The Everything Hedge

Summary:

-QQQ options trade at a substantial pricing discount to the options of its constituent stocks, and are among the cheapest on the market by IV

-Despite the widespread notion that equities in 1999 were the most expensive on record, they traded at comparable or even lower multiples than many popular stocks right now, and were on average much smaller than today’s mega-caps, in terms of market cap and relative to GDP

-Total US market cap is $55T now compared to $17T in 1999, with GDP failing to rise to the same extent. This, combined with a residential real estate market more expensive than its ever been relative to household incomes, makes the wealth effect on the economy extreme as financial assets swing in price

-The recent Fed Beige report published Wednesday indicates a downturn in activity and spending in August, unexpectedly down from moderate growth in July; today’s unemployment report confirms a much slower rate of hiring

-If there is ever a wise moment to hedge, with the current equity market pricing and clear risks, and when the hedge price/odds more than offset the likely total loss of the principal, it’s now

Tungtex Rises From the Dead

In 2023, during an AI frenzy that might soon change our lives, at a time when global internet oligopolists grow in perpetuity with limited additional capital expenditures needed, one of my favorite companies is a 46 year old producer of women’s garments and clothing which posted operating losses for eleven straight years, until this year. Try to hold back your excitement. I’ll do my best to explain my reasoning for owning this out of every public company available.

Wonderful Sky

A leading full-service public relations firm helping start-ups IPO, conduct follow-on offerings, and manage investor relations since 1996 (performing many of the duties of an investment bank), Wonderful Sky has fallen out of favor with investors and shares are down 90% since 2016, with the market cap sinking from HK$2.5b to HK$250m. I’ve been buying since late 2021 at an avg price of HK$0.28. At a tenth of its 2016 price, I’m betting on its future.

Carvana

Carvana, the self-titled Amazon of used cars, has become a magnet for growth investors and short-sellers alike while growing rapidly. With its recent rise in the minds of consumers nationwide, good reviews, rapid revenue growth, and progress towards GAAP profitability, it would seem that it is making headway on consolidating the used car market.

Boston Omaha & Billboards

Boston Omaha (BOMN) is a young holding company with about 50% of its capital invested in the static billboard industry. The company seems to have created some interest among retail investors due to the co-CEO’s familial relation to a certain famous investor from Omaha, and on the surface BOMN’s letters are similar in style and format to those of the early Berkshire. The combination of these elements creates an interesting story and a stock valuation that applies a fair amount of belief as well as a willingness to look beyond the basic economics of their primary operating business.

2 Arbitrage Opportunities and Blatant Market Inefficiency

Despite its numerous practical flaws and the many examples which any investor could bring up to contradict its basic tenets, the CAPM model and the fundamental idea that risk and return are perfectly correlated dominates current investment theory. As a result, it also is what the vast majority of financial advisors/professionals across the country explain to their clientele as they advocate portfolios and investments which they believe to be somewhere along the supposed risk/return frontier.

Netflix: This Isn't the Platform You're Looking For

Since 2009 there has been proliferation of VC-funded unicorns in a variety of tech sectors, and the bubble has been blown on the hopes of finding the quintessential dual-sided platform which will monopolize either the search for or distribution of a certain product (or both). As public investors are learning from the recent offering of Uber however, not all “tech” companies and platforms are created equal.

Markets, Contrarianism, and Popular Opinion

I don’t want to give the impression that investing has much in common with gambling, but the nature of competition and the distribution of profits between players in the two fields have a lot in common. A parimutuel betting market such as horse-racing or sports-betting would be a much closer analogy, but I don’t think that’s as interesting as going with poker.

Random Thoughts on the Inverted Yield Curve and Debt

There was much discussion in 2018 on a temporary inversion of the two and ten year treasury yields, and it almost certainly contributed to some panic as investors widely view inversions in the yield curve as leading indicators of recession. Surprisingly for those who take the position that market timing isn’t possible (it probably is to some extent, but it would likely be difficult and unprofitable to act upon), investors have good reason to believe yield inversions are meaningful, as they have preceded all nine U.S. recessions in the past 60 years with recessions on average occurring 18 months later, with a high level of predictive power according to the San Francisco Fed.

Value Destruction at TransCanada

There are far worse offenders than TransCanada, but value destruction by management is rampant in many cyclical and/or commodity industries, and natural gas is one which has a particularly high rate of occurrence. There are many natural gas firms, particularly those that focus on upstream operations, which compensate officers at least partially on the growth of both production and reserves as opposed to value creation.

Stock Prices are Even Less Efficient Than You Think

Within financial academia, there are three main groups of thinking regarding public equity pricing, all of which stem from the efficient-market hypothesis and depend on it to varying degrees. The strong form of market efficiency thinkers believe stock prices reflect all information that can be known about any business, including insider information, and that stock prices are wholly unexploitable for above-average risk-adjusted returns.

An Investing Metaphor

I don’t know how productive this will be to anyone’s understanding of investment, but I personally found the following to be a very simple and helpful thought experiment. Generally speaking, I believe most investors would benefit dramatically from viewing their investments in the belief that their ownership is completely illiquid and that the only source of returns will be dividends.

The Basics of Deep Value Investing

A few years ago I had a blog in which I used to post about the details of deep value investing and some of the methods by which an investor could go about exploiting market inefficiencies. Those posts weren't ever brought over to this site and it dawns on me that despite explaining some theoretical concepts, I've never explained much of anything about how I have been generating our performance over the past few years in basic, practical terms for anyone interested in hearing about it. 

Stock Price Fluctuations Are Your Friend

This is by far the most important thing I will ever write about investing and it is essentially mandatory reading for anyone looking to become a client and partner of this firm. If you're not with me on this you likely won't be a good fit for us (or for proper investing in general). What I will explain is extremely simple and in my opinion the most important thing to understand and follow in order to achieve excess returns but for whatever reason, it is difficult for most investors to implement in their practice. 

The Assumptions Built into Stock Prices- Netflix & Amazon

This should be a short piece, but I wanted to use a few examples to describe the assumptions inherent in stock prices and why investors need to think through stock valuations. Given that price is a major factor in predicting future returns, investors should of course be unwilling to pay anything greater than the present value of all future free cash flows, discounted at an appropriate rate for any investment.

Growth, Returns on Capital, and Business Valuation

Before I start this piece on valuation, I just want to say that nothing in business or finance is as complicated as it looks, and nearly all of it is much simpler than you think. I’m going to get a bit wonky in explaining some terms here but what’s important is that the concepts are understood.

U.S. Stock Market Valuations and Future Returns of the S&P 500

In 2013, Eugene Fama, Lars Hansen, and Robert Shiller won the Nobel Prize in Economics. It was an odd trio, given that Fama is one of the fathers of the efficient markets theory and Shiller wrote a book titled 'Irrational Exuberance' in which he discussed the irrationally high stock prices  shortly before the crash of 1999.