The right side of the disruption

I am swivelling my intellectual crosshairs around, as there is a lot going on, in the world. Well, there is usually a lot going on, in the world, and I think it is just the focus of my personal attention that changes its scope. Sometimes, I pay attention just to the stuff immediately in front of me, whilst on other times I go wide and broad in my perspective.

My research on collective intelligence, and on the application of artificial neural networks as simulators thereof has brought me recently to studying outlier cases. I am an economist, and I do business in the stock market, and therefore it comes as sort of logical that I am interested in business outliers. I hold some stock of the two so-far winners of the vaccine race: Moderna (https://investors.modernatx.com/ ) and BionTech (https://investors.biontech.de/investors-media ), the vaccine companies. I am interested in the otherwise classical, Schumpeterian questions: to what extent are their respective business models predictors of their so-far success in the vaccine contest, and, seen from the opposite perspective, to what extent is that whole technological race of vaccines predictive of the business models which its contenders adopt?

I like approaching business models with the attitude of a mean detective. I assume that people usually lie, and it starts with lying to themselves, and that, consequently, those nicely rounded statements in annual reports about ‘efficient strategies’ and ‘ambitious goals’ are always bullshit to some extent. In the same spirit, I assume that I am prone to lying to myself. All in all, I like falling back onto hard numbers, in the first place. When I want to figure out someone’s business model with a minimum of preconceived ideas, I start with their balance sheet, to see their capital base and the way they finance it, just to continue with their cash-flow. The latter helps my understanding on how they make money, at the end of the day, or how they fail to make any.

I take two points in time: the end of 2019, thus the starting blocks of the vaccine race, and then the latest reported period, namely the 3rd quarter of 2020. Landscape #1: end of 2019. BionTech sports $885 388 000 in total assets, whilst Moderna has $1 589 422 000. Here, a pretty amazing detail pops up. I do a routine check of proportion between fixed assets and total assets. It is about to see what percentage of the company’s capital base is immobilized, and thus supposed to bring steady capital returns, as opposed to the current assets, fluid, quick to exchange and made for greasing the current working of the business. When I measure that coefficient ‘fixed assets divided by total assets’, it comes as 29,8% for BionTech, and 29% for Moderna. Coincidence? There is a lot of coincidence in those two companies. When I switch to Landscape #2: end of September 2020, it is pretty much the. You can see it in the two tables below:

As you look at those numbers, they sort of collide with the common image of biotech companies in sci fi movies. In movies, we can see huge labs, like 10 storeys underground, with caged animals inside etc. In real life, biotech is cash, most of all. Biotech companies are like big wallets, camped next to some useful science. Direct investment in biotech means very largely depositing one’s cash on the bank account run by the biotech company.

After studying the active side of those two balance sheets, i.e. in BionTech and in Moderna, I shift my focus to the passive side. I want to know how exactly people put cash in those businesses. I can see that most of it comes in the form of additional paid-in equity, which is an interesting thing for publicly listed companies. In the case of Moderna, the bulk of that addition to equity comes as a mechanism called ‘vesting of restricted common stock’. Although it is not specified in their financial report how exactly that vesting takes place, the generic category corresponds to operations where people close to the company, employees or close collaborators, anyway in a closed private circle, buy stock of the company in a restricted issuance.  With Biontech, it is slightly different. Most of the proceeds from public issuance of common stock is considered as reserve capital, distinct from share capital, and on the top of that they seem to be running, similarly to Moderna, transactions of vesting restricted stock. Another important source of financing in both companies are short-term liabilities, mostly deferred transactional payments. Still, I have an intuitive impression of being surrounded by maybies (you know: ‘maybe I am correct, unless I am wrong), and thus I decided to broaden my view. I take all the 7 biotech companies I currently have in my investment portfolio, which are, besides BionTech and Moderna, five others: Soligenix (http://ir.soligenix.com/ ), Altimmune (http://ir.altimmune.com/investors ), Novavax (https://ir.novavax.com/ ) and VBI Vaccines (https://www.vbivaccines.com/investors/  ). In the two tables below, I am trying to summarize my essential observations about those seven business models.

Despite significant differences in the size of their respective capital base, all the seven businesses hold most of their capital in the highly liquid financial form: cash or tradable financial securities. Their main source of financing is definitely the additional paid-in equity. Now, some readers could ask: how the hell is it possible for the additional paid-in equity to make more than the value of assets, like 193%? When a business accumulates a lot of operational losses, they have to be subtracted from the incumbent equity. Additions to equity serve as a compensation of those losses. It seems to be a routine business practice in biotech.

Now, I am going to go slightly conspiracy-theoretical. Not much, just an inch. When I see businesses such as Soligenix, where cumulative losses, and the resulting additions to equity amount to teen times the value of assets, I am suspicious. I believe in the power of science, but I also believe that facing a choice between using my equity to compensate so big a loss, on the one hand, and using it to invest into something less catastrophic financially, I will choose the latter. My point is that cases such as Soligenix smell scam. There must be some non-reported financial interests in that business. Something is going on behind the stage, there.  

In my previous update, titled ‘An odd vector in a comfortably Apple world’, I studied the cases of Tesla and Apple in order to understand better the phenomenon of outlier events in technological change. The short glance I had on those COVID-vaccine-involved biotechs gives me some more insight. Biotech companies are heavily scientific. This is scientific research shaped into a business structure. Most of the biotech business looks like an ever-lasting debut, long before breaking even. In textbooks of microeconomics and management, we can read that being able to run the business at a profit is a basic condition of calling it a business. In biotech, it is different. Biotechs are the true outliers, nascent at the very juncture of cutting-edge science, and business strictly spoken. This is how outliers emerge: there is some cool science. I mean, really cool, the one likely to change the face of the world. Those mRNA biotechnologies are likely to do so. The COVID vaccine is the first big attempt to transform those mRNA therapies from experimental ones into massively distributed and highly standardized medicine. If this stuff works on a big scale, it is a new perspective. It allows fixing people, literally, instead of just curing diseases.

Anyway, there is that cool science, and it somehow attracts large amounts of cash. Here, a little digression from the theory of finance is due. Money and other liquid financial instruments can be seen as risk-absorbing bumpers. People accumulate large monetary balances in times and places when and where they perceive a lot of manageable risk, i.e. where they perceive something likely to disrupt the incumbent business, and they want to be on the right side of the disruption.

Cultural classes

Some of my readers asked me to explain how to get in control of one’s own emotions when starting their adventure as small investors in the stock market. The purely psychological side of self-control is something I leave to people smarter than me in that respect. What I do to have more control is the Wim Hof method (https://www.wimhofmethod.com/ ) and it works. You are welcome to try. I described my experience in that matter in the update titled ‘Something even more basic’. Still, there is another thing, namely, to start with a strategy of investment clever enough to allow emotional self-control. The strongest emotion I have been experiencing on my otherwise quite successful path of investment is the fear of loss. Yes, there are occasional bubbles of greed, but they are more like childish expectations to get the biggest toy in the neighbourhood. They are bubbles, which burst quickly and inconsequentially. The fear of loss is there to stay, on the other hand.    

This is what I advise to do. I mean this is what I didn’t do at the very beginning, and fault of doing it I made some big mistakes in my decisions. Only after some time (around 2 months), I figured out the mental framework I am going to present. Start by picking up a market. I started with a dual portfolio, like 50% in the Polish stock market, and 50% in the big foreign ones, such as US, Germany, France etc. Define the industries you want to invest in, like biotech, IT, renewable energies. Whatever: pick something. Study the stock prices in those industries. Pay particular attention to the observed losses, i.e., the observed magnitude of depreciation in those stocks. Figure out the average possible loss, and the maximum one. Now, you have an idea of how much you can lose in percentage. Quantitative techniques such as mean-reversion or extrapolation of the past changes can help. You can consult my update titled ‘What is my take on these four: Bitcoin, Ethereum, Steem, and Golem?’ to see the general drift.

The next step is to accept the occurrence of losses. You need to acknowledge very openly the following: you will lose money on some of your investment positions, inevitably. This is why you build a portfolio of many investment positions. All investors lose money on parts of their portfolio. The trick is to balance losses with even greater gains. You will be experimenting, and some of those experiments will be successful, whilst others will be failures. When you learn investment, you fail a lot. The losses you incur when learning, are the cost of your learning.

My price of learning was around €600, and then I bounced back and compensated it with a large surplus. If I take those €600 and compare it to the cost of taking an investment course online, e.g. with Coursera, I think I made a good deal.

Never invest all your money in the stock market. My method is to take some 30% of my monthly income and invest it, month after month, patiently and rhythmically, by instalments. For you, it can be 10% or 50%, which depends on what exactly your personal budget looks like. Invest just the amount you feel you can afford exposing to losses. Nail down this amount honestly. My experience is that big gains in the stock market are always the outcome of many consecutive steps, with experimentation and the cumulative learning derived therefrom.

General remark: you are much calmer when you know what you’re doing. Look at the fundamental trends and factors. Look beyond stock prices. Try to understand what is happening in the real business you are buying and selling the stock of. That gives perspective and allows more rational decisions.  

That would be it, as regards investment. You are welcome to ask questions. Now, I shift my topic radically. I return to the painful and laborious process of writing my book about collective intelligence. I feel like shaking things off a bit. I feel I need a kick in the ass. The pandemic being around and little social contacts being around, I need to be the one who kicks my own ass.

I am running myself through a series of typical questions asked by a publisher. Those questions fall in two broad categories: interest for me, as compared to interest for readers. I start with the external point of view: why should anyone bother to read what I am going to write? I guess that I will have two groups of readers: social scientists on the one hand, and plain folks on the other hand. The latter might very well have a deeper insight than the former, only the former like being addressed with reverence. I know something about it: I am a scientist.

Now comes the harsh truth: I don’t know why other people should bother about my writing. Honestly. I don’t know. I have been sort of carried away and in the stream of my own blogging and research, and that question comes as alien to the line of logic I have been developing for months. I need to look at my own writing and thinking from outside, so as to adopt something like a fake observer’s perspective. I have to ask myself what is really interesting in my writing.

I think it is going to be a case of assembling a coherent whole out of sparse pieces. I guess I can enumerate, once again, the main points of interest I find in my research on collective intelligence and investigate whether at all and under what conditions the same points are likely to be interesting for other people.

Here I go. There are two, sort of primary and foundational points. For one, I started my whole research on collective intelligence when I experienced the neophyte’s fascination with Artificial Intelligence, i.e. when I discovered that some specific sequences of equations can really figure stuff out just by experimenting with themselves. I did both some review of literature, and some empirical testing of my own, and I discovered that artificial neural networks can be and are used as more advanced counterparts to classical quantitative models. In social sciences, quantitative models are about the things that human societies do. If an artificial form of intelligence can be representative for what happens in societies, I can hypothesise that said societies are forms of intelligence, too, just collective forms.

I am trying to remember what triggered in me that ‘Aha!’ moment, when I started seriously hypothesising about collective intelligence. I think it was when I was casually listening to an online lecture on AI, streamed from the Massachusetts Institute of Technology. It was about programming AI in robots, in order to make them able to learn. I remember one ‘Aha!’ sentence: ‘With a given set of empirical data supplied for training, robots become more proficient at completing some specific tasks rather than others’. At the time, I was working on an article for the journal ‘Energy’. I was struggling. I had an empirical dataset on energy efficiency in selected countries (i.e. on the average amount of real output per unit of energy consumption), combined with some other variables. After weeks and weeks of data mining, I had a gut feeling that some important meaning is hidden in that data, only I wasn’t able to put my finger precisely on it.

That MIT-coined sentence on robots triggered that crazy question in me. What if I return to the old and apparently obsolete claim of the utilitarian school in social sciences, and assume that all those societies I have empirical data about are something like one big organism, with different variables being just different measurable manifestations of its activity?

Why was that question crazy? Utilitarianism is always contentious, as it is frequently used to claim that small local injustice can be justified by bringing a greater common good for the whole society. Many scholars have advocated for that claim, and probably even more of them have advocated against. I am essentially against. Injustice is injustice, whatever greater good you bring about to justify it. Besides, being born and raised in a communist country, I am viscerally vigilant to people who wield the argument of ‘greater good’.

Yet, the fundamental assumptions of utilitarianism can be used under a different angle. Social systems are essentially collective, and energy systems in a society are just as collective. There is any point at all in talking about the energy efficiency of a society when we are talking about the entire intricate system of using energy. About 30% of the energy that we use is used in transport, and transport is from one person to another. Stands to reason, doesn’t it?

Studying my dataset as a complex manifestation of activity in a big complex organism begs for the basic question: what do organisms do, like in their daily life? They adapt, I thought. They constantly adjust to their environment. I mean, they do if they want to survive. If I settle for studying my dataset as informative about a complex social organism, what does this organism adapt to? It could be adapting to a gazillion of factors, including some invisible cosmic radiation (the visible one is called ‘sunlight’). Still, keeping in mind that sentence about robots, adaptation can be considered as actual optimization of some specific traits. In my dataset, I have a range of variables. Each variable can be hypothetically considered as informative about a task, which the collective social robot strives to excel at.

From there, it was relatively simple. At the time (some 16 months ago), I was already familiar with the logical structure of a perceptron, i.e. a very basic form of artificial neural network. I didn’t know – and I still don’t – how to program effectively the algorithm of a perceptron, but I knew how to make a perceptron in Excel. In a perceptron, I take one variable from my dataset as output, the remaining ones are instrumental as input, and I make my perceptron minimize the error on estimating the output. With that simple strategy in mind, I can make as many alternative perceptrons out of my dataset as I have variables in the latter, and it was exactly what I did with my data on energy efficiency. Out of sheer curiosity, I wanted to check how similar were the datasets transformed by the perceptron to the source empirical data. I computed Euclidean distances between the vectors of expected mean values, in all the datasets I had. I expected something foggy and pretty random, and once again, life went against my expectations. What I found was a clear pattern. The perceptron pegged on optimizing the coefficient of fixed capital assets per one domestic patent application was much more similar to the source dataset than any other transformation.

In other words, I created an intelligent computation, and I made it optimize different variables in my dataset, and it turned out that, when optimizing that specific variable, i.e. the coefficient of fixed capital assets per one domestic patent application, that computation was the most fidel representation of the real empirical data.   

This is when I started wrapping my mind around the idea that artificial neural networks can be more than just tools for optimizing quantitative models; they can be simulators of social reality. If that intuition of mine is true, societies can be studied as forms of intelligence, and, as they are, precisely, societies, we are talking about collective intelligence.

Much to my surprise, I am discovering similar a perspective in Steven Pinker’s book ‘How The Mind Works’ (W. W. Norton & Company, New York London, Copyright 1997 by Steven Pinker, ISBN 0-393-04535-8). Professor Steven Pinker uses a perceptron as a representation of human mind, and it seems to be a bloody accurate representation.

That makes me come back to the interest that readers could have in my book about collective intelligence, and I cannot help referring to still another book of another author: Nassim Nicholas Taleb’s ‘The black swan. The impact of the highly improbable’ (2010, Penguin Books, ISBN 9780812973815). Speaking from an abundant experience of quantitative assessment of risk, Nassim Taleb criticizes most quantitative models used in finance and economics as pretty much useless in making reliable predictions. Those quantitative models are good solvers, and they are good at capturing correlations, but they suck are predicting things, based on those correlations, he says.

My experience of investment in the stock market tells me that those mid-term waves of stock prices, which I so much like riding, are the product of dissonance rather than correlation. When a specific industry or a specific company suddenly starts behaving in an unexpected way, e.g. in the context of the pandemic, investors really pay attention. Correlations are boring. In the stock market, you make good money when you spot a Black Swan, not another white one. Here comes a nuance. I think that black swans happen unexpectedly from the point of view of quantitative predictions, yet they don’t come out of nowhere. There is always a process that leads to the emergence of a Black Swan. The trick is to spot it in time.

F**k, I need to focus. The interest of my book for the readers. Right. I think I can use the concept of collective intelligence as a pretext to discuss the logic of using quantitative models in social sciences in general. More specifically, I want to study the relation between correlations and orientations. I am going to use an example in order to make my point a bit more explicit, hopefully. In my preceding update, titled ‘Cool discovery’, I did my best, using my neophytic and modest skills in programming, the method of negotiation proposed in Chris Voss’s book ‘Never Split the Difference’ into a Python algorithm. Surprisingly for myself, I found two alternative ways of doing it: as a loop, on the one hand, and as a class, on the other hand. They differ greatly.

Now, I simulate a situation when all social life is a collection of negotiations between people who try to settle, over and over again, contentious issues arising from us being human and together. I assume that we are a collective intelligence of people who learn by negotiated interactions, i.e. by civilized management of conflictual issues. We form social games, and each game involves negotiations. It can be represented as a lot of these >>

… and a lot of those >>

In other words, we collectively negotiate by creating cultural classes – logical structures connecting names to facts – and inside those classes we ritualise looping behaviours.

Money being just money for the sake of it

I have been doing that research on the role of cities in our human civilization, and I remember the moment of first inspiration to go down this particular rabbit hole. It was the beginning of March, 2020, when the first epidemic lockdown has been imposed in my home country, Poland. I was cycling through streets of Krakow, my city, from home to the campus of my university. I remember being floored at how dead – yes, literally dead – the city looked. That was the moment when I started perceiving cities as something almost alive. I started wondering how will pandemic affect the mechanics of those quasi-living, urban organisms.

Here is one aspect I want to discuss: restaurants. Most restaurants in Krakow turn into takeouts. In the past, each restaurant had the catering part of the business, but it was mostly for special events, like conferences, weddings and whatnot. Catering was sort of a wholesale segment in the restaurant business, and the retail was, well, the table, the napkin, the waiter, that type of story. That retail part was supposed to be the main one. Catering was an addition to that basic business model, which entailed a few characteristic traits. When your essential business process takes place in a restaurant room with tables and guests sitting at them, the place is just as essential. The location, the size, the look, the relative accessibility: it all played a fundamental role. The rent for the place was among the most important fixed costs of a restaurant. When setting up business, one of the most important questions – and risk factors – was: “Will I be able to attract sufficiently profuse customers to this place, and to ramp up prices sufficiently high to as to pay the rent for the place and still have satisfactory profit?”. It was like a functional loop: a better place (location, look) meant more select a clientele and higher prices, which required to pay a high rent etc.

As I was travelling to other countries, and across my own country, I noticed many times that the attributes of the restaurant as physical place were partly substitute to the quality of food. I know a lot of places where the customers used to pretend that the food is excellent just because said food was so strange that it just didn’t do to say it is crappy in taste. Those people pretended they enjoy the food because the place was awesome. Awesomeness of the place, in turn, was largely based on the fact that many people enjoyed coming there, it was trendy, stylish, it was a good thing to show up there from time to time, just to show I have something to show to others. That was another loop in the business model of restaurants: the peculiar, idiosyncratic, gravitational field between places and customers.

In that business model, quite substantial expenses, i.e.  the rent, and the money spent on decorating and equipping the space for customers were essentially sunk costs. The most important financial outlays you made to make the place competitive did not translate into any capital value in your assets. The only way to do such translation was to buy the place instead of renting it. Advantageous, long-term lease was another option. In some cities, e.g. the big French ones, such as Paris, Lyon or Marseille, the market of places suitable for running restaurants, both legally and physically, used to be a special segment in the market of real estate, with its own special contracts, barriers to entry etc.   

As restaurants turn into takeouts, amidst epidemic restrictions, their business model changes. Food counts in the first place, and the place counts only to the extent of accessibility for takeout. Even if I order food from a very fancy restaurant, I pay for food, not for fanciness. When consumed at home, with the glittering reputation of the restaurant taken away from it, food suddenly tastes differently. I consume it much more with my palate and much less with my ideas of what is trendy. Preparation and delivery of food becomes the essential business process. I think it facilitates new entries into the market of gastronomy. Yes, I know, restaurants are going bankrupt, and my take on it is that places are going bankrupt, but people stay. Chefs and cooks are still there. Human capital, until recently being 50/50 important – together with the real estate aspect of the business – becomes definitely the greatest asset of the restaurants’ sector as they focus on takeout. The broadly spoken cooking skills, including the ability to purchase ingredients of good quality, become primordial. Equipping a business-scale kitchen is not really rocket science, and, what is just as important, there is a market for second-hand equipment of that kind. The equipment of a kitchen, in a takeout-oriented restaurant, is much more of an asset than the decoration of a dining room. The rent you pay, or the market price of the whole place in the real-estate market are much lower, too, as compared to classical restaurants.

What restaurant owners face amidst the pandemic is the necessity to switch quickly, and on a very short notice of 1 – 2 weeks, between their classical business model based on a classy place to receive customers, and the takeout business model, focused on the quality of food and the promptness of delivery. It is a zone of uncertainty more than a durable change, and this zone is

associated with different cash flows and different assets. That, in turn, means measurable risk. Risk in big amounts is an amount, essentially, much more than a likelihood. We talk about risk, in economics and in finance, when we are actually sure that some adverse events will happen, and we even know what is going to be the total amount of adversity to deal with; we just don’t know where exactly that adversity will hit and who exactly will have to deal with it.

There are two basic ways of responding to measurable risk: hedging and insurance. I can face risk by having some aces up my sleeve, i.e. by having some alternative assets, sort of fall-back ones, which assure me slightly softer a landing, should the s**t which I hedge against really happen. When I am at risk in my in-situ restaurant business, I can hedge towards my takeout business. With time, I can discover that I am so good at the logistics of delivery that it pays off to hedge towards a marketing platform for takeouts rather than one takeout business. There is an old saying that you shouldn’t put all your eggs in the same basket, and hedging is the perfect illustration thereof. I hedge in business by putting my resources in many different baskets.

On the other hand, I can face risk by sharing it with other people. I can make a business partnership with a few other folks. When I don’t really care who exactly those folks are, I can make a joint-stock company with tradable shares of participation in equity. I can issue derivative financial instruments pegged on the value of the assets which I perceive as risky. When I lend money to a business perceived as risky, I can demand it to be secured with tradable notes AKA bills of exchange. All that is insurance, i.e. a scheme where I give away part of my cash flow in exchange of the guarantee that other people will share with me the burden of damage, if I come to consume my risks. The type of contract designated expressis verbis as ‘insurance’ is one among many forms of insurance: I pay an insurance premium in exchange o the insurer’s guarantee to cover my damages. Restaurant owners can insure their epidemic-based risk by sharing it with someone else. With whom and against what kind of premium on risk? Good question. I can see like a shade of that. During the pandemic, marketing platforms for gastronomy, such as Uber Eats, swell like balloons. These might be the insurers of the restaurant business. They capitalize on the customer base for takeout. As a matter of fact, they can almost own that customer base.

A group of my students, all from France, as if by accident, had an interesting business concept: a platform for ordering food from specific chefs. A list of well-credentialed chefs is available on the website. Each of them recommends a few flagship recipes of theirs. The customer picks the specific chef and their specific culinary chef d’oeuvre. One more click, and the customer has that chef d’oeuvre delivered on their doorstep. Interesting development. Pas si con que ça, as the French say.     

Businesspeople have been using both hedging and insurance for centuries, to face various risks. When used systematically, those two schemes create two characteristic types of capitalistic institutions: financial markets and pooled funds. Spreading my capitalistic eggs across many baskets means that, over time, we need a way to switch quickly among baskets. Tradable financial instruments serve to that purpose, and money is probably the most liquid and versatile among them. Yet, it is the least profitable one: flexibility and adaptability is the only gain that one can derive from holding large monetary balances. No interest rate, no participation in profits of any kind, no speculative gain on the market value. Just adaptability. Sometimes, just being adaptable is enough to forego other gains. In the presence of significant need for hedging risks, businesses hold abnormally large amounts of cash money.

When people insure a lot – and we keep in mind the general meaning of insurance as described above – they tend to create large pooled funds of liquid financial assets, which stand at the ready to repair any breach in the hull of the market. Once again, we return to money and financial markets. Whilst abundant use of hedging as strategy for facing risk leads to hoarding money at the individual level, systematic application of insurance-type contracts favours pooling funds in joint ventures. Hedging and insurance sort of balance each other.

Those pieces of the puzzle sort of fall together into a pattern. As I have been doing my investment in the stock market, all over 2020, financial markets seems to be puffy with liquid capital, and that capital seems to be avid of some productive application. It is as if money itself was saying: ‘C’mon, guys. I know I’m liquid, and I can compensate risk, but I am more than that. Me being liquid and versatile makes me easily convertible into productive assets, so please, start converting. I’m bored with being just me, I mean with money being just money for the sake of it’.

Time for a revolution

I am rethinking the economics of technological change, especially in the context of cloud computing and its spectacular rise, as, essentially, a new and distinct segment of digital business. As I am teaching microeconomics, this semester, I am connecting mostly to that level of technological change. I want to dive a bit more into the business level of cloud computing, and thus I pass in review the annual reports of heavyweights in the IT industry: Alphabet, Microsoft and IBM.

First of all, a didactic reminder is due. When I want to study the business, which is publicly listed in a stock market, I am approaching that business from its investor-relations side, and more specifically the investor-relations site. Each company listed in the stock market runs such a site, dedicated to show, with some reluctance to full transparency, mind you, the way the business works. Thus, in my review, I call by, respectively: https://abc.xyz/investor/ for Alphabet (you know, the mothership of Google), https://www.microsoft.com/en-us/investor as regards Microsoft, and https://www.ibm.com/investor as for them Ibemians.

I start with the Mother of All Clouds, i.e. with Google and its mother company, namely Alphabet. Keep in mind: the GDP of Poland, my home country, is roughly $590 billions, and the gross margin which Alphabet generated in 2019 was $89 857 million, thus 15% of the Polish GDP. That’s the size of business we are talking about and I am talking about that business precisely for that reason. There is a school in economic sciences, called new institutionalism. Roughly speaking, those guys study the question why big corporate structures exist at all. The answer is that corporations are a social contrivance which allows internalizing a market inside an organization. You can understand the general drift of that scientific school if you study a foundational paper by O.D. Hart (Hart 1988[1]). Long story short, when a corporate structure grows as big as Alphabet, I can assume its internal structure is somehow representative for the digital industry as a whole. You could say: but them Google people, they don’t make hardware. No, they don’t, and yet they massively invest in hardware, mostly in servers. Their activity translates into a lot of IT hardware.

Anyway, I assume that the business structure of Alphabet is informative about the general structure and the drift of the digital business globally. In the two tables below, I show the structure of their revenues. For the non-economic people: revenue is the value of sales, or, in analytical terms, Price multiplied by Quantity.     


Semi-annual revenue of Alphabet Inc.

The next step is to understand specifically the meaning of categories defined as ‘Segments’, and the general business drift. The latter is strongly rooted in what the Google tribe cherishes as ‘Moonshots’, and which means technological change seen as revolution rather than evolution. Their business develops by technological leaps, smoothed by exogenous economic conditions. Those exogenous conditions translate into the Alphabet’s business mostly as advertising. In the subsection titled ‘How we make money’, you can read it explicitly. By the way, under the mysterious categories of ‘Google other’ and ‘Other Bets revenues’, Alphabet understands, respectively:

>> Google other: Google Play, including sales of apps and in-app purchases, as well as digital content sold in the Google Play store; hardware, including Google Nest home products, Pixelbooks, Pixel phones and other devices; YouTube non-advertising, including YouTube Premium and YouTube TV subscriptions and other services;

>> Other Bet revenues are, in the Google corporate jargon, young and risky businesses, slightly off the main Googly track; right now, they cover the sales of Access internet, TV services, Verily licensing, and R&D services.

Against that background, Google Cloud, which most of us are not really familiar with, as it is a business-to-business functionality, shows interesting growth. Still, it is to keep in mind that Google is cloud: ‘Google was a company built in the cloud. We continue to invest in infrastructure, security, data management, analytics and AI’ (page 7 of the 10K annual report for 2019). You Tube ads, which show a breath-taking ascent in the company’s revenue, base their efficiency and attractiveness on artificial intelligence operating in a huge cloud of data regarding the viewers’ activity on You Tube.

Now, I want to have a look at Alphabet from other financial angles. Their balance sheet, i.e. their capital account, comes next in line. In two tables below, I present that balance sheet one side at a time, and I start with the active side, i.e. with assets. I use the principle that if I know what kind of assets a company invests money in, I can guess a lot about the way their business works. When I look at Alphabet’s assets, the biggest single category is that of ‘Marketable securities’, closely followed by ‘Property and Equipment’. They are like a big factory with a big portfolio of financial securities, and the portfolio is noticeably bigger than the factory. This is a pattern which I recently observe in a lot of tech companies. They hold huge reserves of liquid financial assets, probably in order to max out on their flexibility. You never know when exactly you will face both the opportunity and the necessity to invest in the next technological moonshot. Accounts receivable and goodwill come in the second place, as regards the value in distinct groups of assets. A bit of explanation is due as for that latter category. Goodwill might suggest someone had good intentions. Weeell, sort of. When you are a big company and you buy a smaller company, and you obviously overpay for the control over that company, over the market price of that stock, the surplus you have overpaid you call ‘Goodwill’. It means that this really expensive purchase is, in the same time, very promising, and there is likely to be plenty of future profits. When? In the future, stands to reason.

Now, I call by the passive side of Alphabet’s balance sheet, i.e. by their liabilities and equity, which is shown schematically in the next table below. The biggest single category here, i.e. the biggest distinct stream of financial capital fuelling this specific corporate machine is made of ‘Retained Earnings’, and stock equity comes in the second place. Those two categories taken together made 73% of the Alphabet’s total capital base, by the end of 2019. Still, by the end of 2018, that share was of 77%. Whilst Alphabet retains a lot of its net profit, something like 50%, there is a subtle shift in their financing. They seem to be moving from an equity-based model of financing towards more liability-based one. It happens by baby steps, yet it happens. Some accrued compensations and benefits (i.e. money which Alphabet should pay to their employees, yet they don’t, because…), some accrued revenue share… all those little movements indicate a change in their way of accumulating and using capital.   

The next two tables below give a bird’s eye view of Alphabet in terms of trends in their financials. They have a steady profitability (i.e. capacity to make money out of current business), their capacity to bring return on equity and assets steadily grows, and they shift gently from equity-based finance towards more complex a capital base, with more long-term liabilities. My general conclusion is that Alphabet is up to something, like really. They claim they constantly do revolution, but my gut feeling is that they are poising themselves for a really big revolution, business-wise, coming shortly. Those reserves of liquid financial assets, that accumulation of liabilities… All that stuff is typical in businesses coiling for a big leap.  There is another thing, closely correlated with this one. In their annual report, Alphabet claims that they mostly make money on advertising. In a narrow, operational sense, it might be true. Yet, when I have a look at their cash-flow, it looks different. What they have cash from, first and most of all, are maturities and sales of financial securities, and this one comes as way a dominant, single source of cash, hands down. They make money on financial operations in the stock market, in somehow plainer a human lingo. Then, in the second place, come two operational inflows of cash: amortization of fixed assets, and tax benefits resulting from the payment of stock-based compensations. Alphabet makes real money on financial operations and tax benefits. They might be a cloud in their operations, but in their cash-flows they are a good, old-fashioned financial scheme.  

Now, I compare with Microsoft (https://www.microsoft.com/en-us/Investor/sec-filings.aspx). In a recent update, titled ‘#howcouldtheyhavedoneittome’, I discussed the emerging position of cloud computing in the overall business of Microsoft. Now, I focus on their general financials, with a special focus on their balance sheet and their cash-flow. I show a detailed view of both in the two tables that follow. Capital-wise, Microsoft follows slightly different a pattern as compared to Alphabet, although some common denominators appear. On the active side, i.e. as regards the ways of employing capital, Microsoft seems to be even more oriented on liquid financial than Alphabet. Cash, its equivalents, and short-term investments are, by far, the biggest single category of assets in Microsoft. The capital they have in property and equipment is far lower, and, interestingly, almost equal to goodwill. In other words, when Microsoft acquires productive assets, it seems to be like 50/50 their own ones, on the one hand, and those located in acquired companies, on the other hand. As for the sources of capital, Microsoft is clearly more debt-based, especially long-term debt, than Alphabet, whilst retaining comparatively lower a proportion of their net income. It looks as if Alphabet was only discovering, by now, the charms of a capital structure which Microsoft seems to have discovered quite a while ago. As for cash-flows, both giants are very similar. In Microsoft, as in Alphabet, the main single source of cash is the monetization of financial securities, through maturity or by sales, with operational tax write-offs coming in the second place. Both giants seem to be financially bored, so to say. Operations run their way, people are interested in the company’s stock, from time to time a smaller company gets swallowed, and it goes repeatedly, year by year. Boring. Time for a revolution.      

Edit: as I was ruminating my thoughts after having written this update, I recorded a quick video (https://youtu.be/ra2ztH3k0M0 ) on the economics of technological change, where I connect my observations about Alphabet and Microsoft with a classic, namely with the theory of innovation by Joseph Schumpeter.

[1] Hart, O. D. (1988). Incomplete Contracts and the Theory of the Firm. Journal of Law, Economics, & Organization, 4(1), 119-139.

 


[1] Hart, O. D. (1988). Incomplete Contracts and the Theory of the Firm. Journal of Law, Economics, & Organization, 4(1), 119-139.

New, complete course of Business Planning

I have just finished putting together a complete course of Business Planning. You can find the link on the sidebar. In a series of video lectures combined with Power Point presentations, you will go through all the basic skills of business planning: pitching and modelling your business concept, market research and its translation into financials, assessment of the optimal capital base, and thorough reflection on the soft side of the business plan, i.e. your goals, your risks, your people etc.

Click, dive into, dig through and enjoy.

Fire and ice. A real-life business case.

I keep going along the frontier between my scientific research, my small investment business, and my teaching. In this update, I bring you two typically educational pieces of content, one sort of astride educational and practical investment decisions of my own, and finally I give slightly educational an account of a current business decision I am taking.  

In the video entitled ‘My investment experience, my teaching and my science #3  BMW, Daimler and Volkswagen’ [ Invest 3 2020-08-26 14-02-22 ; https://youtu.be/Vot6QMXp7UA  ], I discuss those three investment positions in my portfolio. Three German automotive companies. Same industry, same country, same macroeconomic environment, and yet three different performances in terms of return on investment. In this video, you can see me developing on the distinction between long term-trends and short-term variations, as well as trying to connect technical analysis of price trends with fundamental analysis of their half-annual reports.

I have place on You Tube two pieces of content in the stream of teaching designated as ‘Urban Economics and City Management’. ‘Urban Economics and City Management #1 Lockdowns in pandemic and the role of cities’ [ Cities 1 2020-08-27 08-57-15; https://youtu.be/fYIz_6JVVZk  ] recounts and restates my starting point in this path of research. I browse through the main threads of connection between the pandemic of COVID-19 and the civilisational role of cities. The virus, which just loves densely populated places, makes us question the patterns of urban life, and makes us ask question as for the future of cities.

In ‘Urban Economics and City Management #2 Case study of REIT: Urban Edge and Atrium [Cities 2 2020-08-27 11-00-52 ; https://youtu.be/BURimdfpxcY ], I study the cases of two REITs, i.e. Real Estate Investment Trusts, namely Urban Edge (U.S.) and Atrium (Central Europe), with two assumptions. Firstly, cities can grow and evolve, when the local humans master the craft of agglomerating in one, relatively tiny place, the technologies of construction, sanitation, transportation, energy supply etc., and to parcel those technologies into marketable goods. Secondly, rental and lease of real estate are parcelled, marketable urban technologies.

In the video ‘My investment experience, my teaching and my science #4 The Copernic project’, [ Invest 4 Copernic 2020-08-30 08-57-54 ; https://youtu.be/_6klh0AwJAM  ], I am developing on a topic exactly at the intersection of those three: the Copernic project. Honestly, this is complex stuff. I hesitated to choose this topic as educational material, yet I have that little intuition that good teachers teach useful skills. I want to be a good teacher, and the s**t I teach, I want it to be useful for my students. Life is complex and brutal, business is complex and brutal, and, as a matter of fact, each of us, humans, is complex and brutal. Fake simplicity is for pussies.

Thus, whoever among my students reads this update and watches the accompanying video material, is going to deal with real stuff, far beyond textbooks. This is a business which I am thinking about engaging in, and I am just starting to comprehend its patterns. This update is a living proof and test how good I am, or how I suck, at grasping business models of the digital economy.

In educational terms, I am locating the content relative to Copernic project in the path of teaching which I labelled ‘My investment experience, my teaching and my science’, as I am entertaining the idea of investing in the Copernic project. The subject cuts comprehensively across and into many aspects of economics and management. It can be considered as useful material for any educational path in these major fields.

It started when I reacted to a piece of advertising on Facebook. Yes, many interesting stories start like that, nowadays. It was an ad for the Copernic project itself. Here you have a link to Copernic’s website – https://copernic.io/ – but keep in mind that it is only Polish version, at least for the moment. I will do my best to describe the project in English.

Copernic is both the name of the project, and the name of an LLP (Limited Liability Partnership), incorporated under Polish law, in Krakow, Poland. The commonly used Polish acronym for an LLP is ‘sp. Z o.o.’, however, as I write in English, I will keep using the name ‘Copernic LLP’. I checked this company in the Judicial Register (of incorporated entities) run by the Ministry of Justice of the Republic of Poland, under the link https://ekrs.ms.gov.pl/web/wyszukiwarka-krs/strona-glowna/index.html . A business story emerges. On December 6th, 2019, Copernic LLP is founded, under the register #817764, in Gdansk, Poland, technically by two partners: a physical person and another LLP, i.e. TTC Trade LLP (register #788023). Yet, after scratching the surface, the surface being the Judicial Register, I discovered that TTC Trade LLP is wholly owned by the same physical person who was its partner in Copernic LLP. Anyway, the physical person apported 1000 PLN and took 1 partner share, whilst her LLP paid in 4000 PLN in exchange of 4 partner shares. By the way, PLN stands for Polish zloty and it comes like PLN 1 = $0,27.

On May 6th, 2020, the physical person who founded Copernic LLP steps out of the partnership, and her own LLP, TTC Trade, sells two of its two partner shares in Copernic LLP, to Sapiency LLP (https://sapiency.io/en/, register #789717) incorporated in Krakow, Poland, at their face value of 2000 PLN. On the same day, the partnership contract is being reformulated entirely and signed anew, including a change of headquarters, which move from Gdansk to Krakow, Poland. By the same occasion, another corporate partner steps in, namely Reset Sun Energy LLP (Konin, Poland, register #802147) and takes 2 partner shares in Copernic LLP, for a price of 2000 PLN. By the same means, the total partners’ equity in Copernic LLP moves from 5000 PLN to 6000 PLN.

On July 20th, 2020, TTC Trade LLP and Reset Sun Energy LLP both sell their partner shares in Copernic LLP to Sapiency LLP, at face value, i.e. 6000 PLN. We have an interesting legal structure, when one Limited Liability Partnership (Copernic) is wholly owned by another Limited Liability Partnership (Sapiency), which, in turn, is 50/50 owned by two gentlemen, one of whom I had the honour to meet in person. Cool guy. Fire and ice in one. A bit like me.   

Sapiency is mostly active in cryptocurrencies. They make Blockchain-based tokens for whoever asks, and I think their main technological platform is Ethereum (https://ethereum.org/en/). The marketing model is membership-based, thus oriented on long-term relations with customers. The business model of Copernic LLP is logically connected to that of Sapiency LLP. Copernic builds solar farms in Poland, and markets Blockchain-based tokens labelled Copernic1, at a face value of 4 PLN apiece. Each such token corresponds to a share in the future leasing of solar farms, and those farms, by now, are under actual or planned construction. Later on, i.e. after the solar farms become operational, those lease-connected Copernic1 tokens are supposed to give their holders a claim on secondary tokens CopernicKWH, which, in turn, correspond to claims on electricity generated in those solar farms. The first attribution of CopernicKWH tokens to the holders of Copernic1 tokens is supposed to take place within 14 days after the first photovoltaic farm becomes operational with Copernic LLP, with a standing power of at least 1 MW. That day of operational capacity can be a movable feast, and thus the official statute of those tokens stipulates that the first attribution of CopernicKWH will take place not later than January 1st 2021. After the first attribution of  CopernicKWH, subsequent attributions to the holders of Copernic1 are supposed to take place at least once a week.

The CopernicKWH tokens can be used as means of payment at the Kanga Exchange (https://kanga.exchange ), which looks cool, on the whole, with one exception. According to Kanga’s own statement, ‘Kanga Exchange is operated by Good Investments Ltd, registered in accordance with the International Business Companies Act of the Republic of Seychelles, Company Number 192185’ (https://support.kanga.exchange/company-information/ ). Just for your information: I can incorporate a business in Seychelles without getting up from my desk, 100% online, for the modest sum of 399 British Pounds (https://www.offshoreformations247.com/offshore-jurisdictions/seychelles). I am fully aware how bloody hard it is to set up any business structure connected to cryptocurrencies in the European legal environment, however… Seychelles? Seriously?

The average price of electricity in Poland, when I am writing those words, is around 0,617 PLN per 1 kWh. One Copernic1 token, with its current price of 4 PLN, corresponds to 4/0,617 = 6,48 kWh of energy. Assuming that every week, starting from the day 0 of operations at the solar farm, Copernic LLP attributes me 1 CopernicKWH token for each Copernic1 token in my possession, I break even after 7 weeks, and each consecutive week brings me a net profit.

I do my maths according to the logic of the capital balance sheet. First of all, I want to compute the book value of assets that corresponds to the planned solar farm of 1 megawatt in standing power. In a report published by the International Renewable Energy Agency (IRENA https://irena.org ), entitled ‘Renewable Power Generation Costs in 2019’ (https://irena.org/publications/2020/Jun/Renewable-Power-Costs-in-2019 ), I can read that the average investment needed for 1 watt of power in a photovoltaic installation can be cautiously estimated at $0,38, thus PLN 1,40.

Building a solar farm of 1 MW, thus of a million watts in terms of electric power, means an investment of at least PLN 1,40 * 106 = PLN 1 400 000. To that, you need to add the price of acquiring land. At the end of the day, I would tentatively put a PLN 2 million capital tag on the project. Supposing that capital for the project comes from the sales of Copernic1 tokens, Copernic LLP needs to sell at least 2 000 000 PLN/ 4 PLN = 500 000 of them Copernic1.

Looks like a lot, especially for a Limited Liability Partnership with partner equity at 6000 PLN. Assets worth PLN 2 000 000 minus PLN 6000 in partner equity means PLN 1 994 000 = $ 538 919  in capital which is not clear at all where it is supposed to come from. The sole partner in Copernic LLP, namely Sapiency LLP could pay in additional equity. Happens all the time. Still, Sapiency LLP as a partner equity of PLN 5000. See what I mean? Another option is a massive loan, and, finally, the whole balance sheet could rely mostly on those Copernic1 tokens. Only those tokens are supposed to embody claims on the lease of the solar farm. Now, legally, a lease is a contract which gives to the lessee (the one who physically exploits), the right to exploit things or rights owned by the lessor (the one who graciously allows others to exploit). In exchange, the lessee pays a rent to the lessor.

There are two things about that lease of solar farms. A lease is not really divisible, as it is the right to exploit something. If you divide that something into smaller somethings, you split the initial lease into as many separate leases. If I buy one Copernic1 token and that token embodies claims derived from a lease contract, what specifically is the object of leasing? There is another thing. If I buy Copernic1 tokens, it gives me claims on the future CopernicKWH tokens. In other words, Copernic will pay me in the future. If they pay me, on the basis of a lease contract, it is as if they were paying me a rent, i.e. as if they were leasing that solar farm from me. Only I don’t have that solar farm. They will have it. Yes, indeed, WTF? This is the moment to ask that rhetorical question.

A few paragraphs ago, I wrote that I am entertaining the idea of investing in those Copernic1 tokens. I think the idea has become much less attractive, business-wise, whilst becoming much more entertaining. There is an important question, though. Isn’t it ethically advisable to invest in renewable energies, even if the legal scheme is a bit sketchy, just to push forward those renewables? I can give an answer in two parts to that question. Firstly, renewables grow like hell, both in terms of power supplied, and in terms of attractiveness in financial markets. They really don’t need any exceptional push. They walk, and even run on their own legs. Secondly, I worked through my own ideas for implementing new technologies in the field of renewable energies, and, notably, I worked a lot with a tool called ‘Project Navigator’, run by the same International Renewable Energy Agency which I quoted earlier. The link is here: https://irena.org/navigator . There is one sure takeaway I have from working with that tool: a good project needs a solid, transparent, 100% by-the-book institutional base. Wobbly contracts translate into wobbly financing, and that, in turn, means grim prospects for the project in question.     

Another doubt arises in my mind, as I do flows instead of balances. A solar farm needs to earn money, i.e. to make profit, in order to assure a return on investment. The only asset which can earn value over time is land in itself. In practical terms, as long as we want that solar farm to work, it needs to generate a positive operational cash flow. Photovoltaic equipment ages inexorably, by physical wear and tear as well as by relative moral obsolescence. That aging can assure substantial amortization, yet you need some kind of revenue which you can write that amortization off from. If all or a substantial part of energy produced in the solar farm is tokenized and attributed to the holders of Copernic1, lease-based tokens, there could be hardly any energy left for sale, hence not much of a revenue. In other words, the system of initial financing with tokens can jeopardize economic payoff from the project, and that’s another thing I learnt with the Project Navigator: you need a solid economic base, and there is no way around it.

The hopefully crazy semester

Another handful of educational material, for the apparently (hopefully) crazy semester at the university. Crazy because of the virus, stands to reason. Things are never crazy because we make them so, stands to reason, once again.

I am making a big, fat bottom line at my investment portfolio in the stock market, and I am using this opportunity to make some educational material. The point of using my experience in education. It is personal experience, important to enrich theory. It is a story of personal limitations in business decisions, and understanding those limitations is important for understanding microeconomics as the substance of decisions, macroeconomics as their context, and management as their execution.

I have successful experience, together with hindsight on the mistakes I made. I can utilize it as valuable material to share and to build some teaching on. Since January 2020, I have invested  $7 924,76 in the stock market, and today (August 25th, 2020), my investment portfolio is worth  $11 719,91. I have 47,89% of return on the cash invested, over a period of 7 months. Not bad for a theoretician, isn’t it? I am deeply convinced that personal experience is impossible to bypass in any true teaching. Whatever kind of story I am telling on the moment, I always tell the story of my own existence. I can make it genuine and truthful just as well. Here is the link to the first, introductory video in this path: ‘My investment experience, my teaching and my science #1’  [Invest 1 2020-08-25 11-54-58 ; https://youtu.be/uYm0xB322u0 ]

In the second video of the same series [Invest 2 2020-08-26 07-37-08; https://youtu.be/XqYbe_LMdhY ], I focus on the presentation of my investment portfolio. I stress two points. Firstly, the portfolio which I hold now is the cumulative outcome of past trials and errors. Secondly, my portfolio shows many alternative scenarios of what could possibly have happened to my money, had I invested in just one among the 27 positions, thus if I had not diversified. I could have made +313% or -49%, instead of the 48% I had made as of August 25th 2020. I study more fundamentally the case of General Electric, which is one of my financial failures as for now. Turns out they have stakes in aviation, and that sucks in the times of pandemic.

In the third video of the series ‘Business Models in the Media Industry’ [Media BM 3 2020-08-26 08-24-42; https://youtu.be/bbmdsTaY7Lg ] I focus more in depth on studying the case of Netflix. You can have a glimpse of their transition from a streamer of externally made content to a business based on in-house made content. You can also see how strongly their business model is grounded in the assumption of constant growth in size.

In my second video devoted to Political Systems [PolitSys 2 2020-08-26 09-02-47; https://youtu.be/iRxwZDKlDxM ] I use two cases, i.e. the constitutions of France and Finland, to give my readers, followers and students a first glimpse on forms of political power. You can see that general concept in the context of distinction between a presidential system (France) vs a Parliamentary one (Finland).  

Germany happens too, like all the time

MY EDITORIAL ON YOU TUBE

I am experiencing an unusually long pause between consecutive updates on my blog. I published my latest update, entitled The balance between intelligence and the way we look in seasoned black leather, on June 23rd, 2020. This specific paragraph is technically in the introduction to a new update, yet I am writing it on June 30th, 2020, after having struggled with new writing for 6 entire days. There are two factors. Firstly, quite organically, we are having a persistent storm front over our part of Europe and with storms around, I have hard time to focus. I am in a bizarre state, as if I was sleepy and was having headaches in the same time. No, this is not hangover. There is nothing I could possibly have hangover after, like really, parole d’honneur. Sober as a pig, as we say in Poland.

Tough s**t makes tough people, and I when I experience struggle, I try to extract some learning therefrom. My learning from such episodes of intellectual struggle is that I can apply to my writing the same principles I apply to my training. Consistency and perseverance rule, intensity is an instrument. I can cheat myself into writing by short bouts. I can write better when I relax. I can write better when I consider pain and struggle as an interesting field of experience to explore and discover. By the way, this is something I discovered over the last 3,5 years, since I started practicing the Wim Hof method: that little fringe of struggle at the frontier of my comfort zone is extremely interesting. I discover a lot about myself when I place myself in that zone of proximal development, just beyond the limits of everyday habits. Nothing grand and impressive, just a tiny bit of s**t which I give to myself. When I keep it tiny, I can discover and study my experience thereof, and this is real stuff, as learning comes.   

The other reason I am struggling with my writing for is the amount of information I need to process. I am returning to studying my investment strategy, as I do every month, or so. There is a lot going on in the stock markets, and in my own decisions about them. I have hard times to keep up with my writing. Besides, I am really closing on the basic structure of my book on the civilizational role of cities, and I am preparing teaching content for online learning the next academic year. Yes, it looks like we go almost entirely distance learning, at least in the winter semester.

All in all, this update for my blog is a strange one. Usually, writing helps me put some order in my thinking and doing. This time, I have hard times to keep up with what’s going on. Once again, having hard times just means it is difficult. I keep trying and going. By trying and going, I have almost painfully come to the realisation what kind of message I want to convey in this update, when I finally end up by publishing it. Before I develop on that realisation, a short digression as regards the ‘end up by publishing’ part of the preceding sentence. I work in a rhythm of intuitively experienced intellectual exhaustion: I publish when I feel I have unloaded an intelligible, well rounded portion of my thinking into my writing.

What I am experiencing right now is precisely the feeling of having made a closure on a window of uncertainty and hesitation in many different fields. This update is specifically oriented on my strategy for investing in the stock market, and therefore this is the main thread I am sticking to. Still, that feeling of having just surfed a large wave of uncertainty sort of generally in life. I know it sounds suspiciously introspective in a blog post about investment, but here is another thing I have learnt about investment: being introspective pays. It pays financially. When I put effort into studying my own thoughts and my own decision making process, I learn how to make better, more informed decisions.  

My financial check from last month financial check is to find in ‘The moment of reassessment’. As I repeat that self-study of my own financial strategy, I find it both hard and rewarding. It is much harder to study my own decisions and my own behaviour (self-assessment) than to comment on sort of what people generally do (social science).

I feel as if I were one of those old-school inventors, who would experiment on themselves. Anyway, let’s study. Since ‘The moment of reassessment’ I made a few important financial decisions, and those decisions were marked by an unusual injection of cash. Basically, every month, I invest in the stock market an amount of PLN 2500, thus around $630, which corresponds to the rent I collect monthly from an apartment I own in town. I take the proceeds from one asset. i.e. real estate, and I use them to create a collection of financial assets.

As I have been practicing investment as a real thing, since the end of January, 2020 (see Bloody hard to make a strategy), I have learnt a lot in social sciences, too, mostly as regards microeconomics. I teach my students that fundamental concept of opportunity cost: when you invest anything, i.e. capital or your own work, in thing A, you forego the possibility of investing in thing B, and thus you choose the benefits from investment A to the expense of those from investment B. Those benefits B are the opportunity cost of investing in A. This is theory from textbooks. As I invest in the stock market, I suddenly understand all the depth of that simple rule. The stock market is like an ocean: there is always a lot that remains out of sight, or just out of my current attention span, and the way I orient my attention is crucial.

I have acquired a very acute feeling of what is called ‘bound rationale of economic decisions’ in textbooks. I have come to appreciate and respect the difference between well-informed decisions and the poorly informed ones. I have learnt the connection between information and time. Now, I know that not only do I have a limited bandwidth as regards business intel, but also that limited bandwidth spreads over time: the more time I have to decide, the more information I can process, and yet it would be too easy if it was that simple, since information loses value over time, and new information is better than old information.

That whole investment story has also taught me a lot about business strategies. I realized that I can outline a lot of alternative wannabe strategies, but only a few of them are workable as real sequences of decisions and actions of a strategy.

Good. Time to outline the situation: my current portfolio, comparison with that presented a month ago in ‘The moment of reassessment’, a short explanation how the hell have I come there, assessment of efficiency, and decisions for the future. Here is the thing: at the very moment when I started to write this specific update on my blog, thus on June 24th, 2020, things started to go south, investment-wise. I found myself in a strange situation, i.e. so fluid and changing one that describing it verbally is always one step behind actual events.

When I don’t have what I like, I have to do with what I have. In the absence of order and abundance of chaos, I have to do with chaos. Good chaos can be useful, mind you, as long as I can find my way through it. Step one, I am trying to describe chaos to the extent of possible. I am trying to phrase out the change in itself. There is some chaos in markets, and some in myself.

Good. Now I can start putting some order in chaos. I can describe change piece by piece, and I guess the best starting point is myself. After all, the existential chaos I am facing is – at least partly – the outcome of my own choices. After I published in ‘The moment of reassessment’, I began with taking non-routine decisions. That end-May-beginning-June period was a moment of something like a shake-off in my personal strategy. I was changing a lot. For reasons which I am going to explain in a moment, I sharply increased the amount of money in my two investment accounts. Now, as I look at things, I am coping with the delayed effects of those sudden decisions. The provisional lesson is that when I do something sudden in my business activity (I consider investment in the stock market as regular business: I put cash in assets which are supposed to bring me return), it is like a sudden shock, and ripples from that shock spread over time. Lesson number two is that any unusually big transfer of cash between into or from any of my investment accounts is such a shock, and there are ripples afterwards.

I think it is worth reconstructing a timeline of my so-far adventures in stock-market investment. End of January 2020, I start. I start investing shyly, without really knowing clearly what I want. I didn’t know what exact portfolio I wanted to build. I just had a general principle in mind, namely that I want to open investment positions in renewable energies, biotech, and IT.

From February through March 2020, I experiment with putting those principles into a practical frame. I do a lot of buying and selling. From the today’s perspective, I know that I was just experimenting with my own decision-making process. It had cost me money, I made some losses, and I intuitively figured out how I make my decisions.  

Over April and May 2020, I was progressively winding down those haphazard, experimental investments of mine. Step by step, I developed a reliable sub-portfolio in IT, and I rode an ascending market wave in Polish biotech companies.

At the end of May 2020, two things happened in my personal strategy of investment. First of all, I had the impression (and let’s face it, it was just an impression, devoid of truly solid foundation) that growth in stock prices across the almost entire Polish industry of biotech and medical supplies was just a short-term speculative bubble. I sold out part of my investment positions in the Polish stock market – mostly those in biotech and medical supplies, which proves to have been a poor move – and I transferred $1600 from my Polish investment account to the international one. Besides, my employer paid me the annual lump compensation for overtime during the academic year, and I decided to use like ¾ of that sum, thus some $3 125 as investment capital in the stock market, splitting it 50/50 (i.e. 2 times $1562) between my two accounts.

See? That was the first moment of chaos in me. First, I transferred $1600 from one account to another, and then I paid two times $1562 into both accounts, and all that like days apart. As a results, my Polish investment account noted a net cash outflow of – $1600 + $1562 = + $38 (very clever, indeed), and my international account swelled by $1600 + $1562 = $3 162.

Let’s go downstream. When I did all those cash transfers, I settled for a diversified portfolio. In Poland, I decided to keep my IT positions (11 Bit and Asseco Business Solutions), and to create three other branches: energy, retail, and restaurants. I know, I know: energy sounds cool, but retail and restaurants? Well, I decided to open positions in those two: the shoe retailer CCC, and a restauration giant Amrest, essentially because they were unusually cheap, and my own calculations, i.e. the moving average price, and mean-reverted price, indicated they were going to go up in price. As for two Polish energy companies – Tauron and PGE – my reasoning was the same. They were unusually cheap, and my own simulations allowed expecting some nice bounce-up. Out of those four shots on the discount shelf, two proved good business, the two others not really. Tauron and PGE brought me a nice return, when I closed them a few days ago, the former almost 79%, the other 28%. As for CCC and Amrest, they kept being cheap, and I closed those positions with slight losses, respectively – 4,3% and – 11,7%. Lesson for the future: don’t be daft. Fundamentals rule. This is my takeaway from the last 3 months of learning investment in practice. I need to look at the end of the market lane, where the final demand dwells for the given business.         

Question: why did I close on Tauron and PGE, if they were bringing me profit? Because it looked like they had a temporary rise in price, and then it seemed to be over.

I have already learnt that I make real money on accurate prediction of something, which, fault of a better expression, I call ‘market waves’, and by which I understand a period of many weeks when the price of some specific stock grows substantially for largely fundamental reasons. In other words, something important is happening in real business and these events (trends?) provoke a change in investors’ behaviour. As for now, and since January this year, I have successfully ridden three market waves, got washed under by one such wave, and I am sort of in two minds about a fifth one.

The wave that maimed me was the panic provoked in the stock market in the early weeks of pandemic. At the time, I had just invested some money in the U.S. stock market. I had been tempted by its nice growth in the first weeks of 2020, and, when the pandemic started to unfold, and market indexes started to tremble and then slump, I was like: ‘It is just temporary. I can wait it out’. Well, maybe I could have waited it out, only I didn’t. I waited, I waited, and my stock went really down, like to scrambling on the ground, and then I went into solid, tangible panic. I sold it all out, in the U.S. market (see Which table do I want to play my game on?). On the whole, it was a good decision. I transferred to the Polish stock market whatever cash I saved out of that financial plunge in U.S. and I successfully rode the wave of speculative interest in Polish biotech companies.

I noticed that I got out of the Polish biotech market wave too early. As I cast a casual glance at their performance in the stock market, I can see they have all grown like hell over the last month. I decide to get back into Polish biotech, plus one gaming company: CD Projekt. The biotechs and medical I take on are: Mercator Medical, Biomed Lublin, Neuca, Synektik, Cormay, Bioton. I am taking some risk here: those biotechs are so high on price that I am facing a risk of sudden slump. Still, their moving cumulative average prices are climbing irresistibly. There is a trend.

What do I do with my U.S. assets? I think I will hold. I don’t want to yield to panic once again. Besides, they diversify nicely with my assets in Poland. In Poland, I took a risk: I jumped once again on the rising wave of investment in biotech and medical business, only this time I jumped on it at a much more elevated point, as compared to the beginning of April 2020. The risk of sudden downturn is substantially bigger now than in April. In the U.S. market, I am holding assets which are clearly undervalued now, with all that panic about social unrest and about a second spike in COVID-19. Possibly overvalued assets in one market and undervalued assets in another market: sounds familiar? Yes, this is a form of hedging, which, in plain language, means that I spread my assets between several baskets, and I hand each basket to a different little girl in a little red riding hood, in the hope that at least some of those girls will outsmart those big bad wolves. Girls usually do, by the way.

On the whole, so far, I have invested $6 674,76 in cash into my two investment accounts. With the current value of my assets at $7 853,30, I have a total return on cash invested around 17,65%. It has decreased slightly over the last month: by the end of May 2020, it was 23,2%. 

I think I need to explain the distinction between two rates of return which I quote as regards my investment: return on the currently open positions vs return on the total cash invested in my investment accounts. Any given moment, I hold cash and open positions in securities. The cash I hold is the sum total of two components: past cash transfers into my investment accounts from my other financial accounts, on the one hand, and cash proceeds from the closure of particular investment positions. When I compare the total value of financial assets (i.e. cash + securities) which I currently hold, to the amount of cash I had paid into my investment accounts, I get my total return on cash invested. When I split my financial assets into cash and securities, and I calculate the incremental change in the value of the latter, I get the rate of return on currently open investment positions, and this one is swinging wildly, those last days. This might be the reason why it took me so long to hatch this update for my blog. Last Thursday it was 12,9%, and today it is 5,5%. What happened? United States happened to be in social unrest, for one, and they keep doing so, by the way (c’mon, guys, pull your pants up, I have money in your stock market). Germany happens too, like all the time, and I have some open positions in their automotive sector.

One thing that happens more or less as I expected is the incremental change in stock price as regards the logistics sector. My positions in Deutsche Post, UPS, and FedEx are doing well.       

I have already learnt that I make real money on accurate prediction of something, which, fault of a better expression, I call ‘market waves’, and by which I understand a period of many weeks when the price of some specific stock grows substantially for largely fundamental reasons. In other words, something important is happening in real business and these events (trends?) provoke a change in investors’ behaviour. As for now, and since January this year, I have successfully ridden three market waves, got washed under by one such wave, and I am sort of in two minds about a fifth one.

The wave that maimed me was the panic provoked in the stock market in the early weeks of pandemic. At the time, I had just invested some money in the U.S. stock market. I had been tempted by its nice growth in the first weeks of 2020, and, when the pandemic started to unfold, and market indexes started to tremble and then slump, I was like: ‘It is just temporary. I can wait it out’. Well, maybe I could have waited it out, only I didn’t. I waited, I waited, and my stock went really down, like to scrambling on the ground, and then I went into solid, tangible panic. I sold it all out, in the U.S. market (see Which table do I want to play my game on?). On the whole, it was a good decision. I transferred to the Polish stock market whatever cash I saved out of that financial plunge in U.S. and I successfully rode the wave of speculative interest in Polish biotech companies.

I noticed that I got out of the Polish biotech market wave too early. As I cast a casual glance at their performance in the stock market, I can see they have all grown like hell over the last month. I decide to get back into Polish biotech, plus one gaming company: CD Projekt. The biotechs and medical I take on are: Mercator Medical, Biomed Lublin, Neuca, Synektik, Cormay, Bioton. I am taking some risk here: those biotechs are so high on price that I am facing a risk of sudden slump. Still, their moving cumulative average prices are climbing irresistibly. There is a trend.

OK. I need to end it somewhere. I record my video editorial on You Tube, I attach it to this piece of writing, and, que sera sera (or What The Hell!), let’s publish those uncombed thoughts.  

Discover Social Sciences is a scientific blog, which I, Krzysztof Wasniewski, individually write and manage. If you enjoy the content I create, you can choose to support my work, with a symbolic $1, or whatever other amount you please, via MY PAYPAL ACCOUNT.  What you will contribute to will be almost exactly what you can read now. I have been blogging since 2017, and I think I have a pretty clearly rounded style.

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Besides the continuous stream of writing which I provide to my readers, there are some more durable takeaways. One of them is an e-book which I published in 2017, ‘Capitalism And Political Power’. Normally, it is available with the publisher, the Scholar publishing house (https://scholar.com.pl/en/economics/1703-capitalism-and-political-power.html?search_query=Wasniewski&results=2 ). Via https://discoversocialsciences.com , you can download that e-book for free.

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The moment of reassessment

MY EDITORIAL ON YOU TUBE

For a few days, I am turning into a different thread of my writing: my investment in the stock market. In winter, I decided to come back into the game of active investment in the stock market, and to use my blog as a tool of self-teaching, in the view of sharpening my game (see, for example: Fathom the outcomes and a few subsequent updates). Those of my readers who have been following this thread know that my basic strategy consists in investing in the stock market, every month, the rent I am collecting from an apartment in town. This is a monthly decision, and, whilst I appreciate a day of quick trade on short positions, every now and then, I generally like that slow, monthly paced cycle of investment.

My updates in this specific thread of thinking and writing have a triple function. Firstly, they make me think what I am doing, and by that virtue they help me sharpen myself as an investor. Secondly, this is educational material for my students, especially in Finance and in Economics. Thirdly, for all the other readers of this blog, it is shared experience, seasoned with some science and mathematical rigour.

The time of collecting another instalment of rent approaches, and I am bracing for a new set of decisions. This time, i.e. in this update, I strongly focus on summarizing my so-far experience, since the end of January. I follow the same principle that sport coaches do: if we want to be more efficient, we need to own our past experience, both our mistakes and our successes. I can tell you: it is hard. Like really. I have already past the point of devising my own analytical tools for financial investment (see for example Partial outcomes from individual tables), and, whilst I am aware of the immense wealth of human invention in this field, it is relatively easy. It is modelled. On the other hand, telling my own story, even a short and selective one, is hard in a different way. It requires taking a step back from my own actions, figuring out a rational way of comprehending them, collecting information and putting it all together. When I was doing it, I discovered that my own behaviour is much more difficult to study than the behaviour of other people in the stock market.

Long story short, I did it. I summarized my own story, in a form interpretable for coining up a strategy for the future. First of all, I summarize the journey, which you can see in Graph 1, below. Over the last 4 months, I invested a total of $3 519,42 in my two investment accounts: the domestic one, which I hold with the PeKaO Bank, for buying and selling stock in the Polish stock market, and the international one, which I hold with the Degiro platform. The details of that strictly financial cash flow are to find in Graph 2, further below. Interestingly, the biggest single cash transfer in this thread of my investment story is the transfer from international account to domestic account, in the first days of April. I described my dilemma of the moment in the update from April 5th, 2020, entitled ‘Which table do I want to play my game on?’. I was panicking about the huge slump in the U.S. stock market, and, in the same time, I was having an eye on the speculative bubble swelling on biotechs in the Polish stock market. The first important observation as for my strategy is therefore the following: my cash flows tend to be regular and systematic, unless I go emotional about the market and then I am able to make sudden twists and turns.

Graph 1

Graph 2

The whole chain of deals I made with the cash I paid in has led me, as for May 27th, 2020, to a capital account worth $4 335,79. Over 4 months, I have added $816.37, or 23.2%, to the cash invested, in a total of 36 deals, 10 of which remain open at the moment of writing those words (see Graph 6, much further below) and 26 are closed. My biggest gains are somehow paired with my biggest losses so far. I lost the most money in the U.S. stock market, when it was all just surfing down over the top of the collapsing wave of COVID-19-related panic. I made the most money on the mounting wave of short-term fascination with biotech businesses in the Polish market, right after. Three companies – Biomed Lublin, Airway Medix, and Mercator Medical – were my vessels to ride that wave. Graph 5, further below, shows the profits and losses I made on each of the 20 stocks, which I have been playing with in those 36 deals I opened. Graph 4 illustrates, in the form of a Pareto curve, the relative importance of the deals I opened by the end of March and the beginning of April. Right after the extraordinary, and, let’s face it, abnormal profits I made by riding crest of that speculative bubble, come the much more normal profits I made on Polish IT companies. The one named 11Bit, a gaming business, brought me the most profit as for now. On the whole, and at the condition of having a good look at the fundamentals, IT businesses seem to be a must in a sensible investment portfolio. Graph 6 shows the profit I am currently making on the open financial positions, with those IT guys, i.e. 11 Bit, Asseco Business Solutions, and Talex, clearly sticking out and up above the lot.   

Graph 3

Graph 4

Graph 5

Graph 6

As I observe the timeline of my cumulative profit (Graph 3), a pattern emerges. Up until the end of March, I had been losing money. I suppose it was the price to pay for learning: the price of my early mistakes. Starting from the beginning of April, my cumulative profit on all deals up to date began to poke its head above the zero line. I began making money: what I had paid for my mistakes started bringing fruit. Question: is it a once-and-for-ever pattern, i.e. have I simply paid my entrance ticket to the game and now I will just ride that wave? It is tempting to believe, and yet it is foolish to rely on. I would rather expect a recurring cycle, likely to take place in moments of turbulence. I need a few weeks (like 8?) to make some reconnaissance in the market around me, and then I can target a wave to ride.  

Interestingly, when I started making money, I also started to make sense of the whole process, in the form of analytical tools (see e.g. Acceptably dumb proof. The method of mean-reversion ). Did I start to make money because I developed more formal an understanding of market trends? It might have been exactly the other way around: I might have gone explicitly analytical as, intuitively, I felt I make money. I am serious. I know myself. I know that when I start thinking recurrently about something, to the point of writing consistently about it, those thoughts manifest something going on at a deeper, subconscious level. It is possible that my writing about mean-reversion in financial analysis was expressing the fact that I was getting acquainted with the really observable variance in stock prices.

I can formulate a tentative description of my own strategy as regards investment. This time, by strategy I mean recurrent behavioural patterns in me rather than a set of goals with a plan. First of all, I am strongly intuitive. It seems that what I consciously think I do is usually one step behind what I really do. Probably a lot of people are like that, and what is interesting is to see that pattern manifest in myself. I intuitively look for relatively short-term opportunities for quick gain, and I jump into the game as soon as I see them. I tend to jump a bit too quickly, though. As I study those 26 closed deals I made since January, sometimes I am like: ‘What? Really? I did THAT? Aston Martin? Virgin Galactic? Seriously? What the hell was I thinking?’.

Even with that propensity to uncontrolled fascination with the prospects of quick gain, I am clearly attached to some specific sectors in my investment. So far, it is IT industry, biotechnology and medicine, as well as renewable energy. I declared such a span of interest in the very beginning (see Back in the game) but, in all honesty, when I was making that declaration, by the end of January, I had no idea how consistent I was going to remain. Looks like I am pretty consistent in my sectoral scope of investment.  

Another pattern I noticed in myself is that I like dividing my portfolio in two categories: the no-brainers, on the one hand, and the waves to ride, on the other hand. I like holding some ETF trackers – this is what I mean by ‘no-brainers’ – sort of having someone else doing some of the thinking for me. Yet, I abhor the idea of investing all my money in one investment fund, and allow other people do to all the thinking for me. I want to stay somehow in the middle, i.e. to hold some balanced investments embodied in structured instruments, such as ETFs, and to do active thinking as for other deals.

Summing (provisionally) up, I make money when I acquire a good understanding of the market environment as for the possible occurrence of sudden slumps and sudden rises. I think it is time for me to develop such understanding now. I made some money on one financial wave (biotechs in Poland), and I want to repeat the experience. I want to spot interesting opportunities in a broader context. Intuitively, I feel that I am entering another phase of searching and learning, similar to the one observable in the left half of Graph 3. An intuition is burgeoning in my brain: the capital market is going into another phase. Why do I think so? Well, the last 4 months were mostly marked by the outbreak of the COVID-19 pandemic and by the resulting lockdowns in most economies. Now, lockdowns are being progressively loosened up and I think they are going to stay loosened up, whatever local, epidemic surges appear. Lockdowns are simply unsustainable on the long run: they are a softened, and overly extended transformation of military protocols applicable in the case of a biological attack. I remember those protocols from high school. I was born and raised in the communist Poland, and at the time, we were being indoctrinated that we are supposed to fight an ever-lasting war for peace. We would even crack jokes, like ‘we will keep fighting for peace even after there is nothing left to be at peace with’. Anyway, at school, we had classes called Preparation for National Defence. In the theoretical part, among other things, we would study the rules to follow in the case of attack with mass-destruction weapons, including bio-attacks. The rules I was being taught were to be played out over days, weeks at the worst, not over months. From a long-range perspective, lockdowns are like an attempt to regulate air traffic with fighter jet planes indicating the available flight corridors: theoretically feasible, maybe even spectacular, yet a tiny little bit unpractical.       

Anyway, lockdowns are becoming the past and the new present requires new business models, new markets, and new public policies. My gut feeling is that a lot is going to change in the coming months and years, technology-wise and business-wise. This is why I think I need to reassess the economic context of my investment in the stock market. I start with reassessing the prospects conveyed by my current portfolio of 10 open positions: 11 Bit Studios, Asseco Business Solutions, Talex, Airway Medix, PBKM, Bioton, SMA Solar, First Solar, Medtronic, and Amundi Asset Management. I want to understand the economic and financial alternative scenarios for this specific portfolio.

By my recent experience, I know that it is important to phrase out my intuitions, in order to utilise them fully. As Frank Knight would probably say, if he was still alive, ‘it is important to know how you think about what you think’. I need to understand what is it exactly that I cover with my intuition when I think about the economic context. In my previous analytical updates, I was very technical, in the sense that I was very much focused on short-term interpretation of stock prices (see for example: Partial outcomes from individual tables ). This time, I want to be more oriented on the long term, and therefore I focus on a different set of metrics. For 9 out of the ten investment positions I hold, I am following the same method (the Amundi ETF tracker is in the category ‘no brainer’).

I want to understand, most of all, what do those companies do with the trust expressed by investors. Are they investing in their future, or are they just riding the waves of capitalism? All those 9 companies have benefited from some amount of trust expressed actively by investors who have acquired and hold their shares. I want to understand how this trust has been used in the view of building a future, and therefore I am focusing on assets in those companies’ balance sheets. I am interested in their assets, because this is where I look for future-oriented decisions. If the given company has more assets than it had at the end of the last reporting period, it means, most of all, that the business is accumulating capital. They are investing into being able to make stuff in the future. Next, I want to know what kind of assets is the most variable in their balance sheets.

An insight into each company’s balance sheet allows me to compare changes observable at this level with their market capitalization, and with stock market indexes which I can take as the closest general context. I consider market indexes as a background, informative about general attitudes in investors. Then, I calculate a simple coefficient, that of elasticity, in those companies’ assets, when denominated over market capitalization, and over the market index I chose. Elasticity is calculated as, respectively: ‘∆(assets) / ∆ (market capitalization)’, and ‘∆(assets) / ∆(market index)’. I want to discover to what extent those companies respond, in their capital base, to the signals they receive from the stock market.

On the top of that I add a long-term analytical tool of the stock price strictly spoken. From the general formula of mean-reverted price (see We really don’t see small change), I extract the component of moving average price, calculated cumulatively over the last 12 months of trade, since May 27th, 2019. For every day of trade between May 27th, 2019 and May 26th, 2020, an average closing price is being calculated, for all the daily closing prices between May 27th 2019 and the given date. This form of moving average is probably one of the simplest forms of artificial intelligence. It is a function which learns a long-term trend as it advances in time, and it answers the question about the probable shape of long-term changes in this specific price, based on past experience.

The remaining part of this update is structured in two parts. At first, I bring up a written account of my observations, as I applied the above-described method to the 9 businesses in my portfolio. Then, a series of tables and graphs is provided, with the source numbers, to use at your pleasure and leisure as analytics. I used market indexes specific to the corresponding markets and sectors. As regards 11 Bit Studios, an IT and gaming company listed in the Warsaw Stock Market, I used three indexes: the WIG-GAMES Index, the WIG-INFO Index, and one more general, the WIG Tech index. The two other Polish IT firms, namely Asseco Business Solutions and Talex are being benchmarked against two of those three indexes, i.e. WIG Info, and WIG Tech. The three companies from the broadly spoken medical and biotech sector –  Airway Medix, PBKM, and Bioton – all three listed in the Warsaw Stock Exchange as well, have been benchmarked against the WIG Pharmaceuticals index. First Solar and Medtronic are both listed in the NASDAQ, and the closest index I can find is NASDAQ Industrial. Finally, the German company SMA Solar is compared with the DAX Performance metric.

As I run those analyses, a first observation pops out: Airway Medix has not published yet any financials for 2019. It is impossible to assess the current balance sheet of that company. I have just read they have postponed until mid-June 2020 the publication of ALL their financials for 2019. This is odd and makes me think of something like a ticking bomb. They must have the hell of a mess in their financials. For the moment, they show an interesting short-term trend in their price, and so I hold this position. Yet, I know I need to stay alert. Maybe I sell shortly.

Generally, like across all those 9 firms, I can notice an interesting pattern: when their assets change, it is almost exclusively about current assets, not the fixed ones. As for their state of possession in terms of productive assets, they all have been staying virtually at the same level over the last year. What changes is most of all cash and financial instruments, and in some cases inventories and receivables (Talex). They build up strategic flexibility without going, yet, into any specific avenue of technology. It looks as if all those businesses were poised, up to something. My own gut feeling, and the theory of business cycles by Joseph Alois Schumpeter, allow expecting a big and imminent technological change.      

Now, I am going to exemplify the details of my approach with the 11 Bit Studios. It’s an IT, gaming business, and thus I connect it to three market indexes in the Warsaw Stock Exchange, namely the WIG-GAMES Index, the WIG-INFO Index, and one more general, the WIG Tech index. In Table 1, below, you can see a quick, half-fundamental and half-technical study of 11BIT Studios. Its market capitalisation had shrunk, between the end of 2Q2019 and 1Q2020, yet, currently, its stock price has been growing nicely those last weeks.

Why is that? Let’s look.  The coefficient of market-to-book, i.e. market capitalization divided by the book value of assets, had been decreasing consistently, from the really unsustainable level of 7,17 down to the touch-and-go level of 4,81. It had happened both by a downwards correction in market capitalization (investors collectively said: ‘it is too expensive’), and by ramping up the company’s assets. As I can read in the company’s quarterly reports, the financial strategy they seem to be pursuing, and which manifests in the value of their assets, consists in keeping a baseline reserve of cash around PLN 3 ÷ 3,5 mln, which they periodically pump up to somewhere between PLN 5 million and PLN 6 million, and right after ‘Boom!’, their fixed assets get a pump. It is a sequence I know from observing many tech companies. Over the last few years, tech companies started to behave like banks: they accumulate substantial piles of cash, probably to have flexibility in their investment decisions, and then, suddenly, they acquire some significant, productive assets.

All that development takes place in the context of a capricious market indexes. Yes, they are growing, but the price of growth is increased volatility. The more they grow, the more variance they display. To the extent that anyone can talk about behaviour of a company vis a vis its investors, 11BIT Studios seems to be actively demonstrating that no, they are not an artificially inflated financial balloon, and yes, they intend to invest in future.

Now, you can go to the graphs and tables below.

Table 1 – 11 BIT Studios, selected financial data

30/06/201930/09/201931/12/201930/03/2020
Market cap (PLN mln)908,02902,30914,88823,39
Assets (PLN mln)126,62138,76155,67171,25
Equity (pln mln)100,42106,07119,74136,27
Market cap to assets7,176,505,884,81
WIG Games index18,3418,4518,5515,67
WIG Info Index2 396,242 387,552 834,292 619,12
WIG Tech Index9 965,259 615,8110 898,6610 358,61
Elasticity of assets to market cap(2,12)1,34(0,17)
Elasticity of assets to WIG Games Index110,36169,10(5,41)
Elasticity of assets to WIG Info Index(1,40)0,04(0,07)
Elasticity of assets to WIG Tech index(0,03)0,01(0,03)

Table 2 – Asseco Business Solutions, selected financial data

30/06/201930/09/201931/12/201930/03/2020
Market cap (PLN mln)935,71915,66949,081 035,96
Assets (PLN mln)384,11391,12422,64433,87
Equity (pln mln)272,74288,43316,11331,62
Market cap to assets2,442,342,252,39
WIG Info Index2 396,242 387,552 834,292 619,12
WIG Tech Index9 965,259 615,8110 898,6610 358,61
Elasticity of assets to market cap(0,35)0,940,13
Elasticity of assets to WIG Info Index(0,81)0,07(0,05)
Elasticity of assets to WIG Tech index(0,02)0,02(0,02)

Table 3 – Talex, selected financial data

2020/3M2019/YE2019/9M2019/6M
Market cap (PLN mln)              31,80               38,85               40,80               41,10 
Assets (PLN mln)              81,06               83,34               78,79               81,69 
Equity (pln mln)              54,89               54,59               50,82               51,37 
Market cap to assets                 0,39                  0,47                  0,52                  0,50 
WIG Info Index       2 396,24        2 387,55        2 834,29        2 619,12 
WIG Tech Index       9 965,25        9 615,81     10 898,66     10 358,61 
Elasticity of assets to market cap                 0,32                (2,33)                 9,66 
Elasticity of assets to WIG Info Index               (0,26)               (0,01)               (0,01)
Elasticity of assets to WIG Tech index               (0,01)               (0,00)               (0,01)

Table 4 – Bioton

2020/3M2019/YE2019/9M2019/6M
Market cap (PLN mln)281,63326,28364,06355,48
Assets (PLN mln)890,60881,42914,18907,17
Equity (pln mln)587,84582,00621,10626,59
Market cap to assets0,320,370,400,39
WIG Pharma index3 432,335 197,435 345,735 410,86
Elasticity of assets to market cap(0,21)0,870,82
Elasticity of assets to WIG Pharma index(0,01)0,22(0,11)

Table 5 – PBKM, selected financial data

2020/3M2019/YE2019/9M2019/6M
Market cap (PLN mln)543,06355,68352,27375,00
Assets (PLN mln)n.a.455,59427,00425,20
Equity (pln mln)n.a.188,39181,36179,54
Market cap to assetsn.a.0,780,820,88
WIG Pharma indexn.a.5 197,435 345,735 410,86
Elasticity of assets to market capn.a.8,39(0,08)
Elasticity of assets to WG Pharma indexn.a.(0,19)(0,03)

Table 6 – First Solar

2020/3M2019/YE2019/9M2019/6M
Market cap ($ mln)3 819,015 926,566 143,676 955,98
Assets ($ mln)6 949,147 515,697 054,697 137,81
Equity ($ mln)5 168,625 096,775 182,485 135,12
Market cap to assets0,550,790,870,97
NASDAQ Industrial Index5 785,706 807,706 371,606 559,20
Elasticity of assets to market cap0,27(2,12)0,10
Elasticity of assets to NASDAQ Industrial0,551,060,44

Table 7 – Medtronic

2020/3M2019/YE2019/9M2019/6M
Market cap ($ mln)120 856,18152 041,85145 568,85130 518,78
Assets ($ mln)91 053,0091 268,0089 694,0088 730,00
Equity ($ mln)50 719,0050 497,0050 212,0049 941,00
Market cap to assets1,331,671,621,47
NASDAQ Industrial Index5 785,706 807,706 371,606 559,20
Elasticity of assets to market cap0,010,240,06
Elasticity of assets to NASDAQ Industrial0,213,61(5,14)

Table 8 – SMA Solar

2020/3M2019/YE2019/9M2019/6M
Market cap (€ mln)954,251 199,23902,89887,63
Assets (€ mln)1 031,471 107,321 014,86970,56
Equity (€ mln)415,35416,89411,39406,72
Market cap to assets0,931,080,890,91
DAX Performance Index9 935,8413 249,0112 428,0812 398,80
Elasticity of assets to market cap0,310,312,90
Elasticity of assets to DAX Performance0,020,111,51

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