Money Won’t Find You. You Have To Meet It Halfway.

August 24, 2012

Emulate this cat’s investment strategy, if not his look

 

The CYC principals work at home and thus employ the Fox Business Network as much of the soundtrack (and in our male half’s case, the visual stimulus) for our daily lives. While listening and desultorily watching, we hear the same corporations mentioned again and again. Lately it’s been the ones you’d expect: Facebook and its declining stock price, Apple and its historic book value, Nike (about to release an expensive new shoe), Best Buy (just hired a new CEO, the equivalent of the Doña Paz hiring a new captain after crashing into the Vector), etc.

All of them are famous, with much of the companies’ values deriving from their brand names. That’s why they’re featured so prominently in the media; or perhaps vice versa.

Name recognition is, without question, the worst possible criterion for determining the worth of a stock. In our above examples we have:

  • A pop-culture leviathan that’s effectively eliminated all its competition, and an advertising vehicle that millions of people lock their eyeballs onto daily.
  • A iconic company that not only makes elegantly designed and famously reliable gadgets and computers, but one that’s discovered how to sell slightly upgraded versions of said gadgets to the same loyal customers year after year.
  • Another icon with a devoted following (albeit slightly less devoted than Apple’s), and which, like Apple, sells a lifestyle and a state of mind as much as it sells products.
  • A retail chain whose death throes are almost audible. A decade ago, it was a legitimately cool place to buy toys: today, it’s a prehistoric version of Amazon. Or of the Apple Store.

Publicity is important for entertainers and their ilk. For corporations looking to make money in the long term (and their shareholders), being in the public eye could not be less important. Groupon has gotten more headlines than Cardinal Health every single day of the former’s existence, but it’s the latter that turned a $1 billion profit last year. And sold $100 billion worth of product (drugs, mostly). And employs 30,000 people. Cardinal Health held its initial public offering in 1983, back when Groupon’s managers and directors were barely alive. But there’s a larger point here than comparing daily deal sites to stodgy old pharmaceutical firms.

Listen. Investing is not supposed to be fun.

Check that. Investing should be lots of fun. It’s a far less laborious (and multiplicative) way to build wealth than is working for 8 hours a day. Maybe we’re unclear on how to define “fun”.

We’ve told you in the past not to buy a stock just because you happen to be a customer. But we can do better than just giving you subtractive advice, telling you what to avoid.

Embrace boredom. Invest in workable, quietly successful companies that the average mouth-breather traipsing his way down the street wouldn’t think twice about.

You know what publicly traded company has the highest profit margins? That is, among all of them? Apple is tops among the ones we’ve mentioned so far, but it’s only 24th among all public companies.

Devon Energy! You remember Devon Energy, right? Of course you don’t, you were too busy reading about that chick with the jacked-up teeth getting engaged to that Nickelback guy.

Devon Energy is a natural gas/oil producer based out of Oklahoma City. They own pipelines that are mostly in Texas but that stretch all the way to Illinois. Devon has operations as far north as the British Columbia-Northwest Territories border.

And you’ve never heard of them. The stock is trading at around $60, which is barely 10 times annual earnings. Last year each share paid 80¢ worth of dividends. Analysts think it’ll hit $77 a year from now. Both revenue and gross profit have increased 20% annually over the last few years, the kind of sustained growth that most better-publicized companies can only fantasize about.

(Notice we didn’t tell you what Devon Energy stock has done in the past year. That’s irrelevant to people who don’t own the stock, which presumably includes you.)

None of your friends will be impressed if you tell them you bought a standard lot of Devon Energy. Rather, they’ll get bored and want to leave the room. Fine. Let them.

Opportunities don’t go out of their way to get your attention. Never forget this. Facebook stock was never going to bring you untold riches. The newsworthy IPOs that would don’t exist.

What about Google?

Fine, you got us. Also, retroactively picking stocks is cheating. Google was enjoying healthy if not tropospheric profit margins from Day 1, unlike Facebook. Google was a relatively small player back then: its revenue has grown 38-fold since then, its profits 90-fold. (If you want to see how humorously ancient some business news stories from as recently as 2004 read, check this out.)

When you’re done reading Devon’s financials (a spirited way to spend a Friday afternoon), check out the public companies with the 2nd– through 5th-highest profit margins:

  • MGM Resorts, owners of half the fanciest hotels on the Las Vegas Strip, several in China and Vietnam, and a few bottom-of-the-market yet still highly profitable toilets in Detroit and on the Redneck Riviera.
  • VISA, the favorite creditor of personal finance bloggers across the country.
  • Corning, who probably made the glass your phone is encased in.
  • Gilead Sciences, makers of antiviral drugs. Tamiflu is their most famous one.

Admit it. You’ve never heard of at least one of those companies, and never gave the others a second thought.

We’re not going to do all the work for you. That’s part of the reward. Go to the general-purpose finance site of your choice (our favorite is Yahoo! Finance). Read the quarterly and annual financials, available to everyone, and take a freaking risk that your 401(k) doesn’t offer.

Columns of numbers. God, that sounds like a party.

Do you have to read interoffice memos? Or employee handbooks? Or TPS reports? What the hell’s the difference? Aside from how reading financial statements can make you money. You like money, right?

I don’t know how to interpret them.

Sure you do. Read this first.

You should all be rich, or at least upwardly mobile. The resources are at your disposal, waiting to be capitalized upon. The research is so easy even that dippy, chunky gal from So Over Debt can do it. (Mmm…dippy and chunky.) Stop reusing your paper towels and do something remunerative with your time. You’re welcome.

Filed Under: Investments, Making Smart Choices, Net Worth Tagged With: , , , , ,

You, CFA

August 1, 2012

If you don’t handle your retirement, he might do it for you. IS THAT WHAT YOU WANT?

You can do this.

Fund managers have to be conservative, by definition. Even the smallest fund has tens of millions of OPM (Other people’s money. What are you, 80?) under its control. A fund manager has far less margin for error than does a private investor, at least professionally. If you maintain your own portfolio, and it loses 40% of its value in a given year, that’ll affect you and a handful of others. Do so as a fund manager, and your career will be dead on impact. (Actually, that’s not true. You’d be fired way before you lost 40%.) Imagine the looks of horror and sotto voce comments at the Wharton class of ’07 reunion. (And yes, plenty of fund managers are indeed that young.) You wouldn’t dare show your face. “Is that Spencer? Wasn’t he on the fast track at Vanguard? I heard he’s working in the suburbs now. Had to cut his cocaine use back to weekends only. Poor bastard.”

Fund management, for the most part, is regression to the mean. The same funds hold the same damn stocks, over and over again. Some funds are required to hold the stocks of companies that have reached a certain size. Make the Wilshire 5000, and that automatically qualifies you to be in somebody’s fund. Join the Dow (and someone soon will, to replace recently departed Kraft), and the same thing happens.

This is perverse. The tail is wagging the dog, for lack of a more original phrase. A fund doesn’t take on a new component because the fund manager sees something he likes and discreetly buys a position before someone else can. Funds take on new components because they have to. Or because everyone else is doing it.

Furthermore, fund managers aren’t just sheep. By and large, they’re hypocrites and liars. (Yes, we know. Welcome to the human species.)

Joe Light recently wrote in The Wall Street Journal that Facebook didn’t just seduce ordinary investors suffering from Streisand Syndrome. The professionals got sucked in, too. Big names. Fidelity. JPMorgan. The most successful website since Google (by number of users, anyway) went public, and did so in at least a couple of senses of the phrase. Everyone was talking about it and familiar with the story of its origin (thanks to a timely and critically acclaimed big-budget movie), and few institutional investors had the fortitude to say “no”. Or even say, “Can we take a look at the company’s financials?”

160 mutual funds bought Facebook. These included Fidelity’s Dividend Growth Fund.

Read that last sentence again. Facebook doesn’t pay a dividend.

The JPMorgan Intrepid Value Fund presumably invests in value stocks. An unproven IPO (that ended up losing 1/3 of its market cap out of the gate) doesn’t fit anyone’s definition of a “value” stock.

The managers of these funds didn’t answer the allegations of impropriety. Neither did any company spokespeople. And for the sake of consistency, we’ll end this paragraph in italics, too.

So why the hell were these funds, with their objectives included in their titles, buying a stock that had nothing to do with those objectives?

Again, defense. Say Facebook did what its devotees wanted, and exploded out of the gate. The punishment, professional and otherwise, for being the manager who could’ve bought Facebook but didn’t is overwhelming.

You can complain about how the financiers are screwing the little guy, Wall Street over Main Street, etc. if it makes you feel good. Or you can go David and aim for their heads.

Being small and nimble, i.e. an individual investor, gives you advantages that no fund manager can ever enjoy. Why?

  • You don’t have to answer to anyone.
  • You can take calculated, intelligent risks. Ones where you’ve weighed the potential downside and have decided you can live with it. Professional fund managers can do that too, to some extent, but when they do it it’s no bold move. It’s a piddling activity whose downside is mitigated by there being so many components to their funds. Hundreds of funds owned General Motors stock when it got delisted and the company eventually went bankrupt. No manager who bought GM lost his job, at least not for buying GM.
  • Your objectives are clearer. You’re there to make money. To maximize return by finding value and exploiting it.
    Is a fund manager there to make money? Yes, but not as unambiguously as you are. A fund manager makes a cut, yes, and also makes a salary. Thanks to that salary, the fund manager is operating under the same directive that most people do – I must preserve my job at all costs. The higher the salary, the more tightly someone will hold onto that job and the less they’ll to do risk getting fired. Playing not to lose isn’t just acceptable, from a fund manager’s perspective, it’s good business sense. At least as far as longevity is concerned.

Yes, selecting investments (it’s not “picking stocks”, thank you very much) is hard. It’s not an intellectual exercise along the lines of solving one of Hilbert’s Problems, but it’s hard in that it requires discipline. The same intestinal fortitude that gets your heart in shape or your lungs tobacco-free, can get you rich. Here’s how to start.

Filed Under: Estate Planning, Finance, Healthy Living, Investments, Making Smart Choices Tagged With: , , , ,

What Makes A Stock Drop Like A Hailstone?

July 25, 2012

NOTE I: 

Welcome to our ProBlogger readers, wondering what you stumbled upon and whether it applies to you. (Unless you’re a trust-fund brat, it does.) This is the one personal finance blog that will not only help you build wealth, but periodically enrage you while doing so. More here. 

NOTE II: 

To our regular readers who didn’t understand the previous paragraph, we wrote a piece on ProBlogger. Does it apply to you? Absolutely it does! It’s the detailed explanation of why we don’t allow comments on the site. If you want to contact us, try Twitter. Or Facebook.

_______________________________________________________________________

Let’s look at Monday’s biggest percentage losers, among companies with market capitalizations of at least $1 billion:

Multiple choice quiz time. What single event could cause a company’s stock to lose 28% in a day?

  1. CEO strips naked, runs into local TV studio during 5 pm newscast.
  2. Company executives plead guilty to multiple counts of fraud and embezzlement.
  3. Customers develop necrotizing fasciitis after touching company’s product.
  4. Lawsuits, or the threat thereof. And government regulation, or the promise of same.

Based near Grand Rapids, Michigan, Gentex makes auto-dimming rear view mirrors, and rear cameras for you people who think clueless children riding on tricycles behind parked cars are worth saving. Gentex also makes dimmer switches that are supposed to replace the shades on airplane windows. The company got its start in the 1970s by selling smoke alarms.

A month ago, Gentex got sued by a competitor who claimed that Gentex infringed on a patent for improved car headlamps.

Furthermore, Gentex was banking on the promise of those dead and dismembered children. The National Highway Traffic Safety Administration was supposed to mandate rear cameras on all new cars, an obvious windfall for market leader Gentex. And an obvious hassle for the rest of us, who’d each be paying $200 or so more for a new car. But the NHTSA hasn’t made a decision yet, and doesn’t plan to until the end of the year. (As for what backover accidents have to do with a government bureaucracy whose name implies a mandate for highway traffic, we’re not sure.)

Next up is DeVry, which announced that it’s getting harder to lure students. For one reason, the other for-profit colleges are ramping up admissions. Also, after decades of cluelessness, traditional colleges are figuring out that they can offer online education without compromising their precious accreditation.

Bruker is a German manufacturer of x-ray machines, spectrometers and stuff. Bruker committed the least forgivable sin of all, failing to meet analysts’ expectations. A single disappointing earnings report led to Monday’s fall, illustrated here:

 

Elan is an Irish drugmaker. Why did its shares fall by 1/6? One word. Bapineuzumab! Or if you prefer, C6466H10018N1734O2026S44. 

It’s an Alzheimer’s treatment, and it hasn’t done so well in recent trials. Alzheimer’s patients didn’t respond any better to bapineuzumab than they did to placebos, even among the patients who thought the placebos were jelly beans and tried to shove them in their ears. Elan produced bapineuzumab in conjunction with Eli Lilly, Johnson & Johnson and Pfizer (OMG collusion!) all of which took smaller if still significant hits.

And Lexmark you’ve probably heard of. Based out of Lexington, Kentucky, they make printers. (And would presumably be named “Virginmark” if they were based out of Virginia Beach. Not funny? Go to hell.) Lexmark got wounded by the same problem that hit Bruker – either weak results or unduly optimistic analysis by the forecasters.

Lexmark’s 3rd-quarter profits were 75-85¢ a share. This for a stock that trades around $18. In a vacuum, that sounds pretty good. In a world where analysts have determined that Lexmark should have made 89¢ a share this quarter, it’s cause for panic. Fleeting panic, anyway.

What’s the point? 2 points, actually:

  • It’s still a marathon and not a sprint. Unless you’re 98 years old, in which case we take it back, it’s a sprint.
  • Don’t let analysts make decisions for you.

Meeting projections is what Soviet central planners did. A relatively free economy doesn’t lend itself to narrow projections, especially among independent analysts to whom a public company is an abstraction, a prospectus, a series of symbols.

If your question is which stocks to avoid, understand that a stock only becomes worthless when the market renders the underlying company obsolete (Research in Motion, any minute now), or if it turns out that the emperor never had any clothes to begin with (Enron). And dying companies don’t die suddenly, at least not on run-of-the-mill news like one of many new products not doing well in tests. Or 3rd-party expectations not being met.

Gentex remains a market leader, and the NHTSA’s refusal to mandate rear cameras seems like a mere deferment, rather than a policy change. (“What? You just want children to die?!”)

Elan is still in a burgeoning industry, one that won’t be going anywhere until we learn how to genetically engineer babies in the womb. Lexmark is still profitable, and trading at barely 4 times earnings. (At a 3-year nadir, no less. Just like Gentex.)

DeVry has an attractive price-to-earnings ratio too, under 7, and it’s easy to see its low price (a 7-year nadir) as a buying opportunity. But it’s also the only company on the list of today’s biggest losers whose business model might be getting rapidly outdated. (Apollo Group, the parent company of the University of Phoenix, is in a similar position.)

DeVry enrolment is down 20% from last year, which we’re taking as a good sign – fewer people will spend a semester at night school when there’s the possibility of actually working instead. For-profit graduates are also learning, for lack of a better word, that a DeVry degree in justice administration or business communications just doesn’t mean what it used to.

(Which is a joke, of course. It never meant anything.)

Traditional colleges don’t have that problem. They’ve managed to convince kids and parents that there are irreplaceable benefits to a college education, and that belief is a hard one to uproot. Furthermore, traditional colleges have endowments, legacies, and football programs that make money without having to pay the players. Also, such colleges don’t have shareholders. If the University of South Florida (or more aptly, Penn State) had a board of directors instead of regents, the liquidation would have started a while ago.

Which isn’t to make this a jeremiad against higher education. We do that often enough as it is. Instead, we implore to never invest without thinking. And to understand the difference between a daily blip that’s ultimately meaningless, one that will soon be forgotten; and the recognition of a major shift in a particular economic sector.

THINK. While you’re at it, stay emotionless. If you’re among the poor unfortunates who own Gentex stock, think of today as an opportunity to engage in some dollar-cost averaging. If we’d lost on DeVry stock (or on Apollo Group), we’d bail.

Filed Under: Investments, Making Smart Choices, Net Worth Tagged With: , , , , ,
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