"..don't follow leaders, watch your parking meters..." -Bob Dylan, "Subterranean Homesick Blues"
Articles by Steven Hecht
Random Musings in the Psychology of Financial Investing
Orange Peels & Ethics
As a financial manager and a member of the Ethical Culture Society, I constantly attempt to balance building capital with owning companies I believe offer products and services that positively enhance the quality of life on our planet. I recently had the opportunity to spend an hour and a half speaking with the seventy three year old chairman of New York Stock Exchange listed Flotek, Jerry Dumas. (symbol FTK) I was very favorably impressed with Mr. Dumas, his background, and his company.
I was first introduced to Flotek in 2004, when it was just getting started, by a friend who knew of my interest in ethically oriented companies. Flotek is a chemical/equipment company whose customers are in the oil service field. Their primary product is a biodegradable emulsion that is made from orange peels. The peels contain an oil that can be processed into an emulsion, that when flushed into a deep fractured well with water pressure, releases trapped oil and gas. Flotek has another division that manufactures pumps and lifts used in mining and oil service.
Now anyone who has invested in the financial markets this year knows the carnage that has ensued. The deleveraging of the massive debt spiral of asset backed securities has caused a worldwide recession. Flotek has not been speared. Its stock after rising from single digits in 2004 peaked in late 2007 at $55 per share. It now trades at the lowly price of $3 per share despite expected earnings of a $1 per share in 2008. As Jerry Dumas counseled me, after spending fifty years in the oil business, boom or bust are the norm. Flotek’s balance sheet is healthy. They issued a $115 million 5.25% convertible bonds to finance a highly profitable drilling company acquisition and they are actively paying down a $30 million dollar revolving credit with Wells Fargo Bank.
Its been a brutal year for investors. Fear of any investment other than direct obligations of the U.S. Government has caused devastating drops in the equity and bond markets. The Federal Reserve has had to place billions of taxpayer dollars into the private sector banks to stabilize the financial system. All leading financial institutions have been brought to their knees or like Lehman Brothers and Bear Stearns have been totally put out of business by their reckless use of leveraged financial products.
Flotek is a small capitalization company that was crushed by a raging bear market. Its primary product is made from orange peels and they are profitable. At some point the endless bad news becomes fully discounted by investors. Great fortunes often originate during the blackest of times. On a risk/reward basis Flotek offers much upside and $3 points of downside from current levels.
I have owned Flotek for the past four years and believe it is a small, well managed company, with sound management, and a product that is safe for the environment. Orange peels and ethics make a lot of sense.
Babe Ruth’s Bath Robe
Years ago I attended an antique fair at the Atlantic City Convention Center in New Jersey. It was during a period when the sports memorabilia craze was just beginning to burgeon into a multi-million dollar industry. There were several booths that focused primarily on what seemed to me esoteric items like baseball cleats, jerseys, caps, beer bottles, all kinds of pennants, pins, score cards, signed baseballs, etc. I saw a table with several old time ball players hawking their autographs for $50 a throw. Bob Feller was there and I believe several lesser known N.Y. Yankees.
The strangest item I saw was a big, silky looking, maroon bathrobe in a tall glass case. It immediately reminded me of the skits Jackie Gleason performed wearing a similar robe when he was Reginald Van Gleason, haughty millionaire. On closer inspection I saw the robe had a big tear under the right arm pit and was a bit frayed around the sleeves. Near the bottom of the case was a picture of Babe Ruth wearing purportedly this same robe, looking regal, in his Riverside Drive, New York apartment. There was a small card in the case with the price of the robe. It was $20,000! The dealer proceeded to tell me that he had a letter of authenticity from the Ruth family.
Now we all know that beauty is in the eye of the beholder. Whether its art work, another human being, or a an old bath robe , each of us has a psyche that colors how we see the world and how we react to external stimulus. The Babe, no doubt, was a sports giant, equivalent to a modern day Michael Jordan or Tiger Woods. His heyday in the roaring 1920’s and depression era 1930’s made him an idol to many Americans during a simpler time when baseball was truly America’s pastime. I could see, in a bizarre way, how owning the Babe’s bathrobe could appeal to certain fans. He was a beloved historic sports figure.
Whether its the Duchess of Windsor’s cigarette case, the Babe’s bathrobe, a lock of Elvis’s hair, or shares in Exxon Mobil, buyer’s and seller’s should make two conscious decisions. One is a purely economic decision, the other somewhat more intangible and harder to define.
Does owning or selling the desired item provide greater marginal utility than the required enumeration that will be received or surrendered to complete the transaction? This is somewhat of a personal judgment, all of us are slightly different in our view of what is valuable. Possessing a cigarette case that was owned by the woman whose desirability caused a king to abdicate his thrown has a strange attraction to certain people. Placing a dollar value on that decision is highly subjective.
Secondly, will the possession have greater value in the future? Judgments about the future are sometimes best left to fortune tellers and their crystal calls. Mere mortals have a poor track record at seeing the future, just ask the financial wizards who bet the ranch on mortgaged backed securities over the past several years. If the owning of the Babe’s robe provides someone with unfathomable joy and they have the money maybe my second question is superfluous. There are many aspects of life that can’t be measured by monetary worth. It should be noted that divorce attorneys make an excellent living from people who require them to monetarily measure what they they previously believed to be immeasurable, like emotional feelings.
My point of this recollection of the Babe’s robe is that measuring the future from a purely monetary perspective should be as unemotional as possible. Investing in real estate, memorabilia, stocks, bonds or art work is a belief that their value will rise and a profit will ensue. If your granddad loved the Babe and you loved your granddad by all means acquire the robe for sentimental reasons. The only caveat is that you should never mix sentiment with monetary gain.
Financial products, like stocks, are often less sentimental, but every bit as complex emotionally. Money and the loss of it have a powerful effect on one’s psyche. The current bear market has extracted a huge amount of psychic duress from investors. The bad times will end at some point and economic activity will again show positive growth. Now that would be something to get sentimental about.
Money… Ethics… Investing… An Unholy Alliance?
Like oil and water using the words money and ethics in the same sentence may seem like a non sequitur. Money. Ethics. These words, to many, seem diametrically opposed to each other. Its been said that behind many great and not so great fortunes is a smoking gun of treachery, deceit, and dark deeds. If money is the root of all evil then how does an ethical person pay his bills and save for the future? The daily business headlines are chock full of tales about corporate malfeasance and abuse of the public trust. The world of business is generally perceived as a vicious jungle where the weak are crushed and the bottom line takes precedence over all other matters.
While it is certainly true that in a capitalistic system profits are the one true measure of success, there is some good news to report. Its turns out money and ethics do have much in common. Any corporation large or small ultimately lives by its reputation. Ethics must sit at the top of the mountain for any successful company that wants the trust of the consumers and investors. It can take years to build a brand to the point where it has critical mass and a loyal following. Whether you are selling baby food, investment advice, pharmaceuticals, or construction equipment your product must have the integrity of its people behind it. There are very few second acts once the public perceives your product is flawed by dishonesty or inferior quality.
Profits and ethics are in reality part of the same equation. A corporation that wishes to grow and increase its financial return to its owners must balance many balls. It requires the talent to manage and produce a product that the public desires, then it must be marketed in way that the public believes makes it superior to alternative choices, and finally it must take responsibility for its success or failure to meet the needs of its intended customers.
This is a complex journey fraught with tremendous economic pressures for most companies. Human beings are wired psychologically to operate on an emotional balance beam of fear and greed. The drive for success in the marketplace and to maximize return of capital can lead a company or an individual astray with disastrous results for all those involved. Names like Enron, WorldCom come to mind. Thousands of people lost their jobs, billions in wealth was wiped out when corporate officers chose greed over ethics. No doubt there is a myriad of less known companies that have crossed both ethical and criminal lines in the pursuit of profit. Yet despite the often black headlines many companies strive for and achieve ethical behavior beyond reproach.
So how does an investor ferret out companies that adhere to an ethical code that is compatible with their beliefs? By adapting many of the same intellectual mechanics you use to choose an investment for its profit potential. Each of us are small molecules in a much greater universe. We wake up each morning and interact with the world. Eat breakfast, take a shower, get dressed, travel to work, go to the supermarket, watch television, go to the mall, go on vacation, eat at a restaurant, and on and on. All these activities involve choices and decisions. Where you live, where you work, what kind of food you eat, what movies you watch, what style clothes you favor are all conscious choices for most of us.
All of the products and services we choose whether its the brand of toothpaste we brush with or the car we drive are produced by others. As a starting point make a list of several products or services that you find exemplary and would recommend to others. Go to the web or a library and spend a few hours learning about the companies that you find meet your needs. Review their annual reports, even those of us not financially oriented can get a strong feel for a corporate culture by perusing an annual report. How does the company advertise its products? Are they taking full page adds in Good Housekeeping, Golf Digest, or Playboy. Most companies have a corporate mission statement where they succinctly state what they are about. Are they a financially healthy company? Financial success is not necessarily a criteria for proper ethically behavior, but it gives you an idea of how the marketplace is responding to the company. By all means telephone the investor relations department. Almost all companies are very responsive and will have someone answer your questions. Read publications that focus on the companies you favor and see how their competition treats the issues that concern you.
Most importantly, trust your instincts. Each of us are unique with our psychological landscape. Yet none of us are an island unto ourselves. We all inhabit one planet that grows smaller by the day. What effects someone in China or India may very well have consequences for you and your family. You are not alone. The ethics and codes of behavior you aspire to are very likely held by countless others. Ethics and investing must coexist, but not in parallel universes. Each must support the other because both are necessary for a company to be truly profitable.
“The Times They Are a Changin” (Money Never Sleeps)
Possibly the hardest part of investing is having the ability to divorce your emotions, ego, and prejudices from the reality of the financial markets. I recently spoke with a long time investor who is retired and lives (so he says) off the bounty of his investment acumen. I’m always interested in listening to others speak about their perspective on the markets because it is often provides a trenchant picture into that person’s psyche and personality. I’ve read that a person’s personality is formed when they are very young, and this psychological hard-drive changes very little as you age. It becomes the operating system that governs the way you see the world throughout your life. The ability to invest successfully, I believe, is in large part related to this psychological hard-drive.
Whenever I meet a prospective client for the first time I always try to determine their investment psyche to gauge if my investment style is compatible with their objectives. The aforementioned investor told me that he only owns blue chips which included Pfizer, AIG, GE, Microsoft, Bristol Myers, Homer Depot, Intel, and Merck. As he stated, “The Best of the Best”. After singing the praises of these names, he inquired what I thought of his portfolio. Whereby I told him he should immediately phone his broker and sell everyone one of these names before he lost any more money. As expected, he became highly indignant.
I proceeded to ask him how much AIG had appreciated the past eight years. He was unsure, but was certain it had outperformed because it was the dominant global leader for insurance products. We both looked at my computer screen where I showed him that AIG topped out at $100 a share in early 2000 and today eight years later was trading hands at $43 per share. A 57% loss not including inflationary losses of buying power! So much for the global insurance giant. We went down the list, Pfizer $50 in 2000, $20 today, GE $60 in 2000, $32 now, Microsoft $50 to $30, Home Depot $70 to $30!!!! All his wonderful blue chips were down on average 50% for the past eight years.
Granted 1999/2000 was a high water mark for much of the market, but he failed to recognize that the “Old Generals” of the 1990’s bull market had long been put out to pasture even though they were still “quality companies” as he continuously told me. When the financial markets began to recover after the severe bear market of 2000-2002, the GEs and AIGs continued in a financial coma while new generals, like the once scorned coal, iron ore, natural gas, machinery names were the new darlings. By not adjusting his holdings and falling in love with the names regardless of their abysmal performance, he had destroyed over 50% of his investment capital. This does not even take into account the enormous opportunity costs he incurred.
Its true that no bells are rung at market tops or bottoms. Its much more intuition, a degree of luck, and sharply focusing on the world in which we live that enables successful investing. The 1990’s were all about technology. Names like Cisco, Intel, Microsoft, spawned the Internet Highway and a information revolution that forever changed the way humans communicate and live. Investors in these dominant names, who had the fortitude to stay the course over the 1990-2000 period, more than quadrupled their money. When this technology bull grew old and died in 2000-2002 a new investment landscape was born. The world had enough computer chips and software programs. Everyone was wired to the Internet via a computer and millions of people in countries like China, Russia, India, Brazil, etc. suddenly wanted a middle class life style like much of the population had been enjoying in the USA for the past fifty years. These BRIC countries needed more oil, gas, coal, iron ore, infrastructure for sewage, drinking water, electrical systems to achieve this middle class environment.
This new bull market was the polar opposite of the 1990’s. It is my opinion that life and the world in which we live moves in large macroeconomic waves. These waves last for many years, even whole decades. They are a function of huge shifts in people’s behavior and the way they perceive the world. The ability to recognize the changing of the guard, and shift into the new leaders, while having the investment fortitude to stay with these cycles for their entirety is the true way to build substantial financial wealth. It is never too late to recognize reality and wake from a dream that no longer exists. Leave your comfort zone, question the wisdom of the talking heads in the media, walk a mile in the shoes of someone from another part of the planet. Its life affirming and good for your investment acumen. The times, they really are a changin.
“Never make predictions, especially about the future” Casey Stengel
As a money manager my primary responsibility is to invest client’s money in companies whose value I believe will appreciate in the future. The future whether you define it as ten minutes or ten years is often hard to see. Human beings are very emotional, especially about money. They tend to swing on a pendulum of fear and greed. Modern technology and the warp speed of communications inundates us with information that has the ability to accelerate the pendulum. While most of us care, at least somewhat, about the world around us and the greater good of mankind, it is the day-to day events that control our feelings and moods. What the President said about the latest budgetary measure shrinks rapidly in your food chain of emotions when your stuck in a massive traffic jam and will be late for an important client meeting or your worried because a stock you bought is dropping rapidly.
Watching the whirling dervish of financial markets each day is a front row seat to a battle between the raw emotions of fear and greed. It is often easy to forget that for every trade to be completed there are two willing parties. The buyer who by definition believes his purchase will appreciate and the seller who has the opposite opinion. The most recent plague to beset investors’ emotions is the financial asbestos of sub-prime mortgages. This implosion has rattled investors around the world. Its like a poisonous cauldron that all the major financial institutions drank from. Now they are disgorging this toxic brew all over investors and everyone is feeling nauseous.
By now everyone who even remotely follows the financial news is aware that when interest rates were dropped to 1% after 9/11 to stimulate a paralyzed, shocked economy, many bad mortgage loans were written. This situation was exacerbated by the Wall Street bankers, who packaged these loans into bonds, that were then sold to yield hungry institutions. Now the music has stopped and we are seeing stunning write-downs totaling billions of dollars. The financial genius’s who ran these once mighty investment firms are all being forced to fall on their own swords. While they go off to their country clubs and assuage their bruised egos, the lowly shareholders are left to hold the badly depleted bag.
So how does the individual investor saving for retirement or a college education navigate this financial armageddon? First rule is to not panic. The talking heads on TV or the financial press are often wrong or have an unseen agenda that could conflict with your best interests. Investing is much like a high stakes poker game. You wager based on a judgment of how good your hand is versus what the other players are holding. Stocks often drop because big institutional traders tend to manage money in a very short-term manner. Six months to them is an eternity. Use their short-sightedness to your advantage. Be a contrarian. The majority of mutual funds under-perform the financial benchmarks. Develop a watch list of names you would like to own and at what levels you would be comfortable stepping in at.
Secondly, tune out as much noise as possible. The media is filled with idiot savants who want to lead you to the promised land. Know your own temperament and thresholds of risk and identify one or two news letter advisers or other publications or financial shows that work for you. Do your homework. Study what they are saying. If you agree, go with it. Keep your eyes on the road at all times though. Investing is not a passive sport. It doesn’t mean you have to worry over every bump in the road, but things change. Companies are run by people. Some good, some not so good.
Finally remember that just because Wal Mart is opening down the road, it doesn’t mean your little shop has to go out of business. Many people don’t like the vast impersonal budget stores and want to see a person they recognize when they make purchases. Wall Street is the same way. It is dominated by big institutions with billions of dollars to invest. Be the David not the Goliath. More times than not the crowd is wrong. The big institutions taking billion dollar size write-downs are not always so smart. Think as an individual not as a herd.
It’s Alright, Ma (I’m Only Bleeding) by Bob Dylan (Did Dylan Ever Work on Wall Street?)
Does this time of year leave you feeling all “bent out of shape from society’s pliers”? What’s your thoughts about those news reels showing people locked and loaded at four-AM ready to storm the doors of the local shopping malls intent on buying everything from “toy guns that spark to flesh-colored Christs that glow in the dark”? As one who has CNBC on all day in my office, and thus must listen to the endless stream of mind numbing commercials I can see where the line about “advertising signs that con you into thinking you’re the one that can do what’s never been done, that can win what’s never been won, meantime life outside goes on all around you”, comes from.
CNBC is reporting that some disgruntled Wall Streeters, whose bonus pool has shrunk this year, may sue their employers. I guess that image from “Oliver” of the little street urchin holding up his plate and saying “More, Sir” comes to mind, but Dylan caught their mood quite well by asking if they understand that “darkness at the brink of noon shadows even the silver spoon, the handmade blade, the child’s balloon eclipses both the sun and moon, to understand you know too soon, there is no sense in trying”! As for the myriad fund managers who postulate their opinions ad nauseum on CNBC I’d like to whip a little Dylan on them as well with “… one who sings with his tongue on fire, gargles in the rat race choir… cares not to come up any higher, but rather get you down in the hole that he’s in”.
And finally what would Wall Street be without its partner in crime the Washington politicos? Dylan must have been prescient, especially as we enter a year of presidential primaries, with his thoughts about “… them that defend what they cannot see, with a killer’s pride, security, it blows the minds most bitterly, for them that think death’s honesty won’t fall upon them naturally, life sometimes must get lonely. I wonder if any of the candidates has given thought to the warning, “but even the president of the United States sometimes must have to stand naked”?
As for me “I’m just trying to get out of going through these things twice”, but that’s another Dylan topic.
Mickey Mantle and Wall Street
I recently purchased a mint condition 1961 Mickey Mantle Topps Baseball Card. It cost me $600. I was greatly pleased with my purchase. As I looked upon the smiling face of “The Mick” it brought back wonderful memories of collecting baseball cards as a young child. I read the statistics on the back including Mick’s birthday(October 20, 1931), his height, weight, and home(Dallas). He batted .275 in 1960 and came in second to Roger Maris in the MVP race. It was almost as if I went into a time warp and was back at the local candy store buying my 5 cent packs of baseball cards with their sticks of bazooka bubble gum. The Mick’s baseball card was 46 years old and had appreciated from being part of a nickel pack of cards to $600 over this time frame. Not a bad rate of return. It actually works out to better than 22% a year!
As a money manager I spend much of my day considering and evaluating different investment ideas for my clients. Should I bottom fish the maimed financial stocks, or stay with the hot energy names, or perhaps take a shot at a consumer staple like Procter and Gamble? Its a vicious landscape where hundreds of billions of dollars rattle around daily often in a highly volatile, seemingly irrational manner. Much of it is very emotionally driven by the fear and greed pendulum that exists in all of us. This psychological aspect to the investment arena cannot be accurately measured by even the most sophisticated computer programs, or algorithms.
On a longer-term basis the emotional aspect gets boiled out of the valuation, and equities move up and down based on their earnings and growth rates. Companies are somewhat similar to people in the various stages of their lives. A young company, with lots of promise for its services or products, will often command a higher premium than an older established name whose rate of growth has peaked, due to its size or market for its wares. The vast majority of companies over long periods often fade, and either get merged into more dominant names or simply go out of business like a Woolworth. The rare few, who continually reinvent themselves such as a GE or JNJ, can prove to be very rewarding to shareholders who stay the often bumpy course. Its a very uncertain playing field where superstar companies one year become also rans the next.
Okay so how does the Mick’s 1961 baseball card equate to Wall Street? It doesn’t really except on a philosophical sense. The Mick’s 22% a year return puts him in the Warren Buffet class. My approach to investing is similar to Buffet’s in that I dislike the incessant trading that pervades Wall Street and I abhor making financial decisions under emotional duress caused by a prognostication that “the sky is falling”. By seeing the financial markets in a macroeconomic sense rather than in a micro-economic day-to-day fashion an investor gets a vastly bigger and better picture of how financial wealth is accumulated.
The 1990’s was all about investing in technology names as the Internet and personal computers came of age. Throughout this period there was a whole smorgasbord of frightening moments beginning with massive bank restructuring due to poor commercial lending (similar to today’s environment) followed by violent corrections with the Asian Contagion, Long Term Capital disasters coming to mind. An investor with the fortitude and good fortune to have recognized this trend early on and stayed the course with the Cisco’s, Intel’s, Microsoft’s made more than 5 fold on their money over the ten year period.
After the Internet bubble burst new Generals came on the scene. The world had become a global marketplace and raw materials, natural resources, agriculture names began their macroeconomic cycle. This cycle despite the myriad of fierce financial storms rolls merrily along just like the tech bell weathers did a decade ago. No two cycles are ever exactly alike, but certain fundamental truths of investing withstand the test of time. Long-term investing in leading companies that represent the best names in a macroeconomic cycle outperform all the Wall Street seers. Just go ask anyone who invested in the Mick.
Springsteen, The Coen Brothers, and The Stock Market
How, you may ask, are Bruce Springsteen, the Coen Brothers and the stock market related? I will attempt to explain.
This past weekend I saw the Coen Brothers’ movie, No Country For Old Men, at my local theater. The Coens have the rare ability in today’s movie landscape to constantly make films that are character driven, with unique stories, often set in desperate circumstances. There is something wonderful about sitting in a dark theater and losing yourself in a story about people you actually care about while feeling your heart beat accelerate. It is almost magical. No Country… is about the time eternal pursuit of money, garnished with violence and a cast of anti-heroes trying to make their way in a harsh, unforgiving world. The seemingly commonplace themes of drugs, murder and retribution are woven into a riveting tale that transports the viewer into an alien universe where life and death tread a thin line.
Recently Sirius Radio gave Bruce his own channel on their palette. If you like Bruce’s music it is a kaleidoscope of thirty five years of his recordings including live concerts, rare appearances, and interesting feedback from guest artists like Gary U.S. Bonds and Mitch Ryder. After extended listening you become very familiar with much of the same psychology that the Coen Brother’s characters exhibit. Desperate characters who struggle to survive in a world that offers no succor and even less forgiveness. Pointblank, The River, Jungleland, Back Streets, and on and on each song is a window into the the lives of characters who are victims of a world that stacked overwhelmingly against them. Even the survivors in these songs are left damaged and lost in the darkness that surrounds them. Springsteen’s magic is the ability to make these people come alive in a way that allows you to identify with their plight, much like the lost souls in the Coen Brothers’ movies.
Okay so how does this all tie back into the stock market? As a money manager I stare into the heart of darkness each day as I try and fathom the road to building wealth. The fear and greed that live in all our hearts is on full display while the financial markets provide the battle field for this macabre opera. Striving for economic wealth by investing in financial assets is often a fierce battle of psychology with many unknown variables. There is great volatility and much deceit as the fear and greed pendulum swings to and fro. The cast of characters who inhabit the Coen Brothers and Springsteen worlds have a lot in common with the paper changers and dream merchants who peddle their wares on Wall Street. They all seek to survive in places that can destroy them, lured by promises and lies and a shining sun that is often a Hollywood backdrop with darkness behind it.
Who’s Elephant Is That Anyway?
When the financial markets bang you around it is often easy to suffer self-doubt and loss of confidence. The truth is it is very hard to serve two or more masters. By this I mean the financial markets on a day-to day basis tend to be very schizophrenic, displaying multiple personalities all who beckon that you obey their commands.
The financial press constantly focuses on the crisis of the moment and tends to put out the fire with gasoline. Screaming that the “sky is falling” attracts much greater attention than saying the sun is out. The human psyche for the most part is hard wired to over emphasize the negative aspects of life and take the good for granted. Unless an investor “knows thyself” it is very easy to let your emotions overwhelm rational behavior when the financial markets hit a rough patch.
All financial cataclysms are scary and dark. Be it the Russian missile crisis, 9/11, the Asian Contagion, the crash of 1987, Nixon resigning, to saber rattling in the Middle East, all seem like the world is ending dilemmas when they occur. The elephant in the room that no one seems to notice is that the sun still rises in the East and sets in the West like it always has. Point being, try and serve one master, yourself! Make investment decisions using well thought out strategies and make adjusts when necessary. Don’t be a puppet to the scare mongers and talking heads who treat every event like a life threatening disease.
Fear and Greed : Who’s Your Daddy?
Building Wealth with financial assets is very much about human psychology and understanding the ebb and flow of the fear/greed pendulum. On a day-to-day basis the financial markets are like a schizophrenic person that has twenty personalities all trying to be dominant. Modern technology disseminates information with lightning speed and allows large amounts of money to quickly change course. When unexpected news comes out about a company the fear /greed meter is triggered. Portfolio managers who control billions of dollars attempt to react simultaneously. Very much like trying to run Niagara Falls through a garden hose.
The individual investor is faced with the dilemma of joining the herd from fear of being crushed by the onslaught or attempting to ride out the position. It is my opinion that the crowd mentality is a one way ticket to mediocrity. Human history is littered with the debris of decisions made by the crowd. It is far better to be the “wrong way Feldman” and step back from the maddening rush to follow the crowd. Being a keen observer of the crowd behavior provides the opportunity to exploit their foolishness. Realizing that investing is a marathon not a sprint lets you buy or sell assets when the crowd’s fear greed pendulum is extended in either direction.
Make time your ally. Lottery tickets were invented for people who need to get rich quick. The majority of mutual funds are managed to show quarter to quarter performance. Use their myopia to your advantage. When the herd wants in or out they rarely take prisoners. The yearly high and low for most companies is often twenty or more points apart. Feed the greed and wear the fear. When the herd wants in big time give them your stock. When the herd wants out take a look. Whether the crowd purges its fear or shows its gluttony odds are they are wrong.
Is Your Investment Psyche a Tortoise or a Hare?
I recently read an investment report recommending Jacobs Engineering, symbol JEC, traded on the New York Stock Exchange. JEC, is an engineering infrastructure company with a solid track record. The analyst believed it could rise to $105 a share from its current level of $88 per share in one year’s time. Seeing the target price of $105 made me smile as it brought back my first acquaintance with JEC back in 1986.
My first position in the investment arena was working for a regional bank in New Jersey in the mid 1980’s. The bank was run by a man who was a Holocaust survivor with a personality that was extremely volatile. He ran the bank with an iron fist. Once a week I would meet with him to discuss investments for our trust accounts. Sometime in 1986 he began buying Jacobs heavily for every account. Back then JEC was an obscure, boring AMEX listed company that was unprofitable, and in a very unfavorable industry at that time. I believe it sold for $5 a share. When I questioned the wisdom of his focus on this less than trust quality name, he proceeded to bite my head off in a manner that gave me a great lesson in wealth building.
It was explained to me in an almost violent manner that earning superior returns in equities required the ability to see beyond one’s nose. Any fool could read THE WALL STREET JOURNAL and be aware of current economic trends. True wealth was created by seeing beyond the day’s headlines and sensing where the distant future lie. It was his belief that natural resources be it oil, coal, water, gas were abundant, thus cheap circa 1986, but would someday be dear as the world’s growing population consumed greater and greater quantities of the earth’s bounty. Jacobs, as a designer of power plants, refineries, waterways, etc. would grow far faster than the overall economy.
Jacobs, adjusted for all stock splits was $2 in 1986. Today it is $88 per share. One dollar invested in Jacobs became became $44 dollars in twenty one years. That’s a 24% rate of annual return!
The Internet and modern telecommunications allows information to travel to all reaches of the globe instantaneously. Investors can watch business news shows like CNBC or Cramer’s Mad Money, or Fast Money and be very well informed about THAT DAY’S financial Events. The talking heads on these shows are often savvy, knowledgeable people who can spout their opinions on a myriad of investment topics. The elephant in the room that none of these savants seeks to discuss is that much of their professional existence is superfluous for those who believe long-term investors make far better returns than traders who emotionally react to every financial headline.
Much of what is discussed on these shows is useful if your time frame is the next five minutes. For those with the ability to step back from the day to day chaos we all live with, and see a bigger picture, the investment landscape becomes much clearer. Take a look at the world around you. Getting rich quick is for lottery winners. The rest of us need to develop the ability to see the future. Its there for all to see for those willing to look hard enough.
Most of all remember who won the race between the tortoise and the hare.