Why High Tech Matters II (tech’s influence)

Continuation from:  dear-dad-why-high-tech-matters-part-i

Here’s part of Dad’s response:

I do know this:  when communication was more difficult it was less pervasive, more condensed, thoughtful, and meaningful.

I agree.   There is just a lot of stuff out there.  Emails are often less thoughtful, less relevant, and sometimes terribly verbose.  And that’s just from email you want to receive.  Spam, pop-ups, and numerous other nuisances add to the clutter.

Let me steer the subject towards the influence of high tech.  It has been widely voiced that President  Obama’s  election win was aided by online fund raising, online advertising, and his overall command of his online presence.   The ability to efficiently collect money in small amounts from millions of people [I, for example, donated $25 online to him] was a big financial boost.  The efficiency of email and text messaging to contact his supporters must have saved hundreds of thousands in postage, paper, and printing.  Such efficiencies are a product of technology and the web.

Example #2 of technology’s influence is Google.  Currently Google’s market capitalization is $102.7 billion.  That puts Google solidly in the top 20 largest U.S. companies by market cap.  Not bad for a company founded in 1998 and IPO-ing in 2004.

Example #3 is the social web, or Web 2.0.  For me this buzz-word heavy phenomenon encompasses everything from MP3 players (and ogg players 🙂  to iPhones and other PDAs to Twitter and Facebook.   Starting back in IRC and Usenet and extending through Yahoo! Groups.  Facebook alone claims over 150 million active users!

I could bore you (and myself) with lots more stats about the size and scope of the Web, but I won’t.   Next time I’ll tackle the bigger topic about why high tech actually matters… whether or not one considers oneself a high-tech user.

Note to self:  Get Buffet quote about aviation (the high-tech of the time) being a poor investment.

Dear Dad: Why High Tech Matters (part I)

My Dad is a pretty excellent investor.  And he’s got something else in common with Warren Buffet…  He generally doesn’t grok tech.

Sure he gets how traditional tech relates to investing.  Things like industrial technology, more efficient trains, hybrid cars, recycling.  About high tech, however, he says “So what.  It’s like everybody doing each others laundry.”  In other words, there’s no net economic benefit that he can see.

Because I am deeply immersed in the high tech world, this thinking both annoys and amuses me.  I’ll address some points I’ve tried to make in the past:

  • Me: Technology has made phone communication cheaper and better.
  • Dad: Sure, but cell phones suck.  Bad reception, dropped calls.
  • Me: Point taken.  How about word-processing and email.  These have helped business productivity and efficiency.
  • Dad: Touche.  I used to have a secretary who typed my mail, memos, etc.  Then I got a computer.  At first I hated it, but eventually I preferred it to dictation.
  • Me: Great now we’re getting somewhere.  How about the Internet?  Surely it’s pretty useful.  Online banking, online shopping, vast information!
  • Dad: I can’t find useful information… just lots of noise and useless junk.  I don’t bank or shop online.  Email’s OK though, kinda.
  • Me: What about satellite TV?  You guys have that and seem to like it.
  • Dad: Yeah, but what does TV and lots of channels have to do with improving business or the economy or even society?
  • Me: Hmm? *sigh*  How about we change the subject?

Well, I’ve put words in his mouth, but this distills some of the conversations we’ve had about high tech.  And I think so far I’ve failed to make a convincing case.  But I don’t give up easily.  I’m going feed my “high tech” addiction by playing WoW (World of Warcraft) for awhile, but before I go here are some notes-to-self for part II of this blog:

  • Tackle the transformative nature of technology first:  Google, Web 2.0, President Obama’s use of the web to win the election.
  • Applications of high tech that currently make a difference:
  • MRIs and other medical imagery (tech: superconductors, computer analysis and visualization).
  • Computer simulation for planes, trains, autos, engines, buildings, bridges, etc.  (tech: computers, computer design).
  • LEDs:  The future of green lighting.  (tech: semiconductors, physics)

Review: Ahead of the Curve

I just finished reading “Ahead of the Curve”, an book about Philip D. Broughton’s 2 years at Harvard Business School (HBS).   It was a quick, well-written read.    Broughton did a superb job of conveying the HBS experience, painting an vivid and clear picture of the campus, student, faculty and other who make HBS what it is.  Further he takes the reader off campus to interviews and field trips with the likes of Google and E-Bay.

This is not a book about investing, but it does touch on areas very close to investing such a building, managing, and analyzing companies.  It talks about investment bankers and Wall Street traders who go to HBS to take their careers to either a new level or in a completely different direction.  And it talks about the seduction nature (and reality) of hedge funds and venture capital.

This book might not help you fine tune you investing portfolio, but it may give you some insight into how executives at the companies you own have been taught.  Executives including Henry Paulson, George W. Bush, and Michael Bloomberg.

When a hedge doesn’t

I hedged against a market drop, but I’m out more dollars than had I not hedged.  Here’s an illustrative tale of how I magnified my loss by $841 (most likely)…

December 12th, I decided to hedge my SPY exposure by buying 3 fairly out-of-the-money puts.  SPY was trading at around 89 and I bought January 80 puts which expire on market close of January 16th. My thinking was as follows:

The holidays are coming up and I’m going to be out of town and generally away from the internet.  I’ll ease my investing anxiety by buying some SPY puts… so I don’t have to worry about about a significant market fall while I’m on vacation for two weeks.  These options will insure my “Crazy Ivan” holding of 100 shares as well as partially ensure holdings outside of my Crazy Ivan portfolio.

In a nutshell I paid $841 for insurance, and never filed a claim.  (This is in spite of the fact that SPY went down from $89 to $86.4.)

Here’s where I really come clean.  I bought these calls even though I felt the VIX was high (it was over 40 at the time, and still is).  In other words, I believed that insurance was too expensive and I bought some anyhow.  Another admission — I bought 3 puts rather than 2 [math to explain 2 rather than 1 omitted] — because it diluted the per contract commission.

Long story, short:  I blew $841.

Now, hindsight is 20/20.  I’m not beating myself up for this trade, but I am trying to learn from it.

The Bottom Line Crazy Ivan money update: $19,227.

* Disclaimer:  The Balhiser Crazy Ivan Portfolio.

Bailout for the rest of us

I was amused to hear that even the porn kings are asking for a bailout, if only in jest.  I’ve gotten a lot of feedback about my original bailout blog, and the feedback has been fairly consistent:

  • Thumbs down on general stimulus and tax-loss deductibility changes.
  • Thumbs up on the interest and stocks proposals (for the “average Joe”).
  • Suggestions for real, meaningful infrastructure improvements.

I’ve already addressed the infrastructure feedback, to a degree, in a green power blog article.    I’d like to expound on the ideas that got  good feedback and traction:

  1. Make the first $2500 of interest earned in FDIC-insured vehicles (e.g. savings accounts) in 2009 exempt from federal tax.
  2. U.S. Stocks (including ETFs) purchased in 2009 and held for over 18 months would be exempt from capital gains up to $20,000.  Additionally, after 12 months, dividends on such stocks would be tax-free up to $2500 per year… indefinitely.

Idea #1 was the most popular.  In particular readers seems to really like the middle-class and low-income appeal of the idea.  For example seniors commonly have literally some money in the bank.  In addition to Social Security, they common rely heavily on interest income.  A $2500/year break on interest would be very helpful to seniors.

Similarly idea #1 would be, perhaps, the most realistic investment incentive for low-income people.   The are many more low-income people with savings accounts than stock portfolios.  It is easy to open a bank savings account with $100, and sometimes even $10.   And while there are many “unbanked” low-income earners, there are many more who do use banks or credit unions.   Further, since the first $2500 of interest would be tax free there is less risk of an April 15th-surprise lurking around the corner come tax season.

Idea #1 would, of course, benefit the middle class.  With inflation eating away at the value of our hard-earned dollars every year, why should we have to pay taxes on our meager interest incomes as well?  Getting rid of this insult-to-injury tax on the first $2500 of interest income would be a godsend.

Idea #2 is also very middle-class friendly… at least for the investing class.  If part of the government’s goal is to bolster the stock market, I cannot think of a more powerful way to realistically achieve such a result.  I could invision a veritable surge of stock buying with the one-time lure of tax-free dividends for life (up to $2500/year) and the prospect of up to $20,000 of tax-free capital gains.  Sure the capital gains paperwork for the 1040 would be a bit messy… but more much more so than it already is.  And the the dividend paperwork… that would be easy.

So, Congress, and President-elect Obama, I urge you to consider these common-sense proposals.   Please encourage savings and new investment — from the bottoms up.  Help reward the savings of America’s low-wage workers.   Reinvigorate and reward middle-class savings and investing in 2009.

And, readers, thank you for your feedback.  Keep it up!  It keeps me blogging.  Cheers!

New Year’s Optimism

While I’m reading and hearing a lot of pessimism in the media, I am increasingly optimistic about the buying opportunities that are currently available.   In fact when I hear the recession being called a possible financial depression, I think about buying more shares of  SPY and VTI.    In doing some research on the term depression I have seen several definitions:

  1. A prolonged, severe recession.
  2. A drop in GDP of more than 10 percent.
  3. A drop in GDP of more than 20 percent.

#2, a drop in GDP of at least 10% (absolute year-over-year), is my working definition.  (For reference the Great Depression represented a fall of about 35%)

What we’ve seen in the first 9 months of 2008 is nothing compared a depression.   There have been 2 down quarters in the 12 month period, but overall net GDP growth.  Sure Q4 is likely to be bad.  I’ll stick my neck out and guess it’ll come in at minus 18% annualized (about -4.5% absolute Q3 to Q4).

The popular press (or unpopular press) has covered this financial “crisis” with a stunning mix of balderdash, rubbish, and misapprehension.  There, that’s off my chest.   Now on to what’s making me optimistic.

  1. Reasonable, even occasionally cheap, stock valuations.  (e.g. good, even great buys)
  2. My neighborhood.  I’m seeing houses priced between $160K through $215K get snapped up within days; sometimes as soon as they are listed.  Further I’m seeing continuing, targeted investments in real estate by folks I consider savvy.   I’m seeing low mortgage rates that allow buying rental properties that immediately generate positive cash flow.
  3. A dose of reality.  Finally some borrowers are getting the message that “debt, for the lack of a better word, is BAD”.    While this insight will have a negative impact on the economy in the short term, it is likely to have an overall positive impact in the long term.
  4. Technology.  It’s baa-aack!  I’m talking about computers and the internet.  I’m also talking about materials, advanced transportation (rail, aircraft, hybrid autos).   I believe that technological innovation will propel the world economy forward over the next 5-10 years.  And, the US economy will benefit disproportionately due to it’s innovative, entrepreneurial, and dynamic heritage.

Feel free to call me Polyanna; I’m buying stocks!