How to Buy Losers: Tricking Yourself with Cash-Covered Puts
It's that time of year again. I've started studying for the third (and final) CFA® exam, and my readers are "treated" to my theories of the market and trading. No stock picks today; put your thinking caps on! CAPM: Nice Theory, Too Bad About the Market In Level II of the exam, we studied efficient-market theories, such as CAPM and APT. I actually like an elegant theory (I spent nearly decade of my life studying mathematics), but as a market practitioner, I know the market doesn't work that way. I learned this lesson the hard way. Early in my...
The Big Win You Missed
by Tom Konrad, Ph.D., CFA
My friend Jan Schalkwijk, CFA of JPS Global Investments just asked me if I had any thoughts on Kontrol Energy (KNR.CN, KNRLF), a Canadian smart building firm I had never heard of. (I just added it to AltEnergyStocks.com's Energy Efficiency and Smart Grid stock lists.)
The stock had just shot up after the client sold and went on a kayaking trip. It had disclosed a sensor for detecting COVID-19 from the air.
While I didn't have anything to say about the company, I did have some thoughts on dealing with the emotions around missing out. Since it's...
The Difference between Reality and Pandering
Garvin Jabusch Innovation and increasing economic efficiency have always been the keys to profits and wealth. Getting more value out of systems without commensurate increases in inputs is the definition of growing efficiency, and it has been the engine of human economies since someone figured out how to use energy from a water wheel to grind grain instead of doing it by hand with a stone bowl and pestle. With that development (to simplify), a couple family members could run the wheel, freeing up everyone else for other pursuits. This kind of gain is the hallmark, to greater and...
Climate-Risk Adjusted Returns and the Weasel Coefficient
By Tom Konrad, Ph.D., CFA
An 80% Weasel Coefficient
Some activists, including a friend of mine, recently had a conversation with representatives of TIAA to try to persuade them to divest from fossil fuels. The conversation was mostly cordial, but predictably did not get anywhere.
One of the activists summed up the response from TIAA as “a non-response with a weasel coefficient of at least 80%.” Regarding the weasel coefficient, he also asked,
Can anyone explain to me what "our overarching strategy which targets climate-risk adjusted returns over the long-term” means in plain English?
Well, yes. Yes I can.
Climate Risk Adjusted Returns
When an investment...
Asking the Right Questions: Why Invest in Clean Energy?
Tom Konrad, Ph.D., CFA Often, knowing more about a company is less useful than knowing just a few of the right things. Knowing the right questions to ask can help investors wade through a sea of mostly irrelevant information. Take a moment to answer the following poll: Suppose you want to know if fictional solar Company MySolar will outperform other solar stocks. Which fact would be most useful in your decision?(poll) The key to this question was the stated goal of "outperforming other solar stocks." An investor who is only hoping to achieve returns equal...
Do You Need To Invest In Oil To Benefit From Expensive Oil?
Two months ago, Tom told us how he'd dipped a toe into the black stuff (i.e. bought the OIL etf) on grounds that current supply destruction related to the depressed price of crude oil would eventually lead to the same kind of supply-demand crunch that led oil to spike during the 2004 to mid-2008 period. If you need evidence that the current price of crude is wreaking havoc in the world of oil & gas exploration, look no further than Alberta and its oil sands. The oil sands contain the second largest oil reserves in the world after...
Why I Sold My Utility Stocks
In times like these of financial uncertainty, regulated utilities have traditionally been considered a safe haven. But that is changing. The Dow Jones Utilities Average was down 30% in 2008, vs. a 34% drop in the Dow Industrials. Not much of a safe haven. In a recent interview, utilities analyst Daniel Scotto noted, that the utility industry offers "a lot less security" than it used to. His reasoning is based mainly on the fact that the regulated portion of utility company's business is smaller than it has been in previous recessions, making them vulnerable to lower growth (or even...
How to Beat the Market: Less Money and More Judgement
Last week, I looked at how a small investor could gain an advantage in the market by understanding the other players. The most important other players are institutional investors such as hedge funds, pension funds, mutual funds, and investment banks who have considerably more resources and valuation skills than the individual investor, and so trying to take them on directly to beat them at their own is likely to be an expensive exercise in futility. Two Exploitable Weaknesses On the other hand, I argued that institutional investors have certain handicaps and biases which do allow small investors to enter...
Short Demand for Cree High and Rising
I got a call from my broker this morning asking me if I'd be willing to loan out my shares of Cree, Inc. (NASD:CREE) to a short seller. Since the only cost to me is that I will not be able to vote my shares, and I will earn 2.5% per annum on the value, I said "yes." Normally, brokerages get the shares they lend out to shorts from margin accounts with a margin balance. Since I never carry a balance (although I do have a margin account in order to trade options) they must ask my permission...
Calling for a Marshall Plan, not a Manhattan Project
Electricity too cheap to meter. For many renewable energy advocates, that is the holy grail… new technology which will not only solve the problem of carbon emissions, but be so transformative that we no longer have to worry about turning off the lights when we leave the room. We could argue for days about the viability of any such technology, be it cold fusion, hydrogen, or photovoltaic nanodots. I personally have strong opinions about the likelihood of any technology to produce energy so cheaply that it would not make sense to use some mechanism...
Down and Out in 2011: Headlines from Possible Futures
Tom Konrad, CFA If you don't know what could go wrong in 2010, it could still hurt your portfolio. In Nassim Taleb's Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, he describes an exercise at one of his early jobs. In order to become aware of risks they otherwise might have overlooked, they were to assume that they would lose all the money under their management in the coming year, and they work backwards to figure out how that might have happened. This struck me as an excellent idea, which investors...
UltraPromises Fall Short
When I first came across ProShares' UltraShort ETFs, I thought they were a brilliant idea. They seem to promise a multitude of advantages for investors: The ability to hedge market or sector exposure without having to go short. (Going short requires a margin account, and US law prohibits the use of margin in most retirement accounts.) They should have a better risk profile than shorting. With an UltraShort, you can't lose more than your initial investment. With true shorting, the potential losses are unlimited. As the underlying index rises, each percentage gain creates a smaller dollar fall, while...
A Quick Clean Energy Tracking Portfolio
Yesterday, I outlined a strategy to approximately replicate the performance of a Clean Energy mutual fund at much lower cost, with only a couple hours of effort. I gave a cost example based on $5000 invested in 5 stocks, with another $1000 worth of a single stock added in each subsequent year. This is the procedure I would use to select the initial five stocks. Collect all the top five or ten holdings of the available Clean Energy mutual funds. This data is available from Morningstar, and on fund sponsor's home pages. A few of these holdings may...
Green Energy Investing for Experts, Index and Wrap-Up
Tom Konrad, CFA My Green Energy Investing for Experts series looked at ways shorting could both protect your portfolio against market decline, and make it greener by shorting decidedly non-green companies. This is an index of the entries, plus one more industry for you to consider. Green Energy Investing for Experts, Part I made the case that shorting stocks that are particularly vulnerable to peak oil or climate change is a good way to hedge a portfolio of green stocks against a market decline while making the whole portfolio greener. Green Energy Investing for Experts, Part II looked at...
Opportunity Hiding in Plain Sight
Information asymmetry, climate investing and the active management edge.
By Garvin Jabusch
The theory of efficient markets says all stock prices are perpetually accurate, because investors always have complete and up-to-date information about their holdings.
But as any casual observer knows, information and topical awareness are not evenly distributed, even among professional analysts. Reality is always far more complicated than equity markets can quickly assimilate, meaning information asymmetry is a constant. While usually considered a type of market failure, information asymmetry is frequently used as a “source of competitive advantage.” The person with the most information is best equipped to make the best...
The Black Swan and My Hedging Strategy
Tom Konrad, Ph.D., CFA Nassim Nicholas Taleb's The Black Swan: The Impact of the Highly Improbable changed the way I trade; I can't give a book higher praise. This isn't a book review; since the book is over two years old, and I did not get around to reading it until this Spring, I direct readers to this Foolish Book Review, which agrees with my viewpoint quite well, and to the New York Times for a detailed critique. The latter seemed overly nit-picky to me, but then I'm a fan. Human Biases Recently,...
