ChatGPT Could Break The Internet (But Not In The Way You Think)

ChatGPT and AI is at the forefront of the US investing community at the moment. As an investor who has a background in IT with some AI knowledge and has studied some simple Machine Learning aspects at university such as Neural Networks and Genetic Algorithms, I thought I’d weigh in with some thoughts on the subject.

Because of all the AI hype nascent from ChatGPT, there’s a chance that ChatGPT could break the internet… Not in like a SkyNet AI way nor in a slang way nor due to excess traffic, but because it could cause people to stop sharing information.

Some years ago now, Google improved their search engine by collecting data from websites and displaying answers to people’s questions without having to click on links and go to websites. For example, if you search for “what is planck’s constant?” Google will give you the answer straight away. No need to trawl through websites for the answer.

They did limit this functionality quite significantly though for fear of breaking the internet. Because this information comes from websites, if Google makes it so you don’t need to go to those websites that produce or share the information, those websites will get no traffic. If those websites get no traffic, they won’t be able to sell products or collect advert revenue. This will cause them to shut down, which in turn will cause Google to have less information feeding it and eventually break the internet – no new information being uploaded (at least not without a paywall – which would break search engine algorithms because you wouldn’t know which paywall had the info you needed).

ChatGPT runs a similar risk as it’s trained by data from websites to give people search result information without the user needing to go to the website hosting the data. My concern is that the likes of Microsoft (who are desperate to compete against Google in the search and advert revenue arena) will make a successful AI search engine that does exactly that and breaks the internet.

I’ve used ChatGPT and was very impressed with it. However, talking to others who’ve tested it for other things, suggests that it’s probably not very good for all types of information and it fabricates a lot of information. So in conclusion, I think the internet is safe for now, but we do run the risk of someone significantly changing the culture and nature of the internet in the future.

As for ChatGPT and the AI trend, I think it definitely has it’s uses. Particularly in places where the impact of getting the job wrong is low, the tasks are simple enough to do but require a highly capable communicator or need a gimmick. Taking orders at the drive through, with the option of a human override might be such a task. Outside of this, I can imagine more complex uses for AI, such as coding where the parameters within which the coding may be done are very well defined and possibly constrained (or not, if there’s enough work put into the project).

In summary, a lot of thought needs to be put into the application of AI, specifically around it’s cost and suitability for any given solution.


The Economic Impact Of Auckland’s Flooding

Human impact aside, I would like to use this short article to consider the economic impact of the recent catastrophy of Aucklands malicious weather event.

It seems clear to me that the recent flooding will put yet more pressure on the construction industry as labour will be needed to repair damaged buildings. This will push up prices for labour and materials in the sector.

With people unable to travel to work or even able to work in flooded streets and buildings, I expect this to negatively affect the supply of goods and services. This inflationary pressure will be countered by lack of demand for goods and services due to lack of foot traffic and projects being postponed. I don’t know which of these aspects will affect price most significantly, but the only thing that a supply and demand diagram can tell us for sure is that quantity bought/sold will decrease, which you would have to assume would be bad for the economy, reducing company profits in Auckland and ancillary providers to the city.

Finally, the 400+ yellow/red stickered buildings will possibly create additional demand for housing. While I don’t expect this to have an impact of any significance, it may help abate the falling house prices in a minor way in the country’s most populous city.

In summary, I think the only thing we can predict with any surety is that it will be harder to find construction related labour and materials, and these resources will be more expensive.


Why Are Retirement Village Stocks So Cheap Right Now?

Retirement village stocks in NZ are notably cheaper than their previous highs despite announcing positive results.

In my opinion there are a few reasons for this, which I will explore in this article.

Firstly the OCR increases have meant that the Risk Free Cash rate has increased, so sticks need to earn a higher yield to earn their valuation. In layman’s terms, you can get a higher return for your money in the bank, so stocks need to be cheaper to lure you to buy them.

Secondly, inflation has increased building costs, which affects retirement village company’s ability to grow. Again, this negatively affects the stock price.

Thirdly increasing OCR increases borrowing rates. This is a problem for what is essentially a property development company. As anyone with experience in the rental property industry knows, the whole thing is built on debt. Borrowing money, acquiring property and selling or renting it out to cover the cost of borrowing, then using the equity in the property assets to borrow more money is the game. Increasing those borrowing costs affects growth rates and more importantly adds business risk.

Lastly (and possibly least importantly), the increasing OCR has increased mortgages, which has decreased the price of houses. This means that retirement village unit’s prices must decrease, meaning revenue could drop. Naturally, this risk causes retirement village stock prices to drop.

With inflation failing to abate, more OCR increases seem likely, which could put further downwards pressure on retirement village stocks.

As usual, I’ll be waiting for the right time to reenter this market, but it doesn’t suit me to do so yet.


Thought Of The Day: Cars

My Year hasn’t got off to a great start so far. I’ve had injuries from downhill mountain biking on what would normally be a more junior track for me; my shopping bag burst open as I entered the supermarket car park, sending my shopping all over the floor; sunstroke wiped out the last day of my Christmas break; and finally my car exploded, causing me to have to folk out for a new one – money that would have otherwise been spent on a holiday to Japan and a new (big) project this year.

I don’t like spending money on cars. While cars are certainly a nice item, for me cars are just a necessary money pit. During my ponderances on my unfortunate situation, I reflected on others who might find themselves in a similar situation. I think myself lucky to have money to buy a nice car, but I expect that people in my situation usually don’t have money to easily replace their car, otherwise they probably wouldn’t have been driving a car that’s so close to “replacement” in the first place (my excuse is that I’m not really a car person). This line of thinking went on to consider the effect of government green car policy and it’s affect on car prices, equity, stock and demand, which then moved towards thoughts of a certain listed car company’s future. Ultimately, in line with my recent penchant for predictions, I started thinking about the future of the car industry.

Tesla’s business model of not allowing anyone to work on, repair, buy/replace parts or service their cars is an interesting move. It turns the purchase of one of their cars into a subscription service. Of course car companies have sort of been doing that with the (competed) spare parts market, but tying customers in by withholding parts is a new move in the modern car industry, to my knowledge.

Trying to get recurring revenue is not uncommon in novel industries like the IT industry with hardware, software and even virtual infrastructure rental. Recurring revenue is a great way to reduce business risk, improve efficiency and ameliorate planning.

This made me wonder how else the car industry could become more like the IT industry. After all, cars have greater and greater reliance on software. Perhaps cars could be bought and then have software subscriptions to unlock features or improve performance? For example, you might buy a subscription to use the radio that comes free with a car, or subscribe to be able to use the built in GPS or bluetooth.

The graphics card industry is also interesting to me. As it’s expensive to build machines to make unique graphics cards, sometimes a factory might make only high end graphics cards, but use a hardware chip to limit some, in order to create two lines of graphics cards – a cheap one and an expensive, high performance one.

Such a model could also apply to cars. On-board computers already limit speeds to fit local safety, speed or emissions regulations; why not make powerful cars, reduce the number of factories / models and limit all cars, making high performance an option via subscription? That way people can buy a cheap car and get suckered into upgrading via subscription when they can afford it – paying more in the long run and providing an ongoing income stream for the car company, long after the sale.

I believe that more businesses will try to push customers towards subscription models in the future because of the afore mentioned benefits.

Hopefully you have enjoyed this article and it holds something useful or at least thought provoking to you, in regard to your own business.


Stock Picking Competition And Predictions For 2023

After last year’s dismal picks, yielding -25.77%, I’ve decided not to bother doing the competition in future. While it’s just a bit of fun, it’s not very fun for me because it’s completely random. Why is it random? Well, December is not a time of year that I do research into stocks because the values are all skewed due to the Santa Rally effect. In addition to the lack of research (making my picks just guesses), the skewing affect of the Santa Rally makes picks a bit random anyway, because it’s impossible to know what effect market sentiment will have on stocks after the erratic rally.

Finally, picking stocks at a specific time of year means that it’s not possible to emulate the way I invest because there’s no way to pick the stocks as buying opportunities appear. Consequently, I don’t feel invested in my picks and so I find myself saying each year, my stock picks rarely represent my personal stock portfolio throughout the year.

Predictions For 2023

I will, however, take a punt at predicting how the year will go. This is something that I do constantly throughout the year, which is necessary for investing. While I update my ideas throughout the year, it’s worth having a guess at where things will go so I can plan out my investments throughout the year as time goes by. So here goes, a cursory punt at predicting what may pass in 2023:

  • The property market will continue to decline. I won’t predict how much because the official reports are not aligned with my own perceptions and measurements, so there’s no way to measure the success of such a prediction in an unbiased way. Also, I don’t have enough data to make an accurate prediction on this anyway.
    The fundamental reason for me to think that the property market will worsen is that I believe that inflation will persist, which will lead the RBNZ to continue to increase the OCR, which will increase mortgages and make it harder afford a house (therefore reducing demand)… Which brings me to my next predictions…
  • The OCR will increase to at least 5.5% by the end of the year. This will lead to fixed mortgage rates in excess of 7.5%.
  • Inflation will remain high, but headline inflation will be reported slightly lower. I have no way to work out how much and the concept of “headline inflation” is arbitrary anyway, but for fun, let’s have a guess and say that headline inflation will be 6.2%.
  • Given that the government is churning out policy at high rate, polls and popular opinion don’t seem to be in their favour, I imagine that the government will delay this year’s election as long as possible (unless something comes up that might lean towards their political favour). On that note, I suspect that the next government will be comprised of a National and ACT coalition. This has significant bearing for 2024, meaning that business will improve (in 2024) as immigration policies change improving employment options which will reduce business costs, RSA workers will be allowed in again so food prices will come down, many aspects of the local stock market will recover, etc… But let’s stick with the predictions for 2023 before we get into 2024… needless to say you can see which of the two year’s I’m most looking forward to.
  • Finally, implicitly, given the previous predictions, it should be obvious that I’m going to predict a bit of a recessionary environment throughout 2023, improving in 2024.
  • Jocularly, given how this year started for me, among my peers with whom we are also making predictions, I have also predicted that this year I will get a horrible disease!

Those are my predictions, let’s hope I’m wrong.


Thoughts On Inflation In NZ

Where inflation is concerned, there are aspects of global inflation and domestic inflation in countries around the world. While no country can control global inflation (except perhaps those who control oil supplies), each country can make a significant impact to it’s currency, economy and citizens with the proper handling of inflationary and dis-inflationary policies.

It seems that inflation in the US and Australia is abating a little, but inflation in NZ is not. Looking at why this is, we have to understand that domestic inflation is affected by not only Reserve Bank policy (OCR), but also government policy. The problem as I see it is that the government has and continues to impose inflationary policies upon the country. Here are a few such policies:

  • Government imposed fees on car imports has increased, making cheap cars expensive to import.
  • Farmers have been punished unduely for emissions, pushing food prices up.
  • RSA workers have been stopped from entering the country so crops are upable to be harvested, pushing food prices up.
  • Oil exploration has been banned, meaning that less oil is supplied and pushing prices up.
  • Increased government spending, creating demand and giving people more money to spend.
  • Increased unproductive government jobs, giving people more money to spend.

While the government seem to have started to address some of this (cynically I would say as the election that they’re highly unlikely to win is approaching), I feel that until this current government is removed from power domestic inflation will remain strong. What’s concerning about this is that this increases the OCR further, putting strain on the economy and increasing the Risk Free Cash Rate, making valuations lower. As an investor looking for reliable retirement income rather than a trader looking to make money on asset values, I used to think that asset values (i.e. share prices) didn’t matter if they dropped below what I paid. However, this can be a problem if I’m forced to sell such an asset (perhaps due to lack of performance) because I will basically decimate my income capacity. This is particularly a problem because the current governments policies are anti-business as well as inflationary – reducing the value of investments and increasing their risk contemporaneously. Therefore I have decided that I cannot invest any more money in NZ, at least until the government is changed and a recovery is assured.

This line of thinking has made me explore other options. Firstly in Australia because there are investment opportunities there that aren’t subject to FIF Tax law (one of the goals of my investing for the past few years has been to simplify my tax returns, which is one of the things that attracts me to investing in NZ and has caused me to avoid investing abroad despite the prospect of bigger returns – much to my disappointment!). The problem with Australian securities is that they are taxed in Australia, and then again in NZ. This means that they are 33% more expensive, making valuations highly unfavourable for me.

Secondly, this has caused me to re-research the FIF Tax laws to open up investment in US stocks. The problem with this is the tax basically taxes you on the assumption that you’re getting a 5% dividend – which means that income growth stocks (required for a retirement income to stay relevant to inflation) are over taxed and therefore not viable in a retirement income portfolio such as mine. The other option is essentially paying tax on theoretical (paper) gains based on the price at the start of the tax year vs the end of the tax year. While that sounds fairer, it means that as stocks grow in value (which they must to stay ahead of inflation, to be in a retirement income portfolio), I’d pay more tax that I could possibly earn in dividends. The only way to pay such a tax would be to have a cash reserve on a term deposit (basically un-invested and losing money in real terms) or sell a portion of my shares each year (a yearly loss in terms of the percentage of the companies I invest in and my relative position in the economy – aka inflation loss, of sorts).

At the moment I’ve decided to keep my debts down, holding my current course since my last strategy review. I will reassess the situation in the new tax year and as the inflation situation evolves. I’m concerned that NZ’s poor performance will force me to invest elsewhere, causing me to take my income from capital gains in US stocks taxed at a theoretical dividend rate (what the IRD calls the FDR option in the FIF Tax), at least until NZs economic and political environment become more friendly to businesses and investors.

How disappointing.


Why Cornerstone Investors Aren’t Justification For Qualifying An Investment

I had a chat with Bill from Snowball Effect a few years ago on the subject of cornerstone investors. It seemed to be his view at the time that having a cornerstone investor gives confidence to small investors that the investment is qualified (i.e. worth investing in on the same terms). I didn’t agree with this at the time, but I didn’t articulate my reasoning. I’ve given some thought to this and thought it might make a good subject for an article for the website.

In short, my logic is that an investment is only worthwhile if it fits in your portfolio. More than that however, the reason for fitting in your portfolio affects the valuation, which affects whether you should buy it or not.

Consider this: A very, very rich man may be more focused on protecting his wealth than amassing more. Therefore an investment that returns exactly the rate of inflation with no growth prospects, no way to get your money out and no way to fail would be the idea investment for such a person. That person may purchase a cornerstone shareholding and be very content with their investment.

Similarly a person saving for a house or trying to grow their savings into an early retirement might find this to be a very, very bad investment.

There are a number of other scenarios such as a cornerstone investor might be buying into an investment for leverage over a company to help one of their other investments. There are a number of other reasons a cornerstone investor might invest in something that is not copacetic to a small investors interests, but put simply, this is a common scenario why a cornerstone investor is not justification for investing, and you should always do your own research, planning and calculating.


My Thoughts On GameStop (NYSE.GME)

This is an old article that I started writing years ago, but never finished. I thought I’d wrap up the article and publish it partly to get it out my drafts list, but also because it may provoke some thoughts and ideas, which is rarely a bad thing.

Lewis Hurst

GameStop is massive in the news right now, and the average Joe is fighting back against big fund managers and their shorting. They’re calling it Wall Street vs. Main Street, but who’s the bad guy? I thought I’d share my alternative view of the situation.

What Is Happening?

Fund managers (and others) have taken a “short position” on GameStop (NYSE.GME), which makes money on the gamble that the stock value will go down. Put simply, a “short” is when you ask a broker if you can borrow stocks from them (usually at a fee), which you sell. At a later date, you then buy the stocks back and give them back to the broker. If the stock price went down after you sold, your buy-back price is lower, so you make the difference in money. If the stock went up in price since you sold, you will lose money when you finally buy back the stock to return the stock to the broker.

There is a lot of money to be made while shorting stocks, because you often borrow more than you can afford to buy, so your position is leveraged. The down-side is that you can also lose a lot of money if it goes wrong. The idea being that the difference between a buy and sell is coverable – which dictates how much you can leverage.

Shorting is not an unethical practice in itself, but there can be underhand stock market manipulation to ensure that the price goes down.

A band of Reddit users decided to start a campaign to get the general public to buy lots of GameStop shares to push the price up, so stock shorters lost money.

Who Is Losing?

These Reddit GameStop investors sit on a high horse as though they’re doing a good thing, beating “The Man”, but it’s more complicated than that. What they’re actually doing is stock market manipulation (morally questionable) and screwing over funds whose managers may or may not be unethically manipulating the market to support their shorting.

Unfortunately it’s not “The Man” who loses out here. Fund Managers get paid a lot when they win and less (still lots) when they lose. The real losers are those who invested in the funds that the Fund Managers look after. These can be anyone, which includes retirees, pension schemes of Joe Average (working and retired people) and anyone else who happens to have had their money in those funds.

Therefore, I’m not convinced that there’s anything ethically superior in what the Reddit investors are doing. In fact, I believe that what they are doing is the opposite.

Who Is Winning?

The thing about it is, GameStop are not a good company to invest in. They’re not performing well. Therefore owners of GameStop stock will on average lose money. With this type of manipulation going on, people who sell nearer peak prices will walk away with what is essentially other investors money. This isn’t ethical in my opinion, especially because those in the best position to do that are the people organising these Reddit threads because they’ll be the earlier investors in the manipulation. It’s basically a scam.

Probably the only winners (by group) would be the company (GameStop) itself. With an artificially high share price, it’s possible to do a capital raise (which from memory is what they ended up doing) to get lots of money for other endeavors, prolonging the lifespan of the company and the jobs of those involved and giving it a chance to do something different in the hopes of saving the entity.


When Will The Next Bull Start?

I’ve been thinking about when the next bull run could start, given the context of future events and how things could play out.

I should start by saying that I expect that there will be bull runs in different markets (such as the housing market) depending on things like the start of dropping of the OCR relative to the economy’s health. This article however, focuses on the alignment of events that will likely lead the world’s economy into the next prolonged bull market.

What got me thinking about this was the significant possibility that the Republicans (possibly lead by Trump) could take power in the next election (which I expect will be in 2024). A Republican win would herald a humanitarian disaster in Ukraine and triumph for Putin, given that:

  • Financial, humanitarian and military aid to the Ukraine from the USA dwarfs that of all other countries.
  • Trump supporters / Republicans don’t seem to be the sort of people to care about foreigners (they seem largely America-centric as per Trumps last campaigns) and don’t seem smart enough to understand the broader implications of foreign policy, never mind the complexity of how policies have come about and the effect of unwinding them.

That said, a Republican win in the mid terms would likely mean that Russia would be holding out for military defunding of Ukraine and a guaranteed prolonging of the war (if that’s not already his strategy anyway).

Fortunately it’s looking as though we don’t have to consider the above, as it looks like the Democrats may have seized it.

Economically speaking, I would expect that if America stopped funding Ukraine, this would result directly in a win for Putin, which would likely cause a return to normality for fuel and food inflation as the Ukraine suffered the new normal, whatever that may look like.

So it seems that despite my musings, we remain in no better position to predict future events than before. I have no answers for when the next bull market will break out. I will however suggest that the more things remain the same, the less will change.

That means more inflation to come, more OCR increases and more wage inflation until we hit a recession.

The best course of action seems to be to clear debt, invest sensibly (revise your financial models to consider inflation and personal risks, revise your goals, work out risk vs. reward requirements and investment allocations in your portfolio)… oh, and make sure you are highly employable to the labour market and not at risk where you currently work.


More Thoughts On Inflation

I read an article from The Guardian which reported high levels of people retiring early in their 50’s, based on stats from the ONS (the UK equivalent to Stats NZ).

I can definitely see why this would be a thing. I’m age 40 and ready to retire once I’ve managed to exit my largest private holding (so I can put the money into something that can give me a reliable income).

We’ve all enjoyed over a decade of bull markets throughout the developed world and people must be flush with cash and/or assets which can be deployed into an early retirement.

Interestingly, NZ’s low unemployment figures suggest that this phenomenon isn’t happening over here. Nevertheless, anecdotal evidence suggests that this is also happening in other countries, such as America.

This has got me thinking about inflation risk. Yes, sorry, I’m taking about inflation again, but you were warned in the title of this article and it’s the most significant financial thing happening at the moment which needs to be considered, planned for, and therefore predicted… hostilities with large trading partner countries coming a close second (a brief note on this at the bottom of this article).

Anyway, I have two thoughts on this at the moment.

Firstly I think that with a mass exodus of the employment pool, there will likely be high inflation resulting from inefficiencies (including restricted growth) due to lack of staff, leading to supply and logistics issues. We all know what that means. This will put pressure on GDP, which will make these countries poorer by this measure.

Secondly, due to affluent newly retirees with all that extra time to spend their permanent holiday money, this could put additional demand on economies.

In other words, I foresee additional pressure on both sides of the supply and demand diagram, which leads to higher prices and less supply. To rephrase that into non school of economics speak, on average people will have less money because things will cost more and people will have less things over time because less stuff is being made. In other words, we could be looking at really big inflation over a number of years.

This change of GDP profile also adds to my theory that the trading / industrial profile of such countries will change. For example, those countries whose GDP is mostly made up of financial products might change to be mostly made up of manufacturing products. Such a change would be very disruptive to employees being made redundant, retraining and taking lower wages as novices in their new fields in lower earning companies with less money to pay people. Foreign consultants with newly required skill sets could become the flavour of the day… though this will take along time to play out.

Finally, it’s worth a quick note to say that I will be reducing my exposure to business that rely on trade with countries that could potentially become hostile and are not politically well aligned.

I feel like the coming years will be very difficult to pick long term investments in, due to the volatility, with lots of opportunities for mistakes. I suspect agile investors could be in a position to make a lot of money. This does not bode well for my aim to have minimal effort managing my portfolio and tax.