An enlightened grandfather

I am going personal in my writing, or at least in the piece of writing which follows. It is because I am going through an important change in my life. I mean, I am going through another important change in my life, and, as it is just one more twist among many, I already know a few things about change. I know that when I write about it, I can handle it better as compared to a situation, when I just try to shelf it somewhere in my head and write about something else. The something else I technically should be writing about is science, and here comes the next issue: science and life. I believe science is useful, and it is useful when I have the courage to implement it in real life. I am a social scientist. Changes in my life are social changes in microscale: it is all about me being connected in a certain way to other people. I can wrap my mind around my existential changes both honestly, as a person, and scientifically, as that peculiar mix of a curious ape, a happy bulldog living in the moment, and an austere monk equipped with an Ockham’s razor to cut bullshit out.

The change I am going through is about me and my son. Junior, age (almost) 25, has just left Poland, for Nice, France, to start a new job. In Poland, he was leaving with us, his parents. High time to leave, you would say. Yes, you’re right. I think the same. Still, here is the story. Every story needs proper characters, and thus I am going to name my son. His name is Mikołaj, or Nicolas, from the point of view of non-Slavic folks. Mikołaj used to study computer science and live with us, his parents, until Summer 2019. Steam was building up. As you can easily guess, Mikołaj was 23 in 2019. When a guy in his early twenties lives with his parents, friction starts. His nervous system is already calibrated on social expansion, sex, procreation and generally on thrusting himself into life head-first. None of these things matches with a guy living with his parents. In Summer 2019, Mikołaj left home for one year, and went on an Erasmus+ academic exchange to Nice, France, where, by a strange chain of coincidences, as well as by a lot of his own wit and grit he completed a graduated, at the Sophia Antipolis University, a separate Master’s program of studies. A nice prospect for professional career in France was sketching itself, with a job with the same company where Mikołaj had been doing his internship with.

When Mikołaj was away, we spent hundreds of hours on the phone. I swear, it was him more than I. We just git that vibe on the phone which we seldom could hit when talking face to face. I had been having those distance conversations with a guy who was turning, at a turbo speed, from an over-age teenager into an adult. I was talking to a guy who learnt to cook, who was keeping his apartment clean and tidy, who was open to talk about his mistakes and calmly pointed out at my mistakes. It was cool.

The pandemic changed a lot. The nice professional prospect faded away, as the company in question is specialized in IT services for hotels, airports and airlines, which is not really a tail wind right now. Mikołaj came back home on October 1st, 2020, with the purpose of completing the Polish Master’s program – which he initially started the whole Erasmus adventure with – and another purpose of finding a job. His plan was to wrap it all up – graduation and job seeking – in about 3 months. As plans like doing, this one went sideways, and what was supposed to take three months took a bit more than six. During those 6 months which Mikołaj spent with us, in Poland, both we and him had the impression of having gone back in time, in a weirdly painful and unpleasant way. Mikołaj went back to being the overgrown teenager he had been before leaving for the Erasmus exchange. Our cohabitation was a bit tense. Still, things can change for the better. Around Christmas, they started to. As I was coaching and supporting Mikołaj with his job seeking, we sort of started working together, as if it was a project we would run as a team. It was cool.

Yesterday, on April 10th, 2021, early in the morning, Mikołaj left again, to start a job he found, once again in Nice, France. Splitting up was both painful and liberating. Me and my wife experienced – and still are experiencing – the syndrome of empty nest which, interestingly, rhymes with emptiness. This is precisely what I am trying to wrap my mind around in order to produce some useful, almost new wisdom. As Mikołaj called us from Nice, yesterday in the evening, he said openly he experienced the same. Still, things can change for the better. When I heard Mikołaj’s voice on the phone, yesterday, I knew he is an adult again, and happy again. I wonder what I will cook for lunch, tomorrow, he said. In his voice, he had that peculiar vibe I know from his last stay in Nice. That ‘I am lost as f**k and happy as f**k, and I am kicking ass’ vibe. It was cool.

I am still in the process of realizing that my son is happier and stronger when being away from me than what he used to be when being close to me. It is painful, liberating, and I think it is necessary. Here comes the science. Those last years, I almost obsessively do research about the social role of social roles. What is my social role, after I have realized that from now on, being a father for my son is going to be a whole lot different? First of all, I think that my social role is partly given by external circumstances, and partly created by myself as I respond to those external stimuli. I have the freedom of shaping some part of my social role. Which part exactly? As I look at it from inside, I guess the only way to know it is to try, over and over again. I am trying, over and over again, to be the best possible version of myself. Doesn’t everybody try the same, by the way? Basing on my own life experience, I can cautiously say: ‘No’. Not everybody, or at least not always. I know I haven’t always tried to be the best version of myself. I know I am trying now because I know it has paid me off over the last 6 years or so. This is the window in time when I really started to work purposefully on being the best human I can, and I can tell you, there was a lot to do. I was 46 at the time (now, I am 53).

A bit late for starting personal development, you could say. Well, yes and no. Yes, it is late. Still, there is science behind it. During the reproductive age bracket, i.e. roughly between the age of 20 and that of 45÷50, young men are driven mostly by their sexual instinct, because that instinct is overwhelming and we have the capacity to translate it into elaborate patterns of social behaviour. Long story short, between 20 and 50, we build a position in the social hierarchy. This is how sexual instinct civilizes itself. In their late 40ies, most males start experiencing a noticeable folding down in their levels of testosterone, and the strength of sexual drive follows in step. All the motivation based on it is sort of crumbling down, too. This is what we call mid-life crisis, or, in Polish, the Faun’s afternoon.

I remember a conversation I had with a data scientist specialized in Artificial Intelligence. She told me there are AI-based simulations of the human genome, which demonstrate that said genome is programmed to work until we are 50. Anything after that is culture-based. Our culture takes a lot of pains to raise and educate young humans during the first two decades of their lives. Someone has to take care of that secondary socialization, and the most logical way of assigning that role is to take someone who is post-reproductive as a person. This is how grandparents are made by culture.

As I am meditating about the best possible version of myself, right now, this is precisely what comes to my mind. I can be and I think I want to be an enlightened grandfather. There is a bit of a problem, here, ‘cause my son has no kids for the moment. It is hard to be an actual grandfather in the absence of grandchildren, and this is why I said I want to be an enlightened one. I mean that I take the essence of the social role that a grandfather plays in society, and I try to coin it up into a mission statement.  

A good grandfather should provide wisdom. It means I need to have wisdom, and I need to communicate it intelligibly. How do I know I have wisdom? I think there are two components to that. I need to be aware of and accountable for my own mistakes. I need to work through my personal story with as much objectivism as I can, for one. How can I be objective about myself? Here is a little trick. As I live and make mistakes, I learn to observe other people’s response to my own f**k-ups. I learn there is a different, external perspective on my own actions, and with a bit of effort I can reconstruct that external perspective. I can make good, almost new wisdom about myself by combining thorough introspection of my personal experience with that intersubjective reading of my actions.   

There is more to wisdom than just my personal story. I need to collect information about my cultural surroundings, and aggregate it into intelligible a narrative, and I need to do it in the same spirit of critical observation, with curiosity, love and cold objectivism, all in one. I need to be like a local server in a digital network, with enough content stored on my hard drive, and enough efficiency in retrieving that content to be a valuable node in the system.

A good grandfather should support others and accept to act in the backstage. This is what I have been experiencing since I got that job of fundraising and coordination of research projects in my home university. I take surprisingly great a pleasure in supporting other people’s work and research. I remember that 10 years ago I would approach things differently. I would take care, most of all, about putting myself in the centre and at the top of collective projects. Now, I take pleasure in outcomes more than in my own position within those outcomes.   

Now, by antithesis, what a good grandfather shouldn’t be? I think the kind of big existential mistake I could make now would be to become a burden for other people, especially for my son. How can I make such a mistake? It is simple, I observed it in my own father. I convince myself that all good things in life are over for me, because the falling level of testosterone leaves a gaping hole in my emotional structure. I stop taking care of myself, I let myself sink into depression and cynicism, and Bob’s my uncle: I have become a burden for others. Really simple. Don’t try it at home, even under the supervision of qualified professionals.

That brings me to still another positive aspect of being a good grandfather: grit. For me, grit is something that has the chance to supplant fear and anger, under favourable circumstances. When I was young, and even when I was a mature adult, I did not really know how to fight and stand up against existential adversities. It is mostly by observing other people – who developed that skill – that I progressively learnt some of it. Grit is the emotional counterpart of resilience, and I think that conscious, purposeful resilience requires the perspective of time. I need to know, by experience, how that really crazy kind of s**t unfolds over years, in human existence, in order to develop cognitive and emotional structures for coping with it.  

Summing up, an enlightened grandfather is a critical teller of his own story, a good source of knowledge about the general story of his culture, and a supportive mentor for other people. An enlightened grandfather takes care of his body and his mind, to stay healthy, strong and happy as long as possible. An enlightened grandfather keeps himself sharp enough to help those youngsters keep their s**together when things go south. This is my personal mission statement. This is who I want to be over the 20 – 25 years to come, which is what I reasonably expect to be the time I have left for being any good in this world. What next? Well, next, it is time to say goodbye.   

Rowing in a tiny boat across a big ocean

My editorial on You Tube

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bloody hard to make a strategy

My editorial on You Tube

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sharpen myself

My editorial on You Tube

On February 17th, I sold my position in ATM Grupa. I managed to strike a deal at PLN 4,9 per share, which, after transactional fees, gave me a two-week rate of return at 1,74%. Once again, I broke the rules I declared I would follow. I was supposed to take investment decisions once a month, and here I made one half-way through that period. I wonder what exactly is at work in me, when I suddenly do things like that. The simplest answer would be: ‘Lack of discipline’ etc. Yes, it was lack of discipline, and it occurred in a person – me – who is prone to compulsive discipline, like really. In many other fields of my life, I tend to be overly consistent. I am like one of those golems in Terry Pratchett’s novels. When you tell me to dig a hole in the ground, I will keep digging until you tell me to stop, and if you forget to tell me to stop, well… I will keep digging. People around make me understand, every now and then, that it would be a good thing to accept a bit of chaos into my order.

Thus, what makes me suddenly less consistent when it comes to financial investment? Would it be about a subjectively new type of match between information and decision? Looks like… Another hypothesis is that what I see, for the moment, as lack of consistency, is precisely the right amount of consistency. Maybe my initial assumptions – making investment decisions once a month, as I collect my rent from real estate once a month – were wrong. This is a tricky one: on the one hand, investing capital at the same pace it comes to me is pretty intuitive, and yet, on the other hand, financial investment is supposed to have liquidity, and my own investment strategy should bring me more than just the average rate of return based on market indexes.

One thing is certain: given my ordinary schedule of work, it takes many days, even weeks, to plough through the information I need to make really informed investment decisions. Maybe I can use a strategy in two steps: once a month big shopping with the freshly received rent, and mid-month a correction of the course.

For the moment, I have just taken into account the advice that professionals give: cut your losses short. After having sold ATM Grupa, I have just decided to sell the positions I was losing money on: OAT, Aprea Therapeutics, Vir Biotechnology, Aston Martin, Black Diamond Group, PGE, Cyfrowy Polsat. I sold them all at market price. With the proceeds from selling and the Polish CDM platform, thus with proceeds from selling ATM Grupa, Cyfrowy Polsat, PGE, and OAT, I bought into one position, a gaming company: 11 BIT Studios. This particular egg in my basket is partly what I initially outlined as my strategy, and partly completely not. I guess something similar can be said about most things I do in life. Anyway, with an equity of roughly PLN 106,07 mln, and a market capitalization of PLN 255,93 mln, the company is clearly overvalued in the market. Still, they have good fundamentals, and their stock price growing like hell.

There is an interesting hypothesis to ponder, like generally: the financial count of equity, in a business, can be more or less accurate. The financial value of equity is an expression of underlying economic value in assets net of debt, and the interplay between financial value and economic value can take different forms. Debt is debt, and as long as I don’t want to make that debt tradable in the form of securities, it has a clear nominal value. Assets are a different story. When assets are being valued for the purposes of a balance sheet, two methods can (and should) be used concurrently: the book accounting, and the market valuation. I take the value of assets from the last time I counted it, I subtract depreciation from the current period, and I get the book value net of depreciation. From time to time, I can ask myself what price I could get for my assets if I decided to sell them. This is market valuation, and this is supposed to estimate quite closely the implicit economic utility of my assets, net of any subjective calculations of mine. It is possible that book valuation goes a long way above or below the market valuation.

Financial markets, such as the stock market, have a peculiar property, which was noticed, apparently, hundreds of years ago. When instead of trading assets in big chunks, like whole factories, we just trade small participatory titles in those assets, the financial market yields very sharp valuations of economic value. What? It is just about expectations? Hell, yes. The value of productive assets is all about expectations. Do you buy a factory in order to live inside? I guess it is for having some future business outcomes: it is about expectations. Anyway, in cases like 11BIT Studios, when equity is overvalued, but the stock price keeps flying high, and with good fundamentals, it can be hypothesised that some of their assets have greater an economic value than the official book valuation in their balance sheet. I know, I know: assuming that I see things that other people can’t see is tricky. Still, when that bloody price keeps growing, I guess other people see the same ghosts which I see, and this is reassuring.

I return to my corrective investments. In the DEGIRO platform, after having sold my positions in Aprea Therapeutics, Vir Biotechnology, Aston Martin, and Black Diamond Group, I decided to strengthen the ‘energy’ component of my portfolio. My assets of choice have been: Vivint Solar, and Norsk Hydro.  Vivint Solar’s fundamentals are sort of intriguing. On the one hand, they still lose money. On the other hand, they lose much less than they used to, and they seem being terribly resilient. I remember I spotted their financial reports in early Spring 2017, for the first time, and I was like: ‘What a sad story… Another ambitious bunch of innovators going bankrupt soon’. Still, they haven’t gone bankrupt. They are still there, they keep their head above the water, and they develop, step by step, their technological concept of small smart grids based on renewable energies. As for Norsk Hydro, these guys are fundamentally solid, period. I consider that position as a stabilizer.     

Now, once again, drums: I am drawing a bottom line under my so-far investment decisions. I sum up the state of my possessions as for today, i.e. February 19th, 2020, and I compare with the initial values on February 3rd. My account on the Polish platform CDM comes first. Starting point: February 3rd, cash 2693 PLN. Action #1: buying Cyfrowy Polsat, OAT, PGE, and ATM Grupa. Action #3: selling ATM Grupa at a negotiated deal price. Action #4: selling PGE, OAT, and Cyfrowy Polsat at market price. Action #5: buying 11 Bit at market price. Current status: cash PLN 584,73 + position on 11BIT PLN 1 936 = PLN 2520,73. Net loss of PLN -172,27, or -6,4%.

I pass to my account on the DEGIRO platform, for international investment positions. Starting point: February 3rd, 2020, cash: PLN 2 550. Action #1: I buy into Black Diamond Group, Macrogenics, Incyte, Vir Biotechnology, Amundi Epra (tracker fund), Frequency Therapeutics, Aprea Therapeutics, Aston Martin. Action #2: I buy into First Solar Inc. Action #3: I sell Black Diamond Group, Vir Biotechnology, Aprea Therapeutics, Aston Martin. Action #4: I buy into Vivint Solar and Norsk Hydro. Current status: cash €37,43 + € 512,54 worth of positions on Amundi Epra, First Solar, Vivint Solar, Norsk Hydro, Incyte, Frequency Therapeutics, Macrogenics = € 549,97 = PLN 2 348,37. Net loss: PLN – 201,63, or – 7,9%.   

In the first blog update in this fresh cycle (see Back in the game ), I wrote I am aware how humbling this learning will be. Well, it is humbling. Those losses are the cost of my learning. I understand why those tracker funds are so popular. Many people try what I am trying, i.e. learn by trial and error to invest profitably, and if one is not prepared to pay the price of learning, it is really frustrating. Yet, I am ready to pay the price, and I need to get the most value for that price. I need to learn as much as I can. In my plan, the moment of the next big shopping approaches. By the very end of February, or in the first days of March, I am supposed to invest the next rent, the PLN 2500. I have a few days to sharpen myself for that next step.

Fathom the outcomes

My editorial on You Tube

Here comes the next update in my process of self-learning about investment in financial markets. In the last update ( Back in the game ), I briefly sketched my starting point, i.e. my first handful of financial positions, and my long-term goals. According to a pace I set for myself, once a month I make investment decisions. Why once a month? Because once a month I collect the rent from an apartment I have in town. My basic concept is to invest the rent I collect on one form of capital – real estate – into another form of capital.

What should be my next steps in investment? What should be my strategy? I start by studying my expectations. What do I expect? Shortly and honestly: I expect to beat the index. In the jargon of investment, it means that I expect to achieve abnormally high returns on investment, higher than the returns offered by composite indexes for the stock markets where I invest. Lots of people expect to beat the index, most of them fail, so what makes me expect that I can do it? Well, I can quite clearly pin down situations, in my own past experience as investor, when I managed to beat the index by many lengths, and other situations when I failed lamentably.

I had one success, which gives me some confidence. My success name was Bioton, a Polish biotech company.  I had an eye on them for many years, I worked on their case with my students, and I knew they have good foundations. Innovative enough to launch an original substance of their own – synthetic insulin – and conservative enough to diversify their business into good old generics like basic vitamins, antibiotics or basic vaccines. My investment story with them began in January 2014. At the time, the founder of the company, Mr Krauze, suddenly sold out all of his participations and essentially disappeared from the business landscape of Poland in quite mysterious circumstances. There was a healthy business in a reputationally shitty spot. Their stock price hit an all-time low: 0,03 PLN (less than $0,01) per share. WTH, I thought. At this price, there is not even much to lose. I bought. Two and a half years later, by the end of September 2016, I sold those shares at 10,04 PLN (something like 3 dollars). Yes, I made 33367% of profit on that one. Had I been less timid in opening my initial investment position, I could have bought some real estate with the proceeds. By the way, as I have a fresh look at Bioton, they seem to be back almost to the point where I invested in them. Ever since Autumn 2016, their stock price has been falling. Now, it is at 3,5 PLN per share, which is pretty low, and as I study the graph of their price, they are likely to hit, quite soon, that bottom plateau between the horns of the bull. I need to study their fundamentals, but it looks like the next good opportunity to open an interesting position. I check, and it looks tricky.

I mean, it usually looks tricky. At Bioton, they are losing money: at the end of the 3rd quarter of 2019 they had an operational loss of more than $30 mln. Those fundamentals look bad in the context of their business history. Their stock price tends to nosedive, and there are fundamental reasons to that. Still, they remain undervalued as regards the ‘market to book’ ratio. Calculated as ‘market capitalization divided by equity’, it makes PLN 300,52 mln / PLN 621 mln = 0,483851232. In other words: there is room for making money on this position, at least to a ‘market to book’ coefficient of 1,00, i.e. up to a stock price of about PLN 7,2 ÷ 7,3, which would give a gain of more than 200%. 

Miracles happen quite unfrequently, whence their reputation. Still, I can say ‘Gotcha’!’. That’s the strategy for my investment, which I have been turning and sniffing around for during the last 2 weeks. I had to recapitulate those past events in order to bring those thoughts into daylight. What I am looking for are companies with healthy fundamentals, i.e. with reasonably good financial results and prospects for just good a near future, which, for some reason, are deeply undervalued.

The next step is to run all my present investment positions with the same test. One, check their fundamentals.  Two, check their relative market valuation, denominated over their equity. Three, check the price curve and try to locate the present price of my investment position, so as to check opportunities for growth. I start with OAT – OncoArendi Therapeutics. I am having a look at their quarterly financials for Q3 2019. They lose money, as typical R&D-focused biotechs frequently do. They have very little revenue and much bigger operational costs. They lose cash, too, which is more worrying. When I sum up their operational cash-flow (-2,04 PLN mln) with the investment-related one (-7,3 PLN mln), and with the financial one (6,69 PLN mln), the bottom line is negative, by almost 3 millions of Polish zlotys. I have a look at OAT’s stock price, and I see that I behaved dumbly: I bought their stock right before a local peak, which is now being followed by a descent. I bought on the back of the bear, in the stock-market jargon. Their ‘Market to Book’ coefficient is 164,04/80,08 = 2,05. I see I really need that slow, grinding learning investment by writing about my own investment. That’s what I can call a perfect mistake: bad financials, supposedly overappreciated stock.

I move forward with APREA THERAPEUTICS. The fundamentals are weak and look a bit foggy. They certainly lose money, with a net loss of $6,25 mln in Q3 2019, twice the net loss one year earlier. Technically, the company has no equity in the strict sense of the term. What I bought are some convertible securities. Still, those convertibles, apparently not burdened with any liability, amount to $47 393 333,00. The market capitalization, according to Yahoo Finance, is $664,35 mln, which gives one of those crazy ‘Market to book’ ratios: 14,02. Well, if I was looking for an undervalued biotech company, this is quite the opposite of what I should have bought. Next, FREQUENCY THERAPEUTICS INC.  An interesting case. They lose money, but just a bit. In Q3 2019 they had a net loss of – $575 000, whilst in Q3 2018 it was – $5,14 mln. In 2019 they started to have operational revenues, some $24 mln as for end of September 2019. They have an equity of $92 mln, and a market capitalization of $743,45 mln, which once again gives a huge ‘market to book’ ratio: 8,08.   

The next position in my portfolio is INCYTE CORPORATION . Those guys, they are dutiful: they have already published their annual 10-K report for the fiscal year 2019. The fundamentals look nice. They have a steady profit, second year on end: $402 mln of operational profit, out of revenues amounting to $1 775 mln. The market to book ratio is hilariously high: $16,9 bln of market cap, denominated over $2,6 bln of equity makes 6,5. Still, the trend in market price is interesting: looks like halfway the ascending horn of the bull. This investment position is maybe not the most illustrative for my successful strategy from the past, yet it seems to be offering some promise. I pass to MACROGENICS INC. The latest financial report available is Q3 2019, which shows a clear financial deterioration as compared to Q3 2018: less revenues, deeper loss. The market appreciates this company moderately, with a market cap of $497,42 mln, denominated 1,95 times over the company’s equity, amounting to $255,2 mln. With all that, the price trend looks moderately promising: even over 1 month there seems to be room for a nice jump up.

Finally, my last investment position in biotech: VIR BIOTECHNOLOGY INC. Their fundamental operations don’t look well: a shrinking revenue, and a deepening operational loss. Still, their cash flow is positive: investors seem to be trusting them, and the whole show was over $46 mln on surplus in terms of cash. Over the last weeks, i.e. since I bought their shares, the price has been decreasing, and yet, on Friday 14th, there seems to have been some bounce-back. In terms of market valuation, this company stands $1,75 bln, which, denominated over their nominal equity of $355,8 mln, spells 4,92. This business is to watch with caution. It looks like a big balloon: a lot of confidence from investors with little apparent substance in the business, but what do you want, that’s biotech.

That would be about all as regards my investment positions in biotech, and so I pass to my two Polish crown jewels at the frontier of digital and show business: CYFROWY Polsat and ATM Grupa. CYFROWY Polsat has excellent fundamentals. In Q3 2019 they made PLN 459 mln ($117 mln) of quarterly operational profit. By the way, in businesses involved with media and cinematic production, the most important operational metric is EBITDA, or operational profit plus amortization, and this one stands at more than PLN 1 bln in Q3 2019. Their equity was PLN 14 155 mln, which, when serving as denominator for their market cap of PLN 5 311 mln gives a market to book ratio of 0,38. Interesting: finally, an investment position with clear undervaluation in the stock market. The long-term trend in their stock price is generally steady growth with temporary bumps. As regards ATM Grupa, they have good operational fundamentals, i.e. a comfortable operational profit, yet they seem to be losing cash at the level of financing activities. Anyway, they accumulate equity at a steady pace, and their market capitalization values that equity at 1,59 of its nominal value.

I pass to my investment positions in energy, and I start with FIRST SOLAR INC. Their fundamentals are sort of hesitantly good: they had positive operational margin in Q3 2019, still it had to offset a deeply negative one in Q1 2019. I found a piece of news at Yahoo Finance, which allows some optimism as for the immediate prospects of their business.  Their market capitalization is $5,83 bln, and denominated over book value of equity ($5,2 bln), stands at 1,12. As for the Polish PGE , they seem to be attaching a lot of importance to that EBITDA metric, as if they were running some show business, not power plants. That EBITDA looks substantial, more than PLN 6,6 bln in 2019 (provisional, unaudited results), yet it is a bit less than in 2018. Their equity – PLN 48,7 bln – is deeply undervalued in the stock market: in terms of market capitalization, it stands at 0,23. Looks interesting for a long-term position.   

Thus I come to the two investment positions, which I can’t help calling but my follies:  ASTON MARTIN, and BLACK DIAMOND GROUP LTD . The fundamentals of ASTON MARTIN look a bite like the beginning of trouble. They spike with their sales in the Americas, and in China, but everywhere else, their sales fall. In 2018, they had a positive operational margin, but in 2019 not anymore. Although their assets keep growing, including their fixed assets, they accumulate debt even faster, whence a decrease in nominal equity: £361,9 mln. With a market capitalization at £961,7 mln, they are overappreciated by the market at 2,66. BLACK DIAMOND makes me understand why I bought it. It is stupid. What I wanted to open a position on was Black Diamond Therapeutics. Black Diamond Group, which I actually bought, was just next on the list. I clicked on the wrong one, and I didn’t notice my mistake. Still, just as in a neural network, errors can lead to something interesting. Here comes the first interesting fact: that company is undervalued in the stock market. Their market cap, at CAD 102,87 mln, is just 0,47 of their nominal equity at the end of Q3 2019. Fundamentally, they display a loss before taxes, still it is a loss after amortization. When we kick amortization out of the formula, Black Diamond made a solid CAD 10 mln of operational profit in Q3 2019.

Just as an additional explanation: I do not perform the same kind of check for my last financial position, the tracker fund Amundi Epra DR ISIN LU1437018838. This is a fund calibrated so as to reflect the performance of listed real-estate companies across Europe, in Borsa Italiana,

Nyse Euronext Paris, Nyse Euronext Amsterdam, and London Stock Exchange. It cannot really be undervalued or overvalued.  

Now, the drums. I mean, the drums start drumming, so as to build up some tension, and I compute the rate of return I had on those investments of mine over the first 2 weeks since opening. In the table below, I sum up the descriptive remarks developed earlier, and I give it a bottom line with the rates of return.

Company Market to book Fundamentals Remarks about price trend – opportunity for growth Rate of return as of February 14th, 2020 (after 2 weeks since opening)
OAT Onco Arendi Therapeutics 2,05 weak no -13,78%
Aprea Therapeutics 14,02 weak possible -21,1%
Frequency Therapeutics 8,08 weak, but improving problematic -1,24%
Incyte Corporation 6,5 strong possible 6,36%
Macrogenics Inc 1,95 weak problematic 8,19%
Vir Biotechnology 4,92 weak possible -29,01%
Cyfrowy Polsat 0,38 strong possible but moderate -1,86%
ATM Grupa 1,59 strong not much, looks more like stable 0,08%
First Solar 1,12 mixed, uncertainty possible 3,09%
PGE 0,23 good, slightly deteriorating possible -13,54%
Aston Martin 2,66 deteriorating no -13,79%
Black Diamond Group 0,47 strong possible -7,82%
Amundi Epra – tracker fund n.a. strong possible 5,21%

A few observations emerge out of that table, as regards my learning by writing about doing things I am supposed to learn how to do. I fail more often than I succeed. Out of the 13 positions I opened, 5 are successful (i.e. bring positive return), and the remaining 8 are failures, at least for the moment. Of course, it is just 2 weeks, and I want to invest on the long range. Longer a time perspective might change things. Still, the science of financial markets says that any given moment, I face a certain aggregate volatility of said markets, and my personal art of survival in those markets consists in keeping myself on the positive fringe of that volatility. The useful assumption is that I never have a full knowledge of the financial market, and my strategy is always the one of trial and error. I need to have many takes at the thing, and my overall success depends on the percentage of those attempts, which I derive positive outcomes from. Right now, my rate of success measured across investment positions (i.e. I do not weigh them yet with the respective amounts of money I invested in each of them individually) is 5/13 = 0,3846. In order to even fathom the outcomes I want to reach, my first practical improvement should be to drive that coefficient above 0,5. When I say ‘drive’ it means that my incidence of success should depend on my choices, not on the volatility of the market. Hence, I need to hedge. I can already see that trackers, such as the Amundi Epra one I already have, are a good way to hedge.

Back in the game

My editorial on You Tube

I am starting a new log of activity: investment. After some 18 months of pausing in active investment in financial markets, I am going back into the game, and I want to do it as rationally and as artfully as possible, using all the science I have in order to achieve three consecutive goals: a) achieving predictable, attractively positive growth of market capitalization in my portfolio b) adding positive cash flow to that growth of value (i.e. turning my portfolio into a source of cash revenue, and c) creating an investment fund, i.e. a fund where I manage capital entrusted by third persons. One word of explanation as for that last one, as it could seem overly pretentious. I simply want to develop my skills in investment up to a point, where a group of other people – probably a relatively small group – would trust those skills of mine enough to coordinate their capital investment in businesses of interest common to all of us. I want to develop at least one business connected to renewable energies, and to tackling climate change. Becoming a trusted fiduciary for other people’s investment, and standing up to the corresponding promises, could be quite a good step on that way.    

Over the last 3 years, starting in Spring 2017, I used a scientific blog as a tool to boost my scientific creativity and I think it worked: I reached a level where I make true discoveries, and I feel I bring a real contribution to the development of social sciences. For the time being, my biggest scientific achievement is research published: “Energy efficiency as manifestation of collective intelligence in human societies”. I intend to stay humble and consider what I do just as a contribution to the development of social sciences, not as personal glory. I also intend to develop on that science I already have, Still, achievement is achievement, I know I have gone a path of personal development as a scientist, I think I understand how I have accomplished what I have accomplished, and I want to repeat the experience with a practical application of social sciences, i.e. with financial investment.

The method I intend to use consists in keeping a log of exhaustive, written auto-analysis of what I do, publishing that analysis in the form of updates on my blog “Discover Social Sciences”, and using the insights I develop in the process so as to develop my skills as professional investor. In other words, I know that if I write a lot about what I think I do in a specific line of activity, it makes me think about what I do, and true insights appear. It is a long, laborious process, still it has one advantage from my point of view: I already know the pace of that work, and I know how to structure it, because I have already done it in another line of work, namely in science.

Publishing that investment writing on my blog will be painfully humbling. I will certainly make laughable mistakes in my investment decisions, and many a professional broker will have good times mocking how stupid and pretentious I am if I think I can become proficient enough to create an investment fund of my own. Yes, that’s the desert to walk through, and I know that walking it through brings a reward.     

I start with the account – and the analysis – of what I have done as my first steps, during those last two weeks. I am investing via two digital platforms: a Polish brokerage house CDM PeKaO, and DEGIRO for investment in foreign financial instruments. I put 2500 PLN thus some €585 in each of them, and I did some very intuitive, quick shopping. Precisely, I just did a bit of thinking before buying my first basket of financial instruments. I am learning the way I observe it in neural networks I use. Error is learning, and more error means more learning, as long as I can sustain the consequences. I make errors, I study my errors, I try to understand how exactly I make errors, and this understanding will help me to make more and more informed decisions in the future.

The way I intend to pace myself in that learning of investment is precisely based on the sequence: decision >> analysis and definition of errors >> outline of a strategy free of those errors >> implementation of the new strategy, i.e. next investment decision(s) >> analysis etc. My plan is to practice that loop on a monthly basic, i.e. I invest once a month, in a relatively short window of time, and I spend the rest of the month on studying my own decisions.   

Before I go into describing the details of those first investments of mine, which I made in the first days of February 2020, one thing as sort of popped into my mind. When I was starting to use my account with DEGIRO, I was dealing with something new. DEGIRO is not exactly a brokerage house: it is a transactional platform, something like a very fluid investment fund, where I decide what exact assets I want to have for the money I pay into my DEGIRO account. It was new for me, and I made a series of, if my memory is correct, 3 consecutive transactions where I just paid money onto the DEGIRO account and then withdrew it back onto my main bank account. Why was I doing that? Good question. When I look back at those specific decisions of mine, they were quite emotional and impulsive. I remember being sort of vibrant in my thinking, as I was stroking an unknown animal, wondering whether it is going to leap to my throat. Lesson #1: when I do a new type of financial operation, and I use a new type of financial instrument, I experience strong emotions and those emotions tend to blur my rational thinking. In this case, I was probably afraid that once I pay my money onto the DEGIRO account, there could be problems with recouping it, e.g. very high fees. As a matter of fact, none of that happened. Conclusion: I can make irrational, possibly erroneous investment decisions out of fear. I need to understand what I am afraid of, in my investment, in order to make as informed decisions as possible.

It is interesting to understand my own fears. What exactly was I afraid of, in connection with investment through the DEGIRO platform, and what triggered those fears? In the first place, I freaked out because I did not quite do my homework as for the functionalities available. When I invest with DEGIRO, my account has a few metrics. Among them, I have the amount of cash available, and the so-called ‘free space’, or the exact amount of cash I can use to buy financial assets. The default currency of DEGIRO is the euro, and my balances appear in euro. Right after I effectively transferred Polish zlotys on that account, i.e. right after they became visible as the cash balance as euros, they mirrored in the ‘free space’ account. Still, when I tried to use them for buying financial assets, the platform blocked me and an error message of ‘Insufficient free space’ was displayed. Then I freaked out. ‘They stole my money!’, I thought. I know this was stupid. DEGIRO is a licenced operator, and they are legit as for financial reliability. However, seeing that I have no full access to my cash made me extremely nervous and irrational. This is when I suddenly withdrew, back onto my main bank account, all the cash I had paid onto the DEGIRO account.

Only after having done that, I did my homework in the FAQ section of the DEGIRO page and found out what exactly happened to my money. The default currency at DEGIRO is the euro, but display in euros is not exactly the same as conversion into euros. When I do my transfer in Polish zlotys, they are recalculated into euros in real time, for the needs of display on the cash account, and in the free space account. Yet, they are not immediately converted into euros, and thus not immediately available for transactional purposed. Conversion into euros takes place automatically once a day (technically, once a night) or I can do it manually whenever I want. Thus, when I want to use the zlotys I have just transferred, I need to convert them manually into euros, or I have to wait until the next day, i.e. wait for automatic conversion.

That’s the homework I neglected to do before starting with DEGIRO, and the lack thereof made me do those frantic transfers back and forth between my basic bank account and the DEGIRO account. What exactly was I afraid of? As I try to deconstruct my behaviour, I was anxious because I thought I haven’t immediate control over my money. Fear #1: loss of control, possibly loss of immediate liquidity. It’s funny, but John Maynard Keynes wrote about the same thing: many people truly feel they have money when they are convinced they can spend it whenever they want. He called it propensity to conserve liquidity or something in these lines. Lesson #2: when I invest, I tend to be afraid of losing liquidity, i.e. immediate transactional control over my money.

My fear #2, as I think about the situation, is reputational. I was afraid that someone I know could like have a look on what I do and say: ‘You have done something stupid and you lost money’. Here comes a nice paradox: I invest online, privately, and yet I tend to be very concerned about the possible opinions of other people. A part of me want to look 100% professional in my investment decisions. I know, that’s stupid. A few paragraphs earlier I stated that I want to learn how to be a pro. Lesson #3: when I invest, I need to define my true ‘free space’, i.e. the amount of money I am ready to put on stake without being afraid of losing immediate control over its liquidity. Lesson #4: I need to work through the classical question of personal development, namely ‘How will other people know I am successful in my investment decisions?’. Good question, once again, and I think it is the right moment to describe my first investment decisions.

My general idea was, and still is, to focus on three sectors: biotechnology, renewable energies, and IT. Why? The most honest explanation is that I am interested in those fields of technological change. As it is frequently the case with general ideas, they remain sort of general. As I was sailing the ocean of investment opportunities, and as I took a total of 13 investment positions, 6 among them are biotech businesses: OAT – OncoArendi Therapeutics, APREA THERAPEUTICS , FREQUENCY THERAPEUTICS INC, INCYTE CORPORATION , MACROGENICS INC, VIR BIOTECHNOLOGY INC. Those names of companies are hyperlinked to their respective ‘Investor relations’ sites.  As for IT, I have one investment position, namely CYFROWY Polsat. They are not exactly the type of innovative IT company. It is more of a generalist in telecommunications. Why have I bought their stock? Because I have studied their case with my students, in the class of management. The same applies to a TV production company:  ATM Grupa. Lesson #5: I tend to invest in companies, which either I have an intellectual interest in, or I have discussed their cases in class.

As for renewable energies, I have one position open: FIRST SOLAR INC, a photovoltaic business. I have one more energy business, a Polish one – PGE – yet, in all honesty, you wouldn’t really call them a renewable energy-based business. It is mostly your (well, our) basic coal, with some timid glimpses of RES here and there. As for the First Solar case, I am somehow familiar with them: they were one of the first topics I discussed on my blog, back in 2017. As for PGE, kill me (figuratively), I don’t know why I opened that position. I think I was intuitively looking for something big sort of next door.

There is one position which I opened like a real dumb f**k, i.e. after having read a piece of news. I am talking about ASTON MARTIN WI, ISIN GB00BFXZC448. I read that a new big investor decided to acquire a significant portion of their stock, and I made quite stupid a move of following the grizzly bear all the way into its feeding grounds. Now, you are going to have fun. There is one company, which I haven’t the faintest idea why I opened an investment position on: BLACK DIAMOND GROUP LTD. They are in industrial real estate. WTF? Why did I do it? Go figure.  

The last investment position I took is a so-called ‘tracker’: an investment fund supposed to reflect, as closely as possible, the structure of a big stock market index. I chose Amundi Epra DR ISIN LU1437018838 . As I am deconstructing my way of thinking about it, I a pretty sure I wanted some kind of stabilizer, sort of independent from my own judgement.

As I have a look at those investments of mine, I re-ask myself the question: namely ‘How will other people know I am successful in my investment decisions?’. Two assumed factors of recognition seem to emerge from my decisions: coherence, and sort of a general alertness. I want to feel that I am following some sort of coherent strategy, and, intuitively, I want to save some of my money to investments outside that strategy, as if I wasn’t entirely trusting my own judgement.

That’s all in this update. I hope to keep a nice pace in the months to come. Thank you for your attention.