"...today inflation is nominal, treasuries are what 3.5%, corporate are 4 to 5, we're finding very good companies with free cash flow of 8% to 10%. So we're seeing better values than we've seen in a long time...we're seeing the Cadillacs are selling cheaper than the Chevys these days." - Ron Muhlenkamp
Check out the complete article.
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.
Friday, August 27, 2010
Thursday, August 26, 2010
Fighting the Last War
From this Fortune article:
...how could you have had three extended and anguishing periods of stagnation* that in aggregate--leaving aside dividends--would have lost you money? The answer lies in the mistake that investors repeatedly make...People are habitually guided by the rear-view mirror and, for the most part, by the vistas immediately behind them.
The first part of the century offers a vivid illustration of that myopia. In the century's first 20 years, stocks normally yielded more than high-grade bonds. That relationship now seems quaint, but it was then almost axiomatic. Stocks were known to be riskier, so why buy them unless you were paid a premium? - Warren Buffett
...how could you have had three extended and anguishing periods of stagnation* that in aggregate--leaving aside dividends--would have lost you money? The answer lies in the mistake that investors repeatedly make...People are habitually guided by the rear-view mirror and, for the most part, by the vistas immediately behind them.
The first part of the century offers a vivid illustration of that myopia. In the century's first 20 years, stocks normally yielded more than high-grade bonds. That relationship now seems quaint, but it was then almost axiomatic. Stocks were known to be riskier, so why buy them unless you were paid a premium? - Warren Buffett
What has occurred most recently informs behavior. The last decade has been terrible for stocks so investors decide to own less just when some of them finally start to become attractively valued. Check out the entire Fortune article.
Adam
* In 1899-1920 the Dow started at 66 and ended the period at 72. In 1929-1948 the Dow started at 381 and ended up at 177. Finally, in 1964-1981 it went from 874 to 875. In each case, the extended periods of stagnation for stocks were followed by market booms of 400% or more.
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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.
Adam
* In 1899-1920 the Dow started at 66 and ended the period at 72. In 1929-1948 the Dow started at 381 and ended up at 177. Finally, in 1964-1981 it went from 874 to 875. In each case, the extended periods of stagnation for stocks were followed by market booms of 400% or more.
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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.
Peter Lynch
Often, there is no correlation between the success of a company's operations and the success of its stock over a few months or even a few years. In the long term, there is a 100 percent correlation between the success of the company and the success of its stock. This disparity is the key to making money; it pays to be patient, and to own successful companies. - Peter Lynch
Nassim Taleb: "We Made $ 20 Billion For Our Clients"
Earlier this year, Nassim Taleb said there isn't enough evidence to show Buffett's five decades of investing success isn't just luck.
He also said that it made sense for "every single human being" to short Treasuries.
Great stuff.
Well, here's a quote by Taleb from this 2009 GQ article:
"I went for the jugular--we went for the max. I was interested in screwing these people--I'm not interested in money, but I wanted to teach them a lesson, and the only way you can do it is by trying to take it away from them. We didn't short the banks--there's not much to be gained there, these were all these complex instruments, options and so forth. We'd been building our positions for a while...when they went to the wall we made $20bn for our clients, half a billion for the Black Swan fund."
So, according to GQ, Taleb said "we made $ 20bn for our clients" but Janet Tavakoli checked into these claims and discovered otherwise:
"I checked with Nassim Taleb regarding the $20 billion in gains and asked if he were misquoted. He responded via email: 'The quote is inaccurate. THe [sic] 20 billion might correspond to the face value of positions.' This response is both vague and different in character from the mythical $20 billion in gains inaccurately quoted in GQ's article. The total gains could be a tiny fraction of what Taleb loosely describes as 'face value.'"
FT Alphaville offered the following view:
Tavakoli takes down GQ, not Taleb
"...it seems pretty clear from Tavakoli's letter that she is blaming GQ — not Taleb."
A separate article on FT Alphaville added that Taleb did point out the error to GQ beforehand:
"For whatever reason, it seems Self [the author of the GQ article] or GQ did not correct the story — perhaps because they stood by Taleb's quote.
In any case, if Taleb knew the number was incorrect he probably should have put up a note of some sort to accompany the article long before Tavakoli pointed it [sic] out the discrepancy."
Apparently, Taleb did try to correct the numbers well before the GQ article was published.
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.
He also said that it made sense for "every single human being" to short Treasuries.
Great stuff.
Well, here's a quote by Taleb from this 2009 GQ article:
"I went for the jugular--we went for the max. I was interested in screwing these people--I'm not interested in money, but I wanted to teach them a lesson, and the only way you can do it is by trying to take it away from them. We didn't short the banks--there's not much to be gained there, these were all these complex instruments, options and so forth. We'd been building our positions for a while...when they went to the wall we made $20bn for our clients, half a billion for the Black Swan fund."
So, according to GQ, Taleb said "we made $ 20bn for our clients" but Janet Tavakoli checked into these claims and discovered otherwise:
"I checked with Nassim Taleb regarding the $20 billion in gains and asked if he were misquoted. He responded via email: 'The quote is inaccurate. THe [sic] 20 billion might correspond to the face value of positions.' This response is both vague and different in character from the mythical $20 billion in gains inaccurately quoted in GQ's article. The total gains could be a tiny fraction of what Taleb loosely describes as 'face value.'"
FT Alphaville offered the following view:
Tavakoli takes down GQ, not Taleb
"...it seems pretty clear from Tavakoli's letter that she is blaming GQ — not Taleb."
A separate article on FT Alphaville added that Taleb did point out the error to GQ beforehand:
"For whatever reason, it seems Self [the author of the GQ article] or GQ did not correct the story — perhaps because they stood by Taleb's quote.
In any case, if Taleb knew the number was incorrect he probably should have put up a note of some sort to accompany the article long before Tavakoli pointed it [sic] out the discrepancy."
Apparently, Taleb did try to correct the numbers well before the GQ article was published.
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.
Wednesday, August 25, 2010
The "Drive By" Market
From this Bespoke Investment Group article on what it calls a "drive by" market:
"...from 1990 through 2006 the number of days where a net of 400 (80%) stocks in the S&P 500 moved in the same direction never exceeded 20 and averaged five per year."
According to Bespoke, the number has grown an awful lot since 2006 is on pace for at least 50 this year.
There's a good chart in the Bespoke article worth checking out that pretty much says it all. Later in the post they point to leveraged ETFs as one possible culprit in the exaggerated moves. I'm guessing it's somewhat more complicated than that but probably at least one good example among many of what's behind it.
To me, this kind of stuff is usually just background noise but there's no doubt all this financial "innovation" and the short term orientation that's evolved in the past couple decades sure has made a mess out of things. Lots of new participants owning stocks for weeks, days, or even seconds with no perspective beyond the end of their nose.
"...from 1990 through 2006 the number of days where a net of 400 (80%) stocks in the S&P 500 moved in the same direction never exceeded 20 and averaged five per year."
According to Bespoke, the number has grown an awful lot since 2006 is on pace for at least 50 this year.
There's a good chart in the Bespoke article worth checking out that pretty much says it all. Later in the post they point to leveraged ETFs as one possible culprit in the exaggerated moves. I'm guessing it's somewhat more complicated than that but probably at least one good example among many of what's behind it.
If buying stocks for the long-term best to ignore these daily gyrations other than using them to grab more shares whenever the market goes into a "drive by" funk.
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.
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.
Tuesday, August 24, 2010
10% FCF Yield
From an interview with Glenn Greenberg this past spring:
If you could buy a decent - not great, but decent quality business with a 10% free cash flow yield – my experience is that you would rarely lose money. A decent business is going to grow –maybe not really fast, but if you can start out with a 10% free cash flow yield and it is going to grow at some modest rate, 3-4%, you are going to end up with a pretty decent investment – a theoretical 13-14% rate of return.
Think about how that compares with what anyone says the market can offer over a given period of time, which is between 7-8%. So the question is why should a decent quality or good quality business be priced to give you a 13-15% return when the market is priced to give you a return of about half that?
If you could buy a decent - not great, but decent quality business with a 10% free cash flow yield – my experience is that you would rarely lose money. A decent business is going to grow –maybe not really fast, but if you can start out with a 10% free cash flow yield and it is going to grow at some modest rate, 3-4%, you are going to end up with a pretty decent investment – a theoretical 13-14% rate of return.
Think about how that compares with what anyone says the market can offer over a given period of time, which is between 7-8%. So the question is why should a decent quality or good quality business be priced to give you a 13-15% return when the market is priced to give you a return of about half that?
What Greenberg says about "decent" businesses also applies to the better franchises. You may not be able to pick the great ones up at a 10% FCF yield but their superior and durable economics will produce better than market returns at lower risk.
You can't compare returns between investments without adjusting for the risks taken to achieve those returns.
The lower risk profile matters.
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.
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.
Monday, August 23, 2010
Buffett on the Stock Market
I think the following makes the truly excessive focus on the next economic indicator by business media, analysts, and others look kinda silly.
It's well established that Buffett does not believe attempting to time or predict the market is wise or even possible. Yet, in the past, he has been willing to articulate what he believes are the economic and psychological forces that determine stock prices. Here's one example. In 2001 he had this to say in Fortune about the stock market.
Things like growth in GDP reveal little about the future of the stock market though the daily obsession with the latest economic indicator may make some feel otherwise. Better to have some skepticism the next time anyone implies a strong correlation. Most macro factors mean very little in the context of successful long-term equity investing.
The last time I tackled this subject, in 1999, I broke down the previous 34 years into two 17-year periods*, which in the sense of lean years and fat were astonishingly symmetrical. Here's the first period. As you can see, over 17 years the Dow gained exactly one-tenth of one percent.
Dow Jones Industrial Average
Dec. 31, 1964: 874.12
Dec. 31, 1981: 875.00
And here's the second, marked by an incredible bull market that, as I laid out my thoughts, was about to end (though I didn't know that).
Dow Jones Industrial Average
Dec. 31, 1981: 875.00
Dec. 31, 1998: 9181.43
Now, you couldn't explain this remarkable divergence in markets by, say, differences in the growth of gross national product. In the first period--that dismal time for the market--GNP actually grew more than twice as fast as it did in the second period.
Gain in Gross National Product
1964-1981: 373%
1981-1998: 177%
So what was the explanation? I concluded that the market's contrasting moves were caused by extraordinary changes in two critical economic variables--and by a related psychological force that eventually came into play.
Here I need to remind you about the definition of "investing," which though simple is often forgotten. Investing is laying out money today to receive more money tomorrow.
That gets to the first of the economic variables that affected stock prices in the two periods--interest rates. In economics, interest rates act as gravity behaves in the physical world. At all times, in all markets, in all parts of the world, the tiniest change in rates changes the value of every financial asset. You see that clearly with the fluctuating prices of bonds. But the rule applies as well to farmland, oil reserves, stocks, and every other financial asset. And the effects can be huge on values. If interest rates are, say, 13%, the present value of a dollar that you're going to receive in the future from an investment is not nearly as high as the present value of a dollar if rates are 4%.
So here's the record on interest rates at key dates in our 34-year span. They moved dramatically up--that was bad for investors--in the first half of that period and dramatically down--a boon for investors--in the second half.
Interest rates, Long-term government bonds
Dec. 31, 1964: 4.20%
Dec. 31, 1981: 13.65%
Dec. 31, 1998: 5.09%
The other critical variable here is how many dollars investors expected to get from the companies in which they invested. During the first period expectations fell significantly because corporate profits weren't looking good. By the early 1980s Fed Chairman Paul Volcker's economic sledgehammer had, in fact, driven corporate profitability to a level that people hadn't seen since the 1930s.
The upshot is that investors lost their confidence in the American economy: They were looking at a future they believed would be plagued by two negatives. First, they didn't see much good coming in the way of corporate profits. Second, the sky-high interest rates prevailing caused them to discount those meager profits further. These two factors, working together, caused stagnation in the stock market from 1964 to 1981, even though those years featured huge improvements in GNP. The business of the country grew while investors' valuation of that business shrank!
And then the reversal of those factors created a period during which much lower GNP gains were accompanied by a bonanza for the market. First, you got a major increase in the rate of profitability. Second, you got an enormous drop in interest rates, which made a dollar of future profit that much more valuable. Both phenomena were real and powerful fuels for a major bull market. And in time the psychological factor I mentioned was added to the equation: Speculative trading exploded, simply because of the market action that people had seen.
Dow Jones Industrial Average
Dec. 31, 1964: 874.12
Dec. 31, 1981: 875.00
And here's the second, marked by an incredible bull market that, as I laid out my thoughts, was about to end (though I didn't know that).
Dow Jones Industrial Average
Dec. 31, 1981: 875.00
Dec. 31, 1998: 9181.43
Now, you couldn't explain this remarkable divergence in markets by, say, differences in the growth of gross national product. In the first period--that dismal time for the market--GNP actually grew more than twice as fast as it did in the second period.
Gain in Gross National Product
1964-1981: 373%
1981-1998: 177%
So what was the explanation? I concluded that the market's contrasting moves were caused by extraordinary changes in two critical economic variables--and by a related psychological force that eventually came into play.
Here I need to remind you about the definition of "investing," which though simple is often forgotten. Investing is laying out money today to receive more money tomorrow.
That gets to the first of the economic variables that affected stock prices in the two periods--interest rates. In economics, interest rates act as gravity behaves in the physical world. At all times, in all markets, in all parts of the world, the tiniest change in rates changes the value of every financial asset. You see that clearly with the fluctuating prices of bonds. But the rule applies as well to farmland, oil reserves, stocks, and every other financial asset. And the effects can be huge on values. If interest rates are, say, 13%, the present value of a dollar that you're going to receive in the future from an investment is not nearly as high as the present value of a dollar if rates are 4%.
So here's the record on interest rates at key dates in our 34-year span. They moved dramatically up--that was bad for investors--in the first half of that period and dramatically down--a boon for investors--in the second half.
Interest rates, Long-term government bonds
Dec. 31, 1964: 4.20%
Dec. 31, 1981: 13.65%
Dec. 31, 1998: 5.09%
The other critical variable here is how many dollars investors expected to get from the companies in which they invested. During the first period expectations fell significantly because corporate profits weren't looking good. By the early 1980s Fed Chairman Paul Volcker's economic sledgehammer had, in fact, driven corporate profitability to a level that people hadn't seen since the 1930s.
The upshot is that investors lost their confidence in the American economy: They were looking at a future they believed would be plagued by two negatives. First, they didn't see much good coming in the way of corporate profits. Second, the sky-high interest rates prevailing caused them to discount those meager profits further. These two factors, working together, caused stagnation in the stock market from 1964 to 1981, even though those years featured huge improvements in GNP. The business of the country grew while investors' valuation of that business shrank!
And then the reversal of those factors created a period during which much lower GNP gains were accompanied by a bonanza for the market. First, you got a major increase in the rate of profitability. Second, you got an enormous drop in interest rates, which made a dollar of future profit that much more valuable. Both phenomena were real and powerful fuels for a major bull market. And in time the psychological factor I mentioned was added to the equation: Speculative trading exploded, simply because of the market action that people had seen.
Things like growth in GDP reveal little about the future of the stock market though the daily obsession with the latest economic indicator may make some feel otherwise. Better to have some skepticism the next time anyone implies a strong correlation. Most macro factors mean very little in the context of successful long-term equity investing.
The initial price of a stock relative to its intrinsic value, growth in that value driven by profitability, future interest rates, and psychological factors are what determine future prices. Being able to see upfront the mispricing of an individual securities (usually when the micro and macro news is bad) and avoiding the mistake of projecting forward recent economic and investing experience make a huge difference.
Experience cannot be informed by a short historical perspective.
In 1999 many were projecting forward, incorrectly, the experience of the 1980s and 1990s bull markets into the 2000s. Any recent experience in the collective psyche of investors can help cause mispricing of individual securities. Knowing history is smart but it needs to cover a sufficiently long time frame.
Otherwise, what's recently been in the rear-view mirror distorts expected future outcomes.
Adam
* Art Cashin makes reference to the 17.6 Year Market Cycle in this previous post.
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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.
High-Speed Trading & Quality Large Caps
In this Barron's interview, Morris Mark makes the following notable points:
- High-speed traders pull out about $ 20 billion/year from the system whereas their predecessors pulled more like $ 200 million. If true, that's a 100-fold increase in frictional costs. So there is now substantial additional frictional costs in the system that seems to benefit only the high-speed traders. The costs, naturally, are borne by other market participants.
- On a more positive not, he says quality large caps can be bought at no premium and added that Google, IBM, and Coca-Cola are examples.
- Coca-Cola's pervasive brand and distribution system are crucial assets especially as the emerging middle class continues to grow.
The long-term economics of businesses like Coca-Cola tend to be very favorable. Businesses with brands and strong distribution are often capable of producing durable high return on capital over the long haul.
Unfortunately, high-speed trading won't be reigned in anytime soon. Check out the full interview.
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.
- High-speed traders pull out about $ 20 billion/year from the system whereas their predecessors pulled more like $ 200 million. If true, that's a 100-fold increase in frictional costs. So there is now substantial additional frictional costs in the system that seems to benefit only the high-speed traders. The costs, naturally, are borne by other market participants.
- On a more positive not, he says quality large caps can be bought at no premium and added that Google, IBM, and Coca-Cola are examples.
- Coca-Cola's pervasive brand and distribution system are crucial assets especially as the emerging middle class continues to grow.
The long-term economics of businesses like Coca-Cola tend to be very favorable. Businesses with brands and strong distribution are often capable of producing durable high return on capital over the long haul.
Unfortunately, high-speed trading won't be reigned in anytime soon. Check out the full interview.
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.
Thursday, August 19, 2010
Earnings Yield
From Michael Santoli's column in Barron's:
J.P. Morgan noted last week that the forward "earnings yield" of the Standard & Poor's 500 based on current forecasts is 8.1%, while high-yield bonds were at 8.3%—the narrowest spread in history (it has averaged 5.1% since 1987).
The above, of course, guarantees nothing in the short run but sets up reasonably well if your time horizon is measured in several 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.
J.P. Morgan noted last week that the forward "earnings yield" of the Standard & Poor's 500 based on current forecasts is 8.1%, while high-yield bonds were at 8.3%—the narrowest spread in history (it has averaged 5.1% since 1987).
The above, of course, guarantees nothing in the short run but sets up reasonably well if your time horizon is measured in several 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.
Creativity Crisis?
After rising for decades in America, the scores on a test that is the gold standard for measuring creativity have been falling.
Apparently, the test predicts future creative accomplishment incredible well.
Apparently, the test predicts future creative accomplishment incredible well.
The correlation to lifetime creative accomplishment was more than three times stronger for childhood creativity than childhood IQ.
Like intelligence tests, Torrance's test—a 90-minute series of discrete tasks, administered by a psychologist—has been taken by millions worldwide in 50 languages. Yet there is one crucial difference between IQ and CQ scores. With intelligence, there is a phenomenon called the Flynn effect—each generation, scores go up about 10 points. Enriched environments are making kids smarter. With creativity, a reverse trend has just been identified and is being reported for the first time here: American creativity scores are falling.
Creativity scores had been climbing until 1990 but since then have reversed the trend.
The article points out that it's too early to determine why U.S. creativity scores are declining but suggests some possible culprits.
- # of hours kids now spend in front of the TV/playing videogames
- Creativity development (or lack thereof) in our schools.
Seems a trend worth reversing. It can't be a good thing as far as economic progress over the long run is concerned.
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.
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