How I Understand Stocks and Economics

The S&P 500 keeps making new highs. It can easily post another 20% gains for 2020.

When I say that I am one of the greatest financial forecasters and stock pickers ever, it’s not hyperbole , but backed by data. For example, was right about Tesla and Facebook, but also MasterCard, Visa, Microsoft, Amazon, Uber, and so on. Right about the strength of the US economy and the out-performance of the US economy and US dollar relative to foreign economies and currencies. Tesla stock, which is trading at $490 and will be at $1000 soon, fits perfectly with my HBD-investing model, as being a high-IQ company with massive growth, ubiquity, tons of positive media coverage and popularity, and few viable competitors, and an example of US economic and capitalistic dominance in a world that is otherwise afflicted by socialism, stagnation, unrest, and corruption (except China). Related to China, Tesla has begun selling cars there, and pro-China sentiment is very high by both American and Chinese millennials and gen-z, as further evidence of the US-China cultural and economic connection, which I have written about many times. In spite of rhetoric by Trump against China, US-China business, economic, and cultural ties are closer and stronger than ever, and this trend will continue.

Consider Ethereum, having in May 2019 predicted that the ratio of Ethereum relative to Bitcoin would fall substantially. Ethereum is in trouble due to delays and lack of cohesion among the developer team. So far, right again. Ethereum 2.0 looks to be delayed indefinitely as I predicted last year it would. The ETH/BTC ratio has fallen from .03 in early 2019 to now .017 now, and has much further to fall. Although Ethereum was co-founded by someone who can arguably lay claim to being one of the smartest people alive, coding and math prodigy Vitalik Buterin, and the product itself, a decentralized victual machine and crypto-currency of sorts, is also technical, it is missing other factors that are necessary for a successful investment: cohesion, irreproducibility, market dominance, and growth. This shows how IQ is a necessary but still insufficient condition because the other components are needed too. Ethereum is just one of many coins that purports to be a successor to Bitcoin but have in one way or another fallen way short of that goal. I had honed my skills to such an extent that just by listening to a single Etheruem conference call in September 2018 I knew there were problems on the horizon. Conference calls are boring but reveal insights into a company or organization than cannot be ascertained by financial statements alone.

Interestingly, although there are tons of stories about math, chess, or music prodigies, one seldom, if ever, hears about finance, economics, or investing prodigies. It’s very uncommon for someone to become a math or music expert as an adult but have no obvious, demonstrable exceptional ability in adolescence. But finance, econ, and ability to “disentangle noise from signal and see the ‘big picture’” are skills that become more obvious and are teachable in adulthood, than adolescence. What about Warren Buffett? Couldn’t he be considered an investing prodigy? Although he traded stocks starting at the age of 11, he wasn’t very good at it and his approach was haphazard, not hitting his stride and until his 30s. Despite purportedly having an IQ of 150, he didn’t enter business school or become a fund manager at a really early age, but went through the same motions as everyone else, applying to business school, working at an LP under someone else, and then finally raising capital from friends, partners, and family to start his own firm.

It takes a long time and a lot of reading and studying to develop the necessary models and strategies required to understand, profit from, and predict this stuff. I didn’t have an interest in stocks until my last year of high school, and it wasn’t for another 6-8 years that I learned enough about macro econ and finance, including financial modeling and option pricing, to become good enough to pick stocks a better rate than flipping a coin and learning what advice and insight is worth heeding and what to ignore . I would spend 3 hours a day reading business and finance newspapers, magazines and books at the library, and then another 3-5 hours a day watching financial TV. Then learning about HBD in 2011-2013 and applying it to investing and forecasting gave me an even bigger edge. I always had some interest in IQ and human biology, but always saw it as distinct from investing or economics.

The nice about developing the correct model/system and knowing what to filter, is that additional research is often unnecessary. I have not watched financial TV or read a newspaper in years yet continue to be right about almost everything as it pertains to stocks and economics. Similar to learning a math concept or a scientific law, it is immutable and unchanging. Also, to go off on a tangent, the state of journalism has gotten so bad in recent years that following the news, arguably, provides negative utility–that is, willful ignorance is better than the alternative of being intentionally mislead or propagandized. The New York Times slapped a big, fat editors note on that recent Bret Stephens article about Jews and IQ, because it cited a potentially racist study about IQ, which was scrubbed from the article. One would have been hard-pressed to be offended by such a harmless, well-intentioned column but apparently someone was and brought it to the attention of the editors. What better way to discourage antisemitism than to try to have everything you oppose censored. That will make people like Jews more. This is why we cannot have nice things and civil debates about topics that fall outside this tiny, arbitrary window of acceptable discourse.

I still research individual companies, but it’s not like I need to research hundreds of companies or devote hours of time to it. Rather, I zero in on companies that are getting a lot media coverage and are talked about a lot online by the ‘smart’crowd (such as on /r/wallstreetbets). So by doing this, this satisfies two of the criteria: ubiquity and media coverage. Facebook and Tesla are always in the news, are talked about online a lot, and are indispensable and ubiquitous. If they vanished tomorrow, it would be hard or impossible to find something that is interchangeable that would fill the void, and it would be a huge deal. There is no substitute for Tesla, Facebook, Microsoft or Amazon in the same what there there is a substitute for, say, Exxon, GE, Ford, Under Armor, or Nike. They are also high-IQ, employing some of the smartest people in the world, annoying left-wing politics not withstanding, and have advanced technology, network effects and huge user-bases that hard to replicate and protected by IP laws. Ford and GM have electric cars, but lack the ubiquity, performance, and cachet of ‘cool’ that Tesla has.

In the post-2008 era of winner-take-all, bigger-is-better capitalism, mega-cap companies are superior to small companies.

I would argue however that the permanent ascendance of large technology companies, financialization, and globalization have made business cycles a thing of the past. The 20th century was characterized by boom-bust cycles, but now, since 2009, we’re in a perpetual ‘boom’, and big tech companies such as Google and Microsoft keep getting bigger and bigger, and are occupying an increasingly dominant and important role in the global economy, and this provides an economically stabilizing effect (which helps explains why the post-2009 recovery has been so enduring). In that sense, economics is changing, but the assumptions of neoclassical economics remain true. This is more of a refutation of Austrian economics, specially the Austrian business cycle theory (ABCT).

FAANG stocks such as Google, Amazon, Facebook, and Microsoft (each valued at at least $500 billion) can post the same huge returns as small caps can, but with much less volatility and risk and much more consistency. An increasing amount of wealth is being concentrated in a few mega-sized companies, so by accreting this wealth and economic activity against a backdrop of an already strong economy, large companies can post the same outsized returns and growth as small companies can. So the growth rate is doubled: first because the US economy is growing, but also by subsuming smaller industries and companies. Most small caps are terrible investment on a risk-adjusted basis and maybe 3% of them go up 100% in a year, but with FAANG stocks, I am sure to get 20-30%/year, and with options that return can be doubled. There is no need to research hundreds or thousands of tiny companies, that have a high rate of failure, when the winners are staring you in the face, and you are probably using them right now (such as your computer having a Windows operating system, by shopping Amazon, paying with Visa or MasterCard, and using a Chrome browser on an Android or iPhone to surf the web). Once you apply the above criteria, the pool of potential stocks picks shrinks from thousands to just a few dozen, which is why I spend so little time researching this stuff yet am so successful at it.