Bloody hard to make a strategy

My editorial on You Tube

It is weekend, and it is time to sum up my investment decisions. It is time to set a strategy for investing the next rent collected. Besides being a wannabe financial investor, I am a teacher and a scientist, and thus I want to learn by schooling myself. As with any type of behavioural analysis, I start by asking “What the hell am I doing?”. Here comes a bit of financial theory. When I use money to buy corporate stock, I exchange one type of financial instrument (currency) against another type of financial instrument, i.e. equity-based securities. Why? What for? If I trade one thing against another one, there must be a difference that justifies the trade-off. The difference is certainly in the market pricing. Securities are much more volatile in their prices than money. Thus, when I invest money in securities, I go for higher a risk, and higher possible gains. I want to play a game.

Here comes another thing. When I say I want to play a game, the ‘want’ part is complex. I am determined to learn investment in the most practical terms, i.e. as my own investment. Still, something has changed in my emotions over the last month. I feel apprehensive after having taken my first losses into account. Whilst in the beginning, one month ago, I approached investment as a kid would approach picking a toy in a store, now I am much more cautious. Instead of being in a rush to invest in anything, I am even pushing off a bit the moment of investment decision. It is like sport training. Sooner or later, after the first outburst of enthusiasm, there comes the moment when it hurts. Not much, just a bit, but enough to make me feel uncomfortable. That’s the moment when I need to reassess my goals, and just push myself through that window of doubt. As I follow that ‘sport training’ logic, what works for me when I am down on optimism is consistency. I do measured pieces of work, which I can reliably link to predictable outcomes.

Interesting. Two sessions of investment decisions, some 4 weeks apart from each other, and I experience completely different emotions. This is a sure sign that I am really learning something new. I invest 2500 PLN, and in my investments, I mostly swing between positions denominated in PLN, those in EUR, and those in USD. At current exchange rates 2500 PLN = €582,75 = $629,72. Please, notice that when I consider investing Polish zlotys, the PLNs, into securities denominated in PLN, EUR or USD, I consider two, overlapping financial decisions: that of exchanging money (pretty fixed nominal value) against securities, and that of exchanging zlotys against other currencies.

Let’s focus for a moment, on the strictly speaking money game. If I swing between three currencies, it is a good move to choose one as reference. Here comes a practical rule, which I teach to my students: your reference currency is the one you earn the major part of your income in. My income comes from my salary, and from the rent, both in Polish zlotys, and thus the PLN is my denominator. A quick glance at the play between PLN, USD, and EUR brings the following results:

>> PLN to EUR: February 1st 2020, €1 = 4,3034 PLN  ; February 23rd, 2020 €1 = 4,2831 PLN ; net change: (4,2831 – 4,3034) / 4,034 =  -0,50% 

>> PLN to USD: February 1st 2020, $1 = 3,8864 PLN ; February 23rd, 2020 $1 = 3,9623 PLN; net change: (3,9623 – 3,8864) / 3,8864 =  1,95%

For the moment, it seems that the euro is depreciating as compared to the US dollar, and I think it would be better to invest in dollars. Since my last update on this blog, I did something just opposite: I sold in USD, and bought in euro. That would be it as for consistency. February 21st – decided to sell Frequency Therapeutics, as I was losing money on it. I consistently apply the principle of cutting losses short. I had a look at short-term trend in the price of Frequency Therapeutics, and there is no indication of bouncing back up. Question: what to invest that money in? Canadian Solar? No, they are falling. SMA Solar Technology AG? Good fundamentals, rising price trend, equity €411,4 mln, market cap €1 251 mln, clearly overvalued, but maybe for a reason. Bought SMA Solar Technology, and it seems to have been a bad move. I have a slight loss on them, just as I have one on First Solar. I consider selling them both, still they both have interestingly strong fundamentals, yet both are experiencing a downwards trend in stock price. Hard to say why. Hence, what I have just done is to place continuous ‘sell’ orders with a price limit that covers my loss and gives me a profit. We will see how it works. For First Solar, I placed a ‘sell’ order at minimum 54$, and regarding SMA Solar Technology I did the same with the bottom limit at €37.

I found another interesting investment in the industry of renewable energies: SolarWinds Corporation. Good fundamentals, temporarily quite low in price, there is risk, but there is gain in view, too. I would like to explain the logic of investing in particular sectors of the economy. My take on the thing is that when I just spend my money, I spend it sort of evenly on the whole economy because my money is going to circulate. When I decide to invest my money in the equity of particular industries it is a focused decision.

Thus, I come to the issue of strategy. I am completely honest now: I have hard times to sketch any real strategy, i.e. a strategy which I am sure I will stick to. I see three basic directions. Firstly, I can keep the present portfolio, just invest more in each position so as to keep a constant structure. Secondly, I can keep the present portfolio as it is and invest that new portion of money in additional positions. Thirdly, and finally, I can sell the present portfolio in its entirety and open completely new a set of positions. My long-term purpose is, of course, to earn money. Still, my short-term purpose is to learn how to earn money by financial investment. Thus, the first option, i.e. constant structure of my portfolio, seems dumb. Firstly, it is not like I have nailed down something really workable. That last month has been a time of experimentation, summing up with a net loss. The third option sounds so crazy that it is tempting.  

I think about investing the immediately upcoming chunk of money into ETF funds, or so-called trackers. I have just realized they give a nice turbo boost to my investments. The one I already have – Amundi Epra DRG – performs nicely. The only problem is that it is denominated in euros, and I want to move towards dollars, at least for now.

Trackers sectorally adapted to my priorities. Trackers (ETFs) are a bit more expensive – they collect a transactional fee on the top of the fee collected by the broker – yet my experience with Amundi Epra, a tracker focused on European real estate, is quite positive in terms of net returns. I think about Invesco QQQ Trust (QQQ), a tracker oriented on quick-growth stock. Another one is Microsoft. OK, I think about Tesla, too, but it is more than $900 one share. I would have to sell a lot of what I already have in order to buy one. Maybe if I sell some of the well-performing biotechs in my portfolio? Square Inc., the publicly-listed sister company of Twitter, is another interesting one. This is IT, thus one of my preferred sectors. I am having a look at their fundamentals, and yes! They look as if they had finally learnt to make money.

I think I have made my choice. My next rent collected will go 50% into Invesco QQQ Trust (QQQ), and 50% into Square Inc..

My blog is supposed to be very much about investment, and my personal training therein, still I keep in mind the scientific edge. I am reworking, from the base, my concept of Energy Ponds, which I have already developed on for the last year or so (see, for example ‘The mind-blowing hydro’). The general background of ‘Energy Ponds’ consists in natural phenomena observable in Europe as the climate change progresses, namely: a) long-term shift in the structure of precipitations, from snow to rain b) increasing occurrence of floods and droughts c) spontaneous reemergence of wetlands. All these phenomena have one common denominator: increasingly volatile flow per second in rivers. The essential idea of Energy Ponds is to ‘financialize’ that volatile flow, so to say, i.e. to capture its local surpluses, store them for later, and use the very mechanism of storage itself as a source of economic value.

When water flows downstream, in a river, its retention can be approached as the opportunity for the same water to loop many times over the same specific portion of the collecting basin (of the river). Once such a loop is created, we can extend the average time that a liter of water spends in the whereabouts. Ram pumps, connected to storage structures akin to swamps, can give such an opportunity. A ram pump uses the kinetic energy of flowing water in order to pump some of that flow up and away from its mainstream. Ram pumps allow forcing a process, which we now as otherwise natural. Rivers, especially in geological plains, where they flow relatively slowly, tend to build, with time, multiple ramifications. Those branchings can be directly observable at the surface, as meanders, floodplains or seasonal lakes, but much of them is underground, as pockets of groundwater. In this respect, it is useful to keep in mind that mechanically, rivers are the drainpipes of rainwater from their respective basins. Another basic hydrological fact, useful to remember in the context of the Energy Ponds concept, is that strictly speaking retention of rainwater – i.e. a complete halt in its circulation through the collecting basin of the river – is rarely possible, and just as rarely it is a sensible idea to implement. Retention means rather a slowdown to the flow of rainwater through the collecting basin into the river.

One of the ways that water can be slowed down consists in making it loop many times over the same section of the river. Let’s imagine a simple looping sequence: water from the river is being ram-pumped up and away into retentive structures akin to swamps, i.e. moderately deep spongy structures underground, with high capacity for retention, covered with a superficial layer of shallow-rooted vegetation. With time, as the swamp fills with water, the surplus is evacuated back into the river, by a system of canals. Water stored in the swamp will be ultimately evacuated, too, minus evaporation, it will just happen much more slowly, by the intermediary of groundwaters. In order to illustrate the concept mathematically, let’ s suppose that we have water in the river flowing at the pace of, e.g. 45 m3 per second. We make it loop once via ram pumps and retentive swamps, and, if as a result of that looping, the speed of the flow is sliced by 3. On the long run we slow down the way that the river works as the local drainpipe: we slow it from 43 m3 per second down to [43/3 = 14,33…] m3 per second.  As water from the river flows slower overall, it can yield more environmental services: each cubic meter of water has more time to ‘work’ in the ecosystem.   

When I think of it, any human social structure, such as settlements, industries, infrastructures etc., needs to stay in balance with natural environment. That balance is to be understood broadly, as the capacity to stay, for a satisfactorily long time, within a ‘safety zone’, where the ecosystem simply doesn’t kill us. That view has little to do with the moral concepts of environment-friendliness or sustainability. As a matter of fact, most known human social structures sooner or later fall out of balance with the ecosystem, and this is how civilizations collapse. Thus, here comes the first important assumption: any human social structure is, at some level, an environmental project. The incumbent social structures, possible to consider as relatively stable, are environmental projects which have simply hold in place long enough to grow social institutions, and those institutions allow further seeking of environmental balance.

Some human structures can be deemed ‘sustainable’, but this looks rather like an exception than the rule. As a civilization, we are anything but frugal and energy-saving. Still, the practical question remains, how can we possibly enhance the creation of sustainable social structures (markets, cities, industries etc.), without relying on a hypothetical moral conversion from the alleged ‘greed’ and ‘wastefulness’, to a more or less utopian state of conscious sustainability. The model presented below argues that such enhancement can occur by creating economic ownership in local communities, as regards the assets invested in environmental projects. Economic ownership is to distinguish from the strictly speaking legal ownership. It can cover, of course, property rights as such, but it can stretch to many different types of enforceable claims on the proceeds from exploiting economic utility derived from the environmental projects in question.

Any human social structure generates an aggregate amount of environmental outcomes EV, understood as reduction of environmental risks. Environmental risk means the probable, uncertain occurrence of adverse environmental effects. Part of those outcomes is captured as economic utility U(EV), and partly comes as freeride benefits F(EV).  For any human social structure there is a threshold value U*(EV), above which the economic utility U(EV) is sufficient to generate social change supportive of the structure in question. Social change means the creation of institutions and markets, which, in turn, have the capacity to last. On the other hand, should U(EV) be lower than U*(EV), the structure in question cannot self-justify its interaction with natural environment, and falls apart.

The derivation of U(EV) is a developmental process rather than an instantaneous phenomenon. It is long-term social change, which can be theoretically approached as evolutionary adaptive walk in rugged landscape. In that adaptive walk, the crucial moment is the formation of markets and/or institutions, where exchange of utility occurs as stochastic change over time in an Ornstein–Uhlenbeck process with a jump component, akin to that observable in electricity prices, i.e. (Borovkova & Schmeck2017[1]). It means that human social structures become able to optimize their environmental impact when they form prices stable enough to be mean-reverted over time, whilst staying flexible enough to drift with jumps. Most technologies we invent serve to transform environmental outcomes into exchangeable goods endowed with economic utility. The set of technologies we use impacts our capacity to sustain social structures. Adaptive walk requires many similar instances of a social structure, similar enough to have common structural traits. Each such instance is a 1-mutation neighbour of at least one other instance. By the way, if you want to contact me directly, you can mail at:

[1] Borovkova, S., & Schmeck, M. D. (2017). Electricity price modeling with stochastic time change. Energy Economics, 63, 51-65. 

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