WM 31 September 2023

Quotes

Lessons & Thoughts

Focus on the process (what you can control) rather than the outcome (what you can't control)

Behavioural pitfalls

Quality of life and time

Life = series of choices

Facts vs Perception: how many animals do you see? Clue: more than one

Correlations are not causation but can inform you of links

Jim Simons and Renaissance Tech's Medalion achieved 66% CAGR before fees for an extended period of time making him and his team the best performing hedge fund manager ever. To understand what this means, it is producing 0.2% daily gains or 4.7% monthly gains. The core of the strategy is based on probabilistic machine learning and placing bets based on reliable patterns taking into account all the data capable of influencing the outcome. Two concepts are worth studying to understand the success of the fund.

The first one is the Markov chain. In a Markov chain each step along the way is subject to uncertainty. However, in certain position, probabilities are high enough to provide forecasts with a relatively high degree of accuracy. This is how weather forecasts are designed, i.e. today's conditions dictate the probability of tomorrow's weather. That said, Laufer (a colleague of Simons) did also use regression model that suggest that when price open unusually high (eg Gaps), the short term tendency is to regress to the mean, so the strategy would typically use a mix of both conditional probability and regression patterns.

Ben Graham's 3 concepts: stocks are part ownership of a business, make "Mr Market" (girations) your friend not your ennemy (i.e. use the market instead of being used by it) and apply a margin of safety,

Walter Schloss

Good short ideas or stocks to avoid

DCF models are used and abused in the financial world. Most practicioners use the model mechanically and in a static way, which would miss many dynamic factors such as cyclicality, capital intensity or future changes of capital allocation strategy. Excess cash can indeed be used for many purposes

Risk and cost of equity

Make sure you value companies based on where it is in its life cycle

Moats

Valuation is almost all that matters in the long run

The magic of compounding

Rule of 72 = how much does it take to 2x over 3 years = 72/3 24%

or 6% =12x6=72 = 12 years to double

Rule of 114= how much does it take to 3x over 3 years= 114/3 =38%

Rule of 144= how much does it take to 4x over 3years=144/3=48%

Rule of 70 gives you the number of years for currency to halve in value = dollar 3.5% debasement = 20 years before purchasing power halves

Quality

Other fun rules

50-30-20 rule = 50% needs, 30% wants and 20% savings

40% EMI rule states that you should not have more than 40% of net income going into debt payments

3x rule = always put 3x your monthly income in emergency funds

life insurance rule = always of have sum insured at least 20x your annual income

100 - age rule = 100- 32years old = 68% percentage in equity

Laws

Everything is connected

Everything has its unique vibration
Everything is subject to attraction
Intentions matter
Cause and effect(s)
You get what you give (energy conversion)

Price vs Volume

Downtrends

Fibonacci

Other classics

Macro news

Money

The concept of liquidity is essential in understanding markets. Low liquidity stocks are getting trounced right now because liquidity is drying up. Liquidity is available money to hold or buy positions. Liquidity proxies are fed fund rates, 10y treasury rates, 30y mortgage rates, BBB corporate bond yields, DJI index, Zillow house price and broad dollar index. Oil is also useful. So in brief. ROC of change of cost of debt + ROC of DXY + ROC of Oil Price.

GDP

CPI

Geo(politics): after car plants, now government is about to shut down?

Where is GenX when we need them? Why can we only have boomers at the top of the State

Socionomics: when magic and conspiration theories are rampant, bear market is near: example of lizard alien people controlling government stories are back. Last time it happened was 1999!

Incentives and results

Causes and effects = some investors are starting to wonder of the succcess of anti obesity drugs (Novo Nordisk largest market cap in Europe) will drive lower food consumption in the US?

Yield curve and asset allocation

DXY

USDJPY

EURUSD

Precious metals

Crypto: now or never? Next halving May 2024. Bitcoin ETF launched

Fixed income: bombed out TLT

Lots of debt but value of bonds down

Fed fund rates vs bond vs equities correl and yield comp

Money market fund inflows continue

New yield regime

TLT (long bond) down

Term premia back to zero

Cost of insuring US default
HF are short

Back to historic averages on 10 year yield "higher for longer"

Oil price responsible for last spike as recession hits copper

Even the German bund yields are rising despite recession

Rare to see 3 years on a row negative returns on 10 year treasuries

ST and LT duration vs real yields

Top in yield near: time to buy long bonds

IG spreads

Global median real rates spike historic

-80% downfall of zero coupon 100 year bonds highlight the demise of duration

Junk bonds are the next shoe to drop

Defaults rising
When junk bonds fall, VIX rises

Credit contraction won't help and add fuel to the fire

As a reminder, global debt reached USD 307tn last month of which USD 100tn is US alone