Value Investing…

I’m just going to leave this here:  Because here is my historical observation/reflection:

  1. In the 1990s, all the big stock exchanges had finally gone electronic, and we discovered algorithmic trading.
  2. Until the crashes in the late 90s, where we realised that bad algorithms are bad.
  3. And then we invented high frequency trading (HFT), and the HFT portion of the trade pie has been increasing like made since the late 2000s.
  4. Today, most trades are algorithmic.

And here is my question: are there any value investing algorithmic/high-frequency traders?

Perhaps. But they would make no sense to me, because you only really need speed for momentum investing. For value investing, you need everyone else to be wrong about the fundamentals at this point, and then you need them to change their minds (ie. to “shift” the momentum against the current trend).

The trouble is: I’m not sure how you shift momentum if almost everyone is a momentum trader.

Although Carl Icahn does do his level best with letters to Tim Cook, etc.

So the market kind of feels out of balance.

Anyway, it’s just a thought/concern that I thought I’d share.

Happy Wednesday

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at Or both.

Financial Literacy: Here’s A Test

Here’s an article that is making my day: People flunked this money test because the questions were dumb.

But let’s backtrack a second to McGraw Hill, the World Bank and Standard & Poors, who posed five questions in a financial literacy survey to 150,000 people in more than 140 countries. You had to get three of the questions right in order to demonstrate financial literacy.

The big drama: only about a third of people were able to do that.

I answered the questions on this Quartz article. Here they are, with some comments on the crazier questions:

Screen Shot 2015-11-24 at 5.59.43 AM

Oh yes… That’s what all the people in India are doing. They’re taking their spare rupees and tossing them into single stocks on the stock market. Not. Also – if you’re entrepreneurial, isn’t it more sensible to put money into your own business as stock?

Screen Shot 2015-11-24 at 6.01.03 AM

Mmmm – because everyone in the world uses banks, amirite?

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Mmm – same question about banks…

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Seriously, about those banks.

Here’s a sample of Felix Salmon’s derision from that making-my-day article:

This is completely bonkers: Nothing useful can be learned by going up to poor workers in, say, Afghanistan (to take the very first country on the list), and asking them this question. They don’t have banks, and if they do have banks they don’t have savings accounts, and if they do have savings accounts they don’t hold on to them for five years, and if they do hold on to them for five years they’ll probably end up with nothing at all, since the bank will probably have been looted, or gone bust, or else they will have no way of proving their ownership of the account. On top of that, there’s no reason to believe that they have any idea what “10 percent” means, because that’s a mathematical concept they are very unlikely to have been taught at school.

Afghans, like everybody else, can be very smart and shrewd about their finances, and, like everybody else, sometimes they can be stupid too. But if they’re smart, and they’re faced with a question like this one, the only sensible response is some kind of WTF eyeroll.

The only other thing that I wanted to say is that the poor are often capable of generating returns that are absolutely astronomical by normal investment return standards.

Consider this:

  1. A poor Indian mother has no money.
  2. So she borrows, say, $5 to be repaid by the end of the day.
  3. It has to be repaid at $6 including interest.
  4. By the end of most days, she has enough money to cover her family’s food (let’s say that she spends $3 on food).
  5. She repays her loan with interest.
  6. The next day, she starts again with no money.

So: she has to make $4 a day in margin ($3 for food, $1 for interest) off $5 in borrowed money (and her own sweat).

That is a Return on Investment of 80% – in a day.

Sure, in absolute terms, it’s not very much at all. But almost no company can claim to be making that kind of ROI.

I realise that there are some flaws in that calculation, but I did a more expanded version of that in this post: “How can I spend my $35 to get the best return on investment?” And the point is: that is financial literacy – it just might not be the kind of financial literacy that the rich use in their day-to-day financial decision-making.

And, I guess, the rich have that kind of financial literacy because they are rich – and they are not rich simply because they have that kind of financial literacy.

If you want to see more of the results, here’s a youtube clip.

Happy Tuesday.

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at Or both.

All the bad commodity news #2015

In June, we had this:

Then, after June, China happened, so September:

And now, this week, Macquarie:

Ain’t it amazing how quickly it can change? But sherbet – the world really hates commodities.

Seems like a good time to start watching for that contrarian wave…

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at Or both.

Should You Cash In An Investment To Buy Your House?

There’s a new article on moneyweb this morning.

Here is the question:

How much of your savings should you liquidate to use as a deposit when you decide to buy a house? Let’s say you are in your late-twenties and have about R500 000 invested in various domestic high-equity unit trusts, and are now interested in buying a house.

Investment books I have read show that historically, equities have outperformed property. I also know that to enjoy the full benefits of equities, you need to leave them alone and let compound interest work in your favour. But on the other hand, we all need a roof over our heads, and most people need to loan money from the bank in order to purchase a house. The more money you loan, the more interest you pay.

So you have a trade-off: do you sacrifice long-term gains in equities in order to put down a sizeable deposit on a house, but the benefit of this is that you pay less interest.

Basically, the answer from the author is “No”. Although I’m simplifying a lot. The expanded version went something like:

  1. Buy a house that you can afford.
  2. Don’t dip into retirement savings to buy a house.
  3. There are other ways to reduce your interest cost quicker.
  4. #NeverCompromiseTheFinancialPlan

Some of which I kind of don’t really agree with.

But what I really disliked was this comment at the bottom:

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And I cannot abide bad math.

Cannot. Abide.

And comparing a “10% deposit” to the “full value of the house today” is just bad math.

That R10,000 deposit is worth R61,400 today (ie. 10% of the house).

It seems that the “numerous additional factors” that went unmentioned included:

  1. The other 90% of the house that had to be paid for; and
  2. The interest repayments over the duration of the mortgage.


To say nothing of the fact that the prime rate of interest has been fluctuating like mad for the last 20 years.

So Let’s Compare It

The deal is one I’ve looked at before. You can either:

  1. Buy the house, and save on the rental; or
  2. Rent the house at a ±5% rental yield, and then invest both the deposit and any rental savings (versus the mortgage repayment).

How the buying option looks, with all those fun changes in prime interest rates:

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Which is exactly what you’d expect. If you had bought a R100,000 house 20 years ago, and you’ve now paid off the mortgage, and housing prices have increased by around 9.5% per year since, then your net worth is R614,161 (the value of the house).

And here’s the comparison:

Screen Shot 2015-11-19 at 11.34.52 AM

For the first few years (in this case, the first 10), the renter is making quite a nice saving – because the rental yield is much lower than the interest rate, and the value of the property has not quite caught up yet.

But inevitably, there is a point at which rentals will start to exceed the mortgage repayments – as rentals are based off the current home value, while mortgage repayments are based on the value of the home on the date that you purchased it. And this is the big benefit of property ownership – the fact that you get to “fix” the price that you pay for the property.

At which point, the renter has to start eating into his savings in order to cover the higher debt.

With that in mind, a picture of net worth:

Screen Shot 2015-11-19 at 11.33.01 AM

Which is really saying that: where interest rates are high – both higher than the rate of property price appreciation, and higher than the rental yield of similar properties – then buying property is more costly than simply renting and investing the money elsewhere.

This analogy also leaves out one of the primary benefits of renting – which is that you do not incur the costs of home maintenance. If we assume that the home owner needs to budget a further 2% of the home value every year in order to keep the house in order, then the picture looks like this:

Screen Shot 2015-11-19 at 11.54.08 AM

The difference looks dramatic because the minute you have home maintenance costs, it increases the relative saving potential of the renter. And over time, those compound. And it also means that the homeowner is now subject to costs that vary with the market value (ie. not all home ownership costs get to be fixed by a mortgage).

Having said that, consider what happens if we make the rental yield a little higher (say: 8%):

Screen Shot 2015-11-19 at 11.59.08 AM

Well now the difference is far more marginal.

And more importantly, the whole concept is predicated on the assumption that the renter will actually save those savings.

This…seems unlikely. We’re a generation of instant gratifiers – and at least home ownership keeps that tendency in check.

And really, as we get older, indefinite renting can get really inconvenient. Sometimes, you just want the security of knowing that you can do what you want to do in your own home, without fear of being kicked out.

But speaking as a fresh 30 year old, I’m going to try and defy my instant gratification need and continue renting. Because here is my other point:

Screen Shot 2015-11-19 at 12.20.38 PMBased on those initial return rates, “saving” on the interest and paying a lower rental yield meant that the renter may have been able to buy the house outright, for cash, in year 8 of the mortgage. Which is a lot sooner than “at the end of the 20 year mortgage period”.

I know it’s just a model, based on high interest rates, and on higher rates of return for equities over property.

But still.

That said

If you’ve already decided to buy the house, then we’re dealing with something quite different. Because once that decision has been made, you’re now choosing between:

  • A potential equity return on an investment; and
  • A guaranteed saving “return” equal to whatever the interest charge is on your mortgage.

In which case, I’d take the guaranteed saving, and then start investing the “relative” saving in a new unit trust portfolio. Because there are times to take chances on future market performance, and then there are times when you must just be sensible.

Which is why I sort of disagree with some of the original article’s answer.

Just some thoughts.

For more of the same, check out the Rent or Buy posts (start at the earliest post, then move forward).

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at Or both.


Bill Gates and the Climate Change Interview

There’s a new Common Sense podcast episode out (#298), and the main subject (apart from an interlude to talk about the Paris terrorist attacks), was focused on the Atlantic’s interview with Bill Gates: “We Need A Climate Change Miracle“.

It is worth your time.

Unfortunately, as Dan points out, the reason this interview is getting attention is not because of Climate Change, but because of two separate side-bar comments.

First, Bill Gates was asked why the Free Market won’t deal with Climate Change:

Well, there’s no fortune to be made. Even if you have a new energy source that costs the same as today’s and emits no CO2, it will be uncertain compared with what’s tried-and-true and already operating at unbelievable scale and has gotten through all the regulatory problems, like “Okay, what do you do with coal ash?” and “How do you guarantee something is safe?” Without a substantial carbon tax, there’s no incentive for innovators or plant buyers to switch.

And for energy as a whole, the incentive to invest is quite limited, because unlike digital products—where you get very rapid adoption and so, within the period that your trade secret stays secret or your patent gives you a 20-year exclusive, you can reap incredible returns—almost everything that’s been invented in energy was invented more than 20 years before it got scaled usage. So if you go back to various energy innovators, actually, they didn’t do that well financially. The rewards to society of these energy advances—not much of that is captured by the individual innovator, because it’s a very conservative market.

And then when asked whether the government will be inefficient:

Yes, the government will be somewhat inept—but the private sector is in general inept. How many companies do venture capitalists invest in that go poorly? By far most of them. And it’s just that every once in a while a Google or a Microsoft comes out, and some medium-scale successes too, and so the overall return is there, and so people keep giving them money.

Oh my. Calling the private sector “in general inept”? Blasphemy!

Observations though:

  1. I’m not sure why everyone is getting so hung up on the side-commentary. This isn’t an ideological discussion about socialism versus free market economics. It’s just acknowledging that in the current circumstances, pragmatically speaking, the free market does not have enough incentive to get too involved in the search for Big Energy.
  2. Yes, that may be because the energy sector is “too” regulated – but we are not going to change that any time soon, so there’s no point in arguing that deregulation is the first step in addressing climate change. It’s like trying to decide whether the first step in putting out the fire is to try and re-build the house out of non-flammable materials #toolateforthat
  3. The pragmatic response is to find the best and quickest solution. Given the current sway of things, that’s going to include government funding. And why not just throw everything at the problem?

Anyway, here’s the more important part:

The heating levels have not tracked the climate models exactly, and the skeptics have had a heyday with that. It’s all within the error-bar range. To me, it’s pretty clear that there’s nothing that relieves this as a big problem. But when people act like we have this great certainty, they somewhat undermine the credibility. There’s a lot of uncertainty in this, but on both the good and the bad side.

By overclaiming, or even trying to ascribe current things more to climate change than to other effects, environmentalists lend weight to the skeptics. Like, in the near term, the Pacific oscillation, this El Niño thing, has a much bigger impact on current weather than climate change has had so far. Now, climate change keeps climbing all the time—it just keeps summing, summing, summing, and adding up. So, as you get up to 2050, 2080, 2100, its effect overwhelms the Pacific oscillation.

So we have to have dramatic change here. It’s unprecedented to move this quickly, to change an infrastructure of this scale—it’s really unprecedented. And, when you turn to India and say, “Please cut your carbon emissions, and do it with energy that’s really expensive, subsidized energy,” that’s really putting them in a tough position, because energy for them means a kid can read at night, or having an air conditioner or a refrigerator, or being able to eat fresh foods, or get to your job, or buy fertilizer.

That’s why we really need to solve that dilemma, we need innovation that gives us energy that’s cheaper than today’s hydrocarbon energy, that has zero CO2 emissions, and that’s as reliable as today’s overall energy system. And when you put all those requirements together, we need an energy miracle. That may make it seem too daunting to people, but in science, miracles are happening all the time.

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at Or both.