Wednesday, October 5, 2016

Assembling a Portfolio in Weird Times

Match.com
It may not seem the case, but not everything is really about the election— even five weeks out from November 8.

In fact, I've found what I do to be a stark relief from the endless round-and-round of posts and tweets, candidates and spin doctors, journalists and pundits, all trying to sell me on a reaction or a policy or a vote. Stock investing is frequently made out to be vulnerable to political outcomes, but it isn't really. Not usually.

I may be in the minority on this. There seem to be gobs of articles on how one industry or another will suffer if Clinton is elected, or what horrors will befall the broader markets if Trump gets the job. Most of it is hogwash. Truth be told, during each of the most recent four big-growth periods for the US stock market, the political affiliation of the American president has shown no favoritism: Eisenhower (R) in the 1950s, Reagan (R) in the 1980s, Bill Clinton (D) in the 1990s, and Obama (D) in the 2010s. Despite popular arguments, economic expansion or contraction during any given administration actually has more to do with the previous presidential administration's impact than with that of the current one.

Under Armour
Which is not to say that an election doesn't sway markets: it certainly does, but not in a way which matters to you and me. Right now, we're seeing big market swings day to day, in large part a reaction to daily news about who's in front, what was said at the debate last night and so on (as well as many factors totally unrelated: interest rates, China, Brexit ...). Not to mention that in 2016 there is one uniquely ill-informed and volatile candidate. All of which creates tremendous uncertainty about world order in general and the resulting business climate. But the difference is this: all the uncertainty and fear is short-term, and we invest long-term. What the S&P 500 does from one day to the next is immaterial if we are buying stocks to hold for a minimum of 3 years. Stocks overall rise over 60% of the time. That's 2 years out of every 3. Financially speaking, who cares what happens just between 9:30 and 4 tomorrow, or even for the next couple of months?

When investing in a business for years to come, it is essential to focus on the business. Don't try to time purchases to when "things calm down" or "the election is behind us" or "prices cool." That's an impossible task to carry out correctly, and amounts largely to guesswork. Who's to say that the election won't give stocks a huge push, increasing prices? Or that some international event doesn't keep things stirred up?

Taser
The better bet is to continue doggedly, season in and season out, to choose businesses led by bright, motivated, transparent people who care more about customers than about the stock price. Businesses with little debt and strong growth. Recognizable and respected brands with excellent products or services, whose competition is way behind. (Read last year's column, 6 Critical Criteria for Investing).

These businesses are not particularly concerned with who currently runs the government, as they are looking further out than four or six years. They shift the dynamic, and change the conversation. Do you not 'Google' the answer to every imaginable question? Shop first for a tricky item at Amazon? Drink Starbucks lattes, depend on an Apple or Samsung smartphone, communicate with friends via Facebook, put most every purchase on a Visa card? These companies change consumer buying patterns, reshape industries, sometimes even alter our very lives. They measure success in millions— or billions— of customers over decades.

Planet Fitness
They are visionary companies. They will dream up journeys to Mars (Tesla), demilitarize the police (Taser), and introduce us to our future loved ones (Match Group). They protect us from hackers (FireEye), keep us healthy on a budget (Planet Fitness), and take on international conglomerates (Under Armour). They will continue to perform and innovate and delight customers everywhere.

Even a frustrating and consuming election season is nothing but a blip. Don't let it impact your investment plan.


Drifting to Fifty | Random unrelated nugget

An asset is something which puts more money into your pocket every year, and a liability is something which takes more money out of your pocket every year. Which one is your house?

Sunday, July 17, 2016

The Buy Now List - Updated for Summer 2016

Just a few weeks ago I wrote a post about the no-movement stock market, the forces holding it back, what I thought would happen next and what not to do (don't sell and buy a boat). You can find that article here

Since then, the market has finally begun to move upwards. Brexit's immediate negative impact on US stocks was reversed and forgotten within about a week. The S&P 500 reached a new high a few days ago, topping its best from mid-2015. If you're not fully invested in stocks right now, you're missing out.


But also since then there have been some news items worth considering when it comes to choosing specific stocks to get into today. So for those of you who can truly buy and hold— aiming for a 3-5 year window— here is my revised Buy list:


Apple (AAPL): No longer the astonishing growth story it's been for the last 15 years, Apple is still one of the most powerful money machines in the world, yet the stock is clearly on sale. Even if Apple is selling fewer iPhones than it was, the company is massively profitable and will continue to be so. In the next few months they will release the iPhone 7, which holds promise as many buyers of the iPhones 5 and 6 still have not upgraded, potentially waiting for the 7 to arrive. In addition, Apple Music will be revamped and easier to use, for release in October; Apple Watch II will be faster and more useful; AppleTV is expanding its reach into the smart home, and on the horizon lies the Apple car, sure to make a dent on an old and stagnating industry.


Disney (DIS): Disney is on a roll. Its theme parks bring in more visitors spending more dollars every year, and the new Shanghai Disneyland will only increase the company's growing brand strength in China. The movie studio's animated, superhero, and Star Wars films continue to dominate at the box office, making huge gains year over year: in 2016 Disney films have vacuumed up 32% of all US box office revenue to date, double the company's market share of just three years ago. And then there are the billions in licensing deals related to hundreds of characters and stories, its Marvel comics and Star Wars universes, and its Frozen juggernaut. Plus they've got ESPN, their children's television networks, their subscription web services, games and so on... Disney is what I like to call a "forever" stock: buy it, tuck it away, forget it, will it to your children. It's an astonishing business.

Facebook (FB): Hard to believe there's anyplace to go with Facebook, now at 1.6 billion members, but here it is: Facebook is massively profitable, yet it's stock price has yet to catch up to it's rocketing revenue growth. While it was once a worry that Facebook would lose its cache once Grandma signed up, it now looks like the very future of digital social connection. 

Under Armour (UA): Under Armour's stock has been beaten down severely from its highs last fall, largely on the departure of two senior executives and a rare earnings miss in Q4. Neither of these will impact the business in the long term. UA has been doing an excellent job growing its core business with exploding sales particularly of basketball shoes and other athletic clothing (partly thanks largely to prescient contracts with basketball phenom Steph Curry and world #3 golfer Jordan Speith— and now newly crowned Wimbledon prince Andy Murray), as well as a fast-growing women's apparel business. Meanwhile the company has invested $1 billion in connected-fitness technology and "wearables", competing with FitBit and the AppleWatch, among others. UA is is still the only company with a chance to actually challenge Nike's worldwide sports and fitness dominance. In fact, nearly all of their success has been in the stateside: UA's penetration of the global market has just begun.


PayPal (PYPL): Recently spun off from eBay, PayPal is rising fast in a newly wild-West payment environment. Scores of companies are now competing to process your spending, from Square to ApplePay to plain old handwritten checks. But trusted stalwart PayPal recently rolled up Venmo (the millennial's favorite cash-exchange system) and is now a major payment processor, putting real fear into the banks and the credit card companies. Digital payments are here to stay and PayPal is one of the frontrunners.

Chipotle (CMG): This fast-casual restaurant chain was one of the fastest-rising stocks of the 2010s until a short but brutal e-coli outbreak hit a number of locations last fall and winter. Stores emptied while management scrambled to contain the damage to Chipotle's locally-sourced healthy image. New nationwide safety processes are now in place to prevent another outbreak and free burrito promotions have put business on the upswing again. Loyalty programs and a renewed focus on quality will propel continued company expansion and stock price increases for the future. Pick it up while it's still underpriced.


I also offer a few higher-risk picks for you adrenaline junkies looking for bigger returns:


Twitter (TWTR): The financial press is all about how user growth is flat at Twitter. True enough, for now. But hundreds of millions of loyal Twitter users around the world continue to count on the service for news, sports updates, and celebrity worship. Twitter has been helpfully evolving its user interface and has recently reinvented its platform for advertisers: it's revenues have never been higher. The company has been rapidly adding live sports-streaming deals to its content coffers. And whether the business continues to go it alone or gets rolled up by Google/Verizon/Amazon, it's not going anywhere and is improving steadily.

Netlix (NFLX): Netflix continues to grow both inside the US market and, more notably, overseas. With services now available in 15 languages across 190 countries, the company is picking up speed with customers around the globe. Netflix defies critics again and again with the breadth and depth of its offerings and its stubbornly-low customer attrition rates, yet prices and revenues are up year after year. The long-held worry that profits will be squeezed as the company pays more for content over time has begun to give way as Netflix increasingly relies on its own in-house production of both TV shows and movies, easing margins and increasing content control. The legacy TV networks look stale and unimaginative in comparison; it may be that Netflix is just hitting its stride. (Day of this post, NFLX missed its expected subscriber growth numbers for Q2; the stock immediately fell off 15%, verifying my expectation of volatility. Plus now it's a bargain!!)

Tesla (TSLA):  On the forefront of the electrical transport revolution, Tesla, as well as its real-life Tony Stark founder Elon Musk, is always in the news. The current fervor surrounds the company's singular vehicular "autopilot" software, implicated in the highway death of a Florida driver who was apparently watching a movie while barreling down the freeway in his Model S sedan. It's a momentary headline. Last month the story was Tesla's offer to buy out its cousin business, Solar City, with the idea to vertically integrate solar panels with batteries and electric vehicles. As a stock Tesla will be a seriously volatile ride, but this company is routinely compared to Apple for its market-making vision, brilliantly conceived (if expensive) products, and its determination to change the world.

Finally, Sell: General Motors (GM): While GM has recently grown both leaner and meaner, making and selling better automobiles than they have in 50 years, and likely will see a small earnings pop this week, nonetheless the company suddenly faces a new and substantial risk. On Tuesday last week a federal appeals court opened the door for billions of dollars in wrongful-death lawsuits stemming from GM's faulty ignition switches, a profit-scorcher from which GM's 2009 bankruptcy would otherwise have shielded it. In light of the potential for those lawsuits now to proceed (124 people died in ignition-related accidents), I am recommending a sell for GM. Details on that story can be found here.


Drifting to Fifty | Random unrelated nugget of the week
Your relationship is a box. It is separate from you and your partner, it's a third thing. It must be made strong. It will contain nothing until you fill it up. If you take out more than you put in, it will be empty. 

Thursday, June 16, 2016

Gracefully Navigating a Frustrating, Go-Nowhere Market



The last 18 months have been a terrible time for market investors. We've seen historic high volatility and, at the same time, virtually zero price appreciation in the S&P 500 or the Dow, which is like getting seasick without even leaving the dock. As a result, many investors are pulling money out of stocks and putting it into Treasury bills (yielding under 2% in most cases), bonds (as much as 4%), and worst of all, spending it.

Don't give up.

Look at what's been happening lately: s Syrian civil war and the resulting refugee crisis threaten to overwhelm western Europe; Brazil is facing crime, corruption, political collapse, and the Zika virus, all set against the coming Summer Olympic games; China's formerly ripping economy, driving much of the world's production of goods, is slowing down; a mass shooting occurs every few months in the US; Great Britain teeters on the verge of exiting the European Union; and a polarizing, confusing, destructive US presidential campaign season is in full swing. The stock market is largely a national thermometer of stability and confidence. Is it any wonder it's in turmoil?

The vast majority of investors feel more comfortable getting out of a market that is stagnant,  erratic or falling. They wait until their own confidence returns— when stocks are clearly rising— and then they reenter the market, only to sell again when things again look bleak. That's the same as selling low and buying high. Then they repeat the cycle.

The appropriate response, of course, is the most logical but also the least comfortable: it is to stand pat. Don't sell your holdings. Wait it out. Because typically, in two years' time, not a single one of the disturbances mentioned above will matter. None will impact your long-term returns.

Soon enough, the market will begin to move again. It might take until after the election in November, or it may be as soon as next week's "Brexit" vote. But it will happen. Consumer spending is relatively strong, in spite everything. That will be reflected in companies' earnings, and that will impact market prices. Given what's been going on, there is a fair amount of pent-up stock price appreciation looking for release. But if you sell, you'll be on the sidelines when the turn comes.

Certainly, not selling doesn't mean you have to do nothing. There are plenty of interesting businesses currently available at great prices. And when things do turn, you'll look brilliant. (I doubled down on LinkedIn late last Friday because it looked underpriced. On Monday news came that Microsoft was buying LinkedIn for a 50% premium over Friday's closing price. I didn't know that would happen, but I'd be lying if I said I didn't love the feeling. And it confirmed my entire investing philosophy.)

With or without market movement, it's a good time to buy

Apple (AAPL): No longer the astonishing growth story it's been for the last 15 years, Apple is still one of the greatest money-makers in the world— yet the stock price reflects only the former. Even if Apple is selling fewer iPhones than it was, the company is massively profitable and will continue to be so. In the next few months they will release the iPhone 7, which holds promise as many buyers of the iPhones 5 and 6 still have not upgraded, potentially waiting for the 7 to arrive. In addition, Apple Music has been revamped, the Apple Watch will be faster and more useful, AppleTV is expanding its reach into the smart home, and on the horizon lies the Apple car, sure to make a dent on an old and stagnating industry.

Facebook (FB): Hard to believe there's anyplace to go with Facebook, but here it is: Facebook is massively profitable, yet it's stock price has yet to catch up to it's rocketing advertising revenues.

Twitter (TWTR): True, user growth is flat at Twitter. But hundreds of millions of loyal Twitter users around the world continue to count on the service for news, sports updates, and celebrity worship. The service has been helpfully evolving its user interface and has recently reinvented its platform for advertisers: it's revenues have never been higher. And whether the company continues to go it alone or gets rolled up by Google/Verizon/Amazon, it's not going anywhere.

General Motors (GM): A leaner, meaner GM is making better automobiles than they have in 50 years. Down to 4 brands (Chevrolet, Buick, Cadillac and GMC Trucks), the company has been on a tear with critics and analysts both. The higher quality, more competitive products have allowed dealers to decrease buyer incentives, which has improved GM's profitability, and the strongest balance sheet in decades hasn't hurt either. The market hasn't recognized the company's achievement yet, but it's coming.

PayPal (PYPL): Recently spun off from eBay, PayPal is rising fast in a newly wild-West payment environment. Scores of companies are now competing to process your spending, from Square to ApplePay to plain old handwritten checks. PayPal recently rolled up Venmo (the millennial's favorite cash-exchange system) and is now a major payment processor, putting real fear into the banks and the credit card companies. Digital payments are here to stay and PayPal is one of the frontrunners.

Under Armour (UA): Under Armour's stock has been beaten down severely from its highs last fall, largely on the departure of two senior executives and a rare earnings miss in Q4. Neither of these is likely to impact the business in the long term. UA has been doing an excellent job growing its core business with exploding sales of basketball shoes and golf clothing (thanks largely to prescient contracts with Steph Curry and Jordan Speith), as well as a fast-growing women's apparel business. Meanwhile the company has invested over $1 billion in connected-fitness technology and "wearables", competing with FitBit and the AppleWatch, among others. And to date, UA is is still the only company with the ability to actually challenge Nike's worldwide sports and fitness dominance.



Friday, April 29, 2016

Are You Certain You Understand Stock Market Risk?

Many investors will tell you the reason they are not currently invested in the stock market is because it's too risky. If you press, they'll describe their fear that, at any time, the market could drop and they'll lose their money.

Sadly, most look no further. Instead they'll leave their money in a savings account earning nothing, which is equivalent to losing 3% or so a year due to inflation. Or they'll put in a coffee can. Or worse, they'll spend it on a depreciating asset, like a car or a living room set.

Most people misunderstand stock market risk. They confuse the risk of owning stock in a particular business with the risk of owning a diversified basket of market stocks— or a broad-market exchange-traded fund. They rightly fear that, without proper education or a willingness to get deep into the weeds of investing, their hard-earned dollars will disappear, even if they do everything "correctly," due to bad luck. So they do nothing.

I can't blame them. There is no formal education in American high schools, and precious little in college, to familiarize them with basic investing concepts such as the power of compounded interest, managing risk and expectations, or opportunity cost. They are left to sift through the gazillion messages thrust upon them from financial TV, newspapers, social media, billboard advertising, and the painful personal anecdotes of their friends and colleagues. The takeaway is that investing is difficult, complicated, frustrating, hazardous.

In fact, it is doesn't have to be any of those things, at least not permanently. Yes, the market swings wildly day to day (and some individual stocks will make you absolutely sick: have a look at Monster, and Netflix). Some years, like 2015, the broader market goes nowhere. And some years, like 2008, it drops precipitously. If you're in the stock market, you will lose money again and again, on paper. It is unavoidable. But smart investors know that over time, the market rises. Absolutely always, no matter what. However bad it looks up close, step back a couple of years and things smooth out. Hold that in your head, endure the short-term drops and stay with it, and you'll find that investing can be actually quite simple and extremely profitable.

Of course, it is in the interests of Wall Street brokers and financial managers everywhere to hide that information, so they will be paid to sort, advise, and manage your money. I expect that the democratization of information will ultimately come to finance, as it has to automobile sales, taxi service, travel booking, and other industries. But until then most folks will be left in the dark. So let's be very clear.

Owning a few shares, or a few hundred shares, of any one business is risky. There are no two ways about it: an individual shareholder has effectively zero power to sway the outcome of that investment, so whatever happens to that company will affect the investor. The business could outspend its sales (Twitter). It could be targeted for legal action (Google). Its products or services could change or be upended by those of a competitor (Apple vs Sony). Or it's entire business model could simply cease to be relevant in a fast-changing environment (Radio Shack). Those risks are real and they are substantial. When you buy that stock, you are placing your faith in the management of that company to shepherd their company, and your investment, to ever greater heights. But no one can see the future and things go wrong all the time.

By contrast, however, owning a few shares each of 10 or 20 businesses is less risky. Things that go wrong at one business are unlikely to affect the other businesses whose stock you hold. One company could hire a new CEO with completely the wrong ideas for the future, and that company could tank. But your other businesses will be fine, so the overall financial risk of ownership is reduced. (Assuming, of course, that the companies are not all in the same  or related industries.)

And by the same token, owning shares of 500 businesses, as one would when buying shares in a low-cost S&P 500 index fund like the Vanguard 500 ETF (which I've discussed before, in this post), is nearly risk-free.

WHAT!? Of course it's not risk-free! you shout. What if the market falls, like in 2008? Or 2000? Or for that matter, like in 1929?

In previous blog posts I've talked about only investing money you don't need for a minimum of 5 years, but preferably for 10 years or longer. We're talking about your toddler's college fund, or your retirement. This is a long, long game. And here's the thing: over time, the S&P 500 always goes up. If you buy an S&P 500 ETF and it goes down, just wait. It will come back up and go on to huge gains. It simply will: I know this because it's been rising in the long term since George Washington won the presidential election in 1789 (unanimous, by the way).




But that's the difference between real stock risk— that any one company's shares will fall and not come back— and perceived market risk. Advisors everywhere describe the stock market as dangerous to asset preservation. They tell their clients not to have too much in the market. They urge diversification. Ok, that's smart. But nowhere else can a typical disinterested and passive investor earn a long-term average return of 10% per year (over the past 100 years) for doing nothing. Because the broader market never stays down. If you own a big basket of stocks, or a broad indexed ETF and things go down, just don't sell. It's long money. Reign in your fear. Stay the course. The market will come back up.

Understand what is, and what is not a risk. Buy that ETF and sit tight. Couldn't be easier.

Monday, March 21, 2016

Winners Wanted

In my last post, I discussed the market 'doldrums' and how I'm preparing during this achingly slow period to ready myself for some buying in the next few months. But what does that mean in real terms? What exactly should I be looking for? I'll need a checklist of attributes I want my businesses to have as well as resources with which to research the companies in question.

First, I'll need a place to start. For that, I often turn to The Motley Fool's free podcasts, of which my favorites are Rule Breaker Investing and MarketFoolery. Respective hosts David Gardner and Chris Hill break down simple stock selection methodology and their favorite companies in brief understandable segments, providing a perfect jumping-off point for beginning investors looking to get the basics, as well as for the more experienced who want fresh ideas.

Next: data and other information. I've said previously that my favorite starting point is Yahoo!Finance. Online today you can't find a more comprehensive, up-to-date, easier-to-navigate stockpile of free public company info. You'll discover recent financial statements, basic criterial calculations, insider (executive) histories and stock positions, and a broad-reaching searchable database of articles on every American public company, plus hundreds of internationals.

(A portion of what follows was originally published last summer. It's been edited and updated.)

Hopefully by now a few specific businesses look promising. When I'm thinking of investing my hard-earned money to buy into one of these businesses, I want to be able to
  • Describe in one sentence exactly what the company does
  • Identify the CEO by name, and whether she or he is a founder of the business
  • Identify primary marketplace competitors 
  • Recall how the stock has done over the past 12 months

The next step is to start examining specific criteria— contrary to a lot of what we read, I generally find it more helpful to search qualitatively than quantitatively— that will help me decide if this company is one I want to own. Here's what I look for:


1. Sustainable Advantage, or 'Wide moat'. What kind of a gap exists between the business I'm looking at and other players on that field? For example, Amazon has a huge moat against every other internet retailer— even every bricks and mortar retailer— due to its sheer scale, which lends it buying power, shipping efficiencies, and brand recognition. Which means in every theoretical matchup between Amazon and Walmart, or Chinese e-tailer Alibaba, Amazon is the odds-on winner. The moat generally makes it a safer investment. 

But a competitive advantage could be anything difficult to replicate, whether another company is currently competing or just thinking of getting into that market. Proprietary technology for example— or actual patents— can keep competition at bay for years. Think of what happened to the Sony Walkman line when Apple introduced the iPod. Plain old momentum, too, provides a hell of an advantage: look at the the uphill battle faced by anyone— including deep-pocketed Amazon— who tries to challenge Netflix in streaming TV.
Under Armour's Kevin Plank

2: Smart, transparent leadership. I also want to learn about the executive team. Every company's 10K (annual report, written by the execs) is available for free, and many execs routinely make themselves available for interviews with the financial press. Are they smart? Does what they say make sense? Do they seem genuine, or phony? Are they likable, or trustworthy? Confident? Slimy? Egotistical? Do they talk about their customers and their employees— or just about their board members and stock price? I'm looking for how they think, whether they duck hard questions or obfuscate their answers. I want to get to know them because ultimately they run the businesses I'm buying into, so largely they will decide the success of my investments.

3: Low debt. I generally don't like businesses which are capital-intensive: they require a lot of expensive equipment or facilities which drag on their cash reserves and profitability. As an example let's look at airlines. An airline has extremely high fixed costs for equipment, fuel contracts, parts, logistics systems, and lots of trained personnel and retirement/pension expense. An airline has to take on huge debt to finance these costs, and the payments on that debt take a fat chunk out of profits. Because airlines sell a commodity (a seat on this plane is largely no better than a seat on that plane) they face brutal price competition, and when the economy dips, customers travel less, and the airlines and their stocks frequently take a pounding.

So I look for the line item Long Term Debt on any business's most recent balance sheet, and what I want to see is total debt around 25% or less of the company's annual revenues (this information is on the Balance Sheet of any public company and is easy to find). I want to know is how much the company is borrowing compared to how much they're selling, so I can get a napkin-sketch idea how much the debt payments (usually 5-10% per year) drag on profitability. 

It's everywhere
4: Be a customer. Many investors are interested only in what they can learn from financial statements, leadership 'guidance', or from technical analysis of charts and graphs. All of which is useful. But unlike them, I believe the customer experience is perhaps the most fundamental measure of a company's values and future opportunity. I'm pretty normal. So when my customer experience is substantially flawed (bad restaurant service, a crappy or crashing website, cheap fabrics, a lousy return policy) I am unlikely to come away feeling good about the company's prospects; that company's values would seem misaligned with mine. But when the customer experience is stellar, I imagine other customers will be as delighted as I was. I start to see possible future trajectories for that business, and I get interested in owning a piece. So whenever possible I prefer to buy companies I do business with directly (Amazon, Netflix, Apple, Starbucks, Chipotle, Twitter) or whose products I've used extensively (Under Armour, Visa, Disney, Imax). While I can research the financials and leadership and competition and operational efficiency, only being a customer gives me the ability to properly judge its products or its value proposition to other customers. Without that piece I have a lot less to go on.

The original 1997 logo
5. Climbing stock price. We've all heard 'buy low, sell high,' so it's counter-intuitive that you'd want to buy a business whose price is climbing. The truth is that buying low often means buying a company which has lost value and might never regain it. There are usually very good reasons why a stock gets hammered down, and the market is brutally efficient. The odds that you'll buy a company whose price is unjustly low— one which has been oversold by unnecessarily fearful investors, so its price is currently below its 'real' value— are slim. Instead, look for businesses with rising prices: these are companies the market has decided are winners, and in the words of David Gardner, "Winners tend to keep on winning." It's more difficult to go wrong with fast-growing businesses, for which revenues are increasing year-on-year and profitability is improving with them.

6. A great brand. This qualitative assessment is more art than science, and it requires me to look around at my community, at the news, current music, at my family, at teenagers in our circle, at colleagues, friends and neighbors. Is this brand popping up more? Are celebrities photographed using their products? Do my kids want me to buy something they make, or does it seem like their prices are rising a little faster than competitors? Am I noticing their stuff product-placed on TV? Does the company ever come up in general conversation? These are all signs that the business in question is hot or heating up, that it's coming of age. Good signs. 

The important thing to bear in mind through this process is that I'm not simply buying something which represents the future success (or failure) of a company. It's not a bet. I'm becoming an owner of this business. Which means the business itself should be fun, exciting, and compelling for me. Otherwise I'll tire of it in a couple of years when it hits a rough patch, and that will make me want to sell. But real investing gains come only over the long term. So buy smart.



Thursday, March 10, 2016

Doldrums



My dad was a sailor. When I was young I had to take sailing lessons first thing in the morning every summer, then on weekends sit with the family, bored out of my mind, on his tiny sloop as we tacked back and forth across Boston Harbor. A typical boy, I wanted speed: speedboat, ski boat, jet-ski, really anything that made a wake. But he was never more content than he was in that open little boat, mainsheet in one hand and steering with the other, sun on his face, a Heineken between his fingers on the tiller.

The worst for me, however, was when the wind died completely. He called it the doldrums, which was technically inaccurate (the doldrums are an actual location near the equator, sitting between trade winds) but he nailed the spirit. As does the word itself: it sounds tired, slow, dreary, which of course it is. When you hit the doldrums, there's nothing much to do. It's a sailboat, after all, and-- ever the purist-- Dad didn't have a motor. So we sat.

After a few dull minutes, Dad would start getting busy with all the nothing. He'd put one of us on Scout duty, scanning the distant surface for any sign of an incoming breeze. He'd have someone else coiling lines and sheets, putting away winch handles and empty soda cans and hats left around the cockpit. Eventually he'd pull out nautical charts of the area and ask Mom to fix a snack or something. It could be a while, he'd tell us. He'd teach us again about the sails and the wind indicators, called telltales. He'd quiz us on terminology. It was all just filler, trying to keep us engaged and interested until the wind returned.

But really he was preparing us, himself, the boat. Because on the water, weather can change suddenly and violently, and then things often happen fast. A sudden a squall, a rogue wave, even just an unexpected gust, and your little boat is rolled and you're in the water.

Welcome to the US stock market doldrums. A real banner year, with all major indices down so far in 2016 after a flat 2015. If you're one of those who finally pulled the trigger and started investing in the last couple of years, take heart.

Technically, of course, we're in year 7 of a bull (rising) market. This is true because, while 2016 to date has seen a correction (short drop), it's not enough to knock the market out of bull status. But that's pointless advisor-driven wordplay. Here on the ground in real time, nothing seems to really be moving much. We got whipped at the start of the year, and now it's up a little on Tuesday, down on Wednesday and Thursday, up again Friday through Wednesday, then down again. No celebration, no panic, no excitement at all.

Sadly, this is the stuff of successful modern investing. It's tremendously tedious, punctuated by tiny moments of action when you buy or sell something. Nearly all of the rest of the time, it's this. Just nothing.

From all that sailing training I know to use the time. And I am. I've been on Scout duty. Of course I'm not just looking for signs of a market wind, but for specific opportunities: businesses that have been repriced by the market correction in January and early February which haven't recovered yet and so represent good values going forward. I'm also inspecting my holdings for signs of weakness: businesses which-- if ultimately a sudden gust comes over my gunwale-- I'll need to sell because they don't necessarily have the products or the distribution or the branding or the management experience to weather a real storm. I've been moving money around, selling some older investments which I believe have had their run, and socking away cash with which to buy when I identify new targets. I've been doing a lot of reading about business, economics, investing practices, media, and the hot mess we're calling a political campaign season. I'm coiling my lines, bagging my empties, readying my winch handles.

Dad would be proud.




Thursday, February 11, 2016

I'm getting killed in 2016-- and that's OK


I don’t know about you, but my portfolio is taking a beating so far in 2016.

As of this writing, I am down more than 20% in the last 6 weeks. That wipes out my +15% for all of 2015 and puts me at about at the level I was in September of 2014 (net of any additional purchases made since then). Which, I think, is better than most … but it sure feels lousy. I think about my kids’ college money burning like a pile of leaves. The plan to pay for my elderly mom’s future medical bills, circling the drain. My own retirement, receding into the distance.

So this is it. We in the investing community—and that’s by definition with a long-term bias, as opposed to the trading community—we often talk about withstanding the downturns in order to realize the big gains which follow. We talk about adding to our existing positions on the dips, to lower our average per-share cost and position us for future rises. We talk about the grit and strong stomach required to hold, even to buy, in times exactly like this. All the practice, all the articles, the books, mentors, the courage we’ve mustered to get into this crazy sandbox in the first place, it all comes to this moment. Right now is why most people can’t invest for themselves. Right now is what they are afraid of. Right now is the origin of the horror stories.

But here’s the truth of it: we are stronger than they are. We can overlook today and focus on tomorrow. My all-time favorite Warren Buffet quotation isn’t the one about fear and greed. It’s the stock market is a device for transferring money from the impatient to the patient.” Right now is the moment the impatient are fleeing, and the patient get to keep the money behind.


The irony is that, awful as it is, we knew it was coming. We didn’t know when, or how bad or how long, but we knew it was coming because it always comes. That’s what it is to be an investor: a series of downs and ups, heartbreaks and triumphs. Following the stock market run that began in 2009, we’ve had a helluva ride, turning victory laps as the broader market more than doubled in 7 years (really only 5 years since we’ve now erased any gains made since 2014). So of course this would happen. And in fact it needed to happen to reset the overpriced businesses, to clear out the high-trading speculators and gamblers, to make prices attractive enough again for the rest of us to buy—which sets up the market to rise again to a higher level.

My friend Morgan Housel just wrote a piece this week about how it is that the markets gyrate as they do, and why that is not only normal but necessary. And my friend Ben Carlson just posted an article about how we view bull and bear markets differently, despite our commitments on each cycle not to do exactly that. Finally, if you’re still panicky, re-read my post from last July about when to sell—and when not to sell.

And get your clicker finger ready to hit the Buy button. Because this won’t last forever, and prices are getting more attractive every day.


Drifting to Fifty | Random unrelated nugget of the week

If inside your suitcase you roll your carefully-folded slacks and shirts around a pile of underwear, socks, pajamas, and shaving kit, the folded clothing will be less wrinkled when you arrive.

Saturday, January 30, 2016

A Calm Voice and a Steady Hand

In my twenties, at a time when my marriage was new, my career was stalled and my father’s illness was worsening, I was fortunate to get to know a gifted man. He was a spiritual leader and a counselor, and among his talents was a rare ability to soothe, and calm, using only his kind eyes and gentle voice. When he turned to you, for that moment you were his entire world, and he made you feel safe. He must have been an amazing counselor.

The markets this month have been a roller coaster from hell, all big drops and loops and fast hairpin turns, not a single steady climb to be seen. A little soothing and sense of security would be welcome.

As I’ve said in previous posts about studying the market and where investing ideas are born, I like to read about business. Clever and observant writers give me most of my ideas not only about what to invest in, but about how those businesses are performing, who they partner with, what their leaders are up to, how they compete, what products are coming down the pipe, and on and on.

And I’ve mentioned before, at least in passing, who I read. But it’s not just academic: these individuals offer analysis, experience, wisdom and also something else: in difficult market moments, these people are the cool and steady hand on the wheel. They reassure me. They remind me that no matter how far the broader market falls, no matter the beating I take on my positions, it will all come back. That I’m playing the long game, measured not in quarters but in decades. That no market rout which lasts a few weeks can shake my foundational belief that over time, the market rises. Without them, I am lost, sleepless, panic-selling into a dropping market.

In no particular order, followed by links to their work and their Twitter handles where applicable:

Morgan Housel, The Motley Fool, @TMFHousel


With a deep understanding of markets, the economy and history, as well as the psychology of the individual investor, Morgan stands alone. He possesses an uncanny ability to simply reframe complex concepts and turn the impenetrably technical understandable. He posts two or three columns a week and is routinely a guest on the Motley Fool podcast series.





Barry Ritholtz, Bloomberg and The Big Picture, @ritholtz


A seasoned money manager and award-winning journalist, with a terrific 10,000-foot view of what’s happening and why you should care. Barry also hosts the Masters in Business podcast series for Bloomberg, offering excellent long-form interviews with the pillars of finance and the economy today. 





Chris Sacca, Lowercase Capital, @sacca


Chris is a former Googler who made some prescient early-stage tech investments when he left, and one thing led to another and he just kept going. He's a venture fund manager, advisor, and entrepreneur, and now appears on Shark Tank. Among his angel plays: Uber, Kickstarter, and Instagram. He spreads his wisdom primarily on Twitter and via his many appearances and interviews.



    Tadas Viskanta, Abnormal Returns, @abnormalreturns


    An investor, blogger and author, Tadas operates the site AbnormalReturns.com, where you can find one of the best curated daily must-read lists on the financial web. What's pertinent to today's investors. Check him daily.





    David Gardner, Rule Breaker Investing, @DavidGFool, @RBIPodcast


    David and his brother Tom founded the Motley Fool in the mid-90s following a remarkable stock-picking run, and they continue to run the advisory and wealth-management firm today. David prefers smart, disruptive, low-capital businesses with huge potential, which he buys early and holds for 5 years or more. His personal returns have been extraordinary over the last 2 decades, and his engaging new podcast teaches how replicate it in a fun and approachable way. Tune in.


    Chris Hill, Market Foolery and Motley Fool Money, @TMFChrisHill 



    I actually don’t read Chris as much as I listen. He hosts two podcasts, MarketFoolery (daily) and Motley Fool Money (Fridays). With the input and analysis of his guests, Chris asks questions we'd ask, distilling daily business news and stock moves into understandable bullet points—so investors quickly learn what’s happening and what do about it.



    Jason Moser, The Motley Fool, Motley Fool Money, Market Foolery, @TMFJMo 


    A straight up “stock” analyst, and probably Chris Hill’s most-often guest. Jason is not just another business expert: he looks at the market like a consumer, deriving many of his excellent specific opinions and recommendations less from the performance of the stock than by the performance of the business, against its competitors and for its customers— which is a better indicator.



    Ben Carlson, A Wealth of Common Sense, @awealthofcs


    With keen observation and a wisdom belying his youth, Ben provides grounding to the financial community with his buy-and-hold doctrine and get-rich-slow values. Ben’s blog offers intelligent analysis not of individual stocks but of the current environment, what drives him crazy about his industry and the potholes we all fall into. His book, A Wealth of Common Sense, is the best investing guide I’ve read in years.

    Josh Brown, The Reformed Broker, @ReformedBroker


    Josh offers a clear-headed and entertaining perspective on the money-management industry as well as on markets and the economy. One recent post related the current volatile bear-market environment to Leonardo DeCaprio's repeated survival trials in The Revenant.






    Then there are those who don’t write a column, but who have outsize impact in the capital markets. These investors have sufficient gravity to pull in board members, executives, journalists, and people like us, who watch them for ideas and perspectives. Just by keeping your eyes peeled for news with their names you’ll gain all sorts of useful insight:

    Warren Buffett, @WarrenBuffett

    You already know who he is, because he’s the biggest of them all. Warren is in the financial news somewhere every day. No one on the planet has more market wisdom or stock-picking expertise, or more patience. Personally I've been underwhelmed with his purchases lately, and I sold shares in his company, Berkshire Hathaway. But there is still no one in the industry more wise, or more worthy of my trust. His instincts and clarity are astonishing. check out his annual letters.


    Charlie Munger


    Warren Buffett’s 50+ year business partner and number-one counsel, Charlie has long been the more acid-tongued and entertaining of the two. The smarts and experience of Warren but with a good dash of pepper. Find him giving interviews on YouTube.







    David Einhorn, @davidein


    Hedge fund manager with a mixed record, but dependably well-researched and frequently does a deep dive on one troubled business or industry a year which he then bets against, and presents his findings as a slide show at investor conferences. Always a fascinating perspective. 




    Carl Icahn, @Carl_C_Icahn


    Phenomenally aggressive and talented activist investor who just about always gets a huge business in which he buys a big stake to cut costs and improve efficiency, thereby driving up the price of the shares owns. An investor could do worse than to routinely follow him in.


    Bill Ackman


    An activist investor with a lot of losses, but even more wins, Bill likes to stir it up and he’s not shy about going public with it. A great source for background information or just for the viewpoint of a smart man who does what we're doing, but on steroids. See his interview with Bloomberg from last autumn.



    Dan Loeb

    Like Bill Ackman, Dan will get aggressive, writing public letters to execs and board members when he’s unhappy about returns on his holdings. His research team could win awards: the discovery that then-Yahoo CEO Scott Thompson had padded his resume ousted Thompson and won Loeb a couple of Yahoo board seats. You can find him on YouTube as well.


    There are many others, of course. I follow dozens of executives, investors, and journalists on Twitter, and their tweets lead me to hundreds of articles a month: I read about my businesses, the industries they compete in, about the larger economic trends, about the day-in-day-out of investing, of searching and questioning, of remaining clear-eyed, and keeping my focus on the horizon.