Tag Archives: Warren Buffett

Money Magic

Casino Illustration

courtesy of tumblr

I enjoy games of chance. I’m particularly fond of casino scenes in movies—tuxedos for men, slinky dresses for women, slow-burning cigarettes, and dry martinis all-around. In real life, casinos are about as alluring as a mud bath. In Europe, for example, you’ll find a casino in every sleepy spa town—massages and “water cures” are meant to give a virtuous sheen to otherwise seedy places. Not a Daniel Craig—or even a  David Niven in sight.

The luck factor is probably one of the reasons I’m interested in stock markets too. There are many other things I’d rather do than actually work for money.  Just pick a winner and off to the races we go! (Of course, it never quite works out that way—darn gravity.)

Sleight-of-hand is not only found in Monte Carlo casinos though. It’s alive and well in many corporations. This past week, quarterly results have started to trickle in. You can get an eyeful of some pretty nifty accounting in their filing reports.

I’ll admit that I’ve tortured myself in many ways: self-doubt, bikini waxes, watching two episodes of Vinyl…but I have yet to savor what is sure to be the retina-frying experience of exhuming a financial statement. When the quarterlies arrive at the door, I immediately deposit them straight into the recycling bin. Warren Buffett may have the patience to pick through financial statements with his mental tweezers; I would rather watch Casino Royale, or paint dry.

Here are a few common sleights-of-hand:

Share buybacks. When corporations buy their own shares it reduces the number of shares outstanding and it makes metrics such as cash-flow-per-share and earnings-per-share look much better than they otherwise would.

Extraordinary items. The “footnotes” section of the annual report is a dumping ground for all kinds of juicy expenses, some of which may be on-going. Items such as restructuring, acquisition, severance, write-downs of impaired assets, and data breaches all have an impact on profitability but are often shooed-away, (“don’t worry your pretty head about these darling”), as non-material.

Lower tax rates. While this is not accounting trickery, per se, by moving a company’s domicile to a low-tax country, such as Ireland, a corporation pays less overall tax. This gives their earnings a rosy hue. But these better looking numbers may have nothing to do with improved earnings through actual growth.

So, how good are today’s corporate earnings for reals?

Some investment brainiacs say that deflation is not out of the question. So, unless you’re James Bond, here’s a hot tip: don’t throw all your chips in.

Rich Face Folly

photo courtesy of Getty Images

photo courtesy of Getty Images

Who remembers the 1973 film Ash Wednesday starring Elizabeth Taylor as a 50-ish housewife who goes to Switzerland for a face-lift to save her marriage? Taylor, draped in furs and marital sorrows, secretly hoofs it to a ritzy clinic in Gstaad, has the surgery, then eats, drinks, gazes at the mountains, flirts with a fashion photographer, has an affair with a hunky German, stares at reflections of her restored beauty, but, alas, never reconciles with her husband, played by Henry Fonda, who’s still boinking a much younger woman. The film is notable in two ways. First, it stars the incomparable Taylor, who is watchable in any old schlock; and, second, it marks the first time that plastic surgery came out of the closet, complete with stomach-turning scenes of an actual surgery.

The film is terribly quaint by today’s standards when practically everyone is getting shot-up with Botox and hyaluronic fillers, or sandblasted with lasers and chemical peels. The latest trend, “richface“, is especially popular with millennials.  It involves extreme dermatological procedures meant to proclaim affluence, if not common sense. Selfies of swollen lips, a la Daffy Duck, puffy cheeks or pneumatic mammaries are posted quick-as-a-bunny for comment and applause.

Far be it for me to frown on the pursuit of beauty through personal grooming. No one would accuse me of being low-maintenance in that department (or any). But hyper-grooming is a risky business subject to the law of diminishing returns. (Exhibits A: Melanie Griffiths, Joan Rivers (RIP), any TV Real Housewife…)

Insecure millennials and reality-show celebrities are not the only ones who would benefit by leaving well-enough, or mediocre-enough, alone. Investors, too, are a restive lot prone to over-grooming, or in this case, excessive trading. This proves costly, both in the short-term (frictional costs of trading and taxes), as well as in the longer-term through poor market timing and weakened compounding benefits.

In his book The Single Best Investment, Lowell Miller makes the distinction between investors and traders. He states that long-term investing is about character, depth of vision and the cultivation of patience. By contrast most “investors” are whipsawed by the drone of economists, stock-pickers and other pontificators who populate the airwaves and provoke the “Three Sirens”: greed, fear, and conformity.  This compels us to constantly tweak our portfolios, jumping from one investment to another. Market liquidity, especially for mid-and-large cap stocks, and ETFs, makes trading as easy as a few keystrokes. This is a different kind of liquidity trap and one that I’ve fallen into more often than I care to admit. It’s also why I found Miller’s book such a welcome relief. It provides a counterpoint to investment industry hysteria.

As a 6th-degree black belt in Aikido, it should come as no surprise that Miller abides by a Spartan code in investing. Hold your ground. Become neither overly excited when your portfolio is up, nor excessively gloomy when it’s down.

Feel your feelings, but don’t feel you need to act on them!

Miller is a strong proponent of investing in high dividend-paying companies, with good cash flow, and growing dividends. You’re unlikely to make a killing with them but, on the other hand, you’re unlikely to get killed. Over time, as the power of compounding takes effect, these investments show their superiority over fixed-income, such as bonds or T-bills.

Alas, time is the friend of the dividend portfolio but not of the human who owns it. Warren Buffett is fond of saying that his holding period is “forever” but he tweaks like everyone else. What’s the sweet spot? Aim to tweak somewhere between Buffett and any one of the Kardashians.

Grounded

Celine Fur Shoes

Celine Fur Shoes

While visiting Paris recently, I was sipping café au lait and munching on lightly toasted Poilâne bread with butter and apricot jam at my favorite breakfast spot on Rue Cherche-Midi when I came across this breaking news: Cannes Red-Carpet Ban on Women Wearing Flat Shoes.

Well, there goes my chance to gate-crash the Croisette. Flat shoes are the tops for me. What started out as “troubled” feet, gradually, with time, jogging, and far too much footwear-inflicted abuse, morphed into end-stage arthritis. A good day means walking the dog—or the winding, cobblestone streets of Paris—without wincing with each step. A bad day, (scratch that, a very bad day), would be being forced to walk in high heels—or, in other words, not walking at all.

It so happened that my career in fashion magazine publishing coincided with a vexing trend in women’s footwear. Designs veered into the realm of S&M with spiked-metal studs and thigh-high, stiletto boots. Nicknamed “limo” or “taxi” shoes, the only way to get around was to hobble into a waiting car. A limited few rose to the occasion, the rest were fashion roadkill. Let’s just say that with my flat, lace-ups, I stood out in a fashion crowd.

But there’s always an upside. My limitation means that I can walk into any shoe store and immediately eliminate 90% of the offerings, so decision-making is faster. In a city like Paris, with great shoe boutiques on practically every corner, this means more time to visit museums and to eat and drink.

On the 8-hour flight home I read The Einstein of Money, a terrific book on Benjamin Graham, the father of value investing. Graham’s rules for disciplined investing have inspired millions, including legends like Warren Buffett and Charles Brandes, and other “superinvestors”.

Graham developed screening methods to assess the intrinsic value of a company based on such metrics as size, earnings growth, dividend records, and ratios of price-to-assets, and price-to-earnings. This allowed him to know whether a company was a bargain or overpriced. Unlike others who base investment decisions on predictions of price movements, Graham peered into the income and balance sheet statements to discern value (not price).

Starting out as a bond salesman, at which he failed miserably, Graham eventually became a financial analyst. In 1916 he strongly recommended to his boss Alfred Newburger that the firm make a substantial investment in a company called Computer-Tabulating-Recording, Corp. that was selling at $45-per-share but whose intrinsic value Graham had estimated at closer to $130. His boss told him, “Ben…I would not touch it with a 10-foot pole.” In 1926 that firm changed its name to IBM.

Graham’s strict investment guidelines meant that he missed many hot stocks and gains through momentum investing. Yet, I admire his ability to eliminate thousands of potential investments into a select few that were highly likely to be “sure bets”, particularly if one was patient enough to let the market eventually weigh a company’s true value.

Today, like a woman shoe shopping in Paris, an active investor has an infinite number of decisions to make. Even product categories like ETFs and mutual funds that should, in theory, simplify investment selection, have exploded in recent years. When I began investing 25 years ago, ETFs didn’t exist and mutual funds were very costly so I began to cobble together a portfolio of individual equities. The process is stimulating and rewarding but can be very time-consuming, and quite harrowing when you add global, and emerging market equities into the mix. Lately I’ve been wondering if there aren’t better uses of my time—like learning French or writing a book?

Though I’m not ready to pull the trigger on my individual holdings, after reading The Einstein of Money, I know what Graham would do. Simplify the selection process.

Oh, and if you have troubled feet and happen to be in Paris and want to simplify your shopping, here are some brands to try: Accessoire Diffusion, Fausto Santini, Gelati, and Prada Sport. Then, with all the time you’ve saved, treat yourself to a glass of Chablis at Café de Flore and watch the pretty people.

Hermessence

Courtesy of Hermes

Courtesy of Hermes

Long gone are the days of sumptuary laws. Fine gems, furs, gold and rich fabrics were verboten to the hoi polloi and wearing them meant risking punishment or sometimes, death. Today, the biggest risk to indulging in a bit of luxury shopping is carrying a balance on your credit card. Not ideal but some distance from summary execution.

But in a world where luxury is available to nearly all, how do we define it? And what’s with all the qualifiers? Today we hear terms like “affordable luxury”, “aspirational luxury” and “absolute luxury”…My favorite definition of luxury comes, not surprisingly, from Hermes: “That which can be repaired.” 

Many years ago a friend bought his mother a classic black Birkin in a vintage shop in Paris. The bag was authentic but missing the lock and key. The salesman assured them that if they took the bag to the Hermes boutique on Rue Faubourg, they could replace the missing accessories.

But at the boutique they were informed, “Before we can sell you the lock, we must send the bag to our spa. The leather is dry and stressed. You will be contacted in a few months when the bag has fully recovered.” (Readers will be pleased to know that several months and several hundred Euros later the bag made a full recovery.)

Lately the markets have been more than a little stressed themselves. During the volatility of the past few weeks, broad swaths have been hit, chief among them oil and gas exploration companies and related industries such as pipelines, heavy machinery, and even some financials.

A good question would be: Which of these companies can, like the Hermes bag, be repaired?

Whenever sentiment turns against a sector, perfectly decent, even great, companies suffer collateral damage. While the price of oil is not going up anytime soon, rest assured that it will go up again. Companies with solid balance sheets, manageable levels of debt, astute management who are savvy capital allocators, and who attract patient institutional investors, will do just fine. Their stock valuations will be repaired.

Junior exploration companies, or highly-leveraged small-and mid-caps are less likely to fare well. Some will get acquired by larger firms who will cherry-pick the best. The remainder will twist in the wind burning cash, slashing dividends and capex, and praying for a recovery in the oil price before their stock certificates end up as landfill.

While business strategies at high-luxury companies do not naturally translate to firms in other industries, (for example luxury companies are not too concerned about the cost of production; goods will be priced to ensure high profit margins), a few general rules still do apply. Among them, of course, is Warren Buffett’s adage to invest in companies with a wide economic moat.

Companies like Hermes benefit from an indelible aura of luxury, including their famous after-service. This gives them, in Buffett parlance, a wide economic moat. When they stumble, as all companies do at some point, they recover.

Oil stocks are experiencing a rapid vertical compression. But they’re not all lemons and many will make a full recovery. Here’s what to do: Find a charming café and order a citron pressé. Sip it slowly while browsing the financial pages. You’re bound to uncover a few oil patch gems. Or, you could always just buy an Hermes bag because their prices only go up.

Golden Slumbers

Photo Courtesy of Hakon H

Photo Courtesy of Hakon H

For years I stalked a gold YSL messenger bag. The first sighting was at the YSL boutique on 57th Street in New York. It was perched like a goldfinch on a shelf just out of my reach. The fabulosity of the gold glitter adorning an otherwise utilitarian city bag tickled my Marie Antointette/Madame Bovary genome. “Dare I”, I wondered?

I daren’t. Instead I opted for a perfectly respectable taupe shoulder bag in a kind of pebbled patent leather. Still, occasionally my mind drifted to the gold YSL that got away. I wondered how it was; where it was?

Occasionally it popped up on eBay, spit up like ambergris, on the waves of fashion. But ambergris, (for those readers not into perfumery, it is otherwise known as whale vomit), the ones that came up for auction were all ‘pre-loved’ as the resale lingo goes. In other words, the bags had been around town. And, friends, gold sparkle is not known for its durability.

In other news, gold, that investment stalwart, has fallen on hard times. Often viewed as a hedge against inflation, many investors liked to have at least a smidge in their portfolios—along with the rows of canned beans in their cellars. The rampant, multi-year bond buying program to the South stoked fears of rising inflation but that has not come to pass. If anything, interest rates are drifting lower raising fears of lowflation or deflation.

Still, in tumultuous times humans find emotional comfort in tangible things like gold, real estate, sable coats, and, as Dennis Gartman, a U.S. economist and editor of the widely followed The Gartman Letter,  put it thusly, [things] “that if dropped on your foot shall hurt.” He’s also long steel, railroads, aluminum and, yes, even gold.

Some investors are adamantly opposed to owning gold. Warren Buffett makes a compelling case for avoiding this asset class entirely. According to Buffett gold has two significant shortcomings: it’s of no use and it’s not procreative.

Yes, it looks pretty on a wrist or finger but if you purchase an ounce of gold in 2014, in 2020 you will still own exactly one ounce of gold. But, if instead you buy 100 shares of Apple this year, there is high probability that your 100 shares will have earned you substantial dividends, as well as an increase in market value during the ensuing six years. Apple is constantly growing and innovating; the gold bar is not. (By the way, this same reasoning applies to currency-based assets like T-bills etc.)

Over the years I’ve taken small nibbles in gold in both large caps and micro caps. Unlike Buffett, I am agnostic on gold. Sometimes I own it, sometimes I don’t. Currently my only position is in a small gold mining company operating out of Burkina Faso. It doubled recently and I sold off half and now I’m left with the “market’s money”—and just as well given circumstances there which are fully reflected in the today’s share price.

Still, there’s something alluring about tangible things that come out of the ground.

Lately I’ve been flirting with graphite—the unsexy carbon. It could have great commercial applications in batteries for electric cars. There’s also a buzz about aluminum as a replacement for steel in car manufacturing to decrease weight and meet government-mandated fuel efficiency targets.

Graphite? Aluminum? Yes, they very far from the glamourama of 57th Street. But fashion never sleeps and neither does Mr. Market. So, until the next gilded age, try a more somber palette.

Kismet

Photo courtesy of Wendy

Photo courtesy of Wendy

Jerry Seinfeld and Chris Rock do a funny and kinda deep riff on marriage on Comedians In Cars Getting Coffee.

Seinfeld says,”When you’re single you think, ‘I’ve really got to find the right person so my marriage works out.’ Once you really know how to do marriage, you could be with anyone…”

Rock turns to two women sitting at the nearby table and says, “Will you marry us?” and the women say, “Sure, our husbands wouldn’t care.”

“Yeah,” says Seinfeld, “our wives wouldn’t care either.”

When we contemplate getting married we look for the one. In Yiddish that person is called our bashert. It’s a romantic notion that somewhere in the big, wide world lives our Talmudic better half, someone who will complete us.

But as Seinfeld and Rock point out, being married is a skill. It’s like driving, once you’ve figured it out, you can do it with a shiny new Cadillac or a dusty old Chevy.

Could the analogy work for investing too? Do you really need to find the one portfolio manager in order to have success?

The investment industry likes to romanticize its brethren. Star stock pickers and asset managers receive glowing profiles in the business press and attract a devoted fan base. They’re courted by potential clients begging them to manage their money. But what if there is no equivalent to a bashert when it comes to investing?

A recent S&P Dow Jones Indices study reported in The New York Times, showed that active mutual fund managers underperform a series of random choices. Or, to put it another way, a blindfolded monkey throwing darts at the financial pages would have had a slightly better investment outcome than trained money managers in monkey suits. Yup.

So what does this mean?

First, get off your romantic cloud.  There’s no special someone who’s going to be your perfect portfolio manager.  Warren Buffett is as close to your money soul mate as they come and he’s not taking any customers. Everyone else is bound to disappoint you at least some of the time, just like your marriage partner does.

Second, always keep an eye on management fees. Low-cost , diversified index or mutual funds, or a low-cost portfolio manager is the way to go. Never over pay as this will erode your returns over time. (If your fancy investment firm includes a concierge service for sporting and cultural events, buy your own theatre tickets and pocket the fifty basis points.)

Third, did you know that from 1926 to 2013 US stocks averaged a 9.2 percent return? Ditto for Canadian and international stocks. Yes, the markets have been extraordinarily kind these past five years, especially for those who are at a later life stage and are cashing out. But, c’mon, 20-percent annually! That’s not sustainable. If your portfolio manager can get you a steady ten percent over the long-term, just say, “thank you” and go live your life.

As in marriage, when choosing an investment advisor it helps to have le coup d’oeil—a good eye. Then, as the song says, love the one you’re with.

Busy Town

Photo Courtesy of Static 416

Photo Courtesy of Static 416

Here we are in the lazy, hazy days of August. Butterflies flit among the leafy branches. A flock of Canada geese skim the lake, their honks blending with the steady thrum of motorboats and the whoop of occasional waterskier in the distance. Ah, summer in Canada.

How fine it would be if we—the ‘Royal’ we, alright?— could allow ourselves to BE HERE NOW. Yet, our addiction to busyness requires us to work, work, work, lest we succumb to some calamity reserved only for inveterate sloths.

Self-imposed busyness temporarily quells our anxiety but, when it comes to investing, it’s the pits. No wonder Warren Buffett, famed investor and quote-factory, said, “Lethargy bordering on sloth remains the cornerstone of our investment style.”

The four horsemen of portfolio returns are: high fees, high turnover, taxes, and market timing. Being a busy-bee in Busy Town contributes to all of them. Let’s take turnover: Once you’ve established your investment goals and made a suitable asset allocation, you should be able to let things coast for long time.

How long? Ten years, for starters. Although that depends on your personal goals and circumstances and on material changes affecting your holdings. Buffett’s favorite holding period is “forever”. Between 10 years and forever is about right.

Look what happens when you or your financial advisor has a Busy Town itch she needs to scratch? Your transaction costs rise. If the transaction triggers capital gains, you’ve now got tax to pay. Investors tend to buy on exuberance and sell on fear. That leads to buying high and selling low. No one can time the market, so when buying high you’ve lost your margin of safety.

Most of us are not stupid and yet our addiction to busyness makes us do stupid things, at least from an investment point-of-view. There’s a famous quote: “An investment portfolio is like a bar of soap, the more you touch it, the smaller it gets.”  The good news is, Busy Town is not Hotel California. We can check-in and we can check-out. Here’s how:

Put yourself on an information diet:
The 24-hour news cycle entraps the mind. Reporters, commentators, opinionators, and pundits all have a job to do. Your job is to periodically take a break from the ‘noise’. Feeling overwhelmed by information is not a recipe for good decision-making.

Trust your plan:
Unless your investment goals or time horizon have changed substantially, trust your investment plan. Tweaking, fiddling, re-allocating, are make-work projects at best and portfolio hazards.

Do nothing:
Sometimes doing nothing is the best course of action. My portfolio has lived through several market meltdowns. Had I panicked and traded, I would have lost out on a robust recovery. Not to mention that once you’re out of the market, it’s emotionally difficult to get back in.

Though it seems counter-intuitive, one of the keys to successful investing is to do nothing, or at least as little as possible. Now I’m going to grab a cold beer, sit on the dock and watch the ducks bob-on-by. They seem to have the right idea.