Less is More. Even Less is Even More.

August 17, 2011

That there’s too much information is obvious. So don’t perpetuate the problem.

If you’re reading this, then presumably you’re financially curious if not financially savvy. As the old saying was supposed to go, curiosity killed the overzealous investor. Here, just this once, resist the temptation to check the market daily. It does you no good to let your moods move in sync with what other people are willing to pay for stocks. If the public is an ass, what does that make the person who lets them dictate his behavior? Instead of exposing yourself to numbers that you’re powerless to do anything about anyway, live your life. Walk your dog. Learn HTML. Take shooting lessons. Floss your teeth, which you probably don’t do enough anyway.

The Wall Street Journal, Yahoo! Finance and every general news outlet’s business section each devote a prominent place to the same particular piece of information, listing the index values and changes from yesterday (or from the previous hour, or sometimes the previous minute.) Every change, no matter how minor, becomes newsworthy by definition: otherwise, CNBC and Fox Business would be reporting on something else.

Even no news is news: “Stocks remained largely unchanged today.”

If you’ve ever obsessed about your weight, and most people have, you’ve stepped on the scale daily. (We’re talking to the normal-sized people in the audience, not the fat ones.) It’s not uncommon to weigh yourself twice or even more times a day; say, immediately before and after a workout. (Note to the fat people who are still reading after specifically being told not to a couple of lines ago: a “workout” is this procedure by which you combine aerobic and anaerobic exercise in order to build muscle and burn lipids. “Exercise” is this…oh, never mind.)

Ever been in a relationship where either you or the other person constantly looked for reinforcement? If it happens often enough, suffocation sets in and the relationship crumbles. If he loved you 6 hours ago, and last week, and last month, and a year ago, chances are pretty good he still loves you now.

The week of August 8-12 was an anomaly among weeks on the New York Stock Exchange, with 400-point swings every day. Given the level of the Dow, that means changes of less than 4% every day. Each of which might be meaningful if every jump hadn’t been followed by a fall of similar magnitude, and vice versa.

400-point swings on an index that sits around 11,000 aren’t as important as you think, especially given how fleeting they are. For a comparison, thank God the ordinary digital bathroom scale only gives readouts to the nearest half-pound. There are people reading this right now who would freak out and discover a new thing to obsess over if there existed a commercial scale that could weigh you at 150.3489 pounds first thing in the morning, 151.9849 after breakfast, 150.6227 before lunch and 150.1452 when you went to bed.

Here’s 12 days’ worth of recent market movement:

And 12 months’ worth, each plot point representing the Dow on the 1st day of the given month (or the 31st day of the previous month if the 1st was a Saturday, etc.)

Note the difference in the heights, but also note the difference in the scale.

Most importantly, note the difference in the progression. The same investors and railbirds who were alternately cheering and cursing the market throughout the time span of the first chart could probably look at the second chart with sober happiness, if they a) wanted prices to rise and b) had the capacity to process information at this more deliberate speed.

Seriously, look at the pretty multihued second chart again. Tell the typical investor in September of 2010 that the market is going to do that over the next year, and she’d have been overjoyed. Unless, of course, she was selling everything short. Granted she’d have preferred to have gotten out of the market back in May, but we humans haven’t been equipped with functional hindsight. All in all, the market has shown a consistent path toward growth over the past year. No, it might not in the future. As usual, that’s not the point.

When you check the market as often as it swings, that makes as much sense as a climatologist duly noting that her geographic region of interest warms up every morning yet gets colder every evening.  It’s not that the data means nothing, it’s that it means nothing unless placed in the appropriate context. If you’re a mayfly, or Zsa Zsa Gabor, then go ahead and check stock prices as often as you can. In fact, even that doesn’t make sense because if you’ve only got a short time ahead of you you should be enjoying life, not looking at columns of data.

Most of you are going to check the market tomorrow regardless of what we suggest. If you’re really hungry for information, browse our archives. Or better yet, buy our book and learn what else you should be doing.

**This article is featured in the Yakezie Carnival, The Hurricane Season Edition**

Filed Under: Bad Examples, Investments, Making Smart Choices, Newsflash Tagged With: , , , , ,

Look at the BIG PICTURE

August 10, 2011

 

Our generation's U.S. Steel

Slow down, already.

Yesterday, Arizona Diamondbacks left fielder Gerardo Parra went 4-for-4 against the Houston Astros, making Parra the best hitter in the world by far. He batted 1.000, or 634 points higher than Ty Cobb’s record career average. Move over, Georgia Peach, there’s a new all-time greatest: baseball’s first perfect hitter. Parra’s historic achievement will doubtless lead every sportscast across the nation and put him on the cover of Sports Illustrated and possibly Time and Newsweek.

Don’t be ridiculous. One day means nothing. Any idiot knows you can’t look at batting averages over a 4-at-bat period and determine anything meaningful.

Are you sure? Because judging from the nationwide panic over Monday’s stock market drop, the extreme short term means everything.

Our nation’s debt got downgraded Friday, for the first time in history (which is to say, 90 years.) Which presumably means the United States will have to pay higher interest rates to borrow money in the future. Those interest rates will trickle down to the institutional and consumer levels, meaning we’re all going to be paying a few basis points more. The price of money goes up, less of us can afford to borrow, and the economy will stagnate all the more.

That much is likely true. But it’s not going to happen overnight, despite what Monday’s enormous market drop would indicate. Because once again, the market followed a gigantic fall with a massive rise. It almost always happens this way.

It’s tough for the rookie investor to believe this, and it’s tough for the seasoned investor to remember it, but…

Stock prices are nothing more than opinions. They’re values attached, via crowdsourcing, to intangible pieces of dynamic, vibrant corporations.

And collective human wisdom can sometimes be extremely short-sighted.

That’s “dynamic” and “vibrant” in the literal sense of those words, rather than their modern connotations. Those corporations aren’t necessarily growing richer and more powerful every day, but rather their worths continuously fluctuate.

Think about it. On Monday the Dow dropped 634 points, one of the 10 highest absolute falls in history (relative to its level, it didn’t make the top 30.) Take a random Dow component, i.e. one of the 30 stocks whose prices comprise the Dow Jones Industrial Average. (Read this if that makes no sense.) Caterpillar closed Friday at $91.09, shortly before the debt downgrade came down. CAT closed Monday at $82.60.

Step back for a minute. Does it make any kind of sense that one of America’s most venerable companies (its venerability ratified by its very place on the Dow), the world’s largest manufacturer of construction and mining equipment, became 10% less desirable to own in a single 8-hour period?

This is a company that grossed $14 billion in profit over the last year. CEO Doug Oberhelmen didn’t suddenly quit and name Russell Brand as his successor. The FDA didn’t find dangerous levels of peanut residue on Caterpillar’s lift trucks. For Caterpillar’s business operations, Monday was just another uneventful day.

But for Wall Street traders and their clients, news that has only an indirect impact on Caterpillar’s business has a direct impact on its stock price. The propensity of traders is to overreact. We just proved that 3 paragraphs ago: there’s no logical reason for a company to suffer a 10% drop in one day unless something cataclysmic happened to its business. Which of course, it didn’t.

On Tuesday, the day after a market sell-off that some ignorant commentators took as the precursor to brokers jumping out of windows (which never happened, not even on Black Monday in 1929), you’ll never guess what happened. The market rose historically, by 429 points. Caterpillar shares gained most of what they’d lost. Again, if you look at it with absolutely no perspective, did Caterpillar do anything to justify a 6% rise in its price, over one day? Of course not. But if you extrapolate that rise over another 10 weeks, CAT will be trading at $1455. This train’s leaving the station! Are you going to be on board?

Every time the market takes a wild daily swing, whether high (stocks just got more difficult for you to buy!) or low (your retirement account lost value!), step back. Don’t ignore the forest for the trees. Even a wild weekly swing is nothing to panic or get excited over. And maybe you should wait a couple of months before declaring a career .279 hitter with below-average power and no particular propensity for getting on base ready for the Hall of Fame.

Parra ran into a couple of pitchers having a bad night. Or perhaps he just swung, hoped for the best, and made contact via dumb luck. Or took advantage of a hungover third baseman playing out of position and begging that the ball not be hit to him. Either way, Parra is not going to be challenging Jose Reyes for a batting title on the strength of one irregular night. Nor is Caterpillar, or any other major corporation, on the brink of bankruptcy. Regardless of what your fellow investors tell you.

**This article is featured in the Totally Money Carnival #33**

Filed Under: Capitalism, Investments, Making Smart Choices, Math, Personal Finance, Shopping Tagged With: , , , , ,

A cupcake IPO? Seriously now?

June 13, 2011

 

 

Perfect for those weekends in Vegas with nothing to do

Yeah, this cupcake’s not feeling well and won’t be able to make it in today

 

NOTE: this post originally ran, in a slightly less libelous version, on Adaptu.

Intermediate readers, skip the next paragraph.

IPO = initial public offering. Refers to a formerly privately owned company finally making its shares available to whomever wants to buy them. The company now trades on a stock exchange and its financial statements are now public record. The biggest American IPO in history (not counting companies that went into receivership, became wards of the taxpayers and reemerged) was that of VISA in 2008. The heretofore private company opened on the New York Stock Exchange at $64.35/share. It peaked at $96.59 last April, and sits around 75 now.

On second thought, skip this paragraph too.

Somewhat evidently, every company has to do its IPO at some point. An IPO is obviously a big deal: and for many companies’ principals, who own options to buy the stock at a certain discounted price and will profit the second the company goes public, an IPO is as good as it’s ever going to get.

A few weeks ago, boutique cupcake retailer Crumbs Bake Shop went public. “Boutique”, by the way, is a French word meaning “small, but with cachet among urbanites and various other pretentious fools.”

Crumbs has 24 retail stores in the New York tri-state area, 6 in Los Angeles, 3 in D.C. and its environs, and 1 in Chicago with 3 more New York-area stores in the works. In New York and Los Angeles, they deliver to your door. The company is a public relations phenomenon, renowned as the creator of the Baba Booey cupcake (peanut butter frosting, chocolate cream cheese frosting, peanut butter chips) and the Artie Lange cupcake (chocolate cream cheese frosting, Vicodin filling, served in an edible wrapper doused in lysergic acid diethylamide).

Still, a company that can get Howard Stern’s attention is not necessarily a company worth investing in. If you’re old enough to remember Outpost.com, you know what we mean. Unlike VISA, Crumbs isn’t an internationally recognized name with decades of results behind it. Nor is it Microsoft (IPO 1986), nor Google (2004), with a palpable potential for growth and a revolutionary and established product line. Use whatever corporate buzzword you want with cupcakes, but “game-changer” doesn’t really fit.

Okay, what about its company history?
It barely has one. Crumbs was founded in 2003 by a husband and wife team – she’s a lawyer, he’s…well, here’s the relevant sentence from his official bio:

Jason started Famous Fixins, a manufacturer of celebrity licensed products, with such products as Britney Spears bubble-gum and NSYNC lip balm as well as products with high profile names such as Derek Jeter, Mike Piazza and Sammy Sosa.

We could go for a cool, refreshing, sturdy, gluten-free, Mac-compatible fair trade Sammy Sosa product right now. How about you?

Does it have goodwill – the accounting term that refers to intangible value beyond its assets?
Nothing you can quantify. To we middle Americans, Crumbs doesn’t even register. We’d even heard repeatedly about their novelty cupcakes, but couldn’t tell you the company’s name. The one New York cupcakery we did know the name of is Magnolia Bakery, and only because of that one Saturday Night Live bit.

Does the company have a competitive advantage that no one can replicate?
That depends. Do you have a kitchen and a couple of mixing bowls?

Crumbs’ IPO hit the ground with a valuation that now leaves it around $58 million. Granted, ExxonMobil has more than that in its petty cash envelope, but $58 million is a decent amount for a company that until this point has had only 2 visible owners.

The markup on a cupcake is enormous. Crumbs retails its cupcakes for $4.50. That’s each, not for a 4-pack. With that much profit baked into every bite, the company has designs on opening 300 more stores.

Making cupcakes can be profitable, maybe even in the long term. But a $58 million business? Here are a couple of schools of investing thought, each encapsulated in a single sentence:

You have to look at a company’s income, shareholders’ equity, how much debt it’s carrying and how much cash flows through it before you invest in it.
Control Your Cash

 

We go to Starbucks every day, so I buy Starbucks stock.
Barbra Streisand

It’s safe to say that Crumbs is counting on people who subscribe to the latter belief to help it grow into maturity.

But even Starbucks sells more than mere coffee. At one point the company went so far as to publicly consider itself the primary place to exist when you’re neither at work nor at home. The Wi-Fi and the music attest to that, and it appears to be working. Besides, when Starbucks went public it was far more entrenched than Crumbs is today.

It’s not that you can’t sell a capricious, semi-serious item in a recession – Altria and Molson Coors are both doing fine, and it’s slightly less harmful for society that overextended people stuff their faces with Baba Booey cupcakes rather than cigarettes or alcohol. But it’s hard. Let the lawyer and the manufacturer of celebrity licensed products build the business themselves.

We give the Crumbs founders our wishes for success. What we’re not giving them is our money.

McKesson has a $21 billion market cap and is trading at close to a 12-year peak. They sell payroll software to doctors, and prepare health claim management forms. You’ve never heard of them, which means they’re really underground. If that’s not hip and trendy, we don’t know what is.

**This article is featured in the Carnival of Personal Finance #314**

Filed Under: Finance, Investments Tagged With: , , , , , ,
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