Author: SJ

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investing · The book

With the Mulligans on Full-D Radio

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Full D Radio

I had the pleasure of being interviewed about the upcoming book by veteran financial journalist Roben Farzad on Full Disclosure Radio, which airs on NPR stations and is available as a podcast. This was a double treat because Roben is so well-prepared and also because he also interviewed two young men, Quinn and Finley Mulligan, for the same segment.

I spoke with a lot of smart people for the book, ranging from experts on options trading to social psychology to short selling to problem gambling to marketing to behavioral finance to Silicon Valley’s culture, but people like Quinn and Finley are really the subject of the book and their insight was tremendously valuable. They are among the “apes” who bought and continue to buy GameStop, AMC and other meme stocks either as a way of making money, sending a message, or both. While I don’t personally recommend doing that, their explanation in the podcast of why they and others continue to is smart and worth a listen. And they aren’t just any apes – the twin brothers are in the process of making a documentary about it, Apes Together Strong.

The rise of the apes and the rush of young investors into stock and crypto trading is the biggest personal finance story, if not financial story period, of the past few years. I knew I had to write about it as soon as one of my sons pointed me to what was happening on r/wallstreetbets a year ago. The episode blew multi-billion dollar holes in some of the slickest hedge funds on Wall Street. But it also poured billions more into the coffers of other Wall Street establishments who claim to be “democratizing finance” and continues to do so.

I hope you’ll check out the podcast, the upcoming documentary and, of course, my book.

Columns

Oprah to Your Portfolio’s Rescue?

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January is a month full of hope for dieters but, as the year rolls by, our resolutions tend to fall by the wayside. Gyms know this, which is why they get so many new members around now and why it’s so difficult to cancel memberships. WW, formerly known as Weight Watchers, doesn’t make it as tough. That’s not just ethical but smart: They have a lot of return customers.

I wrote about the company today. They were expecting a great 2021 even if lots of customers gave up as usual. Instead it was a dreadful year and their stock slumped by a third. Sentiment is about as bad as it was back in 2015 when Oprah Winfrey rode to the rescue, buying a tenth of the company, joining the board, and becoming their brand ambassador. Back then the stock rallied by 1,600% in three years.

I don’t think that will happen again, but it is cheap and one thing holding it back may soon reverse itself. Even though lots of people gained weight during the pandemic, the company’s bet that they would turn to their services to lose it proved wrong because people view dieting as punishment. They had already denied themselves so much during the pandemic that they were looking for a grace period.

There isn’t another Oprah waiting in the wings, but the stock is cheaper than it has been in quite some time. Full year results due next month might not look pretty. That might give patient investors a good entry point.

Columns

YOLO, but Be Careful Out There

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The rallying cries of the boldest meme stock and crypto traders are YOLO and BTFD – you only live once and buy the f*cking dip.

Sure, fine, but here’s an old school Wall Street concept that traders who feel like they are reinventing the wheel should consider. Actually it’s originally an idea applied to gambling, the Kelly Criterion. I wrote about it yesterday. There’s a great book all about Kelly’s idea by William Poundstone, “Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street.”

Two of the smartest guys I know, Victor Haghani and James White from Elm Wealth, wrote a paper on how traders who really think their stocks or coins are going to the moon should approach their bets. Basically there are two things that can happen in a simplified world: You can be right and make a fortune or you can be wrong and lose everything – a distinct possibility with money-losing companies and new, unregulated financial instruments. Those with extremely high expectations. like Bitcoin going to millions of dollars or AMC’s stock going to $500,000 (yeah, really), should bet LESS, not MORE.

Once your payoff is gigantic, you’re taking an unnecessary risk by using a meaningful share of your savings to own something. Yet this is what lots of retail “apes” claim they are doing. They compound it by buying the dip every time it goes down. It’s also what Michael Saylor, CEO of software company Microstrategy, has done. He sees gigantic upside for bitcoin and has had his company borrow heavily to buy it. He owns a lot himself too. If he bet just half as much and turned out to be right then he would have more money than he could spend (he already does in fact), but if he’s wrong he’ll lose almost everything. Kelly allows you to make an optimal bet based on what you think will happen and maximize your payoff while avoiding ruin.

Columns · investing · The book

Does Your Index Fund Have “Diamond Hands?”

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Yes, these are Roaring Kitty’s hands

Anybody who has read my first book knows that I take a mostly dim view of active management. Still, this week I wrote about an episode central to my upcoming book that proves an exception: how active managers handled meme stocks.

When the market values of GameStop, and AMC went up several hundred or thousand percent based on no change in their fundamental value, active fund managers did the obvious thing – they dumped them and moved on. But index funds, which tend to beat those active managers in the long run, held tight with “diamond hands” because they have to. In some cases they bought more at inflated valuations as their assets grew or as those companies issued shares to their now almost entirely retail base of owners. The only passive investor I’m aware of that was able to take the money and run was Dimensional Fund Advisors (I interviewed their deputy head of portfolio management, Mary Phillips, for the column). Even today, with their share prices (in my opinion) still grossly elevated, the main owners of the meme stocks are the self-described “apes,” many of whom believe there is still a short squeeze looming because of phantom shares.

Active fund managers shouldn’t look a gift primate in the mouth. The last year that funds benchmarked to the Morningstar Large Blend category outperformed that benchmark was in 2013 and before that it was 2009, according to a study by Hartford Funds. Index funds have strung together several consecutive winning years over their active counterparts during extended bull markets in the past, too—for example between 1994 and 1999.

This is one of those cases when owning an index fund can be frustrating. As of today, the top two holdings in the Russell 2000 Value Index – let me repeat, “value” – are AMC and Avis Budget Group, another company that recently got the meme treatment for discussing the addition of electric vehicles to its fleet. Whatever.

Uncategorized

Spinoffs: GE, Johnson & Johnson

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I wrote this past week about corporate spinoffs, which are all the rage these days. In a spinoff, a company takes a division or two and hands it to its shareholders, creating a brand new public company. The new company usually doesn’t fit in with its new owners, which can be a very good thing for patient investors.

Funds will own, say, a bank, and now they have a small insurer or whatever and sell its shares. But the managers of the new insurer are suddenly even more motivated as they have stock options and a lot more upside if its shares do well. The famous value investor Joel Greenblatt wrote a gem of a book largely about spinoffs, You Can Be a Stock Market Genius.

As with lots of things in investing, though, the magic has faded. Investing in spinoffs used to be a formula for very good returns, but lately they have lagged. The problem might be too many people reading the same statistics and also too many activist funds pushing companies to split apart for no good reason. With both General Electric and Johnson & Johnson announcing split this past week, I asked whether these latest attempts would create more than some initial excitement.

Breaking apart a company can, in theory, unlock value. Corporate spinoffs as an asset class have done well historically. Value investor Joel Greenblatt highlighted the opportunity for the masses in his book “You Can Be a Stock Market Genius.” Several studies using data from the 1990s through the middle of the last decade have shown that a portfolio of spinoffs can beat the market by 10 to 15 percentage points in the year after they go public. Managers of a newly public company are more focused and valuations often rise to reflect those of peers. But there are catches. One is that investors have to hold on to the spinoff to reap the rewards, and many don’t. Initial selling pressure on spinoffs often creates opportunities for even more outperformance once a new shareholder base is established. But the spinoff secret is out. Activist investors now push companies to reshuffle the deck chairs to generate short-term stock-market gains. Trian, the fund that took a stake in GE in 2017 with disastrous timing, applauded Tuesday’s move.

Columns · investing

Aching Backs = Big Bucks

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Sometimes a fairly small company that I know will otherwise fall through the cracks catches my eye. The latest one is “The Joint,” a fast-growing chain of storefront chiropractic clinics. I learned a lot in the process of reporting it, most of it about the business of franchising rather than the iffy science of back “adjustments.”

The chain had been on a rocket ship ride with its stock up by 3,000% since the current CEO took over in April 2016. Then it took a tumble on a short-seller’s report. I don’t think that the report blew the lid off of a flaky company, as some reports do. But it correctly pointed out that the stock was pricing in some unrealistic growth.

Probably the most analogous company, and one most readers will know, is Massage Envy. Its founder was CEO of The Joint for a while and he sold Massage Envy in 2008 when it was still in its growth phase. It has been stalled for the past decade or so.

Will this do better? Back pain is a big problem, but The Joint has lots of imitators like SnapCrack and Chiro Now with similar no-insurance, subscription-based formulas. It has around 1% of the overall U.S. market and is the biggest storefront player so there is plenty of room to grow. Unfortunately, its revenue opportunity isn’t as big as it seems because clinics charge a lot more and offer more services. The Joint’s market value of $1.2 billion already assumes it will snatch a large share of a pretty big pie at more than 100 times projected earnings for 2023 when its management thinks it will reach 1,000 stores.

Some stores’ impressive profits represent in part an owner-operator’s sweat equity. For both the occasionally underemployed practitioners and their patients, a storefront’s simplicity has been appealing compared with high-pressure clinics. If one views the chain as being at the very early stages of disrupting its sector and assumes that its head start will make it the McDonald’s of back pain then its valuation could be a bargain. But if it is more like another Massage Envy then the stock’s price and its future cash flows are seriously misaligned.

“Aching Backs Equal Big Bucks, but an Adjustment Looms” WSJ, October 16, 2021

investing

Meme Stock Bosses Continue an Old Tradition

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Meme stocks like AMC and GameStop might be new, but their executives are continuing a very old Wall Street tradition: Making hay while the sun shines. You’ve probably read that insiders have sold tens of millions of shares, or “gifted” them to family members in cases when they weren’t allowed to sell, but they also have raised billions of dollars from enthusiastic retail investors.

I wrote about this for today’s Wall Street Journal. The whole #Apestogetherstrong and “diamond hands” schtick is new, but executives have long taken advantage of temporarily overvalued equity to buy competitors. Cisco’s value grew 2,000 fold during the dot-com boom and AOL bought the world’s largest media company with it in 2000. Back in the 1960s, “conglomerateurs” used their companies high growth and lofty P/E ratios to buy more growth with dozens of acquisitions of unrelated companies.

An article in The Saturday Evening Post in 1968, at the height of the boom, was titled: “It Is Theoretically Possible for the Entire United States to Become One Vast Conglomerate Presided Over by Mr. James L. Ling.”

The whole thing fell apart between 1968 and 1970 or so. This will too, but the value of the money raised and whatever it buys, or whatever debts it pays off, is real. Selling shares or using them to buy something can make a corporation more valuable. The math only works at the expense of late-arriving true-believers, though, whose contribution is diluted over the existing shareholder base.

Feeling Lucky?
Uncategorized

Feeling Lucky?

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Remember the DC-10? I’m dating myself by telling you that I recall flying on the widebody jet when I was about nine years old. I couldn’t have been much older than that because all of the ones operating in the U.S. were grounded for a while in June 1979. This came after the deadliest airline crash in U.S. history not related to terrorism, American Airlines Flight 191, which killed 273 people. A much longer grounding, more than a year-and-a-half, resulted from the deaths of 346 people in two crashes of the Boeing 737 MAX. And all U.S. air traffic was shut down for days after the 9/11 terror attacks almost 20 years ago which resulted in almost 3,000 fatalities.

While I’m not arguing that any of these were overreactions, they are a sign of how bad we are at weighing danger. I remember many people saying that, even once cleared to fly, they wouldn’t get on a DC-10 or a 737 MAX. Many skipped flying altogether for months after 9/11. Yet there seems to be virtually no concern today about a threat that killed 1,275 Americans in just the past two days – the Covid-19 pandemic.

Proms are going on unmasked, basketball arenas are full of fans with a few people wearing them draped around their chins, and airplanes are packed. Thank goodness 50% of American adults have now been fully vaccinated, but that leaves half who haven’t been. The people who are most likely to eat in a crowded indoor eatery or other high risk activities are also less-likely to be among the half concerned enough about catching or passing on the coronavirus to ever get a vaccine.

I’m not advocating for a lockdown, but the lack of caution is interesting. Somehow two or three hundred deaths from an air disaster gets us spooked, a few thousand dead from a domestic terror incident has us terrified, but 600 deaths a day with many more hospitalized are an acceptable risk.

Why do we think this way? Is it that a deadly fireball on the evening news seems scarier than the abstract thought of hundreds of people spread all over the country who are probably strangers gasping for breath and dying alone of a respiratory illness? An alternate explanation is that 600 is a whole lot better than the 3,000 plus a day who were dying back in January and that we’ve put the danger in perspective. 

The second explanation might be convincing if it weren’t for the fact that lots of people weren’t being at all careful then either. My family and I drove from New Jersey to Florida for our one and only trip of the pandemic over New Year’s. As soon as we got south of the DC suburbs the level of caution began to evaporate. Pee breaks were filled with anxiety as we walked into rural convenience stores and motel lobbies where patrons and employees seemed blithely unaware of the global pandemic.

But then maybe we were the ones who misunderstood risk. In terms of fatalities per mile traveled, a road trip in non-Covid times is about 750 times as likely to be fatal per mile as a plane journey. Being locked in a pressurized metal tube with a hundred or so mostly-masked strangers for a few hours each way might not have been too much more likely to result in infection than those bathroom breaks. 

All’s well that ends well as we didn’t get sick or crash, but maybe we would have been safer flying — even in a DC-10.

investing

“Unwoke” Investing

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The hottest thing in investing these days is using ESG criteria (environmental, social, and governance). Count me a skeptic. Yes, I have seen studies showing that, for some specific period, such funds have outperformed the market. They usually are funds that have avoided fossil fuels during a particularly bad stretch for energy companies or are loaded up with tech stocks during a really good period.

Should you be forced to invest in a company that conflicts with your ethics? No, I guess not, but then investing in a fund isn’t the same as giving a company money. On the other hand, if you really want to put your money where your mouth (and wallet) is, why not make as much money as possible and then give it to a cause of your choice?

Let’s say that ethically and religiously focused funds, which reduce the number of possible companies in which you can invest, will do just as well over time as a fund that owns the whole stock market. The fees they charge you for doing that will still eat into your return, which is why ESG is a brilliant marketing concept but not such a smart way to invest.

But you know what really isn’t smart? I read today in the Wall Street Journal that Trump allies are now getting into the fund management business to promote “Unwoke” funds.Pictured up top is Kevin Hassett, the co-author of Dow 36,000. Just a reminder that this book came out almost 22 years ago and the Dow hasn’t hit that milestone yet, so caveat emptor. Below is the description of the criteria behind their “Society Defended ETF.”

With respect to the 2nd Amendment Score, the base score will increase for monetary donations that support the right to bear arms or decrease for monetary donations that support gun control laws based on the dollar amount. The degree to which companies provide direct or indirect support to organizations which support gun free zones, support of gun control legislation, oppose stand-your-ground-laws, oppose concealed carry, support banning of firearms or refusal to do business with the firearms industry, and related advocacy groups or legislation will lower their 2nd Amendment Score.

Let’s just leave the gun control debate out of this and look at dollars and cents. If the companies, which I guess you could call anti-ESG, also do just as well as the market then you are paying unnecessary expenses to own the libs. At 0.75%, this fund charges you 0.7 percentage points more than a very low cost index fund. If the market goes up by 8% a year for the next 40 years then a $10,000 investment today would be worth nearly $50,000 less than in a plain vanilla fund. So if you love guns, or whales, or hate coal, or whatever, my recommendation is to just make the best investment possible and then get a nice tax-deduction at the end for contributing part of your windfall.

Columns · investing

All That Glitters Isn’t Goldman

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If you were to hold a contest to design the most-enticing name for a company right now you couldn’t do much better than “RocketFuel Blockchain.” And if you were to pick a bank to associate with it now or really any other time than Goldman Sachs would top your list. But read the fine print before you buy shares in a company by that name written up by Goldman … a lot of people seem not to have bothered.

“Following the release on April 1 of a news release titled “Goldman Small Cap Research Publishes New Research Report on RocketFuel Blockchain, Inc.,” the penny stock surged by as much as 335% in four days. Several lines down is a notice that the research firm, which accepts payment for reports, “is not in any way affiliated with Goldman Sachs & Co.”

And the report’s subject, formerly known as B4MC Gold Mines Inc., and before that as Heavenly Hot Dogs Inc., doesn’t appear to have any revenue and maybe not even a product, based on litigation about a patent that expired. The report was written by an analyst who, while he appears not to have lit the world on fire at more-established firms, has an auspicious name: Rob Goldman.”