It should be obvious by now that it can happen to anybody.
AAPL is down almost 40% from its highs last year and is probably headed lower (see previous post on the stock price going to at least $350).
But why? It continues to operate as THE the premier technology/consumer products company on the planet and will continue to innovate and deliver unique and popular products to the marketplace. Will it make mistakes along the way? Sure, but hopefully none big enough to derail the long-term success of the company. The problem is that when the market starts to assume that nothing will ever go wrong - that the good times will always roll - people start to worry about missing out. So, the stock price begins to accelerate, analyst opinion becomes lopsidedly bullish, ludicrous price targets emerge (think $1111), and you've got the makings of an overvalued stock destined to disappoint. Well, here we are. It should have seemed so obvious at the time, but "investors" who should have known better got caught up.
And here's where the lesson emerges. We as investors need to be asking ourselves the following:
If it can happen to AAPL, who else can it happen to?
And the answer is anybody. And if it can happen to anybody, it can happen to everybody. It can happen to the market as a whole. The herd can become so caught up in stock indices at multi-year highs, reaching meaningless "psychological" round numbers on stock indices, that it fears missing out. Again, stock prices reach new highs, bullishness becomes rampant, bearishness falls by the wayside and index price targets get higher and higher. Realists are dismissed as fear-mongerers. Chatter begins that we're entering a new secular bull market.
Really?
Nevermind that valuations based on normalized earnings are higher than almost 90% of recorded levels over the last 130 years. Nevermind that the dividend yield on the S&P 500 is lower than when most other secular bear markets have started, or that profit margins way above average. Things are different this time. The Fed won't let us down. The economy is recovering. Debt and deficits don't matter. Profit margins won't revert to the mean.
Don't look now, but here we are again, jumping both feet into a market sure to disappoint us down the road. When? No one knows, but when it happens (and it will) it will seem so obvious in hindsight that we shouldn't have taken the risks that we did.
So let AAPL's recent stumble serve as a cautionary tale - it can, and will, happen to anybody, even an entire market.
Sunday, January 27, 2013
Monday, January 21, 2013
Stock Investing - Things I Believe
OK, stream of consciousness time - a quick rundown of some of the things I believe when it comes to stock selection:
Valuation and mean reversion are two of the most powerful forces in finance.
Finding stocks worth buying is the easy part. Being patient and just holding them for potentially a very long time is the hard part.
The true value of a business is not next year's earnings times some random multiple. Value comes from its long-term stream of cash flows. Thus the value of a business changes fairly slowly over time, even if the stock price chnages very rapidly. Beware anybody whose "target price" changes frequently.
I always find it funny how analysts offer up such definitive arguments for a why a particular company, take IBM for example, will or will not benefit from some course of action or some industry trend or some exogenous event. If these analysts' insight was worth a damn, IBM would have hired them away by now. This limitation applies to my own analysis as well. I have no special insight into technology sector. I have no idea what the best course of action is for IBM at this point. However, what I can do is tell if a the management of a business like IBM is doing a good job, and if the stock price currently reflects that. I believe I can also rely on them to continue to perform as they have before, on average, and over the long-term the stock price will reflect that performance.
I believe in a 50% margin of safety before buying.
Currently, very few companies offer such a margin of safety.
Valuation and mean reversion are two of the most powerful forces in finance.
Finding stocks worth buying is the easy part. Being patient and just holding them for potentially a very long time is the hard part.
The true value of a business is not next year's earnings times some random multiple. Value comes from its long-term stream of cash flows. Thus the value of a business changes fairly slowly over time, even if the stock price chnages very rapidly. Beware anybody whose "target price" changes frequently.
I always find it funny how analysts offer up such definitive arguments for a why a particular company, take IBM for example, will or will not benefit from some course of action or some industry trend or some exogenous event. If these analysts' insight was worth a damn, IBM would have hired them away by now. This limitation applies to my own analysis as well. I have no special insight into technology sector. I have no idea what the best course of action is for IBM at this point. However, what I can do is tell if a the management of a business like IBM is doing a good job, and if the stock price currently reflects that. I believe I can also rely on them to continue to perform as they have before, on average, and over the long-term the stock price will reflect that performance.
I believe in a 50% margin of safety before buying.
Currently, very few companies offer such a margin of safety.
Saturday, January 19, 2013
Learning the Hard Way
In Greek mythology, Daedalus and Icarus were the father-son duo who famously fashioned themselves wings made of wax and feathers to escape the island of Crete. Adrenaline pumping, Icarus ignored his father's advice not to fly too close to the sun because, heck, he was living in the moment and having too much fun. Most of us are familiar with the funereal finale to this story, with Icarus succumbing to gravity's relentless pull, his wings melted away by the sun.
What is the lesson here?
Is it "Know your limits?"
Perhaps, "Listen to your elders"?
Maybe it's "Sometimes, you just have to learn the hard way."
Whatever the lesson, we can surely find its application in our markets today. The reason being, of course, is the growing chorus of investment professionals so eager to proclaim the "Era of Crisis" over. Yes, risks remain, they concede, and it might be bumpy but it's ever onward and upward from here. Permabears got things wrong and veteran marketwatchers voicing caution are dismissed as old fuddy-duddies from a different era. According to one up and coming ex-broker, only a lonely, bitter old man would fail to see the world improving all around us, "his mind poisoned by his growing irrelevance in a world that's rapidly passing him by." Maybe. But then again, maybe we have seen this story before.
"Don't fly too high," the market-Daedaluses (Daedali?) warn, "you just might get burned." They can't tell you the exact altitude you'll run into trouble, mind you, and that's all the excuse young market-Icarus needs. He looks around, sees that he's still suspended mid-air despite lofty valuations in practically every asset class and concludes that, hey, the old man is wrong. Besides, this is too much fun - let's keep going.
And so higher he goes, off to re-learn the lessons that so many poor souls have learned the hard way over the years, in many cases multiple times. It wouldn't be so bad if he learned them with just his own money. Too bad oftentimes he's taking others' with him as well.
What is the lesson here?
Is it "Know your limits?"
Perhaps, "Listen to your elders"?
Maybe it's "Sometimes, you just have to learn the hard way."
Whatever the lesson, we can surely find its application in our markets today. The reason being, of course, is the growing chorus of investment professionals so eager to proclaim the "Era of Crisis" over. Yes, risks remain, they concede, and it might be bumpy but it's ever onward and upward from here. Permabears got things wrong and veteran marketwatchers voicing caution are dismissed as old fuddy-duddies from a different era. According to one up and coming ex-broker, only a lonely, bitter old man would fail to see the world improving all around us, "his mind poisoned by his growing irrelevance in a world that's rapidly passing him by." Maybe. But then again, maybe we have seen this story before.
"Don't fly too high," the market-Daedaluses (Daedali?) warn, "you just might get burned." They can't tell you the exact altitude you'll run into trouble, mind you, and that's all the excuse young market-Icarus needs. He looks around, sees that he's still suspended mid-air despite lofty valuations in practically every asset class and concludes that, hey, the old man is wrong. Besides, this is too much fun - let's keep going.
And so higher he goes, off to re-learn the lessons that so many poor souls have learned the hard way over the years, in many cases multiple times. It wouldn't be so bad if he learned them with just his own money. Too bad oftentimes he's taking others' with him as well.
Sunday, January 6, 2013
A Promise to Myself
Matt Taibbi is the man. I don't care about his politics, but whenever he puts pen to paper about the financial industry I can't stop reading. Here is his latest piece revisiting the bailout from four years
ago and what a crappy deal it actually turned out to be:
http://www.rollingstone.com/politics/news/secret-and-lies-of-the-bailout-20130104
I read this stuff and I imagine myself punching Jamie Dimon et al in the face over and over. I'm not a violent person by nature, I swear. I suppose that's the reaction Mr. Taibbi wants me to have but he's right. We should be outraged about this stuff.
So I've made a promise to myself. From now on, I treat everything as a lie. Tim Geithner (or his successor) testifies before Congress? Lies. Brian Moynihan gives updates on a quarterly conference call? He's lying. Lloyd Blankfein tweets what he had for breakfast that morning? That shiny-domed asshole is full of it.
Never again do I even consider the possibility that whatever comes out of their mouths even slightly resembles the truth. And I won't keep it a secret either. My clients will know exactly how I feel and I'll advise them to do the same.
We're letting these guys get away with the same stuff they did before. It's our own fault for letting them by believing the nonsense they spew on a daily basis.
ago and what a crappy deal it actually turned out to be:
http://www.rollingstone.com/politics/news/secret-and-lies-of-the-bailout-20130104
I read this stuff and I imagine myself punching Jamie Dimon et al in the face over and over. I'm not a violent person by nature, I swear. I suppose that's the reaction Mr. Taibbi wants me to have but he's right. We should be outraged about this stuff.
So I've made a promise to myself. From now on, I treat everything as a lie. Tim Geithner (or his successor) testifies before Congress? Lies. Brian Moynihan gives updates on a quarterly conference call? He's lying. Lloyd Blankfein tweets what he had for breakfast that morning? That shiny-domed asshole is full of it.
Never again do I even consider the possibility that whatever comes out of their mouths even slightly resembles the truth. And I won't keep it a secret either. My clients will know exactly how I feel and I'll advise them to do the same.
We're letting these guys get away with the same stuff they did before. It's our own fault for letting them by believing the nonsense they spew on a daily basis.
Saturday, January 5, 2013
2013 Predictions
It's that time of year again - we have to suffer through anyone and everyone's 2013 market predictions. There's really one way to answer the question, "What's the market going to do this year?"
Anyone can do it, and it takes only three little words: "I Don't Know."
That's it. I don't know. You don't know. The talking heads? They don't know either.
The other day I watched Doubline's Jeff Gundlach being interviewed on CNBC, asked to give his 2013 return prediction for 10 year treasuries: 3%. High yield? 6% S&P 500? 6%.
Wrong. The answer is "I don't know."
Don't get me wrong, Mr. Gundlach is a smart guy and a very successful investor. He is not, however, blessed with any specific ability to see exactly 12 months into the future. Nobody is. If he ends up being right, it's pure luck, and nothing else.
Now, if you want longer-term return forecasts based on such trivial things as valuation and mean reversion, I would direct you to GMO's asset class forecasts or John Hussman's "Likely Range of Market Returns in the Coming Decade" for some really impressive analysis. But short-term predictions are nothing short of guesses and usually pretty bad ones at that.
So, the next time someone offers up their end-of-2013 S&P 500 closing level, hit the mute button or change the subject. The same goes for people who love to say, "See? I TOLD you that wasn't going to happen!" Because if they're right they just got lucky, and it's only a matter of time before they are really, really wrong.
Anyone can do it, and it takes only three little words: "I Don't Know."
That's it. I don't know. You don't know. The talking heads? They don't know either.
The other day I watched Doubline's Jeff Gundlach being interviewed on CNBC, asked to give his 2013 return prediction for 10 year treasuries: 3%. High yield? 6% S&P 500? 6%.
Wrong. The answer is "I don't know."
Don't get me wrong, Mr. Gundlach is a smart guy and a very successful investor. He is not, however, blessed with any specific ability to see exactly 12 months into the future. Nobody is. If he ends up being right, it's pure luck, and nothing else.
Now, if you want longer-term return forecasts based on such trivial things as valuation and mean reversion, I would direct you to GMO's asset class forecasts or John Hussman's "Likely Range of Market Returns in the Coming Decade" for some really impressive analysis. But short-term predictions are nothing short of guesses and usually pretty bad ones at that.
So, the next time someone offers up their end-of-2013 S&P 500 closing level, hit the mute button or change the subject. The same goes for people who love to say, "See? I TOLD you that wasn't going to happen!" Because if they're right they just got lucky, and it's only a matter of time before they are really, really wrong.
So many people to listen to out there when it comes to the economy and the markets...who to listen to? And more importantly, who (if anybody) to give your money to? Here's some of the best I've come across:
John Hussman - www.hussmanfunds.com - Free weekly market comment plus an archive going back for a decade. Some of the most valuable market/economic insights you'll find out there. His piece entitled "The Likely Range of Returns in the Coming Decade" completely changed the way I looked at the markets when I first read it a few years ago. Cost: free. If you're not reading you should be.
John Mauldin - www.mauldineconomics.com - His free weekly newsletter "Thoughts from the Frontline" is always a great read. Intelligent, engaging, sometimes a little scary, but always worth the time to read.
The guys over at GMO - www.gmo.com - Jeremy Grantham has been around forever and knows a thing or two about the markets. He writes a quarterly letter that is always a must-read. I'm also a huge fan of James Montier of GMO's asset allocation team. He's the author of a couple of books on value and behavioral investing and I will stop whatever I'm doing to read his latest thought piece. A number of other contributors as well. All free.
Howard Marks - www.oaktreecapital.com - See "Memos from Our Chairman" in the upper right corner. Classic value investor. The guy has seen it all. Make his free periodic memos mandatory reading.
Spotting a trend? Some of the best insights out there cost you nothing other than your time and some thoughtful reflection on their material. This list is by no means comprehensive but its a great start. Check 'em out.
John Hussman - www.hussmanfunds.com - Free weekly market comment plus an archive going back for a decade. Some of the most valuable market/economic insights you'll find out there. His piece entitled "The Likely Range of Returns in the Coming Decade" completely changed the way I looked at the markets when I first read it a few years ago. Cost: free. If you're not reading you should be.
John Mauldin - www.mauldineconomics.com - His free weekly newsletter "Thoughts from the Frontline" is always a great read. Intelligent, engaging, sometimes a little scary, but always worth the time to read.
The guys over at GMO - www.gmo.com - Jeremy Grantham has been around forever and knows a thing or two about the markets. He writes a quarterly letter that is always a must-read. I'm also a huge fan of James Montier of GMO's asset allocation team. He's the author of a couple of books on value and behavioral investing and I will stop whatever I'm doing to read his latest thought piece. A number of other contributors as well. All free.
Howard Marks - www.oaktreecapital.com - See "Memos from Our Chairman" in the upper right corner. Classic value investor. The guy has seen it all. Make his free periodic memos mandatory reading.
Spotting a trend? Some of the best insights out there cost you nothing other than your time and some thoughtful reflection on their material. This list is by no means comprehensive but its a great start. Check 'em out.
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