Turning Trash into Treasure (Part 1)
A case study of Waste Management Inc.
Trading on Margins
I bought my first stock with margin back when I was 17, and it was Waste Management, Inc (WM). The stock price went up quite a bit after a few weeks and I sold a profit for around S$230. I re-invested all the money on buying other margins and I lost all of it in one week. Since then, I never traded with margins again. The idea of “Margin Trading” is fairly simple, but it simply doesn’t work.
Here’s how it works:
Karen has 10 dollars. Felix has 3 dollars.
Felix to Karen: Hey, can I borrow 10 Dollars, I’ll pay you back 11 next week.
(sounds like a good idea to Karen, of course, 10% return in one week)
Karen: Sure.
Felix then buys 100 bolts for 10 dollars.
A few days later, the price of Bolts falls and it was worth 9 dollars.
Karen being a careful woman and observes the price of bolts.
Karen: Are you fucking Nuts!! Give me back the money right now!!!!
Felix being the loaner have the obligation to sell the bolts and pay 11 dollars to Karen.
Karen did no lose anything so she decided to tell her sister about the deal. So her sister Emily decided to do the same with other people with more money. However, when the price goes down, everyone has to sell, and even drives the price more down until no one have enough money to buy. All the Karens’ (P**s 500) and Emilys’ starts to panic.
To put it into words,
When you trade with margins, you are allowed to take loans from other people to trade more securities than you actually own. However, if the securities experience a cascading downfall, you will be faced with a “Margin call”, which means you have to put in your own money to show the lender that you can at least pay back some amount and maintain the position of your securities. However, if you can’t meet the margin call, you will be forced to liquidate your position and the lender will sell off all your securities and you will incur a great loss. In addition, what’s worse is that once the margin securities have rise back to the original position, you would experiencing what’s called “Whipsawed”.
Anyways,
The only reason that I bought the margin stock of Waste Management Inc in the beginning was under two simple underlying assumption: “Globalisation” and “Growing Economy”. I would consider myself quite lucky back then as I didn’t even know how to read balance sheets or cash statements, the only thing I understood was it’s a good day when stock price goes up and if it has been going up for a while, there’s just a slight chance that it will continue to go up. The stock of Waste Management Inc seemed like a fluke back then, but after 4 years (time flies), it caught my eyes agin. This time, it sure isn’t a fluke.
Growing Economy
If you have absolutely no sense of Economics except for supply and demand, think of this. More money in the economy means more spending, more spending means more waste. More waste means more money for the waste business.
Growing Economy = More money for the waste business.
At first glance it probably seem logical for you, but as an individual with an avid interest in philosophy and critical thinking, this looks like “Post hoc ergo propter hoc”; basically assumptions of causality have been made about the premises. This is a very crucial mistake that many investors make when they simply trade on assumptions filled with logical fallacies.
So let’s examine the causality of the premises.
The environmental Kuznets curve
When I was researching stocks related to waste management, I encountered a journal article called “The Relationship between Economic Growth and Municipal Solid Waste & Testing the EKC Hypothesis: Analysis for Saudi Arabia, by Reema Ghazi Alajmi of Swansea University”. The main attraction of the article was their examination of the relationship between economic growth and municipal solid waste (MSW). Their findings were tested with multiple models of correlation tests and provided a significant correlation between the variables. In addition, the model also validated the inverted U-Shape of the Kuznet’s curve.
Here’s how it works,
In general, economic growth increases municipal waste generation.
But, according to the EKC (Environmental Kuznet’s curve) there’s a turning point.
The turning point occurs when the country is at the peak of the industrial era, and declines during the post-industrial era where the service sectors become the prominent factor for the economy. We are currently living in the industrial society as we are able enjoy many services for our own convenience.However, household wastes increases accordingly with the increasing rate of urbanisation. People living in cities purchase groceries packed in plastics, eat fast food in paper bags, wipe off spills with tissues, etc. You get the idea.
Land on Earth is limited unless we get hit by a giant meteorite or some geological movement of the plaques. However, humans can always choose to make babies and move into cities for a more convenient life. In order to accommodate an ever increasing population with limited space, governments must come up with more solutions to be more efficient and lean; so methods of waste management will have a high probability to continue to evolve in the upcoming future. Thus, I believe there will be two turning point in the post-industrial society, where waste becomes a problem, and lean methods of waste management is implemented.
This prediction will only be validated in the future, but if it happens, you heard it here first.
Globalisation
Globalisation is phenomena that we all witness in our everyday life. From the rapid flow of information to consuming goods produced from another country; our lives have been made easier with the growth of globalisation. One of the great benefits of globalisation is international trade and the theory of comparative advantage. Due to the global trade agreements, we are able to consume goods that are made by another country more efficiently with less use of natural resources. However, this means that not only the goods flow from country to country, but so is the waste associated with the consumption of the good. In addition, international trade also allows goods to be produced with cheaper costs, and price of products can be purchased with a lower price. Therefore, our ability to consume strengthens as our purchasing power increase. From buying toys made in China, shoes made in India, to furniture from Ikea. All these purchases create solid waste once the life of these products expire.
This is where waste management come in and take care of all the solid wastes created by households.
In Part 2, I will explain how the business of Waste Management works, and how they make a living with treating household solid wastes.
Urbanisation
Furthermore, I would like to add a third factor to the increased amount of wastes generated by cities in the world.
I believe Urbanisation is the nuclear bomb to the environment. A simulation game called “City Skylines” is a perfect example of how cities is like an artificial meteoroid on the environment. Roads are built we can travel with ease and sustain our lives with agricultural products produced else where. Skyscrapers are built to maximise land use. Water infrastructure are constructed to ensure the lives of the inhabitants. One important thing to take into account is the word “Construction”. It shouldn’t take you long to realise that the building and maintenance of a city creates “Construction and demolition debris” that can be collected and recycle for reuse.
Nature has its own ways of re-establishing the eco-system by occurring wild forest fires, the debris often return nutrients to the soil by burning dead or decaying matters and create a ground to sustain the next generation of eco-systems. As humans, we also do this artificially in urbanised areas by demolition old buildings. The debris of demolition can be recycled and reused, and since there is a finite lifetime of buildings, there are always periodic business in recycling the debris and sell it for reuse.
To conclude,
Waste is the only thing that we create, yet we hate. It’s like a previous bad relationship, you loved it while you’re in it, but you hate it once it’s done. The lesson learned here is that we should not dismiss and forget about past relationships, but treat it like a lesson and continue to learn form it. The more we study about wastes, the more we can minimise waste. It’s a problem that continuously to evolve and solutions will have to modify and change in order to tackle the problem. Which means there will be endless opportunities as long as we don’t give up.
