31 minutes | Mar 22, 2023
Benjamin Claremon – Know What Kind of Investor You Are
BIO: Ben Claremon joined Cove Street in 2011 and has been a Co-Portfolio Manager for the Classic Value | Small Cap PLUS strategy since its inception in 2016. STORY: Benjamin has made the biggest mistakes and lost the most money by buying cheap companies that get less valuable over time. LEARNING: Know what kind of investor you are and let your portfolio reflects that. Just because it’s cheap doesn’t mean you have to buy it. Invest in a business you can own for years. “It’s hard to establish a true margin of safety when the intrinsic value is falling over time. It’s like catching a falling knife.” Benjamin Claremon Guest profile Ben Claremon joined Cove Street in 2011 and has been a Co-Portfolio Manager for the Classic Value | Small Cap PLUS strategy since its inception in 2016. His background includes positions on the long and short side of hedge funds as well as commercial real estate finance and management. Ben is the proprietor of the value investing blog The Inoculated Investor, the founder of the 10-K Club of Southern California, and the host of the podcast Compounders: The Anatomy of a Mutlibagger.Worst investment ever The place where Benjamin has made the biggest mistakes and lost the most money is with companies that get less valuable over time. These are businesses facing secular headwinds or outright secular decline. Every day, the businesses become worth a little bit less. They seem lucrative to buy when they’re cheap and sell when the valuation goes from highly depressed to merely depressed. However, businesses that don’t get more valuable, over time, tend to throw curveballs at you that you might not be expecting. Whether it’s a balance sheet issue, a capital allocation issue, or a management change, trouble just breeds more trouble. There was such a company that Benjamin was relatively public on. When investing in this company, Benjamin thought there was a distinctive margin of safety. He believed the management team understood how to create value for shareholders. The company had valuable assets that could be sold at higher prices in the current valuation. And that capital allocation changes could have increased the company’s value relative to the current stock price. For this reason, Benjamin thought that the business connectivity and the business services sides were worth a certain fair amount more than the stock was trading for. He was looking at a situation where the value was much higher if they could just unlock it via divestitures. Amazingly, that’s precisely what the management did. They sold three businesses, all of which were at multiples higher than the stock price. But, to date, the stock is still down.Lessons learned Before you invest in a company, ask yourself, does this business look like it is getting more valuable over time and has a chance to compound? If the answer is no, don’t waste your time on it. Know what kind of investor you are, what fits your temperament, and what allows you to sleep well at night. Then let your portfolio reflects that. You’re better off investing in a business you can own for years instead of one meant to be sold. When investing, consider the moat trajectory and determine if the company is stable, expanding, or contracting. If it’s contracting, don’t assume that a cheap valuation will protect you from
38 minutes | Mar 21, 2023
Edward McQuarrie – Never Ever Sell Naked Calls
BIO: Edward McQuarrie is Professor Emeritus at Santa Clara University. He writes on market history and personal finance, and his research has been mentioned in columns in the Wall Street Journal, Marketwatch, and Barron’s. STORY: Edward opened an account to trade naked puts. When the financial crisis of 2008 hit, he thought it was a good time to sell his puts. He ended up losing almost all the money in his account. LEARNING: Keep your play money small. Never trade your treasury bond until maturity to avoid losses. “I find intermediate treasuries to be superior to total bonds, especially for new investors.” Edward McQuarrie Guest profile Edward McQuarrie is Professor Emeritus at Santa Clara University. He writes on market history and personal finance, and his research has been mentioned in columns in the Wall Street Journal, Marketwatch, and Barron’s. His papers can be downloaded from SSRN.com, and he posts as McQ at Bogleheads.org, where you can view some of the charts mentioned today.Worst investment ever Years ago, Edward gave himself a small play account to keep his hands off the money in his 401(k) account. In that play account, which he opened with a broker, Edward began to trade options, and more particularly, he began to sell naked puts. Then the great financial crisis of 2008 hit. Edward had been trading puts and calls for four or five years at that point. By November 2008, the Lehman Brothers had already gone bust, and the markets were going down, so Edward thought this was an excellent time to sell a naked put. At that point, Edward had $21,000 in his play account, and his maintenance requirement was only $11,000. A day later, he logged into his account and found a balance of $11,000 and a $21,000 maintenance requirement. This meant Edward was $10,000 short. His best option was to take the loss and reduce the maintenance requirement. So after 30 minutes of frenzy to position covering, Edward still got a margin of about $2,000, which he had to cover with money outside the play account.Lessons learned Keep your play money small. Always have a lifeline in case you totally screw it up. Nobody holding a US Treasury to maturity loses their money nominally. It’s when you trade them before maturity that you can lose significantly. Andrew’s takeaways Always have a backup plan to survive. Get into a short-duration bond when you think that bond prices will fall. On the other hand, invest in a long-duration bond if you think that prices will rise. No.1 goal for the next 12 months Edward’s number one goal for the next 12 months is to write as much good stuff as he can pump out the door.Parting words “Own the total stock market, just like Andrew said.” Edward McQuarrie [spp-transcript] Connect with Edward McQuarrie LinkedIn Website Books Andrew’s books
21 minutes | Mar 20, 2023
ISMS 12: CPI Racing Across the Globe
Is global CPI going to follow the US CPI slowdown?Global MarketsGlobal CPI has leveled off and is slowing in DMs, but still rising in EMs Economies across the world have GDP of about US$90trn and an average CPI rate of 7.4% The developed world has GDP of US$52trn and CPI of 6.9% And the emerging world has GDP of US$38trn and a higher 8.2% CPI rate World Jan. 2023 CPI was 7.4%, up 2.1ppts YoY; MoM DM continues to fall, while EM is rising DM Jan. 2023 CPI was 6.9%, up 1.5ppts YoY, but falling slightly MoM EM Jan. 2023 CPI was 8.2%, up 2.9ppts YoY, and is rising MoM Key points Global CPI was 7.4% in January, up 2.1ppts YoY, but it was flat MoM Developed world CPI was 6.9%, up 1.5ppts YoY, but falling slightly MoM Emerging world CPI in January at 8.2%, up 2.9ppts YoY, and it rose MoM Developed Markets RegionsCPI is contained in DM Americas, peaking in DM Europe, and rising in DM Asia With in the Developed Markets, DM Americas is the largest with US$25trn of GDP and 6.3% CPI Developed Europe has US$15trn of GDP and a higher 8.3% CPI Developed Pacific is smaller at US$8trn and has the lowest CPI of the developed regions at 5.1% DM Americas CPI falling, DM Europe peaking, DM Asia rising 12 months ago, DM Americas had a 7.4% CPI which is now down to 6.3%, a 1.1ppts fall This means that CPI went from 2.1ppts above the global average to 1.1ppts below DM Europe rose from 4.4% 12 months ago to 8.3%, up 3.8ppts This means it went from 0.9ppts below to 0.8ppts above the global average CPI is racing up in DM Pacific from 1.5% 12 months ago to the current 5.1%, that’s a 3.6ppts increase It has gone from 3.8ppts lower than World CPI to 2.4ppts lower Key points DM Americas 6.3% January CPI is down from 7.4% 12 months ago; and has now shifted from being 2.1ppts above the global average to 1.1ppts below CPI nearly doubled in DM Europe over the past 12 months from 4.4% to 8.3%, shifting from about 1ppts below to 1ppts above the global average CPI in the must smaller DM Pacific region raced up from 1.5% 12 months ago to the current 5.1%; despite that massive 3.6ppts increase, it remains about 2.4ppts lower than the global average Emerging MarketsEM CPI rising in Asia, Middle East and Africa, and Frontier markets on fire EM Americas had a small GDP of US$3.8trn and CPI of 7.9% EM Asia had a massive GDP of US$25.7trn and 3.2% CPI EM Europe had US$3.9trn GDP and a massive 23% CPI EM Middle East and Africa had a small US$1.7trn GDP and a high 10.2% CPI Finally, Frontier markets had US$2.9trn GDP and 30% CPI EM CPI rising in Asia, Middle East and Africa, and Frontier markets on fire EM Americas CPI was 7.9% in January, down slightly from 8.5% 12 months ago EM Asia CPI went from a tiny 1.9% 12 months ago to 3.2% and is still 4.3ppts below the World CPI Most notably, this has ticked up slightly MoM EM Europe CPI was 23% and over the past two months has been falling; though it is still 15.5ppts above the World average EM ME&A CPI was 10.2% compared to 3.7% 12 months ago. It has now risen to be 2.8ppts above the world average compared to 1.7ppts below 12 months ago Consumer prices are on fire in Frontier markets up 30% YoY in January; this is double where they were 12 months ago; CPI keeps rising MoM and is now 22.5ppts above the world average Key points EM Americas CPI was 7.9% in January, down slightly from 8.5% 12
44 minutes | Mar 20, 2023
ISMS 11: US Banking Crisis and Fed Rate Cut
Did the Fed finally break something with its aggressive rate rises? I’ve been repeating in my investment strategy that the Fed will eventually break something, and yes, they did. They did. Was the collapse of the Silicon Valley Bank the beginning of the 2023 US banking crisis? Has quantitative tightening ended? Are we in quantitative easing? Could this spread throughout the US? Or the global banking system? Was this caused by the government or the bad behavior of banks? Is the dollar going up or down due to what’s happening? Could this trigger a much-anticipated recession in America? And how does this impact Feds tightening and inflation the Fed is meeting this week? Did the Fed finally break something with its aggressive rate rises? Was the collapse of the Silicon Valley Bank the beginning of the 2023 US banking crisis? First, we start with the situation of Silicon Valley Bank, which is going bust. In Silicon Valley Bank’s case, first of all, there was a huge influx of deposits into Silicon Valley Bank over the last couple of years, as well as the whole banking sector in the US. Where did these deposits come from? In the US, those deposits came from the US government pumping money into the hands of individuals and companies through the various and massive stimulus programs during the covid shutdown. Those stimulus packages passed by Congress went into the banks as deposits from individuals and companies. Consider the fact that most countries around the world couldn’t do this. Thailand where I am right now, there’s no way the government could print all that money because the currency would have collapsed. And therefore, most governments did not have the privilege of having a reserve currency asset and the ability to print as much money as needed. So America is quite unique in this, and that’s one of the reasons why what’s happening in the US is may not spread to such an extent globally.What did Silicon Valley Bank do when they got all these deposits? Well, they didn’t have enough loans available to lend this money out. A bank does basically three things with the deposits that it receives: 1) it can hold it as cash, 2) it can buy some security or investment, like a security that could be traded, or 3) the traditional business of a bank, is they lend out money. Now if they had a lot of opportunities to lend that money out, they would have locked that money up in loans. Now imagine that a bank had 5% cash, 5% securities, and 90% loans. If people wanted to pull their deposits out of the bank, the bank would have 5% of the money available of their total, and then another 5%, they could sell those securities and repay deposits. Now they could also go to the government to the Fed and borrow some money to repay deposits to prevent a bank run. But it’s not so easy to get out of loans, right? If you’ve lent money to a company and need that money back, you can’t get that. So the loans are very illiquid, but securities are very liquid.After the 2008 crisis, new regulations tried to force the banks to hold more cash Now, let’s add that after the 2008 crisis, basically, the US government came up with new regulations that tried to force the banks to hold more cash and more securities, with the idea being that the combination of cash and securities would be highly liquid assets. And basically, the banks would then be able to pay back if any depositors came, they would be able to pay back. In fact, at the peak liquidity of the banks, you had almost 20% of the US banking sector’s assets in cash and almost 20% in securities. That means almost 40% of the bank’s balance sheet was in highly liquid assets. Now also what the US government did is they said, look, if you buy US Treasuries, we’ll count them as purely risk-free, meaning that you don’t have to...
12 minutes | Mar 20, 2023
ISMS 10: US CPI Could Decline to 4% By YE23; Unless QE Revs Up
Is US CPI going up or down by yearend 2023?Feb 2023 US CPI was 6%, down from 6.4% in Jan and off its June 2022 peak 9.1%Food accounts for 13.5% of CPI and was a high 9.5% in FebruaryFood has come off its Aug 2022 11.4% peakEnergy accounts for 7.1% of US CPI and was up only 5.2%Energy has come down considerably from its 41.6% June 2022 peakWhen oil price rises, it causes a similar, but muted rise in the US CPI energy component Correlation between oil price and the energy component of CPI is about 90% Food and energy are a tiny part of US CPI, 79% of the weight comes from all other itemsNon-food and energy items are less volatile and total CPI is coming back down to that level This less volatile and slow to adjust group of products and services illustrates why I was previously arguing that overall CPI was unlikely to come down fast Most volatility in US CPI comes from the energy component, which accounts for only 7% of CPIThe largest impact on the food category is “Food at home” which was up 10.2% This is coming from supply chain pressures that take a long time to work through Though high, food at home peaked in August 2022’s 13.5% high and has fallen 3ppts Food away from home never was exceptionally high and as a result is slowly falling Energy is 7% of US CPI and is broken equally into commodities related and services Commodities is related to the oil and gas that Americans buy Energy services show how energy costs feed into the price of electricity that individuals and businesses pay Gasoline prices were the main driver and at its peak in Jun 2022 was up 60% Biden’s first drawdown of emergency oil stockpiles from the Strategic Petroleum Reserve was in November 2021, just before the election In 2022, Biden released 222 million barrels of oil from the Strategic Petroleum Reserve This 38% reduction increased worldwide supply and helped bring down oil price 21% of CPI comes from products like cars and cars, which were only up 1% The cost of homes is the largest part of the US CPI at 34% and it was up 7.3% Services excluding energy services is mainly comprised of owner's equivalent rent OER is still slowly adjusting up as a result of the rise in home prices This accounts for 30% of CPI and will take months to adjust down Oil price moved from US$39/bbl in Oct 2020 to US$82/bbl 12 months later The peak was US$114/bbl in June 2022 US housing price were rising at 5% per year since 2012 They shot up 12% in 2020 thanks to the Feds near zero interest rates Then they went up a massive 18% in 2021 30-year fixed mortgage rate hovered around 3% from July 2020 to October 2021. Now 6% Summary Feb 2023 US CPI was 6%, down from 6.4% in Jan and off its June 2022 peak 9.1% Food accounts for 13.5% of CPI and was a high 9.5% in February; “Food at home” was up 10.2%, showing lingering supply chain pressures Energy is a small component of US CPI and was up only 5.2%, down considerably from its 41.6% June 2022 peak The correlation between oil price and the energy component of CPI is about 90%, so with oil prices down, US CPI is down Biden’s 38% drawdown of the Strategic Petroleum Reserve in November 2021, just before the election, increased worldwide supply and helped bring about that oil fall Oil prices feed slowly into the price of electricity; hence energy services were up 13.3% and will be slow to fall 79% of the weight comes from ex-food and energy items, which is much less volatile Cars, apparel, and the like are about 21% of CPI was only up...
45 minutes | Mar 19, 2023
Michelle Leder – Read the 10-K Before You Buy That Stock
BIO: Michelle Leder has probably read more SEC filings than just about anyone else on the planet since writing her book, Financial Fineprint: Uncovering a Company’s True Value, and starting her website, footnoted.com nearly 20 years ago. STORY: Michelle invested in a company without going through important SEC reports. LEARNING: Dig deep into the company’s 10-K annual report before investing. Look at the risk factors and what the company says about risk. “Pay attention to the stuff in the 10-K if it is a significant position for you.” Michelle Leder Guest profile Michelle Leder has probably read more SEC filings than just about anyone else on the planet since writing her book, Financial Fineprint: Uncovering a Company’s True Value, and starting her website, footnoted nearly 20 years ago. Michelle recently relaunched Friday Night Dump, a weekly newsletter. It focuses on SEC filings made after 4 pm on Friday afternoons when companies tend to bury the most negative information that they are required to disclose.Worst investment ever Twenty years ago, Michelle was relatively new to investing and had been a business journalist for about 10 years. She bought some shares of Quest Communications because she was covering IBM at the time. IBM had just announced a big deal with Quest. Michelle thought this would be an excellent opportunity to buy some Quest shares. She watched the shares go up until they stopped and started plummeting. Michelle went back, and I looked at the footnotes she’d collected while researching IBM. She discovered that IBM had booked the whole billion dollars for the deal with Quest upfront in year one, even though it was a 10-year deal. Michelle had missed this, so she watched Quest go all the way down.Lessons learned It’s a great time of year to dive into investing, as 10-K reports have been filed. Before investing, look at the risk factors and what the company says about risk. Dig deep into the company’s 10-K annual report for a clear picture of its financial performance. A 10-K report contains much more detail than a company’s annual report. It will give you enough information before you buy or sell shares in the company. For every significant position in your portfolio, ensure you’re aware of important details such as revenue recognition and inventory disclosures. Andrew’s takeaways Financial statements and annual reports are a treasure trove of information for analysts. Michelle’s recommendations Start with one or two companies you know well. See what you can discover by reading essential filings like the 10k and proxy statements. Does the new information you get make a difference?No.1 goal for the next 12 months Michelle’s number one goal for the next 12 months is to focus a lot more on her business.Parting words “Life is a learning experience. In the end, it’s not about the money; it’s about the quality of your relationships.” Michelle Leder Connect with Michelle Leder LinkedIn
39 minutes | Mar 15, 2023
Dave Collum – What Should the US Be Doing in Ukraine?
BIO: Dave Collum is a professor of Organic Chemistry at Cornell University who developed an interest in markets, which, in turn, led to an interest in geopolitics. STORY: Dave talks about his 2022 Year in Review: All Roads Lead to Ukraine. LEARNING: Never trust politicians and bureaucrats. “The more the fact-checkers, the more likely the thing they’re checking is true.” Dave Collum Guest profile Dave Collum is a professor of Organic Chemistry at Cornell University who developed an interest in markets, which, in turn, led to an interest in geopolitics. He enjoys the human folly of it all. He has a natural predilection for being contrarian, which makes him a “denier” on almost all hot topics.2022 Year in Review: All Roads Lead to Ukraine Given his interest in geopolitics, Dave has strong opinions about many things. For him, it’s a natural thing to go against everybody. Today, we’ll not talk about his worst investment ever but rather hear more about his 2022 Year in Review: All Roads Lead to Ukraine. Every year, Dave writes an annual survey of what is happening in the world. The reviews started as a handful of pages for friends and family on a simple website, and then it just got bigger. One year he decided to do a serious job. Now every year has gotten bigger and bolder. Dave has a friend who’s binding all the views so he can sell them all on Amazon. Every year, Dave writes about human folly. In his 2022 review, his primary focus was Ukraine. In his true controversial nature, he took the pro-Putin stance. Dave says he can easily make the case that NATO is bad. Dave argues that Putin is making incredibly rational moves and believes that NATO could have stopped the war but chose not to. He gets pretty troubled to watch people become self-righteous about Ukraine while the US is no victim. Going back in history, Dave says the US has bombed more countries than Russia over the last 20 years. The government has also killed more people with military weapons in the previous 20 years. People want to talk about the Ukraine war while ignoring that the US gave weapons to the Saudis to bomb the Yemenis into oblivion. Or the fact that last year, the US bombed Syria three times to send a message to Tehran. In Dave’s opinion, that should be a war crime. Dave predicts that the war in Ukraine will end soon. A Twitter poll he did shows that people are tired of the war and no longer support it. To end the war, the US must stop sending money and weapons to Ukraine. Go to Peak Prosperity to read Dave’s full honest review.Andrew’s takeaways Andrew has three guiding principles: Never trust politicians. Never trust bureaucrats just like that. They’ve got to earn your trust. The majority of people follow politics blindly. Andrew believes that to really see a change in society, you’ve got to effect that change through the political system and apply that across all boards. [spp-transcript] Connect with Dave Collum LinkedIn
26 minutes | Mar 15, 2023
ISMS 9: Saving Silicon Valley Bank Brings New Risks
The Silicon Valley Bank crisis started when the US government shut down its economy The Silicon Valley Bank crisis started when the US government shut down the economy from 2020 to 2021. Let’s take a step back to January 29th, 2020, when President Donald Trump announced a White House Coronavirus Response task force with the director of the National Institute of Allergy and Infectious Diseases, Anthony Fauci, and Deborah Brix as coordinator. The decision to shut down the economy originated from this body but was ultimately implemented by President Trump, members of congress, and eventually President Joe Biden. This decision was truly the worst decision I have ever seen a government make in my lifetime.Businesses and individuals saw their income collapse During that time, businesses and individuals saw their revenues collapse and could not pay the costs necessary to sustain their businesses and livelihood. The US government then came up with various programs to distribute money to these struggling businesses and individuals. Unfortunately, the government did not have this money to distribute. As we all learned in political science 101, the source of any government funds, of course, comes from its citizens, but in this case, citizens and businesses were reeling from the government’s shutdown of the economy and hence had no money.The US government had to borrow money So the only choice the government had was to borrow money. But the US Treasury department could not borrow from the population as citizens were in dire straits. Usually, the US government would be able to borrow from foreigners; however, as other countries were suffering and for various geopolitical reasons, foreigners didn’t buy much US government debt. In fact, in 2014, foreigners owned US$6.2trn of US Treasury Department bonds; five years later, in 2019, they only held slightly more at US$6.8trn. Throughout the crisis, the US Treasury Department could only get about one trillion dollars of foreign money to buy US Treasuries.The US government needed trillions of dollars But the US government needed a lot more money than that. In fact, between the end of 2019 and the end of 2021, the US government borrowed US$6.4trn, causing total US government debt to rise to US$29.6trn by the end of 2021, 122% of GDP. So, the US government needed US$6.4trn and couldn’t get it from taxpayers or businesses at that time, so where did they get it? As I mentioned earlier, they got about US$1trn of it from foreign investors, which left a US$5.4trn hold.In 2020/21, the Fed stepped in and lent money to the US Treasury The solution was for the Federal Reserve to step in and lend the money to the US Treasury. Now the Fed is not allowed to buy bonds directly from the US Treasury, so the largest banks bought these bonds and then offloaded most of them to the Fed. The total assets of the Fed grew from US$4.6trn at the end of 2019 to US$8.8trn by the end of 2021, a US$4.2trn increase. To put this into perspective, from 2020 to 2021, the US government spent US$12trn and took in taxes of US$5.1trn.This massive injection of money raised deposits This massive injection of money resulted in deposits of individuals and companies at US banks increasing by US$4.7trn during 2020 and 2021. The banks put about half of that money, or about US$2.2trn, into cash. About a third of those deposits, or US$1.6trn, went into securities at a time when interest rates were close to zero. In 2020 US 10-year Treasury bonds yielded about 0.9%, and it was about 1.5% in 2021.Banks receive short-term deposits and lend long-term Banks generally receive short-term deposits and lend that to companies on a long-term basis. But in 2020 and 2021, there was enough concern about the economy that banks didn’t lend much. Instead, they put that money into cash and securities.In 2020...
29 minutes | Mar 14, 2023
Bill Blain – Always Sell Fast in a Difficult Market
BIO: Bill Blain is a well-known financier and commentator on financial markets, contributor, and editor of the Morning Porridge. STORY: Bill loves airships, and many of his investment mistakes involve airships. LEARNING: Ignore the worst and the best estimates and focus on the middle consensus. In a difficult market, a bid is a bid, and you’ve got to sell fast. “The market has one objective only; to inflict the maximum amount of pain on the maximum number of participants.” Bill Blain Guest profile Bill Blain is a well-known financier and commentator on financial markets, contributor, and editor of the Morning Porridge. His day job combines his role as Strategist for Shard Capital, the leading investment management firm, and heading the firm’s Alternatives Group – financing Private debt and equity deals and direct lending transactions. His clients include sovereign wealth funds, hedge funds, insurance and pension managers, credit funds, and family offices.Worst investment ever Bill absolutely loves airships, and many of his investment mistakes—unsurprisingly—involve airships. When Bill was relatively young, he discussed with his grandfather about going to Dundee. He told him about reading about it and his interest in airships. Bill’s grandfather encouraged him to invest in that airship. Billy took his grandfather’s advice and put his pocket money into the airship company. He lost all his money when the company folded a year later. A few years later, as a young banker again, the airship industry came up, and Bill thought investing in it would work this time. So invested and lost a lot. About 10 years ago, there was yet another airship. Bill tried to invest in it, but somebody else beat him to the race since it was a private equity deal. The guy who beat him in the bid lost all their money. Over time, Bill has also made other poor investment decisions, like buying UK bank stocks just before Northern Rock went into meltdown. He also once did lots of serious analysis and market research and concluded that all the world’s growth would be in Southeast Asia. So he piled into Chinese stocks a couple of days before Ali Baba and Tencent were closed down. Another big mistake Bill made was with Tesla. He learned about Tesla very early on and thought it was interesting. He even invested in it. But his confidence in the stock evaporated because he let it get personal. Bill was distraught by the behavior of Elon Musk, particularly his attitude towards a British cave diver trying to rescue children stuck in a cave in Thailand. He felt the way Elon treated that diver, accusing him of being a pedophile, was unforgivable. So Bill decided to exit Tesla at that point. He decided for all the right moral reasons, and it cost him millions in the foregone upside that he would have made if he had held on to the stock.Lessons learned Markets are not clever themselves. They’re not artificial intelligence. All they are is a voting machine. The market has one objective; to inflict the maximum amount of pain on the maximum number of participants. Things are never as bad as you fear but seldom as good as you hope. Ignore the worst and the best estimates and focus on the middle consensus. In a difficult market, a bid is a bid, and you got to sell fast. Bill’s recommendations According to Bill, a phone is the best resource for understanding what’s happening in markets and what you should do. Bill recommends calling...
25 minutes | Mar 12, 2023
Jeroen Blokland – Know the Actual Business Outlook Before Investing
BIO: Jeroen Blokland is a long-term multi-asset investor with a long-term track record in financial markets. Jeroen worked at Robeco, the largest independent asset manager in The Netherlands, for almost 20 years before launching his independent investment research company, True Insights. STORY: Jeroen’s first investment was in a Dutch company selling PCs. He barely did any research or due diligence. The company reported a loss of $27 million in the same year Jeroen invested. It later went bankrupt, leaving Jeroen with a massive loss. LEARNING: Know the actual outlook of a company before investing. Diversify your portfolio. “90% of the investing population doesn’t know the actual outlook of a company.” Jeroen Blokland Guest profile Jeroen Blokland is a long-term multi-asset investor with a long-term track record in financial markets. Jeroen worked at Robeco, the largest independent asset manager in The Netherlands, for almost 20 years before launching his independent investment research company, True Insights. True Insights offers institutional and retail clients high-quality investment research to make better-informed investment decisions based on a proven investment framework covering Macro, Sentiment, and Valuation. True Insights is currently offering a discount on its Subscriptions. Get a 20% discount on your Monthly Premium Subscription (add ‘MONTH’ in the ‘Have a coupon?’ section.) You can also get a 25% discount on top of the regular discount on our Annual Subscription (add ‘YEAR’ in the ‘Have a coupon?’ section.’)Worst investment ever When Jeroen decided to dive into the investment world, he knew nothing about investing and had no framework. He came across a Dutch company, Tulip Computers, the second biggest PC seller, next to IBM in the Netherlands. Jeroen didn’t know anything about the company besides what they did. He looked in the newspaper and ranked the company’s 12-month performance from high to low. He figured it was a good investment. His genuine belief was this is how you make the most money. The company reported a loss of $27 million in the same year Jeroen invested. In 1979 that was a very massive loss. Then the company went bankrupt, and Jeroen lost his entire investment.Lessons learned 90% of investors don’t know the actual outlook of a company, even if they’re experienced in reading a balance sheet. Though difficult, invest in a couple of companies based on their fundamentals. Diversify your portfolio. Andrew’s takeaways Just like investors, most companies also don’t know their actual outlook. Actionable advice Diversify your portfolio and limit your risk by buying more companies or investing less.Jeroen’s recommendations Jeroen recommends using information and research that’s already been done by others. Then determine if you need to gather additional information by yourself. He recommends Twitter as a massive source of helpful information—as long as you follow the right people.No.1 goal for the next 12 months Jeroen started a new business, and his number one goal for the next 12 months is to grow the knowledge part of the business so that more people have access to it.Parting words
58 minutes | Mar 9, 2023
ISMS 8: Larry Swedroe – Investment Mistake No.1: Are You Overconfident in Your Skills?
In this episode of Investment Strategy Made Simple (ISMS), Andrew and Larry discuss a chapter of Larry’s book Investment Mistakes Even Smart Investors Make and How to Avoid Them. In this first series of many, they talk about mistake number one: Are you overconfident in your skills? LEARNING: Don’t be overconfident. Look for value-added information when researching an investment. “When you trade, understand that you’re competing against the market’s collective wisdom.” Larry Swedroe In today’s episode, Andrew chats with Larry Swedroe, head of financial and economic research at Buckingham Wealth Partners. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks. Larry deeply understands the world of academic research and investing, especially risk. Today Andrew and Larry discuss a chapter of Larry’s book Investment Mistakes Even Smart Investors Make and How to Avoid Them. In this first series of many, they talk about mistake number one: Are you overconfident in your skills?The majority of people are naturally overconfident There’s a lot of research showing that human beings tend to be overconfident in their skills. If you ask people, are you liked by others more than the average person? Are you a better lover than the average person? Can you drive better than the average person? It doesn’t matter what the question is; the answer from a vast majority is that they think they’re better than the average person. According to Larry, this is actually a good healthy thing. Imagine getting up daily, looking in the mirror, seeing yourself, and thinking you’re dumb, ugly, stupid, and nobody likes you. You’d live a sad life. So it’s good to feel better about yourself as long as you don’t make mistakes.Overconfidence isn’t such a good trait when it comes to investing Larry says that the market is made up of all types of investors. If some investors are going to outperform, then some investors must underperform. The market must have victims to exploit. Most investors tend to be overconfident and think they’re a lot smarter than the average person, so they will be able to control them. But according to evidence, that’s dead wrong because people are not competing one-on-one.Female investors get better returns than men due to underconfidence Women are not better at stock picking than men. The stocks they buy perform just as poorly as those that men buy. And the stocks they sell go on to outperform in equal measure. However, men have overconfidence in skills they don’t have, while women simply know better. They don’t overestimate their skills as much as men do, so they trade less and have fewer turnover costs, resulting in better returns. Interestingly, married women do worse than single women because they get influenced by their husbands, while married men do better than single men because they have the influence of the sage counsel of their spouses.Does hard work, training, and knowledge play any role in outperformance? Generally, the more knowledge you have, the wiser you become. But the game of investing is very different than, say, the game of tennis, where you’re playing one-on-one. During a one-on-one match, whether tennis, chess, or any other similar game, minor differences in skill lead to considerable differences in outcome. As the competition gets more challenging, it becomes harder to win. And luck becomes more...
33 minutes | Mar 8, 2023
Brian Feroldi – Be Careful When Trading Options
BIO: Brian Feroldi is a financial educator, YouTuber, and author. His career mission statement is “to demystify finance.” STORY: Brian invested in an oil pipeline company with take-or-pay contracts. This meant that the company would get paid either way if the price of oil or natural gas went up or down. Prices went down and despite the contract, the pipeline’s stock went down because its customers couldn’t afford to pay. Brian lost 70% of his entire portfolio. LEARNING: Don’t use options as an investment strategy. Never let one company become your largest position. Be careful about trying to leverage beyond your capability. “When my research makes me unbelievably bullish about something, that probably means I’m blind to some risk.” Brian Feroldi Guest profile Brian Feroldi is a financial educator, YouTuber, and author. His career mission statement is “to demystify finance.” He loves to help other people do better with their money, especially their investments. He has written more than 3,000 articles on stocks, investing, and personal finance for the Motley Fool.Worst investment ever Brian invested in a company in 2013, about nine years into his investing journey. Though not an expert, he completely understood business fundamentals. He had a framework for what kind of companies he was going after. The company Brian invested in was Kinder Morgan, an oil pipeline company. That means they don’t go out and find the oil but own and operate pipelines that move oil and natural gas from the extraction point to a processing plant. The company then takes a fee for moving the oil. What really attracted Brian to that business model was that it had take-or-pay contracts in place. Meaning that if the price of oil or natural gas went up or down, Kinder Morgan would get paid either way. In theory, this company had locked in guaranteed recurring revenue. In addition, it was run by its founder, Richard Kinder, who owned tons of stock and continually bought more. The company had a 4% dividend yield at the time, plus a realistic growth plan for them to expand that dividend by about 10% per year. So from the outside, it looked like a very low-risk company that could earn Brian a high dividend yield. The more Brian studied the company, the more bullish he became on its potential. So over time, he would add to the stock because he thought it was attractive. Within no time, Kinder Morgan became Brian’s number one position. At the time, Brian was learning about options and how they work. He set up a synthetic long on Kinder Morgan. Synthetic long is when you sell a long-dated put, which brings in cash today, and you use that cash to buy a long-dated call option. Essentially, you get to benefit from the upside. So if that stock goes up, you get paid for that stock to go up ahead of time. So the returns to the investor are enormous on a percentage basis. The downside to a synthetic long is if the stock price falls, you’re on the hook for pure leverage because you don’t own the shares. Brian’s confidence level in this thing was sky-high because it looked so bulletproof. After he set up this position, the oil and natural gas prices suddenly tanked by more than 50%. There was simply an oversupply on the market. What confused Brian at the time was that Kinder Morgan’s stock was going down a lot during this downturn. The company had take-or-pay contracts in place, and it got paid no matter the energy price, so...
29 minutes | Mar 7, 2023
Matt LeBris – Prepare for the Downs During the Uptime
BIO: Matt LeBris is a born and raised NY’er who inevitably caught the hustler’s spirit that fills his hometown streets. STORY: Matt got an opportunity to be part of a successful business venture in his early 20s. He was making good money and living a good life. Unfortunately, the business went down, and he took an unpaid internship with Daymond John of Shark Tank. Matt’s biggest mistake was to continue living large even though he no longer had money coming up. He blew over $80,000 of his savings by living way above his means. LEARNING: Understand how you’re subconsciously programmed about money. Live below your means. “Understand how money works. If money’s not coming in, be very cautious of how it’s going out.” Matt LeBris Guest profile Matt LeBris is a born and raised NY’er who inevitably caught the hustler’s spirit that fills his hometown streets. A Forbes 30 Under 30 nominee, Matt has worked with Daymond John of Shark Tank as well as hosted a top 1% globally ranked podcast, Decoding Success. His life mission: impact one person a day, and that’s what he’s here to do today.Worst investment ever When Matt was in college, he was very fortunate to have had an opportunity to surround himself with individuals a little older than him in a particular business venture. It was a New York City hospitality throwing various events. Matt was in his early 20s and raking it in. He was doing good for himself and felt proud to make a lot of money, drive a nice car, travel, and eat out without making a dent in his bank account. At a certain point, the business started to change. Matt also began to change as a person. This led him to intern with Daymond John of Shark Tank. It was a leap of faith for Matt because it was an unpaid internship. What Matt didn’t do was change his lifestyle. He wanted people to still think he was the rich young man he was before. Even though Matt now had no money coming in, he continued to live above his means just to maintain an image. He ended up blowing $80,000, taking Ubers instead of taking the train and eating at the most lavish restaurants instead of eating at home. Matt’s need to appease his ego was his worst investment ever. He is still trying to forgive himself for that.Lessons learned Understand how you’re subconsciously programmed about money. Live below your means. Turn your worth inward. Andrew’s takeaways Your life is going to be full of ups and downs. You’ve got to manage during your uptimes to have the cushion you need to survive the downtime. Spend as little as you can and take pride in that. This will keep you happy even during your worst times. Actionable advice Understand how money works. If money’s not coming in, be very cautious of how it’s going out. Put your ego aside and find any possible ways to make money.Matt’s recommendations Matt recommends talking to somebody like a therapist if you’re feeling down or struggling to regularly work through these issues.No.1 goal for the next 12 months Matt’s number one goal for the next 12 months is to adopt the mindset of John Gordon’s simple equation: E+P=O (events plus perspective equals the outcome.)Parting words “I’m giving you your kudos, Andrew. Thank you so much for...
42 minutes | Mar 5, 2023
Pim van Vliet – Just Because It’s Cheap Doesn’t Mean You Have to Buy It
BIO: Pim van Vliet is Head of Conservative Equities and Chief Quant Strategist at Robeco. He is responsible for a wide range of global, regional, and sustainable low-volatility strategies. STORY: Pim wanted to make more money investing, so he decided to go all in on a cheap stock. He believed the price would eventually go up as it had done a few years back. Unfortunately, the company went bankrupt, and Pim lost 75% of his investment. LEARNING: Don’t be overconfident and over-optimistic when investing. Just because it’s cheap doesn’t mean you have to buy it. “I thought taking risks gives you a return. That’s not always the case. Taking more risk could give you a lower return.” Pim van Vliet Guest profile Pim van Vliet is Head of Conservative Equities and Chief Quant Strategist at Robeco. He is responsible for a wide range of global, regional, and sustainable low-volatility strategies. He specializes in low-volatility investing, asset pricing, and quantitative finance. He is the author of numerous academic research papers and various books.Worst investment ever Pim has been fascinated with money-saving ever since he was a small kid. His father was an entrepreneur who had a family business. Growing up, Pim would sometimes work at the family business and save the money he made in a savings account. He would get good interest. He learned about the compounding of interest in the process. As Pim learned more about saving, he decided to go into a mutual bond fund to earn more return on his money. Now he would make an 8% yield, up from 6%. This was during the 90s when the stock market became increasingly popular. The newspapers started to write more about it. Pim was getting a bit bored by mutual bond funds because he wanted to make more money. Bonds were just very low, volatile, and boring. Being an eager kid, Pim started to follow the news and learned about a Dutch aircraft manufacturer trading for $13. He researched and discovered that the stock price had once been $40, so it was cheap he thought. Pim believed the stock price would return to $40, so he invested in it. His advisor at the bank cautioned him against investing in just one stock. But of course, Pim was overconfident that the stock price would only go up. So he put a sizeable amount of his wealth into this one stock. Then things went sour. The stock price went down and down. The company eventually went bankrupt. Luckily, Pim could get out at $3 but lost 75% of his investment.Lessons learned Don’t be overconfident and over-optimistic when investing. It’s more important to protect your downside than to keep your upside. Andrew’s takeaways Just because it’s cheap doesn’t mean you have to buy it. Don’t go all in on one stock. As an individual investor, having more than 10 stocks would be overwhelming. And to have less than five would leave you with too much risk if any of them went bad. So invest in 10 stocks and put stop losses on them. Actionable advice If you’re young, take some risks. Risks allow you to learn even if you don’t get a reward for it in investing. So take some controlled risks with the objective of learning instead of becoming rich.Pim’s recommendations Pim recommends reading good investment books that are time-tested such as Benjamin Graham’s books and
15 minutes | Mar 2, 2023
ISMS 7: Financials, Cons. Disc., and Utilities Sectors Look Most Interesting
In this presentation, I will introduce you to our MSCI Sectors and their attractiveness Click here to get the PDF with all charts and graphsWhat do you think: Which of the global sectors is most attractive?We use GICS sector classification GICS The Global Industry Classification Standard (GICS®) is an industry classification system developed by Standard & Poor’s Financial Services LLC (S&P) and MSCI in 1999 GICS works well for the global financial community MSCI separates stocks into 11 different sectors Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology, Communication Services, Utilities, and Real Estate Then 25 Industry groups Some sectors such as Industrials have three Industry groups as follows: Capital Goods Commercial & Professional Services Transportation There are 74 industries Within Transportation Industry Group there are five main Industries 1) Air Freight & Logistics, 2) Passenger Airlines, 3) Marine Transportation, 4) Ground Transportation, and 5) Transportation Infrastructure There are 163 Sub-Industries Finally, within the Industrials Sector, the Transportation Industry group, the Transportation Infrastructure Industry, are 3 Sub-Industries 1) Airport Services, 2) Highways & Railtracks, and 3) Marine Ports & Services GICS sectors include 1,508 Developed Market companies, total market cap is about US$53trn The largest sector is Info. Tech. at US$11trn market cap and consists of 183 companies The smallest is Real Estate with a market cap of US$1.5trn and 96 companies What is your investment framework? Our investment strategies for ETFs and stocks come from our FVMR framework We backtest and optimize the strategy for the factors that have worked best in each market We do all our research in-house We don’t rely on other people’s research We might of course get ideas from others, but we then test those ideas in our FVMR framework The benefit of an investment framework is that it forces discipline when emotions run high Emotions from wild market events can cause you to make rash and costly decisions To avoid this, stick to a framework Our framework relies on data & structure, not just a feeling or opinion Management Is responsible for producing earnings Investors Set the price the company trades at There are 4 Elements to our FVMR framework Fundamentals: Strong profitability shows a company is managed well. We prefer high or rising profitability. Valuation: Shows how the market perceives the stock. We prefer good fundamentals at relatively cheap valuations. Momentum: We try to avoid “value traps” by looking for positive price and earnings momentum. At times, low momentum signals an out-of-favor opportunity. Risk: We prefer low business and price risk. Not every stock is going to fly; some just provide stable returns and strong dividends. FundamentalsInfo. Tech has a 23% ROE; Health Care, Cons. Staples, and Energy are each earning 20% ROE 15%
31 minutes | Mar 1, 2023
Logan Nathan – Your Supplier Is an Extension of Your Business, Not an Outsider
BIO: Logan Nathan is the founder and CEO at i4T Global. He’s a digital transformation specialist, a serial startup entrepreneur, a board director and advisor, and an angel investor. STORY: Logan offers time-tested advice on how to launch a successful software product. LEARNING: Focus on customer experience and satisfaction to win confidence. “The culture within you as a supplier is vital in building trust with your client.” Logan Nathan Guest profile Logan Nathan is the founder and CEO at i4T Global. He’s a digital transformation specialist, a serial startup entrepreneur, a board director and advisor, and an angel investor. We won’t discuss Logan’s worst investment story in today’s episode because he shared that in Ep374: Your Solutions Are with Your Advocates Talk to Them. Today we’ll discuss what’s been happening with his business over the last few years. He’ll also offer time-tested advice on how to launch a successful software product. Logan’s business—i4T Global—provides a Field Services Management platform for people or companies that manage property assets on behalf of their clients. The platform automates most of the work creating efficiency, compliance, and safety easier. In doing so, it brings more tenants.How to hire and work with the right developers If you’re looking to hire a developer/s for your new software, Logan’s advice is to go to credible supplier platforms, such as LinkedIn. Here, you can independently verify client testimonials of various developers. This will help you ascertain whether they can do what they claim to do. Secondly, before you hire a developer, ensure you make them understand your business requirements, not just your technical needs. Agree on what happens if you don’t get what you want, how changes will be made, and the penalty for not delivering on the agreed deliverables. A frank conversation with the supplier about current and future business requirements is crucial. Agree on what should happen as your business grows and requirements change. Will the supplier grow with you? Do they have the agility to deliver what your business needs promptly?Focus on the customer experience and satisfaction Logan believes delivering top-notch customer experience is the key to running a successful software business. His advice is to have a process that allows you to fully understand the customer’s requirements and deliver them as requested. To achieve this, you need a communication channel that collects customer feedback regularly. To continuously offer services that fulfill your customers’ requirements, you need to understand the changes in your industry. Then reiterate to provide more benefits, even if your customer hasn’t requested them.How to win the confidence of your customers Building a relationship with your client will guarantee you a return customer. The best way to build a relationship is to win their confidence by delivering your value proposition. When a customer requests for a piece of change—which will happen often—document the request, understand the business requirement and then deliver it on time, every time. Doing this will show the client you’re reliable and want to stay with you long-term.Andrew’s takeaways Create a minimum viable product (your...
59 minutes | Feb 28, 2023
Louis-Vincent Gave – Your Success Comes Down to Portfolio Sizing
BIO: Louis-Vincent Gave is the Chief Executive Officer of Gavekal, a Hong Kong-based company he co-founded over 20 years ago with his father, Charles, and Anatole Kaletsky. STORY: Louis’s father invested one million dollars in a portfolio of 10 Asian companies. Louis was managing this portfolio, whose size was disproportionate to his earnings. He was earning $50,000 annually at the time and had never owned a portfolio this big, which made him sick. LEARNING: Portfolio sizing matters tremendously. Never under or over-position yourself. Invest with people who have experience. “Know your own weaknesses and don’t put yourself in a situation that plays to those weaknesses.” Louis-Vincent Gave Guest profile Louis-Vincent Gave is the Chief Executive Officer of Gavekal, a Hong Kong-based company he co-founded over 20 years ago with his father, Charles, and Anatole Kaletsky. Gavekal has grown to become one of the world’s leading independent research providers to institutional investors around the globe. Louis has written seven books. His latest, Avoiding The Punch, published in 2021, deals with the challenges of building resilient portfolios in inflationary times.The real challenge of venturing into China Before getting down to Louis’s worst investment ever, he spoke to us about his strategy to build a market for his company in the Chinese market. His company, Gavekal, has operated successfully for over 20 years. When Louis started Gavekal in Hong Kong in the early 2000s, it was evident that China would be a massive factor in the global economy. There was a huge gap in understanding China’s role in the world and people’s understanding of it. Louis and his father figured they could try to monetize that gap. So they started an independent research firm. It was a macro research firm but with a strong China angle. Louis has tried to build up his expertise in China over the years. According to Louis, the real challenge in China is always getting a clear picture. Many foreign investors don’t trust the available data.How to succeed in the Chinese market Louis says that the important thing for a foreign investor eyeing the Chinese market is to put things into context. You need to relate the economic data and the policy pronouncements to what you hear from corporations. So when Louis and his father entered the market, they talked to the corporates and policymakers to put together a picture that was as close to the truth as possible.Worst investment ever Louis grew up very privileged. His dad had been a very successful money manager and had made much money selling his firm to Alliance capital in the mid-90s. After the sale, he retired. At the time, Louis was in Asia when the Asian crisis hit, and everything went bust. Louis’s dad called and told him he wanted to invest a million dollars in 10 high-quality blue-chip Asian companies. This was in August 1998. Louis earned $50,000 a year, so managing a one-million-dollar portfolio was a huge deal for him. Between August and October, the portfolio fell by 60%. Louis was literally sick of looking at these positions where, on every individual position, he was losing more than his annual salary. Then between October and December, the market started stabilizing. By March, the portfolio was...
24 minutes | Feb 26, 2023
Adam Rosen – Build to Sell From the Start
BIO: Adam Rosen is an entrepreneur who loves to support business owners and share his rollercoaster startup journey to help those on a similar path. STORY: As soon as Adam was done with college, he co-founded a business. He gave his all to the business for four years and enjoyed little success. LEARNING: Get to product market fit as quickly as possible. Focus on delivering something that the client wants to use forever. “Every single business owner has a responsibility to build their company to sell it from the start.” Adam Rosen Guest profile Adam Rosen is an entrepreneur who loves to support business owners and share his rollercoaster startup journey to help those on a similar path. He is the founder of Email Outreach Company, where they do automated email outreach to get startups on more sales appointments without the hassle.Worst investment ever Coming out of college, Adam had an excellent opportunity to make a good amount of money. He decided to start his first business—with two other college mates. The company wasn’t funded in the first year. The founders didn’t take any salary from the business. Adam had to work in a restaurant on weekends to keep his bank account going. In the second year, the founders raised capital. The next four years were a roller coaster. The company had some decent success, but Adam never paid himself. He was literally living on his credit card for years, thinking he would get his big break soon. And it never happened. The founders sold the company but didn’t get much for it. They simply took the exit deal to ensure their customers could end up in a good spot and the business could live on.Lessons learned Get to product market fit as quickly as possible. Churn can be a killer for any business. Find the reality of your business as soon as possible; are you profitable or not? Andrew’s takeaways Before entering the startup world, understand that you’ll be trapped in that situation. So be sure you’re doing the right thing with the right people. The startup world has no badge of honor for not paying yourself. Focus on delivering something that the client wants to use forever. Actionable advice Focus on profitable systems. Can your system get you new customers and keep those customers? Can it make your business profitable? On top of all that, build to sell from the start.Adam’s recommendations If you want more sales appointments, or you’re doing cold emails alone and not getting the responses you wish, Adam recommends checking out eocworks.com. You can book a call through his calendar directly on the website. He’ll talk with you about either his company doing this for you, helping you with your current approach, or just talking about startup sales and getting more sales opportunities.No.1 goal for the next 12 months Adam’s number one goal for the next 12 months is to get a 2x revenue offer for his company. On top of that, he wants to be happy, enjoy life and keep traveling the world.Parting words “Thank you, Andrew; keep up the good work. For everybody, just keep on going. Perseverance and spirit have done wonders in all ages.” Adam Rosen [spp-transcript] Connect with Adam...
12 minutes | Feb 23, 2023
ISMS 6: UK Looks Most Interesting Among the Top 5 Stock Markets
In this presentation, I will introduce you to our FVMR investment framework And will apply it to assess the attractiveness of the top five developed countries in the world: US, Japan, Germany, UK, and France. Click here to get the PDF with all charts and graphsWhat do you think: Which of the largest country’s stock markets is most attractive?What is your investment framework? Our investment strategies for ETFs and stocks come from our FVMR framework We backtest and optimize the strategy for the factors that have worked best in that market We do all our research in-house We don’t rely on other people’s research We might, of course, get ideas from others, but we then test those ideas in our FVMR framework The benefit of an investment framework is that it forces discipline It’s easy to be emotionally affected by market events, which can cause you to make rash and costly decisions To avoid this, we stick to our framework A robust framework means our strategy relies on data and structure rather than just a feeling or an opinion Management is responsible for producing earnings Investors set the price the company trades at There are Four Elements to our Framework Fundamentals: Strong profitability shows a company is managed well. We prefer high or rising profitability. Valuation: Shows how the market perceives the stock. We prefer good fundamentals at relatively cheap valuations. Momentum: We try to avoid “value traps” by looking for positive price and earnings momentum. At times, low momentum signals an out-of-favor opportunity. Risk: Prefer low business and price risk. Not every stock is going to fly; some just provide stable returns and strong dividends. For this study, we look at the top 5 Developed Market countries ranked by GDP USA – US$23trn Japan – US$4.9trn Germany – US$4.2trn UK – US$3.2trn France – US$2.9trn EBITDA margin remains high in the US and UK at above 20%, lowest in Japan at 13% Net margin is a remarkably high 12% in the US and UK, double the global LT average At 7%, Japan is still double its long-term net margin of 3% At 7% Germany is nearly double its long-term average of 4% US companies have a relatively high 19% ROE, above its 16% LT average Japan’s low 9% ROE is partially driven by the low interest rate environment Germany is just slightly above its 11% long-term average European companies have paid out more cash to shareholders US companies also return cash to shareholders through buybacks in addition to dividends, a reason this number is relatively low Shareholder yield is about equal across these markets US remains the most expensive market at 19x PE Japan, Germany, and France at 13x UK super cheap at 10x On a PB basis, the US is very expensive at 3.7x UK companies are asset-heavy US revenue/asset: 0.70x Japan: 0.69x, Germany: 0.58x, UK: 0.57x, and France: 0.52x US companies are most expensive again with price-to-cash flow at 13x About 50% higher than the others, which hover between 7x and 8x price-to-cash flow Super low US dividend yield due to expensive market and payouts coming from share buybacks The UK market now pays a high 4.2% This shows that the market is cheap and also that inflation expectations are high Considering ROE/PB, UK is super...
33 minutes | Feb 22, 2023
Terri Spath – Always Know When to Buy and When to Fold
BIO: Terri Spath is the founder and CIO of Zuma Wealth LLC and has earned top performance marks stewarding billions of dollars at large investment shops through the booms and busts of the past quarter-century. STORY: At the height of the Dotcom boom, Terri bought—on behalf of clients—some terrific companies because she knew how to value, assess, and analyze them. But she kept holding onto the companies when the market tanked instead of selling. LEARNING: Know when to buy and when to sell. Don’t get too attached to your favorite stocks. “If you have great self-discipline, you can figure out how to make money in your sleep.” Terri Spath Guest profile Terri Spath is the founder and CIO of Zuma Wealth LLC and has earned top performance marks stewarding billions of dollars at large investment shops through the booms and busts of the past quarter-century. A renowned expert, Terri is a regular CNBC and Bloomberg TV guest and a sought-after industry speaker. She was named a “Top 10 Inspiring Women of 2022” and shortlisted by the Women in Asset Management awards. She has earned the CFA charter, the CFP® certification, an MBA from Columbia University, and an AB from the University of Michigan. Terri started investing when her father introduced her to the concept of compound interest when she learned she could make money in her sleep.Worst investment ever When Terri came out of Columbia Business School, she got hired by a big company on the West Coast. She had already started investing, as she had learned a lot when studying for her CFA. The philosophy of Columbia Business School is very much in line with Benjamin Graham and Warren Buffett. The philosophy is that value investing relies on picking good companies that have great moats around them and strong management, and you can buy them at a dirt-cheap price. Terri came out of Colombia, well-trained in that arena, and when she started working for the big company, she started putting those ideas to work. At the time, more and more technology and internet companies were coming out. Terri was assigned to the industry and covered all the stocks under that umbrella. She was buying conservatively, following what she had learned at Columbia about buying stuff cheap. Terri didn’t get trapped in the excitement of the new companies. She followed the philosophy she had learned. Terri bought some terrific companies on behalf of clients because she knew how to value, assess, and analyze them. Terri believed she had made good purchases. The frenzy and excitement in internet retail and technology companies pulled the market up. Then some of those companies started to collapse. This ripple effect killed the technology stocks, the NASDAQ, and the broader markets. When everything started going down, Terri decided to hang onto those stocks. She didn’t acknowledge it was time to sell. Terri’s biggest mistake was holding onto what she thought were great companies in terrible markets.Lessons learned Pay attention to the broader markets too. Have the discipline to evaluate when to buy and when to fold to avoid losing your profits. Don’t get too attached to your favorite stocks; always know when to get out. Make sure that you understand the risk. Most investors tend to be better at one side of the trade than the other, but balancing both sides will bring you more success. Have a sell strategy and apply it regularly. Andrew’s takeaways Employ stop losses to help