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
Money is about more than money
Making money. Managing money. Saving money. Spending money. Giving money.
Money is about more than money.
The way we manage, think about, and act on acquiring and disbursing money is all about our values and priorities.
Money is an efficient mechanism for facilitating the exchange of value. What we do with it and how we make it and spend it is a reflection of our selves.
Money is about more than money.
The way we manage, think about, and act on acquiring and disbursing money is all about our values and priorities.
Money is an efficient mechanism for facilitating the exchange of value. What we do with it and how we make it and spend it is a reflection of our selves.
Principle # 2: Have A Plan
"Everyone has a plan 'till they get punched in the face." - Mike Tyson
“A good plan now is better than a perfect plan executed next
week.” - General
George S. Patton
Introduction
On
the face of it the value of a plan may seem self-evident, but whether you get
hit by an economic punch or have a sub-par plan, it bears repeating, because
according to the 2012 National Consumer Survey on Personal Finance, nearly 66%
of respondents did not have a financial plan. This is problematic, because in
the absence of a plan, how do you know where you are going? And, how do you
know how to get there? As Vanguard, the Valley Forge, PA fund giant puts it, “A
carefully conceived financial plan is a must-have for every investor. It’s the
blueprint that spells out the details of your short- and long-term financial
well-being.”
Purpose
Carl
Richards, author of “The One-Page Financial Plan” points out, “before you
plan…you have to know why you are planning.” Richards goes on to say, “the best
financial plan has nothing to do with what the markets are doing and everything
to do with what’s important to you – your life, your dreams, your goals.” The purpose of a plan is simple. It provides
a roadmap for your financial path. Planning is the process by
which you take stock of your life, organize your financial affairs and
better understand your values. It helps identify goals and aspirations, and
charts a course for the future. A well constructed plan reconciles hopes and
dreams with reality, imposes discipline upon the investment process, provides
peace of mind and is the basis for all future conversations. It
is your personal Rosetta Stone - the reference you return to over time.
Basic Issues
A
formal financial plan does
not need to be fancy, but it should provide an accounting of your assets,
liabilities, current and future income, risk tolerance, time horizon and goals.
Core issues addressed within the context of a financial planning conversation
are saving and spending habits, short term and long term financial goals, expected
life changes, taxes, charitable giving, de-cumulation and the passing of wealth
to heirs.
The Value Of
A Plan
A
plan communicates purpose and shows intent toward a goal, but it should also be
flexible enough to adapt to changing circumstance. It helps you to think about
the issues and align your life goals. A formal plan increases the chance of
making good decisions and decreases the chance of making bad decisions. A plan
helps remove emotion from the markets and imposes structure and discipline upon
the decision making process. A plan creates buy-in and commitment to a course
of action, and serves as something tangible against which to gauge progress. Above
all a good plan should match with your personal and emotional DNA (it is no
good having a plan if you can’t stick to it!).
Bottom-Line
A financial plan is about more than money. It is about why money is
important to you and how that translates to your life. It is an insight to the inner
individual. Having a plan is critical to establishing good financial habits
and setting a path to the future. A plan is something that moves you from being
reactive to events and circumstances, to something more measured in the
management of your financial affairs. As such, it is probably a good idea to
have a plan.
Friday, June 26, 2015
White Lies The Industry Tells Itself
The service we provide is valuable and worth every penny people pay.
Just wait till the next downturn. That is where we outperform.
I am a highly trained financial professional and deserve the money I am paid.
I control my outcomes.
We are investment focused (not sales/marketing focused).
Investments is what we are all about.
We can beat the market.
Costs don't matter when you beat the market.
This is an exclusive investment.
We have a differentiated product, process, people, approach.
We are active (not closet indexers).
We consistently produce alpha.
The quality and amount of our experts, technology, resources matters.
There is implied skill in our outcomes.
It is all about investing (not gathering funds).
Our costs and fees are fair. You get what you pay for.
Tricks of the trade: change the base year; change the benchmark; gross of fees; advertise only the winners; spin the departure of a manager; change the risk measure that works best; look at our fund rating (even though it has no predictive value); focus on a three year record; selectively choose which funds, criteria, which period to advertise.
Just wait till the next downturn. That is where we outperform.
I am a highly trained financial professional and deserve the money I am paid.
I control my outcomes.
We are investment focused (not sales/marketing focused).
Investments is what we are all about.
We can beat the market.
Costs don't matter when you beat the market.
This is an exclusive investment.
We have a differentiated product, process, people, approach.
We are active (not closet indexers).
We consistently produce alpha.
The quality and amount of our experts, technology, resources matters.
There is implied skill in our outcomes.
It is all about investing (not gathering funds).
Our costs and fees are fair. You get what you pay for.
Tricks of the trade: change the base year; change the benchmark; gross of fees; advertise only the winners; spin the departure of a manager; change the risk measure that works best; look at our fund rating (even though it has no predictive value); focus on a three year record; selectively choose which funds, criteria, which period to advertise.
Wednesday, June 24, 2015
Transformation and Change aka Jumping the Shark
It is amazing how quickly change can flow through an industry.
It was not more than a couple of years ago that active management and fundamental-based research was the core of the industry. Now, less than 6 years after the financial crisis, active management is in full retreat and human-based fundamental analysis is increasingly marginalized. If I had to put a date on when active management jumped the shark, I would tentatively place it at 2014. Of course, active management still dominates the industry and that is not going to change for quite some time. But the secular trends are clearly in place and the level of knowledge and understanding among the masses is growing.
Information and computers have transformed the industry and the research function, and will no doubt transform the advisor function in the next 5 years or so.
It was not more than a couple of years ago that active management and fundamental-based research was the core of the industry. Now, less than 6 years after the financial crisis, active management is in full retreat and human-based fundamental analysis is increasingly marginalized. If I had to put a date on when active management jumped the shark, I would tentatively place it at 2014. Of course, active management still dominates the industry and that is not going to change for quite some time. But the secular trends are clearly in place and the level of knowledge and understanding among the masses is growing.
Information and computers have transformed the industry and the research function, and will no doubt transform the advisor function in the next 5 years or so.
Friday, June 19, 2015
Philosophical Predilections
Was thinking. They teach you to be an analyst in college. Or at least they provide you with the tools to be an analyst. Everyone comes out with the same tools. But you take on an investment perspective/philosophy when you join a firm. Investment management is unique in that there are literally many ways to skin the cat - many paths to market beating nirvana (sadly none of them guarantee success). Some basic principles are essential, but after that you can seek to beat the market in any number of different ways. One reason for this is because there is no unified theory of investing. There is no one empirically correct way to beat the market.
And so, how important is the philosophical predilection of a shop? and, What effect (or bias) does that predilection have on the analyst's analysis?
Does a value oriented analyst in a value shop overly discount everything? Does a growth oriented analyst in a growth shop overestimate everything? [do they even do any analysis!!! my little joke]
Does it make any difference if you have a value-oriented analyst in a growth shop or a growth-oriented analyst in a value shop?
I would say Yes to everything.
And so, how important is the philosophical predilection of a shop? and, What effect (or bias) does that predilection have on the analyst's analysis?
Does a value oriented analyst in a value shop overly discount everything? Does a growth oriented analyst in a growth shop overestimate everything? [do they even do any analysis!!! my little joke]
Does it make any difference if you have a value-oriented analyst in a growth shop or a growth-oriented analyst in a value shop?
I would say Yes to everything.
Wednesday, June 17, 2015
Dealing With Hardship
Hardship befalls most people in their life at some point. Some deal with it on a much greater scale, others for a much greater time, but hardship is just a stones throw away. Life and success and happiness are fragile. And just like health, you don't appreciate what you had until you lose it.
And everyone deals with it differently. Some go into their shell, others roll up their sleeves. Some are embarrassed, some are prideful, some don't want anyone to know (even as everyone knows). Time keeps on slipping away making it harder and harder to change get out of one's quiet desperation.
And everyone deals with it differently. Some go into their shell, others roll up their sleeves. Some are embarrassed, some are prideful, some don't want anyone to know (even as everyone knows). Time keeps on slipping away making it harder and harder to change get out of one's quiet desperation.
Monday, June 15, 2015
Vanguard's Advantage Wasn't It Mutual Structure But It's Investment Philosophy
Vanguard's unique corporate structure is not why Vanguard is different and beating people. There is plenty of money to be made in Vanguard's corporate structure. Vanguard is successful because it's investment approach/philosophy conforms to financial theory (ie. it creates broad-based asset class products) and seeks to be the lowest cost producer. I guess not having to respond to profit pressures from shareholders is valuable, but a for profit company could have adopted the same strategy and been equally successful. In fact, Dimensional is an example of that as were Wells Fargo Nikko and Barclays Index which have since been subsumed. Mutual funds are in theory structured the same way as Vanguard, but when controlled by for profit entities are obviously not interested in doing everything in the client's/shareholder's best interests.
Serial Correlation Affecting Quality Large Caps In A Panic
Rusty was big on this and I think he was right (although I don't like the conspiracy allusions that are usually drawn with it), and it is not something that you see too much written or talked about.
During the crisis when everyone hit the exits at the same time, quality company large cap stocks got hit just as much, if not more, compared to low quality stocks. The reason being that they were liquid and provided an avenue to exit when other avenues were not as attractive.
In theory this should create an inefficient situation where information based investors (ie. value investors) step in to take advantage of the temporary oversupply in the market. Unfortunately, much of the oversupply was probably being created by value investors as much as any other type of investor and that is why the window of opportunity was so great and the time period for taking advantage greater than normal.
Timing is everything. Contrarians likely bought too soon. Value managers were so abused that they were stuck on the sidelines too long. Growth and momentum guys were just dazed and confused.
But the reality was in a panic, high quality large caps are hit just as much as any other segment precisely because they are a store of value and a ready source of funds.
During the crisis when everyone hit the exits at the same time, quality company large cap stocks got hit just as much, if not more, compared to low quality stocks. The reason being that they were liquid and provided an avenue to exit when other avenues were not as attractive.
In theory this should create an inefficient situation where information based investors (ie. value investors) step in to take advantage of the temporary oversupply in the market. Unfortunately, much of the oversupply was probably being created by value investors as much as any other type of investor and that is why the window of opportunity was so great and the time period for taking advantage greater than normal.
Timing is everything. Contrarians likely bought too soon. Value managers were so abused that they were stuck on the sidelines too long. Growth and momentum guys were just dazed and confused.
But the reality was in a panic, high quality large caps are hit just as much as any other segment precisely because they are a store of value and a ready source of funds.
Pet Peeve
I really hate (hate is proverbial and hyperbole...dislike is the more appropriate word) all the crap research that comes out matching S&P 500 performance or industry/sector performance or company specific performance with things like presidential election years, interest rate changes, currency changes, geopolitical crisis or any other market factor. I think it is junk science and junk information. It tickles the fancy, but is ultimately not worth much.
Taking Another Shot At Market Efficiency
The market is inefficient.
What I mean by this is that the market is always in a state of controlled chaos. Some may consider this equilibria, but it is equilibria in a very limited sense of the word. Equilibria is not the same as intrinsic or fundamental value (which is also in the eye of the beholder).
Because market prices are a function of consensus feelings, emotions, expectations and sentiment regarding earnings, interest rates, risk and the future (in other words they reflect the current zeitgeist of the day and embed some feelings for the future), they are necessarily wrong all the time. No one knows what the future holds. Of course as markets correct and swing from overvalued to undervalued and vice versa, they must by definition pass through some median or fair value point. The problem is they rarely trade at the fair value point for any steady state period of time.
Getting cyclical trend and momentum right are consequently the most important ingredients to long term active investing, while have a mean reversion contrarian disposition can help cut off the excesses of the tails. The problem is we never really know beforehand the timing, time or magnitude of any new cycle.
Therein lies the problem.
What I mean by this is that the market is always in a state of controlled chaos. Some may consider this equilibria, but it is equilibria in a very limited sense of the word. Equilibria is not the same as intrinsic or fundamental value (which is also in the eye of the beholder).
Because market prices are a function of consensus feelings, emotions, expectations and sentiment regarding earnings, interest rates, risk and the future (in other words they reflect the current zeitgeist of the day and embed some feelings for the future), they are necessarily wrong all the time. No one knows what the future holds. Of course as markets correct and swing from overvalued to undervalued and vice versa, they must by definition pass through some median or fair value point. The problem is they rarely trade at the fair value point for any steady state period of time.
Getting cyclical trend and momentum right are consequently the most important ingredients to long term active investing, while have a mean reversion contrarian disposition can help cut off the excesses of the tails. The problem is we never really know beforehand the timing, time or magnitude of any new cycle.
Therein lies the problem.
Thursday, June 11, 2015
Fed Rate Hike
Will they or won't they...hike in July, September...some time this year.
I don't think so. There is no reason to hike. Inflation is low. Growth is subdued. Other countries are cutting their interest rates. Why should the Fed raise rates. The only reason would be if the markets really take off.
I don't think so. There is no reason to hike. Inflation is low. Growth is subdued. Other countries are cutting their interest rates. Why should the Fed raise rates. The only reason would be if the markets really take off.
Friday, June 5, 2015
You Only Get One Chance...Can't Go Back To The Well
My experience has been that you only get one chance with people when you ask for their help. There is a short window after the initial meeting where they are willing to help, but you can't keep going back to them asking for help. They turn off.
Tuesday, June 2, 2015
ETFs Made Factor Investing
Factor investing has been around a long time, but it was not until the advent of ETFs and the regulatory requirements for approval that factor investing came to the fore.
Subscribe to:
Posts (Atom)