Talk About the Pot Calling the Kettle Black

From the Financial Times:

Activist investor Jeff Ubben urges ‘fix’ for Silicon Valley

Talk about the pot calling the kettle black.

Corporate compensation and inurement is out of whack. I agree.

But it is ironic, to say the least, that a guy who comes out of an industry in which the top 10 managers each earn more than $1b a year - doing nothing but taking levered bets on other peoples money - has the gall to criticize the $100m salary of the guy who managed to build a globally ubiquitious business increasing its shareholder wealth from $36b to $367b company in less than ten years.


I say pox on both their homes. 


Addendum:
Institutional Investors Top 25 Earning Hedge Fund Managers in 2013.

The Insurance Scam

All insurance companies do this.

"bait and switch"

They hook you with attractive first year (or six month) rates and then they start cranking up the renewal each year (generally between 10%-30%).

The scam is based on the assumption that customers are either too lazy to change or can't remember last year's rate. 

To sink their teeth into you are far as they can, they try to get you signed-up for auto-renewal at the front-end.

The practice is probably worst with house insurance. I don't really know, because I pay for my home owners each year outside the mortgage escrow account.

Note: And it is not just Insurance that is the scam. Cable, internet, phone. They're all scams predicated on "bait and switch" and lazy consumers. The basic assumption is that if they make it so hard to switch, then they'll keep their annuity stream. And they are right. 

Lots of Sturm und Drang but Not Much To Show For It

Naturally I'm kicking myself for not hanging tough on my high beta shorts. Actually I'm not really. I wish I had them. They would have been killing it. But I had to cover because you just don't know how high a market can go.

What it does is confirm how close I am to making the big score.  If I keep it up, one day I am going to nail it and make the mullah.

It feels as though the market has been going nuts, but the averages are only off a little bit (actually the S&P is still up over a 1% for the year, Naz off 2.2%). Let's hope it doesn't implode upon itself because although there has been plenty of noise thusfar the damage hasn't been all the bad (unless you own the momo guys).

Season's Change

Here's hoping.

The Art of Short Selling - Wealth With Risk

Short sellers unearth facts from financial statements and from observation to ascertain that a stock is overpriced. Short sellers are information-based traders. Before 1983, no solely short funds existed. Stocks can only go to zero on the way down, but can go to infinity on the way up (reply: I've seen a lot more stocks go to zero than to infinity). Short sellers take greater risk than other investors - they must have strong evidence to support cases for price declines. Becauses reverses are sudden and terrifying, the burden of evidence rests on a solid, careful analysis completed before the stock is shorted.

Short selling is a niche. It is very small relative to the stock market as a whole. The long bias of and in the market creates exploitable inefficiencies for shorters, ie. there are more overpriced stocks than underpriced stocks (Asquith and Meulbroek). Negative earnings surprises affect stock prices to a greater degree than positive earnings surprises, and that effect persists over time. The common wisdom that there is no such thing as one bad quarter has a statistical basis. Stocks become torpedo candidates when very high expectations give way to earnings disappointments.

Short sale candidates cluster in three broad categories:

1. Companies in which management lies to investors and obscures events that affect earnings.
2. Companies that have tremendously inflated stock prices - speculative bubble.
3. Companies that will be affected in a significant way by changing external events. 

The trail signs to look for:

1. Accounting gimmickry: clues that the financial statements 
2. Insider sleaze: inurement, insider sellling.
3. Fad or bubble stock pricing: large price rise over short period.
4. A gluttonous corporate appetite for cash.
5. Overvalued assets or an ugly balance sheet.

The main precept of short selling analysis is bulk. Volumes of disparate facts and observations.

Accounting-based analysis is not difficult to do, but it takes time, patience and a suspension of belief.

The lack of attention by other professional investors to financial details provides the inefficiency in information dissemination that is so central to the short sellers art.

The goal is to identify the tragic flaw in a business long before the company's demise (the death rattle of a company in decline). The art of short selling trains analysts to avoid torpedo stocks or to profit from them.

The main weakness of short sellers is the inability/difficulty in judging the timing of collapse. Short sellers are consistently years too early when they sell stocks. Short sellers fear most a sustained rally in a stock.

How to make money in short selling and how not to lose money by selling are different sides of the same coin.

Short selling is a game of wits with the odds in favor of the analysts who do hard work and think for themselves, who turn jaundiced eyes on what passes for Wall St wisdom.

The Art of Short Selling - Preface

The analytical methods of great short sellers are characterized by prodigious analysis attentive to (1) the quality of earnings, (2) quality of assets, (3) and, quality of management.

You are looking for a bad business run by incompetent managers.

The years 1991 to 1993 decimated the population of short sellers. Those years saw the ascendancy of mutual funds, of momentum investing, and of the short squeeze.
(sounds eerily like 2012-2014 with ETFs, momentum investing, and short squeezes)

The simplest techniques work year in and year out - rising inventories, and insider selling.

Bernard Baruch on Bears

Bears can make money only if the bulls push up stocks to where they are overpriced and unsound.

Bulls always have been more popular than bears in this country because optimism is so strong a part of our heritage. Still, over-optimism is capably of doing more damage than pessimism since caution tends to be thrown aside.

To enjoy the advantages of a free market, one must have both buyers and sellers, both bulls and bears. A market without bears would be like a nation without a free press. There would be no one to criticize and restrain the false optimism that always leads to disaster.

Quote at the beginning of "The Art of Short Selling."