Rowing in a tiny boat across a big ocean

My editorial on You Tube

On February 24th, after I posted my last update ( Bloody hard to make a strategy ), I did what I was declaring I would do: I bought 1 share of Invesco QQQ Trust (QQQ) for $224,4, 5 shares of Square Inc, at $76,85, thus investing $384,25 in this one. Besides, I have just placed an order to buy one share ($33) of Virgin Galactic Holdings, mostly because it is high tech.

These are the small steps I took, but now, as financial markets are freaking out about coronavirus, it is the right moment to figure out my endgame, my strategy. Yes, that’s surely one thing I have already nailed down as regards investment: the more the market is driven by strong emotions, the more I need to stay calm. Another thing I have learnt by experience is that it really pays off, at least for me, to philosophise about the things I do, would it be science or a business strategy. It really pays to take a step back from current events, sit and meditate on said events. Besides, in terms of scientific research, I am currently working on the ways to derive economic value added from environmental projects. I guess that fundamental questioning regarding economic value and decisions we make about it will be interesting.

When I philosophise about anything connected to social sciences, I like talking to dead people. I mean, no candles, no hand-touching, just reading and thinking. I discovered that I can find exceptionally deep insights in the writings of people labelled as ‘classics’. More specifically, books and articles written at an epoch when the given type of economic institution was forming, or changing fundamentally, are particularly insightful. It is a little bit as if I were an astrophysicist and I had a book, written by an alien who watched the formation of a planet. The classic that I want to have a word with right now is Louis Bachelier. I am talking about Bachelier’s ‘Theory of Speculation’ , the PhD thesis from 1900, originally published in French as ‘Théorie de la spéculation’ (Bachelier 1900[1]). Here’s how Louis Bachelier introduces his thesis: ‘INTRODUCTION. The influences which determine the movements of the Stock Exchange are innumerable. Events past, present or even anticipated, often showing no apparent connection with its fluctuations, yet have repercussions on its course. Beside fluctuations from, as it were, natural causes, artificial causes are also involved. The Stock Exchange acts upon itself and its current movement is a function not only of earlier fluctuations, but also of the present market position. The determination of these fluctuations is subject to an infinite number of factors: it is therefore impossible to expect a mathematically exact forecast. Contradictory opinions in regard to these fluctuations are so divided that at the same instant buyers believe the market is rising and sellers that it is falling. Undoubtedly, the Theory of Probability will never be applicable to the movements of quoted prices and the dynamics of the Stock Exchange will never be an exact science. However, it is possible to study mathematically the static state of the market at a given instant, that is to say, to establish the probability law for the price fluctuations that the market admits at this instant. Indeed, while the market does not foresee fluctuations, it considers which of them are more or less probable, and this probability can be evaluated mathematically.

As I see, Louis Bachelier had very much the same feelings about the stock market as I have today. I am talking about the impression to be rowing in a really tiny boat across a bloody big ocean, with huge waves, currents and whatnot, and a general hope that none of these big dangerous things hits me. And yes, there are sharks. A natural question arises: why the hell stepping into that tiny boat, in the first place, and why leaving shore? If it is that risky, why bother at all? I think there is only one sensible answer to that: because I can, because it is interesting, and because I expect a reward, all three in the same time.

This is the general, duly snappy reply, which I need to translate, over and over again, into goals and values. Back in the day, almost 30 years ago, I used to do business, before I went into science. For the last 4 years or so, I am thinking about getting back into business. The difference between doing real business and investing in the stock market is mostly the diversification of risk. I dare say that aggregate risk is the same. When I do real business, as a small businessman, I have the same feeling of rowing in that tiny boat across a big ocean. I have so little control over the way my small business goes that when I manage to get in control of something, I get so excited that I immediately label that controlled thing as ‘successful business model’. Yet, running my own small business is so time and energy absorbing that I have hardly any juice left for anything else. I have all my eggs in the same basket, i.e. I do not hedge my risks. With any luck, I just insure them, i.e. I share them with someone else.

When I invest in the stock market, I almost intuitively spread my equity over many financial assets. I hedge the business-specific risks. Here comes an interesting question: why did I choose to invest in biotechnology, renewable energies and IT? (see Back in the game ). At the time, one month ago, I made that choice very intuitively, following my intellectual interests. Now, I want to understand myself deeper. Logically, I turn to another dead man: Joseph Alois Schumpeter, and to his ‘Business Cycles’. Why am I knocking at this specific door? Because Joseph Alois Schumpeter studied the phenomenon of technological change with the kind of empirical assiduity that even today inspires respect. From Schumpeter I took that idea that once true technological change starts, it is unstoppable, and it inevitably drives resources from the old technologies towards the new ones. There are technologies in the today’s world, precisely such as biotechnology, information technologies, and new sources of energy, which no one can find their way around. Those technologies are already reshaping deeply our everyday existence, and they will keep doing so. If I wanted to start a business of my own in any of these industries, it would take me years to have the thing running, and even more years to see any economic gains. If I invest in those industries via the stock market, I can tap directly into the economic gains of the already existing businesses. Egoistic but honest. I come back to that metaphor of boat and ocean: instead of rowing in a small boat across a big ocean, I hook onto a passing cruiser and I just follow it.

There is more to the difference between entrepreneurship, and investment in the stock market. In the latter case, I can clearly pace myself, and that’s what I do: every month, I invest another parcel of capital, on the grounds of learning acquired in past months. In entrepreneurship, such a pacing is possible, yet much harder to achieve. Capital investment required to start the business usually comes in a lump: if I need $500 000 to buy machines, I just need it. Of course, there is the fine art of engaging my own equity into a business step by step, leveraging the whole thing with credit. It is possible in an incorporated business. Still, the very incorporation of a business requires engaging a minimum equity, which is way greater than the baby steps of investment.

Incidentally, the very present developments in the stock market make an excellent opportunity to discuss more in depth. If you care to have a look at the NASDAQ Composite Index , especially at its relatively longer time window, i.e. from 1 month up, you will see that what we have now is a typical deep trough. In my own portfolio of investment positions, virtually every security is just nosediving. Why does it happen? Because a lot of investors sell out their stock, at whatever price anybody is ready to pay for it.

Have you ever wondered how do stock prices plummet, as it is the case now? I mean, HOW EXACTLY? Market prices are actual transactional prices, i.e. prices that actual deals are closed at. When stock prices dive, people who sell are those who panic, I get it. Who buys? I mean, for a very low stock price to become a market price, someone must be buying at this specific price. Who is that, who buys at low prices when other people freak out and sell out? Interesting question. When the market price of a security falls, the common interpretation is: ‘it is ‘cause that security has become less attractive to investors’. Wait a minute: if the price falls, someone buys at this falling price. Clearly, there are investors who consider that security attractive enough to pay for it even though the price is likely to fall further.

When a whole market index, such as NASDAQ Composite, is skiing downhill, I can see the same phenomenon. Some people – right, lots of people – sell out whatever financial assets they have because they are afraid to see the market prices fall further down. Some other people buy. They see an opportunity in the widespread depreciation. What kind of opportunity? The one that comes out of other people losing control over their behaviour. Now, from there, it is easy to go into the forest of conspiracy theories, and start talking about some ‘them’, who ‘want to..’ etc. Yes, there is a rational core to those theories. The stock market is like an ocean, an there are sharks in it. They just wait patiently for the prey to come close to them. Yes, officially, the spiritus movens of the present trough in stock markets is coronavirus. Wait a minute: is it coronavirus as such, or what we think about it? Wait another minute: is it about what we think as regards the coronavirus, or about what we expect other people (in the stock market) to think about it?

When I look at the hard numbers about coronavirus, they look refreshing. When I divide the number of fatalities by the number of officially diagnosed cases of infection, that f**ker is, under some angle, less deadly than common flu. Take a look at Worldometer: 85 217 official carriers of it, and 2 924 of those carriers dead. The incidence of fatality is 2924/85217 = 3,43%. A study by the Center for Infectious Disease Research and Policy at the University of Minnesota finds an even lower rate: 2,3%. As reported by CNBC, just in the United States of America, during the on-going flu season, the flu virus has infected 19 million people, and caused 10 000 deaths. The incidence of death among people infected with flu is much lower, 10000/19000000 = 0,05%, yet the absolute numbers are much higher.       

Please, notice that when a real panic overwhelms financial markets, there is no visible fall in prices, because there are no prices at all: nobody is buying. This is when pricing is suspended, and the stock market is effectively shut down. As long as there are any prices in the market, some market agents are buying. Here comes my big claim, sourced in my recent conversation with the late Joseph Schumpeter: the present panic in the stock market is just superficially connected to coronavirus, and what is manifesting itself deep underneath that surface is widespread preparation for a bloody deep technological change, coming our way right now. What technological change? Digital technologies, AI, robotization, shift towards new sources of energy, and, lurking from the bottom of the abyss, the necessity to face climate change.

I am deeply convinced that my own investment strategy, should it demonstrate any foresight and long-range planning, should be most of all espousing the process of that technological change. Thus, it is useful to understand the process and to plan my strategy accordingly. I have already done some research in this field and my general observation is that technological change as it is going on right now is most of all marked by increasing diversity in technologies. What we are witnessing is not just a quick replacement of old technologies by new ones: that would be too easy. Owners of technological assets need to think in terms of stockpiling many generations of technologies in the same time, and the same place.

From the point of view of an entrepreneur it is what the French call “l’embarras du choix”, which means embarrassingly wide range of alternative technological decisions to take. I described it partially in ‘4 units of quantity in technological assets to make one unit of quantity in final goods’.  Long story short, there is a threshold speed of technological, up to which older technological assets can me simply replaced by newer ones. Past that threshold, managing technological change at the business level becomes progressively more and more a guessing game. Which specific cocktail of old technologies, and those cutting-edge ones, all that peppered with a pinch of those in between, will work optimally? The more technologies we can choose between, the more aleatory, and the less informed is the guess we make.

I have noticed and studied one specific consequence of that ever-widening choice of technological cocktails: the need for cash. Mathematically, it is observable as correlation between two coefficients: {Amortization / Revenue} on the one hand, and {Cash & cash equivalent / Assets} on the other hand. The greater a percentage of revenues is consumed by amortization of fixed assets, the more cash (in proportion to total assets) businesses hold in their balance sheets. I nailed it down statistically, and it is quite logical. The greater a palette of choices I might have to navigate my way through, the more choices I have to make in a unit of time, and when you need to make a lot of business choices, cash is king, like really. Open credit lines with banks are nice, just as crowdfunding platforms, but in the presence of significant uncertainty there is nothing like a nice, fat bank account with plenty of liquidity at arm’s reach.

When a business holds a lot of cash for a long time, they end up by holding a lot of the so-called ‘cash equivalents’, i.e. a low-risk portfolio of financial securities with a liquidity close to cash strictly spoken. Those securities are listed in some stock market, whence an inflow of capital into the stock market from companies holding a lot of cash just in case a breakthrough technology pokes its head from around the corner. Quick technological change, quick enough to go past the threshold of simple replacement (understood as straightforward shift from older technology towards and into a newer one), generates a mounting wave of capital placed on short-term positions in the stock market.

Those positions are short-term. In this specific financial strategy, entrepreneurs perceive the stock market as one of those garage-size warehouses. In such a place, you can store, for a relatively short time, things which you don’t know exactly what to do with, yet you feel could need them in the future. Logically, growing an occurrence of of short-term positions in the stock market induces additional volatility. Each marginal million of dollars pumped in the stock market via this tube is more restless than the previous one, whence increasing propensity of the market as a whole to panic and run in the presence of any external stressor. Joseph Schumpeter described that: when the economy is really up to a technological leap, it becomes overly liquid financially. The financial hormone gets piled up in the view of going all out.

I come back to thinking about my own strategy. Whatever kind of run we have in the stock market right now, the coronavirus is just a trigger, and the underlying tension it triggered is linked to technological change of apparently unseen speed and complexity.

In my portfolio, just two positions remain positive as for their return rate: Incyte Corporation and Square Inc. All the others have yielded to the overwhelming panic in the market. Why? I can follow the tracks of two hypotheses. One, those companies have particularly good fundamentals, whilst being promisingly innovative: they sort of surf elegantly on the wave of technological change. Two, it is more aleatory. In the times of panic such as we experience now, in any given set of listed securities, investors flock, in a largely random way, towards some businesses, and away from others. Mind you, those two hypotheses are mutually complementary (or rather they are not mutually exclusive): aleatory, panicky behaviour on the part of investors conjoins with a good mix of characteristics in specific businesses.     

Right, so I have the following situation. In my portfolio, I have two champions of survival, as regards the rate of return – the above-mentioned Incyte Corporation and Square Inc. – in the presence of all them other zombies that succumbed to the surrounding panic: First Solar Inc., Macrogenics, Norsk Hydro, SMA Solar Technology AG, Virgin Galactic Holdings, Vivint Solar, 11Bit, Asseco Business Solutions, AMUNDI EPRA DR (ETF Tracker), and Invesco PowerShares EQQQ Nasdaq-100 UCITS (ETF Tracker). I keep in mind the ‘how?’ of the situation. In the case of Incyte Corporation and Square Inc., investors are willing to pay for them more than they were ready to pay in the past, i.e. deals on those securities tend to be closed at a ramping up average price. As for all the others, displaying negative rates of return, presently investors pay for them less than they used to a few days or weeks ago. I stress once again the fact that investors pay. This is how prices are fixed. Whichever of those securities we take, some investors keep buying.

What I can observe are two different strategies of opening new investment positions. The first one, largely dominating, consists in buying into cheap stuff, and forcing that stuff to go even cheaper. The second one, clearly less frequently occurring, displays investors opening new positions in the market at a higher price than before. I am observing two distinct behavioural patterns, and I presume, though I am not sure, that these two patterns of investment are correlated with the intrinsic properties of two supposedly different sets of securities. I know that at this point I am drifting away from the classical ‘supply – demand’ pattern of pricing in the stock market, yet I am not drifting really far. I acknowledge the working of Marshallian equilibrium in that price setting, I just enrich my investigation with the assumption of diverging behavioural patterns.

In my portfolio, I hold securities which somehow are attached to both of those behavioural patterns. I have taken a position on other people’s possible behaviour. This is an important finding about my own investment strategy and the ways I can possibly get better at it. I can be successful in my investment if I make the right guess as regards the businesses or securities that incite the pattern of behaviour manifesting in growing price that deals get closed at.  What I can observe now, in the times of panic in the market, is a selective panic. As a matter of fact, even before that coronavirus story went western, securities in my portfolio were disparate in their rate of return: some of them positive, some others negative. What has changed now is just the proportion between the positive returns and the negative ones.  

Another question comes to my mind: when I open positions on the stock of businesses in some selected technological fields, like solar energy, do I participate in technological change, or do I just surf over the top of financial foam made by that change? There is that theory, called ‘Q theory of investment’ (see for example Yoshikawa 1980[2]), developed by James Tobin and William Brainard, and that theory claims that when I invest in the stock of listed companies, I actually buy claims on their productive assets. In other words, yes, listed shares are just financial instruments, but when I buy them or sell them, I, as an investor, I develop strategies of participation in assets, not just in equity.

When I think about my own behaviour, as investor, I certainly can distinguish between two frames of mind: the gambling one, and the farming one. There are moments, when I fall, unfortunately, into a sort of frantic buying and selling, and I use just small bits of information, and the information I use is exclusively technical, i.e. exclusively the price curves of particular securities. This is the gambling pattern. I do my best to weed out this pattern of behaviour in myself, as it: a) usually makes me lose money, like really and b) is contrary to my philosophy of developing long term strategies for my investment. On the other hand, when I am free of that gambling frenzy, I tend to look at my investment positions in the way I look at roses in my garden, sort of ‘What can I do to make them grow bigger and flourish more abundantly?’. This is my farming frame of mind, it is much less emotional than the gambling one, and I intuitively perceive it as more functional for my long-term goals.

Good, it looks like I should give some provisional closure and put this update online. I think that in the presence of a hurricane, it is good to stay calm, and to meditate over the place to go when the hurricane calms down. I guess that for the weeks to come, until I collect my next rent and invest it in the stock market, no sudden decisions are recommended, given the surrounding panic. I think the best I can do during those weeks is to study the fundamentals of my present portfolio of investment positions and draw some conclusions from it.

If you want to contact me directly, you can mail at: .

[1] Bachelier, L. (1900). Théorie de la spéculation. In Annales scientifiques de l’École normale supérieure (Vol. 17, pp. 21-86).

[2] Yoshikawa, H. (1980). On the” q” Theory of Investment. The American Economic Review, 70(4), 739-743.

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