Carl from Chicago – Page 125

A Random Walk…

January 9, 2009January 8, 2009 by Carl from Chicago

I was reading a Wall Street Journal column by James Stewart recently. He has a column called “Common Sense” which outlines his approach to selecting stocks and investing. His strategy involves buying when the stock market drops 10% and then selling when the stock market rises 25%. This type of investing (which looks at relative market levels) is a type of “technical analysis” as opposed to “fundamental analysis” which looks at the merit of individual stocks relative to financial metrics. To be fair, Mr. Stewart’s model is a mix of technical and fundamental analysis, but the “buy”and “sell” signals are pure technical analysis (in my opinion).

The headline of the article really caught my eye, however:

When bad times get worse, it’s best to stick to a system

That quote reminded me of a line from one of my favorite investing books titled “A Random Walk Down Wall Street” by Burton Malkiel. On p146 he discusses his opinions of technicians which rings eerily familiar:

I personally have never known a successful technician, but I have seen the wrecks of several unsuccessful ones. Curiously, however, the broke technician is never apologetic. If you commit the social blunder of asking him why he is broke, he will tell you quite ingenuously that he made the all-too-human error of not believing his own charts

Stock Selection

January 6, 2009January 6, 2009 by Carl from Chicago

In the “efficient markets” hypothesis, all available information is factored into the stock price, making attempts to “beat the market” by selecting your own stocks a fool’s errand. Index funds, which were originally stock mutual funds, such as those at Vanguard, not only attempt to mimic rather than beat the index, they also sport much lower expenses. Thus even if the performance was the same for an index as a stock picker, the index would win with costs as low as 0.2% / year as opposed to 1% – 2% / year for managed funds. One advantage that remained of a stock selection methodology over mutual funds was related to taxes – individual stocks were definitely more tax efficient if handled correctly; now index ETF’s have erased that lead.

Of course, theories don’t always work in the real world, as the recent financial meltdown attests, when AAA rated financial instruments took significant losses. In a similar vein, those in favor of active stock selection could always point to a few candidates to make their cases. One candidate was Bill Miller, head of the Legg Mason Value Trust, who beat the S&P 500 for 15 consecutive years.

While Bill Miller may have been the “poster boy” for those that point to active stock pickers, he was a reticent candidate. He even said that a lot of his “streak” was due to timing on the calendar and didn’t strut around like a world-beater. Thus I didn’t take much pleasure in the this article…

Bill Miller, whose Legg Mason Value Trust achieved the unlikely feat of beating the S&P 500-stock index for 15 consecutive years, has become the fund world’s punching bag. So far this year, the fund is down a devastating 56 percent on account of bad bets on stocks including AIG, Washington Mutual, and Freddie Mac. This horrific year (combined with lackluster results in 2006 and 2007) has banished Legg Mason’s crown jewel to the ranks of the worst-performing mutual funds not only for the year, but for all standard periods of measurement.

Leverage and the world in 2009

January 5, 2009 by Carl from Chicago

A recent article focused on satellite radio and the merger of XM and Sirius. In an interview with CEO Mel Karmazin, he said:

Ironically, one rationale for the merger was the expectation that the combined company could borrow money more cheaply. “The bankers who covered the deal believed that one of the synergies of the merger was the ability to refinance at a lower level,” says Mr. Karmazin. Consider this: five years ago, Sirius, with 300,000 subscribers and no hint that Mr. Stern would be gracing its channel lineup, borrowed money at 2.5 percent interest. Those days are long gone. “Warren Buffett managed to get a 10 percent coupon from G.E. and Goldman Sachs,” says Mr. Karmazin, speaking of the interest rate that Mr. Buffett, the Omaha investing legend, was promised for his recent investments in both companies. “So if you are Sirius XM, what should the coupon be?”

Thus the Sirius / XM stock ticker, which peaked at $9 in 2005, now trades at 12 cents. Approximately $3B in debt is outstanding for the company; since they are not cash flow positive to any significant degree and raising money through stock offerings is extremely difficult when you are a penny stock, their balance sheet is killing the company, and possibly the entire satellite radio industry as a result.

A Change in the Social Order

January 4, 2009 by Carl from Chicago

A recent NY Times article highlighted the impact of the financial crisis on Ireland, a country which had previously been riding high on a property boom (and also low tax rates and generally sound economic policies).

There is a photo of a property tycoon and his lovely wife (recently married), 20 years his junior, above. From the article:

The Celtic Tiger my be dead and if the banking crisis continues I could be considered insolvent. but the one thing that I have is my wife and children – and they can’t take that away from me

No, Mr. Tycoon, THEY can’t take her away from you, but your real risk is that she’ll leave on her own.

Private Equity

January 3, 2009 by Carl from Chicago

Recently I wrote about the troubles in hedge funds, where easy money in terms of 2% of assets and 20% of profits (easy to find when the market was moving up) has evaporated. Another field where someone a few years out of (an elite) college can make millions is… private equity.

Wikipedia has a decent summary of private equity. Private equity typically consists of taking a public company private by purchasing their equity shares, taking actions to increase the value of the company, and then re-launching the company back in the public markets and “cashing out”. Another path to private equity consists of taking equity stakes in start up companies (like the famous venture capitalists in the dot.com era) and then earning profits when the company goes public. Often the private equity firms raise “funds” with a time horizon, typically ten years, where they invest the money in a variety of investments and then the money is returned to investors at the completion of the fund, whether it results in new profits or losses.

Along with hedge funds, private equity made up a large component of the “alternative investments” that many endowments and wealthy individuals started to invest in en masse in the late nineties and into the current decade in search of higher returns. Typically these sorts of investors put their money into public market equities, debt and real estate – this “alternative investments” were supposed to bring higher returns and also not be not correlated with equity, debt and real estate.