Investing ideas come in many forms:

  • Factors like Valuation, Sentiment, Momentum, Size, Neglect…
  • New technologies
  • New financing methods and security types
  • Changes in government policies will have effects, cultural change, or other top-down macro ideas
  • New countries to invest in
  • Events where value might be discovered, like recapitalizations, mergers, acquisitions, spinoffs, etc.
  • New asset classes or subclasses
  • Durable competitive advantage of marketing, technology, cultural, or other corporate practices

Now, before an idea is discovered, the economics behind the idea still exist, but the returns happen in a way that no one yet perceives.  When an idea is discovered, the discovery might be made public early, or the discoverer might keep it to himself until it slowly leaks out.

For an example, think of Ben Graham in the early days.  He taught openly at Columbia, but few followed his ideas within the investing public because everyone was still shell-shocked from the trauma of the Great Depression.  As a result, there was a large amount of companies trading for less than the value of their current assets minus their total liabilities.

As Graham gained disciples, both known and unknown, they chipped away at the companies that were so priced, until by the late ’60s there were few opportunities of that sort left.  Graham had long since retired; Buffett winds up his partnerships, and manages the textile firm he took over as a means of creating a nascent conglomerate.

The returns generated during its era were phenomenal, but for the most part, they were never to be repeated.  Toward the end of the era, many of the practitioners made their own mistakes as they violated “margin of safety” principles.  It was a hard way of learning that the vein of financial ore they were mining was finite, and trying to expand to mine a type of “fool’s gold” was not a winning idea.

Value investing principles, rather than dying there, broadened out to consider other ways that securities could be undervalued, and the analysis process began again.

My main point this evening is this: when a valid new investing idea is discovered, a lot of returns are generated in the initial phase. For the most part they will never be repeated because there will likely never be another time when that investment idea is totally forgotten.

Now think of the technologies that led to the dot-com bubble.  The idealism, and the “follow the leader” price momentum that it created lasted until enough cash was sucked into unproductive enterprises, where the value was destroyed.  The current economic value of investment ideas can overshoot or undershoot the fundamental value of the idea, seen in hindsight.

My second point is that often the price performance of an investment idea overshoots.  Then the cash flows of the assets can’t justify the prices, and the prices fall dramatically, sometimes undershooting.  It might happen because of expected demand that does not occur, or too much short-term leverage applied to long-term assets.

Later, when the returns for the investment idea are calculated, how do you characterize the value of the investment idea?  A new investment factor is discovered:

  1. it earns great returns on a small amount of assets applied to it.
  2. More assets get applied, and more people use the factor.
  3. The factor develops its own price momentum, but few think about it that way
  4. The factor exceeds the “carrying capacity” that it should have in the market, overshoots, and burns out or crashes.
  5. It may be downplayed, but it lives on to some degree as an aspect of investing.

On a time-weighted rate of return basis, the factor will show that it had great performance, but a lot of the excess returns will be in the early era where very little money was applied to the factor.  By the time a lot of money was applied to the factor, the future excess returns were either small or even negative.  On a dollar-weighted basis, the verdict on the factor might not be so hot.

So, how useful is the time-weighted rate of return series for the factor/idea in question for making judgments about the future?  Not very useful.  Dollar weighted?  Better, but still of limited use, because the discovery era will likely never be repeated.

What should we do then to make decisions about any factor/idea for purposes of future decisions?  We have to look at the degree to which the factor or idea is presently neglected, and estimate future potential returns if the neglect is eliminated.  That’s not easy to do, but it will give us a better sense of future potential than looking at historical statistics that bear the marks of an unusual period that is little like the present.

It leaves us with a mess, and few firm statistics to work from, but it is better to be approximately right and somewhat uncertain, than to be precisely wrong with tidy statistical anomalies bearing the overglorified title “facts.”

That’s all for now.  As always, be careful with your statistics, and use sound business judgment to analyze their validity in the present situation.

I was writing to potential clients when I realized that I don’t have so much to write about my bond track record as I do my track record with stocks.  I jotted down a note to formalize what I say about my bond portfolios.

One person I was writing to asked some detailed questions, and I told him that the stock market was likely to return about 4.5%/yr (not adjusted for inflation) over the next ten years.  The model I use is the same one as this one used by pseudonymous Philosophical Economist.  I don’t always agree with him, but he’s a bright guy, what can I say?  That’s not a very high return — the historical average is around 9.5%.  The market is in the 85th-90th percentiles of valuation, which is pretty high.  That said, I am not taking any defensive action yet.

Yet.

But then it hit me.  The yield on my bond portfolio is around 4.5% also.  Now, it’s not a riskless bond portfolio, as you can tell by the yield.  I’m no longer running the portfolio described in Fire and Ice.  I sold the long Treasuries about 30 basis points ago.  Right now, I am only running the Credit sensitive portion of the portfolio, with a bit of foreign bonds mixed in.

Why am I doing this?  I think it has a good balance of risks.  Remember that there is no such thing as generic risk.  There are many risks.  At this point this portfolio has a decent amount of credit risk, some foreign exchange risk, and is low in interest rate risk.  The duration of the portfolio is less than 2, so I am not concerned about rising rates, should the FOMC ever do such a thing as raise rates.  (Who knows?  The economy might actually grow faster if they did that.  Savers will eventually spend more.)

But 10 years is a long time for a bond portfolio with a duration of less than 2 years.  I’m clipping coupons in the short run, running credit risk while I don’t see any major credit risks on the horizon aside from weak sovereigns (think the PIIGS), student loans, and weak junk (ratings starting with a “C”).  The risks on bank loans are possibly overdone here, even with weakened covenants.  Aside from that, if we really do see a lot of credit risk crop up, stocks will get hit a lot harder than this portfolio.  Dollar weakness and US inflation (should we see any) would also not be a risk.

I’ve set a kind of a mental stop loss at losing 5% of portfolio value.  Bad credit is the only significant factor that could harm the portfolio.  If credit problems got that bad, it would be time to exit because credit problems come in bundles, not dribs and drabs.

I’m not doing it yet, but it is tempting to reposition some of my IRA assets presently in stocks into the bond strategy.  I’m not sure I would lose that much in terms of profit potential, and it would increase the overall safety of the portfolio.

I’ll keep you posted.  That is, after I would tell my clients what I am doing, and give them a chance to act, should they want to.

Finally, do you have a different opinion?  You can email me, or, you can share it with all of the readers in the comments.  Please do.

I had the fun today of taping a segment with Ameera David on RT Boom/Bust. The above video covers the first half of the session, and lasts about seven minutes. We covered the following topics (with links to articles of mine, if any are applicable):

The second half, should it make it onto the show, deals mostly with international issues.  Enjoy the video, if you want to.

This will be a short piece, because what I have to say is simple.  My portfolio rule eight requires me to make changes to the portfolio 3-4 times a year.  Here’s the rule:

Make changes to the portfolio 3-4 times per year. Evaluate the replacement candidates as a group against the current portfolio. New additions must be better than the median idea currently in the portfolio. Companies leaving the portfolio must be below the median idea currently in the portfolio.

It’s a useful rule, but what if the search that I do doesn’t come up with any suitable candidates for purchase better than what I currently own?

That is what has happened in the second quarter of 2015.

This hasn’t happened before.

I did my main search, and came up empty-handed.  I then did about five additional searches that I never ordinarily do, but are other ways of sourcing portfolio buy ideas.  Three also came up empty.  One gave me an idea off of a spinoff happening later this month, and another idea that was kind of interesting, but made me edgy regarding margin of safety.  The last search gave me four ideas that I am still working through, but none of them thrill me, for various reasons.

I know what my most marginal ideas are in my current portfolio, and I can honestly say at present I like all of them more than all of the remaining  ideas I am still kicking around, minus the spinoff.  (The key question on the spinoff is how cheaply it trades post-spin.)

After all of my searching, it makes me wonder from a bottom-up point of view whether the market isn’t overvalued.  Top down, the market should return about 4.5%/yr over the next ten years, which is about the 87th percentile in terms of expensiveness.

A lot of money can be lost speculating on that idea, and I am not a market timer, so I will let others fight about that.  This is just a straw blowing in the wind.  Practically, it means this period I do nothing with the portfolio, most likely.  It gets tougher if this repeats next quarter.

Your opinions are welcome in the comments.

 

Recently I ran across an academic journal article where they posited one dozen or so risk premiums that were durable, could be taken advantage of in the markets.  In the past, if you had done so, you could have earned incredible returns.

What were some of the risk premiums?  I don’t have the article in front of me but I’ll toss out a few.

  • Many were Credit-oriented.  Lend and make money.
  • Some were volatility-oriented.  Sell options on high volatility assets and make money.
  • Some were currency-oriented.  Buy government bonds where they yield more, and short those that yield less.
  • Some had you act like a bank.  Borrow short, lend long.
  • Some were like value investors.  Buy cheap assets and hold.
  • Some were akin to arbitrage.  Take illiquidity risk or deal/credit risk.
  • Others were akin to momentum investing.  Ride the fastest pony you can find.

After I glanced through the paper, I said a few things to myself:

  • Someone will start a hedge fund off this.
  • Many of these are correlated; with enough leverage behind it, the hedge fund could leave a very large hole when it blows up.
  • Yes, who wouldn’t want to be a bank without regulations?
  • What an exercise in data-mining and overfitting.  The data only existed for a short time, and most of these are well-recognized now, but few do all of them, and no one does them all well.
  • Hubris, and not sufficiently skeptical of the limits of quantitative finance.

Risk premiums aren’t free money — eggs from a chicken, a cow to be milked, etc.  (Even those are not truly free; animals have to be fed and cared for.)  They exist because there comes a point in each risk cycle when bad investments are revealed to not be “money good,” and even good investments are revealed to be overpriced.

Risk premiums exist to compensate good investors for bearing risk on “money good” investments through the risk cycle, and occasionally taking a loss on an investment that proves to not be “money good.”

(Note: “money good” is a bond market term for a bond that pays all of its interest and principal.  Usage: “Is it ‘money good?'”  “Yes, it is ‘money good.'”)

In general, it is best to take advantage of wide risk premiums during times of panic, if you have the free cash or a strong balance sheet behind you.  There are a few problems though:

  • Typically, few have free cash at that time, because people make bad investment commitments near the end of booms.
  • Many come late to the party, when risk premiums dwindle, because the past performance looks so good, and they would like some “free money.”

These are the same problems experienced by almost all institutional investors in one form or another.  What bank wouldn’t want to sell off their highest risk loan book prior to the end of the credit cycle?  What insurance company wouldn’t want to sell off its junk bonds at that time as well?  And what lemmings will buy then, and run over the cliff?

This is just a more sophisticated form of market timing.  Also, like many quantitative studies, I’m not sure it takes into account the market impact of trying to move into and out of the risk premiums, which could be significant, and change the nature of the markets.

One more note: I have seen a number of investment books take these approaches — the track records look phenomenal, but implementation will be more difficult than the books make it out to be.  Just be wary, as an intelligent businessman should, ask what could go wrong, and how risk could be mitigated, if at all.

This is a difficult book to review.  Let me tell you what it is not, and then let me tell you what it is more easily as a result.

1) The book does not give you detailed biographies of the people that it features.  Indeed, the writing on each person is less than the amount that Ken Fisher wrote in his book, 100 Minds That Made the Market.  If you are looking for detailed biographical sketches, you will be disappointed.

2) The book does not give detailed and comparable reviews of the portfolio performance of those that it features.  There’s no way from what is written to tell really how good many of the investors are.  I mean, I would want to see dollar-weighted rates of return, and perhaps, measures of dollar alpha.  The truly best managers have expansive strategies that can perform well managing a large amount of money.

3) The book admits that the managers selected may not be the greatest, but are some of the “greats.”  Okay, fair enough, but I would argue that a few of the managers don’t deserve to be featured even as that if you review their dollar-weighted performance.  A few of them showed that they did not pay adequate attention to margin of safety in the recent financial crisis, and lost a lot of money for people at the time that they should have been the most careful.

4) If you wanted to understand the strategies of the managers, this is not the book for you.  They are not described, except in the broadest terms.

5) There is no integration of any common themes of what makes an investment manager great.  You don’t get a necklace; you just get a jar of pretty, non-comparable beads that don’t have any holes in them.

What do you get in this book?  You get beautiful black and white photos of 33 managers, and vignettes of each of them written by six authors.  The author writes two-thirds of the vignettes.

Do I recommend this book?  Yes, if you understand what it is good for.  It is a well-done coffee table book on thick glossy paper, with truly beautiful photographs. It is well-suited for people waiting in a reception area, who want to read something light and short about several notable investment managers.

But if you are looking for anything involved in my five points above, you will not be satisfied by this book.

One final note on the side — I would have somehow reworked the layout of Bill Miller’s photograph.  Splitting his face down the middle of the gutter does not represent him to be the handsome guy that he is.

If you would like to buy it, you can buy it here: The Great Minds of Investing.

Full disclosure: I received a copy from the author.  He was most helpful.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

Photo Credit: Jugbo

Photo Credit: Jugbo || A puzzle to solve…

From a friend of mine:

About a quarter of my assets are in my company stock. I have been counting this as a stock in my portfolio, but now I am wondering if that might be making my portfolio too conservative. The company is privately held, and they manage the “price”, so that it goes up consistently with the growth of the company. As long and the company does not go bust, this seem to be more stable than a stock fund.

What do you think?

I don’t think you are being too conservative.  Count it as stock.  Here’s why:

Don’t look at the price, on the first pass.  Consider the underlying stability of the company.  Here’s a way to think about it: if the company borrowed money over the intermediate-term from a bank, or floated a bond, what kind of rate would they pay?  Would they be considered investment grade, and pay a low interest rate, or would they be more like a high-yield bond, where both the covenants on the debt and the yield paid are significant.

If it would be an investment grade lending risk, you might be able to think about it as partially stock and partially a bond.  If not, then stock.  Regardless of how you think about it, you have to realize that you are running a concentrated risk here, and play everything else a little safer as a result.

Now, the stock price that they quote to you does have a meaning, which varies based on what your employment plans are with your firm.  If you are thinking of leaving, you would like a high price to get cashed out at, but if you are thinking of staying, you would probably like a lower price, as you may get more shares.

I don’t know everything here, so my advice is general.  It would change if you could buy or sell with discretion, but that is not likely.  If you have some idea of how upper management views the long-term prospects of the company, that could guide your reasoning.  As an analogy, consider the investment banks on Wall Street prior to their becoming publicly traded.  Management viewed their ownership in the bank as part of their pension, so they shot down ideas that were too risky.  They were happy to see the value of the firm grow at a reasonable rate with near-certainty, rather than a rapid rate with a moderate probability of failure.

So, think about your management team and what they do.  Make discreet inquiries to them if you think it is wise.  Be careful with the rest of your assets.  How careful depends on the soundness of the firm, your risk tolerance, and your time horizon for when you will need to convert the assets to another form for your own use.

Today I saw an article about a high school investing contest, and like most contests of that type, it does not teach investing, but speculation.

I’ve wanted to try this for about ten years or so.  I’d like to try running a stock picking contest, but only if I can offer decent prizes, and get enough participants.  I’ve written about this before, these would be the rules:

  1. No leverage and no shorting
  2. No trading — buy & hold
  3. No Exchange Traded Products, and only common stocks
  4. Minimum market capitalization of $100 million
  5. Only stocks traded on US exchanges
  6. Forced diversification — a portfolio of ten stocks equally weighted
  7. One stock from each of ten volatility buckets, to reduce speculation
  8. Highest geometric mean return wins — this gives a bonus to consistency, which also reduces speculation.  (Alternative rule: the best return on the seventh best stock in each portfolio wins.)
  9. Six month time frame.
  10. One entry per person.

The most critical rules are seven and eight.  The idea is to get people to think like investors, not speculators.  By forcing investors to buy a broad range of companies from conservative to aggressive will force them to evaluate individual companies, with an eye to avoiding big losers.  Rule number one, as many say, is don’t lose money.  This would honor the idea of avoiding losses while trying to make gains.  It would be a lot like what intelligent investing in a portfolio of stocks is really like.

The idea is to promote stock-picking.  Now lest you think I have taken all of the speculation out of this, let me tell you what my rules don’t stop:

  • Factor tilts — you can assemble a portfolio with price momentum
  • Industry and sector tilts
  • Foreign tilts
  • Size tilts
  • Valuation tilts
  • Investing in special situations
  • Copying famous investors

Now, Who Would Be Sponsors?

I can’t fund this on my own.  Also, I don’t think registration fees could fund such a contest.  Parties that could benefit from the branding and free advertising would include financial information companies and brokerages — they are some of the logical beneficiaries of promoting stock-picking.  So, would the following consider sponsoring such a contest?

  • Wall Street Journal, Yahoo Finance, Bloomberg, Marketwatch, Reuters, Money, Value Line, theStreet.com, etc.
  • Nasdaq OMX, Intercontinental Exchange
  • Schwab, E-Trade, Scottrade, Interactive Brokers, Ameritrade, Fidelity, ETrade, etc.

I don’t know, but I would want to have at least 1,000 entrants and $50,000 in prize money if were going to run a contest like this.  I’m sure it would be a lot of fun, and would teach investors a lot about investing, as opposed to speculation.

Thoughts?  Send them to me.  (Especially if you are interested in sponsoring the event.)

I imagine the SEC (or the Fed, IRS, or the FSOC) saying: “If we only have enough data, we can answer the policy questions that we are interested in, create better policy, prosecute bad guys, and regulate markets well.”

If they deigned to listen to an obscure quantitative analyst like me, I would tell them that it is much harder than that.  Data is useless without context and interpretation.  First, you have to have the right models of behavior, and understand the linkages between disparate markets.  Neoclassical economics will not be helpful here, because we aren’t rational in the ways that the economists posit.

Second, in markets you often find that causation is a squirrelly concept, and difficult to prove statistically.  Third, the question of right and wrong is a genuinely difficult one — what is acceptable behavior in markets?  Do we run a market for “big boys” who understand that this is all “at your own risk,” or a market that protects the interests of smaller players at a cost to the larger players?  Do we run a market that encourages volume, speed and efficiency, or one that avoids large movements in prices?

This article is an attempt to comment on the Wall Street Journal article on the SEC’s effort to create the Consolidated Audit Trail [CAT], in an effort to prevent future “flash crashes,” like the one we had five years ago.  I don’t think the efforts of the SEC will work, and I don’t think the goal they are pursuing is a desirable one.

People take actions in the markets for a wide number of reasons.  Some are hedging; some are investing; others are speculating.  Some invest for long periods, and others for seconds, and every period in-between.  Some are intermediaries, while others are direct investors.  Some are in one market, while others are operating in many markets at once.  Some react rapidly, and others trade little, if at all.  Just seeing that one party bought or sold a given security tells you little about what is going on and why.

Following price momentum works as an investment strategy, until the volume of trading following momentum strategies gets too high.  Then things go nuts.  Actions that by themselves are innocent may add up to an event that is unexpected.  After all, that is what dynamic hedging led to in 1987.  There was no sinister cabal looking to drive the market down.  And, because the event did not reflect any fundamental change to where valuations should be, price came back over time.

My contention is even with the huge amount of data, there will still be alternative theories, information that might be material excluded, and fuzziness over whether a given investment action was wrong or not.

After that, we can ask whether the proposed actions of the government provide any significant value to the market.  Some are offended when markets move rapidly for seemingly no reason, because they lose money on orders placed in the market at that time.  There is a much simpler, money saving solution to that close to home for each investor: DON’T USE MARKET ORDERS!  Set the price levels for your orders carefully, knowing that you could get lifted/filled at the level.

This is basic stuff that many investors counsel regarding investing.  If you use a market order you could get a price very different than what you anticipate, as I accidentally experienced in this tale.  I could complain, but is the government supposed to protect us from our own neglect and stupidity?  If we wanted that, there is no guarantee that we would end up with a better system.  After all, when the government sets rules, it does not always do them intelligently.

One of the beauties of capitalism is that it enables intelligent responses as a society to gluts and shortages without having a lot of rules to insure that.  Volatility is not a problem in the long run for a capitalist society.

If you lose money in the short run due to market volatility, no one told you that you had to trade that day.  Illogical market behavior, as in 1987 or the “flash crash” could be waited out with few ill effects.  Most of the difficulties inherent in a flash crash could be solved by people taking a longer view of the markets, and thinking like businessmen.

“It’s Baseball, Mom.”

I often spend time watching two of my younger children play basketball, baseball and softball.  They are often in situations where they might get hurt.  In those situations, after an accident, my wife gets antsy, while I watch to see if a rare severe injury has happened.  My wife asked one of my sons, “Don’t you worry about getting hurt?”  His response was, “It’s Baseball, Mom.  If you don’t get hurt every now and then, you aren’t playing hard enough.”  That didn’t put her at ease, but she understood, and accepted it.

In that same sense, I can tell you now that regardless of what the SEC does, there will be accidents, market events, and violent movements.  There will be people that complain that they lost money due to unfair behavior.  This is all a part of the broader “game” of the markets, which no one is required to play.  You can take the markets on your own terms and trade rarely, and guess what — you will likely do better than most, and avoid short-term volatility.

The SEC can decide what it wants to do with its scarce resources.  Is this the best use for the good of small investors?  I can think of many other lower cost ways to improve things… even just hiring more attorneys to prosecute cases, because most of the true problems the SEC faces are not problems of knowledge, but problems of the will to act and bear the political fallout for doing so.  And that — is a different game of baseball.

This will be the last of my institutional error pieces. It is not that I have not made any other errors, but these were the big ones.

National Atlantic Holdings [NAHC]

I was wrong yesterday.  I actually do have a lot available that I have written on this failure, since I wrote about it here at Aleph Blog.  More than you can shake a stick at.

Let me start at the beginning.  NAHC was an insurer with a niche presence in New Jersey.  They competed only in personal lines, which usually is easy to analyze.  New Jersey was a tough but not impossible state to operate in, and NAHC was a medium-sized fish for the size of the pond that they were in.

Chubb was not in NewJersey at that point in time, and so they wanted to insure autos, homes, and personal property, particularly that of wealthy people.

I thought it was an interesting company, trading slightly below tangible book, with a single-digit multiple on earnings, good protective boundaries, and a motivated management team.  The CEO owned over 10% of the firm, which seemed to be enough to motivate, but not enough to ignore shareholders.

In 2005, we bought a 5%+ stake in the company, which in 2006 became 10%+, and eventually topped out at 17%.  We might have bought more with the approval of the NewJersey Department of Insurance, which was easy at lower levels, and harder at higher levels, which was an interesting anti-takeover defense.

The company showed promise in many ways, but always seemed to have performance issues — little to medium surprises every few quarters.  The stock price didn’t do that much bad or good.  When I left Hovde at the end of July 2007, the position was at a modest gain.  Hovde had a hard time finding long names in that era, so the performance up to that point wasn’t that bad.

If you want to see my original logic for buying the stock after I left Hovde, you can read it here.

Here was the stock price graph from May 2007 to May 2008:

NAHC_current_loss

My old employer Hovde owned 17%.  I eventually owned 0.15%, at the prices you see there, at an average cost of $6.67 for me.  I eventually sold out at an average price of around $6.10.  (In the above graph, “Exit” was not a sale, but where I cut off the calculation.)  This wasn’t my worst loss by any means, but it cost my former employer badly, and it was my fault, not theirs.

What Went Wrong?

  • Their competitive position deteriorated as companies that previously avoided New Jersey entered the state.
  • They announced that they had reserving errors, and reported moderate losses as a result.
  • They announced a sale to Palisades Insurance, a private New Jersey insurer for $6.25/sh, valuing the company at less than 60% of tangible book value.  The fairness opinion was a bad joke.  The company would have been worth more in run-off.
  • Really, the management team was weak.

The first problem would be a tough one to solve.  On the second problem, I never got a good answer to how the loss reserves got so cockeyed, and somehow no one was to blame for it.  This is personal lines insurance — the reserves validate themselves every year.

But the third problem made me think the management was somewhat dishonest.  A larger company could have paid a higher price for NAHC, but that probably would have meant that management would lose their jobs.  They gave shareholders the short end of the stick for the good of management, and perhaps employees.

My biggest error was giving too much credit, and too much patience to the management team.  I met far better management teams in my time as a buy-side analyst, and they were on the low end of the competence scale.  I let cheapness and a strong balance sheet blind me to the eroding competitiveness, and weak ability to deal with the problem.

Ultimately, Hovde found itself in a weak position because it could not file for appraisal rights, a fraud case would have been weak, and the NJ Department of Insurance would not let them acquire enough to block the deal.  Besides, once arbs got a hold of over 40% of the shares, the deal was almost impossible to block.

As I often say, risk control is best done on the front end.  On the back end, solutions are expensive, if they are available at all.

The front end for you can be learning from my errors.  Wise men learn from the mistakes of others.  Average men learn from their own mistakes.  Dumb men never learn.

In closing, be conservative in investing, and be wise.  I thought I was being both, so seek the counsel of others to check your logic.