Tag Archives: value

Investors from Mars and Venus

Can we ever understand one another?

Photo: Amshudhagar. Source: Wikipedia

In 1959 English novelist C.P. Snow gave a lecture on “The Two Cultures,” bemoaning the lack of understanding between literary intellectuals and scientists, between science and the humanities. At the time, folks were worried that scientists had never read Shakespeare or Dickens, and that the Atomic Age would usher in a technocratic tyranny, along the lines of Huxley’s “Brave New World.” But to these humanities scholars Snow asked, “Can you describe the Second Law of Thermodynamics? Or what is meant by mass and acceleration?” In other words, can you understand basic physics? The lack of understanding isn’t just on one side.

Snow was concerned that the ignorance of science by people educated in the humanities would limit the benefits of technological progress. His influence was so great in England that he was offered what amounted to a Cabinet post. There was controversy around the idea, but the notion of “two cultures” persists – with much of liberal education trying – and failing – to bridge this gap.

Investors also experience a sort of “two cultures” debate – between value and growth investing. These two approaches are sometimes caricatured. Value investing has been defined as finding half-smoked cigar butts on the street and taking a drag, or as dumpster diving in the stock market. Growth investing, on other hand has been described as “buy high, and sell higher,” or as momentum investing. Value investors are thought of as painstaking, cautious, and obsessed with a margin of safety, while growth investors are portrayed as fun, go-go trendsetters focused on finding tomorrow’s winners that would be “cheap at any price.” The value/growth dichotomy is reinforced by analysis that divides the market into style-boxes: a matrix of small, mid, and large companies that are value, growth, or a mix.

Source: Moneyandmarkets.com

Often the two camps criticize each other, citing academic studies and investment gurus to support their respective cases.

But the purpose of investing is to make money, not score debate points. There’s more than one way to skin a catfish, and there are lots of ways to assemble a profitable portfolio. In fact, there are as many different portfolios as there are investors, depending on return requirements, attitudes about risk, time horizon, liquidity needs, and so on. Every investor has a unique financial and psychological profile. Their investments would no more fit into a style box than they themselves fit into personality-box.

Both growth and value styles have their place in money management—just as humanities and science education do in the University. They key in both cases is to keep growing.

Douglas R. Tengdin, CFA

Running With The Herd

Are investors just herd animals?

Source: South Dakota Department of Tourism

Investors have to wrestle with lots of issues—economics, financial reporting, asset structure, valuation—but perhaps the most difficult factor they face is their own nature. People are naturally social creatures, something Aristotle noted 2500 years ago. We like to do what other people are doing. Going against the crowd can feel like standing up against a herd of charging buffalo.

But strategists have long seen the advantages of going against popular opinion. “Never follow the crowd,” Bernard Baruch says. Sir John Templeton put it this way: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” We need to buy when most people are pessimistic and sell when they are optimistic.

The past 20 years have seen this borne out twice in the US: once during the internet boom and bust, and then again during the housing boom and bust. Lately there’s been a bubble in “bubble spotting”: looking for investments inflated by optimism and leverage, as investors try to avoid the fallout when they pop.

Portuguese Stock Exchange. Source: Bloomberg

But the very fact that people are looking for bubbles means bubbles are less likely to form. We may be social animals, but other investors are our competitors. Just because a stock has gone up a lot doesn’t mean it’s going to go right back down. From 1975 to 1990 the shares of Wal-Mart grew by over 100 times. But if you waited for that “bubble” to burst, you were disappointed. The stock grew another 10 times over the next ten years. And their fundamental value proposition – people buying essential goods at low prices – has allowed the share price to stay around that level since.

Wal Mart Shares. Source: Bloomberg

That’s why it’s so difficult to invest. You don’t want to miss out when someone is doing something especially innovative that provides value. But you also don’t want to just follow the herd – especially when its headed off a cliff.

Douglas R. Tengdin, CFA

Not Free Parking

How much should parking cost?

Source: Wikia

A recent story in the New York Times describes a 10-unit luxury condo building in New York’s Soho district. Parking is so scarce that the developer is asking $1 million for a single parking spot. The living units upstairs will cost between $8 and $13 million, so the buyers can probably afford the additional expense. But $1 million seems outrageous. At that price, the parking spot costs over twice what the living space goes for, on a per-foot basis.

But what is anything worth? Private parking spaces are rare in Manhattan, and their number has been falling. And it’s especially hard to find parking in Soho. There are few to no public parking options, let alone a reserved spot in your own building. To build the 10 spots, the developer had to get a special exception.

Photo: ProjectManhattan. Source: Wikipedia

Parking goes for a premium in other cities. Last year, a tandem space went for $560 thousand in Boston’s Back Bay neighborhood. Time is money. It could save a lot of time to have a spot that’s always available. If someone’s income is high enough, the spot can pay for itself.

Economically, an item’s value is determined by the cashflow it can generate over time. A story in the Book of Genesis tells of Abraham haggling over the price of a burial plot after his wife Sarah dies. He ends up paying a king’s ransom, but maybe that land was especially productive, or perhaps it had mineral resources. It’s possible the spot was strategically important. We don’t know enough now to determine if the asking price back then was fair. All we do know is that Abraham was willing to pay it.

Today, though, even someone who can pay $10 million for an apartment might find a million bucks for parking little steep. Maybe the owners would consider $950 thousand–for a spot next to the dumpster.

Douglas R. Tengdin, CFA

Chief Investment Officer

Prices and Memory

Do prices matter?

That’s the question investors have to ask all the time. Is gold a good investment? Depends on the price: if you bought it at $1000, you’re still happy with the metal trading at $1250. If you paid $1800, you’re just waiting for it to go back up so you can get “your” money back.

But an investment doesn’t know that you own it, and the universe doesn’t owe you a living. If a stock goes down after you buy it and nothing has changed—same management, same business strategy—why should it go back up? But people do this all the time. “Please get me back to even so I can get out!” is one of the most common prayers to the market. It’s a little rosary of fear and greed.

But it does seem—in retrospect—that some prices are more significant than others. Traders and investors recall what they paid and that affects subsequent market action. Technical analysis centers around how people behave at specific prices. Support and resistance lines aren’t magic, they reflect emotions around market movements.

Try this out: mention an investment, and see what people say. If you hear “Ugh!” take note: you may have discovered a hated—and profitable–asset. But if the response is peals of joy, be very, very careful. Because what goes around comes around: nothing is so good that the price doesn’t matter.

Douglas R. Tengdin, CFA

Chief Investment Officer

What About the BRICs?

Whatever happened to emerging markets?

Amid the shining stars of investments in 2013, emerging markets stand out. Not as bright points, but as black holes. China was flat. Russia was down 10%. Brazil was down 25%. An emerging market composite declined 6%.

After a decade of being the investing world’s darlings, these markets are struggling. The catalyst appeared to be the “taper talk” last May. Of course, that discussion was no real surprise. We’ve known that ultra-low interest rates couldn’t last forever, and that when the economy moved back towards normal, so would bond yields.

But rising rates remove a big rationale for emerging markets: growth. When it seemed developed economies had entered a “new normal” of slower growth, investments migrated to the developing world, where population growth and technological advances provide stronger potential. When growth returned to the US and Europe, the money came back. Economies in Asia, Africa, and Latin America that had become dependent upon massive capital inflows found that they couldn’t fund their current account deficits. The adjustment has been severe.

So now instead of the BRICS we now have the Fragile Five, which appear on the brink of a crisis. But today’s emergency is tomorrow’s opportunity; low prices lead to higher returns. The best time to buy equities recently in the US was in March of 2009, when our own crisis seemed darkest.

Capital seeks return. It may take time, but global trade and domestic commerce will lift these economies. China may not rule the world any time soon, but it still provides tremendous opportunities.

Douglas R. Tengdin, CFA

Chief Investment Officer

Lehman Lessons (Part 4)

After five years, what have investors learned from Lehman?

Lehman’s bankruptcy and the pricking of the housing bubble created chaos, disruption, and market opportunities on a scale that hasn’t been seen in the markets for decades. Indeed, not since 1974, with double-digit inflation at home and foreign policy failures abroad had the market been so cheap. The bear market of the ’70s offered its own lessons to investors–inflation matters, price matters, government policies can change–which were incorporated into the bull market of the ’80s. Does the financial crisis offer similar schooling?

One clear instructional gem is that diversification works, but only if you let it. A portfolio of 25 banks is not diversified; a portfolio split between government bonds, muni bonds, large-cap stocks, and small-cap stocks is. Many all-stock portfolios went down 50% or more after Lehman failed; balanced portfolios declined about half as much. And that diversification served you well, if you had the stomach to rebalance during the Winter of Discontent in 2009.

But that’s another lesson: it’s much easier to say "I’ll be greedy when others are fearful" than to act on the principle. Almost everyone–including myself–should have been more aggressive when the market crashed. But it’s hard: all those negative stories with fears of bank nationalization and Great Depression 2.0 were paralyzing for many. Just riding out the cycle was a white-knuckle experience.

And five years on we’re back to all-time highs in the market. That’s the final lesson. Recessions happen. Bubbles happen. Keeping your head and viewing the market in perspective is hard, but if you did, you saw some outstanding bargains: excellent companies offered at excellent prices. There were also some value traps. But the opportunities created by the general panic were real, and level-headed investors bought in and then moved on.

Investing is hard work. But if you can keep your head when everyone else is panicking, the market is yours.

Douglas R. Tengdin, CFA

Chief Investment Officer