Trading the Hype

  • Jim Lee

Riding the Hype Cycle

You'll find the second and third floors of our house completely loaded with books. My wife and I both just love to read. For Steph, it is mostly literary and historical fiction. I'm an avid reader of business books, trends, philosophy, and sci-fi. Maybe 40-50 titles per year for each of us.

As a professional investor, it feels like 2017 was a year of tremendously hyped stories. Artificial intelligence, autonomous vehicles, blockchain, immuno-oncology, and marijuana legalization all had their moments in the spotlight.

Billions of dollars were made, billions of dollars will be lost.

But how do you analyze a speculation with no history and no profits? There are some explosive opportunities in the markets, and many of these defy any reasonable financial analysis. (I run into this problem with biotech stocks all the time.)

This month, I'll outline a process for evaluating some of these "story stocks."

What is the story? Why is it compelling? Is it easy to explain? If you can, write down a synopsis of why this is the next big thing.

How big is the story? What's the upside here? Will this be just a niche market, or is it a technology/service/product with broad implications? Also, what is a size of the company relative to the opportunity?

Is it real? Would this story be shelved in the "fiction" or "non-fiction" category? Do the main characters (an organization, its founders, and key personnel) appear to have both depth and realism?

Who knows the story? Some stories have been around forever. Others are comparatively new. The fresher the story, the higher its conversational value. The best stories are often unknown to most people.

Are there alternative narratives? What is the competition? Are there more compelling stories out there? What could go wrong?

When does the climax happen? Are there expectations leading to a key event, such as an FDA approval, a big earnings report, or legislation? Key events can add to the hype and excitement, only to be followed by realism. As the saying goes, "buy the rumor, sell the news." By the time that news becomes completely public, the best opportunity may have already passed.

How does this story end? It is usually a good idea to determine this before making a trade. What is your exit strategy? Do you have an upside target price where you'll take profits? Also, do you have a stop-loss to limit your downside and signal that you need to move on?

Position sizing is important here. That means not making any big bets when there is a lot of risk involved. (I prefer to keep my mistakes small.)

When done well, understanding the story behind a speculation can take just as much time and effort as research done using a classic textbook approach.

Jim Lee, CFA, CMT, CFP®
Founder, StratFI

Disclosure:  Information contained herein is for educational purposes only and is not to be considered a recommendation to buy or sell any security or investment advice. Securities listed herein are for illustrative purposes only and are not to be considered a recommendation.

 

What the Trump Tax Plan Means for You

  • Jim Lee
Depositphotos 11602565 original
 
The end of the year is always a busy time for folks in the investment advisory business.  There are charitable gifts to make, IRA distributions to send out, tax-loss harvesting for portfolios, and last-minute retirement plan contributions.  
 
This year is even more complicated, because the rules of the game are changing. 
 
Earlier this week, Trump's tax reform bill was approved by the Senate.  It will go back to the House for further review before going to the President for his signature within the next month.    
 
Here is a brief summary of what appears to be happening:

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Getting Realistic About Trends & Cycles

  • Jim Lee

There is something irresistible about doing things that people say can't be done. Like trying to beat index funds, or timing the market.

With interest rates coming off all-time lows, bonds are looking less and less attractive for diversification. Real estate is also at risk, particularly if Trump's tax reform plans go through. Meanwhile, stocks have been the "best game in town" for a long, long time. This bull market has been going on since March of 2009 and is the second-longest on record.

Clients are happy with their recent gains, but are beginning to ask me "how long can this go on?"

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The No-Car Garage

  • Jim Lee
Future Car
 
This year, I've been doing a lot of "thinking out loud" about the future of cities and real estate.  The technology that seems to have the greatest buzz (and there are several) appears to be autonomous vehicles.
 
So, let's have some fun with this and spin the wheel of implications. 
 
Urban Landscape:  Today, cars are parked 95% of the time.  Smart cars have places to go and things to do.  They could be out moonlighting and generating additional income while they are waiting for your evening commute.  Life gets complicated when cars have an agenda of their own.
 
Winners:  urban redevelopers, walkable cities 
Losers:  parking attendants, meter maids.
 
Car Sharing:  Why own a single vehicle, when you could have the right car for any occasion?  A mini-van for soccer practice, an energy-efficient commuter car, or a pick-up truck for weekends at Home Depot?  The average car costs a total $8,500 per year (or, $25 per day) for insurance, maintenance, payments, and fuel.  Autonomous vehicles could shift the paradigm from ownership to access by repositioning transportation as a service. 
 
Winners: teenagers, the poor
Losers: public transportation systems 
 
Automotive Design:  What if you could order a car as easily as a pizza?  Would you always want pepperoni, or would get a little crazy and ask for chicken teriyaki barbeque?  Cars have been boring for the past 30 years because they attempt to do everything and keep everyone happy.  As cars are ordered on-demand and ownership declines, we may see whole new classifications of vehicles, including single-person commuting pods, sleeper cars (for long-distance travel), business class vehicles (with workspaces and mobile wi-fi), and party shuttles (which encourage drinking, not driving).  
 
Winners:  creatives, recreational vehicle manufacturers
Losers:  automotive dealerships
 
Shortened Product Cycles:  What if cars wore out as quickly as laptops or cell phones?  If cars are shared and utilized 8 hours a day, we'll need a fraction of the current number of vehicles in use.  It also might be quite possible that these cars will be putting on 30,000 - 50,000 miles per year.  As a result, cars will need to be replaced (and upgraded) much more quickly.  They also might consume more energy, not less, for the trips that they are running with no passengers.    
 
Winners: progress, energy providers, recycling?
Losers:  business-as-usual
 
Liability Coverage:  What happens when an autonomous vehicle crashes?  Today, 85% of all accidents result from human error and 36,000 deaths are caused per year.  If there is no human involved, who do you blame?  There is a good chance that manufacturers will be forced to provide their own warranty coverage, covering liability in the event of an accident due to vehicle malfunction.  This will be paid for by car sharing fees.
 
Winners:  public safetyauto companies
Losers: traditional property-casualty insurers, lawyers
 
Hyper-Commuters and Long-Distance Travel:  Long-distance commuters everywhere will rejoice if they can get to work refreshed and nap on their way home.  Cars might become so comfortable that we could almost live in them.  What if that happens?   
 
Winners:  fitness clubs (gotta shower somewhere)
Losers:  hotels, airports, aviation industry
 
From an investment perspective, we believe that manufacturers of recreational vehicles (including Winnebago, Thor Industries), automotive suppliers (Magna, Harmon), companies involved in the Internet of Things (NXP Semiconductors, Mobileye, Nvidia), and the supply chain of rechargeable batteries (Albemarle, FMC, LithiumX) could be well-positioned for the emerging future. Cars may soon become the 6th screen, and provide enormous amounts of consumer information to be processed and stored (Google, Facebook).
 
So, what kind of time frames are we looking at here?  Social barriers to adoption aside (regulations, etc. - a very big "if"), most automotive companies are estimating that they will have technology ready for mass production by 2023-2025.  It could easily take 13-15 years for old cars to wear out and new cars to be placed into circulation.  That would put us out to 2036 for 50% deployment, or 25-30 years to 2048 and beyond for 90% deployment.
 
Jim Lee, CFA, CMT, CFP®
Founder, StratFI 
 
Disclosures: Information contained herein is for educational purposes only and is not to be considered a recommendation to buy or sell any security or investment advice. Securities listed herein are for illustrative purposes only and are not to be considered a recommendation. As of 10/18/2017, StratFI may hold shares of NXPI, MGA,THO, ALB, LIXXF, GOOGL, and FB within client accounts.

Finding the Sweet Spot in Your Life

  • Jim Lee
In the last blog post, we covered the five stages of successful retirement.  It all begins with a (sometimes) optional step of personal reinvention.  This would be any time in your life when you might ask yourself, "who do I want to be want to be when I grow up?"
 
It can happen in your twenties, your forties, or your sixties.  Think of reinvention as your own personal "do-over".  
 
In Japan, there is this wonderful and useful concept of  ikigai .  In a broad sense, this means "reason for being".  More specifically, it is comprised of two words, "iki" (life, being), and gai (fruit, worth, use).  Everyone has an ikigai.  Finding it requires a journey of self-discovery.   
 
Ikigai illustrated
 
Jim Lee, CFA, CMT, CFP®
Founder, StratFI

The Five Stages of Successful Retirement

  • Jim H. Lee

I'll confess that I was a probably little too young to be coaching people on their retirement back in the early 1990's. Frankly, it is remarkable that I was able to be of any help at all, given my own somewhat minimal experience with personal finance.

A popular misconception that advisors held at the time was that retirement is a singular "event" that could be completely planned for.

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