Mis-perspectives
Wrong
I wish to be misunderstood
that is
to be understood from your perspective— Bill Knott
I’m reminded of Bill Knott’s little poem every time I’m informed by somebody of how or what somebody else thinks.
No Market For Old Men
Stan Druckenmiller talked about luck in his career as a young man in a speech everyone should read. At age 23 he got his lucky break:
After about a year and a half – I was a banking and a chemical analyst – this guy calls me into his office and announces he’s going to make me the director of research, and these other eight guys and my 52-year-old boss are going to report to me. So, I started to think I’m pretty good stuff here. But he instantly said, “Now, do you know why I’m doing this?” I said no. He says, “Because for the same reason they send 18-year-olds to war. You’re too dumb, too young, and too inexperienced not to know to charge.
Ergo, there are bold traders and there are old traders – but there are no bold old traders?
Speaking of old men, the inverse correlation of age to bullishness seems to be hitting 1999 levels – short term traders excluded.
I’m frequently overcome by the creeping paw of weirdness in the market that sets off alarms in my soft little head. I look out at the environment and see subscription services are evolving up the risk curve. Options trading has taken the place of the stock pickers letters of yesteryear and the cool kids are subscribing to futures trading services. And if you’re really too sexy for that there’s someone who will make you rich trading FX for a couple bucks a day.
Is it overdone? Are we nearing a crescendo that casts the world to perdition and makes us long for the good old days of 1932? I doubt it. But there are going to be people who feel like it has if/when we see a 15% drop.
Maybe, though, it’s all in my head. My contemporaries and I have seen a lot of stuff that has all but vanished from the market’s collective memory. We’re like the guy that promoted Druck. We’re afraid to charge. We can pick the Hunt brothers out of a picture. We saw a pissant of a bank in an Oklahoma shopping mall take down Seattle First and The Continental Bank of Illinois. Many of us walked out of work on Black Monday wondering if we were going to have a paycheck on Tuesday. We remember Ivan Boesky and knew the flimflam guys that hitched their wagons to Drexel Burnham Lambert. After the oil patch lost its wheels in the early ’80s, we saw the dominoes fall from a bad regulatory regime that eventually became the S&L crises. And as horrific as that all seemed at the time, then came the dot.com bubble and the GFC.
Yet the world always seems to plod on and business, despite the best efforts of government institutions to interfere, finds its way to deliver the things we need and most of the things we want.
The double-edged sword of experience manifests itself in me with a sense of caution along with a perdurable faith in the world. And above all, as Uncle Warren says, “Don’t bet against America.”
But I’m extremely cautious here. It would be more than redundant for me to list the bull/bear arguments. I’ll leave that to people much smarter and more willing to do the work than I am and you’ve all seen the prognostications. It’s the weirdness, the dismissal that there even can exist some tripwire somewhere that could cause an event something like the long list I pondered above, that has my old man gut yelling at my old man head.
So, I’ve positioned my book mostly with companies that have fortress balance sheets and reasonably competitive moats. I’ve also upped my cash to about 50% and hold some long dated OTM SPDRÂ S&P 500 ETF (SPY) puts. I did the same thing in 1999 and it served me well. It’s foolish, though, to be a Chicken Little – at least until the time you actually see a piece of the sky falling. It’s just anecdotal, I know, but I’ve not seen one yet. And maybe I’ll regret my cautiousness…
I can only offer that people managing money – either their own or other peoples’ – need to stay away from holding hands with either the doomsayers or the Pollyannas. I’m convinced that ZeroHedge would find a bearish case in any cure for cancer.
Manage risk, avoid charlatans, listen to both sides and try to be on the right side of creative destruction. That’s the way I see it.
Errata
1) The market won’t reach a top until everyone is bullish.
Gibberish. I remember lots of caution from the wings in 1999 and 2007 – I was part of that.
2) Your first loss is your best loss.
Really? What would Warren Buffett say? I have no idea what that even means since a loss (or a gain) isn’t realized until you exit. Don’t let your investments turn into trades.
That’s not to say that the first loss rule isn’t sometimes right – more likely a good rule for technical trades. It’s to say that if you buy a stock on fundamentals there’s often no reason to sell unless those fundamentals change. I have 100s of examples where I’ve averaged down and have enhanced my returns. Far more than my losers.
[Side note – One of my best value investments ever: New Gold, Inc. (NGD). I opened a quarter position at about $4 in 2008. Quintupled my position a few months later at around $1. Sold it in 2011 at $11 when it started to have problems with government regulatory changes in South America. The fundamentals changed.]
3) The market is forward looking.
Maybe. That and a $5 will get you a latte. It seems to me that the phrase is used only to rationalize price. I’ve never found any predictive value in it. (Gene Fama agrees.)
4) You can own stocks for the long run.
That’s true and doesn’t qualify as nonsense. But what’s “the long run”? My clients’ average age is 61. Do they ever again get to see the long run?
 5) Price is truth
Sure it is – for what it’s worth. It’s the truth of where the last marginal buyer met the last marginal seller. Other than that it means bupkis. Just ask anyone who runs real money that has had a large position in a thinly traded stock trying to exit. I’ve been there.
6) Trade your plan
Usually a great idea – unless your plan is crap.
7) Do you want to make money or be right?
This often asked question represents to me height of bromide garbage. The sentence implies that you can make money being wrong? Keep this little nugget in your pocket when you want to impress stupid people.
 God and Alpha
I am convinced that He (God) does not play dice. –Albert Einstein
There is No Universal Truth to The Value of Buybacks
There seems to be a binary judgement that corporate buybacks are either good or bad. If only the world were so simple.
When a company accumulates more cash that it can productively invest, the excess cash acts as an anchor on operating efficiency with suboptimal ROA, and (usually) ROE. I was on the complainers’ bandwagon about Microsoft’s (MSFT) horde of cash for nearly 15 years. There are good buybacks.
On the other hand, companies increasing leverage to buy back their stocks at high prices with no positive effect on operating efficiency and/or cost of capital should have stockholders storming the ramparts looking for heads to display on spires. The price support will stop when the buyback ends. There are bad buybacks.
Unfortunately, there have been times of too little of former and too much of the latter.
It’s probably a good idea to know the either/or – instead of listening to pundits who rarely put a pencil to it.
That’s it. I apologize if you need me to so that you can feel better about either yourself or me. Trade ’em well and, as I say, the stuff that can kill you usually comes from places you’re not looking.
db
Follow Dave on Twitter: @davebudge
Disclosure: The author and his clients are long MSFT and SPY puts.
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
