Ari Weinberg
More Fine than Finance
Don't Weep for the Rally
Gross and Grantham quarterly letters, presented without comment.
Lessons from the Value Set
Originally published at FiLife.
Growth investors favor fast-growing, young companies which tend to be light on dividends and heavy on moon-shot products or disruptive technologies.
Value investors, introspective geeks of the investing world, are bargain hunters. They like to buy out-of-favor companies with consistent earnings.
Last week, value investors took center stage at the Value Investing Congress in New York. These are the disciples of famed investor and professor Benjamin Graham. His book, Security Analysis, is The Bible for the value set. It preaches that the best investing is done through solid research and understanding of company operations, not fly-by-night whims or momentum.
Current practitioners of Graham’s theory include Berkshire Hathaway CEO Warren Buffet and mutual fund managers Bill Miller and Mason Hawkins.
I spent a few days at the Congress to glean some value tips for the everyday investor. Here are my observations:
1. Have a World View: Though each manager at the conference came to present one or more individual investing ideas, most of the presenters prefaced their stock pick with a clearly delineated macro-economic thesis.
David Einhorn of Greenlight Capital, famous for recommending a short of Lehman Brothers in 2007, built his case for holding actual physical gold, given his worries about the safety of the banking system and concerns about inflation. Whitney Tilson of T2 Partners presented extensive research on continued trouble for the housing industry.
For most of us, without the time to drill down on individual stocks (remember, it’s their JOB), a world view – right or wrong – can offer a sound rationale for the manner in which we invest.
2. Be a Skeptic: No longer an active hedge fund manager, legendary investor Julian Robertson told the audience to temper their confidence.
“There’s always something that could come along and swat you over the head,” he told the crowd. Also, parting with some in the value crowd, Robertson says he sees value in strong, lasting franchises, even in technology. He cited Intel and Google as examples.
Eventually growth stocks, if they generate enough cash, can excite the value set.
3. Be Principled: Investing on a whim is a sure way to financial ruin. Kian Ghazi of Hawkshaw Capital says he approaches each investment with this question: What would cause a 30% decline in price and have us NOT want to buy more?
This perspective could have helped a lot of us when the markets were in the depths of March. What caused you to run for the doors? Was there a fundamental flaw in your risk tolerance? Was the world actually ending?
4. Have Discipline: As we’ve mentioned at FiLife several times, do not fall in love with your money or investments. Alexander Roepers of Atlantic Investment Management said his firm has clear “buy/sell” discipline.
He mentions this tactic both in terms of how his firm makes an investment – scaling in over time – as well as getting out at a set level.
For everyday investors, this discipline comes in having a plan and rebalancing/reallocating when assets shift. If you are set to own 75% stocks, if you get to 85% because of market improvements, take your gains and go back down.
Who Will Protect Us from the CFPA?
President Barack Obama spent Friday afternoon stumping for the Consumer Financial Protection Agency.
The new regulating body, first proposed in June, would stand up for consumers in a broken world of financial regulation largely built on ensuring the safety of institutions and products.
The agency is for those “who signed contracts they didn’t always understand offered by lenders who didn’t always tell the truth.” In remarks this afternoon, the president added, “They were lured in by promises of low payments, and never made aware of the fine print and hidden fees.”
The issue, however, is that massive protection for the unwitting or the unknowing will end up creating more expensive and rigid products for everyone.
So before the administration and Congress press too hard on the reform button, they should look to the recent credit card bill for evidence.
Reuters blogger Felix Salmon rightly pointed out in a recent column that credit card rates for people assessed interest hit a low of 11.96% in early 2003, hit a high of 15.24% in August 2007 and after a slight dip are back to 14.90%.
Card companies, en masse, have been raising rates before the new laws fully take effect. This is at a time where borrowing costs FOR EVERYTHING ELSE are at all-time lows. Go figure.
The catch with new (and old) financial products is that we don’t know the extent of damage they can cause until they are abused.
Subprime mortgages used to be a backwater of the home loan industry, until everyone and their mother became a lender and every hedge fund wanted to own the loans. A credit card was supposed to serve as a convenient line-of-credit for a large transaction, until people started depending on them. Overdraft protection was supposed to fulfill your payment in the rare case that you didn’t have enough in your account, until rare become everyday.
Now, in these days of online accounts and quick transaction, the burden of overspending, overborrowing and overdrafting falls directly on us.
“This is not intended to take accountability away from consumers,” said Austan Goolsbee, a member of Obama’s Council of Economic Advisors. He and many others contend that the mish-mash of federal and state regulators allowed financial operators to “wiggle their way in between regulatory cracks.”
In this way, the Consumer Financial Protection Agency would be concerned about innovations that pose risks. But, as with any innovation, you never know the risk is there until it HITS.
If you truly want a Consumer Financial Protection Agency, start with yourself, your own financial education and then start working on your friends and family. Sure, the government should be there for you, but you need to be there first.
“Caveat emptor” is the longest standing consumer warning for a good reason.
Sirius XM and Loose Options
Sirius XM, for its troubles and debt load, is supposedly working itself out of a ditch.
The stock, long a favorite of daytraders, has gone from an all-time low of $.05 to $.55 in just 8 months. That’s an 1100% return for the most meticulous timers. But just because the market likes to fling the company’s stock around doesn’t mean the company should do so.
A story in today’s Wall Street Journal notes that five executives sold nearly $3.2 in stock over the past few weeks.
“The executives collectively received almost 10 million restricted shares of Sirius XM on May 19, with the shares to vest gradually over about 40 weeks.”
The author spoke to the company spokesman who stated that the shares were granted as short-term incentive pay.
Clearly!
I can understand a company in dire financial straits offering key executives options or restricted shares to stick around/meet goals, but 40 week vesting?
Either Sirius XM, at the time of the grant, didn’t think its trading stock would actually make it that long or the financial incentives there are quite perverse.
As a subscriber (and therefore a stakeholder), I’m thrilled to see Sirius XM stay healthy. As a proponent of shareholder value, I can’t see how you can match short-term incentives with stock grants.
The Wisdom of Twits
Always be wary of financial advice given for free.
Take this lesson to heart and then dig in to StockTwits, a start-up stock-talk site built on Twitter streams.
The site filters Twitter messages using stock ticker symbols (annotated: $IBM or $MCD) or general market commentary including a “$$.” In order for your posts to show up on the site, you must follow @stocktwits on Twitter.
To the unfamiliar, the StockTwits stream is full of stock touts often associated with Yahoo Message Boards or faded sites like Raging Bull or Silicon Investor (all three shadows of their tech-bubble selves.) But the beauty of StockTwits, for a trader, investor or even casual browser, lies in the ability to find new voices and information on macro-economic trends, sector news and individual stocks all in one place.
True, a quick glance at StockTwits will feature a fair share of rooting – “Go $AIG Go” – when a large stock is running, but as with any new product you have to take some time to learn to use it.
“You have to have a filter,” said Howard Lindzon, the Internet entrepreneur behind StockTwits and, formerly, WallStrip. Lindzon stresses that StockTwits is first and foremost a community and not a stock-tip platform. “It offers social leverage, but also requires collaboration and tolerance.”
And while StockTwits is open for everyone to read, what messages make it through to the official site is discriminated. “There’s no such thing as a truly open community,” says Lindzon.
To keep out spammers and marketers, Lindzon and his team filter what the StockTwits audience sees. (Want the unfiltered version? Just do a Twitter search for your favorite stock and compare the results to the StockTwits search.)
StockTwits is definitely populated with its share of day traders, both momentum folks and technical geeks. There are even options pros. There are few actual professional money managers due to regulatory restrictions and disclosure rules, so you’re not going to get a big stock tip from Fidelity here.
At StockTwits, a casual investor, even someone like myself who generally holds mutual funds, can find macro and sector opinions from informed stock bloggers. They may not (and should not) turn you to the risky side of stock trading, but they can give you quick, real time, insight into business and financial moves that could impact your own work, purchasing or well being.
Chasing stocks is often a rube’s game. The pros have much more money and risk tolerance and will take the casual trader for a ride.
And, increasingly, the pros aren’t even people. The stock markets are being overtaken by Matrix-like supercomputers. So, if you are even considering taking your chances, you need any edge you can get. One blogger and frequent StockTwit poster Todd Sullivan – who runs ValuePlays.net – keeps a running commentary on a book of “value” stocks.
Berkshire Hathaway’s Warren Buffett, the most famous living value investor, likes to buy beaten up companies and coax them back to health over a longer period of time. This is his “value play,” in direct contrast to the profit-yesterday mentality of stock trading.
“Computers don’t make value assessments,” says Jim Gobetz, a Philadelphia-based money manager. Given the number of computers simply trading this market by rote, eventually they are going to get some wrong.
Wouldn’t it be nice to know when? Perhaps you could read about it on StockTwits.
You can also download the company’s StockTwits Desktop application for an integrated experience. Below are a few active (and wise) posters to StockTwits:
@abnormalreturns: Private investor Tadas Viskanta offers his take on financial news.
@GregorMacdonald: An energy investor who offers a macroeconomic perspective.
@marketfolly: A long/short hedge fund analyst’s take.
@toddsullivan: One of the more active value investors on the network.
@aiki14: Money manager Jim Gobetz on U.S. economic news.
Originally published at FiLife.
Take Your Own Credit Measurements
Credit card lenders are a brave bunch.
Their business of (blindly) extending credit is based on three key assumptions:
- Consumers will take a short-term no-interest loan to make a purchase.
- Consumers will overspend/undersave to the point that they pay interest on the loans.
- Merchants will take a haircut to complete a sale.
As each one of these assumptions has broken down over the past few years, the industry is moving quickly to sure up its profit-taking mechanisms in the face of the Credit CARD Act. But a recent interaction with Discover brought me to reconsider how many of these lending banks make financial decisions.
On a recent statement, I expected to see a bill for $1.62. When I checked online, I had received a “small credit balance” and a zeroed-out statement. Card companies have different minimums for which they will bill. Discover, apparently, is among the highest at $2.00. Anything less as an outstanding balance, keep it. It’s not worth it.
Oddly enough, according to the customer service representative I spoke with, Discover considers the total cost of mailing a statment and receiving and processing a check when deciding to issue a credit. While I have not received a printed statement or written a check for a credit card bill in years, I can understand the analysis. Not all companies are as generous, so I’ll take the gravy.
But this experience, and a recent FiLife article, had me thinking about the opposite situation. What if I pushed the limit on the other side? Instead of buying so little that the company waives the bill, what if I maxed out every card and then just paid the minimum without reusing the cards? How long could I last?
I first did a credit card inventory. On a spreadsheet, I entered each card, its credit line and annual percentage rate (APR). You can start by getting a free credit report at annualcreditreport.com, but you’ll have to go to your card site or statement for the rate.
- Aggregate Revolving Credit Line: $118,500
- Weighted Average APR: 12.57%
That anyone in their right mind, individually or collectively, would extend an unsecured $118,500 to me is exemplary of credit card companies’ willingness to take risk. That my APR would range from 7.75% to 18.99% is even more confusing. I used weighted average in order to fully value/discount each APR by the size of its corresponding credit line.
In considering my own capital structure, these lines of credit are undifferentiated and junior to my student loans. They are all variable lines with no seniority and, theoretically, should all be priced the same.
Assuming 4% minimum payments, I would pay of this mother loan in 19.6 years. It’s a pointless figure—let’s call it Maxed-Out Credit Age—but might be an interesting exercise for consumers to take a real look at how long and far they can drive their credit.
What is your maxed-out credit age?
To find out, add up your credit lines, determine the weighted average APR and then assume a 4% minimum payment with this calculator.
Busking 2.0
Working New York’s streets and subways is becoming more difficult. 
As consumers shift their spending to plastic, pockets are naked of bills and coins. No more dollars for the erhu player. No more pennies for the homeless.
And yet, the pitch endures. Organists set up shop in the subway, dropping a few coins and bills in their case to give the appearance that someone before has already appreciated their talents. Panhandlers still ask for change, even pennies, to get something to eat.
It’s almost heartbreaking. And it’s time to move forward.
As far as I can tell, the most recent innovations by street performers and panhandlers are more than a decade old. CDs produced on home computers or cut-rate studios gave passers-by something to remember you. And the United Homeless Organization created a platform for a new (and dubious) homeless pitch.
It’s time to get on the plastic bandwagon. Ingenico or VeriFone, with the cooperation of a bank, should set up a wireless network for panhandlers and buskers to accept credit and debit cards.
Just think of the ease of use. Enter an amount, swipe your card and enter a pin.
You’ve just authorized $1.50 for The Naked Cowboy! And there’s even documentation in case you want to aggregate your donations to the homeless for a tax write-off.
In order to cut down on transaction costs, there would be citywide batch processing and ACH to tranfer to affiliated bank accounts or debit cards.
Then again, such a system would make trackable the enterprise of scofflaws and subterfuge. Considering the complexity and hassle this would entail, buskers and panhandlers would be resistent to such drastic change.
And so, it’s back to change.
Communication Breakdown Palace
Talk about bad PR.
“As you may have guessed by now, Harvard refused to cooperate when I was reporting this story. At first, the university’s public-relations apparatus ignored me. Week after week, e-mail after e-mail, I’d be assured that someone or someone else was unavailable—in meetings, or on vacation, or away from his desk, or out of the office, ill. When I did manage to track someone down, I was thrown a sop of evasive prose. (“I don’t feel we’ve made a decision about how to best engage for your piece,” the vice president for public affairs told me in an e-mail.) A formally scheduled interview with the dean of the business school was canceled at the very last minute. (“Glitch” was the subject heading of an e-mail informing me that the meeting was off.) Even requests for basic, public financial information were bungled. When I asked him a simple question about Harvard’s debt, one of the university’s many communications directors stonewalled: “I’m not a numbers person at all,” he said, wide-eyed.”
The Harvard takedown in the recent Vanity Fair is light on finance and high on invective. The stonewalling by the school is a non-starter for me. When a major publication comes calling, even on a controversial topic, you work with them or against yourself.
Government Shackles Must Really Hurt
Major banks can’t wait to throw themselves from the TARPean Rock.
Take American Express and J.P. Morgan Chase, for instance. Both issued non-FDIC guaranteed debt on May 13. Now in the ranks of several other “banks” (Goldman Sachs, Morgan Stanley, Bank of New York Mellon), these firms are looking to crawl out from the burden of 5% preferred TARP funding by selling common stock or issuing non-FDIC-backed debt.
Where I get caught up is in the speed and pricing. Given the draconian, retroactive rule setting, the TARPtakers are finding operating on government cheese with government strings to be a little uncomfortable. (Refresher, TARP is 5% preferred for 5 years and 9% perpetual preferred after that. But the salary rules and subsequent arguments “if you take X, you must do Y” are taking their toll.)
So, what does it mean when American Express sells 5-year notes at 7.25% just days after Microsoft sells 5-years at 2.95%? Better yet, J.P. Morgan Chase - deemed to be among the strongest banks - priced its 5-year at 4.65%.
Such wide spreads over Microsoft (and Treasurys!) prove that the finance companies will rid themselves of government’s grip at any cost. For J.P. Morgan Chase, of course they would issue the debt. It’s LESS than TARP. American Express - not so much.
American Express - where is the advantage? Are taxpayer bosses, threatening to turn common, really worth the nearly 600 basis point spread to Treasury securities.
Why doesn’t American Express avail itself to government goods until it too can refinance when business settles and spreads come in? What does AmEx know that we don’t which would make them willing to take such a large spread? Could it be that they are taking a real view on rates?
Better lock in those 5, 10 and 30s before inflation starts to make those 9% perpetual preferred look good.
Of course, the Treasury has made the financing decision now one of psychology, employee retention and executive pay as opposed to simple capital structure and finance.
