Tag Archives: action

Built For Action

We humans are doers. We want to move, to make, to accomplish, to act. We do not take kindly to sitting idly by. We do not enjoy being bored and most of us struggle to sit quietly alone. It is increasingly easy to distract ourselves, to push away the quiet. Unless I’m asleep I am within arm’s reach of my phone about 95% of the day. Why sit quietly when Twitter and Instagram await?! Last year I read 10% Happier: How I Tamed the Voice in my Head by Dan Harris (at the recommendation of this post by Shane Parrish at Farnam Street). It is a great reflection on the difficulty of our busy lives and our ability to focus and slow down. Harris, after having a panic attack on national television, explores a path towards meditation and trying to relieve his anxiety. In doing so, he finds that meditation is hard. It’s really hard. Sitting and trying to focus on a single thing (typically breathing) without being distracted by thoughts of work, family, hobbies, to-do lists, dentist appointments and everything else. We are just not very good at doing nothing. This is especially true as investors. And we really don’t like it when are portfolios do nothing. We’re sitting in the doldrums right now. Returns everywhere are nowhere. Here’s a quick rundown of 12-month returns through 9-15-15: S&P 500: 1.77% Russell 2000: 3.05% Barclays Aggregate Bond: 2.32% MSCI EAFE: -6.34% MSCI Emerging Markets: -23.58% US Real Estate: 1.89% Other than Emerging Markets being pretty painful, those are some pretty unexciting numbers. A weighted average of those for a balanced investor is probably going to put you in the -3%ish range for twelve months. A little painful, but probably not panic-inducing for most. And yet, it itches. You get your statement and look at the numbers and it just tickles your nerves a little bit. “Should I do something?” it asks. “What’s not working?” it wants to know. “Have I made a mistake?” “What should I do?” “How do I fix it?” They are quiet questions, but there they are, lingering in the back of our minds. We only get one chance at this investing thing, and we’re terrified that we’ll get it wrong. We’ll miss out on opportunities or hire the wrong advisor or buy at the wrong time or have to listen to our brother-in-law at Thanksgiving talk about how he nailed it AGAIN this year. Hopefully, we have the other voice too. The calm, rational one that reminds us that we have a plan. A pretty well-thought-out plan. A plan that involves boring years and periods where returns don’t meet our expectations. This voice should remind us that we knew about that going in. It doesn’t necessarily make it easier to remember that, but it ought to handcuff us. Even though we simply hate to do nothing, we should. We are not built for it. We are built for action! If it looks broken, fix it! The problem is that what “looks broken” to us is based on our desperate need for immediate gratification and split-second feedback about our decisions. But split-second feedback makes us absolutely terrible investors. In the moment, we can’t take the long view, so we need to listen to our past selves about why we made the plans we did and how we already know what to do in these situations. Generally: nothing.

IBB: Trees Don’t Grow To The Sky

Summary The collective market capitalization of the biotech index is disconnected from actual sales. Given the huge U.S. Federal deficit (now $18 trillion) and skyrocketing healthcare costs, the costs of biotechnology drugs are unsustainable. The U.S. spends far more than other developed nations for healthcare as a percentage of GDP and on a per capita GDP basis. Unless you are reading the children’s story, Jack and the Beanstalk, the last time I checked, trees don’t grow to the sky. Evidently, the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) didn’t get the memo. Let me be clear, I don’t have a science background. So my angle and perspective aren’t derived from actual industry experience or academically grounded. However, as an investor, I don’t need to be able to build the watch, I simply need to tell what time it is. Through a series of charts, common sense, and a general awareness of the world around me, I will lead the reader towards the notion that IBB is priced for perfection. That said, I am not discounting or doubting the remarkable innovation and scientific breakthroughs that are occurring in this gilded age of biotechnological. Rather, I’m simply suggesting the collective valuation is a disconnected sanity. Here are some high level statistics on U.S. healthcare spending. In 2013, U.S. healthcare spending was 17.4% of GDP, or $2.9 trillion. (click to enlarge) Here is a chart comparing per capital spending versus other major industrialized nations: (click to enlarge) Here is another chart depicting spending as a percentage of GDP. As you can clearly see, U.S. spending is off the charts: Source Here are the top holdings within IBB. I also added the rounded market caps. of each top holding (as of September 11, 2015). (click to enlarge) Source: IBB website Although I am much more concerned about IBB than big pharma, I included some of the major pharma names for perspective. The names below cumulatively have $1.7 trillion, that’s with a “T”, in market caps. This doesn’t include their debt as big pharma has been known to issue a lot of low interest rate debt to finance share buybacks and pay sporty dividends. (click to enlarge) Source: Google Finance Over the past five years, IBB has climbed 319% or $270 per share. Wow! (click to enlarge) Source: Google Finance Here is a detailed version of the U.S. healthcare spending: (click to enlarge) Here are the top global drug sales by specific drug and then ranked by the type of therapy area: Source: American Chemical Society Here is why IBB is overvalued and vulnerable to a sharp pullback. Essentially, there is a recognition and ground swell by members of the medical community that drug costs are unsustainable. Given that the government and private health insurers negotiate the prices for these drugs, I’m arguing there will be cost controls and regulatory risks. It is when not if in my mind. Lower-cost generic drugs are on the horizon due to the excessive costs charged by biotechnology companies. These companies have let their greed get the better of them and they may have killed the golden goose. (click to enlarge) Source: WSJ Remember, since 2000, U.S. public debt has grown from $6 trillion to $18 trillion in fifteen years. We have been running deficits every year since the dot-com bubble. Our healthcare costs are at least 600 bps points higher than other industrialized nations and higher on a per capita GDP basis. With the exception of the super-wealthy, the vast majority of people simply can’t afford to buy these expensive medications. (click to enlarge) Andrew Pollack’s NYT article “Drug Prices Soar, Prompting Calls for Justification” published on July 23, 2015, captures this theme poignantly. Here is a direct quote from the article: Pressure is mounting from elsewhere as well. The top Republican and Democrat on the United States Senate Finance Committee last year demanded detailed cost data from Gilead Sciences, whose hepatitis C drugs, which cost $1,000 a pill or more, have strained the budgets of state and federal health programs. The U.A.W. Retiree Medical Benefits Trust tried to make Gilead (NASDAQ: GILD ), Vertex Pharmaceuticals (NASDAQ: VRTX ), Celgene (NASDAQ: CELG ) and other companies report to their shareholders more about how they set prices and the risks to their businesses from resistance to high drug prices. The trust cited the more than $300,000 per year price of Vertex’s cystic fibrosis drug Kalydeco and roughly $150,000 for Celgene’s cancer drug Revlimid. Here is an NPR article with the same theme, “Doctors Press For Action To Lower “Unsustainable” Prices For Cancer Drug.” Here are two direct quotes: “A lot of my patients cry – they’re frustrated,” says Dr. Ayalew Tefferi , a hematologist at the Mayo Clinic. “Many of them spend their life savings on cancer drugs and end up being bankrupt.” The average U.S. family makes $52,000 annually. Cancer drugs can easily cost a $120,000 a year. Out-of-pocket expenses for the insured can run $25,000 to $30,000 – more than half of a typical family’s income. Lastly, written by Robert Pear , here is another NYT article “Health Insurance Companies Seek Big Rate Increases for 2015.” This was published on July 3, 2015. Here is a direct quote from the article: “Health insurance companies around the country are seeking rate increases of 20 percent to 40 percent or more, saying their new customers under the Affordable Care Act turned out to be sicker than expected. Federal officials say they are determined to see that the requests are scaled back.” Conclusion Yes, I understand that 2014 was a great year for purveyors of prescription drugs , with sales climbing 12% at their fastest percentage growth rate since 2002. However, as a society, the political pendulum is tipping towards increased awareness and anger. Given the skyrocketing costs of healthcare, the federal deficits, and the nosebleed market capitalization of biotech stocks relative to sales, it would be prudent to take profits in shares of IBB. The risk greatly outweighs the benefits given the valuations. Remember, trees don’t grow to the sky and $300K drug therapies are unsustainable. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Low Blow – Why Low-Volatility ETFs Could Prove Anything But When You Really Need Them To Be

By Ian Kelly Just as nobody buys a parachute primarily for its colour – well, certainly not twice – presumably the main reason investors choose to buy low-volatility exchange-traded funds (ETFs) is safety-related. If they really were looking for a smoother ride from the share prices of their underlying holdings, though, events in global markets over the last few days may well have come as a considerable shock. Low-volatility stocks have enjoyed a good run in recent years, and as is often the way with investment, the better an asset or sector performs, the more people want a piece of the action. The low-volatility ETF market is now considerable – to pick out one example, the PowerShares offering that tracks the S&P 500 Low Volatility Index (NYSEARCA: SPLV ) has attracted almost £3bn from investors since its launch in May 2011. If pushed on why low-volatility stocks have done so well, here on The Value Perspective, we would raise the possibility they were priced very cheaply at the start of their run. In a previous article, ” Lost and pounds “, for example, we reminded you how lowly valued tobacco stocks used to be as the market fretted over, among other things, huge threats of litigation. Then, as those fears largely receded, the shares re-rated. Once a group of stocks reach “fair value”, however, the only way they can continue to outperform the rest of the market is if they grow their earnings more quickly. Where we would take some convincing then is that there is any reason why a business would be able to grow its earnings faster over the longer term just because its share price happens to bounce around a little less than the wider market does. In other words, while a low-volatility strategy has worked in the past, we have our doubts as to whether it will to continue to do so. Where we have few doubts, however, is that many people will have been shocked over the last few days by just how volatile their low-volatility ETFs have proved since the global markets went into free fall over concerns about China. The following chart shows how the aforementioned S&P 500 Low Volatility ETF traded versus the whole S&P 500 on Friday, August 21. While we would not normally focus on intra-day pricing on The Value Perspective, when a low-volatility ETF at one point plummets 46% as its wider benchmark drops just 7% – while trading real volumes on those numbers – we are prepared to make an exception. (click to enlarge) (Source: Bloomberg, August 2015) (click to enlarge) (Source: Bloomberg, August 2015) A good lesson to take from this is the importance of, as it were, looking under the bonnet of any collective investment so you are comfortable with the sort of businesses you own through it. Anyone “popping the hood” of the S&P 500 Low Volatility Index, for example, would find an allocation of almost 15% to insurance companies and a further 13% to real estate investment trusts. Is there any great reason why the valuations of these stocks should not be volatile over time, or in the case of insurance, the businesses themselves should not be volatile? If you accept that the valuations of these businesses and their earnings are likely to be volatile, you might ask what are they doing making up more than a quarter of a low-volatility benchmark? The answer lies in the fact that these kinds of indices, and the funds that track them, are mechanistic in nature. Thus, the S&P 500 Low Volatility Index is set up to measure the performance of the 100 least volatile stocks of the S&P 500, with volatility defined as “the standard deviation of the security computed using the daily price returns over 252 trading days”. It may seem odd for the index to have a 15% allocation to insurance companies today, but over time, ideas such as low volatility can become self-fulfilling. There will be times when this sort of strategy works and times when it does not. But you only ever get what the market is willing to pay, and at one point on August 21, for low volatility, that was half what it was the day before. To our minds, owning a low-volatility investment that fails to provide it when it is really needed is akin to a pretty-coloured parachute which doesn’t open when you pull the cord.