The Finance Integrator - Get Financially Integrated!
Solving life's financial puzzle. This blog will cover a range of issues from budgeting and saving your money to investing. There will be specific focus on dividend investing (which is my investing approach) as well as well as other stuff that happens to be finance related. I will generally try and post here a couple of times a week.
Market valuations appear elevated. The S&P 500 looks expensive. That’s the refrain when examined through traditional valuation metrics such as earnings multiples compared to long term S&P averages. There is valid argument why this is not the case.
If one assumes that interest rates will revert back to long term averages, market valuations look expensive. However one of the implicit assumption’s in the current valuation of the market is that interest rates will stay lower for longer. Simplistically, low long term interest rates see more demand for higher risk equity investment rather than lower risk, guaranteed bond alternatives.
An increase in interest rates sees a shift in investment dollars from stocks to bonds where investors can get lower risk, guaranteed return. Higher interest rates increase the required return that investors need to compensate them for holding equities as opposed to more guaranteed alternatives like bonds.
While market participants may disagree on the validity of that assumption my view is that there is a very good chance that interest-rates will remain at lower levels for an extended period of time. If that assumption is valid, then valuations don’t appear that troublesome.
Of course rates will gradually and steadily rise as economic activity picks up. I think one of the observations right now is the concerted global economic activity across the board. You’re seeing economies in Asia and Europe grow together in a coordinated fashion for the first time in more than a decade.
Emerging market growth continues to be a bright spot with respect to economic activity, with a potential real estate bubble in China and Chinese banking problems notwithstanding. US economic activity continues to be solid with the unemployment rate remaining at persistently low levels and the personal tax cuts that the government is instituting will likely lead to a pick up in consumer spending which invariably should be positive for the economy in general.
US corporations look set to make investments in their workforce and capital stock for the first time in quite some time. Each day seems to deliver a new hiring announcement by some corporation.
All of these reasons are positive indicators for a gradual and measured rising interest-rates. However, how likely we are to return to historic economic cycle high interest rates will ultimately be a function of inflationary pressures in the economy. Whats puzzled economists is why inflationary pressures have remained persistently low in spite of peak employment and strong economic growth.
In my mind however there is one major factor of significance that explains low levels of inflation and mitigates against interest-rate’s rising two levels that were the norm in in previous economic cycle highs.
That factor is the presence of technology. More specifically it is the sweeping role that artificial intelligence will play in the economy over the next decade. Technology generally is a positive force for productivity improvement for a corporation. However this trend is nothing new. Evidence of this has been seen for a number of decades in the automation of global manufacturing lines and plants for quite some time.
Automation has made possible the steady displacement of workers in areas of the economy that have been reliant on manual labor. In recent years technology innovation has also enabled the displacement of more highly skilled labor performing tasks that require greater sophistication and human interaction.
Banking transactions are now more frequently automated, checks cannot be deposited via application or ATM. Customer service interactions can be handled by a software interface. You tax return is more likely to be handled by software. However this is just the tip of the iceberg. Artificial intelligence will likely extend this paradigm to enable both unskilled and more highly skilled labor to be displaced.
Retail, which is a large employer of labor will see even more profound changes. The Amazon store of the future where customers ‘check themselves out’ will see less need for labor at the checkout. The packers and retail workers that you see stocking shelves? The odds are fairly good that in a few years you’ll have robots doing most of that manual work. Package delivery and drivers? Will these even be occupations that exist in 10 years time? Autonomous vehicles are already a reality. The combination of the two could put large chunks of the workforce out of employment.
The far more scary prospect is the wholesale automation of tasks that require some element of decision making and analysis. In many corporations you have hordes of people focused on activities including data gathering, data preparation and data analysis. Data preparation and financial reporting is something that’s just as likely to be done by sophisticated machines than finance clerks.
Complex interpretation of sophisticated images will be performed by sophisticated machine learning algorithms and computationally intense GPUs. So the radiologist interpreting complex images is just as likely to be a machine from IBM named Watson as it is a human. This will have profound implications across areas as diverse as radiography, medical analysis and retail marketing. Occupational functions that interpret data will increasingly have their judgement farmed out to machines.
So what does any of this have to do with interest-rates and valuations? The first of these is that with the increase in abundance of alternatives to labor the ability of individuals to generally bargain for higher wages is more limited.
Technology and AI will hit lower skilled workers particularly hard. If the machine can do a task just as well as a human can, then the human is less likely to see wage increases. That alone will make workers more reluctant to seek wage increases. The other implication of artificial intelligence is that the labor capacity constraints that come with full employment are also likely to be reduced. That will not only result in productivity improvements but also mean that competition for scarce resources will be limited. Even more likely is the steady displacement of labor to capital.
Capital costs uniformly are decreasing. Chips are getting more powerful. Huge demand is resulting in economies of scale that continues to drop chip prices steadily lower.
Now of course these trends will play themselves out over several years. However they will likely mean that while interest-rate will show gradual increases from historic lows, they can remain at lower levels for longer because they traditional forces that cause rates to rise (typically overheating of economy due to limited labor supply) will be reduced. That will intern have profound implications on equity valuation’s and the shift of wealth from labor to stockholders.
While no doubt a development with immense social implications, this is a development that long time investors would be well advised to monitor.
The equity markets have had a stellar nine-year run. I’ve benefited from this very handsomely. However this can’t last. That’s why I’m moving more defensive.
Markets have been extremely kind to me over the last 10 years. After what was a horror 2008 and 2009 for me I have made hay while the sun shines during this long bull-market.
I have been lucky enough to rack up a roster of positions which are up multiples of capital invested. There are almost 10 companies in which I’ve invested that have doubled or tripled the capital base during the school market.
My triples include company such as Cochlear, Commonwealth Bank and Invocare. Doubles include Mercadolibre, AliBaba, Atlassian, CME, Visa, MasterCard and Westpac. Of course, this doesn’t include many others that are up 50% or more in this time frame
Things of been so good lately that even my almost 2.25 year old Project $1M is returning close 20% annualized, a nice outperformance over the S&P 500. Of course, all good things eventually come to an end, and I believe this strong run of gains will also.
I am a long term investor, so I don’t believe in selling down, no matter how much my businesses have appreciated, provided the underlying competitive advantages of these businesses are still in tact.There is also a real replacement problem in finding suitable businesses of high enough quality, and I strive to ensure all of my positions are of particularly high quality, such that selling them would create other headaches for me.
This doesn’t mean that I won’t be moving to a more conservative stance though. I had been adopting a modest amount of gearing in my portfolio over the last few years in the expectation that the stocks I was acquiring were fairly priced not to mention that interest rates were low. I also wanted to aggressively position more of my holdings in growth.
In the space of a few years, there is a distinct reversal in both low rates and reasonable valuations. With solid economic growth across the globe, an uptick in inflation is likely only a matter of time (I still expect that this should be fairly moderate though). Rates are now on the way up, and any valuation discount that was present in the market is now gone.
I’m taking advantage of my recent exit from Aconex to pay down some of my accumulated margin debt across my equity portfolios and move to a more defensive position. I still don’t see any evidence of really outrageous valuations in my portfolio today. However the low volatility, constant move up in the markets and lack of any notable correction over the last couple of years has me operating with a more defensive mindset.
I also mentioned recently that there is an over bullishness that’s apparent in aspects of the market, with certain hedge fund participants in particular taking highly leveraged steaks in market positions. What this could mean is that any correction is amplified as stop losses and leverage is unwound in the market.
I want to be in the position of taking advantage of this distress and being a buyer of last resort to market participants. This is nothing better than being the buyer of a high-quality business from a forced seller. In order to be able to capitalize, I need to ensure that I have surplus cash reserves and that my own leverage is kept at a minimum.
I still have a high conviction outlook on my own core positions that are being driven by long term tailwinds. I believe the business outlook for all of my positions continues to be positive, but how these positions are valued at any point in time by the market will remain uncertain.
Of course, when we do get the next downturn remains uncertain, but it’s my view that everyday that progresses without the semblance of even modest correction, brings us closer to a larger decline. And my view is that the next decline will be a fairly steep one as a result of some of the market factors I have described. I want to be well positioned for this when it hits.
Readers may recall I had launched an experiment just over 18 months ago, focussed on building wealth as a start up employee. There has been an interesting update to this experiment now.
I previously wrote about what a lottery it is to build start up wealth. Employees need to suck it up for some period of time, slave away with an employer, build up some equity and hope their company makes it big so that they can convert their time and hard work into cold hard cash!
Start up wealth creation is such a gamble. It all depends on being in the right place at the right time and circumstances and good fortune favoring the business that you have thrown your lot in with.
So what if you could handicap this process and pick an early stage business with favorable prospects and ride your luck? That was the basis of my decision to plonk down large sums of money into Aconex and Wisetech Global, 2 emerging businesses that I believed had very strong potential to provide solid growth over the medium term.
I put in material amounts of money in both business. It’s really been a tale of 2 very different journey’s for both since the time I invested. In any event, Aconex’s journey as an independent business looks to have come to an end. The company received an acquisition offer from Oracle a couple of weeks ago for $7.80 a share.
It was a fairly troubled journey for Aconex in the time that it was an independent company. A profit downgrade, coupled with a moderation in revenue growth expectations for the business (from 20% to 15% ) saw the company get attacked by short sellers and its share price cut by almost 40% in a single day in early 2017.
I personally believe that the business owners were making the right moves, and taking a long term approach to steadily growing a business in the construction collaboration market, an area that is ripe for disruption, with good long term growth prospects and a huge market opportunity. They were implementing changes in pricing and business models which had the impact of hurting near term revenue, with the trade off of higher medium term growth.
Clearly I wasn’t the only one who thought that. Oracle also had the foresight to see the strategic value of an asset with the prospects for very solid medium term growth, and actually picked up Aconex for what I believe was a steal. With no real prospect of a counter offer insight, I disposed my holding and I ended up netting about $17,000 profit for my investment in the business.
This episode illustrated some valuable lessons in how hard it is to hit home runs. Its entirely possible the owners of Aconex grew weary of managing a public company. They may have been tired of the constant sniping and the efforts of short sellers to knock down the share price. They may have been also caught in a pincer move by Oracle, and the threat of ‘its either you or your competitor that we buy’. In any case, lesson number one is that you need a management team that have the stomach and the appetite to manage a public enterprise with all the scrutiny and pressure that comes with it.
Secondly, if you happen to build anything of value early enough, you’ll have strategic interest swarming you from all angles which you will have to be bloody minded enough to resist or repel. It happened to Facebook early on (who rebuffed an offer by Yahoo) and it also happened to Google early on as well (who rebuffed an offer to buy Yahoo also!). Founding teams need to have a clear long term vision of how they will shape an industry and what their strategic value is.
So even in spite of being in a high growth industry, with good prospects and good assets, so much of an investors ability to hit home runs from early stage businesses is going to be tied up in a founders appetite for success and their desire to maintain their independence, which is just something that’s so hard to control. I don’t begrudge the Aconex founders their well deserved exit. Though I do shudder to think at the potential wealth creation had they been fixated on independence for even the next 5 years though.
My journey with Wisetech Global has been a different experience thus far. Wisetech Global is in the logistics collaboration business, offering a platform for all those providers in the supply chain to track movement of goods across countries at different stages of the logistics cycle. In this case, we have a singularly focussed CEO who still retains a majority of the stock with no liquid supply for short sellers to mount attacks. It of course also helps that the business has been humming along well, and results have been comfortably beating expectations.
My initial $48k investment here has grown to in excess of $110k. I feel that if Richard White can be at the helm of Wisetech for another 5 years, then some seriously material wealth creation may well be possible. Another doubling of that position from here in that time frame would certainly have made this experiment a very worthwhile one for me.
Popular media can be a very good source of market trends. Some recent things I’ve observed makes me think this long bull-market is coming close to an end.
I recently happened on a very interesting article that suggested that margin lending by hedge funds had reached an all-time high. It also suggested that hedge funds were generally exiting their short positions in favor of going long. While such indications may propel one last and final wave of exuberance in what is been a very lengthy bull-market, the increasing usage of leverage is also a precursor to the fact that the next leg down whenever that is will be a particularly nasty one.
According to the Goldman research, hedge fund leverage is at the highest it’s been in the market since 2009. Also interesting is that the short ratio as a percentage of total equity market value is also the lowest it’s been since the bull market began. While these two indicators can typically be viewed as near-term bullish for markets, taking a more contrary in perspective suggests that exuberance in the market is rapidly reaching a peak.
Successive waves of doubt and disbelief about the length and duration of the rally has now given way to FOMO or fear of missing out, with hedge funds giving up the fight and deciding that if you can’t beat them you have to join them. If you view hedge funds collectively as ‘the market’, high leverage and low levels of short activity suggests peak bullishness.
Also interesting was a distinct trend in chasing outperformance, with hedge funds collectively doubling down on Facebook, Amazon, AliBaba and Alphabet. Now, while all of these are companies of the highest quality, and all core members of Project $1M, the fact that new money is still pouring in here after these names are up 30- 40% in 2017 (or in BABA’s case over 100%) somewhat boggles the mind.
While I don’t believe the valuations on these businesses are onerous, seeing hedge funds collectively gearing up to invest in these businesses on mass doesn’t fill me with a lot of confidence. You can be sure that when the next cyclical downturn comes along that these names will be hit hard as the market corrects.
As a contra indicator, ‘peak exhuberance’ suggests to me that we are getting closer to the beginning of a market decline. Its the moment when something somewhere snaps in someone, and people step back and think, ‘what have we done’?. The tech decline in 2000 was just such a moment. However just because we may be at a moment of ‘peak exhuberance’, it doesn’t necessarily mean that markets will come down crashing imminently.
So what will trigger the inevitable decline? Short of a blackswan event, I see 2 potential triggers.
Rapidly rising interest rates trigger the next economic downturn. This is a little hard to predict in terms of timing and duration, but inevitably interest rates will be raised at a rate which sufficiently depresses economic activity causing an economic decline and a corresponding market decline. This will be a prolonged event that will play out over a couple of years.
We’ve run too far, too fast. A more concerning, and potentially far more rapid unwinding would take place if markets just woke up to themselves one day and say we have run too far, too fast. It may be as simple as the Fed and other Central Banks cautioning on excessive valuations or some other macro deleveraging event in some other part of the world (I see China as a possible cause) that results in the unwinding or liquidation positions. With gearing levels significantly up, these could facilitate an equally rapid tumble and decline that has been as rapid as the rise up.
While its not really possible to predict when and how declines will occur and what triggers them, what we can see empirical evidence of is indicators of optimism. Judging by the way hedge funds are behaving at the moment, I’d suggest peak optimism is not far from where we are. The contrarian in me, and the contrarian in you should be suitably concerned.
Well, that portfolio is now fully invested, I have been opportunistically looking at ways to buy more of these businesses at substantially lower prices. Of course I realize that these opportunities only come around periodically. As a result it seemed like an interesting idea to write out of the money put options at prices that were more consistent with levels that I would like to buy at.
What I have essentially been doing is writing insurance. In other words I’ve been providing insurance to others that hold the same high-quality stocks that I wish to buy, with the assurance that I will be a buyer of last resort if the prices of the stocks fall substantially.
While some people trade options with a view to making a few bucks, I find that option writing on positions of high-quality that I would ultimately like to buy helps keep me disciplined with respect to contemplating new purchase activity.
See, the thing is that I am already generally quite happy with the positions that I have in Project $1M and to a large extent the amount of each of these positions, however I’m always opportunistically looking to increase exposure in these high-quality businesses where favorable pricing presents itself.
Of course these ‘lower prices’ at which I may be interested to buy may never come along However just like the insurance that you take out on your house or on your car ,even if an insurable event doesn’t materialize, you still have to pay your insurance provider premiums.
One of the happy consequences of a rising market in 2017 is that while some of the prices at which I would have liked to have bought stocks haven’t materialized, I’ve been able to pocket option premiums on virtually all of the positions of which I’ve written options. In fact, providing this insurance has enriched my overall portfolio income to the tune of close to $13,000 in 2017.
You can see the details of these option positions below. One thing to point out, as I alluded to above, I’m only interested in writing options or insurance on stocks that I believe are fundamentally high-quality and which I would be prepared to buy at the price I’ve written the option on.
One of the consequence of the rising markets is that I had earned close to 75 to 80% of my option premium in quite a rapid timeframe. Rather than wanting to keep the option outstanding for 20% to 25% of the remaining option premium income I have brought back many of my options that had crossed a 75% option income threshold and which had more than a year till option expiry.
What’s been interesting about writing options in 2017 has been the rather pronounced lack of volatility which has meant that premium incomes have been earned over very short time frames as underlying stock prices have risen so rapidly, causing options to become out of the money in a very short space of time. To illustrate, an option to buy Facebook stock at $130 within 12 months has appreciated due to the rapid rise of Facebook stock in a very short space of time.
I don’t expect 2018 to bring about quite the same amount of option income, as I don’t believe that stock prices will rise anywhere near the extent of their rise in 2017. Thus, I won’t be closing out my options as quickly. If I can earn close to seven to $8000 in 2018 with my option writing endeavors, I think that will be a good performance.
I have relatively few options still on the books going into year-end. I recently wrote some options on GE stock which are long dated options to purchase at $18 a share. I received close to three dollars a share in option income for writing these options, which effectively put my cost price at $15 in GE stock. If options are put to me at that price, I believe that I would be quite a happy buyer at those levels. This is the one exception to my rule of only writing options on those businesses that I would like to hold for the next 10 years. While I don’t want to hold GE for the next 10 years, I believe that the stock has been beaten down to levels where the reward is more in favor of the purchaser at this time.
Other than GE, I recently wrote an option on Celgene stock which would obligate me to purchase stock at levels close to $85 a share, at which price I believe Celgene would be a very good buy. I also have an option on the books for both Mercadolibre and AliBaba, both for which I would be a very happy buyer at the prices that I’ve written options for.
To conclude, option writing has been a very nice endeavor for us in 2017. It’s an activity that I plan to continue with in 2018 at close to the levels with which I have written options in 2017. I do plan on waiting for a long overdue correction to restart my option writing in 2018. However if 2017 is any sort of guide, I’m not sure when that may occur!
I had posted late last year about trying to create or simulate meaningful wealth creation in a manner similar to an employee of an early stage business. Here are some updates on that experiment.
We often see reports of meaningful wealth creation by early employees at people in places like Facebook or Google and stop and think to ourselves, wouldn’t that be cool if that was me! However we often don’t realize the hard work and dedication and sacrifice that goes into being an early employee at some of these places. I read reports of early employees at Google putting in 90-100 hours a week at work on a routine basis. Sure, these early employees ultimately made huge amounts of money but that’s not an insignificant sacrifice upfront without any certainty of reward
Also lost in the mix is that of the one or two companies that create significant wealth for their early employees are stories of the hundreds of other companies that have amounted to nothing, with the hopes and dreams of these employees becoming fragments in the dust.
It was the combination of these things that led me to trying interesting experiment (before I joined a ‘start up’ myself!). What if someone could proxy the ‘financial’ sacrifice typical of an early employee but handpick the businesses where they get equity?. After all the idea of getting employee options is simply exchanging upfront and foregoing time salary and other benefits with the potential promise of a significant windfall when the company makes it big later on.
Instead what if somebody just made a commitment to invest a significant amount of money on a regular basis in one or two hand-picked early-stage businesses and tracked the wealth and rewards that flowed from that experiment. Sounds like a foolhardy endeavor? Well that’s exactly what I did this time last year
I sunk a meaningful amount of money into relatively early stage businesses Aconex and Wisetech Global with the view of effectively proxying that journey like the employee of a start would. I invested a fairly significant amount of my capital in each of these businesses and have since backed it up with incremental capital being further invested in both of these businesses since then.
The results of this experiment have been very interesting so far to say the least. In the case of Aconex growth has slightly underperformed market expectations with the result that it’s been the subject of various short-sellers attacks over the course of the last year. While I still believe that the business is performing well, the market has successively derated the business such that the share price was in freefall for a period of time. I took advantage of this decline to average in with the result that my initial investment of $25,000 was subsequently increased to approximately $60,000.
I am roughly down 15% on my initial investment, and it stands at $50,000. However I still have a strong long-term view on the likely success of this business. Again, the idea of being an early employee in a potentially great business, is that you keep getting regular stock rewards in exchange for an effective investment of your time and effort.
Wisetech Global on the other hand has been a very different story. My initial investment in this business of $25,000 was subsequently increased to just under $50,000. The performance of this business has been good. Way better than what I expected. My investment has almost doubled to just under $95,000.
So net net, my $110k of initial capital is valued at close to $145k. I don’t call victory or loss on this experiment yet. I am in innings 1 of an 8 innings journey, literally. Both these businesses are still in their infancy, with a significant way to go in the journey. I believe both are exceptional quality. However, even for early businesses of exceptional quality, much still has to go right. You need market forces and trends to move in your favor. You need that to happen in a timely fashion. In each case though, I am making a concious commitment as a ‘quasi employee’. Instead of contributing sweat equity, I am stumping up an equivalent amount in capital.
For the moment, I don’t have plans to have meaningful amounts of capital to either business. If significant opportunities present themselves in time, I will reassess this. I am making a commitment to hold both for at least 5 years, no matter how markets may wax and wane.
Greetings all! It’s been quite sometime since I posted here I’ve been very busy with my new gig. Here are some of my observations of life in a start up.
I made a conscious decision about a year ago to shift gears in my corporate career. I had started to get into a bit of a rut and was becoming focused on the wrong things in my corporate life. Instead of looking at new challenges and growth opportunities to improve myself I had started to become immersed in internal politics and become dismayed when I saw others getting promotions that I felt I really deserved.
I quickly came to the realization that that wasn’t a healthy behavior and there was no point in spending the rest of my working career in such an environment. Sure if I was I in the last couple years of my working life I probably could’ve just coasted on in that manner but given I have the better part of my working career ahead of me I made the decision that an exit would be a sensible thing.
Earlier in the year, I made the decision to quit my interesting by unrewarding role in a large corporate and switch it up for a role in a new start up organization within a relatively large organization. I must say that eight months in the journey has been highly stimulating and fulfilling and I’m pleased to say that I don’t regret the move in anyway.
Life in a start up business is very different from working in an established corporation. I guess that’s obvious, but I didn’t fully appreciate the nuances of Start Up life until I took this role. I guess the biggest difference I’ve observed compared to traditional corporate life is that I just have no time for politics. I am completely focused and obsessed on executing my current role to the best of my abilities and really haven’t should’ve thought about what the other political dynamics are that are paramount or present in the broader organization.
So what have I observed?
Responsibility and role definitions mean little. I have probably change the scope of my role at least twice within the last eight months that I’ve been on board. Because work streams and scope change so rapidly in a start up organization, being adaptable and being a utility player is very important. Also an ability to respond and step up your game at a moments notice is very important.
You could be in charge of partnership development one moment, and then have much broader responsibility for sales and business development the next. I know because that’s what happened to me! Capable utility players that have an ability to execute will find themselves increasingly being given greater scope and responsibility then the those who are unable to execute. The unique thing about working in a startup is that it’s a great leveler. There’s really nowhere to hide. If you’re ineffective you can’t really curry favor with anyone to protect you or push your interests to the extent that you can in a larger established organization where you’re one in a sea of minions. I quite like that about working in a startup.
You get rewarded for getting shit done! I had almost given up on corporate America as being a place where things happen, results are driven and performance is rewarded. In fact in most of my previous I had only seen people who were favorites with leadership being given upward mobility almost to the detriment of wanting to achieve real results. Being in a startup organization where you just have to get shit done has been a very refreshing change for me. It’s made me motivated to drive results because I can more tangibly see my impact on the progress of our business. That was something that was sorely lacking to me previously as being one in a ocean of people.
Be prepared for lots of change. We’ve probably done at least two minor tactical pivots in execution in the time that I’ve been with this organization. That’s meant projects have been cut, resources have been re-prioritized, and certain pursuits have just been shut down. We are living proof of rapidly test, experiment, and change what’s not working culture.
Hiring really sharp people is more important than hiring the right person for a specific role. I know this sounds a little ridiculous but hiring intelligent, adaptable utility players is a really big deal. Because you need to be adaptable and the scope of your role and responsibility may change in the early days of a start up, hiring intelligent creative and motivated people is more important than hiring the right individual for a specific role.
We are currently living through some of the consequences of having made specific hires for really specific things and finding that these individuals can’t be repurposed or redeployed for other areas of focus. Hiring is also super important with an emerging business. In a larger corporation you can afford to get a few hires wrong and not be too affected, however in a small organization this is a really big deal because those individuals have nowhere to hide and others need to pick up the slack pretty quickly. It’s embarrassing and uncomfortable for all concerned.
Overall I’ve learned a lot about myself in this role. I’ve learnt that being able to drive real results and make an impact is something that I thrive on. In fact I’m not sure how easily I’ll be able to move into a more traditional role in a fairly large enterprise again. Wasting away shuffling powerpoint decks from person-to-person, team to team is not really a very rewarding endeavor in hindsight.
While I didn’t think very much of it at the time I think it would be difficult for me to go back to something like that again. I have also now realized that there’s a lot of innovation theater in these large organizations. Appearing to effect change whilst really preserving status quo is actually the mandate of most large managers at established organizations.
That’s a fairly depressing realization because it gives you a sense of what the outlook is for most traditional, stodgy businesses in corporate America. Those that don’t have an ethos of trying to affect real change are probably destined to be roadkill by the next innovative business that comes along. I’ve also seen firsthand that it’s easier than ever to spin up something new in a rapidly short amount of time.
I’ll try to provide some additional color and updates on my start up journey as it progresses however suffice to say that things are moving along just about as well as I could’ve expected at this stage in my journey.
The new year is a good time to set goals. Here are my overall priorities for 2017.
Add another rental
Our experience with our existing rental has generally been a good one. Given where stock market valuations are currently at, I’ve been actively thinking about diversifying our portfolios away from equity exposure and directing some monies to property.
My wife and I have been actively looking at adding another rental to help us further diversify our investment portfolio in 2017. In 2017 I’d like to make significant progress on our search for another rental either through making a substantial commitment towards saving up the deposit and perhaps even isolating the specific area in which we would like to purchase.
Who knows if things progress sufficiently well we may even be able to complete a rental transaction in 2017 itself!.
Further extend my option strategy
I was relatively pleased with how my options experiment progressed through 2016. It’s something that I aim to extend and do more of in 2017 I am planning on sticking with the same strategy of writing slightly out of the money put options on high-quality stocks that I’d like to own for the long-term.
This experiment last year generated close to $6,500 in premiums. Of course I expected some of the stocks may get put to me over the course of 2017. However by and large most of the options that I’ve written are now significantly up from when they were initially written.
I expect that I may be slightly more aggressive in terms of the strike price that I write the options at and maintain a slight discount to current market price rather than a more significant discount which I did for 2016.
I will likely also look to write longer-term options contracts to maximize the initial premium that I’m deriving from these options.
Continue maxing out the 401(k)’s
Making a maximum contribution towards my 401(k) was the strategy that worked really well in 2016 given the rapid rise of markets through the year. My wife and I are now sitting on a substantial accumulated sum in our 401(k) that’s difficult to ignore.
Maxing out the 401(k) has now become an effortless undertaking. In fact I don’t even notice the money leaving my paycheck and being invested into the 401(k). My aim is to continue down the path way of maxing out my 401(k) through the course of 2017. Of course market returns will not likely match what was seen in 2016, however the tax benefit on contributions plus the long-term compounding of amounts set aside into the 401(k) will no doubt make this a worthwhile endeavor when looked at in 10 to 15 year’s time
For the most part, 2016 for me was a period of more frenetic investment activity towards the start of the year when markets moved into a tailspin and very little activity in the latter part of the year when markets consistently rose.
In 2017 my aim is to literally do nothing. I don’t wish to make any purchase transactions at current market prices. If markets happen to experience a sustained decline (which I’m not betting on), then I may revisit this.
Similarly I don’t want to have to sell anything. I really just want to leave things alone and give my investments the chance to grow and prosper over the course of the year. The way I see it, I have now done the hard work at the front-end with respect to investment selection and execution. Now is going to be more a time of letting those investments grow and the best way to do that is to not make any active investment decisions, particularly sales of any investment.
Better tracking of finances
My wife mentioned to me that she’d like to create keep a close a tab on our spending and specifically where our money is going. We have fairly good tools to help facilitate that including our Personal Capital accounts which help accurately show expenses and specific categories of spending.
However to be frank we haven’t really paid close attention to where specifically our moneys are going and what is being spent. So for 2017, I would like to make a more concerted effort to understand exactly where our money is going. Of course that may be easier said than done!
I indicated recently that I was contemplating a career shift and moving into a start up. I’m going to provide an update around how things are going.
Earlier this year I decided to make a move from a career standpoint. I left my long-standing employer of almost 8 years to take a punt on a start up opportunity within an established business. I’m pleased to say that a couple of months in I feel strongly that the decision that I made to make the switch appears to be the right opportunity.
My current role involves more operational responsibilities than I’ve previously had. I’m charged with executing on a new business opportunity within this new organization that I’ve joined. It’s essentially a start up opportunity within a large business so I have the luxury and the freedom of a startup employee with the security and backing that comes with being an employee of a large established business.
That in my view provides the best of both worlds. The challenge is an interesting one because growing a business is not a career challenge that I’ve had to undertake at this point in time in my career.
A lot of what I’m doing is defining market strategy, laying out plans to tackle and selling to different industries identify account management strategies to grow from a proof of concept into a market trial and into sales revenue while maintaining a disciplined view with respect to competitor actions in this emerging market.
Unlike traditional start up roles I’m able to do all of this with the understanding that I have a secure and robust financial package yet with the giving potential upside if we are able to outperform in this venture. In the worst case if the venture doesn’t succeed I would simply be redeployed into another part of the organization. In this particular venture we have roughly 3 years to make this successful, however a significant amount of the attraction to me with this opportunity was that I will get to spend an extended period of time in a growth market in the tech sector which likely will keep rolling on for the next 10 to 15 years.
I view this as a long-term career move to establish myself in what I would realistically expect is the last portion of my career journey likely for the next 10 years or so at which point I intend to steadily face myself out a formal employment.
What’s been the most interesting aspect of this switch for me is that I find that I’m less preoccupied with the ongoing politics within the larger organization given that I’m so busy thinking about how to make this start up endeavor successful. That’s left limited time to think and ponder the broader political environment within the company. That frankly to me is a good thing because it means that my efforts and energies are more productively focused on the end endeavor and less so on the annoying distractions of corporate life.
I’m also really enjoyed the opportunity to dip my hands into several different pies at once. For anyone that’s working in a start up you’ll probably know that this is par for the course as far as the expectations of being an early employee in an emerging organization role definition typically means little.
In my case what I was brought on primarily for strategic endeavors. I am simultaneously looking at defining strategy, defining pricing, working on sales and account management as well as investments and managing potential acquisitions.
I’m effectively wearing 6 to 7 different hats within the startup endeavor that I’m pursuing. Not only does that make for a very enriching day-to-day experience but I can see how longer term or even medium time that will help position me really well for any subsequent transition that I may make to any other role or even any moves externally.
I can’t really think of any material downsides at this stage if I were pressed to think of one. The explicit accountability for results is something that I’ve been able to duck and dodge for an extended period of time with my old employer. To be explicitly responsible and accountable for the delivery of certain results is a new experience and a new challenge but frankly one that I’m looking forward to seeing how I do.
The other typical downside with most ups which is the long hours is not something that I am experiencing in my current role. Fortunately the overall culture of the larger corporate organization is still alive and well within the start up venture albeit that we work at a much faster accelerated pace but it is not the expectation to burn unreasonable hours for the sake of making progress. What I’ve observed is that we all collectively tend to work faster and more diligently to accomplish the things that need getting done.
If I was to identify any other specific downside it would probably be that my blogging efforts have suffered a little over these last two months. That’s not for a lack of time to be able to blog but what I have observed is that my free time tends to get invested into thinking of new ideas and opportunities to execute at my start up role which arguably is a good thing because it means that I’m really getting into the role and the opportunities that it’s bringing. I expect so that over time as I transition to more of a business as usual mode that will leave more time to share my thoughts and ideas on investments with you.
An interesting trend has been taking place over the last few months which has seen technology stocks reverse their poor performance of 2016.
Technology stocks were the whipping boys towards the latter portion of 2016. With Trumps ascendancy into the White House, there were concerns that Republican policies would favor old-school telecom and incumbents at the expense of the internet giants and technology start ups..While the jury still out on the extent of the impact of Trump policies on tech it’s fair to say that tech stocks have significantly outperformed since the beginning of 2017.
Markets go through ups and downs sometimes without any rhyme or reason but ultimately they always return back to earnings performance and that’s ultimately what drives the long-term performance of a stock. In Google and Amazon’s case, exceptionally strong revenue growth and correspondingly good earnings performance have seen both stocks significantly outperform the broader index in the first part of 2017. Google stock is up almost 17% year-to-date while Amazon stock is up more than 23%.
While the business performance and underlying growth trends for Google and Amazon look positive going forward it’s fair to say that Trump’s policies are not without adverse implications for large tech in particular Trump’s propose scaleback of H1B provisions which provides the large influx of high-tech workers that the tech giants rely on.
Additionally, a progressive rollback of net neutrality provisions have the potential to thwart the tech giants steady growth. However in my view I don’t believe that either of these actions will necessarily derail the tailwinds that are propelling the revenue, earnings and share price gains that large tech have experienced these last few months.
A reduction in H1B visa’s for large tech companies is probably to see a progressive off shoring of these jobs to emerging tech sectors in Israel, India and Eastern Europe largely to the detriment of US workers. The outsourcing firms like Wipro and Infosys will suffer, however overseas economies will greatly benefit.
While net neutrality is a thornier issue I think it remains to be seen how the final provisions get implemented. If the incumbents like Comcast AT&T and Verizon are able to zero rate or favorably treat their own traffic that may provide a subset of advantages to them at the expense of startups. However the consumer will ultimately be the primary determinant of the services that are consumed and I don’t see favorable data charges shifting consumer preferences in favor of services provided by the cable and Internet providers at the expense of Google and Amazon and Facebook. Brand recognition and a high quality user experience will continue to see these brands thrive.
What’s been the biggest revelation for me with the performance of large cap tech over the last few months has been that even companies with mega market caps in the hundreds of billions of dollars can still experience outsize sales growth if they have tailwinds that are propelling the business.
In Google’s case that’s still evident from the shift of off-line to online advertising. Arguably one can even make the case that this tailwind has further to go given online viewership is accounting for more and more time spent, yet advertising dollars flowing are still yet to fully reflect this trend.
Similarly, in Amazon’s case, e-commerce is accounting for a greater and greater share of purchases and the rate of failure of off-line retail suggests that this trend is going to continue in force for the foreseeable future.
What’s been clear to me is that I’ve consistently underestimated the growth potential that large cap tech still looks set to have over the foreseeable future. I’ve attempted to correct this to some extent by taking more meaningful stakes in both Amazon and Google through the course of 2016 and have been pleasantly surprised by their share price appreciation so far this year.
I still believe that large cap tech is favorably priced compared with the earnings growth that these businesses will continue to experience for the foreseeable future. Further, with the economy continuing to chug along and consumer confidence steadily increasing, Google and Facebook should continue to experience organic advertiser growth, while the destruction of off line retail will continue to benefit Amazon.
On the other hand, the rest of the S&P 500 which has ridden a steady upswing as result of the Trump trade still looks incredibly overpriced to me and I’m avoiding more broad-based accumulation of other stocks in the index.