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.
Showing posts with label investing. Show all posts
Showing posts with label investing. Show all posts
Saturday, July 11, 2015
Tuesday, April 7, 2015
A Rationale For Active Management
Active managers are throwing in the towel. They haven't demonstrated an ability to beat the market and are now re-evaluating their value and their selling proposition to investors.
http://www.thinkadvisor.com/2015/04/06/the-real-point-of-active-investing
I need to think about this some more. There may be a viable rationale to active management beyond trying to beat the market.
Do I want a plane flown only on auto pilot or do I want a plane piloted by a person who may be able to react in an emergency. The analogy may not work because there may be times when a plane flown by a person takes emergency action for no reason whatsoever.
http://www.thinkadvisor.com/2015/04/06/the-real-point-of-active-investing
I need to think about this some more. There may be a viable rationale to active management beyond trying to beat the market.
Do I want a plane flown only on auto pilot or do I want a plane piloted by a person who may be able to react in an emergency. The analogy may not work because there may be times when a plane flown by a person takes emergency action for no reason whatsoever.
Friday, October 3, 2014
Investing - A contact sport?
Investing is not a contact sport.
Investing should be a spectator sport.
If you spend your time watching the proceedings, then you will invariably be drawn into the fray and that is where mistakes are made.
Investing should be a spectator sport.
If you spend your time watching the proceedings, then you will invariably be drawn into the fray and that is where mistakes are made.
Saturday, July 12, 2014
Patience Is A Virtue - Sitting Tight
I have essentially been sitting tight on my positions (with the exception of being stopped out of my high momo shorts earlier this year) for the better part of a year. If I had held my high momo shorts I would have made a killing (30%-40% returns). I don't feel bad about that because you have to enact a limit loss discipline in the short realm. Fortunately, I didn't panic when the market took its little dive in February. The main reason was that I didn't think my holdings warranted being sold. I put a long mega-cap tech position on last year based on what I considered to be a significant undervaluation for the space (relative to the high growth momos and the rest of the market). That thesis has played out over the period and I expect it to continue to play out (which is likely to provide an upward bias to the indices). In fact, many of those names (INTC, QCOM, MSFT, ORCL, GOOG, AAPL, EMC, CSCO) still look very attractive on a valuation & yield basis relative to alternative investments. I have price targets set for each name and will begin reducing my exposure as those targets get hit. INTC = $36-$38, QCOM = $90-$100, MSFT = $45-$48, ORCL = $48-$52, GOOG = $620-$650, AAPL = $120-$130, EMC = $34-$36, CSCO = $34-$36. I also have a kind of net-net barbell on with KLIC, QLGC, GENC, TST & WSTL. I'm eyeing RELL but expect to pick it up when the market pulls back. I have a stodgy contrarian core with BP, RDSA, CHL, SYT, BEN and JPM, and two contrarian plays in BBRY and SGI and a speculator in ARO.
I think patience is the most important part of investing. At least it is for me. I feel that it is my weakness - my achilles heel. I cannot count the number of times I was in the right position, but failed to hold, either through lack of conviction or pulling the trigger too quick or reacting to macro events. With the market continuing to march higher, I am feeling pressure to take profits and put some money in the bank, even as my thesis hasn't played out. And when those names reach their target levels there is a good chance I'll re-evaluate and decide they are still the best option from a value, yield and alternative valuation perspective. In which case, I may trade around those positions. Right now, I am hitting my one year holding period and so the temptation to lock in long term gains is definitely there.
I think patience is the most important part of investing. At least it is for me. I feel that it is my weakness - my achilles heel. I cannot count the number of times I was in the right position, but failed to hold, either through lack of conviction or pulling the trigger too quick or reacting to macro events. With the market continuing to march higher, I am feeling pressure to take profits and put some money in the bank, even as my thesis hasn't played out. And when those names reach their target levels there is a good chance I'll re-evaluate and decide they are still the best option from a value, yield and alternative valuation perspective. In which case, I may trade around those positions. Right now, I am hitting my one year holding period and so the temptation to lock in long term gains is definitely there.
Friday, February 21, 2014
WhatsApp and Facebook = Jump the Shark
The smart money is using the fleeting money (high stock valuations) to hit the exits.
Whether it is Facebook using its funny money (stock) to buy WhatsApp for $19b, or the raft of other mega-valuation names (LNKD, TWTR, CSOD, NOW, P, AMZN, WDAY, CNQR, SPLK, DDD, SSYS, etc.) who are hitting the market market with secondaries and/or convertibles or debt of some sort, I think the smart guys are taking money off the table.
We are moving into the 2Q doldrums so I think this is probably a good time to shorten up as well. The market hasn't broken yet, but when it does there will be lots of regret. The writing was on the wall.
Whether it is Facebook using its funny money (stock) to buy WhatsApp for $19b, or the raft of other mega-valuation names (LNKD, TWTR, CSOD, NOW, P, AMZN, WDAY, CNQR, SPLK, DDD, SSYS, etc.) who are hitting the market market with secondaries and/or convertibles or debt of some sort, I think the smart guys are taking money off the table.
We are moving into the 2Q doldrums so I think this is probably a good time to shorten up as well. The market hasn't broken yet, but when it does there will be lots of regret. The writing was on the wall.
Thursday, January 23, 2014
The 180 Rule
Interesting blog post talking about the 180 rule:
Essentially he advocates taking a serious look at shorting a stock that you own but want to sell, and going long a stock you were short but now want to cover.
He makes some good points like the value in re-evaluating the reasons why you are buying/selling and how the 180 rule can force that discipline upon you.
Essentially he advocates taking a serious look at shorting a stock that you own but want to sell, and going long a stock you were short but now want to cover.
He makes some good points like the value in re-evaluating the reasons why you are buying/selling and how the 180 rule can force that discipline upon you.
Tuesday, January 14, 2014
I'm not bearish...I just don't trust it
I'm not bearish.
I really think the US economy is coming out of its slumber. Most of the signs are pretty good.
The problem is I don't trust the market.
After such a big run over the last year, I can see the market continuing higher. With a little bit of earnings growth (9% projected this year...which could be a stretch, but maybe it isn't) and a little more multiple expansion (say from 15.5x to 18x) the market could easily deliver another 26% return - and even then would not be overly valued. I find myself making these rationalizations. It is easy to do.
The problem is the higher it goes, the less margin for error there is and the more I don't trust it.
When you know you are playing a con(fidence) game, you are always looking to be the first to exit the party (which can make for some bad - kneejerk - decisions).
I really think the US economy is coming out of its slumber. Most of the signs are pretty good.
The problem is I don't trust the market.
After such a big run over the last year, I can see the market continuing higher. With a little bit of earnings growth (9% projected this year...which could be a stretch, but maybe it isn't) and a little more multiple expansion (say from 15.5x to 18x) the market could easily deliver another 26% return - and even then would not be overly valued. I find myself making these rationalizations. It is easy to do.
The problem is the higher it goes, the less margin for error there is and the more I don't trust it.
When you know you are playing a con(fidence) game, you are always looking to be the first to exit the party (which can make for some bad - kneejerk - decisions).
Sunday, January 12, 2014
Obvious Beforehand
It is obvious to me that the market will shortly (before July) have a 10%+ pullback in response to concerns about declining profit growth and mean reverting profit margins.
This conversation has been had over the last year but has yet to have effect.
Just saying!
P.S. I say this because I have a decent sized short position and it is getting hammered and I expect I'll be stopped out shortly - not long before the market loses its courage. It is also equally unlikely that I will reinitiate a short position in time to take advantage of the pullback - just the way things seem to work out.
P.P.S. This post points to the importance of behavioral issues, patience, courage, conviction and downside risk management/limitation.
This conversation has been had over the last year but has yet to have effect.
Just saying!
P.S. I say this because I have a decent sized short position and it is getting hammered and I expect I'll be stopped out shortly - not long before the market loses its courage. It is also equally unlikely that I will reinitiate a short position in time to take advantage of the pullback - just the way things seem to work out.
P.P.S. This post points to the importance of behavioral issues, patience, courage, conviction and downside risk management/limitation.
Tuesday, December 24, 2013
Tail Wagging The Dog
Not sure whether I have mentioned this previously but was thinking about it this morning and figured I'd put the thought down.
Funds flow has all been into indexing and ETF vehicles over the past 3 or 4 years. ETFs are now the primary vehicle for many financial advisor and trader playbooks. This begs the question is the tail wagging the dog.
With investors hitting the ETF vehicle (sector, country, or other) before they worry about the underlying, markets are being buffetted by dull signals. Arbitrage keeps things in place, but the weight of money is coming from the macro side and it seems in keeping with the adage "shoot them all and let God sort them out."
Funds flow has all been into indexing and ETF vehicles over the past 3 or 4 years. ETFs are now the primary vehicle for many financial advisor and trader playbooks. This begs the question is the tail wagging the dog.
With investors hitting the ETF vehicle (sector, country, or other) before they worry about the underlying, markets are being buffetted by dull signals. Arbitrage keeps things in place, but the weight of money is coming from the macro side and it seems in keeping with the adage "shoot them all and let God sort them out."
Monday, December 23, 2013
Declaring Failure and Moving On
This is a very rough note. I think it could be fleshed out into a very meaningful article, but for right now it is just some top of mind reflections.
My underlying framework post-GFC was one where the business/investment cycles going forward was going to be more compressed (timewise) and more volatile. I was also heavily influenced by the new normal meme and how the economy was going to be stagnant as it worked through a balance sheet recession.
If I were to attribute a reason to that belief I would ascribe it to my ideological bias toward market economics and the belief that the market had not been allowed to clear properly due to significant artificial interventions. It was also heavily influenced by the recent traumatic past and the idea that modern markets/economies were more integrated, interrelated, more complex than ever before, and were consequently prone to momentum and cascade effects.
Financial marketwise this has not played out and I must declare failure and move on. I think the reason why financial markets have not reflected those beliefs is due in large part to hindsight bias and the massive trauma effected upon the psyche of market participants who endured the brutality and existential angst of a market implosion that could have gone even further. Investors have been fighting the last war. They have been overly pessimistic. They have been unwilling to give the Fed (or the govt) credit for stimulus. The market has climbed a massive wall of worry the whole way.
We are now at a point where the market is coming around to the idea that the Fed may have steered us over the canyon and to other side. The economy may be gaining sufficient strength to be self-supporting and a new cycle of more normal growth is going to ensue (even as the stimulus disappears).
That is the hope. We shall see how things pan out in practice.
My underlying framework post-GFC was one where the business/investment cycles going forward was going to be more compressed (timewise) and more volatile. I was also heavily influenced by the new normal meme and how the economy was going to be stagnant as it worked through a balance sheet recession.
If I were to attribute a reason to that belief I would ascribe it to my ideological bias toward market economics and the belief that the market had not been allowed to clear properly due to significant artificial interventions. It was also heavily influenced by the recent traumatic past and the idea that modern markets/economies were more integrated, interrelated, more complex than ever before, and were consequently prone to momentum and cascade effects.
Financial marketwise this has not played out and I must declare failure and move on. I think the reason why financial markets have not reflected those beliefs is due in large part to hindsight bias and the massive trauma effected upon the psyche of market participants who endured the brutality and existential angst of a market implosion that could have gone even further. Investors have been fighting the last war. They have been overly pessimistic. They have been unwilling to give the Fed (or the govt) credit for stimulus. The market has climbed a massive wall of worry the whole way.
We are now at a point where the market is coming around to the idea that the Fed may have steered us over the canyon and to other side. The economy may be gaining sufficient strength to be self-supporting and a new cycle of more normal growth is going to ensue (even as the stimulus disappears).
That is the hope. We shall see how things pan out in practice.
Tuesday, December 17, 2013
When You Least Expect It...Expect It
The market hasn't provided an opening for a nice buy the dip all year. It has been incessant and merciless to the uncommitted...
...and it has proven Al Funt's maxim "when you least expect it, expect it."
...and it has proven Al Funt's maxim "when you least expect it, expect it."
Friday, December 13, 2013
Market Avalanches by Jim Sogi
Great analogy
Avalanche prediction requires the study of the snowpack both historically and how the snow structure has metamorphosed over time. One of the prime causes of avalanches are weak layers and slab formation. Weak layers in the snow pack are layers in the snow that cause the snow on top of it to slide off it and down the hill causing an avalanche. Weak layers can be low density snow or an ice layer or hoar frost flakes. Slab avalanches are created when higher density snow bonds together then slides on a weak on steep hill. Avalanches can kill.
Avalanches remind me of markets. You can study market structure historically by looking at the number of trades at a price. Over time the density may change. Market order depth structure is not available in full but could be inferred to some degree. Some parties have access to full book.
The theory is there are weak layers in the market structure that might cause a market avalanche or rapid rise. There may also be dense layers in the market structure. An example is a long bar with big price change but low number if trades. Time may change the number of trades at the prices or depth of orders might affect the reactivity of the bar. And a gap is also an example of a weak layer.
Avalanche prediction requires the study of the snowpack both historically and how the snow structure has metamorphosed over time. One of the prime causes of avalanches are weak layers and slab formation. Weak layers in the snow pack are layers in the snow that cause the snow on top of it to slide off it and down the hill causing an avalanche. Weak layers can be low density snow or an ice layer or hoar frost flakes. Slab avalanches are created when higher density snow bonds together then slides on a weak on steep hill. Avalanches can kill.
Avalanches remind me of markets. You can study market structure historically by looking at the number of trades at a price. Over time the density may change. Market order depth structure is not available in full but could be inferred to some degree. Some parties have access to full book.
The theory is there are weak layers in the market structure that might cause a market avalanche or rapid rise. There may also be dense layers in the market structure. An example is a long bar with big price change but low number if trades. Time may change the number of trades at the prices or depth of orders might affect the reactivity of the bar. And a gap is also an example of a weak layer.
Wednesday, December 11, 2013
Backfire
Taken from a SeekingAlpha article:
This phenomena is called 'backfire', and has been studied extensively by behavioral psychologists. The basic premise is that when confronted with facts that prove them wrong, opinionated individuals react very differently from the uninformed. Basically, instead of changing their minds and acknowledging the correct facts, they entrench themselves even deeper into their existing view.
This phenomena is called 'backfire', and has been studied extensively by behavioral psychologists. The basic premise is that when confronted with facts that prove them wrong, opinionated individuals react very differently from the uninformed. Basically, instead of changing their minds and acknowledging the correct facts, they entrench themselves even deeper into their existing view.
Tuesday, December 10, 2013
Turn Off The Noise
Great advice from Charlie Munger:
"For decades I read almost all of The Wall Street Journal each day—and considerable portions of both The New York Times and The Los Angeles Times. I listened to the news on my ride to and from work, and at least a few times a week caught the national news on TV. By most common measures, I was clearly informed. But I was no wiser from it. All my wisdom came from my life experiences, my on-the-job observations, and the many books I started to read. Our job as investors is not merely to know what’s happening. We need to have appropriate context and perspective to understand the implications of what’s happening in order to make sensible choices."
"For decades I read almost all of The Wall Street Journal each day—and considerable portions of both The New York Times and The Los Angeles Times. I listened to the news on my ride to and from work, and at least a few times a week caught the national news on TV. By most common measures, I was clearly informed. But I was no wiser from it. All my wisdom came from my life experiences, my on-the-job observations, and the many books I started to read. Our job as investors is not merely to know what’s happening. We need to have appropriate context and perspective to understand the implications of what’s happening in order to make sensible choices."
Thursday, December 5, 2013
Why The Market Pays Up for Growth
Great comment from Jason Cohen.
"The market rewards growth over profit ONLY WHEN the market also believes there's a lot more growth ahead of the company AND when the other mechanics in the company are sound, eg. good gross profit margin and high long term value: CAC. Once a company is large and simple market expansion isn't how it will grow, they're betting on the development of stronger business models. This is the current bet on FB, P & TWTR."
I had always intuited this and so liked when I saw it articulated. Not rocket science, but sometimes stating the obvious is good.
"The market rewards growth over profit ONLY WHEN the market also believes there's a lot more growth ahead of the company AND when the other mechanics in the company are sound, eg. good gross profit margin and high long term value: CAC. Once a company is large and simple market expansion isn't how it will grow, they're betting on the development of stronger business models. This is the current bet on FB, P & TWTR."
I had always intuited this and so liked when I saw it articulated. Not rocket science, but sometimes stating the obvious is good.
Friday, November 22, 2013
The Market and the Economy Re-tethered
After a long period of apparent dislocation, I think the market is now re-tethered to the economy. As such it will rise and fall with the credit/economic/business cycle (all of which have reserves to go higher or improve).
Why?
The negatives and the positives seem pretty evenly balanced. Positives: strong momentum from wealth effect, sense of confidence flowing back into the system, no real signs of overleverage in the system, high earnings level, high profit margins, improving economic indicators (housing, unemployment, PMI, fiscal, output), low inflation, low interest rates, strengthening bank capital, strong credit growth, reasonable valuations, cash on sidelines, no real signs of hubris or greed, still a pessimistic undertone, Fed accomodation, low gas prices, China stabilizing, Japan recovering, Europe recovering. Negatives: political stalemate, above trend profit margins, slowing earnings growth, high earnings expectations next year, growing inequality, market up big, taper not far off, an underlying fragility, corporate leverage increasing, artifice masking underlying weakness, potential reversal of labor/capital trade-off, fiscal exit, stagnation.
The strong move in the market over the past year (with little pullback) indicates a market looking to the future positively.
Why?
The negatives and the positives seem pretty evenly balanced. Positives: strong momentum from wealth effect, sense of confidence flowing back into the system, no real signs of overleverage in the system, high earnings level, high profit margins, improving economic indicators (housing, unemployment, PMI, fiscal, output), low inflation, low interest rates, strengthening bank capital, strong credit growth, reasonable valuations, cash on sidelines, no real signs of hubris or greed, still a pessimistic undertone, Fed accomodation, low gas prices, China stabilizing, Japan recovering, Europe recovering. Negatives: political stalemate, above trend profit margins, slowing earnings growth, high earnings expectations next year, growing inequality, market up big, taper not far off, an underlying fragility, corporate leverage increasing, artifice masking underlying weakness, potential reversal of labor/capital trade-off, fiscal exit, stagnation.
The strong move in the market over the past year (with little pullback) indicates a market looking to the future positively.
Wednesday, October 30, 2013
What Drives Equities
Over the long term equities are driven by two things. One, fundamental and the other sentimental.
The Fundamental
The fundamental driver of equities values is earnings. Earnings are a function of revenues (demand), margins (efficiency) and tax regimes. Earnings may vary over time, but trend positive.
The Sentimental
The sentimental driver of equities values (which is to some extent and at different times more important than earnings) is the multiple. What the market is prepared to pay for earnings at any particular point in time. It is a function of confidence and risk. The multiple the market is prepared to pay for present (and implied future earnings) varies from a high of 35x to a low of 8x.
Since bottoming in 2009 the market has been propelled by substantial earnings recovery and earnings growth ($30 EPS to $115 EPS), and by multiple expansion (11x to 16x). With earnings plateauing, future market performance is likely a function of multiple performance. If the multiple goes from the present 16x to 20x then the market can rise to 2300 (30% above the present level). Projecting earnings is relatively easy (or if not easy, more stable). Projecting multiples is a lot more difficult.
The Fundamental
The fundamental driver of equities values is earnings. Earnings are a function of revenues (demand), margins (efficiency) and tax regimes. Earnings may vary over time, but trend positive.
The Sentimental
The sentimental driver of equities values (which is to some extent and at different times more important than earnings) is the multiple. What the market is prepared to pay for earnings at any particular point in time. It is a function of confidence and risk. The multiple the market is prepared to pay for present (and implied future earnings) varies from a high of 35x to a low of 8x.
Since bottoming in 2009 the market has been propelled by substantial earnings recovery and earnings growth ($30 EPS to $115 EPS), and by multiple expansion (11x to 16x). With earnings plateauing, future market performance is likely a function of multiple performance. If the multiple goes from the present 16x to 20x then the market can rise to 2300 (30% above the present level). Projecting earnings is relatively easy (or if not easy, more stable). Projecting multiples is a lot more difficult.
Monday, October 28, 2013
Sitting Out A Rally
In our business you can't sit out a rally. Even if your philosophy and your process support such a move. The reason is because "the business of money management" will not allow to sit out a positively trending market and in the back of your mind you justify staying-in on the basis that "you can't time the market." The other thing is, each time you have attempted to go to cash, you have been steamrolled.
What this does is change you from an intrinsic value investor to a relative value investor.
What this does is change you from an intrinsic value investor to a relative value investor.
Friday, May 24, 2013
Psychological Foibles
You think the market has risen too far too fast and is due a pullback.
The conundrum.
How and when do you decide to get back in?
The Psychological Challenge
The market starts breaking a little. Hope rises. It is moving your direction. You don't want to jump in too soon. After all you have been short and patiently waiting for this for quite a while. You don't want to waste those missed opportunities (now sunk opportunity cost) by blowing your powder too soon and seeing it pan out in the fashion you envisioned all along. On the other hand, you have been in this position before on the run-up, failed to cover or buy the dip, and seen it tear off again, only to have to chase (or worse fight a losing cause).
There is no good answer to the question. Doing your due diligence. Setting price levels and being disciplined. Having a system, a process, and a philosophy. You're not going to win them all. But you do want to have a system or process in place where you put the odds on your side when you go to bat.
The conundrum.
How and when do you decide to get back in?
The Psychological Challenge
The market starts breaking a little. Hope rises. It is moving your direction. You don't want to jump in too soon. After all you have been short and patiently waiting for this for quite a while. You don't want to waste those missed opportunities (now sunk opportunity cost) by blowing your powder too soon and seeing it pan out in the fashion you envisioned all along. On the other hand, you have been in this position before on the run-up, failed to cover or buy the dip, and seen it tear off again, only to have to chase (or worse fight a losing cause).
There is no good answer to the question. Doing your due diligence. Setting price levels and being disciplined. Having a system, a process, and a philosophy. You're not going to win them all. But you do want to have a system or process in place where you put the odds on your side when you go to bat.
Friday, May 10, 2013
When Contrarianism Can Hurt You
Contrarianism when things are falling is a slightly safer bet than contrarianism when things are rising.
In both cases, you are following the go against the herd dictate - "buy when they are selling and sell when they are buying."
However if you stick your toe in the water at -10% and it goes to -20%, then to -30%, then that is very painful. But at least there is a floor somewhere, and if history is any guide, the market will eventually recover and sometimes will do so in spectacular fashion. So you are better off sucking it up, waiting for the turn and then letting it flow.
Conversely, when the market is moving up and you dip your toe in to sell, it can be incredibly painful watching it go up another 10%, 20%, 30%, because you have no way to recoup that lost opportunity cost and you have no idea how much further it might rise. Even if you know there is a short term limit, you don't know where it is and you can't be assured you'll be able to get your timing right when the dip comes.
In both cases, you are following the go against the herd dictate - "buy when they are selling and sell when they are buying."
However if you stick your toe in the water at -10% and it goes to -20%, then to -30%, then that is very painful. But at least there is a floor somewhere, and if history is any guide, the market will eventually recover and sometimes will do so in spectacular fashion. So you are better off sucking it up, waiting for the turn and then letting it flow.
Conversely, when the market is moving up and you dip your toe in to sell, it can be incredibly painful watching it go up another 10%, 20%, 30%, because you have no way to recoup that lost opportunity cost and you have no idea how much further it might rise. Even if you know there is a short term limit, you don't know where it is and you can't be assured you'll be able to get your timing right when the dip comes.
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