Value Investing – Page 11

Advice on Organizing Asset Allocations and Managers

Posted on 26 February 2015 by David Merkel

I was reading an occasional blast email from my friend Tom Brakke, when he mentioned a free publication from Redington, a UK asset management firm that employs actuaries, among others. I was very impressed with what I read in the 32-page publication, and highly recommend it to those who select investment managers or create asset allocations, subject to some caveats that I will list later in this article.

In the UK, actuaries are trained to a higher degree to deal with investments than they are in the US. The Society of Actuaries could learn a lot from the Institute of Actuaries in that regard. As a former Fellow in the Society of Actuaries, I was in the vanguard of those trying to apply actuarial principles to risk management, both when I managed risks for insurance companies, worked for non-insurance organizations, and manage money for upper middle class individuals and small institutions. Redington’s thoughts are very much like mine in most ways. As I see it, the best things about their investment reasoning are:

Risk management must be both quantitative and qualitative.
Risk is measured relative to client needs and thus the risk of an investment is different for clients with different needs. ?Universal measures of risk like Sharpe ratios, beta and standard deviation of asset returns are generally inferior measures of risk. ?(DM: But they allow the academics to publish! ?That’s why they exist! ?Please fire consultants that use them.)
Risk control methods must be?implemented by clients, and not countermanded if they want the risk control to work.
Shorting requires greater certainty than going long (DM: or going levered long).
Margin of safety is paramount in investing.
Risk control is more important when things are going well.
It is better to think of alternatives in terms of the specific risks that they pose, and likely future compensation, rather than look at track records.
Illiquidity should be taken on with caution, and with more than enough compensation for the loss of flexibility in future asset allocation decisions and cash flow needs.
Don’t?merely avoid risk, but take risks where?there is more than fair compensation for the risks undertaken.
And more… read the 32-page publication from Redington if you are interested. ?You will have to register for emails if you do so, but they seem to be a classy firm that would honor a future unsubscribe request. ?Me? ?I’m looking forward to the next missive.

Now, here are a few places where I differ with them:

Caveats

Aside from pacifying clients with lower volatility, selling puts and setting stop-losses will probably lower returns for investors with long liabilities to fund, who can bear the added volatility. ?Better to try to educate the client that they are likely leaving money on the table. ?(An aside: selling short-duration at-the-money puts makes money on average, and the opposite for buying them. ?Investors with long funding needs could dedicate 1% of their assets to that when the payment to do so is high — it’s another way of profiting from offering insurance in of for a crisis.)
Risk parity strategies are overrated (my arguments against it here:?one, two).
I think that reducing allocations to risky assets when volatility gets high is the wrong way to do it. ?Once volatility is high, most of the time the disaster has already happened. ?If risky asset valuations show that the market is offering you significant deals, take the deals, even if volatility is high. ?If volatility is high and valuations indicate that your opportunities are average to poor at best, yeah, get out if you can. ?But focus on valuations relative to the risk of significant loss.
In general, many of their asset class articles give you a good taste of the issues at hand, but I would have preferred more depth at the cost of a longer publication.

But aside from those caveats, the publication is highly recommended. ?Enjoy!

A New Exercise in Industry Rotation

Posted on 17 February 2015 by David Merkel

At Abnormal Returns, over the weekend, Tadas Viskanta featured a free article from Credit Suisse called the?Credit Suisse Global Investment Returns Yearbook 2015. ?It featured articles on whether the returns on industries as a whole mean-revert or have momentum, whether there is a valuation effect on industry returns, “social responsibility” in investing, and the existence of equity discount rate for the market as a whole.

There are no surprises in the articles — it is all “dog bites man.” ?They find that:

Industry returns exhibit momentum
There is a valuation component in industry returns
Socially responsible investing doesn’t necessarily produce or miss excess returns
There is an overall equity discount rate, which is levered about 20-25 times, i.e., a 1% increase in the rate lowers valuations by 20-25%.

The first two are well-known for individual stocks, so it isn’t surprising that it happens at the industry level. ?The third one has been written about ad nauseam, with many conflicting opinions, so that there is little effect is no big surprise. ?The last one resembles research I saw in the mid-90s, where the effect of changes in real interest rates has about that impact on stocks. ?Again, nothing new — which is as it should be.

But now some more on industry returns. ?They found that industry return momentum was significant. ?Industries that did well one year were likely to do well in the next year. ?The second finding was that industries with cheap valuations also tended to do well, but it was a smaller effect.

So, using one-year price returns as my momentum variable and book-to-market as a valuation variable (both suggested in the article), I divided industries for companies trading in the US into quintiles (also suggested in the article) for momentum and valuation. ?(Each quintile has roughly 20% of the total market cap.) ?Here is the result:

Low valuations are at the right, high at the left. ?Low momentum at the top, high momentum at the bottom. ?Ideally by this method, you would look for industries in the southeast corner.

To me, Agriculture, Information Technology, Security, Waste, Some Retail, and Some Transportation look interesting. ?One in the far southeast that is not so interesting for me is P&C Insurance. ?Yes, it has done well, and compared to other industries, it is cheap. ?But industry surplus has grown significantly, leading to more competition, and sagging premium rates. ?Probably not a great time to make new commitments there.

Anyway, the above table should print out nicely on two sheets of letter-sized paper. ?Not that it would be a substitute for your own due diligence, but perhaps it could start a few ideas going. ?All for now.

One Dozen Reasons Why the Average Person Underperforms In Investing, Part 1

Posted on 13 February 2015 by David Merkel

Brian Lund recently put up a post called 5 Reasons You Deserve to Lose Every Penny in the Stock Market. ?Though I don’t endorse everything in his article, I think it is worth a read. ?I’m going to tackle the same question from a broader perspective, and write a different article. ?As we often say, “It takes two to make a market,” so feel free to compare our views.

I have one?dozen reasons, many of which are related. ?I do them separately, because I think it reveals more than grouping them into fewer categories. ?Here we go:

1) Arrive at the wrong time

When does the average person show up to invest? ?Is it when assets are cheap or expensive?

The average person shows up when there has been a lot of news about how well an asset class has been doing. ?It could be stocks, housing, or any well-known asset. ?Typically the media trumpets the wisdom of those that previously invested, and suggests that there is more money to be made.

It can get as ridiculous as articles that suggest that everyone could be rich if they just bought the favored asset. ?Think for a moment. ?If holding the favored asset conferred wealth, why should anyone sell it to you? ?Homebuilders would hang onto their inventories. Companies would not go public — they would hang onto their own stock and not sell it to you.

I am reminded of some of my cousins who decided to plow money into dot-com stocks in late 1999. ?Did they get to the party early? ?No, late. ?Very late. ?And so it is with most people who think there is easy money to be made in markets — they get to the party after stock prices have been bid up. ?They put in the top.

2)?Leave at the wrong time

This is the flip side of point 1. ?If I had a dollar for every time someone said to me in 1987, 2002 or 2009 “I am never touching stocks ever again,” I could buy a very nice dinner for my wife and me. ?Average people sell in disappointment thinking that they are?protecting the value of their assets. ?In reality, they lock in a large loss.

There’s a saying that the right trade is the one that hurts the most. ?Giving into greed or fear is emotionally satisfying. ?Resisting trends and losing some?money in the short run is more difficult to do, even if the trade ultimately ends up being profitable. ?Maintaining exposure to stocks at all times means you ride a roller coaster, but it also means that you earn the long-term returns that accrue to stocks, which market timers rarely do.

You can read some of my older pieces on how investors earn less on average than buy-and-hold investors do. ?Here’s one on how investors in the S&P 500 ETF [SPY], trail buy-and-hold returns by 7%/year. ?Ouch! ?That comes from buying and selling at the wrong times. ?ETFs may lower expenses, but they also make it easy for people to trade at the wrong times.

3) Chase the hot sector/industry

The lure of easy money brings out the worst in people. ?Whether it is tech stocks in 1987, dot-coms in 1999, or housing-related assets in 2007, there will always be people who think that the current industry fad will be a one-way ticket to riches. ?There is psychological satisfaction to be had by buying what is popular. ?Everyone wants to be one of the “cool kids.” ?It’s a pity that that is not a good way to make money. ?That brings up point 4:

4)?Ignore Valuations

The returns you get are a product of the difference in the entry and exit valuations, and the change in the value of the factor used to measure valuation, whether that is earnings, cash flow from operations, EBITDA, free cash flow, sales, book, etc. ?Buying cheap aids overall returns if you have the?correct estimate of future value.

This is more than a stock market idea — it applies to private equity, and the?purchase of capital assets in a business. ?The cheaper you can source an asset, the better the ultimate return.

Ignoring valuations is most common with hot sectors or industries, and with growth stocks. ?The more you pay for the future, the harder it is to earn a strong return as the stock hopefully grows into the valuation.

5) Not think like a businessman, or treat it like a business

Investing should involve asking questions about whether the economic decisions are being made largely right by those that manage the company or debts in question. ?This is not knowledge?that everyone has immediately, but it develops with experience. ?Thus you start by analyzing business situations that you do understand, while expanding your knowledge of new areas near your existing knowledge.

There is always more to learn, and a good investor is typically a lifelong learner. ?You’d be surprised how concepts in one industry or market get mirrored in other industries, but with different names. ?One from my experience:?Asset managers, actuaries and bankers often do the same things, or close to the same things, but the terminology differs. ?Or, there are different ways of enhancing credit quality in different industries. ?Understanding different perspectives enriches your understanding of business. ?The end goal is to be able to think like an intelligent business manager who understands investing, so that you can say along with Buffett:

I am a better investor because I am a businessman, and a better businessman because I am an?investor.

(Note: this often gets misquoted because Forbes got mixed up at some point, where they think it is:?I am a better investor because I am a businessman, and a better businessman because I am no investor.) ?Good investment knowledge feeds on itself. ?Little of it is difficult, but learn and learn until you can ask competent questions about investing.

After all, you are investing money. ?Should that be easy and require no learning? ?If so, any fool could do it, but my experience is that those who don’t learn in advance of investing tend to get fleeced.

6)?Not diversify enough

The main objective here is that you need to only invest what you can afford to lose. ?The main reason for this is that you have to be calm and rational in all the decisions you make. ?If you need the money for another purpose aside from investing, you won’t be capable of making those decisions well if in a bear market you find yourself forced to sell in order to protect what you have.

But this applies to risky assets as well. ?Diversification is inverse to knowledge. ?The more you genuinely know about an investment, the larger your positions can be. ?That said I make mistakes, as other people do. ?How much of a loss can you take on an individual investment before you feel crippled, and lose confidence in your abilities.

In the 25+ years I have been investing, I have taken significant losses about ten times. ?I felt really stupid after each one. ?But if you take my ten best investments over that same period, they pay for all of the losses I have ever had, leaving the smaller gains as my total gains. ?As a result, my losses never inhibited me from continuing in investing; they were just a part of the price of getting the gains.

Temporary Conclusion

I have six more to go, and since this article is already too long, they will have to go in part 2. ?For now, remember the main points are to structure your investing affairs so that you can think rationally and analyze business opportunities without panic or greed interfering.

Learning from the Past, Part 3

Posted on 31 January 20151 February 2015 by David Merkel

Photo Credit: Thibaut Ch?ron Photographies

I wish I could tell you that it was easy for me to stop making macroeconomic forecasts, once I set out to become a value investor. ?It’s difficult to get rid of convictions, especially if they are simple ones, such as which way will interest rates go?

In the early-to-mid ’90s, many were convinced that interest rates had no way to go but up. ?A few mortgage REITs designed themselves around that idea. ?Fortunately, I arrived at the party late, after their investments that implicitly required interest rates to rise soon, fell dramatically in price. ?I bought a basket of them for less than book value, excluding the value of taxes that could be sheltered in a reverse merger.

For some time, the stocks continued to fall, though not rapidly. ?I became familiar with what it was like to go through coercive rights offerings from cash-hungry companies in trouble. ?Bankruptcy was not impossible… and I burned a lot of mental bandwidth on these. ?The rights offerings weren’t really good things in themselves, but they led me to buy in at a good time. ?Fortunately I had slack capital to deploy. ?That may have taught me the wrong lesson on averaging down, as we will see later. ?As it was, I ended up making money on these, though less than the market, and with a lot of Sturm und Drang.

That leads me to my main topic of the era: Caldor. ?Caldor was a discount retailer that was active in the Northeast, but nationally was a poor third to Walmart and KMart. ?It came up with the bright idea of?expanding the number of stores it had in the mid-90s without raising capital. ?It even turned down an opportunity to float junk bonds. ?I remember noting that the leverage seemed high.

What I didn’t recognize that the cost of avoiding issuing equity or longer-term debt was greater reliance on short-term debt from factors — short-term lenders that had a priority claim on inventory. ?It would eventually prove to be a fatal error, and one that an asset-liability manager should have known well — never finance a long term asset with short-term debt. ?It seems like a cost savings, but it raises the likelihood of insolvency significantly.

Still, it seemed very cheap, and one of my favorite value investors, Michael Price, owned a little less than 10% of the common stock. ?So I bought some, and averaged down three times before the bankruptcy, and one time afterwards, until I learned Michael Price was selling his stake, and when he did so, he did it without any thought of what it would do to the stock price.

Now for two counterfactuals: Caldor could have perhaps merged with Bradlee’s, closed their worst stores, refinanced their debt, issued equity, and tried to be a northeast regional retail player. ?It didn’t do that.

The investor relations guy could have given a more understanding answer when he was asked whether Caldor was having any difficulties with credit lines from their factors. ?Instead, he was rude and dismissive to the questioning analyst. ?What was the result? ?The factors blinked and pulled their lines, and Caldor went into bankruptcy.

What were my lessons from this episode?

Don’t average down more than once, and only do so limitedly, without a significant analysis. ?This is where my portfolio rule?seven came from.
Don’t engage in hero worship, and have initial distrust for single large investors until they prove to be fair to all outside passive minority investors.
Avoid overly indebted companies. ?Avoid asset liability mismatches. ?Portfolio rule three would have helped me here.
Analyze whether management has a decent strategy, particularly when they are up against stronger competition. ?The broader understanding of portfolio rule six would have steered me clear.
Impose a diversification limit. ?Even though I concentrate positions and industries in my investing, I still have limits. ?That’s another part of rule seven, which limits me from getting too certain.

The result was my largest loss, and I would not lose more on any single investment again until 2008 — I’ll get to that one later. ?It was my largest loss as a fraction of my net worth ever — after taxes, it was about 4%. ?As a fraction of my liquid net worth at the time, more like 10%. ?Ouch.

So, what did I do to memorialize this? ?Big losses should always be memorialized. ?I taught my (then small) kids to say “Caldor” to me when I talked too much about investing. ?They thought it was kind of fun, and I would thank them for it, while grimacing.

But that helped. ?Remember, value investing is first about safety, and second about cheapness. ?Cheapness rarely makes something safe enough on its own, so analyze balance sheets, strategy, use of cash flow, etc. ?This is not to say that I did not make any more errors, but this one reduced the size and frequency.

That said, there will be more “fun” chapters to share in this series, because we always learn more from errors than successes.

Talking About Value Investing and Fed Policy

Posted on 30 January 2015 by David Merkel

Here is the second part of my interview on RT Boom/Bust. It was recorded while the FOMC was releasing its statement, so I had no idea at that time as to what the announcement had been.

The interview covers my view of Apple (not one of my strong points), Fed Policy, and what should value investors do in this low interest rate environment. Note that not all of my opinions are strong ones, and that in my opinion is a good thing. Often the best opinions are not controversial.

If you are interested in these topics, or listening to me, then please enjoy the above video. My segment is about seven minutes long.

Talking Mostly About Earnings

Posted on 29 January 2015 by David Merkel

I was on RT Boom/Bust yesterday. ?The segment that I taped here was mostly on corporate earnings. ?There’s only seven minutes of me here — so enjoy it if you will.

Learning from the Past, Part 2

Posted on 2 January 201516 February 2015 by David Merkel

Happy New Year to all of my readers. May 2015 be an enriching year for you in all ways, not just money.

This is a series on learning about investing, using my past mistakes as grist for the mill. ?I have had my share of mistakes, as you will see. ?The real question is whether you learn from your mistakes, and I can say that I mostly learn from them, but never perfectly.

In the early 90s, I fell in with some newsletter writers that were fairly pessimistic. ?As such, I did not do the one thing that from my past experience that I found I was good at: picking stocks. ?Long before I had money to invest, I thought it was a lot of fun to curl up with Value Line and look for promising companies. ?Usually, I did it well.

But I didn’t do that in that era. ?Instead, I populated my portfolio with international stock and bond funds, commodity trading funds, etc., and almost nothing that was based in?the USA. ?I played around with closed-end funds trying to see if I could eke alpha out of the discounts to NAV. ?(Answer: No.) ?I also tried shorting badly run companies to make a profit. ?(I succeeded minimally, but that was the era, not skill.)

I’ve been using my tax returns from that era to prompt?my memory of what I did, and the kindest thing I can say is that I?didn’t have a consistent strategy, and so my results were poor-to-moderate. ?I made money, just not much money. ?I even manged to buy the Japanese equity market on the day that it peaked, and after many months got out with a less-than-deserved 3% loss in dollar terms because of offsetting currency movements.

One thing I did benefit from was learning about a wide number of investing techniques and instruments, which benefited me professionally, because it taught me about the broader context of investing. ?That said, it cost time, and some of what I learned was marginal.

But not having a good overall strategy largely means you are wasting your time in investing. ?You may succeed for a while with what some call luck, but luck by its nature is not consistent.

Thus, I would encourage all of my readers to adopt an approach that fits their:

Knowledge
Personality
Available time

You have to do something that you truly understand, even if it is hiring an advisor, wealth manager, etc. ?You must be able to understand the outer edges of what they do, or how will you evaluate whether they are serving you well or not? ?Honesty, integrity, and reputation can go a long way here, but it really helps to know the basics.

Picking fund managers is challenging enough. ?How much of their good performance was due to:

their style being in favor
new cash flows in pushing up the prices of the assets that they like to buy
a few good ideas that won’t be repeated
a clever aide that is about to leave to set up his/her own shop
temporary alignment with the macroeconomic environment
or skill?

Personality is another matter — some people don’t learn patience, which cuts off a number of strategies that require time to work out. ?Few things also work right off the bat, so even a good strategy might get discarded by someone expecting immediate results.

Time is another factor which I will take up at a later point in this series. ?The best investment methods out there are no good for you unless you can make them fit into the rest of your life which often contains the far more important things of family, recreation, faith, learning, etc. ?It’s no good to be a wealthy old miser who never learned to appreciate life or the goodness of God’s providence in life.

And so to that end, I say choose wisely. ?My eventual choice was value investing, which isn’t that hard to learn, but requires patience, but can scale to the time that you have. ?For those that work in a business, it has the side-benefit that it is the most businesslike of all investment methods, and can make you more valuable to the firm that you work for, because you can learn to marry business sense with your technical expertise, potentially leading to greater profit.

For me, I can say that it broadened my abilities to think qualitatively, complementing my skills as a mathematician. ?The firms I worked for definitely benefited. ?Maybe it can do the same for you.

Till next time, where I tell you how value investing is *not* supposed to be done. 😉

PS — one more note: it is *very* difficult to make money off of macro insights in equities. ?Maybe there are some guys that can do that well, but I am not one of them. ?Limiting the effect of my insights there has been an aid to doing better in investing, because it forces me to be modest in an area where I know my likely success is less probable.

Should Jim Cramer Sell TheStreet or Quit CNBC?

Posted on 4 December 20144 December 2014 by David Merkel

Like my friend Josh Brown does, I often don’t know where I will end when I start writing… I know I have something to say, given my own time writing for RealMoney.com, and now having publicly written on financial matters for over eleven years, with?thanks to Jim Cramer, who gave me my start.

Recently, a 9% holder of TheStreet sent a letter to Jim, asking him to either sell off TheStreet in an auction or leave CNBC and rebuild the value of TheStreet. ?The Stock rose roughly 7% on the news. ?Personally, I don’t think it should have budged. ?Here’s why:

1)?What is a perpetual money-loser worth? ?TheStreet hasn’t earned significant money since 2007.

2) What is TheStreet worth in an auction? ?The complainant says:

Despite these improvements TST trades at an enterprise value to 2015 estimated revenues of 1.3. This compares to BC Partners Limited?s acquisition of Mergermarket Group at three times revenue. Morningstar Inc. (?MORN? ? $65.97) trades at 3.4 times 2015 consensus revenue estimate. Allegedly, BoardEx competitor Relationship Science recently raised capital at a $300 million valuation compared with its purported $5 million revenue for 2013.

TheStreet is not comparable to these in my opinion. ?I’ll use Morningstar as my example: it is a comprehensive site offering a wide amount of data about investments, and relatively light on opinions. ?Where it speaks, it is authoritative, and it has a relatively sticky following, making their revenues more valuable than that of TheStreet. ?Let’s be real… would you buy TheStreet at the same enterprise value to sales ratio as Morningstar?

3) Selling investment opinions is a very competitive business, with low barriers to entry. ?If a party is any good at marketing it, and wants to sell a newsletter, there are a lot of people who will buy, as noted later by the complainant:

We estimate that 41,500 customers pay roughly $350 per annum ($14.5 million in totum) for your newsletters. This is nothing to scoff at but a fraction of the 400,000 to 500,000 subscribers enjoyed, by (we believe) The Motley Fool Stock Advisor and Stansberry & Associates Investment Research ? two wildly more profitable competitors which charge similar prices. (We estimate that each of these competitors yield $25 to $45 million of pre-tax earnings for their private owners.) Given the strength of your brand, it both amazes and frustrates that subscriptions to your products are so paltry. Were you to de-couple from CNBC (where you are understandably prohibited from promoting PLUS) I would hope, nay expect, that subscriptions of PLUS would treble.

I don’t like market newsletters generally, but I know there are a lot of people who would rather pay for opinions than money management services. ?I often get requests to start a newsletter, but I don’t respect the concept. ?My detailed ideas are for my clients; that’s the business that I am in.

Jim’s newsletter has been out for a long time. ?Of those that buy newsletters, most would be familiar with Cramer, and know that the newsletter?exists. ?Even if Cramer came back to TheStreet full-time, I doubt it would get that much more in subscriptions.

4) Also, auctioning off a Cramer-less TheStreet would likely flop. ?There would be few if any buyers for?a such a company that had lost its main writer.

5) Then there is the complainant’s appeal to Cramer as to his legacy:

You are 59. When you lie upon your deathbed, how will you reflect upon on your legacy? Once a $70 stock, TST is now $2.20. You have done well, but how has the common shareholder done?

I have a little insight here. ?A little less than twelve years ago, I was invited by my Merrill coverage to come to an institutional investor conference where Cramer would be the unscripted keynote speaker. ?It was a great talk, and?at the end of it, as Cramer left, I figured out where I likely needed to be if I wanted a word with him. ?Sure enough, he came my way, and I identified myself to him as the guy who had been writing to him on bonds for the past four years. ?He remembered me and greeted me warmly. ?I told him that I was going to work at a hedge fund. ?He?congratulated me, and said that it was where all the smart guys were going. ?And then he said something to the effect of:

I wish I were still running a hedge fund. ?I really loved that.

And at that point, the crowd caught up, and that was the end of my time with him. ?But when I got home that night, I sent him an e-mail telling him that life is too short, do what you love. ?Go back to the hedge fund and write more occasionally for the rest of us. ?His reply was brief as usual, and if my memory is any good it was something like:

Can’t do that. ?Gotta get the price of theStreet.com over the IPO price.

Even at the time, that made me blink. ?Make the stock rise by more than a factor of 10? ?That would be Herculean at minimum.

But, that gives you an insight into Cramer’s mind at one point. ?He’s already thought along those lines. ?He’s no dummy. ?He knows how difficult it would be — and he has pursued that effort for a number of years. ?My sense is that he has given up, or maybe something close to that. ?The price of TheStreet has been remarkably stable for the past five years, despite all efforts made…

6) But does Cramer have no legacy from TheStreet? ?I would argue he does. ?He enriched the investment writing world in two ways: he created a bunch of young savvy journalists that occupy many places in the broader investment journalism world, and he encouraged a lot of clever investors to write for him.

We are all better off as a result of both of these, even if the benefits never went to shareholders. ?It’s a tough business, and even the best enterprises have a hard time making money at it.

7) Perhaps the complainant needs to be reminded of one of Marty Whitman’s principles on value investing: “Something off the top.” ?Control of a company is a valuable thing, and one of the reasons is that a closely-held company does not merely pay the controlling owner dividends, they often receive something off the top. ?That is true of Cramer here, with a salary of $3.5 million/year. ?Why should he relinquish that? ?In his mind, he may think that he has tried to turn it around for years to no avail. ?If the company is not likely to ever get back to a significantly higher price, why should he knock himself out on a hopeless mission that he has already tried?

8?) So, with that, let the complainant contact his fellow shareholders and ask for help. ?I’m not sure they will agree with the prescription, though they might like to see some actions taken. ?Personally, I can’t get excited about it; I would be inclined to pass, and quietly sell my shares into the current strength generated by the complainant.

Full disclosure: no positions in any companies mentioned here, and as they used to say at TheStreet, I am?writing about a microcap stock, so they would typically not allow articles on it without a big warning, if at all. ?To make it plain: don’t buy any TST shares as a result of what I wrote here. ?Thanks.

It’s Their Money

Posted on 22 November 201417 April 2023 by David Merkel

Recently, I had a client leave me. I’m not sure why he did — I didn’t ask, because that’s his business. It *is* his money, after all, not mine. After deducting the accrued fee, I thanked him for his business, and wished him well.

I try to be low pressure in my work. I also try to discourage the idea that if someone uses my services, they will do better than the average, much less phenomenally. I remind potential clients of what happened to stocks in the Great Depression (down almost 90% during a period in 1929-1932). I ask potential clients to stick with me through a full cycle of the market, but I don’t require it because:

It’s their money.

One thing I do promise them is that my money is on the line in the exact same proportion as their money. Over 90% of my liquid wealth is invested in my stock portfolio. I don’t make any decisions for clients that I would not make for myself, mostly for ethical reasons. But I make sure of it, because I am still my largest client, and I am always on the same side of the table as my clients, aside from my one and only source of revenue, my fee.

It’s their money, but, when it is under my care, it gets the close treatment that my own money receives — no more and no less.

Many wealth/asset managers want as much of a client’s assets as possible. Me I get uncomfortable when more than 50% of their assets are riding on me, but if that’s what the client wants, I will do it if they ask, because:

It’s their money.

Jesus, inverting Hillel, said “Do unto others, as you would have them do unto you.” That guides my marketing, because I know that many people feel pestered by those who market to them, including those who once they have their foot in the door, now want the whole relationship. Thus I avoid as much pressure as possible in marketing, and leave it to the good judgment of my clients as to how much they want to entrust to my care, and for how long.

It’s their money.

I don’t pretend to have all of the answers, or even all of the questions. If one of my clients asks me an unrelated question, and I have the time and expertise to aid them as a friend (i.e., you can’t sue me), I will take some time to help. They may ask me about what other managers are doing for them, asset allocation, insurance policies, and other things also. I will give them friendly advice, without any other expectation. I thank them that they are a client of mine — I try to end all of my client letters with that. In the end, I want them to be happy that they chose me to aid them, and to be happy when they leave as well.

That’s the way I would like to be treated as well — low pressure, transparency of services and fees, and alignment of interests with an ethical adviser who is a fiduciary.

Back to the beginning, aside from the client leaving me, the other reason I write this is all of the pitches I have been getting via e-mail, web, radio, etc., where I say to myself “How can they promise that?” “Doesn’t that break the ‘No Testimonials’ rule?” “Great to be selling advice and seminars — why not start an investment business and prove your theories?”

The investment business has more than its share of those who don’t deliver value, and I labor to be on the positive side of that ledger, as do many others. Choose those who will treat you as you deserve to be treated, and enjoy the benefits, because:

It’s your money.

Revenue Misses Can Be Good

Posted on 8 November 20149 November 2014 by David Merkel

Photo Credit: Phineas Jones || Beyond the destruction, honesty?

Few like revenue misses, but let me point out a few?significant things that investors should care about:

If a company misses revenue estimates around 50% of the time, that can be an indicator that it doesn’t play around with revenue recognition, which is probably the most common way of shading accounting results. ?Honest accounting is worth a lot in the long-run, even if the market won’t pay up for it in the short-run.
If a company beats revenue estimates nearly all the time, do a little digging into revenue recognition policies. ?Have they changed? ?It may be that the company is hitting on all cylinders, but that is difficult to keep up for a long time. ?How do accounts receivable look?
If a company misses revenue estimates nearly all the time, take a look at what they are saying about their marketing, and analyze the industry and competition. ?If it is due to the industry, that might not be so bad if you are getting the company’s shares at a cheap valuation. ?If it is due to other reasons, it might be time to look elsewhere…
If you are late in the company’s product pricing cycle, and competitors are overly aggressive, good companies may take a step back and emphasize profitable business over volume, if fixed costs aren’t too high. ?In a pricing war, analyze who has the capability of living through it — maybe it is time to avoid the sector, or simply own the strongest company there, as you wait for capacity to rationalize.

Regardless, it can be a good exercise to look at the current asset accruals of the non-financial companies that you own to see if they look high, because of the higher odds of an earnings disappointment if those accruals are too aggressive. ?If you need a summary statistic to look at, perhaps use normalized operating accruals or the days outstanding in the cash conversion cycle for receivables plus?inventories?minus payables as a fraction of revenues.

That’s all for now.