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, 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. 

    Thursday, January 14, 2016

    Why Investing Is So Damned Hard

    Maybe GoPro isn't so hot after all
    A friend of mine likes to say that, despite his love of flying, he'll never understand sky-diving. "Why would a sane person deliberately jump out of a perfectly good airplane?" The answer, of course, is maybe that no fully sane person would. Perhaps one needs to be just a bit mad to want to try something so mind-alteringly adrenalized, so breathtakingly dangerous.  

    In stock markets like we've seen lately, with all the TV pundits screaming “SELL!”, doomsday bears droning on about a 75% selloff, and credible-seeming analysts telling folks to convert their 401(k)’s into cash (colossal mistake), we investors try to keep our wits about usand our portfolios intact. Chaos distracts from our long-term goals. Many peer into the gloom—notably 2016 has so far been among the worst market starts ever recorded—and actually forget what their goals were, or how they intended to achieve them. The media frenzy and the red in our portfolios generates real fear. It’s a good moment to take a breath, get a massage or a cocktail or go for a walk, and rethink. This is all just the other side of the coin on Wall Street. 

    True, it’s difficult to remember how this can be normal. Market mayhem sometimes looks like Armageddon. But it happens, and we’ve seen it before. Heavy-duty market drops generally occur at least once per decade, and substantial corrections occur even more frequently. In fact, its moments like this that make it possible for stocks to be the fastest-rising asset class over time. This is why we invest in stocks. It’s part and parcel of what we signed up for. 

    But then, you knew it would be difficult. Investing well is incredibly hard, and not even because we can’t remember how to do a discounted cash-flow model or what a moving average is supposed to mean and so, ultimately, we can’t decide what stocks to buy. In actuality those are just tactical decisions and are not so tough: we’ve talked about assessing businesses here before. And here

    What makes profitable investing so hard is that it’s more about emotional discipline than hard skills. Anyone can learn the math of it, or what to look for. Successful individual investors must have something else. We need strict focus and considerable grit to achieve market-beating returns year after year. In fact, most fund managers are no better at it than the average Joes, even with their MBAs and years of brokerage training. According to the New York Times, only 2 out of 2862 funds routinely beat the S&P 500 index. 

    Investing is hard because it means peering through the haze of past performance to see future possibility, on the distant horizon—while those around us see only the haze. 

    Investing is hard because putting our money to work in the market means not making a purchase today, not satisfying that endless craving for stuff, in the hope that we’ll have the ability to work less and buy more years from now. There is no guarantee and we do it anyway. Repeatedly.

    It's hard because to resist cashing out in big market drops we must filter out the noise from TV, radio, social media, and newspapers that urges us to sell, sell, sell into a sliding market (which if done repeatedly will rapidly deteriorate our investment strategy to ‘Buy high, sell low’). Interestingly, the brokers and fund managers we hire are often more impacted by that noise than the rest of usthey're saturated with it with their CNBC and Fox Business and Bloomberg terminals, and they breathe it all day long. Which is partly why so many managed portfolios have lots of churn but little return. 

    Investing is hard because we must actually be greedy when others are fearful--one of Warren Buffett's most oft-quoted lines. Which is to say when all around us are panic selling, running for the hills, we're standing brave and sure, scouting for bargains to scoop up even as the stampede worsens.

    If Jim Cramer's 'Mad Money' was a stock, I'd sell
    And conversely it's hard because we must also be fearful when others are greedy: if the PE teacher and the electrician and the Uber driver and the grocery bagger are all talking stocks, it might well be time to trim our holdings and take a long trip, because it’s probably going to get ugly. 

    Investing is hard because it means avoiding the near-term thinking and portfolio churn pushed daily on us by the financial media, even in rising markets. The same media who are paid for their time on camera or their column or their sound bite, and have to come up with something catchy to say each and every time the microphone turns to them. (The really useful advice is so dull no one would listen.)

    What sane individual would want this job
    It's hard because it means decoding the Wall Street jargon, a financial dialect deliberately conjured to confuse us and scare us into hiring “experts” to manage our investments—for a fee, of course. Beneath the verbiage, getting results in the market isn’t all that difficult. 

    Mostly, it's hard because it means fighting the constant urge to look at our portfolios and do something, anything, when what’s best for strong positive returns is generally doing nothing at all. Investing well is boring stuff, a totally front-loaded decision making process followed by years of sitting on our hands and reading and thinking about our businesses.

    But how else can we do it? Even "blue-chip" stocks these days are off-the-charts volatile, and the financial media machine uses that to frighten us and take our money. Our friends and our brokers are subject to the frenzy and want to "protect" us. The market has terrifying long drops, during which we watch our hard-won gains slashed. And never in all our schooling (even the MBAs!) do we get the emotional training for proper long-term investment strategy. 

    A little bat-sh*t crazy can be a good necessary thing.