Some Investment Advice
Before I get started, I would like to welcome all of my new subscribers. My Substack column is broken up into three different pieces. Monday is generally about business. Wednesday is about politics and Friday is about music.
I know little to nothing about any of them but what I try to do is open up ideas and let the reader do some work for a change. Most of these types of Blogs( I hate that term) generally tell you whatever it is they want to tell you and then give you 50 facts and figures to back up their ideas. Basically, what they are doing is spoon feeding you and drawing you to reach the same conclusion they have. I don’t do that. I will come up with an idea and tell you my feelings about that subject and you can say “oh yes, I agree” or “not so fast skippy” and then research the reasons you disagree.
I want to hear why you think I may be wrong. I feel you learn more from being wrong than being right and I still want to learn.
What I would love everyone to do is pass this column along and hopefully I will get to a point where I may be able to earn a little beer money and actually give this a go as my next career.
One thing I normally do on Sunday afternoon or early Monday morning is look at the week’s economic calendar and see if there is anything in it that might prompt an interesting article or at least a point at which to start. I also use it to prepare for my weekly appearance on Dan Loney’s Wharton Business Report on SiriusXM Channel 132.
As you can see I am not above a plug.
Anyway, It’s usually pretty mundane. Nothing ever really sticks out week to week and while the data that is released each week is important to a certain degree, it rarely moves the needle. However, sometimes it does and that is when more and more people start paying attention to these endless releases.
What I have found over my career, one report does not a disaster make. You can have a huge uptick in one set of numbers and another set that may be connected show little change from expectations. These things over time tend to balance themselves out so I rarely if ever overreact to any of them.
Blips are blips for a reason, they are outside the norm.
What is important, I think, is the moving average or the trend of certain data sets. We see inflation shrinking, albeit slowly. We see employment gains continuing to be stronger than expected and a lot of analysts wonder why. Housing numbers continue to remain in a Goldilocks place.
It is about trends and how we interpret those trends.
You can listen to the Steve Liesman’s of the World try and explain why these numbers, whatever they may be, remain strong or if there are any kinks to the numbers that we may want to keep an eye. Liesman is brilliant but when it comes to dumbing it down a bit, he needs work.
I am here to rescue you from that.
I dumb things down because at the end of the day, we don’t need some complex explanation based on some overused economic theory that may or not actually be correct. We need a simple explanation for why things are good. Why things are bad. Why prices stay elevated. Why some prices are not.
Again, K.I.S.S., Keep It Simple Stupid, is still the greatest acronym of all time. All other acronyms pale by comparison.
That is what this column is about, Keeping it Simple.
As much as I like to throw shade on the media as a whole, I try to cut the business media some slack. While they, for the most part, keep the political ideas away, they report on the facts. Which is what they are supposed to do. Sure there may be some opinions expressed by certain reporters and commentators, they, for the most part will report the facts. It is their guests that do the blowing of smoke up the rear ends of the viewers. I do get part of it, they are trying to make their appearance interesting and to be asked back and they are also trying to promote their investment ideas or the corporate strategy of their employers. I get it. They don’t overtly advertise their company but they have no problem with their hindsight excellence.
Have you ever heard any portfolio manager or CEO come on Fox Business or CNBC and say “Last Quarter or last year we sucked so bad no wonder we had 75% of our portfolio drained”? No. Yet, if you look at overall performance of more than half of the funds out there, they did not beat their benchmark. These guests will work around answering that question for the most part. They are skilled as any politician when it comes to directly answering a question they don’t want to answer.
Hey, I was on CNBC for over 28 years, I knew how to get around a question I didn’t have an answer for so I am not blaming them but I just think I would like to see more honest answers out there, that’s all.
Getting back to the calendar, this week coming up is not one we can prepare for since there is little in the way of important data. The media will latch onto several items but really, unless there is a major miss or shift, I don’t think there is an investable idea in any of it.
Which sometimes is a really good thing.
As an old school investor, I have always looked at several things when I decide to drop a couple of bucks on a stock or some random asset.
The first thing is my time element. What is my time frame for any particular investment? Be it 6 months or 6 years it does make a difference simply because if the reason you are choosing that particular stock. For example: Sometimes in your daily life you happen upon something that you think has potential. You think that this is a great idea and let’s see who is involved. You find a company that may be further along in the creation or development and then you do a little work and see that this may be available to consumers in the next year. Now you have a time frame.
The second element is the fundamentals of a company. This, I think includes management and track record (financially and stock wise as well). Is management experienced? Do they have skin in the game? Their track record at other companies. Reputation and look to something a little deeper, debt to equity ratios and so forth.
The third element is the technicals. Price point in and price point out. I use technicals when trying to find an entry point and vary it if necessary a little. I don’t want to miss something because my charts say the right entry point is $35.50 and the stock dips to $36. You just figure out how much money you were going to invest at$35.50 and buy less at $36.
I don’t do textbook, sorry.
The last component is the out. This is where more people fail than succeed. Trust me, I know what I am talking about.
This really depends on what your expectations are.
I know an investor, very old school who had the simplest philosophy you can imagine. He would buy whatever stock his research found to be a good candidate. He used technical analysis as his primary tool but there would be some fundamental work as well. He would then take a position and his guidance was clear, when a stock rose 20% from his purchase price, he would sell. If the stock fell 10%, he was out. No arguments with PM’s, no 200 page research reports from Goldman. He was out. Over the years, he has averaged around 8 1/2 return after taxes. Not world beating but he slept very well, every night. He also built up a very large investment management business which he sold to a major West Coast bank and lives in the same neighborhood as Bill Gross, who never slept well at night.
There are plenty of investors out there reading this and saying “How boring” or “I can do way better than that”.
Maybe, but remember this, most actively managed funds over the last dozen or so years , on average, have not beaten their benchmarks. Human intervention sometimes is just getting in the way. Why do you think the S&P Index Funds have become so popular?
I have friend, lets call him Max. Max bought Apple several times over the years, mostly on a huge dip. Max’s total investment in Apple is around $90,000. Max has never sold Apple, he has only bought it. He has a cash account at Charles Schwab that he keeps just on the oft-chance that he can buy Apple at a price point he likes. I do not know what that price point is now but I do know that Max had a lot of cash available the last time Apple dropped like a stone. Max also bought a lot of shares during the financial disaster of 2008. Max’s Apple portfolio is worth well over eleven million dollars. Fortunately for Max, he has worked and saved well and his four kids all went to college without him selling his Apple shares. Max is retiring and he has told me that if Apple sinks to some price point (He didn’t say) he will buy more but he has a price point for his out and knowing this guy, if it get’s there he will be selling.
The point of that story is, he was a steadfast investor and he ascribed to several principles but did not ascribe to the last. It was a simple philosophy with maybe the greatest stock and company the United States has ever produced.
There is a little aside to this story. Max owned 3,000 shares at one point and his average price was around 45 dollars a share. Stock was trading at 90 dollars a share and he asked me what do you think? I said sell your initial investments worth and keep the rest, play with their money. He didn’t. The stock split a few times after and he bought a lot more in 2008-2009 and in 2020. My gut tells me, his Apple position is a lot more than eleven million dollars.
Another point that is easy to make is that he is one of those rare investors that knows exactly what he wants, what he has and what he is going to do whenever he gets there. Most investors are not that disciplined.
Investing is simple. You buy something that you believe will appreciate in value and then you will sell it. You will pay Uncle Sam his Tribute and you will use that money to reinvest in something else. The cycle repeats itself endlessly and at the end of the quarter or end of the year you have a return commensurate with the risk you were expecting to take.
Simple.
It is people that muck it up.
Stupid people
Greedy people
People who do not listen or people who believe that they are so smart, they have found the secret sauce to investing.
I am here to tell you. No one has ever found the secret sauce to investing. Not Max, not my friend in LaJolla. No one. Not even Warren Buffet.
Plenty of managers and investors have had success over the years.
Peter Lynch is a perfect example.
I love Peter Lynch, formally of Fidelity’s Magellan Fund. His philosophy was simple. Invest in what you know and what you understand. The minute your eyes glaze over with an investment pitch, scrap it. You can’t explain it, you can’t buy it.
KISS. That was as simple as it gets yet at some point Lynch had had enough. Management at Fidelity is what it is. They are macro and micro managers in the same sentence and maybe he had had enough of the micro and just felt I have done enough. Or, I suspect, it was a matter of his own success. The Magellan Fund was one of the best long term performing funds in history. Lynch was a genius but at some point every fund becomes too big for it’s own good. Too unwieldy as far as investing and it’s impact on markets was felt no matter what they tried to do.
Should the fund have been capped out at some point? Yes. Back in the day, that was not something Fidelity tended to do. Especially with the Magellan Fund. They were earning hundreds of millions of dollars in fees and it was only getting bigger.
Their success killed their success.
Winning ways only last so long and keeping things simple makes it easier for an investor to realize it may be time to move on from any particular investment.
That’s where discipline comes in. Move out before the end approaches. Cockroaches do it. So should investors.
To translate this simple idea of investing to today’s market is not easy. Ideas are coming at investors faster than ever.
Biotech
Artificial Intelligence
Nanotechnology
Quantum Computing
Space, The final frontier
The biggest problem with all of this is that we are dealing with technologies over the next ten years that will probably advance society faster than the last thirty years and all of these ideas are complex in terms of technology and yes, there is a moral component as well. What will succeed and remain good for society? Who the Hell knows?
One thing I will not do is try and unpack the moral or even technological aspects of these things, I don’t have the intelligence or patience to learn or relearn something but what I will do is look at the simplest way to invest.
It’s a stock, it’s a company. It has employees. It has management and it has investors.
How hard could that be?