Jason Zweig wrote this Wall Street Journal article a few months back on algorithmic trading programs or "algos":
An algo doesn't know or care why two assets are moving together; it merely is programmed to recognize that they are doing so. As soon as a computer places bets that such a linkage in prices will persist, other traders—computers and humans alike—tend to take note and follow suit. That can be true, Mr. Simons says, whether or not a correlation is driven by fundamental economic factors.
Market systems are about effective and timely capital formation and allocation. Making sure dollars meet the best ideas and are there to support/develop productive assets and useful capabilities.
"When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done." - John Maynard Keynes
Today, a whole lot of brainpower and talent focuses their energy on creating algorithms designed to game the capital development system.
The result is a less than optimal system with increased frictional costs that distracts some of the best and brightest from doing more useful things.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
Friday, February 4, 2011
Thursday, February 3, 2011
Yacktman Portfolio: Big Cap Household Names
Donald Yacktman and his team have a very solid long-term track record. Over the past ten years the cumulative return of the S&P 500 is 15% while both of the Yacktman Funds (YAFFX & YACKX) are up more than 200% over the same time frame.
At the end of the most recent quarter, Yacktman continued to hold and build positions in large capitalization stocks that are household names. These are relatively concentrated portfolios with ~35-40% in the top 5 stocks depending on the fund.
Top 5 Holdings
1 News Corp (NWSA)
2 Pepsi (PEP)
3 Coca-Cola (KO)
4 Microsoft (MSFT)
5 Procter & Gamble (PG)
So 3 of the top 5 are consumer staples. There's also minimal exposure to financials with only 1 bank in the top 25 (U.S. Bancorp: USB). Here are some thoughts on technology stocks from the Yacktman Funds 4Q 2010 Letter:
Technology
Last year the technology index rose more than 10%, however a few of the larger, more established companies like Microsoft and Cisco Systems declined. The technology sector typified the general investment environment last year, where more "exciting" stories generally performed better than more stable, established value. We think that will reverse sometime soon.
Microsoft's shares declined modestly last year even though the company produced exceptional operating results. Today the shares sell at about 10 times earnings and free cash flow per share after netting out excess cash on the balance sheet. We believe Microsoft has solid growth ahead and its shares are extremely inexpensive.
In the fourth quarter, we purchased a small position in Cisco Systems, another former tech‐bubble darling which now has a value‐priced stock. Since 2000, Cisco's shares have fallen more than 75% from their peak even though the sales and earnings per share of the business have more than doubled. The company has a strong balance sheet and solid management and sells for approximately 12 times 2011 earnings after adjusting for net excess cash.
At the very least, it's worth noting that value-oriented managers like Yacktman (who wouldn't touch a tech stock a decade ago due to extreme overvaluation) are moving into the Microsoft's and Cisco's of the world.
Adam
Long positions in PEP, KO, MSFT, and PG
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
At the end of the most recent quarter, Yacktman continued to hold and build positions in large capitalization stocks that are household names. These are relatively concentrated portfolios with ~35-40% in the top 5 stocks depending on the fund.
Top 5 Holdings
1 News Corp (NWSA)
2 Pepsi (PEP)
3 Coca-Cola (KO)
4 Microsoft (MSFT)
5 Procter & Gamble (PG)
So 3 of the top 5 are consumer staples. There's also minimal exposure to financials with only 1 bank in the top 25 (U.S. Bancorp: USB). Here are some thoughts on technology stocks from the Yacktman Funds 4Q 2010 Letter:
Technology
Last year the technology index rose more than 10%, however a few of the larger, more established companies like Microsoft and Cisco Systems declined. The technology sector typified the general investment environment last year, where more "exciting" stories generally performed better than more stable, established value. We think that will reverse sometime soon.
Microsoft's shares declined modestly last year even though the company produced exceptional operating results. Today the shares sell at about 10 times earnings and free cash flow per share after netting out excess cash on the balance sheet. We believe Microsoft has solid growth ahead and its shares are extremely inexpensive.
In the fourth quarter, we purchased a small position in Cisco Systems, another former tech‐bubble darling which now has a value‐priced stock. Since 2000, Cisco's shares have fallen more than 75% from their peak even though the sales and earnings per share of the business have more than doubled. The company has a strong balance sheet and solid management and sells for approximately 12 times 2011 earnings after adjusting for net excess cash.
At the very least, it's worth noting that value-oriented managers like Yacktman (who wouldn't touch a tech stock a decade ago due to extreme overvaluation) are moving into the Microsoft's and Cisco's of the world.
Adam
Long positions in PEP, KO, MSFT, and PG
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Wednesday, February 2, 2011
Grantham: Weak Force Becomes a Monster
From Jeremy Grantham's latest quarterly letter:
"...quality stocks were not only the least expensive, they were also the least risky, often a formidable combination."
He later added...
"Our sustained heavy overweight in quality stocks in 2009 was painful, intellectually and otherwise. Our pain in 2010 was more 'business as usual,' waiting for the virtues of value to be revealed. The saving grace is that, although value is a weak force in any single year, it becomes a monster over several years. Like gravity, it slowly wears down the opposition."
He later added...
"Our sustained heavy overweight in quality stocks in 2009 was painful, intellectually and otherwise. Our pain in 2010 was more 'business as usual,' waiting for the virtues of value to be revealed. The saving grace is that, although value is a weak force in any single year, it becomes a monster over several years. Like gravity, it slowly wears down the opposition."
Examples of what Jeremy Grantham probably means by "quality stocks" can be found in one of his asset management firm's mutual funds conveniently named GMO Quality III (GQETX).
Clearly, a professional money manager like Mr. Grantham has to worry about yearly performance since clients may leave before the long-term strategy even gets a chance to work.*
A long-term oriented investor that manages his/her own money doesn't have this problem. For those who are in a situation with no short term pressure for returns, it's actually better if the quality stuff continues to underperform since:
Excess capital can be used by the company's management to reduce share count whenever the share sell below intrinsic value (to the benefit of remaining owners...a cheaper stock means less capital needed for each share bought back). It also allows the true long-term owners to buy more of the business on the cheap over time.
The result for the owners that hang in there is a bigger portion of an economic pie. If it's more than a decent business that economic pie should increase in size as it compounds in value. The stock price will take care of itself as the strong force of long run economics take hold.
"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." - Warren Buffett
Today's investment culture is obsessed with short-term price movements by "renters". As far as I'm concerned, the only time one should care what the "renters" are doing is when they gain enough influence on the price of a stock to push it to extremes in either direction. In other words, it's time to sell even a very good business at, let's say, something like 80x earnings -- a 1.25% earnings yield -- as odds are capital can be deployed at higher returns/lower risk elsewhere.
At the other extreme, even a decent business bought at 8x earnings -- a 12.5% earnings yield -- can produce a good result.
For me, investing in stocks comes down to:
1) owning, with a margin of safety, a portion or all of an understandable business that has durable economics (high return on capital, a wide economic moat etc),
At the other extreme, even a decent business bought at 8x earnings -- a 12.5% earnings yield -- can produce a good result.
For me, investing in stocks comes down to:
1) owning, with a margin of safety, a portion or all of an understandable business that has durable economics (high return on capital, a wide economic moat etc),
2) monitoring those factors that could cause the economic moat to shrink or get permanently damaged (regulations, technology shifts etc),
3) evaluating whether widening the moat is a priority for the management team that's in place (and whether they have the competence to widen it).
"We think in terms of moats that are impossible to cross, and tell our managers to widen their moat every year, even if profits do not increase every year." - Warren Buffett at the 2000 Berkshire Hathaway (BRKa) Annual Meeting
and
4) judging how wisely capital is being allocated over time.
Otherwise, allow the magic of compounding to work.
Adam
Long BRKb
Long BRKb
* Jeremy Grantham talks about what he calls "career risk" in part 2 of the latest letter. From the letter: "Career risk drives the institutional world. Basically, everyone behaves as if their job description is 'keep it.' [John Maynard] Keynes explains perfectly how to keep your job: never, ever be wrong on your own. You can be wrong in company; that's okay." This tends to drive market prices well above and below reasonable valuations. Mr. Grantham and other investment professionals had to deal with this dynamic head on during the dot-com bubble. At that time, some pros rightly resisted the herd but were "rewarded" by client redemptions. They just didn't "get" the "new paradigm" or at least that's what much of the herd seemed to be thinking. Only after the fact is it usually clear who "gets it".
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Tuesday, February 1, 2011
Buffett: Profiting from Lack of Change
"I don't try to profit from the Internet. But I do want to understand the damage it can do to an established business. Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it's the lack of change that appeals to me. I don't think it is going to be hurt by the Internet. That's the kind of business I like." - Warren Buffett
Top 3 Brands: Apple, Google, & BMW
Not surprisingly, Apple (AAPL) is at the top according to this Fortune article with Google (GOOG) in second and BMW coming in third. The rankings come from a 56-page "Brand Desire" report recently issue by the Clear marketing division of M&C Saatchi:
Other brands in the top ten include:
4 Disney (DIS)
5 WWF (World Wildlife Fund)
6 Sony
7 Mercedes
8 Rolex
9 Nintendo
10 Microsoft (MSFT)
So according to this one survey: cool devices, search engines, cars, and cartoons rank higher than nature conservation.
Oh, and with Disney specifically, it's apparently cartoon animals over the real ones.
Adam
Long AAPL, GOOG, and MSFT
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
Other brands in the top ten include:
4 Disney (DIS)
5 WWF (World Wildlife Fund)
6 Sony
7 Mercedes
8 Rolex
9 Nintendo
10 Microsoft (MSFT)
So according to this one survey: cool devices, search engines, cars, and cartoons rank higher than nature conservation.
Oh, and with Disney specifically, it's apparently cartoon animals over the real ones.
Adam
Long AAPL, GOOG, and MSFT
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
Monday, January 31, 2011
Shades of the Dot-Com Bubble
This recent Barron's article on Salesforce.com (CRM) makes the following point:
- The stock trades at 300 times earnings
- There's been a sharp rise in expenses
- Shares outstanding has been growing
- Earnings look less than inspiring when looked at using generally accepted accounting principles (GAAP)
- The stock trades at 300 times earnings
- There's been a sharp rise in expenses
- Shares outstanding has been growing
- Earnings look less than inspiring when looked at using generally accepted accounting principles (GAAP)
It's always difficult to predict when a speculative stock's valuation will normalize.
Once you get the kind of valuation CRM has more often than not the time it takes to correct is measured in years, not months. A clearly overvalued stock will often just get more overvalued before those willing to play the greater fool game are done with it. So, on the surface, it would seem there's plenty of time to play the speculative game. Many actually try to time (some succeed, most don't, but either way the winner is the "croupier") getting out before the other speculators head for the door.
Once you get the kind of valuation CRM has more often than not the time it takes to correct is measured in years, not months. A clearly overvalued stock will often just get more overvalued before those willing to play the greater fool game are done with it. So, on the surface, it would seem there's plenty of time to play the speculative game. Many actually try to time (some succeed, most don't, but either way the winner is the "croupier") getting out before the other speculators head for the door.
For me, stuff like this has always fell into the category of AVOID.
Here's why.
Here's why.
Occasionally, this kind of stock will actually even justify what seemed like an inflated valuation. In that specific case, the investor took a huge risk over time by buying at an inflated multiple, in the long run turned out to be right, and ended up breaking even. Sometimes, an exceptional situation like Apple (AAPL)* comes along. Most of the time, if you play in the inflated multiple arena you need to get the trading right or you lose. In any case, if you pay something like a 100x earnings multiple for a stock, huge risks of permanent capital loss are being taken compared to the potential rewards. It's a game where the odds are against the participants but if you can control for those losses it may work out.
For me, there's too much risk of permanent loss of capital. When you avoid the big losses in investing, the gains take care of themselves. It's a simple mathematical truth that percentage gains and losses have an asymmetrical impact on wealth:
- Lose 60% on a stock and an investor needs to make 150% on the next one to break even
- Lose 70% on a stock and an investor needs to make 233% on the next one to break even
It all goes downhill quickly from there. Also, it's wise to keep in mind the adverse affects caused by loss aversion.
In contrast, if you buy a durable business at a fair multiple of earnings, the core economics will determine your long-term outcome. No timing or trading skills required. A good business with durable economics bought below intrinsic value and a stock that happens to go down from the price paid is not a problem for the long-term investor. The core economics will still drive your returns over the long run even if what you see on the quote screen looks a little ugly.
In fact, as a long-term owner, the cheap stock will just serve to juice returns via buybacks.
In fact, as a long-term owner, the cheap stock will just serve to juice returns via buybacks.
Adam
Long position in AAPL established at lower than recent prices. No position in CRM.
* Apple's stock, even with all the appreciation, is actually still not that expensive: Roughly 12-15x. At times during the past decade Apple may have seemed somewhat expensive (though nothing like Salesforce.com) but, with the clarity of hindsight, was certainly not. Those who can predict what Apple has been able to accomplish beforehand deserve big returns.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Long position in AAPL established at lower than recent prices. No position in CRM.
* Apple's stock, even with all the appreciation, is actually still not that expensive: Roughly 12-15x. At times during the past decade Apple may have seemed somewhat expensive (though nothing like Salesforce.com) but, with the clarity of hindsight, was certainly not. Those who can predict what Apple has been able to accomplish beforehand deserve big returns.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Friday, January 28, 2011
Bogle: A System Destined to Fail
In this SmartMoney interview, Bogle says that in a ~13 percent stock market...
-the average mutual fund earns 10 percent
-the average mutual fund investor earns 6.5 percent
From the interview:
"And I haven't even talked about taxes, which take out another 100 basis points.... That's pretty stunning. This never would've happened if not for the greatest bull market in history. Managers' fees didn't matter because it didn't feel like you were being cheated.
People understand the magic of compounding returns. But few investors know about what I call the tyranny of compounding costs.... You put up 100% of the capital and take on all the risk, but you get only 20-something percent of the return. That's a system that is destined to fail. People will not be that dumb forever."
Let's hope not. In the example above, it would seem like the average mutual fund investor will earn half as much as the overall market (13 percent versus 6.5 percent). It's actually worse than that. When you take into account compounding effects, the average mutual fund investor actually ends up with more like less than one fourth as much money over 25 years.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
-the average mutual fund earns 10 percent
-the average mutual fund investor earns 6.5 percent
From the interview:
"And I haven't even talked about taxes, which take out another 100 basis points.... That's pretty stunning. This never would've happened if not for the greatest bull market in history. Managers' fees didn't matter because it didn't feel like you were being cheated.
People understand the magic of compounding returns. But few investors know about what I call the tyranny of compounding costs.... You put up 100% of the capital and take on all the risk, but you get only 20-something percent of the return. That's a system that is destined to fail. People will not be that dumb forever."
Let's hope not. In the example above, it would seem like the average mutual fund investor will earn half as much as the overall market (13 percent versus 6.5 percent). It's actually worse than that. When you take into account compounding effects, the average mutual fund investor actually ends up with more like less than one fourth as much money over 25 years.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Lynch: Investing is Art, Not Science
"Investing in stocks is an art, not a science, and people who've been trained to rigidly quantify everything have a big disadvantage." - Peter Lynch
Thursday, January 27, 2011
Fear, Hope, & Greed
From Jeffrey Saut's most recent Minyanville article:
...if an investor began buying one dollar's worth of the SPX at the end of September 2007, and continued to purchase one dollar's worth of the SPX at the end of each month until year-end 2010, the dollar-cost averaged performance is about 15.4% (excluding commissions) over that 40-month period.
Saut then points out that those who did not dollar-cost average had a roughly 18% loss...
That's a whopping 33% out-performance if our fictional investor had been able to conquer their fear and had employed a dollar-cost averaging strategy. Regrettably, there's the "rub."
Ladies and gentlemen, while it's true over the long term that it's all about earnings, in the short to intermediate term the stock market is fear, hope, and greed only loosely connected to the business cycle.
Well said, Mr. Saut.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
...if an investor began buying one dollar's worth of the SPX at the end of September 2007, and continued to purchase one dollar's worth of the SPX at the end of each month until year-end 2010, the dollar-cost averaged performance is about 15.4% (excluding commissions) over that 40-month period.
Saut then points out that those who did not dollar-cost average had a roughly 18% loss...
That's a whopping 33% out-performance if our fictional investor had been able to conquer their fear and had employed a dollar-cost averaging strategy. Regrettably, there's the "rub."
Ladies and gentlemen, while it's true over the long term that it's all about earnings, in the short to intermediate term the stock market is fear, hope, and greed only loosely connected to the business cycle.
Well said, Mr. Saut.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
Tuesday, January 25, 2011
Beware the Buyback Craze
In this recent post (and several others), I've highlighted how much Buffett likes buybacks when a company comfortably has the financial resources and a stock selling clearly below intrinsic value.
By making repurchases when a company's market value is well below its business value, management clearly demonstrates that it is given to actions that enhance the wealth of shareholders, rather than to actions that expand management's domain but that do nothing for (or even harm) shareholders. - Warren Buffett in the 1984 Berkshire Hathaway (BRKa) Shareholder Letter
While Buffett has articulated on many occasions how much he likes buybacks under the right circumstances, historically Buffett has not felt it necessary to allocate any of Berkshire Hathaway's capital toward buybacks.
By making repurchases when a company's market value is well below its business value, management clearly demonstrates that it is given to actions that enhance the wealth of shareholders, rather than to actions that expand management's domain but that do nothing for (or even harm) shareholders. - Warren Buffett in the 1984 Berkshire Hathaway (BRKa) Shareholder Letter
While Buffett has articulated on many occasions how much he likes buybacks under the right circumstances, historically Buffett has not felt it necessary to allocate any of Berkshire Hathaway's capital toward buybacks.
Here's where it gets a bit tricky. Consider this Barron's article. The evidence seems to show that companies have a tendency to buy high.
Some highlights of points made in the article:
- Buybacks are often done during the good times when company's have lots of cash and stocks are expensive. The article also points out that the biggest buyback year ever was 2007 at $ 863 billion (according to research firm Biryini) when stocks were peaking.
- Buffett called most buybacks in recent times "foolish"; companies were paying too much.
- Buybacks are often done during the good times when company's have lots of cash and stocks are expensive. The article also points out that the biggest buyback year ever was 2007 at $ 863 billion (according to research firm Biryini) when stocks were peaking.
- Buffett called most buybacks in recent times "foolish"; companies were paying too much.
- Buybacks were only $ 125 billion in 2009. If a company has the funds a buyback only makes sense, as Buffett says, if shares are selling below "intrinsic value, conservatively calculated."
A business with durable competitive advantages (wide economic moat) selling below intrinsic value (margin of safety) isn't enough.
Investors need more than that: Management that allocates capital wisely and knows how to widen the moat.
Investors need more than that: Management that allocates capital wisely and knows how to widen the moat.
Adam
Long BRKb
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Long BRKb
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
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