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Tag: podcasts (Page 2 of 4)

Data driven investing

January 28, 2019 /

I found a recent episode of the Cashflow Academy podcast rather interesting and wanted to share some notes I took on the show. Host Andy Tanner interviewed Keith McCullough, professional investor and author of the book, Diary of a Hedge Fund Manager.

The crux of the interview was around Mr. McCullough’s data-driven approach to investing. Much of Mr. McCullough’s algorithms for predicting the path of financial markets is based on the second derivative of Calculus.

Everything that we do is based on the second derivative or the rate of change.

Keith McCullough

The two predominant categories McCullough factors into his second derivative calculations are growth data and inflation data. As an aside, investment guru Ray Dalio, in his book Principles, also stated that growth and inflation are the two most important challenges to solve for in investing.

I’ve learned over the years is that if we get those two very basic things right–growth and inflation and whether it’s accelerating or decelerating, getting better or worse–then we’re in a pretty good place.

Keith McCullough

GDP appears to one of his “growth data” datapoints. GDP just set a new record for accelerating for nine straight quarters in a row.

According to his calculations, though, that rate won’t maintain as he’s predicting a deceleration in Q1 2019. Consequently, he sold all his fast growth products and bought slower growing ones that do well when GDP and inflation are slowing–like long term bonds, the US dollar, and utility stocks.

Interest rates are another datapoint McCullough seems keenly interested in, given the tight relationship between interest rates and inflation. Interest rates seems to rise when both growth and inflation are accelerating at the same time.

McCullough then transitioned into discussing his Four Quad Model: Growth and Inflation, modeled on a second derivative basis, have one of four different outcomes or “quads”. Quad 2 is when both growth and inflation are accelerating at the same time. Quad 4 is the opposite: both growth and inflation are slowing at the same time. Interest rates also usually fall in a Quad 4. Interest rates have been on the rise for about the last three years. Now Mr. McCullough thinks that, in the next 3-4 quarters, inflation will start falling and interest rates will fall in kind.

Throughout the conversation, Mr. Tanner also injected some interesting thoughts. Mr. Tanner underscored four important principles in managing your finances:

  1. Gather fundamental data
  2. Gather technical data
  3. Maintain a position for cashflow
  4. and manage your risk by investing

In a brief tangent on real estate investing, Tanner mentioned two datapoints he valued highly:

  1. Net Operating Income (NOI)
  2. Capitalization Rate (aka Cap Rate)

Mr. Tanner also mentioned a few other terms I must research:

  • Factor exposures — popular quantitative strategies/predictive tracking algorithms
  • Momentum — I believe one type of “factor exposure”
  • High Beta
  • Technology Sector Factor
  • Delta Hedging

Annotating the War on Poverty

September 14, 2018 /

The other day, I was listening to the Contra Krugman episode entitled “How to Unwind the Welfare State”. Toward the end of the discussion, the hosts began listing examples of private organizations in the free market solving social problems only to be stymied when the federal government began to insert itself into the situation. Host Bob Murphy referenced an article he wrote for FEE where he discussed how, in the 1950s and 60s, the free market was already lifting people out of poverty at a pretty good clip just to have Lyndon Johnson and the federal government jump on the bandwagon halfway through and claim that it was their legislation, not the free market, that did all the heavy lifting.

I couldn’t find the article Bob was referencing (maybe it was this?); nevertheless, it occurred to me this might be an opportunity to improve my matplotlib skills. Maybe I could find the official US poverty numbers, plot them out, then annotate the plot with markers indicating when key legislation in the War on Poverty was enacted. Would this convey the point Bob was making?  Here are highlights of what I did (the full code is available on my Github page):

Step 1: Get the data

Is it me or is it just confusing downloading the data you want from the US government?  The US Census Bureau publishes the poverty numbers, but I found it very confusing which numbers I needed and for the time period in which I needed it.  I finally found a dataset I could use on the page, Historical Poverty Tables: People and Families – 1959 to 2016.

Step 2: Load the data

Here’s a snippet of the spreadsheet I downloaded:

Makes sense, I guess, but it took me a while to figure out an optimal way to load the spreadsheet into a dataframe with Pandas.  In the end, though, it only took two lines of code:



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df_pov = pd.read_excel('./hstpov9.xls', header=[3,4,5], index_col=0)

df_pov = df_pov[:-1]  # drop the last row as it's just a footnote

Step 3: Get some legislation dates

Wikipedia to the rescue!  Wikipedia called out four major pieces of legislation in the War on Poverty:

  • The Economic Opportunity Act of 1964 – August 20, 1964
  • Food Stamp Act of 1964 – August 31, 1964
  • Elementary and Secondary Education Act – April 11, 1965
  • Social Security Act 1965 (Created Medicare and Medicaid) – July 19, 1965

Step 4: Plot time?  Not so fast!

So, the major pieces of legislation happened in 1964 and 1965.  Now, I can plot the poverty rate from the dataset I have and then add annotations at years 1964 and 1965.  Er, wait a minute…the dataset is missing the poverty rate from those years!  In fact, it’s missing all the years between 1960 and 1969.  Weird!  How will I know, on the plot, where to place my annotations?  Well, Pandas can figure that out with its handy interpolate function!  Only two lines of code to do the calculation!



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# create a dataframe for the data I'm missing

df_gap_data = df_pov.loc[[1960, 1969], ('Total', 'Below poverty')]

# create rows for the missing data and use Pandas interpolate to make a best guess at what the poverty rate was during

# those missing years

df_gap_data = df_gap_data.reindex(pd.RangeIndex(df_gap_data.index.min(), df_gap_data.index.max() + 1)).interpolate()

Step 5: Now, plot time!

Now that I know where to place my annotations, here’s what I came up with for the plot:



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laws = [('Education Act', 1965), ('Social Security Act', 1965),

        ('Economic Opportunity Act', 1964), ('Food Stamp Act', 1964)]

title = 'Total Below Poverty Percentage, United States, with annotations'

y_offset = 0  # offset counter for the text block annotations



# plot the poverty rate

ax = df_pov.sort_index().loc[:, ('Total', 'Below poverty', 'Percent')].plot(title=title, figsize=(12, 10))

ax.set_xlabel('Year')

ax.set_ylabel('Percent below poverty')



# loop through the legislation so I can add those annotations

for law in laws:

    y_offset += 30

    name, year = law

    percent = df_gap_data.loc[year, 'Percent']

    ci = Ellipse((year, percent), width=0.5, height=0.1, color='black', zorder=5)

    ax.add_patch(ci)



    ax.annotate(name,

                xy=(year, percent), xycoords='data',

                xytext=(175, 300 + y_offset), textcoords='axes points',

                size=20,

                bbox=dict(boxstyle="round", fc="0.8"),

                arrowprops=dict(arrowstyle="->", color='black', patchB=ci,

                                connectionstyle="angle3,angleA=0,angleB=-90"))

 

And that rendered the plot at the top of this post.  Does that chart illustrate the point Bob Murphy was trying to make in the podcast?  I think so, but take a listen for yourself and let me know.  The big takeaway is all the cool annotations you can do in matplotlib.

Teaching your kids about money

August 13, 2018 /

Recently, I listened to an episode of the Rich Dad podcast centered around teaching financial literacy to our kids. Here are my notes on the episode.

In the opening monologue, the host ascribes as “garbage” the convention to:

“…save money and get out of debt and invest for the long term in a 401k. So if you’re teaching your kids to save money, go to school, get out of debt, buy a house, and invest for the long term in a 401k or trust that your company pension or your state pension plan is going to be there to save you, this program is for you.”  (Robert Kiyosaki)

Hmm. So saving money and getting out of debt are not good things? I can certainly understand how putting your complete faith in 401k and pension plans is probably ill-advised and that home ownership as an investment is a dubious proposition. But saving and being debt-free is bad? I think what he really means is that it’s bad to save in US Federal Reserve notes, as the Federal Reserve seems to increase that supply with seeming reckless abandon, eroding the purchasing power of those notes over time.

Cash Flow

The crux of the episode focused on the husband-and-wife team of Andy and Marcy Tanner and how they’re raising their two young boys to be financially literate. Mr. Tanner is the author of two books: 401(k)aos and The Stock Market Cash Flow. 401(k)aos seems to be a book describing deceptive practices in the 401k industry while The Stock Market Cash Flow appears to be more of a prescriptive book about how you can take advantage of the stock market.

The Tanners seem to do a lot of international public speaking and take their boys with them to speak in front of thousands. Learning to speak in front of crowds of adults by itself is certainly a great experience for their children. The family are also avid players of a game called Cashflow–I assume it’s this “Cashflow” game from the Rich Dad franchise, which they say is a chief instructional tool they use with their boys.

Infinite Returns

The episode then detoured from tools and techniques to teach our children about money to “those bums in Washington” and Wall Street. One term that kept coming up was Infinite Return. The best I could gather, Infinite Return is a technique, largely achieved in real estate investing, where you somehow invest no money in an asset and then turn around and sell the asset for an “infinite return” on your initial $0 investment. Tanner did make one observation that never occurred to me before: with 401ks, and probably most other investment vehicles, people invest their own money in these instruments. The 401k managers call this money “assets under management.” Those managers take a fee from the investors. Thus, this is a form of Infinite Return for the managers: they make no investment of their own capital and take none of the risk yet they make a return off the transaction all the same.

Taxation without representation

The conversation then shifted to the age disparity between the host and the two young guests. The host claimed that pension programs use, I guess, incorrect actuarial tables that expect most participants to die at age 70. Since people are living longer these days, retirees are drawing on these programs longer and shifting more and more burden on the young for support.

“One of the questions that was a real epiphany for the boys was: ‘David, are you old enough to vote?’ ‘No.’ ‘And Zach, are you old enough to vote?’ ‘Nope.’ So you guys didn’t get to vote for all this spending. You didn’t get to vote for these policies and, yet, you understand clearly that you’re going to have to pay for it.”  (Andy Tanner)

“So if you didn’t vote for it and yet you have to pay for it, David, what’s that called? ‘Taxation without representation.'”  (Andy Tanner)

Cashflow Quadrant


Mr. Tanner off-handedly mentioned another tool, The Cashflow Quadrant, that he used as an initial teaching device to show the four different roles the kids could assume as they enter the workforce.  Just this image alone seems like a powerful teaching tool I can use today.

Learn how to sell

“The most important skill of an entrepreneur is sales.”  (Andy Tanner)

The Tanners raised their children to hone and enjoy the skill of sales. Lemonade stands advertised on Facebook became the boys’ training ground. With their profits, the boys invested in Disney and McDonalds stock. Then, after learning about the detrimental effects of inflation on their cash savings, they began purchasing silver. Lately, they’ve gravitated toward investing in real estate.

“One of the thing’s that’s fun is Mom and Dad will invest in bigger projects and you get to be part of that….We do have some real estate as a family–in a family trust–but you really want your own, don’t you?”  (Andy Tanner)

Real estate in a family trust. Might be something good to remember.

The biggest asset of the US federal government

In closing, the host mentioned an astonishing statistic that, at first, I just couldn’t believe: at $1.3 trillion, student loan debt is the biggest asset of the United States federal government. What?! How can that be?  How depressing!

More tools, please

So, this podcast episode was decent, I just wish the host and guests would have detailed more tools and techniques they use to educate their kids–particularly tools that aren’t part of the Rich Dad brand.

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