Keys to Olympic Success

One would think the way to succeed at the Olympics is simple: to get a medal in one's event.

Au contraire!

The ways to win fame, endorsements, and television airtime, and the best practitioners of these methods are:

1. Be attractive (Lindsey Vonn).
Carrying on in the great tradition of Lolo Jones, Anna Kournikova and, Lindsey Vonn at previous Olympics, Lindsey is dazzling the viewing public with her glamorous looks, perfect teeth, and sixth-place finishes. She may not be on the podium, but she will surely be in People Magazine's 50 Most Beautiful People.

2. Be gay (Adam Rippon).
Rippon spent the Olympics winning hearts and bashing Vice President Pence- who Public Opinion definitely ranked as way less cooler than the North Korean dictator's sister.  He finished tenth individually, but what an inspiration! As a contrast, Johnny Weir is also gay but works year-round as an analyst with Tara Lipinski because he's really good at what he does.

3. Wear traditional Tongan gear and no shirt during the Opening Ceremony (Lofa Tatupu).
That guy actually was pretty cool, and he didn't finish last in his event. Like!

So, apologies to the more accomplished but less attractive heterosexual Olympic athletes who didn't get prime time interviews with Savannah Guthrie.

Also, snowboarding isn't really an Olympic sport. It's just there so Americans will watch and so Americans can win medals. We really ought to field a football team in the Winter Games- that would be sure to increase ratings. As long as they didn't kneel during their Gold medal ceremony.t

The Dead Cat Bounce Part 1

Last week my friend Jordan alerted me to a news story that blew my mind. From early 2016 until last week, certain investors were making a killing speculating that stock-market volatility would remain low. "Until last week" are the key words here: in about two weeks, XIV, an exchange-traded fund that is the inverse of the volatility index (symbol: VIX, clever, aren't they?), went from its peak of $144.75/share to $5/share, a 96.5% decrease. This after climbing over 800% from $15-20 share two years ago.

"I'm a genius, I'm rich, I'm a genius, I'm rich, I'm a genius, I'm....oh crap!"

Volatility refers to how much the indices veer from the mean on average over time. If stocks are up and down all the time, volatility is high. If they go consistently up, or down (or remain flat), volatility is low. As Jordan explained to me, XIV would have worked well as part of someone's investment strategy: as discussed here, a small bet using 5% or less of your money, as a hedge against low volatility. Presumably on the other side would be a bet that would pay off in the event of high volatility (as we've seen the past two weeks). But a lot of people saw the great rates of return, doubling your money every couple months, and somehow thought the escalator would keep going up forever. So they made it their primary investment! Incredible, right?

Try as I might, I'm not clever enough to understand derivatives like XIV and VIX. For years I've been struggling to even understand the difference between puts and calls, much less how I could use options to my advantage. My lack of understanding has kept me from investing in derivatives, and probably saved me a lot of financial loss and stress.

Investing is full of bromides. We've heard them all:

• Everyone's a genius in a rising market.
• You can't call the top-- or the bottom.
• Be greedy when others are fearful, and vice versa.
• Buy low, sell high.
• Don't catch a falling knife. 
• Even a dead cat bounces.

Wait-- what? Even a dead cat bounces?

With regard to stocks, here's my interpretation of that maxim: buy a stock after it goes way down, because it will probably increase in value the following day.

More broadly, we're talking about reversion to the mean, or regression to the mean. The idea that data points (e.g. stock prices) will follow a trend line. If they veer far away at one measurement (a particular date), the next measurement will be closer to the mean, more likely than not. Maybe even on the other side of the trend line. Everything reverts to the mean.

Lately I've been testing the dead cat bounce theory. Below are a couple of success stories from last year. Full disclosure, these are usually small investments using Roth IRA money. In other words I won't pay tax on gains and I won't need the money for another 25 years. I'm just trying to grow my nest egg. I watch the stock market every day, particularly stocks of the companies I know and use. So when Advance Auto Parts lost nearly 1/4 of its value in a single day, it caught my attention.

August 14: Advance Auto Parts closes at $109.18 a share.
August 15: AAP has a disappointing earnings report and plunges 23% intraday. I buy some at $83.67/share. It closes at $86.97.
August 16: the dead cat bounces. I sell at $92.43/share. AAP closes at $91.40. My profit: 10.5%.

Advance is a Roanoke, VA company. Their employees are knowledgeable and helpful. They'll read your check engine code and change your wipers. The last time I went, 2-3 Advance Auto Parts employees were helping a lady get a snake out of her car! That's above and beyond right there.

My point in telling you the above? Advance is a good company. If I buy it, and the stock doesn't bounce back the next day, week, month, or year, I'm stuck with stock in a good company; eventually it will come back.

The implied task here is don't make short-term investments that you aren't ready to hold as long-term investments in case your intuition turns out to be wrong, or the broader market takes a crap, or there's a major terrorist attack, or.... (you see my point):

1. Invest money you won't need back in less than a year.
2. Invest in companies you believe are good to have long-term. 

In the bigger economic picture, Advance Auto was getting caught up in the broader retail narrative that Amazon is going to kill every brick and mortar store in America (if not the world). In the case of shopping mall department stores that pay indifferent people minimum wage to tell you "I don't know," I'm on board with that thesis. Nobody at Sears is going to help you get a snake out of your car. But painting the forest with a broad brush blinds one to the potential for happy little trees.

"When America sneezes, the world catches a cold." When Amazon sneezes, the market thinks every company is dying of pneumonia. The best example of the insane overreactions Amazon engenders?

THE WHOLE FOODS ANNOUNCEMENT, JUNE 15, 2017. DOOM! GLOOM!

THE TRADITIONAL GROCERY STORE IS DEAD!!!!

The day after this announcement, cable news stock huckster Jim Cramer was on cable news saying "Amazon is going to dominate food in two years."

Reality check! In 2016, Whole Foods had a market share of 1.2% ranking it #10. Kroger ranks second at 7.2%, behind only Walmart (14.5%). Kroger is #18 in the Fortune 500 (Walmart is #1, Whole Foods is #176).

My point? Amazon gets a toehold in the grocery business and every other grocer is going to shut its doors? It was a classic overreaction, and it played out thusly:


June 14: the day before the announcement, KR stock closes at $30.28.
June 16: the day after the announcement, KR plunges, closing at 22.29: a 26.4% drop in two days

It took me a few weeks to recognize the illogical injustice at play here, but I knew Kroger. It's our primary grocery store and gas station. I knew Kroger wasn't going to close down its stores just because Amazon bought a store where Prius-driving DINK yuppies buy organic hummus (going for max stereotyping there). So I decided to put my money where my feelings were:

Aug. 8: I bought KR for $21.38. Reality returned, Kroger had a couple good quarters, and...
Jan. 25: I sold KR for $30.00. That's a 40.3% gain in under 5 months. I figured at $30, it was fairly valued and exactly where it was priced before the "Amazon-Whole Foods" merger.

Don't mistake me here: I like Amazon. I shop there a lot. I own the stock. The Whole Foods deal was the right move for Amazon for a host of reasons. Hell, the increase in AMZN's market capitalization the day of the announcement roughly equaled the value of the $13.7B deal. So it paid for itself!

In conclusion, the beautiful thing about a blog is I don't need a conclusion. Hopefully you learned something or found it interesting. Have you had similar wins investing in stocks you know, or buying when the market overreacted to bad news? Write about it in the comments, or email me at jmarkdavison@gmail.com.

I will follow this up with a tale of how I made some good returns last month on dead cat bounces with one particular stock. Meanwhile, remember that anyone who tells you they have the way is full of it. Anyone who has a way, well, they might have a way.

Until they don't, like the XIV guys.

Using Miles and Points to Europe

I finally booked the trip I've been saving up for. This is the culmination of everything I've learned doing this silly hobby. I followed four simple steps and boom!

1. Earned 110,000 United miles in the last 12-18 months through flights, dining, and shopping. (I got the MileagePlus Explorer Card in 2016 but used the signup bonus last summer).
2. Mrs. Fox got a Chase Sapphire Preferred and transferred the 50,000-point signup bonus to me.
3. Built up 80,000 points through spending on my Chase Sapphire Reserve, added the 50,000 transfer from Mrs. Fox, then exchanged the 130k points 1:1 for United miles (online and instantaneously).
3. Spent hours researching routes and dates, and finally had to call due to glitches. I was worried the Excursionist Perk wouldn't work if I called, but it worked.
4. A nice woman named Trina at United reservations squared me away in about 30 minutes (I always avoid talking to humans and I don't know why; it's pretty dumb and self-defeating).

Rothenburg ob der Tauber

So we are flying as such (x4):

1. 30,000 miles saver fare plus $5.60 taxes: 
Washington DC to Frankfurt, Germany, a nonstop overnight redeye.

We'll rent a car and spend a few days revisiting the sights and restaurants (and restaurants) in Germany, where we lived from 2002-06 (and had our first kid, and made our second kid). I learned that one-way rentals within the same country cost about the same, which is different from the U.S. So that will help keep us from retracing our steps, eliminating the need to lay bread crumbs across Germany so we can find our way back to Frankfurt. We'll eat the bread and fly out of Munich.

2. Zero (!) miles plus $45 taxes using Excursionist Perk*:
Munich to Bilbao, Spain.

No, it's Bil-bao!

Bilbao is about 4 hours from Bordeaux in France where we'll spend a week with my parents who are celebrating their 50th anniversary this year, as well as my siblings and their families. We'll rent a car, about $140 for the week, using Chase or Amex points if it makes sense; otherwise we'll use real money.

3. 30,000 miles saver fare plus $113 taxes:
(1) Bilbao to Munich, 1 hr layover
(2) Munich to London, overnight layover
(3) London to Washington, DC.

In London, I'll use hotel points or pay a cheap weekend fare. There won't be time to see the city but my kids can hear the King's English and say they've been to Great Britain. I loved visiting England and Ireland from Germany because it was so nice to hear people around me speaking a language I could understand.

There aren't many layovers, but while we're waiting for flights, we'll be in the lounge eating free food. 

The Damage/ Analysis of Value

For travel worth a minimum of $5,000:
(4 roundtrip tickets at $1000 each plus 4 intra-Europe one-ways worth $250 each)

240,000 miles plus $604 in taxes

$4396.00 / 240,000 miles = 1.83 cents per mile

The Points Guy does a monthly valuation for points and miles. They value United miles at 1.4 cents each. So I got a good deal by that metric, thanks to the Excursionist Perk. That helps the main in me feel clever, but even if I'd gotten less than 1.4 cents a mile, we're taking an awesome trip for $604!

What is this Excursionist Perk of which you speak, dude? In short, for award travel from one continent to another, United allows you one free* flight within that region. It is pretty complicated and explained in detail here.

*you always gotta pay the taxes; taxes are, after all, the only slightly more popular of life's two certainties

Things I learned

(I know United best but most of these lessons are applicable to other airlines)

1. Book as early as you can. The airlines dedicate a limited number of seats to award travel. Having a United credit card and having status opened more seats to me, but it was still challenging, as my return itinerary demonstrates. Virtually every return trip involved ridiculous itineraries and multiple stopovers to get the saver fare (30k vs the usual 70k miles for economy). It's a weekend in peak season. If I'd have booked 6+ months in advance or even returned mid-week, there would have been better options.
2. They say the toughest way to earn miles is flying. The Mileage Plus Shopping Portal, the Mileage Plus dining program, and even the Mileage Plus X app helped me accrue miles. Oh, and I flew a little, too.
3. Be flexible. I'd have preferred to fly into and out of Bordeaux. To do so would have required an overnight layover in Istanbul airport- where an terrorist attack killed 45 people in 2016! Yeah, those fares are cheap for some reason. It's worth a 4-hour drive along the Atlantic Coast to be less of a target.
4. If you wanna lose weight, try this 1 weird trick.

Conclusion

I was joking about it being simple: it takes some work, and there are challenges.
1. It takes a few months to earn miles and meet minimum spending requirements.
2. It takes years and the right combination of genetics to create and rear four children, three of which will all require braces within a year of one another, enabling you to easily meet those minimum spending requirements.
3. It's tough to find a wife who is willing to use any credit card you hand her. I'm joking about that, too, of course- everybody knows women be shoppin'. Thanks, Mrs. Fox! I'll bring you back some wine and at least two of those three children!

Women be shoppin'! You can't stop a woman from shoppin'!

Amazing new bottle of weight loss medication. Order today!

Nassim Taleb's Antifragile: a book review

Nassim Nichloas Taleb is an incredible thinker and writer. His book "Antifragile" is a delightful blend of ecomomics, philosophy, and life advice.

I read his first major work "Fooled by Randomness" (also the title of his website) in 2009, and his second "The Black Swan" shortly after. But his magnum opus to date is "Antifragile." 

First, the title refers to his thesis that the best systems or organisms (or economies) thrive on stressors. Antifragile things are not merely robust or resilient: the stress/shock makes them better and stronger, hence the term Taleb coined to describe the opposite of fragile. Most everything in the book riffs off of that premise. Below I discuss a few lessons from the book which have influenced me. 

Wu-wei (wait and see)

Wu-wei translates to "without action, without effort, or without control." I think of it as "actively doing nothing." 

"Hell, you don't need a million dollars to do nothing," said the neighbor from Office Space. Not that kind of nothing. 

Wu-wei is a conscious decision to not act, to wait, see what plays out. I do this all the time, and not always because I'm procrastinating. Some problems work themselves out without any intervention on my part. One would think this doesn't apply to plumbing, and it usually doesn't when you have a major leak. But even minor leaks fix themselves sometimes: rust or corrosion forms, and the pinhole in your pipe closes. Just this week I recommended a friend buy Ford stock: it's got a great dividend and Wall Street hates it for irrational and temporary reasons. The friend has hesitated, and Ford's stock has continued to drop. By not following my advice, my friend has saved money. Hmm...

Medical iatrogenics versus "via negativa" 

To solve a medical problem, rather than add a pill (intervention or iatrogenics), the right approach might be to remove something (via negativa). Remove a food from your diet, remove a stressor from your life. There is really something to removing or reducing food (salt, caffeine, or sugar).

Taleb is not anti-intervention, he just wants people to recognize that everything in life has trade-offs. The medical word for these is "side effects." I had knee surgery in 2014 and the doctor prescribed me hydrocodone, an opioid of the sort that is highly addictive. The warnings label included constipation, dizziness...I could have sworn it even said something about paranoia! (But maybe I'm just being paranoid). With Taleb's philosophy fresh in my mind, I decided that the known - "my knee hurts" - was a better side effect than whatever would come from taking hydrocodone, so I flushed them all (sorry, fish!) and ate Motrin every four hours (sorry, stomach lining!).

The writer and economist Thomas Sowell said, "There are no solutions in life, only trade-offs." These are words I live by. Usually it is a politician telling you he can solve a problem. "Tax the rich a little more and everyone can have free college."

My aforementioned knee surgery didn't help me at all. My knee still hurts and swells and I can't run. I went through a few months of pain and physical therapy. I consider the physical therapy a positive in that my leg got stronger and I lost weight doing it. But essentially I chose medical intervention and it didn't help a whit. 

Oh, well! A knee is fairly minor, and so are the risks of knee surgery. But what if it's your brain, or your reproductive system? (These are separate organs in females, generally not so much for males). Always remember that the dentist or surgeon is not necessarily an uninterested party. Your months of pain may be a 50/50 proposition in which the only guarantee is that it will help buy the surgeon a nice boat.

The Paleo diet (shocking the body)

My experience with weight control is that it's 90% diet and 10% exercise. In other words, removing something- extra sugar and calories- is nine times more effective than adding something- exercise. But--there''s always a "but"-- adding even a little exercise is some sort of key that unlocks your body's ability to lose weight. Shortly after my knee surgery, I decided I was tired of my weight- 210 at the time. In about six weeks of eating (almost) no sugar or bread, I lost 15-20 pounds and bought new pants. The only exercise I did was physical therapy 2-3 days a week, which consisted of 15 minutes on a bike or rower followed by various leg weightlifting tortures.

Epilogue: I'm now 215 and in my third year of fixing to start a new diet any day now.

Placing many small bets 

Any Army officer knows that risk is a function of the following:

(probability of event occurring) x (impact)

In your investing life, Taleb advocates placing small, low-probability, high-payoff bets to give you more opportunities to win and also minimize your downside (risk). Ask yourself, what's something that's possible but unlikely, but if it happened would have a huge impact? Taleb did this himself by betting against the banks in the mid-2000s when the housing bubble was in full ridiculousness. He didn't go all-in, and you don't have to either: he just made small bets, some of which paid off in 2008-09 when banks that had been built on garbage mortgages collapsed, requiring taxpayer bailouts.

If you think things like this don't happen, imagine if November 2016, you placed a bet that Donald Trump would beat Hillary Clinton in the presidential election. Or the Patriots would come back from a 25-point deficit to win last year's Super Bowl. Both propositions had 20:1 odds or better, but they happened!

My good friend did this a few years ago by putting $5,000 in each of five "penny stocks" his cousin had recommended. Each company had a share price of ~$5. Since he bought them, four of the five stocks have stagnated or drifted toward zero. One, however, is now worth  $60/share. Let's do that math:

               $25,000 invested in 5 stocks (1000 shares each at $5)

               Current value of the 4 bad ones: $10,000 (4000 shares total at $2.50)

               Current value of the good one: 100 shares at $60 = $60,000

Looking at it holistically, he placed 5 low-probability, high-payoff bets. One of them paid off bigly. So he turned $25,000 into $70,000. Had he put all 25,000 into one of the five companies' stocks, he would have had a 20% chance of having $325,000. Sounds good! But-- he would have had an 80% chance of losing all or most of his money. That's more math than any of us care to do, so I'll leave it there.

It's about time I re-read Antifragile. I don't claim to understand it all- and I especially don't claim to have the courage to follow his every proscription. But I find Taleb witty and absolutely original. He calls charlatans what they are. I just learned writing this piece that Taleb's next work is due February 27: yay! It's called "Skin in the Game" and explores his belief that "If you see fraud and don't shout fraud, you are a fraud."

My favorite Taleb observation is that if economists, with their love of efficiency, designed the human body, people would have one lung and one kidney. If that makes you chuckle and think at the same time, you'll understand why I like this guy.