What Does Equity Price Measure

In the late 90’s I was day trading options. The late 90’s were the lead up to the .com crash. In the early 90’s small caps exploded as tech blew up. I knew guys who made 10M on things like Compaq and Sysco and Sprint buying stock at 10 cents per share. Later they levered the hell out of it and we got Long Term Capital Management. LTCM blew up and the NY banks covered the leverage. The market narrowly missed catastrophe. Next cake .COM and stocks with no property and no earnings, not worth anything were trading in the stratosphere. This is when I was trading options. JDSU was typical. It would undergo a stock split every 90 days with the stock eventually reaching 150 bux so a single share might split 8 times in a year and the price soared to 150 bux a share. Eventually the party was over the musical chairs were filled and JDSU did not have a chair. The stock went to $2 and the stock did a 8:1 reverse split. I made money trading JDSU till I lost money. I still don’t have a clue exactly what I owned in the stock from a value perspective, but what I cared to own was access to cash flow. JDSU LMNOP QRSTUV whatever, all I was doing was trading cash flow and momentum. It’s like sky diving. The acceleration is breath taking and only ends once the ground is hit. By then you better have risk management in place. If you don’t you will bounce. That is what sky divers say happens to people who “go in”, that is suddenly decelerate without deploying their risk management. I’ve seen bounces, they are not pretty. Pretty much everything gets crushed.

I didn’t manage my risk very well in 1999 and managed to loose 1M. I made it back and managed to loose that same 1M in 2008. I made it back as well. In 1999 I did have what I thought of as risk management. I didn’t know much about bonds but I did own some muni zero coupon strips that were paying 7.5%. I had GE. GE got to 57 bux in Aug 2000 AND NEVER RECOVERED! It’s taken GE 20 years to die but dead it is. I owned Fidelity Countrafund It was 6.5 bux in 1999, went to 7.8 bux in 2007 and is about 14 bux today. I sold Contrafund around 2008 but had I held it over 20 years I basically would have doubled my money in that period. That’s a 3.5% rate of return over 20 years dividends reinvested. I did own some Fidelity tech mutual funds in 1999 that actually went out of business. I thought I owned diversity. The interesting thing about 2000 was everybody and their brother was a trader. My contractor who had dropped out of high school had 1M in the market and was filling me in on his book out on my driveway back then. Didn’t turn out so well for either of us, but my risk management was better than his.

In 2005 or so I was having coffee after Church talking to a welder. He owned 5 acres of scrub land out in the sticks near where I live. He was telling me how the 5 acres across the street from him had sold for 90K an acre. I said 90K an ACRE? SELLLLLL I said!! I had priced 10 acres a few years earlier for 4.5K an acre in a much better location and I couldn’t get myself to pull the trigger so no way was 90K an acre reasonable by any stretch. He just looked at me and said: what if it goes to 120? I live in rural FL out where I live there are no lights to pollute the night time sky. My neighbor to the east is the Atlantic ocean so when I get up to pee the eastern sky is magnificent. That same 5 acre plot today would fetch 9.5K/acre. If I was in the market I’d wait a year and could probably get it for7K.

This time feels very much to me like 1999 and 2005. High school dropout contractors and welders are all tycoons. Not to diss them at all. They are my patients neighbors and friends. They go to my Church and shop at my Walgreens. So the question is what does price actually measure these days?

I looked at the market today and saw this:

I’ve read that there are several million new brokerage accounts that have been opened since the crash in March. I’ve read that many peeps on unemployment ate making more on unemployment than they made working. I read that peeps are getting an extra $600/wk. How is it the NAS closes up .29% while the Dow closes down 1.09%? That’s a 1.4% spread! The answer is this is 1999. This is my contractor sitting at home trading QQQ waiting for the job to come back. This is JDSU. This is 90K/acre. This is where the 4T in stimulus went. This is living in a video game called “Stock Market”. This is every fund manager having to go “all in” or else be left behind and loose his job. The laws of gravity have not been repealed. I just reviewed a side deck of world wide demand and world wide production and world wide shipping (supply chain) on a region by region basis. This deck is what life is like outside the video game.

Here is an example Singapore. Singapore is a city state Island in south Malaysia. It is a wealthy country and has 6M people and had 25 Covid deaths with 38K infections. Here are a couple charts of what’s going on in Singapore

Recreation is down 65% and work is down 60%. This is common across the world. Nothing anywhere is gangbusters. The title of the report is “Slowly Recovering”. Is Singapore consistent with a NAS of 10K? What happens to QQQ when the stimulus rolls off in July and NAS has a down day? What does price measure? Rate of change or value?

7 Replies to “What Does Equity Price Measure”

  1. I hear you brother.
    That was a nice trip down memory lane for me.

    I was shocked by but survived the 1987 crash. It was deep, but brief. It shook my rosy beliefs though about the market “always going up.”

    I did well in 1999 since I was steeped in Ben Graham’s value investing at the time. A spine surgeon friend of mine tried to talk me into a 2X NASDAQ Pro Fund. I told him the market was overvalued by any measure he chose. He later lost 95% of his investment in that fund!

    Another friend had his whole retirement in Compaq. It did well in the 90s as you mentioned, but he lost more than he could recover from eventually and was unable to retire from inpatient medicine.

    Another doctor-friend fired his value investor advisor in 2000 because he was only making 12% on his money. This brilliant clinician felt he knew enough to manage his own money better. I tried to talk him out of it as did the advisor. He said, “we have a hundred years of data showing success with stable value investing….” My friend wanted none of that nonsense. The tech revolution had changed everything. Ha! He too lost hundreds of thousands over a year or two.

    In 2007, I was busy building my offices and took my eye off the ball. By the time I looked, my small value hand-picked stocks were a train wreck. I panicked and sold. Classic blunder.

    We will see how I do with the next crash. I don’t agree with the stock market’s rosy optimism. 25K businesses going under this year. 40M unemployed. Yikes. I have about 30% in stocks. Small enough for me to not panic – I think.

    1. Hey WD. The problem is balance sheets and the fact price no longer signals value, not value tilt. I read an article about a mid tear S&P company that sells shirts (I can’t remember the company). Nothing special in terms of growth, but their “stock price” due to financial manipulation and being in the index has gone up several times over the past decade. The price of shirts have not gone up several times. In the past price was the amount when the value of something became liquid. A 300K house sells for 200K the “price” is 200K. Today the price is a reflection of flow and leverage not value. And so the price is based on flow which is only good as long as there is adequate pressure in the system. The QQQ price for example has nothing to do with value. The Dow is down 186 points, the S&P is down 14 and the Q’s are up 73. Apple is up 3% Microsoft is up 4%. So much for a broad based rally. The gains are strictly based on gambling. One day JDSU was worth $159 soon there after $2. If you believe Munger he thinks Graham is pretty much shot. His feeling as long as prices reflect manipulation and not value there is no efficient frontier and neither price nor risk is knowable.

      1. It’s a very weird time to invest nowadays. Seems like everybody and their mom is day trading using Robinhood now. Robinhooders injected some epi in an already dead Hertz. And it looks like they inflated VTIQ / NKLA. I have to admit, though, I’m part of the herd. I play with Robinhood with 3-5% of my investable money, but I’m not fooling myself; I’m not strictly using play money and not betting the farm. Otherwise I’ll be one of the examples of people who lost it all just like in your post.

        But the question remains… where do people invest nowadays?
        1) Stonks are over inflated due to financial engineering, prices don’t reflect value, and the risk/return ratio doesn’t seem favorable.
        2) Bonds don’t make a lot of sense in this low interest rate environment.
        3) Gold? I’ve watched several George Gammon videos (thanks to you) and he said investing in the GLD ETF is risky because HSBC is the custodian of GLD ETF. And it’s not like I’m going to go out and buy physical gold bars. It takes space and storage to keep them, which costs money. And I’ll probably have to buy a few AR’s to protect them.
        4) BTC? I have a little bit of BTC (like 1% of my portfolio). I still view it as a speculative investment and I don’t feel comfortable owning a ton of it. Plus there seems to be some correlation to the equities market.
        5) Long term volatility? I saw the idea of investing in long term volatility on a George Gammon video. He was talking about Chris Cole’s Dragon Portfolio. Sounds compelling, especially since markets (and the world) seem so volatile right now. But nobody really explains how to invest in long term volatility. I’m pretty sure it’s not holding TVIX or VXX (or some equivalent etf).
        6) Cash? But cash is trash…

        Yeah, it’s a perplexing time for investors right now.

        Anyways, I always appreciate your insights.

  2. Appreciate the history and firsthand accounts. Completely agree that the market does not remotely reflect the economy.

    Acknowledging that reality, I’m curious if you see any role for government printing money in times of great crisis – something that Keynesian economists like Krugman have supported despite the obvious illusory sense of stability it imbues.

    It was one of the major levers described in the Ray Dalio video on the Economic Machine you posted some time ago that so precisely captured what happens at times like this.

    Look forward to your thoughts as always,

    CD

    1. I think there is a governmental roll is stabilizing things. The problem is what they are stabilizing in many respects is not worth doing that. We have been under a regimen of financial engineering for 30 years. We print financial numbers which are not a real reflection of reality, like inflation. We print money which expands the balance sheet and we take toxic assets off private balance sheets and onto public balance sheets which cause moral hazard. We allow companies to blow up their stock prices using borrowed money for share buy back which adds nothing to the productivity of a company, only to it’s debt BUT the guys in the C suite get a huge payday. Hospitals are laying off staff while CEO’s are getting hundreds of millions in raises on public money. The Fed balance sheet can not be shrunk because that causes a market crash and would lead to recession or depression. In fact the economy has been rolling over since Dec 2018, supported by smoke and mirrors, COVID just brought the eventuality forward by a few months. There are 7B people on the planet and 335T in debt That means every body on the planet owes 45K/person. A family of 4 owes 180K planet wide. You’ve been to Mexico are any of the people who served you packing a spare 180K to pay off a debt they had no say in creating, so some hospital CEO can walk away with 500M dollars? Pretending debt doesn’t matter is the problem. The think that is wrong with the economy is NOT liquidity, which is why “priming the pump” won’t work. The problem is the pulley on the pump aka demand is destroyed. People are freaked out. The savings rate is like 15% and since demand is destroyed the supply chains will respond to over capacity by shutting down idling workers. Boeing hasn’t had a new order for an airplane in 3 months. 17,000 planes have been mothballed world wide.

      The Krugman argument only works if there is growth enough to multiply the cost of the debt. There is a law that says once debt to GDP gets bigger tan 90% further increase in debt results in a decrement in growth. If we were at 80% ration we could expect $1.20 return for every $1 borrowed. At the present level 107% we can expect less than 90 cents of increased economic activity for every dollar borrowed. In addition we are being sold a narrative about our economic stability and a V recovery. How can you have a V recovery if everyone is sitting at home making more on unemployment than if they were working? GDP is based on economic productivity not largess.

      What needs to happen is zombie companies need to go bankrupt and creative destruction needs to happen. There is something called the 4th turning happening demographically world wide as the boomer’s retire and soon expire and new regimens will come to pass. You remember ol’ Zeke Emanuel from Obama care fame> His latest is “75 is enough” meaning when you reach 75 support will be withdrawn. You had a nice life here’s an aspirin NEXT! Never let a crisis go to waste. We are not going back to 2019 or to the preceding 12 years of economy. The next thing will be to legalize pot so “we don’t feel so all alone, everybody must get stoned” and nobody will give a shit, as long as the twinkies hold out.

      The killer will be inflation.

  3. It’s a very weird time to invest nowadays. Seems like everybody and their mom is day trading using Robinhood now. Robinhooders injected some epi in an already dead Hertz. And it looks like they inflated VTIQ / NKLA.

    I have to admit, though, I’m part of the herd. I play with Robinhood with 3-5% of my investable money, but I’m not fooling myself. I’m only using play money and not betting the farm. Otherwise I’ll be one of the examples of people who lost it all just like in your post.

    But the question remains… where do people invest nowadays?
    1) Stonks are over inflated due to financial engineering, prices don’t reflect value, and the risk/return ratio doesn’t seem favorable.
    2) Bonds don’t make a lot of sense in this low interest rate environment.
    3) Gold? I’ve watched several George Gammon videos (thanks to you) and he said investing in the GLD ETF is risky because HSBC is the custodian of GLD ETF. And it’s not like I’m going to go out and buy physical gold bars. It takes space and storage to keep them, which costs money. And I’ll probably have to buy a few AR’s to protect them.
    4) BTC? I have a little bit of BTC (like 1% of my portfolio). I still view it as a speculative investment and I don’t feel comfortable owning a ton of it. Plus there seems to be some correlation to the equities market.
    5) Long term volatility? I saw the idea of investing in long term volatility on a George Gammon video. He was talking about Chris Cole’s Dragon Portfolio. Sounds compelling, especially since markets (and the world) seem so volatile right now. But nobody really explains how to invest in long term volatility. I’m pretty sure it’s not holding TVIX or VXX (or some equivalent etf).
    6) Cash? But cash is trash…

    Yeah, it’s a perplexing time for investors right now.

    Anyways, I always appreciate your insights.

    1. Use this site

      It’s a list of dozens of volatility measurements. Click on the VIX and stretch it to a year. The highest vol in 2019 is when the Fed had to start injecting dough into the Repo market but it was only about 24 at its worst. You can see in March accelerating VIX. In 2019 you made money. In 2019 the market was safe to invest. There was still vol but the vol behaved. In 2020 the vol is in a regimen of uninvestibility. When in this regimen since the spread of vol is so wide, you can’t tell what will happen. If you buy ABC for 100 bux and the vol is 10 you have a pretty good idea your risk is 90 to 110ish. If the vol is 50 and you buy at 100 what can you expect? Say 50 to 150 in other words you don’t have a clue and that a real $100 your screwing with. The robin hoodies expect 150, based on?. The unemployment and decreased GDP says 50. My perspective is IDK and I’m not willing to bet because the risk is so high and the loss so consequential. Suppose there is 1929 or 1937. Who says your expected pension/s is/are going to be there. What if your monthly payout may have inflated away to the price of a single loaf of bread? That’s the risk no bogglehead is addressing. Family offices went to cash in 2019. Buffet went to cash in 2019. Apple went to cash in 2019 I went to cash is 2019. Why would they go to cash if cash is trash? Maybe the smart money knows cash is golden. In a market 40% down the riskless asset is 40% ahead.

      I sold out to cash in March at very early in the crash and lost about 1 year of gains from my 12 years of gains since the GFC. I’m investing in and out of gold and between gold and BTC I’ve made a little less than 100K back of what I lost placing at most 18% of my capital at risk. That leaves 82% in a risk free asset. Since I’m trading GLD the volatility is well defined Gold’s vol is about 20 and has been as low as 17 in the past month. VIX is 44. In the present regimen 20 is eminently trade-able and you can make money trading it, 44 is eminently stupid and will chop you up. Trading bankrupt stocks is just stupid. Why are you concerned about BTC and not AMZN? AMZN vol is 39 and BTC is 3.9. In March when VIX was 86, BTC vol was 10. Does BTC have risk? Everything has risk in this market.

      If the market goes up and you own cash, you own your principal free and clear. and you can wait till the Vix falls to 20 or 16, invest and make some money. If the market falls in half, you’re 50% ahead compared to the robin hoodie. You have been sold a narrative. The narrative is buy and hold of index funds is somehow safe. The narrative is you can’t make money trading because some dumbass somewhere thinks he read a study that says that. YET Buffet family offices etc went to cash. The narrative is if you sell low you’re screwed. Why yes that’s true so don’t sell low. The rule is BUY LOW, sell high. The family offices all sold high and are now waiting to buy low. Index funds have been analyzed for flows. There are no buyers except the companies buying back shares and the boggleheads and the robin hoodies. Geezers have stopped buying and started distributions which will push down price and the sales are government forced. Wh do you think they raised RMD to 72? Because as soon as RMD hits a ton of boomers the market is going to crack so they put that off for a couple years. I’m sure for someones political benefit.

      I think the simple 4 x 25 kind of formula index investing is dead as a viable style. There are too many smart people and too many changes to market infrastructure and optimizations for that kind of investing to be viable. Using published CPI, the S&P over 20 years returned 3.19% dividends reinvested inflation adjusted from Dec 1999 (.com peak) to May 2020(last month). What if the CPI was actually 4 instead of 2? Maybe a return of 1% over 20 years. How much principal do you need to retire on a 1% return? So much fore FIRE. One better FIRL retire late. Things probably will come back, although things never did come back in Japan. In a world of super high unemployment extremely low to negative GDP and monstrous debt and frank deflation gambling (bidding up Hertz on a greater fool premise) is about the only game in town, or hold on to the cash. At least gold pays 0% What if bonds go to -1%? Your name is the key: McFrugal. Be very very McFrugal. What did Frugal McDuck have in his vault? Unfortunately the old formula may not have a good return anymore.

      Here is a video of your future when it comes to investing https://www.youtube.com/watch?v=3dt7UbG03X8

      Super good to hear from you Doc been a long time!

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