One of the truths about investing is that to invest is to make mistakes. I am not suggesting that investing is an avoidable mistake. We have no choice but to invest our time, talents, and capital. The reason we have no choice is that these resources already exist in some form and if we do not change them, we are reinvesting them in their present forms. Innately, humans and animals instinctively know that our resources will deteriorate and perhaps disappear over time. Thus, we choose to do something with our resources. For most of us, we have no choice but to invest or attempt to improve our condition.
How we choose to invest is primarily a function of our experience. Our experience is not just what we individually have lived through, but also what we have consciously learned through the experiences of others with whom we choose to identify. Whether we like it or not, one of the inputs to our experience is our own DNA. This DNA is composed of elements of human race characteristics and more directly, family background. This is not to say that since there have been four separate (and not connected) Lipper brokerage firms, that for all time members of my family are condemned to be members of the New York Stock Exchange. What it does suggest is that we have a disposition to be attracted to transactions and services for others who transact. These tendencies can be applied to the various worlds of art and computer services among others. Luckily for the world, people are wired differently so we can find essential diversity in what we do. For the most part, our experience, no matter how formed, does not trap us into certain behavior, despite our propensities. Thus, as we enter each new theater of experience, we either treat what we are about to do as something new, or part of a continuum from the past.
Experienced investors, or if you will, old money, invest differently than those with new money. Each of us is human, and therefore makes mistakes; but often the mistakes of old money are different than the mistakes of new money.
Most of the old money that I know did not materially change the disposition of their financial assets after the experience of the last couple of years, even though their money piles are smaller. Their “normal” asset distribution might have been 5% in cash, 35% in bonds, 20% in domestic growth stocks or funds, 20% value stocks or funds and 20% international stocks. At the end of last year they may have had over 60% in cash and fixed income, 15% in value-oriented stocks or funds, 15% in international and 10% invested with a growth objective. An experienced investor believing that almost all relative performance is cyclical, might not change any commitments. For what the market takes away it will return over time. Further, from their experience, they believe after a major decline they should not change most managers or stocks of currently profitable companies. Old money has an affinity to long term records as they have had their money over the long term. They also generally prefer investing with organizations rather than in the success of any particular CEO or money manager. Thus, they chalk up the declines they have experienced as just a “normal’ cyclical decline which will be corrected by a “normal” recovery followed by some secular growth. In many ways this is almost a Newtonian view of a grand watchmaker overseeing our universe.
Owners of new money are full of themselves. They earnestly believe that their investment results are largely, if not totally, dependent upon themselves. They look at the current market always as an opportunity to show how bright they are relative to the mistakes of others. This personality-driven approach often identifies with specific hero CEOs or hot money managers. A somewhat over-simplification of their choices is that they believe in participating, if not leading momentum. Everyone recognizes that at any given time there are numerous unknowns that are likely to dramatically impact security prices and trends. If momentum won’t supply the answer, the new money is more likely to divine the right answers. They have more tools, or if you prefer gadgets, than the old money players and this give them an almost insurmountable advantage.
In these stylized cases, both the old money and the new money are making fundamental investment mistakes that others have committed in the past. Old money is betting on repetition, as in history repeats itself. If that was entirely true there would be no progress, as everything would circle back to our beginning point. In truth, history does show an uneven upward bias to the human condition and valuations. What many do not realize is that the upward bias is caused at least in part by the abandonment of failed, or too weak to survive, elements; as well as the pull of some new potential riches. Further progress is made by recognizing mistakes/opportunities. In the “old money” asset allocation example shown above, some wise investors might reallocate their money back to their “normal” portfolio. (There may be a seldom-declared advantage to this tactic: By increasing one’s commitment to a currently depressed area, if successful, the quicker one will get to the upper limit of the allocation causing a cut-back. One of the reasons for the dramatic declines in numerous portfolios last year was their over-investment in what was “hot” was not automatically corrected.)
New money often does not recognize that what is working so well now is very similar to similar beneficiaries of momentum in past market cycles. One of the many lessons coming out of the Great Depression of the 1930s was the peril of the extreme use of leverage or margin in the 1920’s by various utility holding companies, the great Goldman Sachs Trading Company and individual investors. Applying those lessons from the ancient past might have reduced the 2008 losses in various leveraged vehicles.
Both the stereotypical old money investor and the new money investor do not take into their considerations that they may be wrong. Their “system” like those of many disappointed race track bettors, does not contemplate that judgment mistakes are as normal as other accidents. Both set of investors can reduce their odds on big individual mistakes of judgments by using professionally sound funds. (Caveat Emptor: I manage portfolios of funds for institutions and a very limited number of individuals.) One might combine both the old money and new money approaches (using the asset allocation example above), by reweighting the equity portion of the account in favor of growth stocks or funds as momentum appears to be picking up in that direction. Another example of combining the lessons from these two habit patterns is taking the view that in terms of high-quality fixed income, it appears unlikely that interest rates will drop materially and therefore the capital appreciation potential from this particular segment is limited, and thus the commitment to high quality fixed income should be below “normal.”
Which kind of an investor are you old or new?
Sunday, October 4, 2009
Sunday, September 27, 2009
Seven Steps For Giving to Charities
At this time of year snail-mail and email carry an extra heavy burden of pleas to give money to any number of mostly worthy charitable causes. Due to various disclosure documents and/or if your zip code is in one of the higher income tax payment districts, one certainty is that any charitable giving this year will generate many more requests next year. These requests will come from the same group to which you gave, but also many others who learn (or guess) that you are good for a contribution.
My Seven Steps for Giving to Charities:
1. The first step is to have a CHARITABLE GIVING PLAN. There will be more urgent pleas for your money than all of your resources. (As Mark Antony was quoted by Shakespeare in Julius Caesar, “They are all honorable men.”) This plan could encompass this year or future years. Due in part (and only, in part) to high “death taxes,” charitable giving is an important part of many people’s estate plans.
As with any plan, writing the first plan is the most difficult. The writer or if you prefer the professional term, the grantor, is often paralyzed by trying to think of every conceivable element to the plan. This paralysis usually prevents the production of a plan. As one who has drawn up many business and organization plans, I recognize that the first step is a commitment to plan. Experienced planners know that plans are meant to be revised over time. Nevertheless, if shared with one’s attorney, the first plan can become one of the foundations of an estate plan with a good chance of doing what the grantor intended. As one matures in the art of preparing and revising charitable giving plans, there may be comfort in discussing the plan with selected beneficiaries, now and in the future.
2. TRANSFERRING RESOURCES is similar to an equation. On one side are the resources. Most often cash or securities are deducted from one’s total and added to one or more charities. The motivation for the transfer is triggered by a belief there is a benefit from the transfer. This benefit is often difficult to measure or even define. In some cases the benefit is best summed up by the phrase, “A warm feeling.” I suggest one should be a little more precise in identifying the benefits.
The first benefit is that the specific charity can accomplish a favored endeavor that it could not do at all, or as well, without the contribution. The next possible benefit is that the charity’s work relieves others of an additional requirement that would have to be funded. (Perhaps improved educational opportunities that help children lead a productive life rather than increased taxes for incarceration.) There can be a personal benefit, other than a tax deduction, e.g. helping children learn a trade or a business that is needed for a well- functioning society. We need more plumbers, landscapers, and bookkeepers as well as classically-trained musicians, among many other skill sets. One of the benefits for giving money away wisely is to teach other, younger members of the family how to help others.
An important part of your charitable giving plan is to identify and understand the benefits of charitable giving.
3. GET TO KNOW THE ORGANIZATION. Many charities will treat contributions they receive as “manna from heaven,” and spend the money as they see fit. There are a large number of horror stories of various charities spending money that was intended for various forms of “good works” on themselves in the forms of compensation, facilities, and entertainment. Others have used money to influence the political process. Some contributions have been diverted to favored commercial activities. While each of these is improper and possibly illegal, the biggest waste of contributors’ resources is through inefficiencies or outright mismanagement. People who work in the non-profit world, in general, are attracted because they have faith in the good works of their particular charities. Often, but not always, they lack management skills and training. Quite often they are short in financial and investment skills. In dealing with these types of concerns, one should compare the size of one’s intended gift relative to the size of the organization.
I believe, if one is intending to become an important contributor to a charity, it would be wise to get involved as a volunteer. For a few non-profits, my principal contribution is to be a member, or chair, of their investment or finance committee. Over time what I can save for them (or earn for them) is much larger than my initial contribution. (I urge my children to follow a similar pattern for any non-profits that have an interest in helping.)
Your charitable giving plan should take into consideration not only your cash contributions, but other resources, most importantly the time being given. Unfortunately, a number of worthy causes are organizations that are not well managed.
4. UNDERSTAND WHAT YOU ARE SUPPORTING. Once one begins to show any sort of sincere interest in a non-profit, one quickly learns of its projects, programs and policies.
Projects typically spend money today or in the near future to accomplish a mission by a certain given date. Think of a new YMCA facility, a specialized hospital wing, or dormitory. Each of these requires an estimated amount of money to be spent on a specific funding schedule. Some of these projects require cash up-front; some require cash to meet progress payments due to contractors and others may require long-term financing for mortgages or equity for the charity.
Programs are often a continuous activity of involvement, with the people the charity sees as its audience. Most often, this takes the form of providing education or medical services to a community that can not afford to pay for these needed services. Instead of brick and mortar spending, program spending is mostly about paying people to work with those in need. “As the poor will always be with us,” the funding needs will almost always be with us. However, the size of the funding support can change based on the flow of contributions and perception of the immediate need.
Policies often deal with the charity’s desire to change the world. This may entail focusing public opinion on a need or attending to a problem. In working toward this goal, interacting with various levels of government is required. This activity is labeled “educating the government,” not specifically lobbying. While the mission of most charities won’t change, their policies can change slowly or dramatically depending on visibility and the political focus.
Understand what you choose to support; projects, programs, or policies. Each can have different funding needs and opportunities.
5. UNDERSTAND THE DIFFERENCES BETWEEN TRADITIONAL CHARITIES vs. MORE VENTURE DRIVEN CHARITIES. Many of the new-multi millionaires have generated their wealth quickly from being involved early in successful companies funded along the way by various venture capitalists. With their newly-achieved fortunes, they want to use the methods that made money for them when they invest in non-profits. I use the term “invest” intentionally, as this is their attitude. They look for a clear mission statement, which appears do-able. They want to see capable management in place, or at least specifically identified. They expect a timetable with specific milestones. Further, they want to see the same level of intensity in the non-profit that they “invest in” as they employed in building their fortunes. Since many made their money in new companies, often they favor new charities. But do not expect them to work their way through the various seats on a board of directors/trustees in the traditional path before they become the anointed leaders!
Understand the differences the way established charities work versus the more venture driven new charities and determine where your comfort level is.
6. MEASURE THE RESULTS. We live in a results-driven world. One of the elements of a well- thought out plan is the measurement of results. Many charities publish self-congratulatory annual reports which trumpet their perceived successes, and the even larger needs facing them. These are like other corporate annual reports or fund reports, which give one side of the story. An intelligent grantor should come up with his/her expectations and measurement yardsticks. In assessing the relative success of a potential gift, one should include personal benefits. For example, listening to great concerts, meeting interesting people, or gaining a deeper understanding of important factors about the community. If other family members have benefitted from these experiences that is also important.
In very human terms, we should periodically measure our efficiency in giving as well as living.
7. SELF-CORRECT. The final stage in any business plan or charitable-giving plan is the feed-back loop so corrections can be made and errors of judgment corrected. Facts believed will prove to be incorrect. One’s knowledge of what is important, will evolve. All of these elements should lead to the next edition of our charitable giving plan.
__________
*One of the advantages of publishing a blog is that I receive feedback. Often some of the most insightful comments are from my family. The topic of this week’s blog was suggested by my writer son, Don, who believes that some multi-millionaires need help in thinking through their gifts to charities. Thanks, Don.
My Seven Steps for Giving to Charities:
1. The first step is to have a CHARITABLE GIVING PLAN. There will be more urgent pleas for your money than all of your resources. (As Mark Antony was quoted by Shakespeare in Julius Caesar, “They are all honorable men.”) This plan could encompass this year or future years. Due in part (and only, in part) to high “death taxes,” charitable giving is an important part of many people’s estate plans.
As with any plan, writing the first plan is the most difficult. The writer or if you prefer the professional term, the grantor, is often paralyzed by trying to think of every conceivable element to the plan. This paralysis usually prevents the production of a plan. As one who has drawn up many business and organization plans, I recognize that the first step is a commitment to plan. Experienced planners know that plans are meant to be revised over time. Nevertheless, if shared with one’s attorney, the first plan can become one of the foundations of an estate plan with a good chance of doing what the grantor intended. As one matures in the art of preparing and revising charitable giving plans, there may be comfort in discussing the plan with selected beneficiaries, now and in the future.
2. TRANSFERRING RESOURCES is similar to an equation. On one side are the resources. Most often cash or securities are deducted from one’s total and added to one or more charities. The motivation for the transfer is triggered by a belief there is a benefit from the transfer. This benefit is often difficult to measure or even define. In some cases the benefit is best summed up by the phrase, “A warm feeling.” I suggest one should be a little more precise in identifying the benefits.
The first benefit is that the specific charity can accomplish a favored endeavor that it could not do at all, or as well, without the contribution. The next possible benefit is that the charity’s work relieves others of an additional requirement that would have to be funded. (Perhaps improved educational opportunities that help children lead a productive life rather than increased taxes for incarceration.) There can be a personal benefit, other than a tax deduction, e.g. helping children learn a trade or a business that is needed for a well- functioning society. We need more plumbers, landscapers, and bookkeepers as well as classically-trained musicians, among many other skill sets. One of the benefits for giving money away wisely is to teach other, younger members of the family how to help others.
An important part of your charitable giving plan is to identify and understand the benefits of charitable giving.
3. GET TO KNOW THE ORGANIZATION. Many charities will treat contributions they receive as “manna from heaven,” and spend the money as they see fit. There are a large number of horror stories of various charities spending money that was intended for various forms of “good works” on themselves in the forms of compensation, facilities, and entertainment. Others have used money to influence the political process. Some contributions have been diverted to favored commercial activities. While each of these is improper and possibly illegal, the biggest waste of contributors’ resources is through inefficiencies or outright mismanagement. People who work in the non-profit world, in general, are attracted because they have faith in the good works of their particular charities. Often, but not always, they lack management skills and training. Quite often they are short in financial and investment skills. In dealing with these types of concerns, one should compare the size of one’s intended gift relative to the size of the organization.
I believe, if one is intending to become an important contributor to a charity, it would be wise to get involved as a volunteer. For a few non-profits, my principal contribution is to be a member, or chair, of their investment or finance committee. Over time what I can save for them (or earn for them) is much larger than my initial contribution. (I urge my children to follow a similar pattern for any non-profits that have an interest in helping.)
Your charitable giving plan should take into consideration not only your cash contributions, but other resources, most importantly the time being given. Unfortunately, a number of worthy causes are organizations that are not well managed.
4. UNDERSTAND WHAT YOU ARE SUPPORTING. Once one begins to show any sort of sincere interest in a non-profit, one quickly learns of its projects, programs and policies.
Projects typically spend money today or in the near future to accomplish a mission by a certain given date. Think of a new YMCA facility, a specialized hospital wing, or dormitory. Each of these requires an estimated amount of money to be spent on a specific funding schedule. Some of these projects require cash up-front; some require cash to meet progress payments due to contractors and others may require long-term financing for mortgages or equity for the charity.
Programs are often a continuous activity of involvement, with the people the charity sees as its audience. Most often, this takes the form of providing education or medical services to a community that can not afford to pay for these needed services. Instead of brick and mortar spending, program spending is mostly about paying people to work with those in need. “As the poor will always be with us,” the funding needs will almost always be with us. However, the size of the funding support can change based on the flow of contributions and perception of the immediate need.
Policies often deal with the charity’s desire to change the world. This may entail focusing public opinion on a need or attending to a problem. In working toward this goal, interacting with various levels of government is required. This activity is labeled “educating the government,” not specifically lobbying. While the mission of most charities won’t change, their policies can change slowly or dramatically depending on visibility and the political focus.
Understand what you choose to support; projects, programs, or policies. Each can have different funding needs and opportunities.
5. UNDERSTAND THE DIFFERENCES BETWEEN TRADITIONAL CHARITIES vs. MORE VENTURE DRIVEN CHARITIES. Many of the new-multi millionaires have generated their wealth quickly from being involved early in successful companies funded along the way by various venture capitalists. With their newly-achieved fortunes, they want to use the methods that made money for them when they invest in non-profits. I use the term “invest” intentionally, as this is their attitude. They look for a clear mission statement, which appears do-able. They want to see capable management in place, or at least specifically identified. They expect a timetable with specific milestones. Further, they want to see the same level of intensity in the non-profit that they “invest in” as they employed in building their fortunes. Since many made their money in new companies, often they favor new charities. But do not expect them to work their way through the various seats on a board of directors/trustees in the traditional path before they become the anointed leaders!
Understand the differences the way established charities work versus the more venture driven new charities and determine where your comfort level is.
6. MEASURE THE RESULTS. We live in a results-driven world. One of the elements of a well- thought out plan is the measurement of results. Many charities publish self-congratulatory annual reports which trumpet their perceived successes, and the even larger needs facing them. These are like other corporate annual reports or fund reports, which give one side of the story. An intelligent grantor should come up with his/her expectations and measurement yardsticks. In assessing the relative success of a potential gift, one should include personal benefits. For example, listening to great concerts, meeting interesting people, or gaining a deeper understanding of important factors about the community. If other family members have benefitted from these experiences that is also important.
In very human terms, we should periodically measure our efficiency in giving as well as living.
7. SELF-CORRECT. The final stage in any business plan or charitable-giving plan is the feed-back loop so corrections can be made and errors of judgment corrected. Facts believed will prove to be incorrect. One’s knowledge of what is important, will evolve. All of these elements should lead to the next edition of our charitable giving plan.
__________
*One of the advantages of publishing a blog is that I receive feedback. Often some of the most insightful comments are from my family. The topic of this week’s blog was suggested by my writer son, Don, who believes that some multi-millionaires need help in thinking through their gifts to charities. Thanks, Don.
Sunday, September 20, 2009
WRONG-HEADLINE RISK
The frequency of similar financial headlines today tell us much more about current perceptions than future risks and opportunities. This misaligned focus has been true ever since there has been financial gossip emanating from market places. Instead of deriding these calls for attention, we should array these headlines in a reasonably normal progression from total collapse to a glorious future, as a indication of where we are in a normal progression.
Beginning in the fall of last year and through the first quarter of 2009, great concern was expressed as to the closing down and liquidation of financial and industrial enterprises. While Lehman Brothers is in various forms of liquidation, no other large scale enterprise has been closed putting almost all of its employees out of work. Many employees are still drawing paychecks from corporations that are working their way through bankruptcy and other arrangements to restructure their debts. Analysts are now celebrating companies that are generating cash. (Note the cash is before various non-cash charges such as depreciation to pay for the costs of past capital expenditures including, in some instances, acquisitions.)
The next series of headlines will be when companies like the auto makers actually earn a full net income, albeit probably not accruing income taxes due to past losses. At this point we are likely to see equity offerings from the auto companies as a way to pay back the government (us). Soon we may see reports suggesting that even if there is another leg down in the economy, various companies have developed survival earnings that can keep their doors open in a decline. (Many companies world-wide are probably there today.)
After surviving in a defensive bunker, we will see an increase in the number of analytical reports that will declare various stocks are cheap in that they are selling at relatively low multiples of earnings power. As most analysts and most management are not good at estimating future earnings, they will rely on the past. Earnings power will be determined as the average earnings per share developed over the last five or ten years. The thought is that the future, on average, won’t be a great deal different than the past.
The more venturesome investors will look at the very best earnings, or perhaps margins, achieved in the past and declare that stock prices are real cheap when compared to the past. While they do not come out and say it, they are hinting that most market indexes will accede to their old highs. (This would suggest a doubling or more for NASDAQ, and even more for Japanese securities.)
For corporate managements contemplating meaningful capital expenditures, they need to deal with payback periods of five to twenty-five years. To give a go ahead for such spending, they probably need to see net cash generation growth on the order of 15% or more. We are actually seeing those kinds of commitments being made selectively in mining and pharmaceutical companies.
There are some unreconstructed optimists that believe that there will be other large scale developments that will generate massive earnings power as has the Internet and cell phones in the past twenty-five years. (I am awaiting a list of these opportunities from you, the readers of this blog.)
The popular fears that accompany each step in this progression from a bear market collapse to a bubble bull market are unlikely to materialize because too many are expecting it, and have already made some preparations. The progression from bear to bull won’t be smooth with regular steps up. There will be falls along the way for geopolitical disturbances, fraud, forced liquidations of visible capital positions handled poorly, and disappointments in people, products and services.
Less than a year after the point of feared liquidations of employment and capital, I look at the long term horizon positively. Do you?
Beginning in the fall of last year and through the first quarter of 2009, great concern was expressed as to the closing down and liquidation of financial and industrial enterprises. While Lehman Brothers is in various forms of liquidation, no other large scale enterprise has been closed putting almost all of its employees out of work. Many employees are still drawing paychecks from corporations that are working their way through bankruptcy and other arrangements to restructure their debts. Analysts are now celebrating companies that are generating cash. (Note the cash is before various non-cash charges such as depreciation to pay for the costs of past capital expenditures including, in some instances, acquisitions.)
The next series of headlines will be when companies like the auto makers actually earn a full net income, albeit probably not accruing income taxes due to past losses. At this point we are likely to see equity offerings from the auto companies as a way to pay back the government (us). Soon we may see reports suggesting that even if there is another leg down in the economy, various companies have developed survival earnings that can keep their doors open in a decline. (Many companies world-wide are probably there today.)
After surviving in a defensive bunker, we will see an increase in the number of analytical reports that will declare various stocks are cheap in that they are selling at relatively low multiples of earnings power. As most analysts and most management are not good at estimating future earnings, they will rely on the past. Earnings power will be determined as the average earnings per share developed over the last five or ten years. The thought is that the future, on average, won’t be a great deal different than the past.
The more venturesome investors will look at the very best earnings, or perhaps margins, achieved in the past and declare that stock prices are real cheap when compared to the past. While they do not come out and say it, they are hinting that most market indexes will accede to their old highs. (This would suggest a doubling or more for NASDAQ, and even more for Japanese securities.)
For corporate managements contemplating meaningful capital expenditures, they need to deal with payback periods of five to twenty-five years. To give a go ahead for such spending, they probably need to see net cash generation growth on the order of 15% or more. We are actually seeing those kinds of commitments being made selectively in mining and pharmaceutical companies.
There are some unreconstructed optimists that believe that there will be other large scale developments that will generate massive earnings power as has the Internet and cell phones in the past twenty-five years. (I am awaiting a list of these opportunities from you, the readers of this blog.)
The popular fears that accompany each step in this progression from a bear market collapse to a bubble bull market are unlikely to materialize because too many are expecting it, and have already made some preparations. The progression from bear to bull won’t be smooth with regular steps up. There will be falls along the way for geopolitical disturbances, fraud, forced liquidations of visible capital positions handled poorly, and disappointments in people, products and services.
Less than a year after the point of feared liquidations of employment and capital, I look at the long term horizon positively. Do you?
Sunday, September 13, 2009
Who are Better Equipped
to Make Decisions?
History often seems to be a tale of decisions made by many versus those made by few. Humans recognize that the results of various decisions can turn out poorly for us individually. In search to improve the odds, we crave some form of central authority. In the distant past, people invested these roles of all-knowing and all-powerful in external forces, supported by strong religious beliefs. In more modern times, we have substituted various forms of governments to play the role of God on Earth. The question is, what level of authority should we invest in the government to make critical decisions for us?
After reading the above paragraph, you are preparing yourself for a long polemic about healthcare and the other issues of the day. What follows is about portfolio management, much lighter, but perhaps more immediately meaningful for many investors.
When we seek advice, traditionally we seek “experts.” While various governmental or trade associations require those who put themselves out as “experts” to have passed various examinations about a generally accepted body of knowledge and codes of ethics in dealing with clients, none of these exams measure the success of picking the correct investments. As a very poor substitute for this measure of success, so called “track records” are proffered. As the early developer of one of the largest and most accurate data banks on investment companies (popularly known as mutual funds), I urge caution in the application of these “track records.” The data shown is point to point, is flat and has a lack depth or narrative. For example, earlier this week I was discussing with an associate the search for a new technology focused fund to add to a specific portfolio. My associate suggested a relatively new fund that is managed by a manager who had a very good record in the distant past when technology stocks were flying. I demurred, for I distinctly remembered that the fund in question benefitted from the buying power of its group to load up on “hot” IPOs, between quarterly statements. There are many other examples of important factors that are not captured within performance records.
Worse than an ordinary expert, is a well-known expert or a minor celebrity. I experienced that treatment in my own home Saturday night. Ruth and I were hosting a cocktail party for friends who had recently returned from their honeymoon. The party included many of their long-time friends, some we did not know.
Allow me to make a composite of several conversations. The composite couple (not the newlyweds) had very impressive positions at learned institutions. They wanted a brief shopping list as to where they should invest their money. There was not much discussion as to any of the factors what would go into a proper prescription to their needs.
I found this ironic. While we did not talk current politics with our guests that evening, I am under the impression that they believe that healthcare decisions should be left almost exclusively in the hands of the medical/scientific community, for they are the only ones equipped with the knowledge of what worked in the past (most of the time) and through appropriate diagnosis of a patient, select what would be medically the best solution. They understood the individualized need of the patient but not the investor.
In such situations, some might provide a “school solution.” This approach calls for 30% in money market or other high quality short term funds, 10% in somewhat longer term funds of intermediate investment grade quality bonds, 20% in international or global funds, 20% in domestic-oriented growth funds spread by market capitalization, and the final 20% in large domestic valued oriented stock funds. The advantage of the school solution is that many will adhere to it. Disclosure point: None of the accounts that we manage would follow the exact school solution, as it would not fit their needs.
The school solution would be authoritative, not because I said it, but it is close to the overall mutual fund industry taxable composite.
In the world of investments, be wary of all experts, particularly celebrities. Central authorities lead eventually to unstable conditions, as other solutions prove to be more beneficial for many.
After reading the above paragraph, you are preparing yourself for a long polemic about healthcare and the other issues of the day. What follows is about portfolio management, much lighter, but perhaps more immediately meaningful for many investors.
When we seek advice, traditionally we seek “experts.” While various governmental or trade associations require those who put themselves out as “experts” to have passed various examinations about a generally accepted body of knowledge and codes of ethics in dealing with clients, none of these exams measure the success of picking the correct investments. As a very poor substitute for this measure of success, so called “track records” are proffered. As the early developer of one of the largest and most accurate data banks on investment companies (popularly known as mutual funds), I urge caution in the application of these “track records.” The data shown is point to point, is flat and has a lack depth or narrative. For example, earlier this week I was discussing with an associate the search for a new technology focused fund to add to a specific portfolio. My associate suggested a relatively new fund that is managed by a manager who had a very good record in the distant past when technology stocks were flying. I demurred, for I distinctly remembered that the fund in question benefitted from the buying power of its group to load up on “hot” IPOs, between quarterly statements. There are many other examples of important factors that are not captured within performance records.
Worse than an ordinary expert, is a well-known expert or a minor celebrity. I experienced that treatment in my own home Saturday night. Ruth and I were hosting a cocktail party for friends who had recently returned from their honeymoon. The party included many of their long-time friends, some we did not know.
Allow me to make a composite of several conversations. The composite couple (not the newlyweds) had very impressive positions at learned institutions. They wanted a brief shopping list as to where they should invest their money. There was not much discussion as to any of the factors what would go into a proper prescription to their needs.
I found this ironic. While we did not talk current politics with our guests that evening, I am under the impression that they believe that healthcare decisions should be left almost exclusively in the hands of the medical/scientific community, for they are the only ones equipped with the knowledge of what worked in the past (most of the time) and through appropriate diagnosis of a patient, select what would be medically the best solution. They understood the individualized need of the patient but not the investor.
In such situations, some might provide a “school solution.” This approach calls for 30% in money market or other high quality short term funds, 10% in somewhat longer term funds of intermediate investment grade quality bonds, 20% in international or global funds, 20% in domestic-oriented growth funds spread by market capitalization, and the final 20% in large domestic valued oriented stock funds. The advantage of the school solution is that many will adhere to it. Disclosure point: None of the accounts that we manage would follow the exact school solution, as it would not fit their needs.
The school solution would be authoritative, not because I said it, but it is close to the overall mutual fund industry taxable composite.
In the world of investments, be wary of all experts, particularly celebrities. Central authorities lead eventually to unstable conditions, as other solutions prove to be more beneficial for many.
Sunday, September 6, 2009
Monday, August 31, 2009
Searching for Innovations
My muse was resting over the weekend, thus this blog was a bit delayed.
In last week’s blog I was describing the search for meaningful innovation as one of the approaches to find true “growth stocks.” Luckily for me and my investors, I have the ability to frequently discuss scientific breakthroughs with Dr. Philip Neches and other fellow members of the Caltech Board of Trustees. Application of science is another way to find innovations that will change the commercial balance of power. As with many of my ideas, they are not new and often they have been used before in mutual funds around the world. Years ago there was fund which, in theory, invested exclusively in electricity. Initially they invested in electrical power producers and some utilities. As time went on, many of the electrical power producers merged, and utilities became unattractive investments. The portfolio managers broadened the list of acceptable stocks, eventually reaching the conclusion that any company that used electricity was a candidate. While the managers’ conclusion may have been a too wide an application, the principle is the father of my thought process today.
Before I discuss certain applications of technology to everyday experience, I believe it is important to share my views as to why innovation is so important today. In classical economics, one of the rationales for the cyclical nature of economies’ progress is that the declines were to reduce or eliminate the excesses. Though most attention is being paid to leverage as the cause for the current decline, I suggest there were a number of other excesses. Under the cover of rising revenues, numerous companies over-hired. This was understandable, as hiring is always a gamble as to whether the candidate really fits the critical need of the organization. In addition, employee welfare services expanded. In the subsequent decline, a good number of these jobs were eliminated, yet many of the chastened employers now recognize that while they eliminated the jobs, some of the needs remain. This is exactly the type of environment where innovation can, and often needs, to flourish.
Even during the current period of low interest rates (and therefore low float value), extensive work is being conducted on payment systems. This work is impacting securities markets, commercial markets, international markets and markets that individuals use. The drive for all of these efforts is not primarily to capture float, but to improve the collection of credit. (I am told by one of my sons that the difference between a good small bank and one that gets in trouble is the speed its collection system can identify problems.) Since much of the work done in the payment systems world is machine rather human-based, productivity goes up.
One of the more intriguing insights to the payment system world is being practiced by a very large retailer who was denied a banking license, yet is providing a bill payment service for individuals. Many, but not all of the customers for this service are already customers of the store. The essence of a bill paying system is the optimum timing of paying bills. This concept is very sophisticated for people of all wealth strata, but particularly for those who shop in low-end stores. We have known throughout history that some people of limited means are very good money managers. (Hopefully, they will be the next generations’ bankers.) The intriguing question is: Can we get a larger portion of the people with limited resources to become better money managers? If bill paying services open the way, the impact on this country’s long term financial status will be incredibly improved.
Other examples of innovation are the uses of hand-held devices. On a recent trip to visit the wise people in Boston, the woman boarding the plane ahead of me displayed her Blackberry which had her boarding pass on its screen. The attendant used her optical card reader wand and the woman was processed through the gate faster than those of us with computer printed paper. If more passengers could be processed this way, labor would be saved and boarding time reduced. Imagine the benefit when a flight is cancelled and rapid rebooking becomes necessary.
These are just a few examples of innovative applications. We need to find others that can impact publicly traded stocks and fund portfolios. We will probably find these more in small caps and micro caps than in large caps.
Any thoughts?
In last week’s blog I was describing the search for meaningful innovation as one of the approaches to find true “growth stocks.” Luckily for me and my investors, I have the ability to frequently discuss scientific breakthroughs with Dr. Philip Neches and other fellow members of the Caltech Board of Trustees. Application of science is another way to find innovations that will change the commercial balance of power. As with many of my ideas, they are not new and often they have been used before in mutual funds around the world. Years ago there was fund which, in theory, invested exclusively in electricity. Initially they invested in electrical power producers and some utilities. As time went on, many of the electrical power producers merged, and utilities became unattractive investments. The portfolio managers broadened the list of acceptable stocks, eventually reaching the conclusion that any company that used electricity was a candidate. While the managers’ conclusion may have been a too wide an application, the principle is the father of my thought process today.
Before I discuss certain applications of technology to everyday experience, I believe it is important to share my views as to why innovation is so important today. In classical economics, one of the rationales for the cyclical nature of economies’ progress is that the declines were to reduce or eliminate the excesses. Though most attention is being paid to leverage as the cause for the current decline, I suggest there were a number of other excesses. Under the cover of rising revenues, numerous companies over-hired. This was understandable, as hiring is always a gamble as to whether the candidate really fits the critical need of the organization. In addition, employee welfare services expanded. In the subsequent decline, a good number of these jobs were eliminated, yet many of the chastened employers now recognize that while they eliminated the jobs, some of the needs remain. This is exactly the type of environment where innovation can, and often needs, to flourish.
Even during the current period of low interest rates (and therefore low float value), extensive work is being conducted on payment systems. This work is impacting securities markets, commercial markets, international markets and markets that individuals use. The drive for all of these efforts is not primarily to capture float, but to improve the collection of credit. (I am told by one of my sons that the difference between a good small bank and one that gets in trouble is the speed its collection system can identify problems.) Since much of the work done in the payment systems world is machine rather human-based, productivity goes up.
One of the more intriguing insights to the payment system world is being practiced by a very large retailer who was denied a banking license, yet is providing a bill payment service for individuals. Many, but not all of the customers for this service are already customers of the store. The essence of a bill paying system is the optimum timing of paying bills. This concept is very sophisticated for people of all wealth strata, but particularly for those who shop in low-end stores. We have known throughout history that some people of limited means are very good money managers. (Hopefully, they will be the next generations’ bankers.) The intriguing question is: Can we get a larger portion of the people with limited resources to become better money managers? If bill paying services open the way, the impact on this country’s long term financial status will be incredibly improved.
Other examples of innovation are the uses of hand-held devices. On a recent trip to visit the wise people in Boston, the woman boarding the plane ahead of me displayed her Blackberry which had her boarding pass on its screen. The attendant used her optical card reader wand and the woman was processed through the gate faster than those of us with computer printed paper. If more passengers could be processed this way, labor would be saved and boarding time reduced. Imagine the benefit when a flight is cancelled and rapid rebooking becomes necessary.
These are just a few examples of innovative applications. We need to find others that can impact publicly traded stocks and fund portfolios. We will probably find these more in small caps and micro caps than in large caps.
Any thoughts?
Sunday, August 23, 2009
ARE WE GAMBLING TOO MUCH
AND SPECULATING TOO LITTLE?
As some of you already know, I count the race track as one of the two leading educational institutions in my life. (The United States Marine Corps is the other.) The essence of successful handicapping at the track rests primarily on integrating two important variables. The first is the selective past performance of races, parts of races, and workouts under similar track conditions for each horse in a race. For younger colts and fillies, breeding plays a role in the absence of sufficient race history. The second statistical measure to be integrated is the odds that are currently being quoted or calculated for Win (first), Place (second), and Show (third). These are compared with the handicapper’s own belief as to what the proper odds should be. This way of thinking and intense studying essentially looks for a return to some past result which we consider to be normal. One could say this approach is an exercise in selective extrapolation. I would suggest that this gambling. Gambling that some part of the past will repeat itself.
Examine most of the “sage” comments on today’s economy and markets. (Very little of what I read these days looks forward to a distant time horizon.) The focus is a return to normal or the "new normal." The essential belief is the past foretells the future. A security may be “cheap” because its valuation is below some other point in its history.
The size of the recent declines and the destruction of numerous market mechanisms are perhaps similar to the period in American history between the 1920s up through WW II. In my opinion, we have closed an era of excessive demand without the ability to pay for it.
There is a difference between gambling and speculating. Gambling, as I indicated, is essentially reworking the past to find a difference between the current compared with a selected past. Speculation is looking forward and trying to predict the future.
I recently visited Sacramento’s “Old Town” with my youngest grandsons and their parents. My son pointed to the highest structure, a platform over a merchant’s store, and commented that it was a good example of successful speculation. From his high perch, this enterprising merchant was the first to see the oncoming arrival of a ship coming up the river. My son guessed that the vessel carried merchandise for the town, probably items in short supply. Upon the ship’s arrival, the prices for these items would drop. With this sole knowledge, the merchant could immediately lower the prices of his current merchandise, saving his business from the significantly lower price realizations expected to occur as a result of the ship’s deliveries.
Curiously, I did not see similar viewing platforms in the town. Thus, I concluded the speculation worked more than once. This merchant was following the literal definition of the word’s Latin roots: to look ahead.
While speculating is much more difficult than gambling on various elements of history to repeat itself, the returns on successful speculating are likely to be much greater.
Successful speculation can be a result of the following elements:
Many of these searches/speculations are being carried out by large companies who will benefit from being early. However, the big winners are likely to be smaller, or mid-sized companies.
Unfortunately, I am not seeing portfolios being built on these types of speculations. As analysts, perhaps we need to be spending more time with directors of research, marketing planning staff, and purchasing agents rather than just the financial and investor relations people. In many ways, this was how I used to follow companies. The rewards to investing in these speculations are greater than investing in the general economy.
If any of you see a future trend that is radically different from those of the past, please share them with me. I always appreciate sound examples of fresh thinking for the investment accounts for which I am responsible.
Examine most of the “sage” comments on today’s economy and markets. (Very little of what I read these days looks forward to a distant time horizon.) The focus is a return to normal or the "new normal." The essential belief is the past foretells the future. A security may be “cheap” because its valuation is below some other point in its history.
The size of the recent declines and the destruction of numerous market mechanisms are perhaps similar to the period in American history between the 1920s up through WW II. In my opinion, we have closed an era of excessive demand without the ability to pay for it.
There is a difference between gambling and speculating. Gambling, as I indicated, is essentially reworking the past to find a difference between the current compared with a selected past. Speculation is looking forward and trying to predict the future.
I recently visited Sacramento’s “Old Town” with my youngest grandsons and their parents. My son pointed to the highest structure, a platform over a merchant’s store, and commented that it was a good example of successful speculation. From his high perch, this enterprising merchant was the first to see the oncoming arrival of a ship coming up the river. My son guessed that the vessel carried merchandise for the town, probably items in short supply. Upon the ship’s arrival, the prices for these items would drop. With this sole knowledge, the merchant could immediately lower the prices of his current merchandise, saving his business from the significantly lower price realizations expected to occur as a result of the ship’s deliveries.
Curiously, I did not see similar viewing platforms in the town. Thus, I concluded the speculation worked more than once. This merchant was following the literal definition of the word’s Latin roots: to look ahead.
While speculating is much more difficult than gambling on various elements of history to repeat itself, the returns on successful speculating are likely to be much greater.
Successful speculation can be a result of the following elements:
- Changes in demographics in any large consumer market.
- Major discoveries in the fields of energy or curative medicine.
- Significant productivity advances in the production, delivery and consumption of goods and services.
- Technological break-throughs.
- More effective advertising through old and new media.
Many of these searches/speculations are being carried out by large companies who will benefit from being early. However, the big winners are likely to be smaller, or mid-sized companies.
Unfortunately, I am not seeing portfolios being built on these types of speculations. As analysts, perhaps we need to be spending more time with directors of research, marketing planning staff, and purchasing agents rather than just the financial and investor relations people. In many ways, this was how I used to follow companies. The rewards to investing in these speculations are greater than investing in the general economy.
If any of you see a future trend that is radically different from those of the past, please share them with me. I always appreciate sound examples of fresh thinking for the investment accounts for which I am responsible.
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