Pokemon Go – Gotta Blog About Em All

Pokemon deja vu


The second coming of over one hundred catchable Pokemon as a phone app has created a lot of excitement. And ‘Pokemon Go’ has sent the blogosphere into full hyperbolic overdrive.

I have to admit that even I’ve got a little caught up in the frenzy. Well if you can’t beat ’em, join ’em. And it’s a feeling of deja-vu.

Over fifteen years ago I queued up for hours at Nintendo’s Pokemon store in the Ginza district (think Oxford Street) of Tokyo to buy a Pokemon branded GameBoy. And then I did it again as they only sold one at a time and I have two daughters.

So last weekend, when my Pokemon loving eldest daughter returned home to celebrate her 24th birthday, I was feeling somewhat nostalgic and made her a Pikachu cake. And the theme continued when she arrived. She had her ‘Pokemon Go’ in hand and the first thing she told me was there are pocket monsters in our driveway.

And there’s the hook. Whether you’re a chartered wealth manager or a Phd student of atmospheric science, you can’t help but look.

To be fair, she said they were just the common ones; the pidgeys, zubats and rattatas. There’s no more merit in catching them than a cold. But, lurking in our Jurassic garden she also found an Oddish, Eevee and even a Jigglypuff which are far higher up the Pokemon gene pool.

At this point I’d ask all the Big Pokemon Game Hunters amongst you that, before entering our garden, could you kindly knock first? And please take a business card on the way out.

All right, it's not the best interpretation of Pikachu, but there are some worse ones out there!
All right, it’s not the best interpretation of Pikachu, but there are some worse ones out there!

Risk assessment needed


As delightful as the game is, it’s not without its unintended risks as one young man found out when his girlfriend checked his phone. The app’s tracking history showed that he’d been playing hunt the ‘Weedle’ and ‘Wigglytuff’ at his ex-girlfriend’s place.  Ouch!

But I’m safe.

It’s over 34 years since I had an ex-girlfriend. And I can’t play the game even if I wanted to – I have a Windows phone and there is no windows app. And that is a clue to what I am supposed to be writing about in this blog. The problem for investors surrounding the value of the Pokemon Go to Nintendo.

 

A roller coaster ride for Nintendo shares


Microsoft, the owner of everything Windows, has upset plenty of software firms getting to where it is. So some app developers won’t cater for its phone operating system. It also doesn’t have the scale of Apples iOS system or Google’s Android.

Nintendo, as a hardware and software maker, didn’t want to be in Microsoft’s position. To avoid a conflict of interest with Apple or Google, it spun off everything Pokemon into a separate venture.

After the wildly successful launch of Pokemon Go in the States the question then was, ‘how much of that venture does Nintendo own and how much money will they make from it?’. But the answer didn’t seem to bother those caught up in the hyperbole.  From July 6th to July 19th Nintendo shares more than doubled from 14,380 yen to 31,770 yen.

During that run a sobering assessment of Nintendo’s Pokemon Go earnings on July 13th by John Gapper in the FT was ignored.  But people did pay attention when Mr Gapper’s assessment was backed up by the company themselves on July 25th. Nintendo said earnings from the game would be ‘limited’.

On the Monday before that announcement one headline stated, ‘Nintendo breaks stock market records thanks to Pokemon’. After the company’s mea culpa there was a change of tone, ‘Nintendo feels pressure after biggest fall in 26 years’ and ‘Nintendo loses $6 billion in value’.

But as I write it’s still at 21,080 yen compared with 14,380 yen at the start of the month.

 

Keep calm and carry on


What happened to Nintendo shares this month is a demonstration of how emotive investing can be. And it’s not helped by headline writers stressing the most absurd comparative statistic without any constructive context.

And that emotion can lead to bad outcomes. I wrote about a variety of cognitive biases that can lead to bad decision making here.

The answer is to plan and manage risk where possible. From auto-enrolment workplace pension schemes to stock index investments to balanced funds to currencies, there are different ways of approaching all of them.

 


Please remember:

  • past performance is no guide or guarantee of future returns;
  • the value of stock market investments can rise and fall over time, so it is quite possible to get back less than what you put in, depending upon timing;
  • this blog does not constitute financial advice and is provided for general information purposes only.

It’s a Small World – Part Two, ‘What’s the chance of that happening?’

chanceIn the first of these two blog posts, I highlighted how good and bad economic events are much more likely than you might expect. And this is partly due to the way the economic world is wired. There is a ‘network effect’ that also applies to many other complicated systems, such as our bodies.

I also described how some students in the States had developed a game that demonstrates this effect called the ‘Bacon Game’. The game is based upon linking actors to Kevin Bacon, either through appearing in the same movie as him or having acted with someone who has….and so on. And what we discover is that the acting universe is far more connected to the star of such movie greats as ‘Tremors’, than we would think if they only knew each other randomly.

But this second blog is about how, even if things did just happen randomly in the same way as tossing a coin or rolling a dice, unlikely events still happen more often than we expect. Or to put it another way, when the world gets as big and complicated as it is, coincidences are very likely even though we might imagine that the chances of them happening are extremely small.

Now I am not attempting to rubbish any beliefs you might have about ideas such as fate, for example. I am merely demonstrating that we ought to consider how likely coincidences are before we assign them any special spiritual or paranormal significance.

And in investing terms, it means that yours truly is especially sceptical when looking at a presentation from an expensive fund manager showing magnificent potential returns for my clients. After checking whether I think the data is real, I then need to consider whether they’ve just been lucky. Maybe they have just been ‘fooled by randomness’ as Nassim Taleb put it in the book of the same name.

One of the best examples used to demonstrate how more likely coincidences are than we expect is this question – What is the chance that two children in the same class at school have the same birthday? Statisticians know this question as the ‘birthday problem’ or ‘birthday paradox’.

And the answer?

Well, assume there are 30 kids in a class and that birthdays are evenly spread over the year. Given there are 365 days in a year, the answer would seem pretty unlikely. But, the mistake we make is that we tend to think in terms of any two children sharing a specific date such as the 12th November, rather than the chance of sharing any date in the year.

The answer is 50% – actually, it’s a little over a half as you only need a class of 23 to get a chance of 50%. Or to put it differently, if we had two classes of children, we would expect one of the classes to have two children sharing a birthday.

There are several ways of calculating this theoretically and if you contact me I can send the most straightforward one to you. But, we can also get the same answer using a mathematical technique of trial and error called a ‘Monte Carlo simulation’.

If you create a column of 23 random dates in an excel spreadsheet and keep hitting the F9 key to recalculate those random dates, you’ll find that half the time two of those 23 dates will match. This is a very simple example of this technique and I use it far more extensively when making financial plans.

Of course, the other option is to ask your own children or remember your own school days. And at my school I was that kid in my maths class that shared their birthday with a girl in the same class. I don’t think my teacher appreciated the statistical likelihood of that outcome – he was just demonstrating data selection techniques and had come up with his own early version of a dating service using holes punched in cards.

Alas, while his experiment was a perfect example of the’ birthday problem’, as an exercise in matchmaking it didn’t work. We’d have been a pretty odd couple. The girl in question was six inches taller than me at the time and went on to become a national karate champion – I was more into art.

I did, however, marry the girl in the next classroom whose birthday is two days after mine. And here we are together over 30 years later – what’s the chance of that happening?

Apparently, a little more that I’d give Sheldon and Amy in the ‘Big Bang Theory’.

Please remember:

  • past performance is no guide or guarantee of future returns;
  • the value of stock market investments can rise and fall over time,  so it is quite possible to get back less than what you put in, depending upon timing

Sex & Drugs & GDP

On a trip to the coast a fortnight ago, I went inside a café to order a couple of ice-cream cones. Ahead of me in the queue was a father, who was looking a little stressed. He was waiting for a few burgers and hotdogs for his family and it was taking a little longer than expected.

He wasn’t the only one who was a little tense. The staff were feeling the heat of the kitchen as well – and I was wondering how I managed to get on the wrong queue again. His order did finally arrive and everything seemed to relax a bit as the lady behind the counter entered his order into the digital till.

In anticipation, the dad stood there with a twenty pound note in his hand and I doubt he expected much change. However, the final total on the till suggested he had under-clubbed it a bit. The price for some soft drinks and a few burgers and hotdogs? £26,000.

A bit pricey for a few burgers and drinks.
A bit pricey for a few burgers and drinks.

 

He quite calmly said, ‘I wasn’t thinking of spending that much’. And from the back of the kitchen came a distant voice, ‘has the till gone wrong again?’

They settled on an amount nearer £15 and my own bill was a more moderate £3.20 as we resorted to the old analogue system of a notepad to record the trade and cash to pay for it.

I mention it because, for a fleeting moment there, the Gross Domestic Product (GDP) of the UK was artificially raised by approximately £25,985.

I am jesting, of course, but last week we learned that the Office for National Statistics will attempt to add the oldest industry in the economy to their quarterly estimate of how the economy is faring. From September, as part of other changes that will lift GDP by 2.3%, they will include the value of drugs and prostitution.

It’s important to emphasise the word ‘estimate’. GDP figures are reported and debated in the media as though they are factual, but they are subject to revisions as some parts of the economy are far harder to assess than others and not all the data arrives at the same time.

In this case, the Office for National Statistics kindly give us a separate Excel spreadsheet that shows us their assumptions. In total, it amounts to £9.7 billion, based on 2009 prices, or approximately 0.7% of the then GDP – and it breaks down as follows:

Prostitution        £5.27 billion        54%

Drugs                  £4.43 billion        46%

In the case of prostitution they reached that number by estimating there are 60,879 prostitutes in the UK – each with 25 clients a week paying £67.16. If £67.16 seems ridiculously precise, it’s an old figure of £50 adjusted for inflation. Take off costs of £44 million, which were borrowed from a Dutch estimate and you get the final figure.

And for the drugs industry, cocaine in its various forms represents 71% of the total (42% crack, 29% powder). Those numbers allow for the cost of importing it, so the sales figures are even higher with cocaine accounting for 77% of the grim total.

So why are they attempting to do this?

Ostensibly it is to meet European Union rules to establish common practice among member countries. The Dutch, for example, have reported parts of these figures for years as prostitution and certain drugs as are legal. However, the overall changes are also in line with international guidance from the likes of the US and Australia.

It’s hard to argue with the idea of trying to measure all areas of the economy and some countries have a lot of work to do. In April the IMF endorsed a near doubling of Nigeria’s GDP to $510 billion as new industires were added and prices updated. As the Economist newspaper pointed out, the new numbers aren’t fiddled, it’s the old numbers that were wonky.

So what’s most important is that the numbers as a whole are regarded as credible. And the numbers of two countries stand out as being questionable.

The government of Greece, endorsed by some economists, justified higher levels of national debt before the recent crisis due to the estimated size of its black economy. At the time, as now, it wasn’t even collecting normal levels of tax on its legitimate one. We know how that one turned out.

And then there’s China, where the GDP figures miraculously meet official annual targets near 7%, despite the sheer scale and complexity of their calculation. Mathematically, continuous growth of 7% is a notable number – it means the economy is doubling in size every ten years. And if an economy of that size is really growing at that rate, they are more likely to bump into problems – especially rising levels of debt.

Michael Pettis, a professor of finance at Peking University, whose blog we have followed for some time, now makes the case that it can’t continue that way – the country needs to rebalance towards lower growth nearer 3 or 4%. I’m not sure the investment world fully appreciates that.

I’ll leave the final comment to the lyrics of Ian Drury, from whom we borrowed the title of this blog. He knew a thing or two about simple explanations of complicated subjects. My favourite has to be these two verses about two well known gentlemen from ‘There Ain’t Half Been Some Clever Bastards’ –

Van Gogh did some eyeball pleasers

He must have been a pencil squeezer

He didn’t do the Mona Lisa

That was an Italian geezer.

The next verse isn’t quite as factual, but brilliant nonetheless

Einstein can’t be classed as witless

He claimed atoms were the littlest

When you did a bit of splitting-em-ness

Frighten everybody shitless

 

A Close Shave

In recent months I have, hopefully, shown you how different investing lessons can be learned from activities as diverse as eating marshmallows, buying trousers and assembling Ikea furniture. This week, I am looking at one man’s approach to problem solving that also helps us to navigate the modern financial world.

He is no modern ‘Flash Boy’ as depicted in the book I reviewed in my last blog. William of Ockham (c. 1287 – 1347) was an English Franciscan friar and scholastic philosopher who lived in the Surrey village of the same name and gave us the misspelled ‘Occam’s razor’.  And Ockham should certainly be proud of him.

My own town of Spalding doesn’t quite hit the same heights on the philosophical map of the world, although I would be delighted to be corrected. We do have a blue plaque commemorating the visit of Jean-Jacques Rousseau almost 250 years ago, but he was here for just nine days.rousseau plaque

William was no medieval Victor Kiam – the man who loved his Remington electric razor so much he bought the company. William was clean shaven, as was his tonsure, but ‘razor’ in this context is a rule of thumb in philosophy that rules out unlikely explanations for problems.  It simply states that the most likely explanation for a problem is the one with the fewest assumptions. In other words, the most obvious when you think logically. And I’d wished I’d thought of applying it when I mislaid something a few years ago.

Unfortunately for me, the ‘something’ in this case was my youngest daughter who was seven at the time. My wife and eldest daughter were out for the day, and I was somewhat engrossed in setting up our new TV when I noticed she had gone.

So I followed a different philosophical maxim, ‘if in doubt, panic!!!’

I shouted after her, but there was no reply in the home and having pegged it up and down the street outside there was still no sign of her. I returned to the house and was on the verge of calling up a ‘posse’, when I noticed the cardboard box for the new TV in the middle of the lounge. I opened it to find this peaceful scene.

Sleep

So, I’d missed two pretty obvious things. Given it was most likely she was in the house, it did not occur to me that she wasn’t answering me because she was asleep – I’d automatically assumed the less likely worse-case scenario. And a large cardboard box to a child is manna from heaven.

In the world of investing Occam’s razor is an invaluable tool in all sorts of situations, from debunking conspiracy theories to interpreting news. But a very simple application is perhaps better described with the phrase, ‘if it’s too good to be true, it probably is’.

This simple analysis raises the red flag for some of the poorer investment schemes. I deliberately keep an old email address alive just to capture the latest too good to be true offers of wonderful growth on land in Brazil, vintage wine or carbon trading schemes.

And on a larger scale, there have been outright frauds perpetuated where the returns offered could not reasonably be possible – not only were the returns too high, but too consistent and, therefore, likely to be fake. However, in order to understand this you also needed to understand all the underlying investments – and few do.

Equally, there are other legitimate investments where the returns available can only imply greater risk, whatever the marketing material might say. That is not necessarily a problem, where it is appropriate, but not where the return is being relied upon – or where the underlying instrument is poorly understood.

It is important to appreciate that I am not making a case against investing – far from it. The case for investing to meet long term financial goals is very sound. But before making our choices, we need to use as many tools as possible to increase our chances of success. And Occam’s razor is another weapon in our armoury.

Next week I will be revealing all about Fern Britain.  Now before you think I am about to challenge the hegemony of OK!, Hello! and Bella, the clue is in the spelling.

Please remember:

  • past performance is no guide or guarantee of future returns;
  • the value of stock market investments can rise and fall over time,  so it is quite possible to get back less than what you put in, depending upon timing