Lessons from Vacation

27 May 2018
Jim Lee

Earlier this month, I took a two-week vacation to Moab, Utah. What’s in Moab? Dirt, rocks, and some of the best mountain biking in the world. What used to be a burned-out uranium town is now a world-class destination for people who enjoy the outdoors. Moab is the home of legendary trails such as Porcupine Ridge, Slickrock, and Bull Run.

We just keep going back....

After biking for twenty years, I learned a few things along the way.

Where you focus is where you lean
You are less likely to have an accident if you are well-balanced
Everything is easier with momentum (except for making turns!)
Over-steering is like micro-managing. It only slows you down.
Keep your hands off the brakes, and let the hills do the work for you.
Everyone learns faster when leadership is shared.
Keep your eyes on the trail at least 20 feet ahead of you. More time to react.
Switch gears before absolutely necessary.
Everything is better with friends.
The best views usually follow the longest climbs.

Some of these lessons have useful analogies for investing. As I get older, I’m beginning to learn the value of avoiding injury. Sometimes, winning means simply being able to hit the trails again the next day.

Investing (like staying fit) provides it's own rewards and sense of achievement. If you want to get better, the key is to push yourself just a little while still playing it safe. It's OK (and even fun) to take a few small risks. Just keep them survivable so that you can wake up tomorrow and do it again.

Work hard, have fun, be excellent - and enjoy Memorial Day weekend!

James H. Lee, CFA, CMT, CFP

Thinking Fast and Slow

27 May 2018
Jim Lee

I’ve been doing a lot of research lately on the future of real estate. This is an easy and popular topic – so much of it is tangible and visually interesting.

One thing really stands out. We’ve had some radical shifts in how we think, act, and organize. Yet, our physical world has been relatively unchanged for decades. We have the same streets, the same buildings, and the same forms of transportation. Cities change slowly. Parts grow, parts fade away. Yet the “bones” often remain across the generations.

Understanding why change doesn’t happen is almost as interesting was why it does. One of my favorite explanations comes from Stewart Brand, of the Long Now Foundation. He writes about this in his book How Buildings Learn.

Brand noticed that while collective change is now a given, not everything adjusts at the same rate.

This is a layered view of the world that we live in. Brand refers to this as "pace layer thinking."

Fashion and technology move very quickly. Every few months, there are trendy new lines of clothing, movies to watch, and music to follow. Our language is surprisingly adaptable.
Commerce and businessdo their best to keep up with the times, rolling out new offerings and updating existing ones. The start-up period between idea and reality is quickening, but it can still take years to introduce an entirely new product.
Infrastructure projects take significant planning, and often require a decade or more to build out. Part of this relates to the red-tape involved in obtaining approvals, and the need to raise massive amounts of capital.
At the layer of governance, building codes and zoning regulations can last a century or more.
Culture is not so much about fashion as it is about core values and traditions. The time frame for change can be hundreds (if not thousands) of years.
And in the end, nature has the final word. It will last longer than civilization.

Between each of these layers, you’ll have an element of turbulence and friction. This is where public discussion frequently happens. The faster moving layers get all the attention, while the slower moving layers have the power.

Pace layer thinking explains why cities and our built environment tend to change slowly over time. It provides insights to why the market for hydrogen fuel is so small (infrastructure), or why crypto-currencies might not hit ever reach the mainstream (governance). Cultural considerations are also significant. We may have some of the technology needed for genetic engineering, yet are reluctant to embrace it.

So, next time you encounter a new investment concept, take some time to consider why it might work out (or not). Think fast. Think slow.

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.

Trading the Hype

19 January 2018
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

What the Trump Tax Plan Means for You

26 December 2017
Jim Lee

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:

Getting Realistic About Trends & Cycles

19 November 2017
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?"

The No-Car Garage

08 November 2017
Jim Lee

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 safety, auto 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.

Lessons from Vacation

Thinking Fast and Slow

Trading the Hype

What the Trump Tax Plan Means for You

Getting Realistic About Trends & Cycles

The No-Car Garage

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