Thinking Digital as the Market Rips!
While the individual man is an insoluble puzzle, in the aggregate he becomes a mathematical certainty. You can, for example, never foretell what any one man will be up to, but you can say with precision what an average number will be up to. Individuals vary, but percentages remain constant. So says the statistician. ~Arthur Conan Doyle
If you are a parent, you have probably read about the importance of STEM for the next generation. By STEM, I mean Science, Technology, Engineering, and Math, so we have everybody on the same page. In all of those fields, numbers and statistics play a vital role in understanding the subject matter. Relatedly, the central premise of the digital generation is using data, mostly involving statistics and mathmatics, to make life better. In the case of businesses, it involves efficiency and using the past to project the future based on historical information. Statistics and the ability to make sense of numbers is the basis of emerging fields like the cloud, artificial intelligence, machine learning, sensors, geolocation, drones, voice commerce, and data analytics related to security. As we are about ten years into the big data explosion, many industries are already applying these tools and preparing for the future in unique ways. For example, in the energy sector, the integrated oil companies are making digital copies of all of their largest assets and operations for all kinds of reasons, including maintenance, drilling yields, use of resources, and production levels. We see it in health care with the explosion of sensors in wearable devices as a way to monitor vital readings like blood pressure, glucose levels, and heart rates. In retail, with the improved picture taking technology available, analysis of picture data is leading to the idea that because a customer has bought a piece of furniture like a sofa, maybe the accompanying end or coffee table that matches would make sense. Essentially, we know x, so lets tack on y because the data proves it. The logic is applicable in so many areas it becomes overwhelming. The largest data collectors, think Amazon, Facebook, Google, Apple, and Netflix, would seem to have build in advantages as the more data one has, the algorithms based on historical trends would be more accurate. As time slowly moves on, society integrates technology to become more efficient, and it applies to the investment world as well. How so?
Let’s take a look at an issue which is front and center, which is the outperformance of the United States markets versus the rest of the world, otherwise known as divergence. If you look at the US economy, the data dictates it probably does deserve to sell at a higher multiple than nearly any other country. The largest investors have all kinds of data to analyze which can compare multiples here versus a specific country or region. It can be compared to historical multiples to see how great that is relative to what it has been. The same holds true for individual companies in the US versus their peer group in specific regions. It is where the practice of algorithmic investing and trading comes in as algorithms are used to find the specific discrepancies between what has historically been the case, and what exists today. The individual investor can use the same kind of methodology to compare the past with today’s situation as a way to try and find possible opportunities in nearly any asset class you can think of- stocks, bonds, currencies, options, real estate, etc. Clearly, if you haven’t done so already, time to dust off that old statistics book.
In the markets this week, the biggest story was in the marijuana sector where something called Tilray rocketed to a nearly 15 billion dollar valuation on a measly 24 million of sales. Clearly a bargain. If you think about it, marijuana, cryptocurrencies, housing, oil, rare earth metals, and internet related companies have all experienced a time frame where the sectors rocketed to excessive values. If Wall Street can sell it to you, they will make it available at any price. It is up to you to discern whether the merchandise is worth paying for. I suspect the next bubble will be in something quite interesting, oh, I don’t know, maybe bubble gum wrapped sand? Elsewhere, Fed Ex, Oracle, and Autozone reported earnings last week as investors found a way to look positively on triple witching week.
Politically, I thought I would mention, in case you weren’t aware, how bad both parties are on a few topics. Democrats often mention the corruption and influence of money in politics. Meanwhile, we learned this week that the Obama Foundation is going to receive a 99 year lease from the City of Chicago, run by ex campaign manager Rahm Emanuel, for 10 dollars. The Republicans, who preach fiscal discipline, have been passing budgets which approve trillion dollar deficits. The inability to have a functioning government is the responsibility of both parties, and historically, if you compared the lack of civility, hatred, and out and out nastiness of the Donkeys and Rhinos today versus any other period, I would imagine it has never been worse, not by a long shot. You don’t have to be a statistician to figure that out, either.
Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one's overall financial situation. The fact that Yale Bock has earned the right to use the Chartered Financial Analyst in no way means or guarantee performance better than market indexes.