investing · The book

You Named Your Fund What?

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.

But we have now jumped the fund name shark. An article today by my colleague Cara Lombardo is titled: “Far Point To Buy Global Blue From Silver Lake.”

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!

journalism · The book

Mueller Needs a Literary Agent

I published my book without the benefit of a literary agent (long story), but going through the process without one made me appreciate what one can do for you, even if I got in the door at Penguin/RandomHouse on my own. This week I asked in an Overheard column how much money Robert Mueller could have earned if he had the rights to his free-to-read report on President Trump and his associates. Various versions were the number one, two, and four sellers on Amazon as of Monday morning.


If Robert Mueller was like most authors, he would be pingingAmazon.com ’s website hourly to track the popularity of his eponymous report. He also would be jumping for joy. As of Monday morning, various versions of the partially redacted text occupied the first, second and fourth slots among all books.

Of course, unlike the opportunistic publishers charging money for the 448-page tome, which can be read for free online, Mr. Mueller won’t be receiving royalties on his best seller. The fortunes of the various versions, available for preorder for as much as $26.89 in hardcover and $10.22 in paperback, speak volumes, though.
No. 2 in sales overall is a version containing a foreword by legal scholar and sometimes Donald Trump defender Alan Dershowitz. Despite costing a dollar more, readers seem to prefer a copy less flattering to the president featuring analysis by three Washington Post journalists.

From the Overheard column, April 22, 2019
The book · Uncategorized

Heads I Win Voted “Best Read” for Advisers

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I’m honored that my book was just listed as one of the best summer reads for advisers by Financial Planning. It’s on the list with some great books such as Michael Lewis’s The Undoing Project,” Daniel Kahneman’s “Thinking Fast and Slow,” and a book called “Great Expectations” by some British guy named Charles Dickens whose name rings a bell.

“There’s great stuff in here to share with clients, particularly when markets head south. Good behavior is handsomely rewarded for investors with long-term time horizons. I quote from it often.” – reviewer Stephanie Genkin.

This was a great one-year “bookiversary” gift. I’ll be speaking this fall at the FPA’s Financial Fitness Workshop in New York and at the annual meeting of the American Association of Individual Investors in Orlando for anyone who wants to see and hear me discuss the book’s lessons in person.

 

investing · The book

Markets Have Reached Peak Consonant

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We’ve hit peak consonant and that has me worried about the stock market.

There’s a difference between being an investor and a speculator. I advise readers to stick to the former in my book and to keep it simple. But I also point out that the awful performance of most ordinary savers has a flip side since the markets are a zero sum game. Aside from fees, which are considerable and keep many fund managers and advisers in fine fettle, a small number of speculators reap the rewards of outwitting a large number of suckers. When you zig they often zag. if you want to be one of those guys or girls who can sniff out opportunity or danger and profit from it then you have to be able to read the writing on the wall. I think I just saw it.

The trend of naming companies and products with few or no vowels seems to have peaked. The shuttered burger store pictured above, which I walked by yesterday on Broadway,  is exhibit A. Why on earth would this matter, though? Names are just names, after all, and the likes of Flickr, Scribd, or Unbxd are mostly private companies or, like Tumblr,  divisions of public ones with other activities.

Ah, but trendy names have been a recurring sign of danger in markets. Back in the early 1960s there were the “tronics.” Any company associated with space or electronics did marvelously for a while as the government poured cash into the Space Race. Burton Malkiel writes about a company that sold records door-to-door and changed its name to Space Tone. It saw its stock rise sevenfold in a short period. This sort of irrationality signaled not only a bubble for those particular companies but the beginning of the end of the Kennedy Bull Market.

Years later, most of us were in the market already during the granddaddy of them all when hundreds of companies with a dot-com in their names achieved lofty valuations. We all know how that ended.

In fact it seems that, even outside of a bubble, avoiding companies with exciting names is smart. The great investor Peter Lynch wrote in One Up On Wall Street, the first book I ever read about investing, that “a flashy name in a mediocre company attracts investors and gives them a false sense of security,” and he warned against buying stocks that have an x in their name.

I decided to test this out for an article I wrote for the Financial Times back in 2010 and found 109 companies in the Wilshire 5000 that began or ended with an ‘x.’ They were, in fact, more expensive, far more volatile, and less likely to be profitable. In a stock picking game I’ve been playing for several years I’ve blindly shorted such stocks and made decent returns doing so. ‘Q’ is just as bad.

So back to the vowel-less companies. Is it a case of what’s old is new again? The Semitic languages, including modern Hebrew and Arabic, had some of the first alphabets and are written mostly without vowels. When I went to Hebrew school they were written in but are considered training wheels in modern Hebrew, much to my confusion in Israel.

That’s not the case here. There is no convenience factor as with those scripts, just a hipness quotient. My former colleague John Carney once made up a fake company called Grindr that would grind down your enemies, but it turns out someone grabbed the name to start a gay dating app. I considered grabbing the url for Tstr, perhaps to launch a grilled cheese company, but it already was  claimed by “Tacoma & Seattle Trailer Repair.” Darn.

Anyway, the moment has passed and you’ve been warned. The stock market as a whole is at the 96th percentile of all observations in 135 years based on the Shiller P/E ratio and companies like Tesla with no earnings or free cash flow are worth multiples of established competitors many times their size. Put “cloud” in front of a product and you can command double the multiple. I can go on and on.

Watch out below – srsly.

The book

Happy Bookiversary to Me

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Signing books at Books & Greetings in July, photo by Angela Schuster

“How’s the book going?”

If someone, somewhere had bought a copy of my book every time I’ve been asked that question then Michael Lewis would be quaking in his boots. My stock answer is: “Oh, not a bestseller, but pretty well.” The truth is that it’s actually hard to say. Measured how and relative to what?

Well, now that I’m at the six month mark since Heads I Win, Tails I Win was released in hardcover, it’s time to take stock. The information about industry sales is pretty patchy, but what I found surprised me.

According to Steven Piersanti of publishing house Berrett-Koehler there were 256 million adult non-fiction books sold in the U.S. in 2013. That sounds like a big number but, even before counting self-published titles, there are an awful lot of new books per potential reader. He says the average U.S. nonfiction book sells less than 250 copies a year and fewer than 2,000 in its lifetime. That nonfiction average is pulled higher by bestsellers, many by celebrities. The median probably is lower. (For example, Tina Fey’s Bossypants sold 3.5 million copies as of last year). That jibes with what my editor at Penguin/Random House told me – that most books they buy don’t make them a profit. Mine has. It doesn’t even come out in paperback until this summer and I’ve nearly outsold “Hooking Up” by Tia Tequila.

So I guess I should be pleased. According to my publisher’s partial tally of sales, my book sold a combined 5,207 copies in six months including e-books but not audiobooks. Nielsen BookScan data, which Amazon breaks out on my author page, says that 3,397 physical copies have been sold in the United States. Of those, 499 were purchased in New York, my leading market by far. Los Angeles, Chicago, Boston, and San Francisco also were pretty good.

The “be cheap and lazy” brand of investing advice sold less-well in the Midwest, but I’m happy to say that there isn’t a metropolitan area where no one at all bought a copy. If you’re the one person who bought it in Toledo, Ohio, South Bend-Elkhart, Indiana, or Davenport-Rock-Island-Moline, Illinois, thank you!

Should I care about this? Isn’t it the quality that matters? I wish life were so simple.

It’s true that I poured my heart and soul into the book and that it got really nice reviews and mentions in Forbes, Money, Barron’s, USA Today and The New York Times and was excerpted by The Wall Street Journal, Marketwatch, and others, along with some great advance praise. Book-writing is a business, though.

So am I in it only for the income? Samuel Johnson famously said that “no man but a blockhead ever wrote, except for money.” Consider me a semi-blockhead, then. Completing a book is an ordeal for the author and his or her family and I would never write one with no expectation of remuneration. On the other hand, the “how’s the book going” crowd would be shocked if they knew the effective pay per hour that a moderately successful author such as myself earns. I try not to think about it, or to guffaw when people ask if I’m planning on retiring to write books full time!

Publishers pretty much count on people like me who have more passion than common sense. They’re much less sentimental, which is fine – they have families to support too. Even if the prose sings and the subject matter is groundbreaking, they won’t publish a book that they think will sell only 800 copies.

In that sense, then, the book is doing pretty well. It would have to sell a lot more copies for me to see any income beyond my advance on royalties. On the other hand, the more copies I manage to flog the greater the odds of my next project finding a publisher.

Stay tuned.

The book · Uncategorized

Come See Me in Nashville

Neon Lights of Lower Broadway, Nashville, TN

Music, hot chicken, Vanderbilt, my sister and her family, more hot chicken – I love coming to Nashville. My next visit and first-ever speaking engagement in town will be on February 9th at 6:30-8:00 in the evening at University School of Nashville. The $25 fee goes towards an excellent cause: the USN scholarship fund.

The title of my talk is “Beat the Odds and Become a Much Better Investor.” I’ll also be signing and selling copies (at my cost) of my book, Heads I Win Tails I Win: Why Smart Investors Fail and How to Tilt the Odds in Your Favor.

Sign up here.

 

investing · The book

The Warren Buffett Argument

The Wall Street Journal is running a smart series this week, pegged to the 40th anniversary of the first index mutual fund, on the merits of passive investing. The editors asked me if there were any arguments for why active managers, despite their awful relative performance, are worth it. I came up with three arguments, the most convincing of which readers of my book will be familiar with: “Warren Buffett.”

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investing · The book · Uncategorized

Least Likely to Succeed

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(This excerpt originally appeared as a post on my LinkedIn feed).

Whoever first said that “life isn’t a popularity contest” probably needed to get out more, but he or she had one redeeming quality: being a good investor. My new book, Heads I Win, Tails I Win, shows that most of us are lousy.

Think back to your high school. If it was anything like mine, the student body voted to decide which of their classmates was cutest, best-dressed, funniest and most likely to succeed, among other categories. The last of those was often the easiest to guess: a kid who had it all figured out and was well on his or her way to an Ivy League university followed by medical school or some other solid, lucrative path.

There isn’t a vote for least likely to succeed. The point of these contests isn’t to hurt people’s feelings, even if they sometimes do. But if there were then the recipient would be equally obvious: that good-for-nothing stoner who was late for every class and barely graduated or didn’t at all.

Now imagine being able to buy a share in the future earnings of Mr. or Mrs. “Most Likely” and “Least Likely” as if they were a company. The market prices would be sky high for the former and a pittance for the latter, with good reason. Everyone else would fall somewhere in-between. That’s exactly how the stock market works, though the vote occurs every minute of the day.

Whether you rely on conventional wisdom or actual surveys such as “America’s Most Admired Companies,” picking out the corporate crème de la crème isn’t hard. But investing in them exclusively happens to be a bad idea. In fact, the least admired companies on such lists tend to outperform the best ones as measured by stock market performance.

Think back on the high and low achievers in your graduating class. Some of the bad eggs probably turned things around and, while they may not be fabulously wealthy, are doing fine. Meanwhile, some super-achievers never really lived up to expectations. Likewise, we pay too much of a premium for respectability in the corporate world. Once a company is a blue chip, it’s priced not only appropriately but at a premium. Translated into stock selection, going with less popular, less obvious choices is likely to be profitable. Finance professors Meir Statman and Deniz Anginer combed through several back issues of Fortune Magazine’s ranking of respectability and created a “most admired” and “least admired” portfolio. Shares of the latter outperformed the former by nearly two percentage points a year.

Favoring Wall Street’s redheaded stepchildren can be done systematically. One way is to buy companies that essentially are being dumped by larger corporations. Unable to sell them or unwilling to pay a big bill to Uncle Sam in the process of doing so, companies frequently “spin-off” subsidiaries to existing shareholders in a tax-free transaction. The thing is, though, professional investors act strangely when these brand new companies land in their portfolios. Suddenly a fund that owned, say, a large bank, also has the same exact stake in a small or medium-sized insurance company. They already owned it before, of course, but it didn’t have its own name and stock ticker. In a value-destroying disservice to their clients (hey, what else is new) , they decide that keeping it in their portfolio is more trouble than it’s worth so they’re likely to sell their shares in the near future, putting downward pressure on its price early on.

Meanwhile, a middle-level corporate manager at the former insurance subsidiary suddenly finds himself as the chief executive of a listed company with his or her very own stock options and an even stronger incentive to do well. It may take a while, but the results usually are surprisingly good. The phenomenally successful value investor Joel Greenblatt wrote about his strategy of buying spinoffs in You Can Be a Stock Market Genius. Other investors have taken note. There are exchange traded funds that buy spinoffs exclusively. A $100 investment in an index tracking their performance has grown to $319 in the past year compared to just $170 in the broad stock market

Another long-running, well-known, yet still successful way to profit from what’s out of favor on Wall Street is to buy the “Dogs of the Dow” each January – the ten highest dividend-yielding stocks among the 30 Dow Jones Industrials. These usually were relatively poor performers in the previous year, allowing their dividend yields to rise (as price falls, yield rises as long as payouts are unchanged). A $100 investment at the start of this century in the Dogs turned into $313 compared to $233 in the broad market.

Far worse than investing in the most-admired companies is having a preference for the most glamorous or exciting ones. The very first investing book I ever read, Peter Lynch’s 1989 bestseller One Up on Wall Street, warned investors away from companies with flashy names. It specifically said companies with an “x” in their name were to be avoided.

It seemed like a throwaway line but it stuck in my head years later. Just for fun I decided to test it out for an investing column in 2010. The results were surprising. I found 109 stocks in the Wilshire 5000, the broadest U.S. stock index, that began or ended with an “x,” including a few that did both. Right away I could see that Lynch was onto something. Only 49 of them had been profitable in the previous year. Even weeding the money-losing ones out, the remaining stocks were far more expensive on measures such as price-to-book or price-to-earnings than the broad market and also a lot more volatile. In other words, they were both riskier and less desirable on average.

Why would there be a connection? As any Scrabble player can tell you, few words have an “x” so that letter, probably along with “z” and “q,” lend themselves to made-up, snazzy-sounding names. By my calculation, an “x” appears in company names 17 times more frequently than in actual English words.

The same warning could have been given about companies with a “dot-com” in their name 15 years ago. A quarter century earlier, in the swinging sixties, it was anything with the suffix “tronic” or the word “scientific.” Hot companies included Vulcatron, Circuitronics, Astron and the gratuitously snazzy-sounding “Powerton Ultrasonics.” In his classic A Random Walk Down Wall Street, Burton Malkiel tells the story of a company that sold vinyl records door-to-door. Its stock price surged 600% when it changed its name to Space Tone.

The fact that boring stocks are better seems to be a lesson that each generation has to learn anew. Superior bang for the buck from dowdy, out-of-favor companies was discussed as early as 1934 in Security Analysis, the investing classic by Benjamin Graham and David Dodd. Graham was the teacher and has served as the inspiration for the most-successful investor of all time, Warren Buffett, so it’s safe to say that his theories have worked pretty well in practice.

Each generation may make the same mistakes, but individual experience seems to matter. When my son’s high school had a stock picking contest I asked if I could see his classmates’ portfolios. The most popular choices were highfliers such as Tesla, Facebook, and Apple. Not a boring company in sight. Most of his classmates lagged the market.

A company called Openfolio that anonymously aggregates results and holdings from thousands of individual investors showed the same thing. Some 77% of Tesla shareholders were 49 or younger while 73% of Exxon Mobil owners were over 50. But younger investors’ love of flashy companies hurt them. During 2014 the portfolios of 35 to 49 years olds lagged 50 to 64 year olds by 2.3 percentage points. Those below 25 lagged the older group by a whopping 6.4 percentage points.

Maybe we do live and learn.