Since everyone else is playing the Facebook valuation parlor game, here is a stab at it.
If you want to frustrate someone for a day, give them a program. If you want to frustrate them for a lifetime, teach them how to program.
What does an efficient long-run portfolio look like for major US asset classes, and where does gold fit in?
Let’s take US annual stock, bond, T-bill, and gold returns for 1928-2010, and subtract CPI inflation to get real returns.
|Real Return||Real Risk|
Let’s plot an efficient frontier. This shows the highest return you could achieve with those four assets over those 83 years at different levels of risk.
|Real Return||Real Risk|
|4% real return portfolio
(34% stocks, 44% bonds, 22% gold)
|5% real return portfolio
(49% stocks, 32% bonds, 19% gold)
Let’s plot a transition map. As you move from low risk to high risk left to right, it shows you the composition of the best-performing portfolio at that risk level, how much would be in each asset.
What does this tell us?
While returns are adjusted for CPI inflation, they don’t reflect fees and taxes.
The analysis is based on this post at Systematic Investor, and the gold mine of R code generously shared there. Will post more technical details, code, and some drill down analysis in coming days/weeks.
(A follow-up post looking at how stable this relationship was over time.)
Case study #1. Megatrends: migration from wired to mobile unwired; broadcast & circuit switched to packet-switched Internet.
Verizon cut a blockbuster deal with Time Warner Cable and Comcast, essentially sacrificing the declining fixed-line residential business to try to gain a big edge in mobile.
Why did they strike a truce?
If it goes as planned, Verizon could be in an emerging duopoly with AT&T in mobile, with a network edge in footprint, bandwidth, and LTE 4G technology, and a distribution edge through the cable tie-up.
Case study #2. Megatrends: PC and client/server migration to tablet/mobile device/cloud.
In the future, we are going to do everything on mobile devices like tablets: communicate, read books, listen to music, watch movies, run productivity apps.
Who do you like in this world?
So you have a battle for the post-desktop (the lap?). Three different strategies, and three different business models. Apple makes money the old-fashioned way, by selling high-margin hardware, with an assist from media and software through iTunes. Google gives an incredible mobile/cloud platform to hardware manufacturers for free and sells access to the users. Amazon wants to own media distribution and retail on the device. They are basically a software as a service platform for retail and media distribution (and any online business through the cloud platform).
It’s far easier to see a 20-something without a landline and cable TV and PC, than without a mobile device. YouTube and Netflix are available over Internet, live sports are the only exclusive broadcast offering, and Internet sports packages seem like a foregone conclusion (e.g. Apple’s rumored-but-denied bid for Premier League).
It will be interesting to see what Apple has up its sleeve with iTV, and if one of these platform companies makes a strong play for Netflix, which seems wedged between strong upstream content providers and downstream cable networks, that both wish it would die.
Tech winds of change shift. Unfurl the sails, and try ride them to blue ocean, uncontested market space.
Some drive-by thoughts on Europe:
While the LTRO takeup was larger than anticipated, the consensus seems to be the new ECB funding largely replaces old ECB funding, bank deposits that are fleeing, interbank credit and money market funding that has dried up.
To the extent it signals the ECB will do everything necessary to prevent a bank failure, and potentially takes a Lehman scenario off the table for now, it is a positive development.
It’s the turning point in the crisis, only if it’s a signal that the Great Pumpkin is coming next year in the form of more QE, orderly equity raises for the solvent banks, bailouts/mergers of the insolvent ones, and above all, resumption of economic growth.
ROCKY HILL, Conn. – Three asset managers from Connecticut’s affluent New York suburbs claimed a $254 million Powerball jackpot on Monday off a $1 ticket.
Lottery tickets are generally a terrible deal in terms of expected value – the lottery pays out far less in winnings than it receives in ticket sales. It has to pay expenses and show a profit. Then the winner has to pay a big income tax bill.
But occasionally, after no one wins the big prize several drawings in a row, the jackpot gets so big that the expected value is positive.
You might think that’s a good time to buy a ticket. Actually, it turns out that’s still a losing strategy. Why? Because unless you’re a millionaire, the correct amount to bet is very small. And if you’re not a millionaire, a single ticket is an overbet. You almost always go broke before you hit the jackpot. Paradoxically, even though each individual bet has positive expected value, your expected long-run profit if you bet every week is less than zero.
What’s the right amount to bet on a risky, but profitable proposition?