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Thursday, October 18, 2012

Use Your Edge

In addition the sports explosion around my house this weekend, I had the chance on Saturday to spend a few hours at a gathering of business and professional folks at a networking event.  My wife had a table at the event so I tagged along to see what I could learn and who I could meet. One small group gathered around the coffee table talking about markets and I wandered over and joined.  Anytime I join one of these conversations I listen and grunt a lot without offering too much commentary. I view it as a learning experience. What I learned this week is all too consistent with what I have taken away from similar gatherings.

This was a group of business owners and professionals, not full time investors or traders. They are not in front of the screen with sophisticated tools to evaluate short term market moves. One gentleman was bragging that he “figured out” that David Einhorn was not going to talk about Herbalife (HLF) at last week’s Value Investing Congress and made a few hundred bucks by buying the stock and flipping it later in the week. Another bemoaned the fact that he thought we would have a really week employment report and bought a double inverse ETF and lost several hundred on Friday.

The conversation went on and as I stood listening to this group of investors talked about the stocks they owned and traded. There was much talk of Apple (AAPL) and Google (GOOG) and how third quarter earnings would look for these tech giants. The prospects for local favorites Darden (DRI) and Disney (DIS) were mentioned as well. I heard talk of the same popular stocks you see on TV every day as well as lots of chatter about breakouts, trend lines and such. I have been a part of this discussion a million times it seems and it is always the same.

Individual investors give up all the advantages we have to play a game we cannot win. Figuring out what David Einhorn may or may not do and trying to front run is a loser’s game. If he had presented Herbalife that stock would have tumbled like Chipotle(CMG) did that day. What makes anyone think that while running a business, paying taxes, doing regulatory filings, making it to the kid’s soccer game and remembering your wife’s birthday you can successfully trade a data release? There is an army of economists with super computers trying to guess the number and even they usually get it wrong. Short term trading of the hot stocks puts you in the lion’s den against the professionals and you are not the lion.

All the commercials from the brokerages and advisory services leads individuals to believe they can compete in the trading arena. Odds are you cannot. Successful traders are immersed in the markets as a full time profession. They have tools and capabilities that you simply do not. Even then more traders fail than succeed. Trading is not an easy game that can be won by part timers.

As investors individuals have an enormous edge. We do not have an institutional mandate that limits what stocks we can buy or what percentage of our accounts must be invested in specific asset classes. No one is going to criticize us if we fail to win the quarterly performance game. We do not run the risk of getting fired for having a stock no one has ever heard of in our portfolio. No one is going to search our quarterly reports to make sure we own the popular most recently successful stocks. We have the luxury of not having to care what other people think of our investments.

We have the luxury of waiting. We do not have to play just because the casino happens to be open on a particular day. We can wait until we get the conditions that put the odds of investment success in our favor. We do not have to have an opinion on the next series of economic data but we can react to extreme market reactions to any data set that tips pricing and valuation in our favor. We can buy stocks that in companies that are too small for the big funds or too unpopular for most fund managers to buy.

Trying to play the same game the professional do is a losing game for individuals. Trading the way your brokerage firm wants you to will make them very happy but I doubt it does much for you in the long run.  Invest in sound businesses at good prices and hold for long periods of time. Trade less and hold longer. Worry more about long term profits and less about short term bragging rights and you can beat the pros returns handily.
\Consider how most people will be approaching the current earnings season. It is a losers game with no edge for most of us.As we head deeper into earnings season over the next couple of weeks I am once again amused at all the noise and fury that is concentrated on the reports. It is a quarterly snapshot of a corporation and nothing else. Far from being the holy grail that Wall Street’s short term focused has turned it into the quarterly earnings report and 10Q filing are just a tiny slice of c corporate life span. The report does contain valuable information about the current business and financial status of a company but is just an update. It was never intended to be the stock market equivalent of the Daily Racing Form.

As I roam around the net and listen to the various stock commentators everyone is focusing on, and biting on, these short term reports. Hundreds of billions of market cap will be created and destroyed by how actual earnings compare to the always highly accurate analysts’ estimates.  Incredibly most of this money will be bet on the same stocks that always dominate the news, the high flying high multiple darlings and a few select bellwether type blue chip names. Investors and traders playing the earnings game are competing against the super computer armed market makers, themselves and the big wall street firms  to pick up pennies betting on the favorite.

I approach earnings season a little differently. Please understand that I am not going to engage in the feverish trading activity that will mark the next few weeks. I do occasionally engage in speculation but betting on the unknowable against a player with a formidable edge does not interest me much. I like to look at those companies that are cheap, or near cheap and have run off a string of earnings disappointments. No one cares about these companies except for the shrinking handful of analysts forced to cover them. No one expects anything g good to happen to these companies and often excessively negative expectations are built into the share price.

There are some interesting stocks on my list of disappointing companies. Pico Holdings (PICO) is an interesting collection of real estate, agricultural and water assets. The also have an insurance business in run off mode and investments in fixed income and equity securities. Pico has the misfortune of being an asset rich company in an earnings driven market. The shares trade right at book value but they have a lot of land and water rights that have been on the book for an extended period of time and may be understated in value. There is only one analyst following the company right now after Pico had two consecutive enormous earnings shortfalls.

This stock is a win- win in my eyes. If the company has another bad earnings quarter the shares could drop further and allow me to buy the shares cheaper than the current quote. If conditions have improved no one is going to notice and I can pay around the current quote for a solid collection of assets with an improving earnings stream. The company reports early in November.

Tutor Perini (TPC) is another stock I will be following this earnings season.  The contractor and construction management company is dependent on infrastructure spending and has posted 3 consecutive large earnings short falls. Wall Street estimates of the company have fallen by about 25% over the past three months.  In spite of the weak environment for large scale construction contracts Perini is managing to stay busy. They currently are working on projects like the Tappan Zee Bridge rehab in New York, the Alaskan Viaduct in Seattle and the freedom tower in New York City.  They have an existing backlog of more than $5 billion and pending awards of more than $4 billion. They may not live up to Wall Street’s expectations but this company should make $1.50 or so a share for the full year.

Tutor Perini is a 115 year old company that has been publicly traded for more than 50 years. When the economy firms this company will win more than its share of new infrastructures construction as well as large commercial and industrial projects. I hope they fall short once again so I can pay single digits for a stock that traded in the 70’s less than five years ago.

I have never found it productive or profitable to watch the same stocks as everyone else or trade like the crowd. I will be watching the unloved and unpopular names in hopes earning s season creates an attractive long term entry point.

originally published on real money

Monday, October 15, 2012

Baseball, Markets and God

I have refrained from commenting on the baseball season and the Orioles until it was over. Although the playoffs go on for the Orioles the season is indeed over. It is hard to be terribly upset about this. No one including me expected to see the Birds of Baltimore back in the playoffs this year. No one expected them to win as much as 70 games. Instead we competed for the division title right down to the wire. No one expected us to beat Texas in the play in game. Everyone though the Yankees would sweep the poor tired Orioles. Guess what? We won 93 games, beat the Rangers and took the Yankees to five tension filled games before finally yielding.

Dan Duquette’s strategy of bringing every arm he could find in spring training and then keeping them all in the system somewhere worked far better than I could have hoped. We lost Markakis for much of the year and I suspect Brian Roberts is just done. We were 20th in the majors in batting average, 15th in total runs scored. We had the high honor of being dead last in stolen bases. We were 28th in fielding percentage and 11th in total errors. However were second in total home runs and had one of the best bull pens in the majors. It was not always pretty but somehow this team under Buck Showalter found a way to win baseball games.

We could compete for several years with a few minor tweaks to the team. We have some strong young arms in the farm system. Manny Machado may become a superstar in the league in very short order. There a few bats that looks promising in the minors as well. We have some trade bait type players on the roster that could bring us more young talent to bolster our future chances. Buck will be back next year and if the baseball gods smile on us for even longer than that. 

I had a New Yorker address me in an email forum after the Yankees series saying, take notes Tim, this is how it’s done. With that one statement he reveals himself to be one of the obnoxious fucking New Yorkers who doesn’t know jack shit about baseball and only cares in October. Now, I won’t disparage the Yankees as many others do. This a great organization with strong ownership and a fabulous GM. The truth is only the Yankees CAN do what the Yankees do. They have the money to make it happen and George left a powerful framework for winning. Not only do they have the money to buy what they need, they have a damn good GM in Brian Cashman who is pretty good at figuring out who and what to buy. Kudos to them but for most of baseball taking notes is a worthless exercise.

The rest of us, especially Baltimore, have to go back to basics and build though the farm system and small ball trades that may not include marquee players but make the team better. Building a team around long ball, pitching and a fiery manager has a certain feel to it for Orioles fans. Let’s hope we can replicate that team of the late 60’s and 70’s who won while the aging  over paid and over hyped New York Yankees existed just to kiss our ass as we made our way to the playoffs every year. I would love to see this division become about the Tampa Bay Rays and Baltimore Orioles for a few years and the money whipped fuckers from New York and Boston deal with over aged ballplayers and obscene payrolls fullof underperformers and has beens. We saw it in the first part of the 70s and may well see it again. Whatever happens I am looking forward to making the short drive over to Sarasota for spring training next year and watch the birth of what I hope will be a new dynasty in the AL East. Thanks for a great year of baseball guys.

 Moving onto markets I find that the world becomes slightly more incomprehensible every day. I talk to a lot of people during the course of a week and most of us are in the middle ground and looking for what opportunities may exist in these uncertain times. On either end of the spectrum about 10% of the folks are wildly bullish and another 10% are wildly bearish. For these folks I have one simple question. Are you out of your fucking mind? How could you possibly have a high conviction opinion of market direction right now? We have never been where we are before in modern financial history. Global markets and economies are more interconnected than ever before. The central banks of the world have been on a money printing binge and are over leveraged to a degree we have never seen. More concerning is that all this printing has not really worked. We do not see any real sign of strong growth anywhere but China and that is slowing no matter which set of dubious stats and outright lies are being tossed out by the government this week. The fiscal and dividend cliffs loom large in just a few short months.

Given all that I must be bearish right? Not exactly. The worlds governments are determined not to see the world fall off an economic cliff and seem to be willing to kick the can as far down the road as they have to  in order to delay disaster. Zero interest rates basically forces money into risk assets and this could continue for some time. At a minimum it can continue long enough for those betting against the equity markets to go stone cold broke.

For a US investor the absolute best course of action right now is to not do one single damn thing. Earnings season is upon us and we have the chorus singing both the bull and bear songs in spite of the fact that no one has a clue if this is the beginning of a serious earnings slow down or a trough bought on by spending delays. If you have done this right you have a decent portfolio of cheap stocks bought last fall and during this year’s sell off back in the late spring. You should still have plenty of cash on hand. It is time to sit back and let this play out. If stocks rally on better than expected earnings you can take gains in names that are fairly or overvalued. If the bottom falls out you have cash to put to work as stocks become too cheap not to own. Doing nothing is the best course right now. Fortunately I am really good at that.

While I am on the subject of markets I have to ask what I think is an important question. How the fresh fuck did we ever let it get to this? We used to have stocks and bonds. Then we added options and futures to help both speculators and hedgers to take positions. We should have stopped right there. Instead, always looking for a new way to make money and fuck the public, Wall Street turned the keys over to rocket scientists who have no clue about the real world. They created shit they don’t even really understand. The banks and brokers then created trillions of dollars of intertwined derivative obligations that no one can decipher and have the potential to destroy the banking system. Just because we can create complex rocket ship products does not mean we should. Did we ever really need to repackage mortgage bonds that were already slices and tranches of tranches of the actual underlying mortgages? Most derivatives do not fulfill a real function except to provide a profit center for their creators. If investment and merchants banks were still partnerships with the owners capital at risk I can tell you that none of this shit would have been created much less traded. It is much easier to speculate and trade in financial nuclear weapons if it is not your money at risk. There is much to be said for simplicity and common sense but both seem to be sadly lacking on today’s financial markets.

I have spent a fair amount of time of late thinking about religion. Much of this is sparked by the recent Muslim riots and calls for laws preventing defaming the prophet of their faith. I am not on a first name basis with God but I am pretty sure that no god meant for this be the central faith of the world. I keep hearing from moderate Muslim that Islam is the religion of peace. Excuse me but I sure as shit do not see it. In the parts of the world where Islam holds sway I see violence, ignorance, subjection of women, illiteracy and pure hatred of everyone who does think like the local mullah. This is all blamed on the small percentage of Muslims that are extremists. Forgive me but I do not see anyone who claims to be a moderate peace loving Muslim condemning them or helping to eradicate the so called extremists. Furthermore I have read your books of faith and they seem pretty damn violent to me. I view Islam as serious threat to a peaceful world and cannot fathom how intelligent people can follow such a hate filled and violent faith.  The religion itself strikes me as extreme and harmful to its followers to say nothing of those they would convert at the point of the sword.

The other train of thought is aimed at those who would call themselves Christians, especially those of the conservative version of the faith. For a group whose God gave you the commandment to love one another you sure seem to hate a lot of people. You invent and spin texts to prove that it is right and just to hate everyone who does not share your view of the world. Rather than love, you loathe those who thinks differently than you . You hate gays, women who want to make their own choices in life, doctors who make what they considered to be the most humane decisions, politicians who do not vote the way you want, and pretty much anyone who does not think exactly as you do.  You encourage ignorance and ignore science and discovery. You think we should base our government and society on your narrow minded beliefs. You do not like abortion but think the death penalty is A-okay. All of which given the commandments to love one another and judge not lest ye be judged is pretty suspect.  To say nothing of the central doctrine of forgiving others as God has forgiven you. Not a shit ton of difference between and your narrow minded Muslim Brothers of the book.

I think a lot about Jesus’ statements about money changers and his idea of selling all that you have, give to the poor and follow him. I drive around town, the state, the country and I am in absolute fucking awe of the amount of prime property owned by churches. Then I contemplate how much money pours into the offering baskets every Sunday and I think I have a way to solve many of our social ills. If you sold the trillions of dollars’ worth of property and devoted the tens of billions thrown in the basket every Sunday how many schools could be built? How many people could be fed? How many micro loans could be funded to create small businesses and jobs? How serious are you about this whole love one another thing? Love one another, feed the poor, and forgive. You Christian folks should actually try this shit sometime instead of building impressive edifices from which you may judge and hate the rest of humanity.

I am pretty sure there is a god or universal power. Perhaps this deity did not create us individually but merely allowed the mathematics to develop that allowed us to exist. Maybe He or She was simply bored and created us a celestial comedy channel. But a look around at the world in which we live in convinces me that there is a God that created us and gave us a world of wonderful things to appreciate and enjoy. I think that any God that gave us love, music, literature, sex, sunsets, beaches, mountains, sunshine, rainy days and baseball is going to be highly pissed off when you present yourself afterwards and tell her that you eschewed all that good stuff in hopes you could cut a better deal later.

 You are born into a world of sunny days, glorious oceans, serene lakes, first kisses, 10,000th kisses,the smell of a newborn, the laughter of a child and the love of a parent. To ignore all this is a sin. Along the way you have good cigars, wine, friends, gin and tonic, Miles Davis, Mickey Mantle, Beethoven, Twain, sweaty sex, sleeping in, lazy dogs and long walks at twilight. To spend your days inside a sterile man made building exploring ancient texts for a justification for your prejudices and bargaining with God for a better life banging 72 virgins or playing harp on a cloud seems foolish and downright disrespectful to the god who gave you such blessings.

I think I will start a new religion. I will call it the religion of no fucking clue. We are pretty sure that there is a god and the he loves us and forgives us out mistakes since he programmed to us to be prone to numerous such. He created an awesome world for us to live in and while not everything will be perfect and there will be pockets and places where uncontrollable evil will occur all in the all the world is pretty decent. We do not understand the bad shit any better than those who claim to have all the answers but we do our best to fix what we can and accept what we cant. We have no fucking clue what it all means or what’s next but we know what we have right here, right now. We hope there is an afterlife and it is an Irish Pub with heavenly ESPN , lots of interesting people and all our favorites from history and our own lives wander in and our but we accept we have fucking clue.  I hereby proclaim myself the prophet and high priest of the religion of no fucking clue and issue these proclamations:

Do no harm. Try to help if you can but at least don’t hurt anyone intentionally. Work hard, play fair and resist the temptation to fuck others for personal gain

Have lots of sex

Sex is better when mixed with love. It is like bacon and eggs. Both are pretty good on their own but even better together.

Read lots of books. Fiction,  nonfiction,  history,  mysteries,  poetry and trashy novels. Read them all and often. We may or may not have written the real secrets of life in some book somewhere and you will need to read as many as possible to find it

Drink a lot of wine. Its good stuff, relaxes, lowers blood pressure and tastes good. Helps facilitate drunken sex and falling in love as well which is keeping with proclamations #2 and 3.

Listen to lots of music. In a perfect day you will hear more hours of music than you watch TV. Listen to all kinds of music. Except rap and metal. Some other evil ass religion invented that stuff. Just nasty.

Do not take what is not yours. I don’t care if you call it theft, redistribution, taxes or armed fucking robbery. If it is not your do not take it.

If you can help someone do so. Specialize in hand ups not handouts but do what you can to make the world a better, happier place than you found it. If you do give a handout then give it and be done. It is a gift, not a power grab. Give it, take your karma points and move on.

Loans to relatives and friends are gifts. Viewing it this way will relieve a lot of stress since there is almost no chance you are gonna get the money back. Again, take the points and move on.

Watch lots of sunsets. They are beautiful and calming. Same can apply to sunrises but those fuckers happen awfully early in the morning.

If you love someone tell them often. If you dislike someone keep that shit to yourself. No one really cares.

Fuck fear and being afraid. Most of the crap you worry about will never happen. Even if it does happen if it doesn't kill you it is not fatal and you can recover. If it kills you really won’t give shit about the problem afterwards. Marley was right. Don’t worry, be happy.

Work hard. Hopefully it is at something you love. If not, work hard at what you have until you can do what you love. Don’t worry so much about retirement. That sounds boring as shit anyway.

Take lots of vacations.

Laugh a lot. Life is fucking hysterical most of the time. Don’t think so? Consider the mechanics and plumbing of the sex act. Or the fact that some politicians really believe government knows best. This shit is a crack up.

Love dangerously those that you love. By dangerously I mean risking to be yourself and show your flaws and accept theirs. You are not perfect dipshit. Don’t expect your lovers and partner to be. Or your kids for that matter. 

Watch lots of baseball. Don’t root for the Yankees unless you actually live in New York. You should always root for the Cubs at least a little no matter where you live.

Friends are important. Make good ones and hold fast.

Forgive quickly. Other people are just as entitled to fuck up as you are.

Enjoy all the good things of life. Savor the moments that make up a life.  Even the meanest, ugliest life has moments of stunning beauty. Hold onto those above the bumps and grinds of day to day existence.

There will be rain and tears. Embrace and accept that fact. Time does heal most wounds and you can carry on. Happiness and sunshine need a comparable to be meaningful.

Life on balance should be fun and full of raucous joy. If not what the fresh hell is the point of all this?

I’m pretty sure God would like you to get to heaven with bruises  and a  hangover thanking her for the incredible ride.

We do not know what is next but we can damn sure enjoy what is here. We have no fucking clue but accept the wine is proof that God exists and loves us (stealing from and rewording the esteemed Mr. Franklin).

Your prophet is something of an asshole but send me money anyway.