Most decisions are not binary, and there are usually better answers waiting to be found if you do the analysis and involve the right people. Jamie Dimon
Have you ever been put in a situation where you were forced to make a decision right then and there? When you are a young adult, you might be out and about on the town with your friends. One group wants to go to location A and another group isn’t interested, preferring spot B instead. The existing place is not going to work for either bunch, so a decision must be made. It is called a binary choice. Either A or B. Life often gives you these scenarios where it appears there is only a binary choice involved. If you are involved in finance, binary choices appear in many areas. Statistical analysis is rooted in binary theory, especially in the gaming domain. Option pricing is fundamentally tied with binary outcomes. Investing in asset classes can be viewed in simple binary choices- stocks or bonds, cash or Cd’s, municipal bonds or corporate bonds, commodities or treasuries, ETF’s or mutual funds? Analyzing industries to narrow the best companies down to two choices, A or B, might be considered another example, too. Let’s take a closer look at why binary choices are quite applicable in the current market environment.
With the investment world focused on the Corona virus pandemic, companies which benefit from the stay at home mindset have been rewarded with sky high multiples. Entities which suffer from the abnormal situation have been sold down. Potentially, you can view this as a binary choice between paying up for something that benefits today, or paying very little for something which is penalized by the pandemic. Obviously, what you are paying for and their future prospects matter a great deal. If you look at anything energy related, especially carbon based energy, investors see no future as electrification is all the rage. Tesla at seven million times earnings is more appealing than Exxon at near a decade low. Extending this idea, if you look at retail, Amazon versus Macy’s can be seen as a binary choice. If we look at Mr. Dimon’s thesis, many of these choices are not binary and require some more thought, and certainly more analysis. A more comprehensive understanding of any choice is always preferable, and eliminating any time or peer pressure is even better. Whenever a salesman says you must act now, inevitably by not acting you wind up with a better deal. Anyway, it seems clear that taking your time, not necessarily buying into an artificial binary choice, especially under unique and temporary circumstances, and sizing up different possibilities makes more sense when you are allocating your hard earned dollars.
In the markets this week, merger Monday gave investors a boost with NVIDIA’s purchase of ARM Holdings from Softbank for 40 billion big ones. Gilead Sciences bought Immunomedics for a cool $21 billion. On the earnings front, Lennar, Adobe, and FedEx beat estimates while Cracker Barrel missed it’s number. The red hot SPAC trend continues as Sir Richard Branson joined the club, raising over $400 million. Other notable SPAC raisers include former MGM head Jim Murren and ex Speaker of the House Paul Ryan. The Fed announced it’s plans to keep rates unchanged through 2023. The job market remains the key to any future moves, and vaccine related developments will affect that area in a big way. Regarding vaccine progress, it appears in November and December we will get the first data from stage three trials by at least two or three candidates. Speaking of binary choices, let’s turn to the ultimate one, shall we?
In about ten days, the world’s gaze will turn to the first presidential debate. With Ruth Bader Ginsburg’s unfortunate passing, throw in another contentious topic to the polarized brew which the country is sucking down. Politically, both parties are engaged in a high stakes coin flipping contest on the outcome of the impending election. In finance, risk management is about minimizing your exposure to losses. Our political parties have done the opposite by essentially saying we are OK taking the risk of winning the election or losing power. One of these groups is going to be very wrong about their current reading of the general population. We will know in less than fifty days which one it is. A binary choice for sure.
Thank you for reading the blog this week, and if you have any questions about investing, please email me at firstname.lastname@example.org.
Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation. The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.