22 May 2008 – The Aleph Blog

The Glass Ceiling Revisited

Posted on 22 May 2008 by David Merkel

After seeing this article from Dealbreaker, I felt that I had to bring out a very old piece of mine.

In late 1997, Gene Epstein of Barron’s wrote an article called “Low Ceiling.” I wrote a letter to the editor:

To the Editor
The “Glass Ceiling” will always exist for women — and men, for that matter — who are principled enough to care for their children. There are jobs that demand so much time that a conscientious parent cannot take them.

Childrearing is aided by at least one parent sacrificing monetary income for the sake of time to spend with the children. It makes a big difference in quality of life, particularly for the children. The main determinant of a child’s future success is parental input. Without that parental effort, which is economically unprofitable in the short run, the future is not as economically bright, nor as friendly.

Perhaps it should not surprise us that standard educational achievement scores have dropped as the incidence of two-income families has risen. The pattern goes back for centuries. Wealthy parents get so busy that they cannot raise their children, so they hand the kids off to those who are often far less capable. It is no surprise that their familial wealth rarely lasts past the third generation.

DAVID J. MERKEL
Aston, Pennsylvania

I have worked with many bright, capable women in the workplace, some in the firm that I worked for, and some outside.? Most of them wanted a family and productive work, as I did, which often led to lasting friendships.? But it cuts against advancement in the workplace, which tends to go to men, and the few women who are willing to sacrifice their families for material advancement.

Women have it worse than dedicated men, because they have to bear the children, and that involves unavoidable pains and delays, and considerably more guilt feelings over whether they are doing it right for their children.? Men in general don’t have those doubts.

I have turned down jobs that would take me away from my family, and as a result, I am less wealthy.? I don’t care — my wife and kids are happy, in general, and that is what counts.? Though I love writing about economics and finance, I am not a slave to greed, and that enables me to be happier than many in my field.

We also have to recognize that good men and women are both similar and different.? Similar, in that they care for their families.?? Different, in that children require care that differs for each sex.? Fathers can’t nurse, and aren’t as compassionate, on average.? They are also better at dealing with boys as they age.? Women are better with the girls as they age, and better at the early nurture — I changed my share of diapers, but most men are clueless with little kids.

I leave this possibly controversial piece here — children need care, and parents need to provide it.? That will inhibit your careers, but leave you qualitatively richer in the long run.? I am happy with the sacrifices that I have made for the good of my wife and children.

On Industry Selection

Posted on 22 May 2008 by David Merkel

Recently I received an e-mail:

David,
Always enjoy your blog – very thought provoking, and I’ve learned a lot from reading you across a variety of topics. Assuming I haven’t missed this in an older post… one thing you mention as a key investment strategy is finding the right industry at the right time, and I’ve never seen a very good explanation of how one goes about that. In one of Jim Cramer’s recent books he offered a sort of stylized graph outlining a general playbook to that effect – I’ll send it to you if you’d like – but I’d like to get a primer on how you go about industry over/underweights.

Thanks and Best,
JC

It made me think that I should go through my basic principles of industry selection, and explain them.? JC mentions Cramer’s “playbook” — that’s the classical guide to what industries do best in an “ordinary” business cycle.? Personally, I think Cramer’s views on industry selection are more complex than that, largely for the reason that I don’t follow the “playbook” in any strict sense: global demand is more important than US demand alone for many industries.? The old playbook is no longer valid, until we get a totally integrated world economy.? (Side note: we will never get that — some war will upset the globalization — it is the nature of mankind.)

Anyway, I have four basic tenets when looking at industries:

Buy strong companies in weak industries when the industry pricing outlook seems hopeless.
Buy moderate to strong companies in strong industries where the earnings power and duration are underestimated.
Underweight/Ignore/Short industries where pricing power is likely to be negative for several more years, and especially industries that are in terminal decline.
Avoid fad industries.? There are P/E levels that no industry can grow into.

My best example of #1 is the P&C insurance industry in early 2000.? Total gloom.? I bought a lot of The St. Paul then.? Another example: Steel in 2001-2002.? I bought Nucor.

For #2, think of the energy industry — current stock prices embed oil prices far below current levels.? Or, think of the life insurance industry — low P/Es, but the demographic trends are in their favor.

On the third one, think of newspapers, whose richest revenue sources are getting eaten up by the internet.

For the last one, think of the internet/tech bubble 1998-2000.? Very few companies that were hot then are at higher prices now.

I share the results of my industry model once a quarter at minimum.? But I don’t use my model blindly.? For example, lending financials and housing have been cheap for some time, but I have avoided them.? They are cheap for a reason.

My main model uses the Value Line ranking system, and uses the nominal rank, and how it is different from the average historical rank.? It can be used in two ways: highly rated industries can be analyzed to see where the pricing power is not reflected in the stock prices yet.? Low rated industries should be analyzed for the possibility or reversal due to undeserved hopelessness.

But you can create your own model just from a series of index prices.? The idea is to look at industries that either have strong momentum that you think is deserved, or industries with weak momentum where things seem very bad but not terminal.? You can even modify it to look at industries that have bad performance over the past 3-5 years, but have rebounded over the past 6-12 months.

Behind all of that, remember my rule: sharp movements tend to mean-revert, slow, grinding, fitful movements tend to persist.? Things that are too certain tend to disappoint, while those things that are less certain tend to surprise.

One reason I have done well over the past 7+ years is that I have been willing to let my industry selection vary considerably from where the indexes have been.? If you think that you have insight into the longer-term earnings power of industries, then take your opportunity, and deviate from market weightings.