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.
Some very interesting characters who advocate building homes on the world’s oceans tried to make lemonade out of lemons, but it went pear-shaped. They picked up a cruise ship cheaply since the industry is still idled by the Covid-19 pandemic and began auctioning cabins off to cryptocurrency enthusiasts — in dollars of course — to use as a floating base off the coast of Panama. The group rechristened the former Pacific Dawn the MS Satoshi.
Always do your research before an impulse purchase! As I wrote in a brief “Overheard,” the normal maritime laws still applied, even in a country known for its flags of convenience. The insurance requirements proved ruinous.
I wrote about a hot topic – literally. Every day enough natural gas is burned off to fuel Germany, France, and Belgium combined. It contributes about 1% of global greenhouse gas emissions. The reasons for this tremendous waste are complicated, but there is much that can be done.
It sounds like a spoof, but a New Jersey company that says it values “your privacy” is suing to thwart an effort to end a costly and invasive practice: calls from strangers using faked numbers made to appear familiar or even official.
Earlier this year, North Dakota made it a crime to “transmit misleading or inaccurate caller identification information with the intent to defraud or cause harm.” The company, called SpoofCall, argues the law is unconstitutional according to a report by The Bismarck Tribune.
Ironically, SpoofCard was until last year part of a company that also offered a service to “find out who’s calling from blocked numbers.” IAC bought the parent last year but says SpoofCard wasn’t part of the deal.
Chief Executive Officer Amanda Pietrocola says the company only objects to provisions punishing callers for “defrauding people of their time.” “Our goal is to find a happy medium here.” She says SpoofCard doesn’t do business with robocallers but won’t disclose how many calls it enables daily.
Tracking down the company’s attorney was straightforward, but contacting Ms. Pietrocola through her company’s own public website took more effort: It doesn’t list a phone number.
An excerpt of my book appears in today’s Wall Street Journal (front page of the Money & Investing section). It explains, using “Back to the Future Part II,” why market timing is so futile.
What follows is an excerpt of the excerpt (is there a word for that … excerptlet maybe?).
Investors are way off in their estimate of how their portfolio has done, routinely guessing several percentage points a year too high. While that comes as a shock, they are even more surprised to be told that it is missing good times rather than suffering through selloffs that hurt them the most.
Like Biff, investors sit out on some really good days by trying to avoid bad ones. Nearly all of those happen around scary episodes such as October 1929, October 1987 and in 2008 following the collapse of Lehman Brothers. Pretend, for example, that you took your money out of the market following the choppiest episodes over the last 20 years and wound up missing the epic rebounds that made up the 40 best days. You actually would lose money. A couple of days a year on average produce all of the market’s return.
Read the whole thing or, even better, buy the book. It just went on sale.
Can’t wait to read my brilliant explanations of why people are such lousy investors and how you can get better in Heads I Win, Tails I Win? A sneak preview is now online and in print days before the book is available in stores.
It’s an adaptation of a chapter titled “The Seven Habits of Highly Ineffective Investors” and is one of the parts of the book I had the most fun writing. It’s also the only chapter of my book, or for that matter any investing book, that recounts an episode of “Leave it to Beaver.”
There will be other excerpts available around publication time but this one is the longest and also appears in a publication that readers of my book should check out (they should subscribe to The Wall Street Journal too, of course!).
The AAII Journal accepts no advertising and is published by the American Association of Individual Investors. This group provides a lot of good investor education and also publishes an interesting survey of its members that I mention elsewhere in the book.
I was thrilled to see that my upcoming book was reviewed this weekend in Fortune Magazine and even more so when I saw that the reviewer was none other than Roger Lowenstein. He’s one of the most accomplished financial journalists around, the author of several books I’ve enjoyed, and also a former Heard on the Street columnist like me.
I was perplexed when I started to read the review, though. The first 264 words – as long as some entire book reviews – were about Benjamin Graham, the father of value investing, mentor to Warren Buffett, and a man I mention several times in Heads I Win, Tails I Win. After that he finally got to my book and said a couple of nice things.
He wrote that “Jakab has plenty of sensible advice” and that my writing is “anecdotal and witty.” But that’s where the praise ends. Lowenstein laments that the author, “a former security (sic) analyst … spends many pages debunking the idea that investors should try to time market breaks (he aptly likens this to astrology). He devotes not a paragraph to how one might estimate the future profitability of a business…One does not learn how to evaluate stocks. One learns that value investing has worked, but not why.”
While a more positive review would have made me happier, the weird thing was that Lowenstein really seemed to want to have read an entirely different book – one that taught my mostly mom and pop audience how to value stocks and beat the market. The premise of my book, though, is that this is mostly a wasted exercise, whether you try to do that yourself or pay some clever broker or stock picker to do it. My own work as a securities analyst and overwhelming academic evidence support this.
But the weird thing is that he invokes Graham. I guess Lowenstein isn’t familiar with the great man’s final interview in 1976 in the Financial Analyst’s Journal, the year he died. Here’s the money quote:
I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook “Graham and Dodd” was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I’m on the side of the “efficient market” school of thought now generally accepted by the professors.
In a nutshell, “beta” means stock market return whereas “alpha” is the extra gain that clever fund managers try and usually fail to generate. That’s why passive index funds are the best bet for most investors. But smart beta tweaks that by attaching allegedly smart criteria to a passive fund. These are getting more and more exotic, though they can be something as basic as equally-weighting stocks rather than using market value or favoring stocks with lower P/E ratios.
Some smart beta is a costly gimmick and other products are pretty sound, but beta can be as smart as a whip and not help investors who do dumb things. That tendency to buy high and sell low is hardwired into most of us.
It was a lively, respectful discussion. Then the gloves came off and we discussed the relative merits of Alexa, the Amazon.com talking speaker, and cheese. You see this week’s WSJ Heard on the Street podcast featured David Reilly’s very own Alexa. Stephen and Paul thought it was a cheap stunt to overshadow their podcast earlier in the week when they attempted to eat three pounds of cheese. You see there’s a big cheese surplus in the U.S. and every man, woman, and child in the country would have to consume that much of the stuff to deplete the excess.
Unfortunately, the lightweights on WSJ Moneybeat couldn’t eat all the cheese between them and had to leave plates of it in the newsroom for the rest of us to help polish off. Despite mild lactose intolerance, I bravely chipped in to whittle away at the surplus.