Warren the Great

Warren Buffet is biting off a stake in Wrigley’s gum. At a time when the US economy is softening, the Oracle of Omaha is buying. What lessons can we learn?

In an interview, Buffet was asked straight out: why now? He answered quite clearly: the best time to buy a really great business is when you can. The folks at Wrigley want to sell. And so since Warren Buffet likes to invest in  well-established brands—think Coke, Gillette, and See’s candy—and Wrigley’s has been around for about 70 years, this was the time to do the deal, no matter how the economy looks right now.

Great investors often have no clue what things will be like next quarter. Often they don’t care very much, either. But they know that great companies will continue to be great, year in and year out. That’s investment advice that we can take to the bank.


Douglas R. Tengdin, CFA
Chief Investment Officer
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Hedging Your Bets

Is there a global elite out there? You bet there is. Do they operate under different rules than you or me? Sometimes yes, sometimes no.

There’s no question that the rich can get richer. Hedge fund managers George Soros and James Simon earned over $3 billion last year betting against the US housing market. And they can use vehicles like Credit Default Swaps that aren’t available to us mere mortals.

But do the super-rich possess super-powers? Not likely. Studies show that the average hedge fund investor actually earned less than someone who just bought a stock market index fund. Index funds may be boring, but they’re fair, cheap, and widely available. Chances are, a hedge fund’s super-sized returns one year will be offset by losses another. But those don’t always get reported.

The global elite may feel that they’re special, but they put their pants on one leg at a time just like the rest of us. Investment skill is hard to develop. And you’re as likely to find it at a small trust company as at some big investment bank.


Douglas R. Tengdin, CFA
Chief Investment Officer
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Confidence in the Consumer

You see the latest consumer confidence numbers? Do you even want to? According to the University of Michigan, confidence fell in April to its lowest level since the early ‘80s.

But do you ever wonder how they come up with these numbers? They take a telephone survey of only 300 people. It’s no surprise that people sound depressed: layoffs and foreclosures have people in a funk. And if they think the interviewer is downbeat, they’re likely respond in kind.

So what do the data tell us? We know that the news has been gloomy. But I like to watch what consumers do, not what they say. What they are doing isn’t upbeat, but it’s not that bad either. Consumers are still borrowing and buying stuff—clothes, cars, and big screen TVs. But the pace has slowed.

I wouldn’t panic on the basis of some survey. Chances are, consumers will keep right on spending.


Douglas R. Tengdin, CFA
Chief Investment Officer
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Falling in Love

“We can’t sell that stock! I love that stock!”

How many times have I heard these words? More than I care to remember. Whether it’s a stock, or a house, or something else, people have a tendency to get overly attached to things that they own.

Maybe it’s our tendency to personalize everything. Or maybe we just get greedy. Whatever the reason, many investors hang onto their purchases long after there’s any economic reason to do so. How else can we explain mutual funds that charge 3% in fees sticking around for years and years?

When it comes to managing money, emotions are your enemy. While you need to care deeply about what you’re doing, any stock won’t know that you own it. Whatever it is in your life you’re attracted to, you should never fall in love with anything that doesn’t love you back.


Douglas R. Tengdin, CFA
Chief Investment Officer
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The Rogue

Late last year Societe Generale, or SocGen, was rocked by a trading scandal. Now its head honcho has to step down.

Fifteen years ago, Daniel Bouton moved from the government’s finance office to SocGen’s executive suite. Since then he’s presided over remarkable growth as the bank grew five-fold. In the process, SocGen became an equity derivatives powerhouse, and the stock rose about 10% per year.

But their risk management systems didn’t keep up with their business growth. A low-level functionary figured out how to hack into the control system, and suddenly poof when 5 billion Euros.

Now SocGen is looking at replacing their whole management team. And the larger lesson here is that bad things can happen to good businesses. And the only way to avoid these losses is to diversify, or spread out your risk.


Douglas R. Tengdin, CFA
Chief Investment Officer
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Animal Spirits

John Maynard Keynes famously wrote that spontaneous optimism, or “animal spirits,” have more of an effect on our economic decision-making rather than rational calculation. Now we have proof.

A couple of Cambridge University dons had 17 stock traders in London give saliva samples twice a day. What they found was that when the traders’ bets paid off, their testosterone levels were significantly higher. That led to more confidence and often further winnings, leading to a positive feedback loop.

The researchers speculate that long periods of elevated testosterone can turn risk-taking into an addiction, exaggerating market moves. Of course, any investment’s long-term profitability depends of business strategy and economic reality, not the hormonal levels of the traders. But this study validates Keynes view: markets can act irrationally.

What do we make of all this? Short-term irrational fears and exuberance can offer the thoughtful investor real opportunities. But it takes discipline and staying-power to exploit them.


Douglas R. Tengdin, CFA
Chief Investment Officer
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An Oil Drought of Choice

Why has oil production been so slow to respond to higher prices? Since 2003 prices are up 3 ½ times. We’d expect companies to look for oil everywhere. The returns would be there. So what gives?

First, the oil companies have been pretty pessimistic when it comes to prices. Many of them have forecast future crude prices of around $60 / barrel. That would imply pump prices of less than $3. We wish. But if you’re paying a $100 million for an offshore rig, you need to be careful with your planning.

Second, governments often look at the oil companies as piggy banks that they can smash and withdraw cash from at will. From presidential candidates proposing windfall profit taxes to Canadian provinces raising lease payments, the political risks of the energy business have increased dramatically.

Conservative corporations and greedy politicians have slowed the oil supply response. Now we’re all paying for it. Supplies will go up. We just don’t know how soon.


Douglas R. Tengdin, CFA
Chief Investment Officer
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Ticker Tape, Schmicker Tape (Part 3)

So what is really important in investing? Last week we derided the notion that short-term wiggles and jiggles matter to anyone except people who profit from investor panic.

But what should investors do, then? Strange as it may seem, the best thing that many investors can do to understand the markets is to get out and plant a garden.

You see, planting a garden requires planning, patience, a reasonable amount of work, and a longer term perspective. You need to distinguish between everyday annoyances and real threats that could doom your whole enterprise. It’s a good idea to have a broad variety of different crops out there. And you need to start early and keep at it.

These are all elements of gardening that have a direct application to investing. Planning, patience, discipline, and diversification are critical elements of investing success. But they don’t make for a very exciting show on CNN. And you’ll never see them on the tape feed under the screen.


Douglas R. Tengdin, CFA
Chief Investment Officer
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Ticker Tape, Schmicker Tape (Part 2)

So why don’t we focus on the flashy elements of finance? Why don’t we comment on the latest changes in stock prices and index levels?

At one level, it makes sense for a financial firm to follow the latest prices. And we do. But most of our research is done in anticipating the market’s reaction to the latest news. Once the price has changed, 90% of the news is already out there. There just isn’t that much value to be gained by following the trend.

Also, the latest news and quotes tend to distract people from the more important issues in investments: managing risk, understanding the underlying business, and preparing for change. If all you do is watch the price change, you’re just going to make yourself jumpy.

When I walk into a brokerage house I often see a big screen TV flashing the latest prices. It makes some sense for a business that makes more money when people are jumpy. Just remember that the root word in brokerage is broke. And somebody has to pay for all that fancy equipment.


Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!

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direct: 603-252-6509
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Ticker Tape, Schmicker Tape (Part 1)

This commentary is called the “Global Market Update,” but you may have noticed that we don’t do much discussion of daily price movements in stocks and bonds. Many people wonder why.

First, we don’t think that daily price changes are particularly helpful. There aren’t many investors out there who need to know if GE went up and eighth, or Johnson & Johnson down a quarter. That kind of daily blather just adds to the noise pollution on the airwaves.

Second, short-term speculation has been part of the problem with capital markets today. Citigroup’s former CEO Charles Prince is famous for saying that “while the music is playing, you have to dance.” This drive for quarterly performance has led many corporations into financially and morally suspect transactions.

Investing is a deliberate process that requires thoughtful analysis and careful reflection. Repeating the daily market noise is no better than reading off the daily horse-racing handicap sheet.


Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
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www.chartertrust.com • www.moneybasicsradio.com www.globalmarketupdate.net