Columns

Not Quite Supertankers

One of the more overused clichés is “it’s like turning around a supertanker.” As a landlubber, I’ll go ahead and assume that’s true in the literal sense. Financially-speaking, though, the business of hauling oil across the world certainly turned on a dime in the past year. Daily earnings collapsed by 99% from last March to the past week as carriers capable of holding two million barrels became very expensive floating storage tanks when there was a glut and are suddenly hunting for cargoes as big exporters try to buoy prices.

Jinjoo Lee and I wrote about the dramatic turn. Our takeaway was that things are looking up for this extremely cyclical business.

A year after their incredible good fortune, an equal basket of four energy shipping firms has lagged the S&P 500 by 70 percentage points over the past year and is right back to its long-term average ratio of price to book value. With life and energy demand returning to normal, this is no time for investors to walk the plank.

https://www.wsj.com/articles/not-so-supertankers-deserve-a-look-as-pandemic-fades-11615815253
Columns · investing

The Curse of Star Managers

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.

Columns · investing

Bear Markets

With apologies to Stanley Kubrick, I titled my latest Heard essay “How I Learned to Stop Worrying and Love the Bear Market.

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.

Columns

Cruise Companies Will Get Decked

I wrote about the cruise industry. There are often disasters or mishaps like the 2012 Costa Concordia accident or the Carnival “poop ship” in 2013 that produce temporary bargains for people brave enough to pounce on a cheap vacation deal or stock. The latest scary quarantines may be different, though.

There are threats aside from the immediate epidemic. The fact that the quarantines have occurred in Asia may do permanent damage to China’s embrace of cruising in what Carnival management has said it believes will grow into the world’s largest cruise market. About 4.24 million, or 15% of cruise passengers, came from Asia in 2018 according to the Cruise Lines International Association.When cruising was in its infancy in the U.S. it received a warmhearted P.R. boost from “The Love Boat” TV show that ran from 1977 to 1986. To would-be cruisers from China’s emerging middle class, scenes of ambulances and quarantines are leaving a far less heartwarming image than jolly Captain Stubing.

investing

Billion, trillion, schmillion

Don’t tell you know who, but, by some measures, the $2 trillion valuation of Aramco only puts it in fairly middling company.

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.

Now that is a princely sum.

Columns · investing

Buy the “Wrong” Stock, Hit the Jackpot

I wrote about the phenomenon of tech stock doppelgängers showering riches on people who can act quickly, but mostly parting fools from their money.

Zoom Technologies is carrying on a long American tradition: making people rich by accident.

Not to be confused with Zoom Video Communications, a unicorn that went public in April, making its backers truly wealthy, the similarly named penny stock appears to have benefited from mistaken identity. A $1,000 investment in late March would have been worth over half a million dollars by mid-April. Even now, assuming one were able to find a buyer, it would be worth $175,000.

Zoom joins the likes of doppelgangers Tweeter and Snap Interactive. Similarly confusing episodes happened in the last tech bull market. For example, penny stock Appian Technology surged by nearly 19,000% because it shared a ticker with a hot initial public offering on Nasdaq, AppNet, in 1999.

Of course all of these scenarios enriched people already owning the shares of the “wrong” company, and only if they acted quickly. Buyers fooled by similar names or tickers usually regret it. Not always, though. Mistaken buyers of food company Sysco back in March 2000—when red-hot Cisco Systems briefly the world’s most valuable company—have made 571% since then compared with a loss of 12% by owning the “correct” stock.

Columns · investing · journalism

Making Monkeys out of Hedge Fund Stars

The darts don’t lie

So we decided a year ago to poke some fun at the masters of the universe who unveil their stock picks each year at the Sohn Investment Conference . My team and I decided to throw darts at stock listings and see how things panned out. It was a blowout.


No animals were harmed in this financial experiment, but some human egos were bruised.
Burton Malkiel famously wrote in “A Random Walk Down Wall Street” that “a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by the experts.” A year ago the journalists at Heard on the Street decided to see if they could beat the crème de la crème—fund managers presenting their stock picks at the annual Sohn Conference in New York.
The results were brutal. Heard columnists, not monkeys, threw the darts at newspaper stock listings, but Mr. Malkiel would still approve. The columnists’ eight long and two short picks beat the pros’ selections by a stinging 27 percentage points in the year through April 22. Only 3 of 12 of the Sohn picks even outperformed the S&P 500.

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 · 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.