Monthly Archives: October 2014

The Cat’s Meow

Photo courtesy of Michele Trimarchi

Photo courtesy of Michele Trimarchi

Stevie Wonder sang about thirteen-month old babies and seven years of bad luck in his hit Superstition but who among us isn’t just a wee bit circumspect about certain things? For example, I’m cautious about people whose names start with ‘V’.

It all started in junior school with Velma. She was a chucky blonde bruiser to whom all of us 65-pound weaklings gave a wide berth. Years later, in my first magazine job, there was another troublesome V: Vivian, whose last name also started with a V for a double whammy. By coincidence, she was also a chunky blonde. Vivian acted as the editor-in-chief’s chief enforcer pouncing on unsuspecting editors over missed typos and other real or imagined editorial lapses.

I’m not the only one with name superstitions. One of my friends has had chronic issues with men named Chris. And another acquaintance has learned to avoid Steves altogether. And that’s just superstitions about letters and names! Add numbers, animals, eye and nose shapes, lines on the palm and ‘Do Not Cross’ lines multiply like Kardashians in a swag bag line.

Though we cling to them, it should come as no surprise that being superstitious is a form of idiocy. Idiots make bad investors.

A recent research paper looked at Tawainese stock traders. Among many Asian superstitions is a strong preference for the number ‘eight’ because it sounds like the word of ‘prosperity’; and, conversely, an avoidance of the number ‘four’ because it sounds like the word for ‘death’.

In Taiwan, retail investors are twice as likely to buy stocks whose prices end in an ‘eight’ than a ‘four’. This costs them approximately 8.8% (oops!) annually.

The researchers conclude that this type of superstition is a form of ‘general cognitive disability’. Yet it is one of scores of emotional and cognitive biases that many investors have. We prefer even numbers to odd ones. We prefer to invest in our home country stock market. We believe in lucky streaks (the ‘hot hand fallacy’), and so on.

This type of irrational, yet predictable, behavior makes us catnip to ‘quants’. These are the whiz kids who write algorithms that exploit our biases. Programmed stock trading swoops in and snatches victory from us as we’re counting our chickens.

The good news, according to the same study, is we learn from our mistakes. Getting repeatedly hammered in the markets, we mend our ways and superstitions loosen their grip on us. So don’t worry your pretty little heads about auspicious signs. Instead, follow in the footsteps of the greats: Buy Low, Sell High.

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Eat Cake

photo courtesy of tarakanova07

photo courtesy of tarakanova07

Remember how we used to eat muffins for breakfast? We scarfed them between gulps of grande coffee and felt terribly virtuous. It was the breakfast of champions, not guilt-inducing cake. (“Dude, it’s cake.”) Muffins have all the sugar, fat and calories of cake without any of the pleasure of eating a real, honest-to-goodness cake.

Often we act in ways that are not altogether rational and are ultimately counter-productive. This can end up costing us more than we think. (See the latest research on sugar substitutes and their link to obesity and illness.)

Years ago I was on a business trip in Paris and a colleague and I went window-shopping. By pure chance we happened upon the Hermes boutique on Rue Faubourg St. Honoré. We climbed the stairs and entered handbag heaven. Our eyes popped over the vast array of styles and colors. We sighed over the sky-high prices. Some day, we vowed, in the far, far distant future, we would give ourselves permission to buy just one.

As we left the store, my colleague turned to me and said, “You know, we’ve probably spent way more money on crap we no longer like or use. If we had just bought the thing we really wanted, it would’ve been a lot cheaper.”

Lately, I’ve been cleaning out my closets and her comment has hit home. Piles of clothing and accessories that I no longer wear have found second lives. Sometimes at the neighborhood charity shop—sometimes straight into Lady Gaga’s closet. (She swept into town in late summer and bought some of my Issey Miyake dresses and Yves Saint Laurent evening clutches from an upscale resale boutique here. God bless her fashion lovin’ heart.)

During my pruning season, I learned an uncomfortable lesson: It’s designer label or bust. All those charming dresses in mint condition by homegrown designers? Resale poison. Or, in investment terms, zero liquidity. Bupkis.

As investors, we’re often tempted by what we think of as bargains. Is a 10-cent stock cheap and a $100 stock expensive?

The answer is, it depends. The micro-cap likely has no earnings, a lot of debt, low liquidity, and a spotty cash flow. On the other hand, the $100 stock may have robust earnings, be growing rapidly, be in a favored sector, pay regular and growing dividends, have great cash flow, no debt, high liquidity, and lots of cash on its books. Now which one is expensive?

Owning a large cap stock is like owning a top designer label:

  • There’s good liquidity. If you need to raise cash or simply want to take some profits, somebody will be on the other side of the trade. There’s always a buyer for a Chanel handbag. Not so for a Lida Baday coat.
  • It will be relatively easy to assess its intrinsic value. Even a novice can quickly access information about the company’s key metrics like dividend yield, cash flow, and earnings estimates. Likewise, everyone knows the market value of an Hermes Kelly.
  • Top large cap stocks, like top brands, retain or grow in value over time. A Van Cleef and Arpels necklace will never be on sale; a mid-tier name like David Yurman will.
  • A top company is covered by many analysts so it’s easy to keep up with news and material changes that could affect the value of the stock. Ditto for designer labels. They have lots of fans, not to mention powerful ad campaigns, to talk them up and keep prices plumped. Louis Vuitton is not running those ads for charity. (And, by the way, doesn’t Michelle Williams look darling in the fall campaign?)

The world would be a boring place if we only wore big brands and bought big caps. But when it comes to your wardrobe—and stock market investing—strategic asset allocation rules the day. Why not buy some high yield large caps and then spring for a nice Chanel something with the divvies? Have your cake and eat it too.

Exit Plan

coco-chanelBetween drags from her cigarette and stabbing fit models with straight pins, Coco Chanel said, “Elegance is refusal.” Meaning, if you want to be truly chic, before you leave the house, remove anything superfluous. Choose one: silly boater hat with black grosgrain ribbon, multi-strand of pearls, gold long chain of precious stones, ruby earrings, or jangly charm bracelets. Or, if you are Coco Chanel, you do whatever the hell you want.

Still, the woman had a point— and it applies equally to finance as it does to fashion. Letting something go, whether it’s a ring whose style you’ve outgrown but has sentimental value or a stock that has been a workhorse for years, is hard. Hanging on to the former crimps your style, while clinging to the latter can be like taking a wrecking ball to your net worth.

Investors make all kinds of irrational excuses as to why it’s not a good time to sell. If the stock has dropped, we’re reluctant to book a loss, so we tell ourselves we’ll hang on until we hit break-even. This “strategy” comes with some heavy opportunity costs. What if something fundamental is affecting the share price? What if it never bounces back?

The opposite scenario can be even harder to deal with. The stock price is on steroids. Something good happened, or enough somebodies think something good will happen. You’re rolling in the green! But, “Oh, no!” if you sell now and the price keeps rising, you’ll have missed out. Greed has sent many otherwise sane investors down the rabbit hole.

I’ve fallen into this trap more times than I care to admit. The first time was in the ’90s with Silicon Graphics. I had a paper profit. Life was good. Then some hotshot who ran a big US investment fund announced that there was only one stock he loved and it was, you guessed it, Silicon Graphics.

“What a boon,” I thought. This one is going to go through the roof. I passed the time making mental lists of the all beautiful things I would buy with my “winnings”. Funny thing happened. The guy must have been dumping every last share of Silicon Graphics just as his sage advice was going to press. The stock sank, then sank some more. Like a girl whose beau was lost at sea, I kept a vigil for the stock’s safe return but I can’t recall that it ever happened. (Like many investors I have a selective memory when it comes to losses.)

As investors, it’s good to remind ourselves that job #1 is to make a profit. Sometimes that means leaving money on the table.

Unless you have psychic powers it’s impossible to time the market and find the perfect exit price. But just as Chanel counseled, you must be disciplined. Before you take a position, plan your exit strategy. Twenty-percent or a triple-bagger? Once you hit it, get the hell out of Dodge.

Like the little black dress or the string of pearls, there are always some keepers. But blindly following a buy-and-hold strategy is sub-optimal because markets are dynamic and sector dominance fluctuates.

In an attempt to be a better investor, I recently sold Imperial Oil. I had had it for decades and it had done well. Due to weak oil prices, I felt it was time to take profits and move to greener pastures. Who knows, I may pick it up again later, but it felt good to take the profit.

Now the big question is, would Chanel approve?