Mike - homebuilders give a good study on optionality. NVR only acquires land through options on those lots, and only exercises each option (on an individual lot) when they receive a deposit to buy a house on that lot. This strategy led to huge relative success for them vs peers in 2006-08 because they didn't need to write down the value of their land holdings as much (look at book value per share of NVR vs DHI & LEN over this period). Many builders have since copied their strategy and now control a substantial share of their land bank through options. This will help insulate them on any potential major downturn the next few years.
Warwick, thanks for the feedback. I am very familiar with this business model. Ultimately, paying a premium for options has to have a cost; imho, you are describing an increasingly concentrated market with less willingness to pay for fixed land banks which lowers landowner bargaining power. Ultimately means less homes get supplied which, all else equal, lowers aggregate profits and social value while raising individual firm profits.
Great read Mike! I'd like to get more of your thoughts on MMT. Does a fully elastic fiat system work better since we can unleash human capital and achieve things previously unthinkable? If running massive deficits allows us to cure cancer I see that as fiat WELL spent. The Peter Schiff's of the world do not understand IMO.....
My intuition (and not more than that, since I suck at math) is that your random sampling exercise has implications for portfolio sizing choices. John Authers -now at Bloomberg but then at the FT- once wrote that the „correct“ Kelly ratio for the S&P 500, based on its return history, was 1.2 (if I remember correctly). I now wonder if that is true only for the actual data series, or if it holds for all alternative histories.
Thank you for such a valuable article, it motivates, rekindles, on what I can be doing for my 6 and 4 years old’s outcomes in life. Came to the article for the authors insights on how things will go, but have gotten so much more out of it. Thanks again, thoroughly enjoyed it, and am going to make some tangible changes as a result of it.
Terrific insight about the change in value of equity optionality as we approach/enter recession. Is this perhaps another time when valuation trends accelerate, thus justifying the 'capitulation' - and eventually the 'acceleration from the bottom' into a new bull trend?
Excellent piece. We cannot rely on insights from the past if our current system is built on insights from the past, the current system will thus act differently to those of the past.
You are correct, YouTube videos are no substitute for the real thing. You had the Discovery Room, I had 4-H. 4-H played an outsized role in my childhood where I participated in fairs, learned skills like photography and ceramics, took several trips to Washington DC and most importantly I learned public speaking, a skill which I can still turn on today if necessary.
4-H no longer exists today, at least the way it once did. I feel sad that kids will miss that experience, something that Tik-Tok will never recreate.
There are limitless opposing takes on '23 within the spectra of possibilities from dystopia to Goldilocks. Not a bad tome to just stick with know what you own, and watch it like a hawk.
for the thoughtful investors..."Luck is not a strategy. But it exists. If you want to bet on variance maybe the most practical thing to remember is “trade less when you don’t have an edge”. You are in the exact mirror situation of a casino with a small edge that wants you to pull the handle every day"
Mike - homebuilders give a good study on optionality. NVR only acquires land through options on those lots, and only exercises each option (on an individual lot) when they receive a deposit to buy a house on that lot. This strategy led to huge relative success for them vs peers in 2006-08 because they didn't need to write down the value of their land holdings as much (look at book value per share of NVR vs DHI & LEN over this period). Many builders have since copied their strategy and now control a substantial share of their land bank through options. This will help insulate them on any potential major downturn the next few years.
Warwick, thanks for the feedback. I am very familiar with this business model. Ultimately, paying a premium for options has to have a cost; imho, you are describing an increasingly concentrated market with less willingness to pay for fixed land banks which lowers landowner bargaining power. Ultimately means less homes get supplied which, all else equal, lowers aggregate profits and social value while raising individual firm profits.
I’m from the Winky Dink generation. We put a piece of plastic on the tv and wrote on the screen...now I’m old and am writing on the screen.
It's not easy being Green.
Ribbit.
Great read Mike! I'd like to get more of your thoughts on MMT. Does a fully elastic fiat system work better since we can unleash human capital and achieve things previously unthinkable? If running massive deficits allows us to cure cancer I see that as fiat WELL spent. The Peter Schiff's of the world do not understand IMO.....
My intuition (and not more than that, since I suck at math) is that your random sampling exercise has implications for portfolio sizing choices. John Authers -now at Bloomberg but then at the FT- once wrote that the „correct“ Kelly ratio for the S&P 500, based on its return history, was 1.2 (if I remember correctly). I now wonder if that is true only for the actual data series, or if it holds for all alternative histories.
Thank you for such a valuable article, it motivates, rekindles, on what I can be doing for my 6 and 4 years old’s outcomes in life. Came to the article for the authors insights on how things will go, but have gotten so much more out of it. Thanks again, thoroughly enjoyed it, and am going to make some tangible changes as a result of it.
Terrific insight about the change in value of equity optionality as we approach/enter recession. Is this perhaps another time when valuation trends accelerate, thus justifying the 'capitulation' - and eventually the 'acceleration from the bottom' into a new bull trend?
Excellent piece. We cannot rely on insights from the past if our current system is built on insights from the past, the current system will thus act differently to those of the past.
You are correct, YouTube videos are no substitute for the real thing. You had the Discovery Room, I had 4-H. 4-H played an outsized role in my childhood where I participated in fairs, learned skills like photography and ceramics, took several trips to Washington DC and most importantly I learned public speaking, a skill which I can still turn on today if necessary.
4-H no longer exists today, at least the way it once did. I feel sad that kids will miss that experience, something that Tik-Tok will never recreate.
Good piece Mike, love the nostalgia.
There are limitless opposing takes on '23 within the spectra of possibilities from dystopia to Goldilocks. Not a bad tome to just stick with know what you own, and watch it like a hawk.
for the thoughtful investors..."Luck is not a strategy. But it exists. If you want to bet on variance maybe the most practical thing to remember is “trade less when you don’t have an edge”. You are in the exact mirror situation of a casino with a small edge that wants you to pull the handle every day"
--Moontower#175