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.
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.”
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.
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.”
I edit more and write less these days, but even when I do write I often forget to link to it here. I’ll try to be better in 2021.
One thing I wrote recently generated an unusual amount of reader email, split about 40-60 between congratulatory and outraged. I said that star fund managers are to be avoided and I used the example of Cathie Wood, whose main exchange traded fund at ARK Invest grew assets by 1,000% last year and gained nearly 160%. She bet big and won on hot stocks like Tesla and biotechs that benefitted from Covid-19 speculation.
I am apparently a misogynist or don’t understand her genius or both. Anyway, the evidence is pretty strong that jumping on the bandwagon once a fund manager graces magazine covers isn’t a great idea whether that manager has a “Y” chromosome or not. You can read more about managers like Ken Heebner and Bill Miller in my book.
The column starts out with a “famous last words” puff piece from The Motley Fool titles “Move Over, Warren Buffett : This Is the Star Investor You Should Be Following.”
So read the headline on a year-end article from retail investing advice site Motley Fool touting the performance of fund manager Cathie Wood. Variations on the “Buffett is done” theme have been around since at least the tech bubble, while the cult of star mutual-fund managers goes back to the 1960s. Such commentators have eventually eaten their words.
Ms. Wood is a savvy businesswoman, but is she a savvy investor? Stock picking skill is very rare and even harder to discern when the manager is riding a hot category. In a bull market propelled by dumb retail money, everyone is a genius. It takes many years to establish whether success is random. And, as I point out, star manager’s performance is often worse than random on the downside. The most promising active funds are those that lagged their peers recently or got a low rating from a firm like Morningstar.
Fund managers are often compared with dart-throwing monkeys. That might be too flattering for those who get the most attention. Hot funds’ performance is often worse than random on the downside. A regularly updated study on the persistence of investor performance from S&P Dow Jones Indices shows that just 0.18% of domestic equity funds in the top quartile of performance in 2015 maintained that through each of the next four years—less than half what one would have expected by pure chance. And of course most actively managed funds lag behind the index to which they are benchmarked because of fees and taxes.
Anyway, the tone of the emails has made me more convinced that some investors in “disruptive innovators” have lost touch with reality. Congrats if you were early — the fund’s performance is pretty impressive (see chart below) — and be careful if you were late.
It sounds a bit flippant at a time when so many people are seeing their nest eggs melt down on paper, but the message is important. Retail investors lag the market significantly because of timing errors and the biggest mistakes are made at junctures like these. If the 20% bounce from the coronavirus-fueled low turns out to be a dead cat bounce then it will stoke further pessimism and cause people to either sell or to have less of their wealth in risky assets such as stocks once the eventual turn comes.
I’d love to tell you when that turn will be, but I can’t and neither can anyone else. The important thing to remember, though, is that if you were comfortable having, say, 70% of your nest egg in stocks when the Dow was knocking on the door of 30,000 then you should feel the same way at 20,000 or (gulp) 15,000. The richest gains of the next bull market (no, I don’t think this recent bounce was the start of one) probably will come early on. They always have before.
For example, if you put $100,000 into a plain vanilla U.S. index fund at the very start of the last bull market in March 2009 and had sold at last month’s peak then you’d have $630,000 including dividends. If you had decided to wait three months to make sure it wasn’t another false alarm then you’d have just $450,000.
Bad times are surprisingly good. If you could go back in a time machine and buy stocks at the bottom of every bear market of the past 90 years but had to sell as soon as a recession had officially ended then your annualized return would be a whopping 64%. You would never have lagged the market’s long-run return.
And what if you really can’t sleep at night? Well that’s okay – Covid-19 is enough to worry about! But then you should do one of two things. One would be to dial back the risk you take permanently – no cheating the next time everyone around you is getting rich on pot stocks or whatever the next fad will be. You’ll be that much older and closer to retirement then anyway. The other would be to entrust your money to someone else like a reputable fee-only adviser or a robo-advisor like Betterment or Wealthfront and just check it as infrequently as possible.
Why should you (sort of) like bear markets? Because they’re the time when your attitude can make you a superior investor. Everyone is a genius in a bull market, but tough times are when your mettle matters – no finance degree or superior IQ required. When those glossy brochures from a brokerage firm tell you that the long run return of stocks is 9.6% or whatever, those returns include bear markets that have seen portfolios cut in half or worse.
That’s my usual spiel, which you can read about at length in my book as well, but it’s when I finish giving it and emphasize that nobody on Wall Street knows anything that someone inevitably asks what I think about the market anyway.
I used to get paid a lot to tell people which stocks to buy. Now I get paid a more modest sum to write and edit articles about the same thing. It doesn’t mean you should listen to me about what or when to buy. But, for whatever you may think it’s worth, I’m pretty pessimistic at the moment. If I hold to form then I’ll still be pessimistic when the turning point is reached and we all should be buying stock funds like crazy.
Back when I was writing my book, I decided to start a chapter on the wild, wacky, and frequently value-destroying world of “alternative investments” by playing around with the Hedge Fund Name Generator. It usually combines a color, a geographic feature and a corporate moniker. For example, I just came up with “Red Road Partners.”
For the purposes of the book, I kept trying until it spit out some bizarre or offensive sounding ones like YellowRoad Associates, SolidOcean Markets and, best/worst of all, Black Street Brothers.
The fashion used to be names from Greek mythology and I wrote a LinkedIn post a while back, Letter From a Failing Hedge Fund Manager, in which the author’s fund was called Oedipus Capital. But while you use up the acceptable classical names pretty quickly, the current trend has a ways to go. Just do the math: Six primary or secondary colors times 30 geographic features times seven corporate types gives you 1,260 fund names — way more than you’ll glean from the index in Edith Hamilton’s Mythology. Throw in street or town names and you have tens of thousands of choices.
Doesn’t this confuse people? “Hey man, was I supposed to wire that billion dollars to Golden Lake or Silver Lake?” Isn’t it at least getting a bit old? I know that there is some reflected glory here — BlackRock and what have you — but how about just gaming the system the way the way a plumber does to get to the top of the listings in the Yellow Pages: “2 & 20 Management” or “AAA Amazing Returns Capital?”
Alternatively, just get to the point. “Gigantic Stacks of Money Partners,” for example. It isn’t like there are truth in advertising rules for hedge funds. One of the best funds ever, by the way — though it existed only on paper — was Andrew Lo’s “Capital Decimation Partners.” It gained 2,560% over seven years, though it contained the seeds of its own destruction because it simply sold out-of-the-money puts. In today’s return-hungry world, I bet he could start a real fund, name it that, point out in bold text how it could all end in tears, and still attract huge inflows. What a time to be alive!
Saudi Arabia’s de facto ruler Mohammed bin Salman wanted to see his country’s crown jewel, Saudi Arabian Oil Co., or Aramco, valued at $2 trillion. Market reality got in the way and he had to settle for a mere $1.7 trillion in last week’s initial public offering, which also was limited to regional investors.
But the first day of trading Wednesday saw the shares limit up—a rise of 10% on the local Tadawul exchange. Another performance like that—and strong social and financial incentives not to sell make that a distinct possibility—will see the sought-after $2 trillion mark breached.
Looked at another way, though, the company’s value is absolutely pedestrian. Aramco’s 1.5% free float means shares owned by the public are worth only $28 billion. By contrast, Microsoft and Apple have floats worth $1.08 trillion and $1.06 trillion, respectively, if one excludes insiders.
In the energy world, North American exploration and production companies Occidental Petroleum, Marathon Petroleum and Canadian Natural Resources are all larger on this metric. Super major Exxon Mobil has a float worth 10 times as much as Aramco at nearly $300 billion.
Warren Buffett ’s 89th birthday is a good occasion to revisit a question that has been weighing on financial minds lately—what price to put on Greenland. As far as we know, President Trump hasn’t contacted the Oracle of Omaha on the question of valuation, much less negotiating tips. But one of Mr. Buffett’s earliest letters to investors has an interesting way to think about such outlays. He quipped that Queen Isabella of Spain, who gave Christopher Columbus the equivalent of $30,000 to find the New World, could have instead invested it at 4% interest and had $2 trillion by 1963—nearly $18 trillion today. Denmark spurned an offer from President Harry Truman of $100 million in 1946 to sell Greenland. It is unlikely that a then-17-year-old Buffett, already a budding value investor, would have made the offer. The same sum invested in the S&P 500 would have compounded since then, with dividends reinvested, to a whopping $163 billion.
Denmark may have missed a huge opportunity, but don’t judge too harshly—the future author of “The Art of the Deal” was only born that year.