Prior to the provision
of 'Coupled Ratios' analysis reviewing the Q2 performance for the
auto-majors, the second-half of this two-part web-log continues to
view the learning and advice of the 20th century's
investment luminaries.
This as conveyed via
John Train's collating efforts in the 1980 book 'Money Masters of Our
Time'; itself re-published in 2000.
Herein the perspectives
of :
- John Neff
- Julian Robertson
- Jim Rogers
- George Soros
- Philip Carret
- Michael Steinhardt
- Ralph Wanger
- Robert Wilson
- Peter Lynch
[NB though the number
of individuals covered is similar to part 1, the inclusion of John
Train's own pertinent comments and the odd observation by
investment-auto-motives extends the length of the text.
John Neff (1931 - ) -
As is so often the way,
it seem that childhood, adolescence and early adult-hood shaped
Neff's outlook, and whilst not from a wholly destitute background
financial security was an issue, the 'poor boy' reality moulding a
workaholic attitude which meant that he would gain financial literacy
and handle money more astutely when the time came.
Keen to escape the
confines of school for exposure to the real-world, it was time spent
with his father in an industrial equipment supply business that
created the foundations of his mentality.
“Merchandise well
bought is well sold”
A short period in the
Navy as an aviation electronics technician was followed by
university, reading 'Industrial Marketing' so combining external and
internal aspects of a generic manufacturing company operations, and
also including corporate finance and investment...so a path was set.
Thereafter various security analyst positions until running a fund
within Wellington Management in 1964.
Endemic traits were
that of a neo-Grahamite, so value-driven and a classic contrarian,
though also noting that contrarians can be wrong if they can't
appreciate the broader macro environment.
Thought of stocks as
'acting badly' (ie under-valued) or 'acting-strongly' (ie
over-valued), preferring those which are relatively dull,
“misunderstood and woebegone” which when bought cheaply did not
have far to fall if it be the case, yet still paid a dividend...so
insisting on income from the items held.
“the market over-pays
for the prospect of growth”...”so better to gain a total return
from a slower growth company that pays a higher dividend”, so
preferring a mixed basis of capital gain + dividend to the need for
greater capital appreciation alone.
[NB John Train remarks
that his is a classic 'institutional approach' often unrecognised by
individual investors who tend to enjoy viewing the satisfaction of
obvious capital appreciation, but less aware of the uncollected
income that had been possible}.
“the best investments
are the least understood”
He believed in a high
concentration in relatively few industrial sectors, as when in 1984
he bought into Ford Motor Co at its $12 low, and by 1988 his
portfolio comprising of 22.2% in auto-stocks.
“a few ideas backed
heavily”
Criteria:
1. sound balance sheet
2. satisfactory cash
flow
3. above average return
on equity
4. able management
5. prospect of
continued growth
6. attractive product /
service
7. a strong market in
which to operate
He created the idea of
a calculated 'terminal relationship' value of a stock or group of
comparative stocks, by which the capital growth rate + the yield rate
was divided by the p/e value.
There was also a more
'pseudo-scientific' method used from which a buy-price was determined
from earnings projections over a number of future years and a
determined p/e value the market would put on those earnings, so
giving a target price several years out, then calculates the
difference between that hypothesised price and current market's
price, so giving a notional 'discount percentage' of the present-day,
and so potential for equal appreciation.
[NB this is obviously a
subjective matter, quite similar to the modelling of DCF
calculations, which can be over-emphasised].
Using the same
principle he calculated a similar consolidated figure for the whole
existing portfolio and considered this the 'hurdle rate'. If a
prospective stock could not match or beat this 'hurdle rate' it was
not bought.
Furthermore, extremely
disciplined about buy and sell price-points, and would wait for the
intra-day market-strength.
“sell a stock before
it has achieved its full potential, leave enough incentive for the
next buyer”...which also indicates that he did not want to be left
holding the baby once a stock peaked and dropped thereafter.
He would hold a
company's stock for years even if it did not move, as long as it
remained cheap compared to the rest of the portfolio and the outlook
remained positive.
Julian Robertson (1932
- ) -
Exposed to the stock
market at an early age by his father, so not of the typical 'born
poor' type who chases security by understanding and so dominating the
financial world as a relative loner. This more fortunate background
then allowed him to comprehend the markets at an earlier age and so
better interweave social and managerial skills when running the Tiger
Management fund.
Started 2 other funds
(Jaguar and Puma) devoted to invoke greater global macro perspective
yet retaining specific stock-picking criteria, so not complete
'country bets'
He stated that “it is
amazing how in the rest of the world (ie non-US) no-one seems to care
about profitability!”
[NB this undoubtedly
highlighting what even management in the rest of the world views as
the 'narrowness' of American absorption in commerce verses a more
rounded quality of life perspective. (Finding a way to both via
self-education is vital)]
In the USA he
sought-out well managed firms (eg Harley-Davidson of the time)
He operated the then
classic hedge fund model (now thankfully far less prevalent) which
itself had its assets leveraged by 2 - 2.5 times, so increasing
mistake exposure, using stress tests to appreciate the impact of a
10% cross-portfolio loss.
Preferences / Criteria
:
- 'monopolistic and
oligopolistic firms (eg De Beers diamonds when listed)
- little noticed
out-performers, well positioned and stability
- great value based
upon detailed examination of company's books
- management devoted to
the bottom-line
- a firm that has
regulation assist its competitive position
- recognition of
'upstream needs' ie serving a whole sector (eg palladium)
Philosophy:
- a steady flow of
ideas rather than relying upon a single 'home run'
- growth orientation
(presumably as opposed to turnarounds)
- big core positions
(tried and true companies ie US blue-chips)
However, eventually the
fund's initial stellar performance shrank markedly as the 1990s IT
based 'new economy' took hold, with leverage-effect a major cause.
[John Train
stipulates...”when you are a mega-buck hedge fund investor and the
stock you own too much of is leveraged, the negative effect is
magnified”]
Jim Rogers (1942 - ) -
Still a well known face
on the likes of Fox TV, Bloomberg TV etc, Rogers today runs two
interests, but previously became well known as a co-founder of a 1969
fund with George Soros (see below), and the desire to alter from a US
domestic viewpoint to that of 'global-macro'. Today focused upon a
commodities focused resource fund.
A 1980 'retirement' saw
him travel around parts of the world on a motorcycle to view first
hand worldwide economic dynamics, this followed-up in 1990 with a
motorcycle tour of China, and later in 1999 in a similar manner, but
more comfortably in a modified Mercedes SLK sat upon on a 4x4 G-Wagon
chassis pulling a trailer with support crew.
Ultimately, best known
for his “big bets in unpopular countries”
Criteria:
1. must be economically
much better than previously
2. must be better-off
than generally realised
3. the domestic
currency must be convertible
4. the investment must
be liquid (so as to escape if necessary)
5. recognise that any
prospect is useless if no other foreigner can buy
6. entry via
conventional channels
7. recognise that
supposed people of influence are not always so
Past Case-Studies :
Seeing the
socio-political shifts of the mid 1980s.
A. Portugal, as
socialists were ousted by the right
B. Austria, as
misleading published intelligence blurred 'on the ground'
opportunities
C. Sweden,
market-shorted after explosive rise in market prices
D. Norway,
market-shorted after oil revenues shrank with collapsed global oil
prices
E. Singapore and
Malaysia, 'perfect storm' of regulatory reforms, market contraction
and emergency measures halting new IPO issuances so supply
availability.
Thoughts :
“there are lots of
countries where things are cheap, and will stay that way”...”need
to know why they are cheap”...”and what reasons for change”.
“risks and
opportunities are understood through travel, history and philosophy,
not in business school”
“what I liked about
it [the investment world] was not so much investing money, because at
the time I didn't have any, but that if you were smart, used your
wits and paid attention to the world, it was all you had to do”
“You need to
understand how broad PESTEL factors will alter the destiny of an
industry or stock-group for some time”
“everybody dreams of
making a lot of money, but let me tell you, it is not easy”
“I'm very much a
loner, a maverick, a misanthrope”
[NB
investment-auto-motives understands that this is often the case.
Possibly resulting from the mix of suffering through tough times,
sense of responsibility previously and that they naturally seek the
truth in things to be sure; given insecure backgrounds. Obvious
regards company assessment, but also the case with much else,
especially so analysis – conscious or otherwise – of people's
behaviour and attitudes (similar to themselves or not) and so
trustworthiness. As seen by comments regards mass-culture in the
Soros synopsis, the comfort and distractions of the 20th
and 21st centuries effectively made western people more
shallow, irresponsible and inconsistent, hence Rogers' 'misanthrope'
reaction]
Viewpoints:
- to bet on whole
industries much like whole countries
- develop a 'massive
investment concept'
- buy as much stock as
possible in a 'turnaround industry'
- look for major
secular change, ignoring fluctuating business conditions
Types of Changes:
- 'disasters', when an
entire industry is in crisis (eg Chrysler and Lockheed in late
1970s), with a number of large firms at or near bankruptcy, as long
as structural fundamentals can be changed.
[NB this the case for
US Autos post 2008, though with the accordant Ch 11 bond and
stock-holder losses at GM and Chrysler. But the emergence of MLC
selling 'old assets' to 'New GM' and a restructured FIAT-Chrysler
providing the new buy opportunity, as seen by Buffet's increased
sector spending]
- 'changes for the
worse', expected when an industry is so popular that investing
institutions own 80% of the available stock, so “over-valued” and
viewed as a shorting opportunity
- 'new trends' (then
and partially now), such as: 1960s japanese motorcycles, 1970s
women's use of less cosmetics, day-centres, hospital chains, garden
centres, various treatment centres, mobile homes.
- 'governmental
initiatives', then “throws money at the problem”, such as: when
in the 1973 Arab-Israeli war the US was forced to spend on defence
electronics to assist Israel so as to match the Russian systems in
Egyptian hands. The stock of all such defence companies rose
massively.
Investing Process:
“I never talk to
security analysts or brokers”
“develop a way to
think independently”
“talking to people
just muddies my thinking”
“just sit back, read,
and figure things out”
“don't use inside
information, even if legal, nine times out of ten it is wrong,
garbled en route”
“I look down before I
look up”, meaning that stock must be so cheap that even if it does
fall the capital invested will effectively sterile for a while before
re-climbing.
“don't lose money, if
you don't now the facts don't play”
“I don't use computer
databases since the figures may be unreliable”
“better to have no
information than the wrong information”
“avoid second-hand
figures from information providers”
“study annual reports
and (SEC) 10Ks/20ks” (or similar elsewhere)
“the balance sheet is
more important than the income statement”
“the cash from
depreciation and amortisation could help a 'bankrupt' firm survive,
since they are book-keeping, not cash going out the door”
“truly understand why
results and are good or bad”
“buy when things are
bad, just about to get better”
Ratios Assessed:
1. capital expenditure
in absolute terms
2. capital expenditure
as % of depreciation
3. capital expenditure
as % of gross plant and equipment
4. capital expenditure
as % of net plant and equipment
5. sales to receivables
6. debt to equity
“when there is almost
no inventory, when receivables are low, when the profit margin is
20%, when the pre-tax return on equity is 25%, when capital
expenditures are growing at 40-50% a year I begin to smell a classic
top, and go short”
“business school
graduates crowding into an industry can also signal a top” (eg
Atari's implosion)
“I like tried and
tested ratios to see how bad things can get...when they reach their
lower limit the typically move the opposite way”
“with a relaxation of
regulation so capex needs fall”
[NB this seen in US
autos in the 1970s regards emissions and safety, and in nuclear power
after '3-mile island' incident].
Back in the late 1990s
he was also obviously keen on Chinese growth, “the 21st
century will be China's”, on African development as democracy,
security and new wealth assisted 'pioneer-markets', and on
commodities such as tea and sugar, with regional commodities markets
integrated into global ones.
1997 he said “scout
for nations that are living up to the ideals and principles that made
our country great, namely those with unshackled economies and free
markets”.
George Soros (1930 - )
-
Whilst the likes of
Buffet appear 'home-spun' in preferring a simple approach tied to
long-terminism, in direct contrast Soros appears all together
'worldly' with capability to act as a short-termist trader and
speculator.
From a wealthy and
informed Hungarian-jew background – his father said to have managed
that group's assets under German rule during the WW2 occupation –
he moved to London in 1947 to study at the LSE, then onto jewish
owned investment firms in London and New York, before creating the
self-run Quantum fund in 1969 with Jim Rogers.
He predicted and gained
financial rewards from the meteoric rise and fall of REITS in late
'60s / early '70s America, also moving into Japanese equities in
1971.
Quantum undertook
'multi-directional' speculation across commodities, currencies,
equities and bonds. It recognised the then early value of defence
stocks (as seen) and that of bigger named firms within the technology
sector; though made and lost money on oil services.
The fund then
re-organised to include greater team participation of mini-account
managers and researchers.
Soros is renowned for
his 1992 play on shorting the UK pound during the ERM related 'Black
Wednesday' crisis, collecting a reported $1.5bn in doing so (partly
assisted by a weaker dollar); riding a pan-markets belief that the UK
government could not substantively support the pound given its
ramifications on its foreign currency reserves.
This win followed by a
$400m loss when he wrongly predicted that US-Japanese trade talks
would falter.
Russia was seen as a
natural interest in the mid 1990s, the telecoms sector specifically
given its utility function and 'defensive' character, so $980m was
provided as part f a bigger consortium. However in 1997 the Russian
crisis brought about a $1bn loss, though the fund ended up 15% by
year end.
An early exit of the
technology stock boom of the late 1990s a year prior to its peak was
reversed and then caught-out by the collapse.
Thereafter the original
Quantum fund was consolidated with another to form the Quantum
Endowment Fund.
Behaviour:
- little time spent on
economic study
- does not read Wall
Street research
- reads newspapers and
general dispatches from around the world
- talks to well placed
people / sources around the world
- participates in
foreign relations boards, so access to foreign governments
- the ability to
process raw intelligence quickly
- highly intuitive,
that intuition based upon strong knowledge
- constantly honed
skill, applied daily, unremitting concentration
- no discernible
specific methods
Techniques:
- start small and
build-up a position as stability increases
- don't try to be 'all
knowing' about the complete market
- speculation: define
the level of risk that is dared to assume
This the most difficult
judgement.
Market Theories:
- falsity of 'efficient
markets hypothesis', shown by superior performance
- technical analysis is
theoretically feeble, so inconsistent
- fundamental analysis
determines stock price, but prices also change fundamental values,
via a firm's re-purchases or mergers and acquisitions.
- “reflexivity”,
perceptions changes events which in turn changes perceptions (ie
feedback)
[NB Here Train well
notes that 'contrarianism' is the hallmark of the good long-term
investor, but can be very dangerous for the short-term margin (ie
borrowed finance) trader].
[NB The Soros
Foundation highlights the worldwide need for an 'open-society', as
opposed to 'dictatorial' system, to promote democracy and capitalism.
However, its affiliated NGOs seen as ideologically problematic by
some CIS countries given his wealth and power.
As an aspirational
philosopher he should well understand that 'open societies' can be
even more tightly controlled than dictatorial counterparts, which
often see major power shifts from one regime to another. Open
societies controlled through far subtler sociological, psychological
and psycho-analytical methods: see the early 20th century
connections between Freud's psycho-analysis and mass-advertising. The
basic aspects of which could be said to have become the tools of
mass-culture, whilst more insular high-brow culture expands as
necessary to equally mould and control].
Philip Carret (1896 –
1998) -
If Benjamin Graham was
the grand-father of investment analysis, then Carret was the great
grand-father of common-sense investing strategies.
He launched the Mutual
Trust in 1928 which became Pioneer Investments and latterly Pioneer
Fund, and managed it for 55 years.
Thoughts:
“instinct – the
subconscious – is much more reliable than statistics...one should
follow one's own convictions”.
“in a business debt
is quite reasonable...but 'margin debt' – stock market debt -is
terribly dangerous, because it is so easy to get....a businessman has
to explain all to his banker, whereas an investor just has to pick up
the telephone.”
“I like
over-the-counter stocks. And yet I'm more conservative than most
people; people think conservative means GM, IBM etc, but I've always
been in off-beat stuff...there less subject to manipulation by NYSE
companies and are less affected by crowd psychology”...
“I remember the
popularity of Winnebago, Coachman Industries and all the other 'rec
vehicle outfits...but to justify their peak prices half the
population would need to abandon their houses and ride around
continuously...I avoid fads”.
“when I invest, I
gamble with a certain amount of my capital buying dogs, the usual way
I lose is when buying concept stocks...they rarely work”.
“I don't know if
over-the-counter is better than listed stocks, all sorts of junk is
is sold, but also some crown jewels”
“if a company has
increased earnings for fifteen years, it is probably about to have a
bad year”
“I do like a very
good balance sheet”
“If I see the equity
ratio is low, or the current ratio is low, I don't go any further...I
want no term debt and a better ratio than 2:1 current ratio”
“I want to see
management own a significant amount of stock”
“an officer should
have at least a year's salary invested in his/her company...if he
does not have that much faith in the company he should not be a key
executive of it...if they don't own a lot of stock why should I own
any?”
“business principles
are just that...principles. One deviates from sound principles at his
peril, some people are smart enough to do it – to dart in and out –
but they are few and far between”.
“I'm always turned
off by an overly optimistic letter from the president in an annual
report...if his letter is mildly pessimistic, to me that's a good
sign”.
Principles:
- never hold less than
10 different securities spanning five different sectors
- at least once every
six months re-appraise each security held
- keep at least half
the fund in income producing securities
- consider yield the
least important aspect when analysing stock
- be quick to take
losses, slow to take profits
- never put more than
25% of a fund into stocks without accessible regular information
- avoid inside
information “as you would the plague”
- seek facts
diligently, advice never
- ignore mechanical
formulas for analysing stocks
- when stocks are high,
money rates rising, and business prosperous, at least half the fund
should be placed in short-term bonds.
- borrow money
sparingly and only when stocks are low, money rates low or falling,
and business depressed.
- set aside a moderate
proportion of funds available for the purchase of long-term options
on stocks of promising companies whenever available
“I bought my desk
from my old employer for $1...it has served me very well for 60
years”
Michael Steinhardt
(1940 - ) -
It is said that like
many great investors, Steinhardt was said to be initially poor. But
as the son of a (criminally associated) jeweller and given 200 shares
in two companies for his bar mitzvah, things could not have been as
financially problematic for his family as for the majority of truly
poor.
Thereafter he was able
to study broker's reports and frequently visited a Merrill Lynch
office, again not typical of the 'unfortunate'. Good intelligence
allowed him to graduate high school at 16 and graduate from Wharton
School of Finance at 19, in 1960 taking his first job at a mutual
fund, before others.
With 2 other partners,
he started a fund in 1967, with amazing success in the initial 2
years more than tripling the asset-base, and thereafter a near decade
of dedication. Taking a sabbatical in 1978 he used the time to create
an Israeli property development company in the so called 'development
towns' (which incoming jews from outside Israel), but its success
faltered with bad business practices.
He returned to the New
York investment scene, and by 1979 operated the firm alone.
“my principle role is
that of guidance, managing passively, but if things are not working
out I go over the (investment story) time and time again, determining
our overall exposure and deciding what level of risk we can accept”
“I see my role as
trying to achieve the best possible return on capital using a full
range of techniques that will allow me to attain that goal, without
commitment to any particular style”
“most of my long
positions are chosen on the basis of long-term fundamental
prospects...not that I necessarily hold onto them for very long...I
work-out how the market will respond to a long-term conception, at
least for a minimum period”
“strongly believe in
company stock that has re-purchase programs”
[NB Train states that
Steinhardt “being very active in the market is exposed to endless
opportunities and focuses on whatever areas of the markets are moving
at the time].
“I've a fascination
for the S&P Futures Index, since they are a good measure of the
essence of the market”...”but whilst over-valuation (of the
'premium') for short intra-day periods is favourable, if it lasts for
days and weeks, that is a more bearish sign”
Positions / Concerns:
1. long term
investments
2. new issues when
attractive
3. loan of stocks to
brokers to cover short positions
4. arbitrage, buying
bankruptcies and trade claims
5. 'modern gimmickry –
index futures etc”
Steinhardt comments
that short-selling requires a metal change to overcome the feeling
that 'one is against', plus the fact that a short-side can have
infinite losses as opposed to 'going long' which can only loose 100%
of one's own capital. But “you never make big money without getting
in the way of danger”.
[NB Train states that
this is the very opposite to the Benjamin-type bargain hunter
investor].
Such a risk absorbing
strategy though can fail dramatically, as when he shorted some big
name growth stocks in the early 1970s at p/e of 35, to then rise to
45. Hedging such positions though was key, and the sale of other long
positions at equally high p/e assisted.
“the stocks I'm short
tend to be the reverse of my longs”...”but the perennial problem
is the timing of such shorts”.
With regards to brokers
reports...”people who's first interest is in commission (ie report
writing commissions) are rarely great stock pickers. If someone is
really good it makes no sense to sell his ideas, the rate of return
will be too low”.
“Most brokers won't
hold an opinion if the tide turns against them”
[The next portion
demonstrates the increasingly 'hollow core' of the markets from early
1980s onward through to the 2000s].
“the two main reasons
for the continued rise of the stock market [over this period] are
lower interest rates and the 'leveraging' of America's industrial
base...leveraged buy-outs and corporate re-purchase plans reduce free
floats and boost stock prices...the new dominant element is debt”
“debt will be key to
the economic future of the western world...the ethics surrounding
debt are now different...Reagan doubling the debt level...debt
(across: quality rating, consumer, industrial, municipal and third
world) has changed so much as to create new patterns in our lives”.
“there has been
enormous growth of debt, as compared to earnings or assets or
anything else”.
[Tellingly....about
2008]
“it amounts to a
leaning tower that will eventually topple, it cannot be sustained”
“the debt will
eventually be repudiated and turned into equity, resulting in
inflation”
He retired in 1995 to
devote time to 'secular jewish' activities....so continued to 'hedge'
even in personal life.
Ralph Wanger (1933 - )
-
One of the more
theatrically minded investment gurus, Wanger enjoyed the use of
metaphors when describing the different types of investor groups.
Typically exotic African animals , whereby all investors were zebras
- vs the markets' lions – yet highlighting that the zebra pack
consisted of 2 types.
The first type the
institutional managers who stay 'safe' tucked into the middle of the
pack though eating only poor quality trampled grass (ie gaining
poorer profits). The second type the self-determining higher return
investor, more risk confident willing to stand at the edge of the
herd and eat better quality untrampled grass, though more prone to
external attack.
Both inner and outer
locations have pros and cons, much depending upon market timing; what
Wanger determines as the terrain, altering from wide open, clear view
plain to closed-in, narrow canyon, and the behaviour of the lions.
Originally from
Chicago, he had a post-graduate degree in industrial management,
entering the investment field in 1960 with Harris Associates,
half-pragmatically and half-jokingly stating that he enjoyed the work
“because there was no heavy lifting”.He went on to run the Acorn
Fund and became President in 1977.
Philosophy:
- look for good small
companies, which are more attractive than big ones
- identify a major
trend, then pick downstream companies that will benefit*
(* this an alternative
to T Rowe Price's preference for industry leaders).
“buy small companies
below their economic value, let the them grow, and sell them as
proven successes at full economic value”
“even armies of
analysts at the large institutions neglect small companies”
“most institutional
money managers say that Wall Street research is useless...but then
take thirty calls a day from Wall Street”
“follow the trends to
see who is likely to gain...like the trend for middle-aged people
taking-up various fitness regimes, leading to older people with bad
backs and knees, which require treatment”
Within this a
preference for easily understood basic firms run by capable
management, as opposed to the then emergence of new-economy
semi-conductor companies, amongst which he believes only a hand-full
did well.
“its like the oil
business or railroads...they transformed the world, but only a few
truly made money”.
“the capitalisation
of American railroads was effectively a reverse wealth transfer,
taking the savings of the English and Scottish trusts and moving the
wealth over here into the US”
(This then presumably
highlighting the disadvantages of earl-stage speculation where a
plethora of companies emerge and the need to overcome the mid ad
long-term haul).
“in a transforming
industry, the big money is made outside the core business”
On the proclivity of IT
to dominate processes...
“Index funds,
data-bases etc..its scary, someday you'll be able to go into a
computer store and pay $80 for a portfolio manager programme. You'll
put in everything that's know, and I'll be out of business. An
'expert system' can probably do it better”
(This has indeed been
the case with HFT programmes, but their disadvantages have been
recognised spanning from overtly simplistic modelling techniques,
often looking for arbitrage, to propensity for flash-crashes, hence
calls for reform. Plus IT driven and dictated markets effectively
shuns the many millions of prospective individual investors across
the 'developed and EM worlds).
On Asia...
“the populations of
some of those Pacific Rim countries seem to work a lot harder and
have more sense than anyone else”
“if investing in an
airline (as he did with Cathay Pacific, Singapore and Malaysian) one
should seek a line with a very large route, structure, short-feeders,
little discounting and high growth in traffic rate”
“tourism and hotels
another opportunity, having seen the Japanese come to America en
mass, the Taiwanese will be close behind [did not happen] and then
the Chinese [as seen]...so the likes of Carnival Cruise Lines, Disney
Corp, and through luxury products, such as Waterford Glass”
Futurism:
The ability to predict
is not easy, futurologists make wholesale predictions but only a
small number have any real meaningful impact. As importantly, they
are wrong on many counts, and had missed important changes that had
come about.
“we are in a world
where the environment changes at an increasingly rapid rate, I think
concentrating on smaller companies improves the chances of catching
the next wave”
[NB
investment-auto-motives pertains that to date futurologists have
overtly focus upon the 'technology story' that has emerged from the
'laboratory fringe', itself often remote from industry and with
little relevance to companies or people; so theoretical solutions
looking for a real-world problem. (Perhaps the only 'direct plug'
being portions of IT research)
Whilst this 'fringe
work' is usually aligned to prevailing macro-issue concerns, the fact
is that the real drivers behind improvement are the profit motive:
competitive advantage / performance improvement, cost-benefit, better
satisfying an individual's need, the social desire, near-term
political policy. But if technology - even 'white-heat','whiz-bang' -
ads no or little true advantage it has little real impact and so
little profit potential.
One electro-luminescent
material seen recently on a BBC1 show and touted as 'the future' has
existed for 25 years with little true impact. Whilst in the UK
(unlike USA or Germany) the house bric, and related high labour
content, has remained, the brick and the 'brickie' the economic model
Thus, feasibly
migratory research must be coherent within the specific existing
economic structure.]
Criteria:
Wanger uses the
“tripod” of:
1. Growth:
growing market, good
design, efficient production, sound marketing, healthy profit margin
2.Financial Strength:
low debt, adequate
working capital, conservative accounting
a strong balance sheet
enables working cap without need to dilute current equity
3. Fundamental Value
(Price)
a good company with
unattractive stock
(“institutionals
often confuse a company with its stock”)
The Quit Game:
Wanger plays the 'quit
game' whereby he hypothesises that an eccentric banking fried is
willing to lend him all the money required to buy a company's whole
stock issuance at 10% interest. If that appears a tremendous bargain
(euphemistically) “I'll quit my job and go run that company”. If
that 'eureka moment' does not exist, he looks elsewhere for better
bargains
(Basically an
imaginative 'stress test').
Stock valuation based
upon future earnings for two years ahead, or for an asset divestment
the break-up potential, also two years ahead. A future p/e figure is
ascertained based upon the dividend discount model, so determining a
set price. Next it calculates the expected rate of return if the
stock advances to that price from current market price. Wanger uses
this to view the discrepancy between his analysts expectations and
market expectations.
“an attractive
investment area must have favourable characteristics that should last
five years or longer”, his portfolio turnover low at about 25% each
year, so selling one-eighth the holding to buy other things. If the
specific stock's purchase raison d'etre remains, it stays. Thus, as
with other long-termists, the low turnover reduces trading commission
expenses.
Real vs Unreal Banking:
[Tied to Steinhardt's
prediction of the debt-tower collapse to come], Wanger highlighted
the schism of 'real vs unreal banking'; that is when ever-rising
accumulated debts (of badly administered uneconomic countries) [and
subsequently sub-prime property purchasers] look good on a bank's
balance sheet but in reality are never actually collectable.
This fear by the
markets makes some banks under-valued, especially so small regional
ones...”but we try to find the ones run by [credible and
conservative] bankers”...since the term 'aggressive banker' is
ultimately in practice an oxymoron that creates 'fantasy-debt'
problems.
Government's Costs:
Wanger believed that in
the US that social programmes such as social security, medicare,
medicaid had become little more than ponzi schemes...”both
politicians and would-be pensioners are worried” with the
realisation that necessary national wealth created had slowed to a
point where the government could not support the weight of financial
obligations.
“one answer is to
privatize the US pensions system...as presented for Congress'
consideration in 1997”...”as individually funded pension plans
diversify they will buy small caps”.
Robert Wilson (unknown) -
Wilson acted
in a typical 1990s / 2000s hedge fund manner holding both long and
short positions, describing himself as a “long-term trader”
As regard
shorts...
“There's
always a new fad running about, crazily over-priced Net companies,
hot new pharmaceuticals, something with no numbers attached is going
to change the world”
“As the
speculators rush-in the price increases, those speculators
re-enforced by their in their enthusiasm buy more, putting the price
higher still. New speculators rush-in. Soon the whole self-confirming
perpetual motion machine is grossly over-inflated beyond any
reasonable investment value. The 'rubber' begins to stretch taut. I
take a short position. Thanks to brokers' enthusiasm, retail
investors run the stock to its peak”
“I explain
to others why the stock is absurdly over-priced: the management
insincere, the plant antiquated, competition intensifying, costs
rising, the market drying-up, a better product from Japan, debt to
bankers or regulatory problems ahead”.
Train
explains that for Wilson the brokers who puff-up concept stocks act
like beaters at a European shoot, pushing the birds toward him.
After a
two-year spell in the Army during the mid 1950s he went to work for
various New York investment firms, managing his own money in the
process. Unlike other wholly obsessed investors he has interests in
the opera, horticulture and history, and though highlights the vital
importance of wealth and making money actually lives rather
simplistically, recognising the need for 'time out':
“I can do
a year's work in 9 months but not in 12 months!”
As seen
'shorting' is a far more dangerous approach than 'going long', and
this came to pass in the late 1970s when he set against Resorts
International, before himself heading on an extended worldwide
holiday. The company went from “one phony $1m to $50m over eighteen
months; a momentous climb in business folk-lore. By the time the
price had reached $120 per share he had lost $10m, and by $190 he had
to close all of his long positions to cover himself. He put the
failing down to a misunderstanding of company fundamentals itself not
the market dynamic.
Technique:
“to travel
light”
- very
rarely visits a company's management
- ideas
generally come from stockbrokers
- use of
concepts and perceptions rather than reality
- little
concern for company details
- concern
for what will push-up the price
- little
general background reading
- only
interested in intelligence on what he owns
- when he
sells the stock throws away the accrued intelligence
- does not
attend analysts meetings
- does
attend US manufacturers sector gatherings
-
indifferent to exact data (recognising its innate falsity)
-
indifferent to corporate leaders
- wholly
focused upon firm's general position
- the key
changes in its circumstances
- don't
theorize about a firm's competition
- wait for
reality to emerge
- companies
are often not destroyed by competition but complacency
[NB as an
example of complacency he mentions the market share loss of US
auto-makers during the 1970s, 80s and 90s, partially true, yet for
investment-auto-motives, it could also be recognised that market
expansion created room for 'imports' and the possibility that America
itself sought Asian imports specifically to create trade and so
political ties with Japan and S.Korea. The fortunes of domestic
industries (cars, steel, agriculture etc) often have wider
geo-political implications].
He buys
unnoticed stock at low prices, and later when the market recognises
its worth, will wait for a good market price “to let the public
have the stock”, preferring what appear high risk companies since
only such a stock is likely to strikingly head upwards.
Train states
that it seems that his 'imaginative synthesis', unhindered by
analytical detail, allows him to view the market outlook for a
specific stock more easily than for a numbers orientated analyst, and
that 'Wilson the speculator might well buy the same merchandise as
Wilson the baloon-pricker'.
“buy
companies that are doing something new and different, or in a
different way”
“if you
are betting on an election you don't bet on the best man, you bet on
the man you think will win” reflecting his perception of the fact
that he trades 'stock image' that will excite the public over the
coming months of within the year, not 3 years out.
Key Rules:
1. find
intelligent brokers
2. look for
the fundamental idea in a stock
3. then keep
a close eye on performance
4. seek
uncommon insight about lesser known facts
5. look for
pleasant surprises regards unexpected stock climbs
6. 'kick a
dog when its down' about failing companies
7. don't act
too soon even if you know you're right
8. beware of
falling in love with a company
9. 'see the
tree for the forest' regards company over-familiarisation
10. beware
heavily researched stocks
11. beware
popular stocks, for bloating value
12. it is
better to sell a winning stock to late than too soon
13. a firm's
sales market potential and management capability must be in sync
14. beware
managements encouraging comments
15. beware
windfall companies
16. accept
taxes, do not invest to avoid
17. firms
that weather recessions tend to perform better in good times
18. ignore
the institutional level of the free-float
19. look for
exec and mgmt personal share-holding as motivation
Peter Lynch (unknown) -
Son of a
maths professor who passed-away very early, the younger Lynch
experienced a change in his life's previously rosy outlook, and no
doubt soon recognised the importance of financial security.
Furthermore being born Irish-Catholic in 'establishment' Boston
possibly either made him feel he had to always work harder, or chose
to do so.
Working
summer jobs he overheard golf course conversations that led him to
bravely experiment early in the stock market with what for a young
man is a sizeable sum, on a rarely known yet interesting stock. It
rose enough (before being acquired by FedEx) to pay for his tuition
at Wharton in 1966.
That golf
world also assisted by providing a summer job at Fidelity when he
caddied for its then President. After college he started at Fidelity
as a full-time analyst and spanned various sectors before becoming
director of research in 1974.
At this
point Train summarizes a research department as an active think-tank,
constantly visiting companies and concentrating intently on the most
promising through individual peer reviews. In 1977 he took control of
the small in-house Magellan Fund which later absorbed another
internal fund, his 13 year tenure showing an impressive annual
return. In 1990 aged 46 – the same age his father died - he
resigned, recognising that “nobody on their deathbed wishes they'd
spent more time at the office”. Perhaps equally he quit whilst
still holding his champion reputation.
Perspectives:
“my
objective is to catch the turn in a company's fortunes...often there
is a one to twelve month interval between a material change in a
company's fortunes and the corresponding movement in its stock”.
“a lot of
people I compete with seem to be looking for reasons not to
buy...such as labour union existence, competitor actions, etc”
“to make
money you must find something nobody else knows, or do something that
others won't do because they have rigid mindsets”
“I've
found on several occasions that the quiet facts tell a much different
story to the ones being trumpeted”
“a
technique is to wait until the prevailing opinion about a certain
industry has moved from bad to worse, and then buy the strongest
companies in those groups”
“its OK to
make mistakes, the stock that goes from $10 to $20 pays double for
the one that goes down $10 t $5”
“even when
a company moves up from doing mediocre business to fair business, you
can make money”
“my dream
is a growth company in a slow growth industry, you know something has
to be profoundly right about that situation”
“the best
way to make money in the market is to find a small growth company
that has been profitable for a few years and simply goes on growing”
“if you
get the facts right you can make money on what seems a high p/e high
growth company, assuming the price justifies its price”
“I can't
say dividends are something I feature”
(gives
little heed to possible dividend income)
“a
horrible fallacy is buying a stock simply because it has gone
down...'bottom-fishing'...if something was worth $50 six months ago
and is $20 today it must be a bargain...but it was a bargain at $40
and $30, and might well be if it goes down to $10...you must have a
clear conception of the true value and base decisions on that, not on
the stocks recent performance history”
“you have
to stay tuned”
“companies
should complete stock buy-backs instead of undertaking
non-synergistic acquisitions, where management's capabilities can be
stretched beyond core competencies”
“if a
company is successful for 20 years continually, the business model
itself is strong, not necessarily the management”
“leveraged
buy-outs are wholly unfair to the participating public, since a lowly
valued listed company can be bought up by privateers tanks to a
'fair-purchase' note from a banker (for a fat fee)... to the
detriment of minority share-holders...then dismantled to pay
themselves and bankers bank...though the original company could well
have naturally regained its previous higher valuation, so benefiting
original share-holders and additional public participants”
“hi-tech
companies may be just fine, but that doesn't do me much good if I
can't understand them”
(meaning he
would have to rely upon the judgement of industry specialists about
technical issues, yet admits that he should have applied more thought
relative to the majors, eg Microsoft etc)
Train
highlights that Lynch trades between relative values of stocks,
catching before the upside and downside turns, so not working with
'majestic conceptions'.
“you've
got to go where other investors and especially fund managers fear to
tread”
“my
stock-picking method involves elements of art and science plus
legwork and hasn't changed in twenty years”
“in a war
don't back one side or the other, back the company that sells them
both the bullets”
(like
historical gold-rushes, where money was made by the out-fitters, food
merchants, bars and bordellos)
Philosophy:
1. growth
companies that offer 2-3 times input investment over time
2.
under-priced asset plays, 'value stocks' or smaller blue chips
(gain 33% or
so and move on)
3. special
situations and depressed cyclicals
4. defensive
stocks, preferred to cash at 'bottom of the market'
(since cash
cannot benefit from market rebound)
Techniques:
- numerous
company visits both regionally and by country
(at its
height 40 or 50 a month)
- an ability
to 'read' execs personality types
(over-optimistic
vs over-cautious vs honest and reliable)
- brevity in
conversations to get to the crux
- attendance
of regional brokerage conferences
- selective
picking of corporate 'pitches'
- first-hand
contact with firms, not wholly reliant upon desk research
- management
is 'on-side' when you've done the homework
- ask
management about the competition
(take note
of all too rare praise)
- ask mgmt
about suppliers and customers
(to gain
additional exploratory possibilities)
- watch
insider (exec / mgmt) 'insider buying'
- purchase
of many sector inhabitants, later slimmed to favourite few
(like Jim
Roger's approach)
-
willingness to understand all sector and firm types
(a holistic
outlook)
- take small
positions in 'interesting' stocks
(to be
reminded to follow them)
- constant
shift of sector focus
- high
turnover in portfolio
- small
block trades
(most less
than 10,000 shares)
- doesn't
try to exactly 'time the market' for pin-point turns
- don't buy
tips, least of all 'whisper' tips
- look at
the world around you, shopping malls etc
(to see
emergent trends)
- look for
great company in lousy industries
(because the
poor competition drops out)
- avoid the
hottest stock in the hottest industry
Train makes
an important observation about Lynch's broad outlook and wide
spectrum of knowledge...
'he can
evaluate and develop buying and selling targets all across the range
of his huge repertoire of actual and possible holdings...he perceives
far more opportunities than most investors since others reason that
knowing more about a specific, limited field/genre than his/her
competition will give advantage...but when that sector gets
over-priced one is tempted to carry-on exposing the portfolio to
risk, or branch out into some different under-priced sector where one
can easily make mistakes out of ignorance'
Pertinent to
the auto-sector in past times...
'detecting
market inefficiency Lynch acts immediately...the domestic car
companies seem cheap, he buys Ford, Chrysler and GM; they go up...he
adds a collection of foreign ones – Volvo, Subaru, Honda, Peugeot
and FIAT...the relative positions change again...he calmly reverses
field'
Criteria:
- a firm
selling at a low p/e which earns 10-20% on equity and 10% or so on
revenues
- strong and
understandable business franchise
- not after
'superstar' companies, simply 'good-enough' at low prices
- seek 'unit
growth' to ensure physical growth QoQ and YoY
(not simply
price hikes or income additive acquisitions)
Conclusion -
For the most
part, these respective individuals were able to positioned themselves
to ride the historical, though periodically volatile, boom that was
the American 20th century.
From the
re-bound the of the post depression 1930s to the post WW2 ferver of
the 1950s and 1960s, to the exuberance of the financially deregulated
1980s and in some instances the technology boom of the latter half of
the 1990s.
The people
mentioned herein were and are seen as the upper-echelon of that broad
investor group, people who became colloquially known as the 'Masters
of the Universe'; as reflected by the 1987 film Wall Street, and even
referred to in Pretty Woman of 1990. But whereas the former film's
memorable quote was that “greed is good”, in many cases seen here
the individuals involved have reportedly enjoyed a very comfortable
yet relatively unaffected lifestyle.
The
resulting riches for fund manager and clients were born from initial
capital merged with an all important intellectual compulsion. A
compulsion to for the most part find true 'value' in long-term money
placement decisions, and in other 'shorting' instances, the
recognition that greed-induced over-inflation of specific stock
prices will eventually lead to a burst bubble.
Thus far
from the 'more, more, more' attitude conveyed about money managers,
the facts appear that most are, and indeed need to be, very
level-headed, typically with a great sense of personal
responsibility.
People often
able to initiate new perspectives through deep and rounded thinking,
so altering the broader investment community perceptions; which in
turn changed the dynamics of capital markets themselves. Not hype
mongers, but what investment-auto-motives calls 'Economic
Situationists' who are able to see beneath the surface of the
immediate.
[The term
'situationist' derived from that post-modern philosophical group
which existed between 1957 and 1972. They were able to see “the
beach under the pavement”, referring to the underlying sand. The
irony is that they were anti capitalists, and though aspects of their
criticism were justified, it was their ability to view the world
very differently which has been paradoxically adopted here for the
'Money Masters'].
The lessons
such individuals purport, which are perhaps of greater importance
today given the global need for economic equilibrium, is the fact
that market valuations, and so the potential for profit, must be
based upon sound logic. Logic derived from analysing the basic
quantitative and qualitative fundamentals of a company and those of
the geographies it operates within. So a world away from the esoteric
financial instruments whose complexity shook the foundations of what
should be a progressive and 'fair for all' global capitalist system.
Fifteen
years ago the collapse of LTCM arguably highlighted the discord
between its name and investing principles, while five years ago a
western world awash with invisible toxic debt stretched capitalism to
the limits of credulity.
Today, in
the present interest-rate suppressed US, UK and Europe, all investor
types ought to use this unprecedented period of desperate investment
need and opportunity to re-utilise the mentalities and basic tools
that those 'masters' plied.
Post Script
:
Summary of John Train's
background and achievements:
http://en.wikipedia.org/wiki/John_Train_(investment_advisor)
Post Post
Script :
Obviously
the aforementioned names represent only a portion of those recognised
as 'great investors', thus other names well worthy of interest are:
- John
'Jack' Bogle
- David
Dremen
- Philip
Fisher
- Bill Gross
- Carl Icahn
- Jesse L.
Livermore
- Bill
Miller
- William
O'Neil
- James D.
Slater
