The Aleph Blog

On Genworth

Another letter from a reader:

Hi David

Hope you are having a good summer.

Would love to hear your thoughts on recent developments at Genworth.  My sense has always been that LTC care insurance is a really tough business for the underwriter.  How can one possibly know how LTC costs will trend in the future – yet that unknown is what the insurer is agreeing to cover.  And some states aren’t even allowing them to raise prices?  Why would I want any exposure to this!!

Dear Friend,

Yes, LTC [long term  care] is an ugly liability and it has been consistently underpriced for the last 25+ years.  This has lad to the demise of some small companies (like Penn Treaty), with many more exiting or limiting the business.  I try to avoid companies that don’t reserve conservatively, and that has been true of Genworth over the last ten years.  Both LTC and Mortgage Insurance produced more claims than anticipated.

I’m not saying that things will get worse from here, but I put this in my “too hard” pile.  I would need a lot more information before committing money to a stock like this.  There are companies that are easier to understand, that also offer good potential returns.

If you can’t understand it, don’t buy it.



Ignore Yield

Yield is not an inherent feature of an asset.  Why?

  • Dividends can be cut.
  • Bonds can default.
  • Taxable income can fall for REITs, BDCs, and MLPs, thus lowering their distributions.
  • Bonds sometimes have funny features where they can be called away from you, and you get to reinvest in a lower yield environment.
  • With structured notes, your income or principal can be considerably reduced when bad events happen that you thought were unlikely, but really aren’t so unlikely.

Rather, focus on the things that drive the increase in value of an asset.  You can create your own “dividends” by selling off pieces of investments that you own.  Commissions are small if you have the right broker.

Why do I write this, this evening?  I keep running into writers and investment advisors that say, “You need a certain yield?  I can get you that yield!”

Yes, and I can get you that yield too, but I would hate doing it because it would expose you to risks that I would not like to take with my own money.  People forget all of the dividend cuts in the ’70s.  They forget how many times REITs have failed as a group over the past 50 years.  They forget how much money was lost on Limited Partnerships in the ’80s while trying to cheat the taxman.

Even Jonathan Clements, a writer who I would recommend to everyone, is somewhat duped by the need for yield.  Getting yield from stocks is an uncertain proposition.  Focusing on the highest quality stocks, and it is less uncertain, but still uncertain.

One thing is a constant with stocks and dividends — it is better to focus on stocks with low dividends that are growing rapidly, than on stocks with high dividends that grow slowly.  The reason for this is that good management teams pay out a conservative amount of free cash flow as dividends, and reinvest most of the free cash flow to grow the company.

It is also not certain that bond yields will rise.  The US economy is not strong, and there is no great demand for business loans at banks.

At a time like this, charlatans arrive telling you how high yields can be achieved in a low yield environment.  Investment banks offer structured notes with high yields.  Don’t believe them.  Instead focus on the investments that might preserve or increase value best.

Now for the controversial bit: time to increase allocations to cash and gold (or commodities).  You might think, “Wait, are you you saying in a low yield environment, I ought to drop my yield further?” Yes.  I am also saying that when yields are too low, the opportunity costs of holding gold or cash are also low, and maybe that will help to preserve value if things go wrong.

I manage stocks and bonds for total return.  I don’t look at yield as an important guide to future total return in an environment like this.  I try to  view all investments through a “What could go wrong?” lens, rather than a “How much cash will this investment send to me next year?” lens.

Here’s a way to think about it.  Pretend that all investments don’t make distributions.  What investments would you want to own?  Which grow value the best?  That is your first pass in how you should think about investments.  The second refines it by adjusting for tax rules, because some types of income are tax-favored.  That said, put value generation first, and tax consequences second.


On Management Fees

Yet another letter from a reader:

Hi David -

Thank you for your commitment to sharing your wisdom, ideas, and experience.  I aspire to one day enjoy the success and happiness that you have in your life and career as an investor.

My question may be a bit more tactical than others that you have profiled: In our current world of 2% & 20% fee structures and where in past eras Buffett promoted a 25% performance fee above a 6% threshold (with the objective of aligning partners’ wealth creation incentives), why do investment managers choose to promote % of AUM only fee structures?  I believe you also promote a similar fee only structure? 

I’m curious about your insights on the rationale for fee only versus performance only structures.  Does your philosophy have anything to with your faith or past experience working at a hedge fund? 

Many thanks and much continued success to you!!

Personally, I like the flat 1% of assets fee (0.3% for bonds), because it does not make me swing for the fences.  I don’t take extra risks or chances with client assets because of a performance fee.  The main goal of investing is to avoid losing money.  That is what I aim to do over a full market cycle, and I have been successful at it over the last 20+ years.

I respect those who do performance only, like Buffett’s formula, but my value proposition is that those who invest alongside me get what I get, less the small fee.  If I underperform in the future, I will be dejected, and it will hurt me far more, than any money I receive in fees.  I aim to do as well as Buffett, but charge less.  I am not driven by profits, but by service to clients.

Another way to say it is to hire guys who will do this business even if they weren’t paid.  That is the way I feel about investing.

I am out to do well, and not to give my clients a bad deal.

Can the “Permanent Portfolio” Work Today?

Another letter from a reader:

Dear Mr. Merkel:

I just discovered your blog through Valuewalk, which I read most days. I haven’t read much yet on your blog, but from what I’ve seen, I really like your insights and comments.

I’ve been thinking for a long time about the idea of a permanent portfolio concept, based on writing from years ago of an investment analyst, Harry Browne, now deceased. I’ve been thinking about this for my own investment requirements and also because I intend to write a book on the subject.

The big problem with a permanent portfolio today, versus 30 years ago, in my judgement, is identifying a long term fixed income vehicle would survive a major financial collapse. Browne always used 30 year US Treasury bonds, in an era when it seemed clear those bonds could survive a monetary deflation.

Of course, the Fed isn’t about to institute a policy of sustained monetary deflation any time soon, on a voluntary basis. Any such deflation would occur, either because the Fed were unable or unwilling to monetize assets fast enough to head off cascading cross defaults and massive bonk failures; or because the Fed decided to let the house of cards collapse, in some future recession-panic, because it became obvious to a plurality of Fed governors that to prop up the house of cards would guarantee hyper inflation in short order. Of course, a hyper inflation would not only destroy the financial system, including the central bank; it would overturn the established political order, and cause a famine as the division of labor fell apart. 

I think a monetary deflation will happen sooner or later, because of a financial “accident” (that reasonable people can foresee). Even if the central banks were to cause a hyper inflation, when that inflation ends after two or three years, the currency must be renounced. Then we would get deflation for a while via some new currency.

Since I think the deflation risk is realistic, I’m trying to figure out what-if any-bond instruments could survive deflationary destruction. Obviously, in a monetary deflation, all investment prices plummet, except default-free bonds. Default free bonds would rise in price, as interest rates plummeted. However, I’m not clear as to what bonds might work as vehicles in a permanent portfolio, because T bonds are no longer a reliable safe haven from eventual political default.

There might well be sovereign bonds in other countries that are more friendly to free enterprise and private property than contemporary US, and hence less prone to sovereign bond default,  but this introduces the risk of currency fluctuations. So it’s not a perfect solution. Perhaps some foreign sovereign debt combined with US Treasury debt would partly work. It has also occurred to me that some US utility or pipeline firm etc. might offer debt or preferred stock or other forms of fixed income debt/equity ownership that would survive default. In a terrible depression, I’d assume some utility companies would continue to function although, of course, not flourish. Obviously, any such debt or equity would be a very special situation, since most firms are now loaded to the gills with debt, making them poor risks to survive a crushing deflation.

My impression is all this is right up your ally. (Except for my musing-theorizing about the risk of monetary deflation, which no doubt makes me seem like a religious fanatic or political crazy.) Anyway, I’d be interested if you think this problem can be solved. In other words, do you think some private debt issues that are long term or even medium term exist to be discovered that could avoid default in a huge deflationary depression? How would you go about conducting a search for such safe U.S. corporate bonds or other fixed income instruments?

What I really need to do is immerse myself in reading about fixed income analysis. Which I hope to get to in a few months.

None of my fixation with bonds has to do with forecasting a decline in interest rates; until the next crisis, rates on the long end could easily climb. I’m looking for a secure volatile instrument that would gain in price as other investments were falling during a financial panic and subsequent depression.

Thanks for reading through all this. I look forward to spending a lot of hours in the future on your blog.

Yours truly,

Dear Friend,

I have written about the Permanent Portfolio concept here.  I think it is valid.  At some point in the near term, I will update my analysis of the Permanent Portfolio, and publish it for all to see, which I have not done before.

In a significant inflation scenario, gold would soar, long T-bonds would tank, T-bills would actually earn nominal but not real money, and stocks would likely trail inflation, aside from investors that invest in low P/E stocks.  The permanent portfolio would likely do okay.

Same  for a deflation scenario.  Stocks will muddle. T-bonds will do well.  T-bills will do nothing.  Gold will do badly.  That said, the permanent portfolio concept is meant to be an all-weather vehicle, and has done well over the last 44 years, with only 3 losing years, and returns that match the S&P 500, but with half the volatility.

I’m usually not a friend of ideas like this, but the Permanent Portfolio chose four assets where the price responses to changes in real rates and inflation fought each other.  The rebalancing method is important here, as it is a strategy that benefits from volatility.

With respect to where to invest in fixed income to benefit from a depression is a touchy thing — it’s kind of like default swaps on the US government, which are typically denominated in Euros.  How do you know that the counterparty will be solvent?  How do you know that the Euro will be worth anything?

Personally, I would just stick with long US Treasuries.  The US has the least problems of all the great powers in the world.  You could try to intensify you returns by overweighting long Treasuries, but that is making a bet.  The Permanent Portfolio makes no bets.  It just takes advantage of economic volatility, and rides the waves of of the economy.  As a group, stocks, T-bonds, T-bills, and gold, react very differently to volatility, and as such do well, when many other strategies do not.

Warren Buffett is “scary smart,” so says Charlie Munger, who is “scary smart” himself.  I think Harry Browne was “scary smart” with respect to the Permanent Portfolio idea.  But am I, the recommend-er “scary smart?”  I do okay, but probably not “scary smart,” so take my words with a grain of salt.



PS — As an aside, I would note that if everyone adopted the “Permanent Portfolio” idea — gold would go through the roof, because that is the scarcest of the four investments.

How to Start an Investment Advisory Business from a Nontraditional Background

Another letter from a reader:


I recently discovered your blog. I read that you have had quite a long history in the financial industry and you mentioned to be running your own asset management shop as well. I currently work as a software developer but I have had for a long time a strong passion for investing and lately I have combined both of the latter. During the last 2 years I have developed my own software for simulating all sorts of quantitative investment strategies mainly for myself but at times for clients too. However, currently I am in a situation where I would like to take my hobby and passion to the next step and start working in the financial industry as a programmer doing similar tasks as I have done now as a hobby. Would you happen to have any good advice how to move forward and where to start looking for this kind of a position?

Thanks in advance,

You have to make your expertise known.  That can be through a blog, a newsletter (whether e-mail or paper), and must give people a taste of your expertise.  Be aware that to gain reader interest, clever examples will suffice.  To gain clients you will need a track record that shows the results of all decisions made  over the non-discretionary accounts you advised.

Simulated results aren’t enough.  You have to be able to show that you made actual money in real time.  Once you can do that, make your expertise known, and then follow up with those who contact you.

Many clever investors have come from nontraditional backgrounds.  I know more than a few.  I will add only this: don’t quit your “day job” before you have a sense that your investment management firm will have traction.



On Setting Up New Accounts

Another great letter from a reader:

Hi David,

I enjoy your writing. I find myself of a similar mindset. I am an investment advisor running my clients individual accounts in a value fashion. I am currently have my clients invested in about 20 positions. My question is in regards to a new account….I have held off on buying the same positions in that new account unless any of the 20 positions still fall within my estimated “buy” range. Therefore, a new account opened today may sit in cash for some time until new ideas are found, or the 20 positions from the other accounts fall back to a buy range. How do you handle this? Do you use a model portfolio and all accounts consistently look alike?

Thank you and keep up the good work,

Dear Friend,

My value proposition is that clients get a clone of my accounts.  I am my own biggest client; what I get, they get, less fees.  I set them up to mirror my account within a week of receiving the assets.

The main reason I do it this way is that there is little rhyme and reason to target prices.  I don’t have any target prices.  Rather, I compare stocks against each other using a scoring system quarterly, and I sell companies that are relatively  expensive and buy companies that are relatively cheap.  Read my article Portfolio Rule Eight to understand this better.  I realize few managers manage money this way, but I think it is a way that reflects how the markets really work.  We should not compare individual stocks against cash, but compare stocks against each other.  We should compare the stock market as a whole against cash, to analyze whether it is absolutely rich or cheap.



The Investments Matter More than their Form

  • Open-end Mutual Funds, including index funds
  • Closed-end Mutual Funds
  • Exchange Traded Funds, including index funds
  • Separately Managed Accounts
  • Unit Investment Trusts
  • Hedge Funds
  • Private Equity
  • Other Limited Partnerships [LPs], including MLPs
  • Variable Annuities (and Life Insurance)
  • Equity-Indexed Annuities (and Life Insurance)

What do all of the above have in common?  The first one is the easiest — they are all investments.  The second one is harder — they are all ways of investing in the ownership interests of corporations.

Think of the underlying investments within these investment forms when analyzing the forms as investments.  Now the forms aren’t entirely neutral:

  • Index funds don’t take a lot of fees.
  • Hedge Funds, Private Equity, and Insurance Products do take a lot of fees.
  • Insurance Products are tax favored.  LPs, MLPs and Private Equity have some tax advantages.  Separately managed accounts can have tax advantages, if managed right.  If you make the right investment, buying and holding has tax advantages, especially if you take it to the grave.

Thus, you should look at the manager, to try to analyze if he has skill.  You should look at the fees to see what you are giving up.  You should look at the tax advantages.

You should also think about the sensitivity of the investments to the overall risk cycle.  I don’t like the concept of beta, because it is not a stable concept, but in broad hedge funds have low beta, and private equity has high beta, relative to an S&P 500 index fund.  But neither in aggregate have much outperformance, after adjusting for the beta.

There are many clever investors scouring the world of investments looking for underpriced assets.  At a time like now, there aren’t a lot of underpriced assets.  I might find 2-4 per quarter, but they are only relatively underpriced, not absolutely underpriced (I.e. at this price, you should buy it regardless the the economic environment).

Every now and then, the market falls apart.  At such a time, two things happen.

1) Because some sector of the economy had too much debt, prices for the stocks and corporate bonds (or trade claims) fall, and the market as a whole falls along with them, though to a lesser extent.

2) During the crisis, many assets get oversold, and those with better knowledge can profit from the overselling.  The best example I can think of all of the hedge funds that bought non-agency mortgage-backed securities, when they were thrown out the window indiscriminately in 2008, and many of those securities have returned to par.

The ability to achieve alpha (outperformance) increases after a crisis.  Some who prepare for that, like Seth Klarman and Warren Buffett, create their own outperformance by taking more risk when other investors are running away in panic.

As my boss asked me in 2007, “Why have you not done so well for us the last few years, when you did so well 2003-5?  I answered, “When I came to you, the market was like an apple cart  that had fallen over and I picked up the undamaged apples.  Today, the market is rational, and there are not a lot of easy pickings to be had.  That is the difference between the bust and the boom.  It is much easier for a fundamental investor to act during the bust.

Thus I would encourage the following:

  • Pay attention to fees
  • Pay attention to tax advantages.
  • The time at which you invest matters  a great deal: try to invest when opportunities are the greatest (and others are scared stiff)
  • Ignore the form of investing, but invest with skilled managers (if you can find them, otherwise index funds).

Think of Seth Klarman who hands back money to his clients when markets are not promising.  Few professionals have the intelligence to do that.   Fewer have the ethics and courage to do so.

For my equity clients, I have reduced exposure, and I am close to my maximum cash level of 20%.  I am watching the market, and am willing to add to my positions, 10%, 20%, and 30% lower.  I own good companies.  As has been true in the past, I get close to zero cash as the market bottoms.  The market is somewhat high now — I think of it as the 80th percentile.  But it is not at nosebleed levels.

Analyze your investments, and sense the skill of managers, and lack thereof, and the degree of sensitivity to the market as a whole, which is likely higher than you expect.

Then adjust as you see fit.  Every situation is different, except for the parts that are the same.

All for now.

Regarding Underemployment

This is just meant to be a few thoughts.  I haven’t worked everything out, but I want to talk about how the labor markets are weak.

Yes, the headline statistics are strong.  The U-3 unemployment figure is low at 6.2%.  But look at a few other statistics:

My, but wages as a share of GDP has been falling.

And real wages have flatlined.  No surprise that many feel pinched in the present environment.  Even the Federal Reserve Chairwoman Janet Yellen expresses her doubts about the labor markets, which was expressed through the most recent FOMC Statement.

The problem is this: the relationship between labor employment and monetary policy is weak.  It is weaker than pushing on a string.  There are two major factors retarding the US labor market, and they are globalization and increased productivity from technology.

The value of knowledge is rising relative to less-skilled labor.  As such, we are seeing increased income inequality in the US, but lower income inequality globally.  Bright people in foreign lands who can transmit their skills over the internet can do better for themselves, even as more expensive counterparts in the US lose business.

Call this the revenge of the nerds.  The internet enables bright people to profit from their differential knowledge, as it can be applied to wider opportunities.

Think of India for a moment.  Many bright people with advanced degrees, but education amounts to little unless you can use it for your own benefit.

Here’s my main point.  The FOMC con’t do much about the labor markets; their power is weak.  The bigger factors of globalization and technology can’t be fought.  They are too big.

Thus, you are on your own.  The US Government does not have the power to re-create the unique middle class prosperity of the ’50s and ’60s.  If you work for others, you are not your own master.  Aim to make yourself the master of your situation, by making yourself invaluable to your clients.

Not Apt, Not Teed Up, Not Going

Okay, let’s run the promoted stocks scoreboard:

TickerDate of ArticlePrice @ ArticlePrice @ 6/27/14DeclineAnnualizedSplits
 8/1/2014 Median-97.2%-89.6%


Now for tonight’s loser-in-waiting: Apptigo [APPG].  This is a company that  until four months ago was a development stage company for selling Irish horses in the US.  This is a company that has never earned any money, and only has positive net worth at present because of raising capital when the prior company acquired Apptigo in a reverse marger, and renamed itself Apptigo.

This is a company that says it will make money off of selling apps.  Well, they have one app at present, and it is called SCORE – Match Maker.  It has a grand total of seven likes at the iTunes Store.  Now let me hazard a guess here, and say that it is difficult to create a broad network for matchmaking.  The value of a network goes up proportional to the square of its nodes.  How will they attract enough attention in the iTunes ecosystem to make  a significant network?  Even if this is a legitimate company, I don’t see how it will be easy to make it work, as the promoter said it would be easy.

The promoter also said this in tiny type:

Important Notice and Disclaimer: Flying Under the Radar Stocks is an independent paid circulation newsletter. This report is a solicitation for subscriptions and a paid promotional advertisement of Apptigo, Inc. (APPG). Flying Under the Radar Stocks received an editorial fee of twenty five thousand dollars from Micro Cap Media Ltd. APPG was chosen to be profiled after Flying Under the Radar Stocks completed due diligence on APPG. Flying Under the Radar Stocks expects to generate new subscriber revenue the amount of which is unknown at this time resulting from the distribution of this report. Micro Cap Media Ltd. paid nine hundred forty-eight thousand, three hundred sixty-three dollars to advertising agencies for the cost of creating and distributing this report, including printing and postage, in an effort to build investor awareness. This report does not provide an analysis of a company’s financial position, operations or prospects and this is not to be construed as a recommendation by Micro Cap Media Ltd. or an offer to buy or sell any security or investment advice. An offer to buy or sell can only be made with accompanying disclosure documents and only in states and provinces for which they are approved. Do not base any investment decision based solely on information in this report. Although the information contained in this advertisement is believed to be reliable, Micro Cap Media Ltd. makes no warranties as to the accuracy of any of the contents herein and accepts no liability for how readers may choose to utilize the content. Readers should perform their own due diligence, including consulting with a licensed, qualified investment professional. Further, readers are strongly urged to independently verify all statements made in this report APPG’s financial position and all other information regarding APPG should be verified directly with APPG Audited financial statements and other relevant information about APPG can be found at the Security and Exchange Commission’s website at It is recommended that any investment in any security should be made only after consulting with your investment advisor and only after reviewing all publicly available information, including the financial statements of the company. The information contained herein contains forward-looking information within the meaning of section 27a of the Securities Act of 1933 as amended and section 21e of the Securities Act of 1934 as amended including statements regarding growth of APPG. In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act, statements contained herein that look forward in time, which include everything other than historical information, involve risks and uncertainties.  All forward-looking statements are based upon current assumptions that are believed to be reasonable. In the event any such assumptions turn out to be incorrect, forward-looking statements based upon those assumptions will not be accurate. Flying Under the Radar Stocks presents information in this report believed to be reliable, but its accuracy cannot be guaranteed. More information can be found at APPG’s website (underline emphasis mine)

I actually like this disclaimer, except for the fact that it is in tiny type, while the proclamation of the investment’s fake virtues are in big type.  So, I have a simple proposal for the SEC regarding newsletters like this: the type size of any disclaimer must be as large as the the largest type in the document.

This is fair, and consistent with other laws that regulate “the fine print.”

I emailed the CEO of Apptigo to ask him whether he knew about the stock promotions (there are three going on), and whether the company, its major shareholders, or its management was benefiting from the promotion.  There was no answer, though I wrote to him on Thursday.

Regardless, avoid promoted stocks, dear friends.  No company of any good reputation pays anyone to promote their stock.  Avoid promoted stocks.

A Different Look at Neglect

It’s good to look at stocks that not everyone else is looking at.  A little neglect can be a good thing.

  • Companies that are a little illiquid.
  • Companies with a dedicated shareholder base; they don’t sell at the drop of a hat.
  • Companies with control investors that don’t give outside passive minority investors the short end of the stick.
  • Companies that have odd business models that have most investors ignore them
  • Companies in boring businesses.

Let’s look at this top down, looking at neglect by market sector.  Days to turn over indicates how rapidly stocks are traded.  A high number means they trade more slowly.

SectorMarket Cap ($M)Dollar Volume ($K)Days to turn over
05 – Consumer Non-Cyclical1,536,8077,274,592211
07 – Financial3,511,04116,767,713209
12 – Utilities1,051,8115,348,267197
06 – Energy2,425,78714,781,550164
02 – Capital Goods1,253,3617,882,012159
08 – Health Care2,428,96916,080,916151
Grand Total23,817,027161,861,109147
01 – Basic Materials947,8306,770,631140
11 – Transportation594,9894,279,380139
03 – Conglomerates15,805116,462136
09 – Services4,936,83537,308,869132
10 – Technology4,368,57538,382,921114
04 – Consumer Cyclical745,2176,867,798109

In general, colder sectors attract more long-term holders.  Sectors where competitive conditions change more rapidly turn over faster.

An aside before we go on — I excluded from this analysis:

  • Foreign stocks trading on US exchanges
  • Over the counter stocks
  • Stocks with less than $10 million in market cap
  • Exchange traded products

That left me with around 3900 stocks.  As an aside, stock turnover seems have to increased, and I wonder if high frequency trading and ETP creation/liquidation might be driving that.  147 days for an average holding period means stocks trade their entire market capitalization  around 2.5x per year.  Cue up the commentary from Buffett and Munger about how most trading in the stock market is wasted effort.

But now let’s look at industries:

IndustryMarket Cap ($M)Dollar Volume ($K)Days to turn over
0715 – Insurance (Property & Casualty)632,4491,730,968365
0112 – Fabricated Plastic & Rubber3,29810,484315
1206 – Natural Gas Utilities435,1061,407,846309
0506 – Beverages (Non-Alcoholic)354,7101,217,841291
1103 – Air Courier139,858505,601277
0521 – Personal & Household Products434,0081,574,389276
1209 – Water Utilities17,10364,198266
0724 – Money Center Banks223,336877,033255
0524 – Tobacco272,3851,170,334233
0606 – Oil & Gas – Integrated438,1811,900,557231
0957 – Retail (Grocery)398,9811,740,963229
0712 – Insurance (Miscellaneous)51,749227,575227
0218 – Misc. Capital Goods417,8911,859,649225
0975 – Waste Management Services59,927283,562211
0730 – S&Ls/Savings Banks1,8879,013209
1112 – Railroads186,397902,219207
0809 – Major Drugs227,4191,135,147200
0915 – Communications Services692,3733,519,894197
0503 – Beverages (Alcoholic)52,692273,645193
0727 – Regional Banks1,227,8136,422,106191
1030 – Scientific & Technical Instruments265,5951,393,898191
0706 – Insurance (Accident & Health)247,6221,310,785189
0718 – Investment Services554,2252,934,362189
0418 – Footwear80,706428,470188
0512 – Fish/Livestock1,91710,383185
0703 – Consumer Financial Services405,6972,203,610184
0203 – Aerospace and Defense402,2232,254,100178
0960 – Retail (Home Improvement)169,283956,876177
0127 – Misc. Fabricated Products77,222439,594176
0221 – Mobile Homes & RVs5,29731,414169
0612 – Oil Well Services & Equipment574,2923,407,144169
0106 – Chemicals – Plastics and Rubbers173,0531,038,370167
0954 – Retail (Drugs)230,4951,417,370163
1109 – Misc. Transportation73,963456,181162
0103 – Chemical Manufacturing353,3602,227,847159
0709 – Insurance (Life)166,2631,052,261158
0803 – Biotechnology & Drugs1,613,67510,424,895155
1203 – Electric Utilities599,6033,876,223155
0415 – Auto & Truck Parts203,5961,324,773154
0509 – Crops4,88931,874153
0918 – Hotels & Motels94,044616,953152
0609 – Oil & Gas Operations1,386,1759,141,482152
0209 – Construction – Supplies and Fixtures140,270934,529150
1006 – Computer Hardware72,374487,123149
1036 – Software & Programming1,152,9447,816,781147
Grand Total23,817,027161,861,109147
0921 – Motion Pictures159,5681,105,864144
1024 – Electronic Instruments & Controls182,5691,279,912143
0515 – Food Processing403,5982,854,143141
0909 – Business Services446,0843,157,933141
0812 – Medical Equipment & Supplies436,7333,130,033140
0930 – Printing Services7,17051,557139
0109 – Containters & Packaging81,869590,633139
0933 – Real Estate Operations594,2864,295,888138
0206 – Construction & Agricultural Machinery137,131991,809138
0303 – Conglomerates15,805116,462136
0969 – Schools21,108160,274132
1115 – Trucking44,104336,398131
0939 – Rental & Leasing238,5641,828,936130
0130 – Non-Metallic Mining4,78937,031129
0942 – Restaurants219,6611,709,208129
1118 – Water Transportation32,241255,920126
0406 – Appliances & Tools55,182456,389121
0927 – Printing & Publishing91,943760,613121
0133 – Paper & Paper Products30,855256,597120
0936 – Recreational Activities75,698643,463118
0124 – Metal Mining98,839864,894114
0430 – Recreational Products54,015474,019114
0421 – Furniture & Fixtures31,741279,508114
0948 – Retail (Catalog & Mail Order)266,9042,421,091110
0806 – Healthcare Facilities151,1421,390,841109
0121 – Iron & Steel76,186704,432108
0924 – Personal Services41,546386,447108
0403 – Apparel/Accessories89,378848,477105
1018 – Computer Services1,023,2389,989,880102
1003 – Communications Equipment837,8018,227,385102
0972 – Security Systems & Services8,89288,979100
1021 – Computer Storage Devices124,1361,290,69696
0963 – Retail (Specialty Non-Apparel)216,2232,271,38695
0945 – Retail (Apparel)160,3901,696,87995
0906 – Broadcasting & Cable TV471,3875,029,75894
0433 – Textiles – Non-Apparel11,455123,78993
1033 – Semiconductors670,9807,309,56392
0951 – Retail (Department & Discount)102,8491,133,64091
1012 – Computer Networks14,378159,28890
0903 – Advertising39,473442,18089
0409 – Audio & Video Equipment11,660130,67689
0518 – Office Supplies12,608141,98189
0215 – Construction Services119,7821,361,92288
0912 – Casinos & Gaming109,7031,259,52087
0424 – Jewelry & Silverware6,52778,56883
0603 – Coal27,139332,36682
0118 – Gold & Silver20,871256,84281
0115 – Forestry & Wood Products27,489343,90780
1027 – Office Equipment4,01051,06479
0412 – Auto & Truck Manufacturers189,0922,548,45474
0436 – Tires8,943126,83871
0212 – Construction – Raw Materials30,768448,58969
1106 – Airline118,4261,823,06165
0966 – Retail (Technology)20,283329,63762
0427 – Photography2,92347,83761
1015 – Computer Peripherals20,549377,33054

Again, the pattern is more volatile and controversial industries trade more frequently than the more stable industries.  One one sense, this is obvious, because the stock market can be used for two purposes — investing and gambling.  Gambling is much more attractive when prices are volatile, and the prospects for making a big win are significant. (Even if the possibility of big losses is high as well.  Oh well, profits tend to flow to those  who eliminate the downside.)

Finally, let’s look at individual stocks, segmented by market capitalization.

Behemoth Stocks

Berkshire Hathaway Inc.BRK.A07 – Financial0715 – Insurance (Property & Casualty)6,579
Wal-Mart Stores, Inc.WMT09 – Services0957 – Retail (Grocery)542
Exxon Mobil CorporationXOM06 – Energy0609 – Oil & Gas Operations453
Johnson & JohnsonJNJ08 – Health Care0803 – Biotechnology & Drugs427
PepsiCo, Inc.PEP05 – Consumer Non-Cyclical0506 – Beverages (Non-Alcoholic)365
Procter & Gamble Company, ThePG05 – Consumer Non-Cyclical0521 – Personal & Household Products362
General Electric CompanyGE02 – Capital Goods0218 – Misc. Capital Goods353
Wells Fargo & CoWFC07 – Financial0727 – Regional Banks345
Coca-Cola Company, TheKO05 – Consumer Non-Cyclical0506 – Beverages (Non-Alcoholic)341
Chevron CorporationCVX06 – Energy0606 – Oil & Gas – Integrated339
Comcast CorporationCMCSA09 – Services0915 – Communications Services196
QUALCOMM, Inc.QCOM10 – Technology1033 – Semiconductors193
Citigroup IncC07 – Financial0727 – Regional Banks175
Cisco Systems, Inc.CSCO10 – Technology1003 – Communications Equipment161
Intel CorporationINTC10 – Technology1033 – Semiconductors146
Bank of America CorpBAC07 – Financial0727 – Regional Banks138
Gilead Sciences, Inc.GILD08 – Health Care0803 – Biotechnology & Drugs123, Inc.AMZN09 – Services0948 – Retail (Catalog & Mail Order)105
Apple Inc.AAPL10 – Technology1003 – Communications Equipment93
Facebook IncFB10 – Technology1018 – Computer Services50

The table above lists the biggest stocks — the top ten that are less traded, and the top ten that are most traded.  No surprises, those that are most traded are more controversial than those that are traded less.  Also, some companies have investors with control positions, which further slows down trading as most control investors rarely trade.

Large Cap Stocks

Cheniere Energy Partners LP HoCQH12 – Utilities1206 – Natural Gas Utilities1,709
CNA Financial CorpCNA07 – Financial0715 – Insurance (Property & Casualty)1,647
Icahn Enterprises LPIEP09 – Services0963 – Retail (Specialty Non-Apparel)1,355
Spectra Energy Partners, LPSEP12 – Utilities1206 – Natural Gas Utilities1,190
Enable Midstream Partners LPENBL06 – Energy0606 – Oil & Gas – Integrated1,166
Cheniere Energy Partners LPCQP12 – Utilities1206 – Natural Gas Utilities1,041
Thomson Reuters Corporation (UTRI09 – Services0927 – Printing & Publishing1,012
Western Gas Equity Partners LPWGP06 – Energy0609 – Oil & Gas Operations969
Enterprise Products Partners LEPD12 – Utilities1206 – Natural Gas Utilities956
Plains GP Holdings LPPAGP06 – Energy0612 – Oil Well Services & Equipment953
Citrix Systems, Inc.CTXS10 – Technology1036 – Software & Programming54
United Continental Holdings InUAL11 – Transportation1106 – Airline53
LinkedIn CorpLNKD10 – Technology1018 – Computer Services47
Yahoo! Inc.YHOO10 – Technology1018 – Computer Services47
Whole Foods Market, Inc.WFM09 – Services0957 – Retail (Grocery)45
Micron Technology, Inc.MU10 – Technology1033 – Semiconductors39
CBS CorporationCBS09 – Services0906 – Broadcasting & Cable TV37
Tesla Motors IncTSLA04 – Consumer Cyclical0412 – Auto & Truck Manufacturers21
Netflix, Inc.NFLX09 – Services0906 – Broadcasting & Cable TV19
Twitter IncTWTR10 – Technology1018 – Computer Services19

What fascinates me here about the low turnover stocks is the dominance of energy limited partnerships.  Since they are income vehicles, they don’t trade as much stocks used for speculative gains.

Mid-cap Stocks

CIM Commercial Trust CorpCMCT09 – Services0939 – Rental & Leasing9,382
Crown Media Holdings, IncCRWN09 – Services0906 – Broadcasting & Cable TV4,333
Clear Channel Outdoor HoldingsCCO09 – Services0903 – Advertising2,258
American National Insurance CoANAT07 – Financial0715 – Insurance (Property & Casualty)1,756
Gamco Investors IncGBL07 – Financial0718 – Investment Services1,627
Valhi, Inc.VHI01 – Basic Materials0103 – Chemical Manufacturing1,385
OCI Partners LPOCIP01 – Basic Materials0103 – Chemical Manufacturing1,205
Summit Midstream Partners LPSMLP12 – Utilities1206 – Natural Gas Utilities1,199
TFS Financial CorporationTFSL07 – Financial0727 – Regional Banks1,193
Global Partners LPGLP06 – Energy0609 – Oil & Gas Operations1,131
FireEye IncFEYE10 – Technology1036 – Software & Programming21
AK Steel Holding CorporationAKS01 – Basic Materials0121 – Iron & Steel21
Ariad Pharmaceuticals, Inc.ARIA08 – Health Care0803 – Biotechnology & Drugs21
Zillow IncZ09 – Services0933 – Real Estate Operations20
Trulia IncTRLA09 – Services0909 – Business Services20
Sunedison IncSUNE10 – Technology1033 – Semiconductors19
J C Penney Company IncJCP09 – Services0951 – Retail (Department & Discount)17
SolarCity CorpSCTY10 – Technology1033 – Semiconductors17
GT Advanced Technologies IncGTAT10 – Technology1033 – Semiconductors15
Yelp IncYELP09 – Services0927 – Printing & Publishing12

Again. hot stocks with uncertain returns at the bottom, and stocks with more certain prospects at the top.   Note the income vehicles in the less traded stocks.

Small Cap Stocks

PHI Inc.PHII06 – Energy0612 – Oil Well Services & Equipment13,434
First Mid-Illinois Bancshares,FMBH07 – Financial0727 – Regional Banks10,674
QAD Inc.QADB10 – Technology1036 – Software & Programming8,529
Intermountain Community BancorIMCB07 – Financial0727 – Regional Banks8,374
Greene County BancorpGCBC07 – Financial0727 – Regional Banks7,021
Oconee Federal FinancialOFED07 – Financial0727 – Regional Banks6,143
Bel Fuse, Inc.BELFA10 – Technology1024 – Electronic Instruments & Controls5,131
PrimeEnergy CorporationPNRG06 – Energy0609 – Oil & Gas Operations4,303
Community Financial CorpTCFC07 – Financial0727 – Regional Banks3,608
Transcontinental Realty InvestTCI09 – Services0933 – Real Estate Operations3,168
PowerSecure International, IncPOWR12 – Utilities1203 – Electric Utilities20
Penn Virginia CorporationPVA06 – Energy0609 – Oil & Gas Operations20
Pixelworks, Inc.PXLW10 – Technology1033 – Semiconductors20
IsoRay, Inc.ISR08 – Health Care0812 – Medical Equipment & Supplies18
Quantum Fuel Systems Tech WorlQTWW04 – Consumer Cyclical0415 – Auto & Truck Parts17
Pacific Ethanol IncPEIX01 – Basic Materials0103 – Chemical Manufacturing17
Glu Mobile Inc.GLUU10 – Technology1036 – Software & Programming15
Achillion Pharmaceuticals, IncACHN08 – Health Care0809 – Major Drugs14
Walter Energy, Inc.WLT06 – Energy0603 – Coal14
Plug Power IncPLUG10 – Technology1024 – Electronic Instruments & Controls8

Look at all of the regional banks amid those that turn over less.  Look at all of the controversial stocks amid  those that trade frequently.

Microcap Stocks

Bridgford Foods CorporationBRID05 – Consumer Non-Cyclical0515 – Food Processing20,286
Magyar Bancorp, Inc.MGYR07 – Financial0727 – Regional Banks8,948
Bowl America IncorporatedBWL.A09 – Services0936 – Recreational Activities8,599
MSB Financial Corp.MSBF07 – Financial0727 – Regional Banks5,562
Siebert Financial Corp.SIEB07 – Financial0718 – Investment Services5,136
Pathfinder Bancorp, Inc.PBHC07 – Financial0727 – Regional Banks4,764
Jacksonville Bancorp IncJXSB07 – Financial0727 – Regional Banks4,567
Oak Valley Bancorp(NDA)OVLY07 – Financial0727 – Regional Banks4,363
Howard Bancorp IncHBMD07 – Financial0727 – Regional Banks4,308
Bay Bancorp IncBYBK07 – Financial0727 – Regional Banks4,240
Hyperdynamics CorporationHDY06 – Energy0609 – Oil & Gas Operations16
InterCloud Systems IncICLD09 – Services0909 – Business Services14
BioFuel Energy Corp.BIOF01 – Basic Materials0103 – Chemical Manufacturing10
India Globalization Capital, IIGC02 – Capital Goods0215 – Construction Services8
LiveDeal IncLIVE10 – Technology1018 – Computer Services8
Giga-tronics, IncorporatedGIGA10 – Technology1024 – Electronic Instruments & Controls7
Digital Ally, Inc.DGLY04 – Consumer Cyclical0409 – Audio & Video Equipment5
DARA Biosciences IncDARA08 – Health Care0803 – Biotechnology & Drugs4
Spherix IncSPEX09 – Services0909 – Business Services4
USEC Inc.USU12 – Utilities1203 – Electric Utilities3

Look at all of the bitty banks that don’t get traded.  Perfect for some of my friends who buy and hold such banks, if they can get the trade on.  And then, look at all of the controversial companies whose stocks trade trade like a spinning top.

I encourage all of my readers to analyze situations where there are fewer eyeballs looking.  Analyze situations where control investors limit the trading relative to the size of the firm.  Go where others don’t go, because it is dull.  Look for advantage where few others do.  And after that, be willing to hold for a while — years, not months.  Pay attention as to whether the company has a defensible business model — strong balance sheet, moat versus competition, etc.  Then look for a reasonable to low price.  There is the making of a good investment.

Full disclosure: long CVX & BRK/B


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.

Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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