Category Archives: General

Why bitcoin is overhyped

It’s probably a sign of the times that every self respecting value investing blog has to have a post about bitcoin. And when you tell a random person that you invest the first question these days is if you own (or trade) bitcoins or not. So I guess “The Alpha Vulture” can’t stay behind, and share with the world what it thinks about bitcoin, whether you want to hear it or not. As the title of this post implies I’m skeptical about bitcoin, and most other software projects that are based on blockchain technology[1].

To explain why I’m skeptical I’ll first try to explain in the simplest possible way what the whole fuss is about because I suspect that part of the reason why people are so enthusiastic about the blockchain is the fact that they don’t really understand the technology. If you read an explanation about bitcoin you hear cool terms like distributed trust (which is actually cool) and stuff you probably don’t understand without a computer science background (like hash functions). These things are actually not that hard to explain, but not really necessary to understand the key idea behind the blockchain. What you basically do is, instead of trusting security to a single party that (hopefully) has a smartly designed system you substitute that by a large amount of computational power provided by multiple parties. There is a lot more to it than that, but that is just noise and implementation details.

The fact that you don’t rely on a single party is great! I’m not going to dispute that.

The fact that the security is provided by a large amount of computational power is bad.

Just a large amount of computational power would actually not be bad. Chips always get faster and more efficient. But it’s not just a large amount, it’s a relative large amount. The security only works because the amount of computational power required to “take control of the network” is simply too expensive for a malicious third party to acquire (even temporary). So if chips get 10 times faster the computational power required to keep the network secure simply increases with the same factor. If chips get 100 times more energy efficient, the amount of energy required to keep the network secure doesn’t drop at all[2].

Additionally, the amount of computational power required scales with the value of the transactions being done on the network. You need enough computational power to make it unattractive for an attacker to acquire even more computational power and take control of the network. How much computational power this exactly is, is quite an interesting theoretical question (I don’t know the answer). But for sure the amount is high. An attacker only needs a short moment to inflict huge and long-lasting damage on the network. They could for example double spend coins, hurting not only those who would receive them, but also causing a massive loss of trust in the system that would be longer lasting.

So why is this all so problematic? It’s simple: high computational power requirements translate into (relative) high transaction fees. And that’s a problem for a lot of the applications that have been proposed for the blockchain. Using bitcoin as a currency is the biggest obvious problem. Most banks for example process millions of transactions daily, and most of these transactions are almost free because running a nice secure sever that handles a million transaction a day isn’t a lot more expensive than one that handles just a few transactions[3].

If you use bitcoin to speculate on the value of bitcoin transaction costs of a few dollar[4] aren’t very problematic. If you use bitcoin like some sort of virtual gold slash store of value it’s not a real problem. If you use bitcoin for money laundering or other black market transactions it also not a problem[5]. But for the first two to work out I think you need bitcoin to become a broadly used medium for transactions, and just betting on there being a large black market is a questionable proposition as well in my mind. The current hype is mostly driven by speculation, and for most real-world applications high transaction fees are a very serious obstacle. There are probably some niches where it makes sense, but I think broad adaptation of blockchain technology would in most cases be a step backwards. And I’m only looking at the financial angle here, not even mentioning the environmental impact it would have…

Disclosure

Author has zero blockchain related exposure[6]

[1] I’m using the blockchain and bitcoin sort of interchangeably in this post. I know it’s not the same.

[2] I doubt this is true. There is probably some complex relationship between both the cost of new chips, the energy requirement and perhaps even some other tangential factors.

[3] At least not a factor million more expensive. Scaling performance is still hard. It is also going to be hard for bitcoin.

[4] Average transaction fees are now already ~$4, and this is despite the fact that miners are currently also compensated by newly mined bitcoins. Currently miners get 12.5BTC for every block mined. With roughly 2,000 transactions per block and a current BTC price of ~$5500 one transaction actually costs almost $40.

[5] The fact that all transactions are publicly stored in the blockchain might be though…

[6] I used to own a couple of dozen bitcoins in 2011 or something like that back then when mining them on your own graphics card was still economical. Sold them between $20 and $30. Still better than buying two pizza’s for 10,000 BTC though.

How I use Google Sheets to track my portfolio

Regular readers of my blog have probably noticed that I use Google Sheets for almost everything. I use it to track the live net asset values of various companies, I built my valuation models in Google Sheets and everything is tied together in a master portfolio sheet (some if its functionality you can glimpse from my performance review posts) . A few years ago I wrote a short tutorial that explained how you can add realtime price information in Google Sheets for stocks that aren’t support by the standaard =GoogleFinance() function.

What I’ll be focusing on today is how you can pull data from multiple documents to create one sheet with a nice overview of everything. To make this easy it’s smart to standardize your documents a bit. What I do is that when I value a company there is always a sheet called “Thesis” that has a few standardized items at fixes positions, like this:

The price target links to a valuation model in a different sheet (but in the same document), the price (in this case) comes from the =GoogleFinance() function and the last update cell is useful to keep track if I have updated my valuation recently. As you can see here I should probably take a little bit of time soon to update my Pardee Resources valuation. If you make it a habit of doing this for everything your research you can make a nice portfolio sheet that tracks realtime how much upside every position has remaining. Part of my portfolio sheet looks like this:


For obvious reasons I have hidden the number of shares I own, and the value of every position, but you can see how I have an price target for every position that is updated automatically based on the latest price. To pull data from a different document in the sheet we can use the =ImportRange() command. It requires two arguments, one is the url of the sheet where you want to pull the data from, and the second one is the reference to the cell you want to pull the data from. So it would look something like this:

=IMPORTRANGE("https://docs.google.com/spreadsheets/d/blabla/edit#gid=123456789","thesis!C15")

After entering this function in a cell you initially get an error message. Hover with the mouse cursor above the error message, and you will see that a small pop-up that asks if you want to give your sheet access to the other sheet. Do this, and the data will appear :).

Combined with the option to get realtime prices (as discussed in my old tutorial) you have an incredible toolset to make a fancy spreadsheet.  Not only will this give a quick overview of which positions are perhaps becoming more or less attractive, it’s also easy to build a watchlist like this (I have done this as well). Everything that you researched, but didn’t buy can be put in that list together with positions that you have sold in the past.

One limitation to keep in mind is that Google isn’t happy if one sheet requires to much calls to outside sources, and by making one sheet dependent on tons of other sheets the number of calls can explode quickly. So you will have to try to not invoke to many =ImportHTML() and =ImportXML() functions in all the combined sheets in order not to break things.

Disclosure

Author is long the stuff in the sheet

Five year blogging anniversary!

Exactly five years ago I started this blog, an eternity in the blogging world. I follow dozens and dozens of value investing blogs, but most of them disappear just as fast as they appear. I guess everybody has different goals and expectations when they start a blog. My main goal of starting a blog was to become a better investor. I thought that writing down why I make buy/sell decisions would force me to act more rational because I know that my reasons will be scrutinized by my readers. Writing something down while knowing that people will read it is useful in itself, but getting actual feedback is also quite valuable. I have changed my mind more than once on an investment thanks to readers knowing more than me.

A bit more unexpected is that I found the blog also a great tool to generate new ideas. A lot of the ideas that have been published on this blog have originated from like-minded readers that wanted my input on a certain idea, or were just happy to give a good idea as a sign of appreciation. So keep those idea’s coming, and I’ll continue blogging for another five years!

Fireworks

The crap you get when you buy a retail investment product

To take advantage of a small signup bonus at the Dutch insurance company “Nationale-Nederlanden” I applied for an account that would let them invest a bit of money for me. Based on a couple of questions they assign you to a model portfolio, and for doing this they charge a management fee of 1.0%. They assigned me to the “neutral 2” profile, that is pretty conservative with an allocation of 40% equities and 60% bonds. Since I don’t intent to keep this account strictly longer than necessary for the signup bonus, I don’t really care how they invest the money. Nevertheless, I was sort of surprised how crappy the portfolio is that you get:

NN portfolioAs you can see they put my money in a bunch of random mutual funds that add another layer of expenses. In the case of my profile these funds add 0.66% in expenses, so you pay 1.66% annually (more if you don’t meet certain minima). Of course, they managed to tuck in some of their own funds in this list and then it’s just a crappy mix of overlapping funds. There are for example two global bond funds (and there is a third one with inflation protection) and also three European corporate bond funds. And that’s just the tip of the iceberg… Investing like I do isn’t an option for everybody, but this is without a doubt a terrible deal for anyone. Just buy some cheap ETFs! It’s really sad how the big financial institutions are mainly in the business of selling the biggest crap they can get away with. I can’t really complain, because I’m just in it for a small bonus, but imagine someone who’s putting his life savings in this…

Disclosure

I have invested a whopping 50 euro’s in this crap, and already lost 3.89 euro…

How hard (or easy) is it to outperform?

It’s not supposed to be easy. Anyone who finds it easy is stupid.
Charlie Munger

I started writing a post about how the recent market volatility provides a good moment to reflect on your skills as an investor, but I realized that the more interesting topic – that is somewhat related – is how easy or hard it is to outperform the market. I think this is really the most important question that every investor faces since the answer has huge implications on what kind of strategy you should follow. While this is a very fundamental question I don’t think there has ever been a good definitive answer. Are markets almost perfectly efficient and is your best bet an index fund? Do you need 150+ IQ points and read 500 pages/day to have a shot at out performance? Can you have an edge with an average or below average intelligence, but with a contrarian mindset and enough time? Can you be successful if you are really smart, but when you lack the “magic” psychological profile?

What kind of people should consider what kind of strategy?

Usually, this is a question that isn’t even asked when people ask for investment advice. Ask for investment advice on boggleheads.org and everybody is going to advise a portfolio of low-cost index funds. Ask the question somewhere else and they probably recommend their own strategy; which could be buying owner operators, compounders, cheap value stocks, magic formula stocks, swing trading, forex trading, and whatever else exists.

Some of these strategies are probably not a good idea even if you are a genius and have a massive amount of free time (hint: forex trading) while other strategies could be executed by anybody with little effort. But being able to differentiate between a good and a bad strategy is also a skill. Some people might stumble on CoBF.com when they start out as an investor and go for some value strategy while other might stumble on a forex trading site and go that route. If your process for choosing a certain strategy is flawed the possible alpha of that strategy is not really your alpha. And if you are really smart and could generate alpha, but go for a passive indexing approach because that strategy sounded more convincing it’s also proof that investing is hard (unless of course it’s a conscious decision but you, for example, go for indexing because you have a lack of time or interest in investing) .

When I started investing I wasn’t at all convinced about my ability to beat the market, but I knew that there was a large amount of evidence that retail investors underperformed their benchmarks by large amounts by structurally buying high and selling low. I figured if they are able to underperform by such a wide margin I should be able to do well by just trying to do the opposite. That’s easier said than done, but on a day like “black Monday” I thought that the correct course of action was pretty obvious: buy stuff when you see ridiculous trading activity. I bought, for example, some Retail Holdings – because that is a stock that I know – at ~$16 because someone was selling at any price and no-one was buying. In some ETF’s there were even bigger opportunities, but I was too late to that party.

There is actually some research that suggests that intelligent investors are better at buying low and selling high. It doesn’t really sound like a surprising result, but it’s not easy to research since your broker usually doesn’t know your IQ. But in Finland nearly every male of draft age is IQ tested, making an interesting paper possible. Especially this graph that shows when people in the 1995-2002 period were buying tech stocks is pretty neat:

Buying/selling in tech stocks during bubble by IQ group

So I think if you are reasonable smart (maybe 120+ IQ?) and have enough time to research strategies and stocks active investment is perhaps worth a shot. I don’t really think that having the right mindset is extremely important because I think that is largely created by having the right knowledge (for example knowing that selling in a panic is almost the worst thing you can do). But I wouldn’t be surprised if many people think differently, and I also wouldn’t be surprised if I’m wrong about this. Anyway, enough rambling. To sum it up; I think that what people should do really depends on their intelligence, education, available time, their personality and probably other factors that I’m missing. There is no strategy that is a good fit for everybody. Indexing isn’t the right strategy for everybody, nor is value investing.

You have to be brutally honest with yourself about what is the right strategy is for you.