Friday, June 26, 2009

Celebrity Deaths

This week the entertainment business lost three famous people – Michael Jackson, Farrah Fawcett and Ed McMahon. Someone once told me that celebrity deaths tend to come in threes, and this week is another example of this. I am not going to spend much time discussing their passing, but I do wish to send my condolences to their families. Celebrity deaths affect us so much because we feel like we really know these people; like they are a real part of us. I, for one, have enjoyed the work of all three of these people over the years. But as I read the obituaries, I was struck with one very harsh reality – the entertainment business is extraordinarily competitive and “what have you done for me lately” is a huge part of it. Longevity in the entertainment business is hard to come by (unless you’re Mick Jagger or Christopher Lee).

And this leads to today’s musing about the investment business. Unlike some professions where a person may be engaged in a project that starts, has a middle, and then ends, being a professional investor means your work is never through. Luckily, the markets are not open throughout the weekend, but Barron’s comes every Saturday so we can keep thinking about the key issues which occupy our minds during the working week. I am not complaining at all; this is the life I chose and I love it. It’s just that I am acutely aware (as are all professional investors, I suppose) that I am always thinking about the markets, obsessing on how I can perform better and worrying about what’s going to happen in Tokyo while I am asleep.

There is also a very strong “what have you done for me lately” aspect in this business as well. When a stock I buy goes up, I feel somewhat vindicated that all my hard work in researching, analyzing and actually buying the stock has paid off. Yet, unless I sell that stock and move on, every new day brings the potential for some unforeseen and unexpected event that could drive the stock down. It is not necessarily random, but it is an adventure in probabilities and some things simply cannot be avoided (the Black Swans, if you will). Right or wrong, up or down, I am applying the same level of analysis and dedication to each and every fund and stock I work on. My approach does not change and I clearly do not view my worth as an investor simply by how well my stocks have done in the last few months (last few years, yes).

Client reactions can also follow this “what have you done for me lately” mentality. Some folks who were questioning my judgment, experience and perhaps even sanity back in March, now view me much more favorably. What’s changed? I had the investment equivalent of a hit song or movie. Performance has been very strong lately. Part of this near-term success was due to my making very hard, contrarian and seemingly “crazy” decisions earlier in the year. Part of it was simply sticking to my guns when the consensus was suggesting that all past investment principles had been declared null and void. Part of it was simply the law of the harvest (you reap what you sow) as it applies to the investment process.

I feel a modicum of self-satisfaction as I wave modestly to the crowds, but I know full well that after the applause dies down, I will have to get back in the trenches and dig harder to find those choice nuggets amid all the dirt. It’s a dirty job, but hey, someone’s got to do it…

Wednesday, June 17, 2009

Are You Being Served?

I am amazed at how much time and effort goes into media reporting about the capital markets. The vast array of Internet, print and broadcasting coverage is truly astounding. We can now enjoy (if that is indeed the right word), 24/7 coverage of all the markets and all the factors that influence them. Every day we can see periodic updates on commodities, bond prices, economic data, government press releases, currency rates, and on and on. An investor might look at all of this coverage and data and reasonably conclude that he or she is pretty well served by all of this. After all, there must be demand for this kind of stuff, otherwise why would they keep churning it out?

But is the investor really being well served?

It seems to me that capital market reporting falls into two basic areas: 1) Here is what happened and 2) Here is what the experts think about this. Whether it’s an earnings release, market trend (higher commodity prices, etc.) or some kind of event (a bankruptcy, for example), the media is all over this “news” with commentary and analysis.

Regarding 1) -- Call me old fashioned, but I thought the stock market was supposed to discount future events and trends. In theory, what is happening right now should have been discounted by the market weeks or even months ago. This is often the reason that when a company reports earnings below (for instance) consensus, the stock can actually rise on that “news.” Sometimes the market is truly surprised by some news and this is probably worthy of the attention it gets. Trouble is, the media seems to struggle with which items are real surprises and which are really already known by the market. The other big issue I have with most of the commentary I hear from the media, is that it rarely puts the event or news item in any kind of investment context. Great, the unemployment number was X – but how does this number fit into the recent trend? Are there details in the other numbers (beside the headline ones) of the report which may provide some insight as to what the numbers are really suggesting? What is the bond market saying about this number? What about the forex market? Why was this number 25% below the lowest estimate from among all the 76 people providing estimates for it (this was true for the May 2009 jobs number)?

Regarding 2) – Where do they get these people? It seems the media can always find some “expert” to ruminate on any given topic, no matter how big or small, arcane or mainstream, controversial or commonplace. More often than not, this “expert” will be the person with an opinion or outlook quite far away from the consensus -- the average is boring, no? At least in the media’s view… So, inevitably, this person’s viewpoint and forecast will often contain a high degree of error attached to it (mathematically, this has to be true, if this person’s opinion is far from the consensus; it could prove to be correct, but statistically, the odds would be lower). Often, the media will line up an investment professional (trader, mutual fund portfolio manager, analyst, etc.) to comment on some trend or stock.

Now let me ask a very direct question – why would someone appear on television and offer, for free, a value-added opinion that could help some make money in the market, when this person has clients who will pay for that opinion? Other than the answer that comes from an old Eagles song (… it’s a certain kind of fool who likes to hear the sound of his own name”), I would argue that NO ONE would do that. In my experienced (and obviously cynical) opinion, these folks are SELLING SOMETHING! It may be that they want you to buy a stock they already own. It may be that they want to you to be impressed with their searing intellect and buy their fund. It may be they are just amassing face time which will help them sell their next book. Whatever the motivation, I think it is safe to say that the interests and needs of the individual investors listening to their story may not be at the top of their priority list.

I have always thought that investment advice is worth what you pay for it. Those offering free advice have no fiduciary responsibility, cannot offer opinions appropriate for the needs of specific investors and are not accountable in any way for their opinions. You certainly would not buy a used car from a person who had this kind of freedom from consequence. Why would you ever buy a stock based on this kind of opinion?

Wednesday, June 10, 2009

Backs Turned Looking Down the Path

Now that I am no longer operating full time in “crisis management” mode, I thought it might be instructional to look back and reflect on this things I did during the last nine months, which, in case anyone might wonder, has been the most challenging period in my career. This exercise will represent a debriefing, if you will -- an attempt to look back objectively at what happened, how I responded to what happened and what I might have learned from the experience.

Let me start by explaining what I did not do:

1) I did not sell stocks in October 2007, which turned out to be the peak of the market. At that time, the market did not exhibit any of the excesses we generally associate with market peaks. The excesses were located squarely in the housing and credit markets. I had no specific information showing how leveraged the banks and brokers were, nor how this leverage would spill over into the stock market and the general economy. Past bubbles had burst without threatening the entire global financial system. It was not obvious that bursting this one would have that impact.

2) I did not sell stocks to hold cash at any time during this period. I am not a market timer, and I don’t think anyone can do this successfully over time.

3) I did not abandon my long-held personal investment philosophy. It has worked for many decades and I suspect it will work for more decades to come.

4) I did not panic.


Here are a few things I did that I think served me well:

1) By October, I recognized that the situation had quickly deteriorated and that the markets had stopped functioning in a normal fashion. Once the VIX (CBOE Volatility Index) broke the 40 level (which had for years been its peak), I felt that the market could become very volatile. When Lehman Brothers fell and the credit markets seized up, the real trouble began. Still, I had personally experienced the Crash of 1987 and the Long-Term Capital Crisis of 1998, and so I truly felt that we could ride through this one as well. I kept analyzing companies and tried my best to assess the value of stocks – this is my training; this is what I do. Sitting around worrying about what might happen is never a productive activity.

2) By November, I was buying stocks. One of the downsides of being a value investor is that you rarely ever own the stocks everyone loves to talk about – the new and shiny ones with great stories and sex appeal. It’s kind of like driving a Ford Focus when everyone else is driving BMWs. However, starting in November many of the BMWs were going for prices usually associated with Fords. So, compelled by the value I was seeing, I began to nibble at not just the beat-up value stocks, but many of the growth names I had never owned before. The valuations were more compelling that the uncertainty about the future.

3) By early March, I was stubbornly holding my ground. By this time, every single “doom and gloomer” was in full froth mode, telling anyone who would listen (everyone in media, it seems) that the world was truly ending. The January through March decline was very hard for me – the reasons for the decline were even harder for me to understand – the VIX was down and the capital markets were once again working. Why was the market still going down? Was it mostly driven by retail selling? Mutual fund redemptions? Hedge Fund deleveraging? Maybe someday someone will write a book with definitive answers. I did not know that March 9th was the bottom, but I did feel that retail investor panic was peaking that week.

4) I kept working. Go back and read my blogs from February and March. In them you can see that I was closely following the events of the day and trying my hardest to make sense of it all. The best paragraph (in my humble opinion) of the month was this one from my March 9th post:

“Unless ‘this time is different’ (still the four most dangerous words in the investment business, in my view), the stock market will begin climbing the proverbial wall of worry, long before the talking heads will be able to tell us that the recovery has begun.”

Crises, panics and manias are always hard to deal with, but they are absolutely the natural product of open capital markets. No amount of legislation can prevent them. The best way to deal with them, in my opinion, is to 1) understand the risks associated with the markets, 2) understand your investment time horizon and 3) develop a personal investment philosophy that can support and sustain you during the hard times. The last nine months have been a huge challenge, and lots of people have lost a great deal of wealth. But, I firmly believe the only pathway leading to any hope of recovering that wealth will take us directly through the middle of the stock market. Once again.