Photo Credit: BiblioArchives / LibraryArchives & Yousuf Karsh. Library and Archives Canada, e010751643 || Nevah give up! Nevah give up! Nevah give up!!!

I may be off by a year but sometime in 1997 I was invited by Ted Aronson to come meet with him at his office in downtown Philadelphia. We talked for 90 minutes about a wide number of topics related to value investing and quantitative finance. I asked at the end of the conversation, “Why did you invite me to come talk with you? What’s the advantage to you?” He said (something like), “You’re a bright and interesting person, and I benefit by talking with such people.”

I met Ted through the CFA Society in Philadelphia. Sarah Lange, at that time the Chief Investment Officer of Provident Mutual, was president of the Society that year, and I did some small things to bring in some programs for the Society.

I met Ted at least twice more at a variety of CFA events, including the one where I was representing Baltimore at the Boston meeting where the Eastern US Societies met to oust the leader of the CFA Institute for malfeasance in 2003. I also met Harry Markopolos at that time, as he was President of the Boston Society that year.

And as such, given the talk that I had with him that day, the details of which I can’t remember, but it was a lot of fun, I was surprised to see this article:

I was shocked. The one thing I remember about his conversation with me was that he called his method “price-to-zipcode.” From others things that he said, I backed into the idea that he was doing some form of multifactor value investing, which was not far from what I was doing and continue to do.

I was reminded of when I wrote this:

You’ll know a market top is probably coming when:

a) The shorts already have been killed. You don’t hear about them anymore. There is general embarrassment over investments in short-only funds.

b) Long-only managers are getting butchered for conservatism. In early 2000, we saw many eminent value investors give up around the same time. Julian Robertson, George Vanderheiden, Robert Sanborn, Gary Brinson and Stanley Druckenmiller all stepped down shortly before the market top.

Classic: The Fundamentals of Market Tops

We’ve seen a lot of value managers give up in the present era also, and temporarily that depresses “value stocks” as the value managers close their firms, sell stocks, and return capital to shareholders.

Eventually this will come to an end. I agree with David Einhorn who says that tech stocks are in an enormous bubble. It’s not the same as 2000, where tech stocks had no profits. It is different, as tech stocks have extremely high valuations relative to their profits. And that may be no difference at all, as the sum of the weights of technology and communication stocks have hit an all time high this year. The highest weight sector tends to underperform. The only question is when does the momentum fail.

I’m not giving up. My principles have a strong theory behind them. My efforts are not just value, but deep value, and I have gotten my share of kicks to the gut as a result.

At some point the tide will turn, even if it is private equity absorbing value stocks out of the market. The investment math is hard to break. If companies are cheap on net worth and earnings, they will appreciate.

In closing, I thank Ted Aronson for talking to a then young investment actuary who had a lot of ideas but few prospects. He treated me very well, and for that I salute him, even as he shuts his firm down.

Photo Credit: jshrive It is why I tell everyone to avoid debt, or pay it down rapidly. Debt is a curse , as the Bible says, and you must fight it, or it will fight you.

When does a debtor look his best? Immediately after he has received the loan.

Eric Hovde, a beloved boss of mine who said many intelligent things.

We are in the midst of the biggest expansion of debt that the US and the world has seen. At present the credit markets are calm, as few are defaulting relative to expectations. Part of that is that the stock markets are high, and that credit is flowing freely. Defaults in the corporate bond market tend to come three years after corporate issuance has peaked.

In the same way, refinancing and defaults on residential mortgages start small, and 2-3 years out reach a normalized level in absence of a financial crisis like 2008-9. Most asset-backed lending is similar, with defaults arriving 20% of the way into the life of the loan.

Why is this? After the loan is made, a person or corporation has a new asset or cash, and his/its income is typically unchanged from when the loan decision was underwritten. WIth cash, there is new flexibility. WIth a new asset, there is often a lowering of maintenance costs versus older assets.

But that’s just for a time. Assets deteriorate without maintenance, and to some degree, even with maintenance. Cash usually gets used, but the debt is still there… did the debt fund something productive, or was the cash squandered?

We’re in an unusual situation now where there is a lot of fresh debt, and few defaults aside from areas where C19 is killing off certain businesses. With low interest rates and credit spreads, I expect most surviving corporations to term out their debt (replace short-term debt with long-term debt) and wait until the next recession hits. Most companies that default don’t choke on refinancing, but on making interest payments.

But what about government debts? Think of the nations of the world that have genuine failures. There aren’t that many of them, but they are all cases of governments that have borrowed too much in hard currencies, and the export sectors of their economies can’t produce enough hard currencies to service their debts.

But what of the hard currencies themselves? Can they not fail? I’m sure they can, but it will take a failure of confidence to the degree where other nations don’t care whether the failing nation exists or not… and this applies to all of the developed nations and China. Remember that the other nations will have to accept that the debts from a nation that is failing will hurt those in their nation that hold those debts. If they hold a lot of the debts, they will be unlikely to write them off so fast. Think of the LDC debt crises in the early 1980s.

In closing, I would encourage all readers to think hard about what they own, and avoid highly indebted firms. As for governments, the “cleanest dirty shirt” idea applies, unless you want to go for gold — which embeds a bet on inflation. It is quite possible that the next President of the US will struggle with deflation, and the Fed will remain impotent, inflating assets, but not goods and services.

So be careful, and only invest in things that have a significant provision against adverse deviation.

Photo Credit: Michael Stokes

Eight years ago, I wrote a book review on The Payoff, which was primarily about the difficulties of getting effective banking reform done in the first half of Barack Obama’s first term. Though written by a long-time Democratic staffer, it is not generally kind to Obama, Biden, and Clintonistas who were generally in Wall Street’s pocket, and not all that incented to be hard on the banks. The constraints on the banks were the best part of Dodd-Frank — the rest could have been handled in better ways, if it needed to be done at all.

Four years ago, I wrote a piece called They Can’t Help You, which dealt with HIllary Clinton and Trump. I feel what I wrote then is equally applicable now to Trump and Biden.

Please understand that though I am writing about Biden here, I am no fan of Trump. I will not vote for either of them. My main reason for writing this is that I think many people do not get the similarities in the personalities of Trump and Biden. Both are venal and selfish. Biden is less brash about it, at least when in public view.

The writer of The Payoff was a staffer for Biden for many years. He knew him well. I am going to give you eight quotations from the book with relatively little commentary from me. I will do it in page order. Here we go:

Ted, along with Biden’s wife, Jill, sister Valerie, brother Jimmy, and sons (when they became adults), tried to compensate for Biden’s weakness. They were the ones who exuded personal warmth towards staffers. They were the ones who called and stroked Biden’s big campaign contributors and fundraisers. They knew Biden would ignore every task he didn’t want to do and every person he didn’t want to deal with. So they filled in for him. Seen in a positive light, they were using their strengths to complement Biden’s; in a negative light, they were systematically enabling his weaknesses and worst habits.

The Payoff, page 16

Ted is Ted Kaufman, who the author describes as “Biden’s long-time chief of staff and my former boss in Biden’s senate office.”

Unfortunately for America, Obama and Biden (who pledged in his 1972 campaign never to own a stock or a bond) were both financially illiterate.

The Payoff, page 20

This is a major reason that neither of them played a significant role in financial reform. They didn’t get it. They were also allied with the Clintons, who were generally pro-Wall Street.

Note also, that Biden has owned stocks and bonds. His promises are often facile, like those of many politicians. He also will cut corners, as he did when he plagiarized the speeches of Neil Kinnock. That was not only dishonest, but was also an example of not aiming high enough — it was modestly better mediocrity. More on plagiarizing Kinnock:

The result of all this coverage was that every word Biden said publicly, or had said in the past, was being scrutinized for plagiarism or exaggeration. A particularly damaging example—indeed, the campaign’s coup de grâce—was found in a four-month-old C-SPAN video that showed Biden speaking in a kitchen in a New Hampshire home. During the Q&A session, someone asked what Biden’s grades had been like in law school. The correct answer was: not very good. It was a sore subject with Biden, and he snapped at the questioner: “I’ll put my IQ up against yours any day.” He then went on to claim that he’d graduated in the “top half” of his law class (he hadn’t); attended law school on a full scholarship (he’d received a half scholarship based on financial need with some additional assistance based in part on academics); had three degrees (he has only two; he was counting his B.A. with a double major in history and political science as two degrees); and won an international moot-court competition (the competition had been in Toronto, so that claim, at least, was true). Eleanor Clift, at the time a reporter for Newsweek, found the video (she hadn’t seen it when it originally ran) and wrote a story about it.

The Payoff, pages 57-58

The author noted that Biden was not dumb — he went to Law school, which few people do. He did finish 76th out of 85 students in his graduating class. He did graduate, which is a notable thing.

As time passed, I tried to understand why Biden had appealed to me so much in the beginning and then how I saw him after the fact—after his campaign downfall and after working on his staff for a time. In Alabama, I’d watched him train his charisma beam on people of all ages and, as far as I could tell, win them all over. In Washington, he would do the same thing with complete strangers, especially if there was any hint that they might be from Delaware. Yet, behind the scenes, Biden acted like an egomaniacal autocrat and apparently was determined to manage his staff through fear. Like Napoleon, Biden had captured his personal Toulon at a very young age. In comparison, his tentative young staff must have seemed like an army of underachievers. I decided I’d stay until I could help him regain his professional balance and then move on to something else.

The Payoff, Pages 62-63

You have to be careful with people who don’t treat their staff well, like Trump and Biden.

I looked for consolation from a friend who is another former Biden staffer, someone who had worked for Biden for six years. He said, “Jeff, the difference between Ted Kennedy, who has spent decades promoting his former staff into government jobs, and Joe Biden, is Kennedy believes in force projection.  Kennedy Democrats share an ideology. Biden is only about himself becoming president, he doesn’t care about force projection, so he never helps his former staff get jobs.” In other words, the late Ted Kennedy cultivated and promoted staff not just because he was a decent boss, but because he had an ideological agenda and the staff served it across Washington.  In contrast, Biden is a pragmatist. His ambitions, I was coming to understand, were mainly about himself.

The Payoff, page 100

I found this to be the most telling comment about Biden in the book. It points out how (at least according to the author) Biden is a taker and not a giver. That makes him very similar to Trump.

It had been more than twenty years since Biden had signed my notebook “Please stay involved in politics, we need you all.” I had—but had received precious little from Biden in return. As a lobbyist, I’d not once asked for a meeting with or favor from Biden (to his credit, he was famous for not doing them anyway).  A little personal appreciation wouldn’t kill him. Though taken aback, Dennis was sympathetic. After all, for the past twenty years, he, like Ted, had been mollifying the many dissatisfied members of the extended Biden family. 

Two weeks later, I received a handwritten note from Biden: “Jeff, you’ve always been there for me. I hope you know that I will always be there for you.” This, after “thanks for being a true friend,” was the second disingenuous note Biden had sent me. He’d never been therefor me, not in any direct way that had propelled my career or raised my standing in Washington. All he did—weeks after the fact, presumably after succumbing to pressure from Dennis—was send me one-line notes.

The Payoff, page 188

And then some more…. note that Ted Kaufman had been appointed Senator of Delaware to fill Biden’s term for two years, with the promise that he would not run for re-election.

Biden himself had been known among liberal critics as the senator from MBNA, at one time the largest credit card bank in Delaware and which had hired Biden’s son Hunter. Biden had been a leading proponent of a bankruptcy reform bill that had been favored by the credit card banks, a large employer in Delaware. I even used to hear complaints about that from Iowa voters. Now, Ted, Biden’s closest confidant, was campaigning daily against the interests of Wall Street banks (a different breed of cat than the smaller Delaware banks, which didn’t like Ted for it regardless). And while Ted would never admit it, I could tell (from hearing Ted’s half of phone conversations) that Biden secretly was cheering for Ted (the unleashed id to Biden’s ego). 

The Payoff, page 197

To those of you that are stuck and cannot declare bankruptcy, Biden was one of those who helped push that agenda.

Ted had already received so much praise that I told everyone I wanted the party to be about the staff, not Ted. We’d all worked very hard, and we deserved a chance to pat each other on the back. Someone must have leaked word to Biden, because in the middle of my emotional farewell toast to the staff, in walked the Vice President of the United States. I kept speaking as though he weren’t there, while he and his entourage slipped quietly into the back of the room. Then I introduced Ted for his speech. Predictably, Ted handed things over to Biden.  And equally predictably, Biden went on and on about how great Ted was and what a great senator he’d been. And then Biden was gone. Off somewhere being vice president, the second most powerful man in Washington.  He didn’t once mention my name and left without shaking my hand.

The Payoff, page 257

I’ve only met a US Senator once in my life. When I was 16, I remember meeting William Proxmire after he gave a talk to my high school. I have no idea how I ended up meeting him in the hall outside the gymnasium (it was just the two of us), but I was very impressed with the way he treated me with respect and listened to me. Proxmire was an unusual guy, and difficult to pin down ideologically, which made him perfect for the unusual but generally pragmatic state of Wisconsin.

Now, maybe the author wanted too much from Biden. But who doesn’t want some respect from his boss/hero?

Many paint BIden as being out of touch, old, etc. That may or may not be true. But Biden has been less than a compassionate boss to some of his subordinates (some of whom expected that they would be on his staff as Vice-President, and were disappointed).

I would simply say to you to be aware, Biden is not an avuncular guy who is always amiable to those around him. If what the author of The Payoff says is true, he is as hard on his subordinates as Trump is. People who are self-focused should not hold any significant office. That disqualifies both Trump and Biden, and that is where I end this post.

Photo Credit: K a P p Y || At this rate, maybe we should legitimize selling votes, after all money controls the system

Eight years ago I wrote the post NOTA Bene. I felt then, and still feel now that the duopoly of the Republicans and Democrats is harming the US, and is leading to polarization of politics. Invoking the Founding Fathers, they did not want political parties. Let people stand on their own, and make their case to the public.

But no, the Republicans and Democrats make it hard for others to run against them. As such, we need NOTA, “None of the Above” to be a choice on our ballots. If NOTA wins, the election must be redone, and two months later, a new election is held where the prior losers (in every sense of the term) are forbidden from running.

Tonight I offer an enhancement to NOTA. There could be a type of NOTA where parties are not allowed to nominate candidates if NOTA wins. This would have the salient benefit that parties would nominate more centrist candidates in order to avoid a situation where they would have no one running in the second election, if NOTA were to win the first election.

Particularly in this Presidential election, where both both candidates are old, and incapable of any serious reasoning, NOTA is a choice that is far superior. We could clear away both Trump and Biden, and their parties as well. What could be simpler?

Let’s bring politics to the center, and eliminate the power of ideologues who gain power through the primary system. As NOTA ended tyranny in the Soviet Union, let it end dopeyness in America.

Photo Credit: vaXzine || It’s da Bomb. man…

Some securities I own are illiquid. A few are very illiquid. When I wrote for theStreet.com, we had a warning that we posted for every security mentioned where the market cap was less than half a billion dollars, because what we wrote could budge the market, and sometimes it did. I remember when I wrote a post about personal lines P&C insurers, and I mentioned Safety Insurance [SAFT], which was definitely small, as one of the companies that I thought was worth owning, and we did own it at the firm that I worked for. The stock popped about 5% before settling down.

But frenzies to buy are usually tame compared with frenzies to sell. There is an urgency to preserving value that makes the seller particularly zealous in getting out rapidly.

In the last three weeks, I’ve experienced this twice with two securities that I own. In both cases I bought moreas the seller got aggressive. Let me show you what happened.

This is a graph of National Western Life Insurance over the last three weeks. It’s my largest holding in one of my strategies. On September 23rd, near the close, an aggressive seller, on no news, sold a large block of stock, driving down the price temporarily. I was one of those buying from him, but by no means the biggest buyer.

Then there is TCW Strategic Income Fund [TSI], which is the second-largest holding as bond funds go for my clients, behind PIMCO Enhanced Short Maturity Active ETF [MINT] which I use for liquidity. Yesterday, someone was aggressively selling until 2PM or so, and then they seemed to be done. They may have been selling for three days prior to that. In this case also, I was buying as they were selling, and in this case I caught the bottom tick. Again, there was no news, but when is there ever news for a bond fund?

My main point is this: be willing to be a buyer on days when there is no news, an it is not a sector effect, when a security that you know well is getting thrown out the window for no good reason. Occasionally mad bombers show up and they have to sell down to the last share. Having known some institutional traders, that last sale can be quite aggressive because they want to be DONE!

THere was a guy at theStreet.com, I think his name was Ken Wolff who often talked about “dumpers.” Stocks where a bad event happens, and everyone runs to sell, and there is a climax of volatility where the aggressive sellers have sold their last shares. You see the spike up in volume, and the spike down in the price. His idea was that it was simple to buy then, and close out the trade at the end of the day. On that front, I thought he was pretty clever.

Panic never leads to good results. Understand what you own very well, and be willing to buy when other market participants are irrational.

Full disclosure: long NWLI TSI MINT