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My Portfolio: February 2012

I’ve started making trades in the Investopedia Stock Market Simulator; my user name is Nathan_Wailes, and I’m playing in the “2012 No End” game.  I started with $100,000.

I don’t expect to be successful at first, but I figure I’ll learn more by trying things and making mistakes than by only reading.

Actions taken:

  • Bought ~$90,000 of Treasury ETFs (VGLT, VGSH, TLT) at the market
  • Bought ~$5,000 of the biggest S&P500 ETF (SPY) at the market
  • Sold Short ~$5,000 of Groupon (GRPN) at the market

I’ve moved my money into Treasury ETFs except for a bet that Groupon’s value will diminish relative to the market.  Right now I have it as a spread trade: $5,000 shorting Groupon, and $5,000 long on an S&P500 ETF.  This basically allows my bet to control for the overall level of the market, so if people start putting a ton of money into the stock market and the general level of the market goes up, I should still be able to make money as long as Groupon’s value relative to the rest of the market goes down.  The downside of this style of betting is that your reduced risk comes at the cost of reduced profits, since half of your betting money is being used to control for the general level of the market.

Reasoning for My Actions:

The Treasuries bet:

  • There is a lot of uncertainty now about what is going to happen in the EU and the US because of this huge credit bubble stacked on top of an enormous debt problem.
  • If growth for the next 10 years looks like it’s going to be flat, stock PEs may gradually go down as the consensus on stocks changes (ie over 5-8 years of zero growth people will stop looking at stocks as being worth the PEs they’re currently trading at).
  • I want to avoid another crash like ’08, and some intelligent investors have been saying that the danger to the banks that we’re seeing now is just as much worth worrying about as the danger to banks in ’08.
  • Kyle Bass has said (and I think I’ve heard this elsewhere as well) that investors see Treasuries as being the “high ground” in this disaster: the asset least likely to take massive losses in value if everything goes haywire.
  • Timeline for this bet: I’m going to keep the money in Treasuries until I find other uses for it.  So the money could be there for years if I don’t find any other way to use it.  More likely is that it will be there a few months.

The Groupon bet:

  • I’ve gotten the vibe that Groupon was a money-making scheme for its creator, and that’s not a good omen for its future.
  • The practices I’ve heard them engaging in don’t sound like they can go on for years.
  • At a $12 billion market cap, it’s worth more than Office Depot, Safeway, Suzuki, Sunoco, and Quest Diagnostics (individually, not combined).  It seems very unlikely to me that Groupon is that valuable.
  • Jim Rogers has said that he is short US technology stocks; given his opinion on the Facebook IPO (he recommends against buying Facebook shares), I’d be willing to be Groupon is one of the tech stocks he’s shorting.
  • Timeline for this bet: Based on the fate of many late ’90s internet companies, I would guess that Groupon would lose value within the next 5 years.

Things that could make my decisions turn out to be bad ones:

The Treasuries bet:

  • Interest rates go up – Treasuries could lose value if interest rates go up.  Interest rates will go up if the Fed raises them.  The Fed will raise interest rates to avoid high levels of inflation.  High levels of inflation may arise if the amount of money circulating in the economy starts to rise by a lot.  The amount of money circulating in the economy would rise if lots of everyday people went into more debt.
  • The global outlook gets rosier – I’m not exactly how Treasury ETFs work, but it looks like if demand for equities goes up, and then demand for Treasuries goes down as a result, I could lose money.

Further Questions Regarding this Bet:

  1. How much more money, exactly, would need to start circulating in the economy to cause X, Y, or Z levels of inflation?
  2. How much inflation would need to exist to cause the Fed to raise interest rates?
  3. How much money would need to flow out of Treasuries and into the stock market to cause an X% decrease in the value of my holdings?

The Groupon Bet:

  • Groupon purchases or creates a new, exciting, and/or profitable business – Google has bought and created lots of businesses over the years, and my uneducated guess is that that type of growth has played a big role in its huge valuation.
  • Keeping it as a spread trade isn’t worth it – The reduced risk that I get from having it as a spread may not be worth the reduced return I will get from cutting my bet in half.

Further Questions Regarding this Bet:

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Investment Idea: Bet Against Apocalypse Believers

“What’s the idea?”

Find people who genuinely believe the world will end in 2012 and enter into contracts with them in which you give them the cash-equivalent of a fraction of the value of their property now (February 2012) and you get all of their property on January 1, 2013.

“A 2012 apocalypse? Huh?”

The idea of a 2012 apocalypse has been hyped up by the news for the past year or two.  I remember hearing about it being based on the Mayan calendar, but I also remember hearing about Christians talking about it, so honestly I don’t know what the whole story is.  I’m honestly not even sure how many people genuinely believe in it and how much of it is media hype, but I do remember the hype around Y2K and I’m pretty sure a bunch of people thought that Y2K would be the end.

“Why would a hedge fund / individual want to do this?”

Well, it might be too-small and too-expensive an idea for a big hedge fund, but for a smaller group or individual investor it might be profitable.

To understand the idea you need to understand that one of the main ways that people make money in a capitalist system is by removing inefficiencies from the system.  So, for example, if the owner of a painting thinks that his painting is worth $100, and you know that that painting would be valued by someone else at $100,000, it is inefficient for the current owner to have the painting.  You can make money by removing this inefficiency, that is, by buying the painting from the first guy and selling it to the guy who values it more.

In the case of the 2012 apocalypse believers, it is inefficient (from their perspective) to have rights to things that they will not need; that is, it is inefficient for them to have the rights to their property from 2013 on forward.  And from your perspective, these apocalypse believers have a mistaken view of the world that is a source of inefficiency in the economy: if someone believes in Y2K and loads up on food and equipment to prepare for the end, and then the end doesn’t come, that food may spoil and the equipment may never be used, and thus all the effort that went into creating those supplies has been wasted.

The real source of the profit here is the discount you might be able to get on the value of the property you’d be buying: since you’d be making an unusual offer, and since there probably aren’t other buyers out there who are making offers like this, you might be able to get extremely favorable terms with all of these sellers.  Since they think the world is going to end before 2013 anyway, what difference does it make to them whether they get 100 cents on the dollar for the value of their home or only 50 cents?  Or only 25 cents?  Their time is limited, and it doesn’t seem worth spending a significant portion of it trying to get the best possible price.

“How are you going to get these people to enter into the contracts?”

This is where some salesmanship may be required.  One thought that I’ve had is that you could find one believer who is willing to deal with you and use that person to convince the rest of them.  He could say something like the following: “Hey, I’m preparing for the 2012 apocalypse myself, and in order to spread the word to as many people as possible I’ve sold the rights to my property after 2012 to some foolish non-believers.  I’m then using that money to purchase advertisements on billboards and on Google to try to save as many people as possible before it’s too late.”

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