I am excited about my new job with ERS. If this works as expected, it could be a great long term thing. I am disappointed that Long Capital didn't make it.
Bitter sweet.
Moving on.
New chapter in life and career.
Friday, September 4, 2015
Monday, August 3, 2015
HTH conference call
Generalized comments from the Hilltop Holdings 2Q conference call with relevance to the broader economy:
Oil & gas service firms are toast.
Houston is slowing. Austin is hot.
Refi mortgage companies are toast.
Oil & gas service firms are toast.
Houston is slowing. Austin is hot.
Refi mortgage companies are toast.
Tuesday, July 14, 2015
M&A - They're Going To Keep Dancing Until After The Music Stops
M&A activity is hot, hot, hot. Don't expect it to cool off before any correction. They are going to keep dancing right through the decline. Pipelines are full and you can't stop things once they get put in motion.
Many mistakes and bad deals will be done before and after the top.
They just can't help themselves.
When you're paid to dance, what do you think is going to happen. They're going to dance. And they going to keep dancing even when the music stops.
That is just the way the game is played.
The investment bankers are the last guys to call the top. Their job is to feast at the trough as long as they can. 'tis the nature of the beast.
Many mistakes and bad deals will be done before and after the top.
They just can't help themselves.
When you're paid to dance, what do you think is going to happen. They're going to dance. And they going to keep dancing even when the music stops.
That is just the way the game is played.
The investment bankers are the last guys to call the top. Their job is to feast at the trough as long as they can. 'tis the nature of the beast.
Making The Case For Active Management
The key to making the case for active management is to acknowledge at the outset that you are likely to underperform (potentially quite substantially) the markets over the long term. The reason for this is you are likely to sell either too early or too late into a market correction and are likely to either buy too early or too late after a recovery. Timing entries and exits to and from the markets is incredibly imprecise and highly inefficient from a long term investment management perspective.
That having been said, what you are advocating with active management is that you are going to try and reduce your downside by actively taking money off the table when you think the odds are in your favor. The basis for this activity is managing clients emotional wellbeing. The cost of this exercise is reduced upside because you know you are unlikely to time exits and entries perfectly.
You are offering clients the peace of mind of knowing and believing that they have someone out there trying to actively protect their assets. They are willing to forgo some upside because they are happy knowing/believing that the downside is somewhat capped.
A problem occurs when the manager fails to set a stop loss or floor and follows the market down. Usually because of their own behavioral foibles.
I don't think it is unreasonable advocating active management to clients who want to believe they have some semblance of downside protection and realize that it comes at the cost of upside potential.
The problem is clients want it both ways. They want downside protection and unlimited upside potential.
Other issues related to active management are overactive management, ie. chopping and changing market position repeatedly in response to news, and operating within a probability based framework.
Active management is a not unattractive framework for wealthy UHNW investors. The reason is they should want to earn a reasonable return on their wealth in order to preserve its purchasing power and derive a risk premium but they should also want to make sure they don't expose themselves to substantial capital destruction which can happen when markets collapse. Wealthy investors should be more focused on preserving their wealth as compared to growing their wealth. Whether they are or not depends upon the individual and their risk profile.
The irony is that wealthy investors often take more risk than they should because they are 'greedy' for returns. They think because they have been successful the markets somehow owe them greater returns. This is a dangerous trap that many fail to realize until it is too late. The irony is that they seek out active management not to protect their downside but to enhance their upside. And for the most part, they are likely to be sorely disappointed.
That having been said, what you are advocating with active management is that you are going to try and reduce your downside by actively taking money off the table when you think the odds are in your favor. The basis for this activity is managing clients emotional wellbeing. The cost of this exercise is reduced upside because you know you are unlikely to time exits and entries perfectly.
You are offering clients the peace of mind of knowing and believing that they have someone out there trying to actively protect their assets. They are willing to forgo some upside because they are happy knowing/believing that the downside is somewhat capped.
A problem occurs when the manager fails to set a stop loss or floor and follows the market down. Usually because of their own behavioral foibles.
I don't think it is unreasonable advocating active management to clients who want to believe they have some semblance of downside protection and realize that it comes at the cost of upside potential.
The problem is clients want it both ways. They want downside protection and unlimited upside potential.
Other issues related to active management are overactive management, ie. chopping and changing market position repeatedly in response to news, and operating within a probability based framework.
Active management is a not unattractive framework for wealthy UHNW investors. The reason is they should want to earn a reasonable return on their wealth in order to preserve its purchasing power and derive a risk premium but they should also want to make sure they don't expose themselves to substantial capital destruction which can happen when markets collapse. Wealthy investors should be more focused on preserving their wealth as compared to growing their wealth. Whether they are or not depends upon the individual and their risk profile.
The irony is that wealthy investors often take more risk than they should because they are 'greedy' for returns. They think because they have been successful the markets somehow owe them greater returns. This is a dangerous trap that many fail to realize until it is too late. The irony is that they seek out active management not to protect their downside but to enhance their upside. And for the most part, they are likely to be sorely disappointed.
Saturday, July 11, 2015
Model Dictates
The results of my modeling generally dictate my attitude toward investing in a company. This makes sense because presumably your best guesses about the future of that company go into your models.
The problem is that in general when I model a growth stock, I generally model a contracting multiple and when I model a value stock I generally model a stable to expanding multiple.
It doesn't take a rocket scientist to work out that usual outcome there wrt recommendations.
The problem is that in general when I model a growth stock, I generally model a contracting multiple and when I model a value stock I generally model a stable to expanding multiple.
It doesn't take a rocket scientist to work out that usual outcome there wrt recommendations.
The Systemic Mistakes Of Bias and How It Infuses A Process (Disposition Bias)
As a value oriented analyst I find that 'disposition bias' infusing my whole process.
Whether it is using a higher discount rate than appropriate, or discounting growth and margins more than is likely.
I have found myself over the years moving from a 12% discount rate (or expected rate of return) to a 10% discount rate to recently using an 8% discount rate.
I have found myself moving from a normalized PE of 18x down to 15x and contemplating moving it up to 18x. I use the normalized PE to base relative PE's off for each stock.
As a value investor with the implicit cautious nature of that disposition, I tend to use growth rates and margins less than what is embedded by the current consensus.
I am sure the reverse goes for a growth oriented analyst. They are likely to use lower discount rates and higher growth rates and margins than what the current consensus has embedded into the price.
What does this all mean? It means (1) You need to know the bias of your analyst, and (2) You've got to compare your assumptions with the consensus.
Note: In a world where the current WACC or discount rate is probably somewhere around 5%, growth is king. If you use a normalized discount rate of 8%-10%, then current stock prices are not going to look so bueno. But if the game is played using a 5% discount rate, rightly or wrongly, shouldn't you get with the system and play the game the way it is currently being played? Ans. No. Because when the discount rate normalizes, then stock prices will be re-rated to a normalized discount rate.
Whether it is using a higher discount rate than appropriate, or discounting growth and margins more than is likely.
I have found myself over the years moving from a 12% discount rate (or expected rate of return) to a 10% discount rate to recently using an 8% discount rate.
I have found myself moving from a normalized PE of 18x down to 15x and contemplating moving it up to 18x. I use the normalized PE to base relative PE's off for each stock.
As a value investor with the implicit cautious nature of that disposition, I tend to use growth rates and margins less than what is embedded by the current consensus.
I am sure the reverse goes for a growth oriented analyst. They are likely to use lower discount rates and higher growth rates and margins than what the current consensus has embedded into the price.
What does this all mean? It means (1) You need to know the bias of your analyst, and (2) You've got to compare your assumptions with the consensus.
Note: In a world where the current WACC or discount rate is probably somewhere around 5%, growth is king. If you use a normalized discount rate of 8%-10%, then current stock prices are not going to look so bueno. But if the game is played using a 5% discount rate, rightly or wrongly, shouldn't you get with the system and play the game the way it is currently being played? Ans. No. Because when the discount rate normalizes, then stock prices will be re-rated to a normalized discount rate.
Friday, July 10, 2015
Investment Basics - Know Your Returns - The Return That Counts = After tax, after inflation, after costs
-->
Know Your Returns
Real Return: After tax, after inflation, after costs
The return that really counts is your after tax, after inflation and after costs return. Assuming a 20% capital gains tax rate, 2% pa inflation rate and 1% pa management fees. Your real after tax, after inflation, after costs return is:
Tax: $50 – 20% capital gains tax = $40 net after tax amount.
After tax gross return = ($140/$100) = 40%
After tax annualized return = {($140/$100)^(1/5)}-1 = 6.96% pa
Inflation: 2% pa = (1+.02)^5 = 1.104
After tax, after inflation annualized return = {(($140/$100)/1.104)^(1/5)}-1 = 4.86% pa
Cost: 1% pa = (1+.01)^5 = 1.051 After cost amount = ($150/100)/1.051 = $142
After costs, after tax, after inflation annualized return = {(($100+($42-20%))/1.104)^(1/5)}-1 = 3.98% pa
Gross Return
If you start
with $100 and earn $50 on that money over five years, your gross return is:
($150/$100)
- 1 = 50%
Annualized
Return
Your
annualized compound average return on that investment over time is:
{($150/$100)^(1/5)}-1
= 8.45% per annum (pa)
The return that really counts is your after tax, after inflation and after costs return. Assuming a 20% capital gains tax rate, 2% pa inflation rate and 1% pa management fees. Your real after tax, after inflation, after costs return is:
Tax: $50 – 20% capital gains tax = $40 net after tax amount.
After tax gross return = ($140/$100) = 40%
After tax annualized return = {($140/$100)^(1/5)}-1 = 6.96% pa
Inflation: 2% pa = (1+.02)^5 = 1.104
After tax, after inflation annualized return = {(($140/$100)/1.104)^(1/5)}-1 = 4.86% pa
Cost: 1% pa = (1+.01)^5 = 1.051 After cost amount = ($150/100)/1.051 = $142
After costs, after tax, after inflation annualized return = {(($100+($42-20%))/1.104)^(1/5)}-1 = 3.98% pa
Subscribe to:
Posts (Atom)