A brand is no longer what we tell the consumer it is – it is what consumers tell each other it is.” –Scott Cook
IPOs such as Facebook indicate a much warmer market. For those who might enjoy reading more on a psychological perspective: http://blog.marketpsych.com/2012_02_01_archive.html
Musings about the latest happenings in the fields of investor psychology, behavioral finance, and neuro-finance. We’ll explain what the latest research means for you and your bottom-line.
—
Be skeptical……….
Perfect solutions of our difficulties are not to be looked for in an imperfect world.–Winston Churchill
If you haven’t signed up, then here is another chance. I signed up; I need all the help possible.
Hi Everyone,
Good News!!! The course ‘Model Thinking’ will go live very shortly. When it does go live, we’ll be asking you to officially register and agree to some standard terms and conditions. In the interim, you can now go to the site, at http://www.coursera.org/modelthinking/lecture/preview and watch the first two sets of lectures. The first set of lectures covers the benefits of modeling and provides a framework for the course. The second set covers Thomas Schelling’s seminar model of segregation as well as a model of standing ovations that I developed with John Miller of Carnegie Mellon University.
The full site with quizzes, discussion forums, and all the other bells and whistles will be operational very shortly. I thank you all for your patience. Enjoy the first few lectures!!
As we say in Ann Arbor… Go Blue!!!
Scotte
Just in case you missed these:
Ask for a free quarterly newsletter by emailing: Hewitt.Heiserman@EarningsPower.com,
Ask to be on his email list: kessler@robotti.com,
and his weekly emailings:sfriedman@gmail.com There will be overlap, but you will find interesting articles, videos and value investors. Read ruthlessly, however, I don’t bother to read about Fairholme’s investment in BAC or AIG, because those companies are out of my circle of competence. Only read what benefits YOU.
big picture blog: http://www.ritholtz.com/blog/
Hard work pays off in the future. Laziness pays off now.–Steven Wright
Please take the following quiz. Listen to your intuition and solve the problems as quickly as you can—instantly or in under 2 seconds!
Quiz 1:
A bat and a ball cost $1.10
The bat costs one dollar more than the ball.
How much does the ball cost? ANSWER:____________
Quiz 2:
Try to determine if the argument is logically valid. Does the conclusion follow from the premises? Y or N?
All roses are flowers.
Some flowers fade quickly.
Therefore some roses fade quickly
—
Ok, now take a minute and go back and try to answer the questions with deliberate thought.
The answers and further elaboration will be posted tonight.
The judge asked, “What do you plead?” I said, “Insanity, your honour, who in their right mind would park in the passing lane?” — Steven Wright
Hewitt, a reader, kindly sent me an issue. Informative! Just email and ask to be on his mailing list for the Checklist Investor: Hewitt.Heiserman@EarningsPower.com
Below is my old Cessna Pre-Flight Checklist
You use a check-list so as not to overlook critical information (full gas tanks, alternative airport, correct altimeter) and to be able to have mental capacity free to handle emergencies such as this: http://www.youtube.com/watch?v=IbirtASpgEk&feature=related.
As you learn, build YOUR own checklist. When I first look at a company I quickly like to view the Value-Line to check the company’s historical financial history. Is this a good business with relatively stable, high returns on capital, growing sales, low debt, or–if it has debt–then the terms of that debt, and what is the quality of the balance sheet? What is management doing with excess cash? Then, when looking deeper, I immediately check the proxy to see if management is incentivized properly or has conflicts of interest. Can I understand this business moving forward, etc. Soon the checklist will automatically become part of your process.
From the Checklist Investor:
Dear Friends,
The stock market in the last dozen years has been colder than the summit of Mt. Everest.
But we are not curling up in the fetal position.
Instead, we are improving our skills, so we can compete smarter. To this end, we are also publishing a new e-letter for our friends, Checklist Investor Quarterly.
Our e-letter is inspired by Dr. Atul Gawande’s excellent book, The Checklist Manifesto. Gawande’s thesis is that airplane pilots, engineers, and other professionals can improve their desired outcomes just by following a repeatable process; i.e., a checklist. Gawande also profiles a few money managers who became checklist investors and saw their performance get better fast.
In addition to anecdotal evidence, Gawande also cites academic research by Geoff Smart, a Ph.D. psychologist, who examined how 51 venture capitalists decided whether to give an entrepreneur money. Among the group, Smart identified a top-tier he called Airline Captains for their sky-high 80% median return versus 35% for other personality types. Airline Captains, Smart says, “…took a methodical, checklist-driven approach to their task. Studying past mistakes and lessons from others in the field, they built formal checks into their process. They forced themselves to be disciplined and not to skip steps, even when they found someone they “knew” intuitively was a real prospect.” Smart says the other thinker-types—Art Critics, Sponges, Prosecutors, Suitors, and Terminators—were not failures. “But those who added checklists to their experiences proved substantially more successful.”
Our goal with Checklist Investor Quarterly is to share with you the latest thinking from the Internet—a checklist of great ideas, if you will—on how to help you become a better stock-picker. Our motto is: Checklist Investor Quarterly is free, but the information is valuable. If you like what you see, let us know and also pass this issue along to your friends. Anyone who opts in via an email to Hewitt.Heiserman@EarningsPower.com is welcome on our mailing list.
The Spring 2012 issue comes out in April. In the meantime, if you want to share an interesting article with the rest of us, drop us a line.
Important note: We welcome feedback. But as a courtesy to everyone else, please use “Reply”—not “Reply All.” Otherwise, our In-boxes fill up fast, which none of us want.
Best wishes for a healthy and prosperous 2012.
Tim Beyers
Hewitt Heiserman
Co-editors, Checklist Investor Quarterly
Posted in Housekeeping, Investor Psychology
Tagged Alive, Checklist Investor, Flight, Plane Crash, Value Investing Resources
I’m sorry, if you were right, I’d agree with you.–Robin Williams
Free Value Investing Course Work here: www.Capatcolumbia.com
Professor Kahneman uses a variety of examples to discuss the inside/outside view, statistics and stories and prediction. (1:02:45). This radical pessimist says, “The world makes more sense to us than it really is.” Excellent Podcast! http://www.thoughtleaderforum.com/default.asp?P=909655&S=945705
Other interesting lectures as well at www.thoughtleaderforum.com
Key takeaway: As a value investor when investing in a franchise with a winner take all market-BE PATIENT.
Bernanke Lectures on the Federal Reserve: http://www.federalreserve.gov/newsevents/press/other/20120126a.htm
Counterpoint to Bernanke’s Lectures: http://www.economicpolicyjournal.com/2012/01/march-madness-bernanke-versus-rothbard.html
A value investor who incorporates “Austrian” economics into his investing: http://en.wikipedia.org/wiki/Jim_Rogers
Oglala Sioux, Russell Means gives a State of the Union Address. http://www.economicpolicyjournal.com/2012/01/russell-means-endorses-ron-paul.html More informative than Obama’s recent address to the nation last week. Forget the Paul endorsement and instead ask as an investor–if change occurs at the margin, does the Patriot Act and Obama’s recent rejection of the Keystone Pipeline (http://www.washingtonpost.com/opinions/obamas-keystone-pipeline-rejection-is-hard-to-accept/2012/01/18/gIQAf9UG9P_story.html) raise the cost of capital for American companies in general (P/E multiples become compressed).
Russell Charles Means (born November 10, 1939) is an Oglala Sioux activist for the rights of Native American people. He became a prominent member of the American Indian Movement (AIM) after joining the organisation in 1968, and helped organize notable events that attracted national and international media coverage. The organization split in 1993, in part over the 1975 murder of Anna Mae Aquash, the leading woman activist in AIM.[1]
From his email: This is what Greenwald will probably say, which is partly true. But you can put anything to his framework (once successful), and say that is their core competency.
1. Apple’s core expertise is in design, and they extend this design to all products.
2. They don’t manufacture the hardware. They assemble them and wrap it in a much better design. Everything that goes into the hardware, CPU, Hard disks, Memory is not made by them.
3. They do software – some of it, like the OS, etc. They don’t do everything. Even steve jobs says, Focus, Focus, get rid of the things that we don’t want. He gave the Google guys the same advice. Don’t become like Microsoft – don’t try to do a lot of things. Stick to four or five things.
You can also think about Steve Jobs as someone who has come and reduced the inefficiencies. I mean when each person has three/four devices that he can access information from – it will be so much better if someone integrates the content. If you take a picture, and you can seamlessly see it on your iPad, Itouch, Mac, Apple TV (not yet released), customers would benefit. Same applies to email, contacts, etc. (rather than taking a usb stick and moving it around all the time).
They are creating products where there is a need like any entrepreneur.
In “Other Views on Inflation and Stocks” section from this post:http://wp.me/p1PgpH-kz, the Mises links talk about the pool of real savings. What is the author referring to? Does the real pool of savings track real changes in the exchange of goods and services?
My reply: Not exactly……see below. Savings is not the transfer of REAL goods and services being exchanged back and forth, but the postponement of present consumption for the future.
Why Government Data on Saving is Misleading
The nature of the market economy is such that it allows various individuals to specialize. Some individuals engage in the production of final consumer goods, while other individuals engage in the maintenance and enhancement of the production structure that permits the production of final consumer goods.
We suggest that it is the producers of final consumer goods that fund — that is, sustain — the producers in the intermediary stages of production. Individuals who are employed in the intermediary stages are paid from the present output of consumer goods. The present effort of these individuals is likely to contribute to the future flow of consumer goods. Their present effort however, does not make any contribution to the present flow of the production of these goods.
The amount of consumer goods that an individual earns is his income. The earned consumer goods, or income, supports the individual’s life and well-being.
Observe that it is the producers of final consumer goods that pay the intermediary producers out of the existing production of final consumer goods. Hence, the income that intermediary producers receive shouldn’t be counted as part of overall national income — the only relevant income here is that which is produced by the producers of final consumer goods.
For instance, John the baker has produced ten loaves of bread and consumes two loaves. The income in this case is ten loaves of bread, and his savings are eight loaves. Now, he exchanges eight loaves of bread for the products of a toolmaker. John pays with his real savings — eight loaves of bread — for the products of the toolmaker.
One may be tempted to conclude that the overall income is the ten loaves that were produced by the baker, plus the eight loaves that were earned by the toolmaker. In reality, however, only ten loaves of bread were produced — and this is the total income.
The eight loaves are the savings of the baker, which were transferred to the toolmaker in return for the tools. Or, we can say that the baker has invested the eight loaves of bread. The tools, in turn, will assist at some point in the future to expand the production of bread. These tools, however, have nothing to do with the current stock of bread.
While the producers of final consumer goods determine the present flow of savings, other producers could have a say with respect to the use of real savings. For instance, the toolmaker can decide to consume only six loaves of bread and use the other two loaves to purchase some materials from material producers.
This additional exchange, however, will not alter the fact that the total income is still ten loaves of bread and the total savings are still eight loaves. These eight loaves support the toolmaker (six loaves) and the producer of materials (two loaves). Note that the decision of the toolmaker to allocate the two loaves of bread towards the purchase of materials is likely to have a positive contribution toward the production of future consumer goods.
The introduction of money will not alter what we have said. For instance, the baker exchanges his eight saved loaves of bread for eight dollars (under the assumption that the price of a loaf of bread is one dollar).
Now, the baker decides to exchange eight dollars for tools. This means that the baker transfers his eight dollars to the toolmaker. Again, what we have here is an investment in tools by the baker, which at some point in the future will contribute toward the production of bread. The eight dollars that the toolmaker receives are on account of the baker’s decision to make an investment in tools.
Note once more that the tools the toolmaker sold to the baker didn’t make any contribution toward the present income — that is, the production of the present ten loaves of bread. Likewise, there is no contribution to the total present income if the toolmaker exchanges two dollars for the materials of some other producer. All that we have here is another transfer of money to the producer of materials.
Obviously, then, counting the amount of dollars received by intermediary producers as part of the total national income provides a misleading picture as far as total income is concerned.
Yet this if precisely what the NIPA framework does. Consequently, savings data as calculated by the NIPA is highly questionable.
The NIPA Follows the Keynesian Model
The NIPA framework is based on the Keynesian view that spending by one individual becomes part of the earnings of another individual. Each payment transaction thus has two aspects: the spending of the purchaser is the income of the seller. From this it follows that spending equals income.
So, if people maintain their spending, they keep income levels from falling. And this is why consumer spending is viewed as the motor of an economy.
The total amount of money spent is driven by increases in the supply of money. The more money that is created out of thin air, the more of it will be spent — and therefore, the greater the NIPA’s national income will measure (see Figure 2). Thus, an increase in the money supply on account of central bank policies and fractional-reserve banking makes the entire calculation of the total income even more questionable.
Since this money was created out of thin air, it is not backed by any real goods; income in terms of dollars cannot reflect the true income. In fact, the more a central bank pumps additional money into the economy, the more damage is inflicted on the real income. As a result, money income rises while real income shrinks.
Real Savings mentioned http://mises.org/daily/3640
Is there a glut of real savings? Money is not savings: http://mises.org/daily/1882
Good and bad credit: http://mises.org/daily/3151
From Frank Shostak: Do People Save Money?
Is it true that individuals are saving a portion of their money income? Do people save money?
Out of a given money income, an individual can do the following:
he can exchange part of the money for consumer goods;
he can invest;
he can lend out the money (i.e., transfer his money to another party in return for interest);
he can also keep some of the money (i.e., exercise a demand for money).
At no stage, however, do individuals actually save money.
In its capacity as the medium of exchange, money facilitates the flow of real savings. The baker can now exchange his saved bread for money and then exchange the money for final or intermediary goods and services.
What is commonly called “saving” is nothing more than exercising demand for the medium of exchange (i.e., money). This means that people don’t actually save money but rather exercise demand for it. And, when an individual likewise exchanges his real savings for money, he in fact only increases demand for money. The money he receives is not income; it is a medium of exchange that enables the individual to secure goods. In the absence of final consumer goods, all of the money in the world would be of little help to anyone.
My reply: The extent to which an individual will save is explained by his time preference. Savings is deferred consumption. Deferred consumption allows for resources to be used for longer stages of production which should boost productivity.
Read chapter 14 in Capitalism especially pages: 622-651.
For a graphical discussion of real savings read Man, Economy and State pages: 367 to 451 and 517 to 521.
I will speak to a real Austrian economist this week and ask what are REAL savings and see if I can give you a more concise answer.
Also, let’s say that we have a world currency (dollars) and a world Federal
Reserve. If money is dropped from a helicopter into a jungle and every dollar is picked up by a group of 10 individuals, then those 10 individuals would benefit from essentially receiving free money, correct? Their savings would increase and they could use their new found money to purchase capital goods. Society as a whole would lose because REAL savings and REAL capital goods and services exchange would not increase. There would be more money in circulation chasing the same amount of goods, which would cause prices to rise and/or the value of the currency to decline? Does that sound correct?
My reply: Yes, they would benefit as would any counterfeiter would benefit spending the money first before prices can adjust fully. The gain of the early beneficiaries is matched by the losses in real purchasing power of the people who are the last to receive the money AFTER prices have adjusted. You are correct that real savings would NOT increase. In fact, the structure of production is thrown off which in the end hurts society (boom and bust) in addition to the unfairness of inflation. The money printing distorts production causing mal-investment which depletes REAL savings.
Frank Shostak comments: Consider the so-called helicopter money case: the Fed sends every individual a check for one thousand dollars. According to the NIPA accounting, this would be classified as a tremendous increase in personal income. It is commonly held that, for a given consumption expenditure, this would also increase personal savings.
However, we maintain that this has nothing to do with real income and thus with saving. The new money didn’t increase total real income.
What the new money has done is set in motion the diversion of real income from wealth generators to the holders of new money. The new money that the Fed has created out of thin air prompts exchanges of nothing for something. Consequently, wealth generators have less real wealth at their disposal — which means that the process of real wealth and savings formation has weakened.
In the helicopter example we have a situation in which, for a given pool of real savings, an increase in nonproductive consumption took place. (By nonproductive consumption we mean consumption that is not backed up by the production of real wealth.) This means that the real savings of wealth generators, rather than being employed in wealth generation, is now being squandered by nonproductive consumption.
From this, we can also infer that the policies aimed at boosting consumer spending do not produce real economic growth, but in fact weaken the bottom line of the economy.
In the NIPA framework, which is designed according to Keynesian economics, the more money people spend, all else being equal, the greater total income will be. Conversely, the less money is spent (which is labeled as savings), the lower the income is going to be. This means that savings is bad news for an economy.
We have, however, seen that it is precisely real savings that pays — i.e., that which supports the production of real wealth. Hence, the greater the real savings in an economy, the more are the activities that can be supported.
What keeps the real economic growth going, then, is not merely more money, but wealth generators — those who invest a part of their wealth in the expansion and the maintenance of the production structure. It is this that permits the increase in the production of consumer goods, which in turn makes it possible to increase the consumption of these goods.
Only out of a greater production can more be consumed.
Can the State of Savings be Quantified?
What matters for economic growth is the amount of total real savings. However, it is not possible to quantify this total.
To calculate a total, several data sets must be added together. This requires that the data sets have some unit in common. There is no unit of measurement common to refrigerators, cars, and shirts that makes it possible to derive a unified “total output.”
The statisticians’ technique of employing total monetary expenditure adjusted for prices simply won’t do. Why not? To answer this, we must ask: what is a price? A price is the amount of money asked per unit of a given good.
Suppose two transactions were conducted. In the first transaction, one TV set is exchanged for $1,000. In the second transaction, one shirt is exchanged for $40. The price, or the rate of exchange, in the first transaction is $1,000 per TV set. The price in the second transaction is $40 per shirt. In order to calculate the average price, we must add these two ratios and divide them by 2. However, it is conceptually meaningless to add $1,000 per TV set to $40 per shirt. The thought experiment fails.
The Real Culprit
Rather than attempting the impossible, as far as calculating real savings is concerned, one should instead focus on the factors that undermine real savings. We suggest that the key damaging factors are central bank’s and government’s loose monetary and fiscal policies.
These policies are instrumental in the weakening of the process of real savings formation through the diversion of real savings from wealth generators to non-wealth-generating activities.
The US economy has been subjected to massive monetary pumping since early 1980 via the introduction of financial deregulations. The ratio of our monetary measure AMS to its trend jumped from 1.17 in January 1980 to 3.5 in July 2009. (The trend values were calculated by a regression model, which was estimated for the period 1959 to 1979, the period prior the onset of financial deregulations).
Likewise, the US economy was subjected to massive government spending. For the fiscal year 2009, US federal government outlays are expected to stand at $3.5 trillion.
The outlays-to-trend ratio (the trend was estimated for the period 1955 to 1979) jumped to 4.1 in 2009, up from 3.5 in 2008 and 1.45 in 1980.
The ever-expanding government outlays are also depicted by the federal debt, which stands at $11.6 trillion thus far into 2009. Against the background of massive monetary pumping and ever-expanding government, we suggest that this raises the likelihood that the pool of real savings could be in serious trouble.
That this could be the case is also suggested by the private sector debt-to-its-trend ratio. This ratio stood at 5.8 in first quarter, against a similar figure from the previous quarter. The ever-rising ratio raises the likelihood that the increase in the private sector debt is on account of nonproductive debt. Real savings, instead of funding wealth generating activities, have been supporting non-wealth-generating activities. This weakens the ability of wealth-generating activities to grow the economy.
We can conclude that, given prolonged reckless fiscal and monetary policies, there is a growing likelihood that the pool of real savings is in trouble. If our assessment is valid, this means that US real economy is likely to struggle in the quarters ahead.
In addition, if the pool of real savings is under pressure, none of the government and central-bank policies to lift the economy is going to work. Note that as long as the pool of real savings is holding its ground, such policies appear to be effective. In reality, though, it is the expanding pool of real savings that drives the economy — and not various stimulus policies.
Conclusions
According to latest US government data, the personal saving rate jumped to 4.6% in June this year after settling at 0.4% in June last year. We suggest that on account of an erroneous methodology, the so-called “saving rate” that the government presents has nothing to do with true savings.
Since early 1980s, the ever-rising money supply and government outlays have severely undermined the process of real savings formation. As a result, it will not surprise us if the US pool of real savings is in serious trouble. If what we are saying is valid then it will be very hard for the US economy to grow, for it is a growing pool of real savings that makes economic growth possible.
Furthermore, the growing pool of real savings is the reason that loose monetary and fiscal policies appear to be working. In reality, however, all that these loose policies achieve is a further depletion of the pool of real savings — thus reducing prospects for a genuine economic recovery.
If women ran the world we wouldn’t have wars, just intense negotiations every 28 days.–Robin Williams
The Value Vault is being worked on…..patience.
To sign up for interesting value investing articles and links that are emailed to you every weekend don’t forget to ask to be placed on Steve Friedman’s (Santangel’s Review) email list. Contact: sfriedman@gmail.com
Greenblatt Discusses the Magic Formula and the Psychology of Investing.
I included comments on this article because of what you can learn about investor psychology.
Adding Your Two Cents May Cost a Lot Over the Long Term
By Joel Greenblatt, Managing Principal and Co-Chief Investment Officer, Gotham Asset Management | Posted: 01-16-12
Wow. I recently finished examining the first two years of returns for our Formula Investing U.S. separately managed accounts. The results are stunning. But probably not for the reasons you’re thinking. Let me explain.
Formula Investing provides two choices for retail clients to invest in U.S. stocks, either through what we call a “self-managed” account or through a “professionally managed” account. A self-managed account allows clients to make a number of their own choices about which top ranked stocks to buy or sell and when to make these trades. Professionally managed accounts follow a systematic process that buys and sells top ranked stocks with trades scheduled at predetermined intervals. During the two-year period under study[1], both account types chose from the same list of top ranked stocks based on the formulas described in The Little Book that Beats the Market. But before I get to the results, let me rewind a little and review how we got here in the first place.
In 2005, I finished writing the first edition of The Little Book that Beats the Market and I panicked. The book contained a simple formula to pick stocks that encapsulated the most important principles that I use when making my own stock selections. The problem was that after I finished, I realized that the individual investors I was trying to help might try to follow the book’s advice but use poor quality company information found over the internet or a miscalculation of the formula to make unsuccessful stock investments (or possibly worse, they might use the book to learn how to write run-on sentences). I quickly put together a free website called magicformulainvesting.com that used a high quality database and that performed the calculations as I had intended. Unfortunately, it still wasn’t that easy to keep track of all the stocks, trades and timing that are necessary to follow the plan outlined in the book. In fact, my kids and I ended up having a tough time keeping track, too.
So after hundreds of emails from readers asking for more help in managing their portfolios, I had an idea. It was based on an idea I had long ago about creating a “benevolent” brokerage firm that sought to protect its customers from the most common investing errors. The firm would still let clients pick individual stocks, but those stocks would have to be selected from a pre-approved list based on the principles and formula outlined in the book. We would encourage clients to hold a portfolio of at least 20 stocks from this list to aid in the creation of a diversified portfolio and to send them reminders to make trades at the proper time to help maximize tax efficiency. We wouldn’t allow margin accounts so that customers could pursue this investment strategy over the long-term.
At the last-minute after creating the site, Blake Darcy, the CEO of the new venture and the founder of pioneering discount broker DLJdirect (in other words, he knows a thing or two about individual investors) suggested we make one simple addition. He said, why don’t we give customers a check box which essentially says “just do it for me”? In other words, this “professionally managed” account would follow a pre-planned system to buy top ranked stocks from the list at periodic intervals. No judgment involved, just automatically follow the plan.
So, what happened? Well, as it turns out, the self-managed accounts, where clients could choose their own stocks from the pre-approved list and then follow (or not) our guidelines for trading the stocks at fixed intervals didn’t do too badly. A compilation of all self-managed accounts for the two-year period showed a cumulative return of 59.4% after all expenses. Pretty darn good, right? Unfortunately, the S&P 500 during the same period was actually up 62.7%.
“Hmmm….that’s interesting”, you say (or I’ll say it for you, it works either way), “so how did the ‘professionally managed’ accounts do during the same period?” Well, a compilation of all the “professionally managed” accounts earned 84.1% after all expenses over the same two years, beating the “self-managed” by almost 25% (and the S&P by well over 20%). For just a two-year period, that’s a huge difference! It’s especially huge since both “self-managed” and “professionally managed” chose investments from the same list of stocks and supposedly followed the same basic game plan.
Let’s put it another way: on average the people who “self-managed” their accounts took a winning system and used their judgment to unintentionally eliminate all the outperformance and then some!
How’d that happen? Well, here’s what appears to have happened:
(You might consider this a helpful list of things NOT to do!)
1. Self-managed investors avoided buying many of the biggest winners.
How? Well, the market prices certain businesses cheaply for reasons that are usually very well-known. Whether you read the newspaper or follow the news in some other way, you’ll usually know what’s “wrong” with most stocks that appear at the top of the magic formula list. That’s part of the reason they’re available cheap in the first place! Most likely, the near future for a company might not look quite as bright as the recent past or there’s a great deal of uncertainty about the company for one reason or another. Buying stocks that appear cheap relative to trailing measures of cash flow or other measures (even if they’re still “good” businesses that earn high returns on capital), usually means you’re buying companies that are out of favor. These types of companies are systematically avoided by both individuals and institutional investors. Most people and especially professional managers want to make money now. A company that may face short-term issues isn’t where most investors look for near term profits. Many self-managed investors just eliminate companies from the list that they just know from reading the newspaper face a near term problem or some uncertainty. But many of these companies turn out to be the biggest future winners.
2. Many self-managed investors changed their game plan after the strategy underperformed for a period of time.
Many self-managed investors got discouraged after the magic formula strategy underperformed the market for a period of time and simply sold stocks without replacing them, held more cash, and/or stopped updating the strategy on a periodic basis. It’s hard to stick with a strategy that’s not working for a little while. The best performing mutual fund for the decade of the 2000’s actually earned over 18% per year over a decade where the popular market averages were essentially flat. However, because of the capital movements of investors who bailed out during periods after the fund had underperformed for a while, the average investor (weighted by dollars invested) actually turned that 18% annual gain into an 11% LOSS per year during the same 10 year period.[2]
3. Many self-managed investors changed their game plan after the market and their self-managed portfolio declined (regardless of whether the self-managed strategy was outperforming or underperforming a declining market).
This is a similar story to #2 above. Investors don’t like to lose money. Beating the market by losing less than the market isn’t that comforting. Many self-managed investors sold stocks without replacing them, held more cash, and/or stopped updating the strategy on a periodic basis after the markets and their portfolio declined for a period of time. It didn’t matter whether the strategy was outperforming or underperforming over this same period. Investors in that best performing mutual fund of the decade that I mentioned above likely withdrew money after the fund declined regardless of whether it was outperforming a declining market during that same period.
4. Many self-managed investors bought more AFTER good periods of performance.
You get the idea. Most investors sell right AFTER bad performance and buy right AFTER good performance. This is a great way to lower long-term investment returns.
So, is there any good news from this analysis of “self-managed” vs. “professionally managed” accounts? (Other than, of course, learning what mistakes NOT to make—which is pretty darn important!) Well, I can share two observations that are, at the very least, fun to think about:
First, most clients ended up asking Formula Investing to “just do it for me” and selected “professionally managed” accounts with over 90% of clients choosing this option. Perhaps most individual investors actually know what’s best after all!
Second, the best performing “self-managed” account didn’t actually do anything. What I mean is that after the initial account was opened, the client bought stocks from the list and never touched them again for the entire two-year period. That strategy of doing NOTHING outperformed all other “self-managed” accounts. I don’t know if that’s good news, but I like the message it appears to send—simply, when it comes to long-term investing, doing “less” is often “more”. Well, good work if you can get it, anyway.
[1] The study reviewed the period May 1, 2009 to April 30, 2011. Past performance is not indicative of future results.
[2] Source: Morningstar study quoted in The Wall Street Journal, December 31, 2009, “Best Stock Fund of the Decade.”
These stories happen with so many good investment processes. The investor does not have enough faith to weather the inevitable, occasional loss, and begins to ‘fine-tune’ the system into failure.
One of my favorite mutual fund investments before I started picking my own stocks was (still is) Fidelity Contrafund. And it matches my personality. If the crowd is going one way, I tend to go the other. I am skeptical of the conventional wisdom since I learned most Europeans though Columbus would fall off the end of the Earth and painful lessons, like in the tech and real estate booms. When everyone’s getting into the act, it’s time to hit the exits. I brought that style into my own stock investing and tend to want to do the opposite of what most investors do.
Then there’s one of the best lessons I learned from Jim Cramer. It doesn’t matter where a stock or company has been. What matters is where it is going. Period. (OK, history and a track record count. But that didn’t help investments in companies like GRMN, RIMM… AAPL or WMT at critical points of their history).
Morningstar’s forward-looking, fair value, star, moat and certainty ratings give me something solid to anchor to. The bigger the discount to fair value, moat and higher certainty, the more I have invested. Then adjust my position as it changes significantly, taking profits on winners and buying more as a good company’s stock gets cheaper. A simple spreadsheet based on those principles helps keep my discipline and emotions in check.
I think most investors are a lot like I used to be. Lack of confidence in the businesses behind our investments, putting too much weight in what others, including Mr. Market think and being impatient. I’ve made all the mistakes outlined herein and I’m still no rock-solid, Warren Buffett type. But getting there with practice, study and experience. swsalf
Jan 16 2012, I’m a little surprised that Morningstar would publish such a blatant sales pitch on their website.
Let me see, what are we saying here? Let me manage your money for 1% and I will do better than you can. The returns posted on his website commence 2Q’09 – a convenient time to start keeping score – claim to have beaten the S&P 500 by a cumulative 10% or so to date. Not a word about risk incurred relative to the indices. The value approach he touts didn’t work so will in 2008 – witness some well-known value managers stocking up on Countrywide and other financials when they were so cheap.
The true measure of good management is how well you do in downturns, not whether you get an extra 1% during an up market.
I am a self-managed investor (more than two decades) and I do not see this as a sales pitch. The faults identified are real and need to be addressed if one is to become and remain a successful self-managed investor. If you are unwilling to examine your temperament and actions, then perhaps having your money professionally managed may be a better course to investing success. A key, but unstated point is one must take responsibility for their own decisions, whether it be self-managed or professionally managed. A failure to accept that responsibility will lead to misplaced criticism when things go south.
As to your second point, you have to start at some point in time. Granted, starting in May 2009 does slightly tilt the results, but does not negate the message. As a long-term value investor, I am now and was fully invested during the 2008-2009 downturns. And my portfolio was down more than 50% on paper. That did not prevent me from finding the necessary funds (I did not add money to the portfolio) to take advantage of fire-sale prices on many companies. With some repositioning, my paper loss was more than recovered in less than nine months and the portfolio has grown significantly since then. While I may not have made as much on those positions sold, they were all sold for a profit even at the depths of the downturn.
Although having one’s total portfolio down more than 50% can be unnerving, it is not unusual to see the share price of individual companies vary by 50% or more in a year’s time. This is really what the article is about – first, realizing when the market is miss-pricing a company and using that to your advantage to add to your position; second, to maintain positions over time, not concerning yourself with short-term losses or gains. That is what enabled me to sell positions at the depths of 2008-2009 while still enjoying double-digit Compound Annual Growth Rates (CAGR) on those positions.
The importance is having a well-defined plan which accounts for multiple scenarios, providing the flexibility to respond appropriately with a goal of enhancing one’s overall long-term returns. Without an appropriate plan, the investor, self-managed or professional, is subject to the whims of the market and will inevitably suffer lower returns than otherwise possible.
Thanks, Bob.
Many points of this article are well taken. But I have the same concern as yourself. The manager mentioned that “Many self-managed investors changed their game plan after the strategy underperformed for a period of time.” So why did he decide to write this article now, rather than at the time when his strategy “underperformed for a period of time”? wagnerjb
Joel: you describe the specific stocks as value stocks, yet you benchmark your performance against the S&P500? I suspect the professional performance might look more mediocre if you compared it to a more appropriate benchmark. swsalf
I’m a self-managed investor too and have been for quite a while. My five-year return as of 12/11 was 82% cumulative (Fidelity’s calculation) – that includes 2008.
I would certainly agree with the comments above on having a plan and following it. Granted, the article does speak to that. Indeed, it is probably the main point.
Having said that, returns in up and down markets do depend on what the plan is. Even more importantly when you are retired – as I am – and living on your portfolio. A 50% decline in portfolio value would be a disaster for most retirees, particularly if they are relying on capital gains for income. Withdrawals from a depressed portfolio for more than a year or so can put you in a situation from which you might never fully recover. That’s why there’s been so much in the literature about carrying very large cash cushions recently (which I don’t agree with either, incidentally).
I live on a portion of our portfolio’s income, so moderate swings in total value don’t affect us much. But I do favor equity investing with capital (or more importantly – income) preservation in mind. Most money managers do not. They are competing against an index and big decline is still success, if they’re up over the index. If you’re on a twenty year horizon, this will probably work for you. But if not, a black swan event like 2008 is not good and should be recognized as a probability.
Value does not always work. Wally Weitz presumably knows what he’s doing and his 5 year return is ca. -3% (Morningstar’s number) versus the S&P 500. In large part because of the bets he made that in the 2008 time frame that turned out to be value traps.
My biggest problem with this article is that any “magic formula” for investing needs to be tested through up and down markets. Touting total return over a very good past 2.5 years is at best incomplete-some would say misleading. Rick Ferri
I have two “professionally managed” accounts with formula investing. I believe in the strategy. My results are varying significantly in the small amount of time I’ve been invested. An account opened in April 2010 is losing to the S&P 500 index by 7.17%. Another account opened May 2010 is beating the S&P by 6% (both account results before the 1% annual fee).
My Question for Joel, is “what is the average return for all investors at Formula Investing?”, not just the accounts that started in May 2009. How much does timing changes the results? My personal experience (limited to two accounts, a terrifically small sample size) is over a 13% difference in almost two years. And, perhaps more significantly, average out to ~0% improvement on the S&P 500 index.
I have had a managed account with Formula Investing for 24 months and my current total return is 19.36%. That’s a far cry from 84%. He calls it a compilation of the funds but that is disingenuous to claim those returns. Mdlmdl;
I also have a formula investing account, where I first opened it and funded it about 25 months ago. So far, it has tracked the S&P 500 fairly closely. Magic Formula investing did much better than the S&P 500 from when it first started in about April 2009 thru about December 2009. Since then, it has done about the same (from about December 2009 thru December 2011) as the S&P 500. Joel gives the monthly performance versus the S&P 500 on the website.
I’m thinking that there is a good chance that it has done well in January 2012 given that some of the beaten down bargain stocks have done very well within the last few weeks.
I have a couple of beefs with Formula Investing. First, I hate to pay the 1% fee for what I could really do for myself for a lesser total cost (assuming that you have > $100,000 invested there, which I think now is the minimum allowed to start an account.) All you really need to pay is about 40 trades per year (buys plus sells combined on a running count of 20 stocks) at a discount broker, which would be about $240 per year, much less than > $1,000 per year paid to Joel and company.
My second beef is that Formula Investing sets a fairly high floor to the market cap of the companies that it buys shares for clients. I’d like it to offer the option of bringing down the market cap to, say, around $1.5 billion. Then, I think the formula would return slightly higher results over the long run, compared with big-cap only firms.
I have sent emails expressing this last view to the Formula Investing people. But, they don’t seem to forward my suggestions on up the line. David
www.formulainvesting.com/actualperformance_MFT.htm
You can see that Formula Investing beat the S&P 500 by about 16% from its inception in May 2009 thru the end of September 2009. Then, over the next eight quarters (24 months) it ended up essentially equaling the S&P 500’s performance.
—
My point/question is how much do the results vary based on starting date?
The “formula” selects a different set of stocks on any given day based on Joel’s criteria. My results vary considerably. The results Joel post are, I believe, from one discreet starting date. The results from my “April 2010 to now” account do not equal the S&P (under-perform by ~7%) at the end of the 22 month period.
Is variation expected? Absolutely. But what is the average return of all accounts/starting dates?
A lot of companies have chosen to downsize, and maybe that was the right thing for them. We chose a different path. Our belief was that if we kept putting great products in front of customers, they would continue to open their wallets.
A lot of people in our industry haven’t had very diverse experiences. So they don’t have enough dots to connect, and they end up with very linear solutions without a broad perspective on the problem. The broader one’s understanding of the human experience, the better design we will have.
Again, you can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something – your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.
An iPod, a phone, an internet mobile communicator… these are NOT three separate devices! And we are calling it iPhone! Today Apple is going to reinvent the phone. And here it is.
And it comes from saying no to 1,000 things to make sure we don’t get on the wrong track or try to do too much. We’re always thinking about new markets we could enter, but it’s only by saying no that you can concentrate on the things that are really important.
–Steve Jobs
(contact: Aldridge56@aol.com with VALUE VAULT in subject line for the key)
I uploaded 21 videos of 2010 value investing lectures into a sub-folder in the VALUE VAULT. The VAULT seems cluttered so unless anyone objects, I will place non-videos into folders with sub-categories for easier searching. I will choose a quiet time to work on the vault—probably Sunday.
If you are having trouble opening the folder, please contact www.yousendit.com customer service at 888-535-9442 or (outside the USA) 1-408-385-8491 and email me if the problem has or hasn’t been fixed. I will #$%^&*! find out the problem. I am having no issues accessing the folder or videos so far.
If anyone has an idea for a more accessible storage option, let me know.
I’ve just started digging into the Competition Demystified PDF (in VALUE VAULT) and came across this passage (also mentioned in the “Strategy is Local” PDF) and couldn’t help but wonder what’s changed:
“Apple’s experience stands in stark contrast. From the start, Apple took a more global approach than Microsoft. It was both a computer manufacturer and a software producer. Its Macintosh operating system anticipated the attractive features of Windows by many years— “Windows 5 = Macintosh 87,” as the saying goes. Yet its comprehensive product strategy has been at best a limited and occasional success, especially when compared to Microsoft’s more focused approach.”
This strategy of controlling everything (operating system, hardware, software licenses/developers, content delivery, etc.) is, according to Greenwald, a competitive liability, yet today, as Apple is the most valuable company in the world and the most successful tech company, it is the very reason given for their massive success, and the “special genius” of the recently departed Jobs.
What gives? Is Apple just a fad? Is Greenwald making stuff up? Or is there some other piece of this puzzle I am not considering?
The Reader follows up with: “I thought of another strategic element for Apple. I read this somewhere a few months ago, don’t remember where, but Apple basically made exclusive contracts with its various suppliers such that they guaranteed them large volume up front in return for them not taking orders from competitors, essentially (some arrangement like that).
This resulted in two things:
First, conferred a competitive advantage in supply to Apple because they were able to achieve lowest cost in production.
Second, accomplished the strategic goal of totally denying their competitors access to suppliers of similar quality/cost. This meant that the only way a competitor could create something of Apple quality would be to pay (and charge) a lot more for it. But Apple commanded a brand premium in the market place while the competitors did not. This would be a good example of the Jarillo principle of the premium company charging less than they could, forcing competitors who don’t command a premium to price near cost.
I think normally the issue of “what suppliers do we use and how do we contract with them?” would be tactical. But because Apple interfered with their competitors’ ability to compete by working with suppliers the way they did, this seems to be a strategic consideration as well.
My reply: Like a lecturer before an audience, I was hoping no one would notice that my fly was unzipped. The reader is mentioning the elephant in the room–did Steve Jobs read Prof. Greenwald’s Competition Demystified and just do the opposite–Apple has a closed system for hardware and software. Has Apple been successful?
There are a number of possible answers:
Who said strategic thinking would be easy. Let’s take our time to look at a problem from all sides and go through our strategic logic process. We will soon discuss the Coors case study and then move on to Chapter 6: Compaq and Apple in the Personal Computer Industry or pages 113-136 in the book. Once we have finished the book and all the cases, let’s circle back and study Apple’s current success.
One question that should slap you in the face, “Why does Apple have such a low multiple of earnings and cash flow?” Perhaps the market does not believe that Apple can have real growth and/or the genius of Steve Jobs will no longer drive Apple’s future.
Freedom of choice: http://www.youtube.com/watch?v=A6a9549ZeqQ&feature=g-vrec&context=G22064f2RVAAAAAAAABA
We all have our prejudices. Here is how to deal with them.
Prejudice: http://www.youtube.com/watch?NR=1&feature=endscreen&v=9aVUoy9r0CM
Sensitivity Training: http://www.youtube.com/watch?v=iliNaspGVDg&feature=related
More posts to follow…………
Note the chart below. Thoughts? Hedge Funds are a better deal for the fund managers than the clients. Buyer beware.
The Loser’s Game by Charles Ellis: http://www.scribd.com/doc/78279980/CWCM-the-Loser-s-Game
(Source: www.santangelsreview.com) Failure Speech by Paul Tudor Jones (2009) http://www.scribd.com/doc/16588637/Paul-Tudor-Jones-Failure-Speech-June-2009
Einhorn on Why He Shorted Lehman Brothers’ Stock: http://foolingsomepeople.com/main/TCF%202008%20Speech.pdf
Seth Klarman Interview by TIFF: http://www.tiffeducationfoundation.org/commentaryPDFs/2009_Ed2_COM.pdf
I owe several of you replies to your questions. Bear with me as I finish reading the Wal-Mart and Global Crossing Case Studies.
A new readers asks,
I spent about 3 hours yesterday catching up on posts from your site that I had saved in my Google Reader over the past month. I am not sure how to describe my feeling right now besides to say I was enthralled and inspired. Your website is like finding a value investor pirate’s secret treasure trove on a deserted island. There is such a wealth of material and information and it’s all such high quality thoughts that I kept thinking, “Who the hell is this guy?” Attempts to dig into posts related to answering that question yielded several tantalizing details but the mystery remains.
Are you currently or were you an MBA student? I am trying to figure out where these lecture notes are being pulled from. It says “auditing classes from 2001-2007″… that’s an awful long time and the institution and role of the note-taker are left unsaid. I get you’re trying to focus on quality, not reputation, a worthy goal, but I am fascinated simply from the stand point of why I am suddenly able to access all of this information, for free. It doesn’t really matter, I am just curious, that’s all.
My replay: Thanks for the kind words. I have never been an MBA student. I worked on Wall Street as a broker and investment banker before starting a few companies here in the US and Brazil. Upon selling those businesses, I sought to dig into value investing. I saw that the author of a value investing book was teaching at Columbia Business School so living in Greenwich, CT–only 45 minutes from the campus–I hopped the metro train and sat in on his class. The first class was around 1999, when his students would regularly laugh at the idea of valuing companies when all you had to was buy Price-Line or Yahoo and see the price rise five percent in an hour. All I had to do was sit in the back and keep my mouth shut. Now, I think Columbia is touchy about outsiders sitting in on classes.
But you really don’t have to do what I did. You just need to read, read and apply your independent thinking to investing. Look how Michael Burry learned (See the Big Short by Michael Lewis or search this blog). But, I do believe that becoming an “expert” or skilled investor probably takes 5 to 20 years of intensive commitment. Of course, you never “master” investing which is why the journey is fascinating. Also, several great investors have confirmed my belief that the best way to learn about value investing is through your own efforts and application of principles that you will learn through Buffett, Fisher, Klarman, Graham and your accounting textbooks. There are a lot of dead ends and wasted time if you do not know the proper principles and methods for investing.
Investing really is constant applied learning which is cumulative. Let me share what I have noticed with ALL successful investors:
NOT TEAM PLAYERS:
The investors work alone. Any group decisions for Buffett or Walter Schloss? They make their own deicsions, and they are little influcned by any form of group affiliation. Buffett said of Walter Schloss: “I don’t seem to have much influence on Walter. That is one of his strengths: nobody seems to have much influence on him.” Ditto for Michael Burry.
FOXES, NOT HEDGEHOGS
These terms originate from a remark attributed to the Greek poet Archiloschu: “the fox knows many things, but the hedgehod knows on bigf thing.” Foxes are eclectic, viewing the world through a variety of perspectives, with no allegiance to any single approach. READ WIDELY and not just on finance and economics.
Understanding how markets work is more important to an investor than understanding technology (trading systems).
Note that Michael Burry accumulated his investment knowledge gradually, from his own experience and from reading others’ experience via bulletin boards, rather than from finance textbooks. (Hint: study the www.valueinvestorsclub.com or www.yahoo.com finance boards of intelligent contributors).
Successful investing is a practical craft, not an academic discipline, and certainly not a science. The craft of investing is comprised of heuristics: a toolkit of approximate, experience-based rules for making sense of the world. (See the book: FREE CAPITAL by Guy Thomas).
GOALS FOR THIS BLOG
My goal is placing all this material here is multi-fold:
I have the material so I might as well post for the 20 or so hard-core students who will wish to use it. Many talented investors helped me, so giving back is my responsibility, though sharing this material helps me as much as anyone. I do not expect many readers because few people are suited for long-term, intensive self-directed learning.
There are those who are already in the business who think they already know everything; others seek a conventional route of the MBA; while some want investment ideas/tips–not theory, case studies and practice. I wanted the material on the web for easy searching and access.
Secondly, many people have made excellent contributions to the value vault. Like the quarterback who hands the ball off to the running back who then runs 98 yards down field while breaking 7 tackles and leaping into the end zone, I receive too much credit.
Thirdly, interactions with curious readers help keep my thinking sharp.
Other questions:
I have a friend who has been working on developing a grass-based, intensive rotational grazing miniature farm on an acre of land about an hour north of Los Angeles, California. He looks at all the reading, time, energy and money he has spent on this project so far (and in the future) as the cost of acquiring a “personal MBA in agriculture” (yes, he gets that agriculturalists don’t get MBAs, but he’s approaching this project from the mindset of a businessman).
When I read through your site, I realize I could do the same thing using some of your material, as well as other blogs I follow and various recommended readings, as a launching point to pursue my own “personal MBA in investing” over the next 12 mos or so. The focus on case studies, and the ability to directly apply my learnings to my own small portfolio in real-time provide the perfect means to make real-world application to the theory being taught in the “classroom.” I think this is a big idea and I am very excited as I consider it more and more seriously. I plan to blog my entire journey and produce various supporting course materials along the way (such as reading list, top blog posts, favorite video lectures links, etc.) as well as keep a running tab on costs, so at the end of it all I can show other people what I learned and how much it cost to get the knowledge.
Yes, use the material how you wish. Start a study group and work on several of the cases. Eventually, there will be sections on special situation investing, competitive analysis, valuation, Austrian Economics. Or you can take a case study and develop it further. Seek higher; you can also sign up for courses at the Mises academy (www.mises.org) or go to www.thomasewoods.com to learn about Austrian economics.
I want to thank you again for the resources you place on your site. I’ve only just begun to dig into them and it may be some time before I begin actively participating in your site’s discussion but I do think it’s wonderful already.
And I absolutely LOVE that you’re into Austrian economics, as well. Finally, I’ve found someone else who is interested in synthesizing these two great (and in my view, complimentary) philosophies/disciplines, just as I am: http://valueprax.wordpress.com/about/ (going to need to re-write that soon, though, to reflect my slightly new direction for the site, ie, cataloging my progress in acquiring a “personal MBA”)
My reply: I became interested in Austrian Economics because Rothbard and von Mises had the only coherent theory and explanation for booms and busts. But as I studied fruther, I learned more about the structure of production and time preference which helps you understand the risks in different businesses. Every wonder why a steel company fluctuates more in earnings and price than a beverage company? The distance from the consumers in terms of time and production structure. Look at your watch. How long did it take to make? Two hours? Well, who mined the sand to make the glass? Who mined the metal to make the case? Who killed the cow to make the leather wrist-band? And who planned all the production? Perhaps your watch took two years from the moment of assembly to the first production of the materials. You need to understand this if you EVER invest in a highly cyclical company–what company isn’t at some level cyclical?
Okay, that’s all for now. Thanks for sending the link to the Value Vault. Where are you located geographically, generally speaking? East Coast, West Coast? Big city, small town?
I live in Greenwich, CT home of many hedge funds, but I have never been to one.
Good luck on your journey.
A conclusion is the place where you got tired of thinking. –Steven Wright
Every man who says frankly and fully what he things is so far doing a public service. We should be grateful to him for attacking most unsparingly our most cherished opinions. –Sir Leslie Stephen
I joke while presenting the Global Crossing case, but you should spend time to really understand what happened and why. Always in these situations there is much noise and hoopla over new technology, massive growth, booming profits, etc. But you have to stand back to listen: http://www.youtube.com/watch?v=1INb5FM_1lE&feature=related. Obviously, growth does not occur without investment, and growth without profits is DESTRUCTIVE.
….And think strategically. A friend took out margin to buy a huge bundle of out of the money puts on Global Crossing and Level Three (LVLT). See the chart on LVLT here—the collapse will take your breath away. http://www.scribd.com/doc/77916697/Lvlt-Chart.
I asked him, “Are you out of your $%^&*! Mind? What the heck is the matter with you?” He replied serenely, “Have you ever read The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail by Clayton M. Christensen and the Disk Drive Industry?” http://www.readinggroupguides.com/guides_i/innovators_dilemma3.asp
“No,” I said, “I am too busy reading the Lehman report on Global Crossing.”
Research by Lehman on Telecom, Fiber Optics and Global Crossing 1998 http://goodbadstrategy.com/wp-content/downloads/LehmanReport.pdf
“Too bad,” he replied. “Because it is the same situation with the telecom companies only worse. (WHAT is the situation he is talking about____?) Ask yourself what is the WORST industry structure you could possibly design to destroy profits? Sometimes it is easier to know which companies will face certain death than pick the winners. Also, here is the coup de grace—what happens when marginal costs decline to $0.00!?”
One more time: “Can anyone tell me in two or three words what is the first thing when looking at a company/industry? _____ _____ ______
At the end of the weekend, there will be an analysis of the Global Crossing Case.
So what happened to my friend? Here he is: http://www.youtube.com/watch?v=mmMS9nvi6eg&feature=related
At the age of 97 years and 4 months, Shigeaki Hinohara is one of the world’s longest-serving physicians and educators. His secrets to a healthy long life:
http://www.japantimes.co.jp/print/fl20090129jk.html
Podcast on Why We Get Fat by Gary Taubes: http://www.lewrockwell.com/lewrockwell-show/2012/01/11/247-why-we-get-fat-and-what-to-do-about-it/
If you think nobody cares about you, try missing a couple of payments. –S. Wright
Everything has been said before, but since nobody listens we have to keep going back and beginning all over again.” –Andre Gide
Part 1 of this case was presented yesterday here: http://wp.me/p1PgpH-hj
If readers don’t grasp the significance of this case then I will QUIT posting and join them: http://www.youtube.com/watch?v=J_kRDcfTKrg
Part 2: You are about to meet the fund manager in 30 minutes to give your recommendation. Take a glance at Global Crossing’s 10-K. http://www.scribd.com/doc/77824423/Global-Crossing-1999-10-K What’s it worth? The price is near $61 or about $37 billion in market cap.
Forget the financials you think, after reading Gilder’s Technology Report (background on George Gilder, the Guru of the Telecosm: http://www.wired.com/wired/archive/10.07/gilder_pr.html) on the telecosmic Global Grossing, your confidence increases because growth will double every 100 days.
Since you leave nothing to chance, you call up David Cleevely, the managing director of Analysys, in Cambridge, England. Cleevely is a well-regarded observer of the new telecommunications economics. He tells you, “The key thing to understand is the huge advantage of the fat pipe (or high-capacity fiber optic channels). Remember that the cost of laying fiber is mainly the cost of right-of-way and digging or of laying it under the ocean. Recent advances let companies install enormous capacity at no more cost than building a narrow pipe. The economies of scale of the fat pipe are decisive. The fat pipe wins.”
Next you pull a slide from the company’s power point presentation on Where is the Company is Going.
The company will be in a market with EXPLOSIVE growth, competition, capacity on demand, no capital required from telecom carriers, and responsive to market demands.
Your secretary knocks on the door and asks whether you want to read about strategic logic from csinvesing? You are handed some papers, and you immediately slam dunk the research into the circular file (waste-basket). “Who needs this bullsh@t,” you mutter.
You are thinking of the riches you will make and what you will do with your new car: http://www.youtube.com/watch?v=uo5E-2_2mgg&feature=related
You know that economies of scale are important. The logic seems simple—the fat pipes of the new-wave telecom builders and operators gave them much lower average unit costs (Think about how average cost curves are formed). I sat back and thought a moment about fat pipes, scale economies, and telephone calls. What was the “cost” of moving one telephone call, or one megabyte of date, under the Atlantic Ocean?
But the thoughts of massive wealth kept interrupting my thoughts. “Would putting in a fur-lined sink be in bad taste?” I wondered.
What critical aspect of analysis is missing here? If you need a hint go back to the connection between industry structure and profit.
The time is late February 2000 and with your supporting materials and 10-K you wait here for the big boss to arrive. http://www.youtube.com/watch?v=TulxjdKsROI
