Posts Tagged ‘Investing’

4 Reasons Why the “4 Reasons Today’s Tech Scene Differs from the ’90s Bubble” Aren’t Really Reasons

03/29/2011

I hope that the title of the article didn’t scare you. Yet I felt compelled to share with you the same confusion many in the social media world are currently going through with regard to company valuations.

I got to the article “4 Reasons Today’s Tech Scene Differs from the ’90s Bubble” through the article “Buffett Declares Social Media Valuations Overpriced“, in which Buffett, in eerily similar fashion to the Tech Bubble 1.0, claims “it’s extremely difficult to value social networking site companies” and that “some will be huge winners, which will make up for the rest.”

As a student of investor sentiment I love to point out when investors’ hearts jump far ahead of their minds. One of my favorite books of all-time is “Extraordinary Popular Delusions and The Madness of Crowds” in which Charles McKay journeys through the greatest examples of herd-mentality people’s money has been subject to.

I’ve become quite keen of bubbles. Both finding them and pointing out false ones. Tops are more fun than bottoms, simply because bubbles are so much more entertaining.

It’s a funny thing money, because it’s something we work our whole lives for and yet it can drive us completely insane. We gamble when we have everything to lose and we shy away from the greatest of opportunities.

Back to the article.

If you insist that Facebook is worth $85 Billion today you deserve to be made fun of. Let’s begin.

Alexander Hotz is a freelance multimedia journalist and public radio junkie based in New York City. Currently he teaches digital media at Columbia University’s Graduate School of Journalism.

So now we have a case of Buffett vs Hotz. Who do YOU think is going to win? That’s right. The 80 year old investor or some young “public radio junkie”. Sorry, Alex but my money’s on Buffett.

We currently have the following valuations:

Quora $1 Billion

Twitter $10 Billion

Facebook $85 Billion

Alex mentions 4 reasons why “this time is different”.

1. Startup Costs

“[In the 1990s], when you started a company, more money was pumped into office space, servers and equipment,” said Mimeo.com Founder Jeff Stewart. “Today, when you build a company, you don’t own a server — you might even have mobile office.” With so much infrastructure now in the cloud, entrepreneurs can focus more on the product than they could in the past. For their part, investors don’t need to invest as much, so at least in comparison to the 1990s, oftentimes the risk is less. Bottom line — it costs less to start a company today.

There are 3 immediate issues I have with that paragraph.

a. It’s not true. Yes infrastructure costs have lowered significantly yet other costs and other distractions have taken its place. Today, marketing, lead generation, code writing and technical expertise have taken the front seat – aspects just as time consuming as taking out the trash or actually selling product.

b. This doesn’t help us. If startup costs have dropped that means that the incentive for other competitors to compete has risen. What stops some potential college drop-out from spending his night writing better code than your oh-so-genius team?

c. This isn’t a reason. So let us assume that you do have a patent-pending for your state-of-the-art tech-savvy game-changing app. How do you make money? If there’s no money, there’s no valuation. Period. I’ll write that again because it will recur throughout this article. If there’s no money, there’s no valuation.

2. Public vs Private

In the 1990s, tech companies raced to secure a lucrative IPO. When the bubble burst in March 2000, those who got burned weren’t just angel investors and VCs, they were less experienced investors who had jumped on the tech bandwagon.

Today, younger companies aren’t in a rush to go public. Think Facebook’s “special purpose vehicle” with Goldman Sachs. What’s more, today’s public tech companies are market stalwarts. “You can’t call Amazon or Google or Apple overvalued,” said OrganizedWisdom CEO Steve Krein. “[In the 1990s] you could have called DoubleClick, Amazon and Yahoo overvalued.”

Krein agrees with Fred Wilson that the startup world has some “frothiness” or excess capital, but comparisons to the 1990s don’t take into account where the investors are coming from.

Firstly, investors are investors. And history has proven the astute “experienced” investors to be the ones who are often the most foolish ones. You may insist that small investors won’t get burned this time and, I agree, that’s a good thing. But that doesn’t in any way validate the stupidity of the affluent who we know spend millions of dollars on other stupid stuff like art, CDOs and credit default swaps.

I have no doubt that if the small guy could get in on this mayhem, he’d buy Facebook faster than he bought Enron and Pets.com 12 years ago.

Then he mentions Google, Apple and Co., which makes my head spin. Of course Google wasn’t overvalued in 1999. It didn’t exist! So while investors were piling into Yahoo and Juno their ultimate rival wasn’t even a prototype!

The second mistake is a bit more complex. You can’t use the survivor to prove the challenge. You can’t take the 1997 Bulls and claim that the Michael Jordan draft pick was a home run. Apple has come a long way since 1999. Jobs had just joined the company again after 10 years of struggling profits and a stagnant share-price.

3. Hubris

A less tangible difference between the 1990s and today’s startups is the dynamic between the up-and-comers and the established titans. “[In the 1990s] there was a sense of confidence that the new companies would knock off the old companies,” said MeetMoi.com CEO Andrew Weinreich. “Imagine Time Warner, the most venerable of media companies, literally giving away half of itself to an Internet startup AOL. If you were in a startup, you really thought that you would knock off existing players.” Today, the big players are the survivors of the dot com era.

I have to give it to him. He had the substance of a real argument until the last line. Which survivors are we referring to? When people talk about Google being taken over by Facebook, what does that say about hubris?

Finally, since when does hubris a necessity for a valuation bubble. All we’re saying is that investor aren’t discounting anything for the future. Webster’s  defines a “Bubble” as “a state of booming economic activity (as in a stock market) that often ends in a sudden collapse”.

When VCs are throwing (literally) money at these new tech startups there is a definite chance of a sudden collapse in economics activity, at least in Silicon Valley.

4. The Bubble Isn’t a Profitable Joke

In 2000, entrepreneur Philip Kaplan created the satirical website FuckedCompany.com (a take on Fast Company), lampooning the absurdities of the startup world. “When you have a profitable business built around making fun of the bubble, that’s an indicator,” said Stewart. The site made some serious money off the woes of the floundering dot com world. Today, while satirical blogs and social accounts are plentiful, none of them come close to the profitability of lampooning the last bubble.

Do we really need jokes to prove investor insanity? Mind you, every child knows that (bubblegum) bubbles take time to grow, but only an instant to pop. Investors should bear in mind the same. That one day there will be a joke, the next it won’t be so funny.

So is there a bubble?

No.

Guess you weren’t expecting that answer. The fact is that if investors are going this crazy now, it’s due to continue for some time. True, there are no jokes, there are no naysayers (and thus stark advocates) and it’s not the hottest topic on CNBC. Most of all, there aren’t enough people claiming it’s a bubble (yes, a bubble needs a conscience). Not yet at least. But once the IPOs start rolling out and the small investors do get wind of what’s going on, it will end, and badly.

Wait I say.

Wait for the “Facebook taking over Apple” articles.

Wait for the momentum, when volatility increases.

Wait for the young and inexperienced investors to sit on the set of CNBC and tout the reasons for their madness.

Wait until earnings become paramount, while balance sheet quality, cash flow from operations are ignored.

Wait until these “low cost” startups begin to run low on the mountains of cash they acquired.

Wait for when the accounting seems compromised, when large amounts of earnings stem from accruals rather than cash flow from operations.

Wait for the article that say “This time is different”, “P/E ratio’s don’t matter” and “If you don’t invest now you’ll die a broke old man”.

When Buffett said that he “didn’t get tech,” he didn’t mean that he didn’t understand technology; he just couldn’t understand how technology companies would earn returns on equity justifying the capital employed on a sustainable basis.

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Why Invest in Gold?

02/25/2010

By Levik Dubov

Simple Answer:

The reason why investors own precious metals, is to insure themselves from a debasement of currency at a greater rate than available market returns. Few people actually own precious metals physically, and those who do often do for the wrong reasons.

Gold is not a reliable vehicle for appreciation, yet it is an outstanding store of value. The sensible capitalist does not “invest” in gold. He merely safeguards his wealth in the form of non-financed physical-assets in times when currency competency comes into question, and waits until either the inflation subsides or an opportunity of adequate returns to be restored.

As one hedge fund manager recently put it: “All investments have their day, and right now gold is having its day”.

In-Depth Analysis:

For all those who aren’t familiar with Talmudic-style dissection, Get ready!

Some people are natural cynics and approach everything with a good dose of skepticism. (These people often spend years owning nothing but AAA-bonds and Market Funds). Others are opportunists and approach everything with a gullible zeal. (These people are often looking for the next Microsoft). We see ourselves as mere realists, in an attempt to approach everything with a logical and objective frame of mind.

To understand results we must first find reason…

Questions Scott Adams poses:

I am referring to a recent article by famed Dilbert cartoonist, Scott Adams. I enjoy his posts very much and I hope this article will clarify his perplexities regarding precious metals investment.

1. “People aren’t good at predicting the future, no matter how obvious the future path seems”.

It is for precisely this reason, that when things do change, (such as the turn of the English Empire), so few expect it and are prepared. Ask people interested in precious metals, exactly how many ounces of physical metal they own. You’ll notice how few people truly stand behind the words they’ve spoken. As a matter of fact, just glancing through the comments on Adams’ blog, it seems that most of the forum comes across as hypothetical folks who either own too little of a position, or are influenced by invalid reasoning.

2. “Warren Buffett isn’t putting all of his money in gold”.

I will get to the reason behind this in a moment, but it must be understood that Mr. Buffett is a “Common Stock Man”. That’s what fascinates him, that’s what engages him, that’s what he does best. So why should he invest in gold when he has found far greater returns in an under-valued marketplace?

3. “My failure to imagine how the debt can be contained might be just that: a failure of my imagination”.

When it comes to debt there is far too many variables to consider (i.e. Chinese Bond-ownership, Dollar Replacement, Federal Bankruptcy, Currency Revaluation, The Gold Standard). In other words, the ownership of gold stands not as an investment with the intention of appreciation, but as an clever insurance policy against a catastrophic hyper-inflation or currency debasement.

Explanation:

In “The Intelligent Investor” written by Benjamin Graham (Buffett’s famed mentor), which was revised as of 1971, Graham says in Chapter 2, “The Investor and Inflation”, in the article “Alternatives to Common Stock as Inflation Hedges”:

“The standard policy of people all over the world who mistrust their currency is to buy and hold gold… the holder of gold has received no income return on his capital”.

He adds in summation:

“There is no certainty that a stock component will insure adequately against such inflation” [emphasis ours].

A few points need to be highlighted:

1) Graham informs us that the hoarding of gold was an age old practice. This made total sense as in fore-times bank panics, currency debasement and depressions occurred just about once a decade.

2) He cites the years between 1935-71 as “proof” that gold has been a lousy and inadequate investment class. However, between the years of 1969 and 1981, gold appreciated phenomenally, outperforming each and every other asset class by a wide margin. Had Graham witnessed this spectacle there is strong reason to believe that he would have reconsidered his position, and may have made room for precious metals in a conservative portfolio.

3) In that paragraph he also frowns upon investing in real estate claiming that it is subject to “wide fluctuations” and “serious errors”. His only advice to such business is:

“Be sure it’s yours before you go into it”.

What Graham is telling us here, is that any asset is a bad investment if done for speculative reason, or with improper judgement.

4) In his closing remark, Graham even warns that even while common stocks offer great opportunity, they may nevertheless fail to overcome the challenges of inflation, or currency debasement.

What’s Changed?

Much! Too much actually. As a matter of fact, from an economic standpoint America is no longer similar to the America Graham was familiar with. For one, America has lost its status as the world’s largest manufacturer of goods, and has gained a frightening lead in terms of consumptions and spending. (For those familiar with European history, this is how 16th Century Spain lost its position as the world leader in trade and commerce).

The world of currencies have also changed drastically. While I will not delve into the fascinating history of barter, trade and the properties of monetary exchange here, one enormous variable differentiates the Pre-1974 and the Common Eras. In ancient times, every single transaction took place with an element of exchange in mind. Whether it was sea shells, or cattle, or wooden sticks, the value of any transaction or credit was accurately measured in terms of a monetary exchange unit. With the agreement to terminate convertability from gold to Dollars in 1974, this all changed. No longer would the U.S. Dollar, the “ineffable” reserve currency of the world, be exchangeable for the gold metal.

Thus began, the current era of a universally-accpeted fiat (non-commodity based) currency. No longer would each transaction be measurable in accurate terms. And no longer would any Government, foreign or domestic, be compelled and obligated to abide to the regulations of supply and demand. So long as We The People would accept and stand loyal behind the mere faith and credit of the United States Government, so long would our ever-glorified Dollar endure.

4.
“What happens to the price of gold if people simply change their minds about its value?”

Adams’ question seems pertinently logical. However, there is one crucial question that he fails to address…

What is a currency?

The following I adapt from the works of Doug Casey:

In the 4th century BC, Aristotle defined 5 reasons why gold is money, and they are just as valid today as they were then. A good form of money must be: consistent, convenient, durable, divisible, and have value in and of itself.

Consistent. The lack of consistency is why we don’t use real estate as money. One piece is always different from another piece.
Convenient. That’s why we don’t use, for instance, other metals like lead, or even copper. The coins would have to be too huge to handle easily to be of sufficient value.
Durable. That’s pretty obvious – you can’t have your money disintegrating in your pockets or bank vaults. That’s why we don’t use wheat for money; it can rot, be eaten by insects, and so on. It doesn’t last.
Divisible. Again, obvious. It’s why we don’t use diamonds for money, nor artwork. You can’t split them into pieces without destroying the value of the whole.
Value of itself. The lack here is why you shouldn’t use paper as money.

A 6th reason that Aristotle may have overlooked since it wasn’t relevant in his age, and nobody would have thought of it: It can’t be created out of thin air!

This is not a gold bug religion, nor a barbaric superstition. It’s simply common sense. Gold is particularly good for use as money, just as aluminum is particularly good for making aircraft, steel is good for the structures of buildings, uranium is good for fueling nuclear power plants, and paper is good for making books. Not money. If you try to make airplanes out of lead, or money out of paper, you’re in for a crash.

That gold is money is simply the result of the market process, seeking optimum means of storing value and making exchanges.

Buffett’s Investment in Silver, Style and The Finale of an Era:

Buffett It should be noted, that Buffett did make a significant investment into Silver (not gold) in the late 90s, one that has come under sharp scrutiny in recent years, as few are knowledgeable of exactly what led Buffett to purchase over 100 million ounces of physical silver on the open market, and moreover what ever happened to the holding. Those who know him, have even mentioned his fascination with silver over the decades. All in all, we cannot say that Buffett “only” invested in common securities.

We may also add, that the majority of Buffett’s tenure as the “world’s greatest investor” coincided with an era that was quintessential for the class of Common Stocks. The 50s, 60s, 80, and 90s, were all part of a two-part secular bull-market that captivated the attention of Wall Street and Main Street, concluding in the most absurd valuations for up-and-coming Tech start-ups that had neither money nor model. However, one may realize that Buffett’s years of 50-100% returns are far behind him. With over $100 Billion under his management, investment opportunities are slim as: a) Stocks have become a staple of investment and speculation, thus raising valuations to their highest in modern history, and b) The potential for significant returns diminish greatly as the ability for a multi-national corporation to grow is minimal, if not non-existent. This is known in economic circles as The Law of Diminishing Returns.

All in all, it can be assumed that the heyday in common stock are over, as long as current valuations remain at their elevated levels, and investor exuberance and hopeful optimism remain.

Depleting Commodities:

In summation, I’d like to point out why investors and speculators have begun a gradual influx into commodities and precious metals in particular. In brief: They’re disappearing. This doesn’t mean that there will be none left soon, the same way that Peak Oil doesn’t mean that there’ll be no more oil. It simply means that these goods will no longer be available at these prices. This may sound reminiscent to anyone who experienced oil sky-rocket from $1.50/ barrel to over $40 in the late 70s. When the government capped the price level, supply and demand kicked in: Boom! No more gas! Extended lines of anxious cars waiting to be fueled but to no avail. There is no more gasoline left at the price it sells for.

This is why investors flood commodities when inflationary scenarios take hold. Because with all the over-investment into service companies, manufacturing facilities, tech stocks, real estate developments and paper currencies, people have completely forgotten the elements all that possible: physical goods. Oil, Lumber, Cotton,

So take Adams’ post as you wish. But bear in mind that markets aren’t very intuitive. They tend to evaluate the here-and-now and the probable, and don’t have much patience for abstract and the possible.

I only restate the famed Ben Graham’s empirical warning: “Be sure it’s yours before you go into it”.

Good investing!
Levik

Why 2010 May Be Quite Similar to 2009

01/08/2010

If you did well this past year, I guess that’s a good thing!

Friday is my market day and it seems that with the new year some realignment of the big picture is in order. Note of optimism: When you know what’s going on you can properly position yourself to benefit from its leverage. No condition is ever entirely good or entirely bad. So here’s what’s going on…

“Sentiment Oscillation” or “Paradigm Shift”.
That’s the reason for all this mayhem. As general conditions continue to change (as they have since 2007), so will the general mindset. From growing to sustaining. From net profit to net loss. From Investment to saving. From short-term gains to long-term advantage.

Let’s focus solely on economic facts:

The How:

  1. Internationally Governments have already allocated rescue money that will be spent over the next few years
  2. They have also lowered Interest Rates which spurs a higher inflation of credit
  3. When Rates rise savings gains precedence and production falls decreasing the supply of goods and labor
  4. Less supply causes over-demand and higher prices for real goods and commodities
  5. When commodities prices rise, they tend to cut into expenses thus lowering profits
  6. Lower profits and demand for cash decrease momentum of corporate investment and the stock markets decline
  7. Lower Markets lower the sentiment of the consumer and spending decreases
  8. Less sales means less revenue and retail venues under pressure go under causing a Commercial Real Estate bust
  9. With Investing and Equity down and out people turn to Savings and Cash
  10. With Bond markets already pressured by higher Interest Rates and a debt laden currency people begin to turn to Precious Metals and Tangible Goods

Why:

  1. Someone say Bailout? Trillions have been spent and Trillions more will
  2. With the lowest Interest Rates in decades credit is merely being deferred
  3. Businesses decide to save rather than reinvest profits
  4. This one’s tricky but the former ALWAYS leads to latter
  5. Even if businesses raise prices, profits will fall
  6. Bond yields begin to resemble stock dividends only with less apparent risk
  7. Higher stock prices are always met with consumer exuberance
  8. This has already begun but has been prevented by soon ending rescue funds
  9. With higher Interest rates CD’s and Money Market funds begin to make sense again
  10. This is what happened during the 70’s as Real Interest Rates remained negative

Investing Advice: If you are going to “invest”, you must understand that the next 10 years will be similar to the last. Much higher prices for real goods, much lower valuations for equity and paper. This is because we’re doing the same things over (lower rates, more issuance of credit, more debt to pay off). These are times to seek under-valued out-of-favor securities.

Business Advice: If you are going to do business, I believe you will be better off than many people trying to make ends meet on unemployment checks and the reason for that is the ability to be proactive. Your success is what you make of it, and if you’re determination is deep then no recession or even depression could abstain it. Focus on providing customers with durable and consistent value.

Fundraising Advice: If you are in the legions of the eager financiers trying to keep the lights on in your non-profit, raising for a local charity or even seeking capital for your small business, remember that people are always searching for the best place to put their money. Your job is to provide them with the sense of value that its going to the right place for the right reasons.

Have an awesome weekend!

Want to Be Successful? Own Gold!

08/26/2009

People get scared when they hear me talk about gold. “Why Gold?” They ask. “Isn’t gold only for the depression-ready end-of-the-world-as-we-know it pessimists?”

Not if you value it as the most valuable and un-destroyable currency in the world.

Once upon a time, gold was the currency of the wealthy and powerful. Only kings and rich noblemen (and woman) traded in its coinage. The middle-class used primarily silver, and the poor used copper and other base metals.

But as time passed, society began treating gold-equivilents as gold. But when every government around the world “de-linked” their paper currencies from the precious metal, people none the wiser. They continued to treat Dollars – once gold-equivalents – as, well, gold.

I always say that the default holding of any investor should be gold, as it always has been. The investor has to be thoroughly convinced of a business’s potential upside and limited downside to part with it.

I just finished a great article from Gold Basis Trader, Antal Fekete. He wrote a rather lengthy article on te subject here are my take-away notes. Emphasis in bold.

~~~

“The Last Contango in Washington”

The complete article and its follow up can be found here and here.

Contango: In technical jargon of futures markets, the basis is the spread between the nearest futures price and the cash price in the same location. The gold market has always been a carrying-charge market – a contango market – due to the monetary metal status of gold. This means that the gold spread has always reflected the carrying charge, the opportunity cost, of carrying gold, most of which is foregone interest.

Here is the deal they offer you: Give us your cash gold in exchange for gold futures that we’ll let you have at a deep discount so that you can pocket risk-free profits. The offer is increasingly declined. There was a time when a drop in the basis would pull in gold from the moon, figuratively speaking. No more. Arbitrageurs no longer believe that gold futures are fully exchangeable for cash gold.

But a strange phenomenon has been manifesting itself for 35 years, since the inception of gold futures trading. Rather than remaining constant, the trend has been that the basis as a percentage of the rate of interest has been vanishing and now has dropped from 100% to zero. At the same time gold holdings registered at the Comex-approved warehouses have been dwindling. Both indicators point toward a shortage of monetary gold that appears irreversible.

The last contango has first occurred in Zimbabwe, where gold is not available at any price quoted in Zimbabwe dollars. [Editor: Zimbabwe has recently suffered from hyper-inflation by printing many quadrillions (comes after trillions) of notes].

Gold backwardation is virtually inevitable, and when it comes, it will be irreversible. Why? Because it signifies a crisis of the first magnitude: the general disappearance of gold from trade for reasons of lack of confidence. No one will give up gold, because one is no longer confident that he can get it back on the same terms.

Implications

The only thing that might turn this runaway train around is a steep rise in US interest rates. However, that would ruin what is left of the U.S. economy. It would cause the bond market to collapse, sending the dollar down the drain.

I do not see the collapse of the bond market happening any time soon. The US Treasury and the Federal Reserve can muddle through this crisis, and possibly beyond, by making bond speculation risk-free in order to maintain demand for Treasury paper.

Bonds, notes, bills, and other obligations of any government are irredeemable. They are redeemable in nothing but more of the same. Treasury Bonds are redeemable in Federal Reserve credit, which is irredeemable and “backed by” the self-same bonds of the U.S. Treasury. Why is it, then, that these Treasury obligations are in demand where one might think that redeemability is a sine-qua-non of issuing them? What makes people participate in this shell game? How can such a crude check-kiting scheme mesmerize the entire population?

The debt of the U.S. government is still redeemable in a sense, however limited or restrictive it may be. The debt of the U.S. government has a liquid market in which it can be exchanged for Federal Reserve credit. In turn, Federal Reserve credit can still be exchanged in liquid markets for physical gold, the ultimate extinguisher of debt, albeit at a variable price.

Scenario

As the gold markets enter their phase of permanent backwardation, all rational basis for holding U.S. Treasury debt – or any debt, for that matter – will disappear. There will be a mad rush to the exits, and holders of debt will trample one another to death in trying to cash in on their winnings.

Once the $1,000 level is breached, there may be some “profit taking,” to be sure. But because of the zero basis, those who take profits will look rather foolish. Last contango = last profit taking.

Be prepared for a great wave of defaults on paper gold obligations. Certainly, the lessees of central bank gold will default. Comex will close its gold pit for good, and outstanding contracts will be settled on a cash basis.

I’d be surprised if any gold ETF shareholders get a fraction of their gold back from the warehouses – after a lengthy wrangle. Too many claims have been issued on the same lump of gold.

Look at it this way. There is a casino where the lucky gamblers can gamble risk-free. Their bets are “on the house.” This casino is the U.S. bond market. There is only one catch. The pile of the winning chips in front of each gambler may become irredeemable at the exit when the hairy godfather waves his magic wand.

Apart from wartime, the gold standard has been the most crisis-free monetary system in history. Of course, all monetary system have a habit of breaking down during wars.

The international monetary system as now constituted has been built on quicksand. It is a mere makeshift that took its origin in the last gold crisis of 1971.

The Last Contango in Washington will be different from all previous crises. It will destroy virtually all paper wealth and render virtually all physical capital idle. It will destroy our freedoms, unless we take protective action.

~~~

At Sentiment of Success feel that there is still a faint element of pessimism that surrounds gold. That’s why we go with silver. Whatever happens to gold, silver will rise much further and at the same time always maintain its value as a monetary currency.

8 Reasons Why Housing Hasn’t Bottomed

07/27/2009
From the Big Picture by Barry Ritholtz

Prices: By just about every measure, Home prices on a national basis remain elevated. They are now far off their highs, but are still remain about ~15% above historic metrics. I expect prices will continue lower for the next 2-4 quarters, if not longer, and won’t see widespread Real increases for many years after that; Indeed, I don’t expect to see nominal increases for anytime soon.

Mean Reversion: As prices revert back towards historical means, there is the very high probability that they will careen past the median. This is the pattern we see after extended periods of mispricing. Nearly all overpriced asset classes revert not merely to their historic trend line, but typically collapse far below them. I have no reason to believe Housing will be any different.

Employment & Wages: The rate of Unemployment is very likely to continue to rise for the next 4-8 quarters, if not longer. This removes an increasing number of people from the total pool of potential home buyers. There is another issue – Wages, and they have been flat for the past decade (negative in Real terms), crimping the potential for families to trade up to larger houses – a big source of Real Estate activity. Plus, more unemployment means more…

Foreclosures: We likely have not seen the peak in defaults, delinquencies and foreclosures. Many more foreclosures – which are healthy in the long run but wrenching during the process of dislocation – are very likely. These will pressure prices yet lower. And Loan Mods are not working – they are re-defaulting in less than a year between 50-80%, depending upon the mod conditions themselves.

Inventory: There is a substantial supply of “Shadow Inventory” out there which will postpone a recovery in Home prices for a significant period of time. These are the flippers, speculators, builders and financers that are sitting with properties that they do not want to bring back to market yet. Given the extent of the speculative activity during the boom years (2002-06), and the number of foreclosures so far, my back of the envelope estimates are there are anywhere from 1.5 million to as many as 3 million additional homes that could come to market if prices were more advantageous.

Psychology: The investing and home owning public are shell shocked following the twin market crashes and the Housing collapse. First the dot com collapse (2000-03) saw the Nasdaq drop about 80%, then the Credit Crisis of 2008 saw the unprecedented near halving of the market in about a year. Last, Homes nationally have lost about a third of their value since the 2005-06 peak. Total losses to the family balance sheet of these three events are about $25 trillion dollars. These losses not only crimp the ability to make bigger purchases, it dramatically curtails the willingness to take on more debt and leverage. Speaking of which…

Debt Service/Down Payment: Far too many Americans do not have 20% to put down on a home, have poor credit scores, and way too much debt. All of these things act as an impediment to buying a home. At the same time, to get approved for a mortgage, banks are tightening standards, including 1) requiring higher Loan to Values for purchases; 2) better credit scores to get approved for a mortgages; 3) Lower levels of overall debt servicing relative to income for applicants. Yes, the NAR Home Affordability Index shows houses as “more affordable,” but it conveniently ignores these real world factors.

Deleveraging: For the first time in decades, the American consumer is in the process of saving money and deleveraging their balance sheets. After a 40 year credit binge, its long overdue. The process is likely to go on for years, as a new generation is losing confidence in the stock market, Corporate America and their government. Think back to the post-Depression generation that were big savers, modest consumers, who eschewed credit and borrowing. The damage is going to take a while to repair.

Notes:
When differentiating between real and nominal returns – we refer to returns before and after the effects of inflation (7% growth minus 3% inflation = 4% Real return).

Loan Mods refers to Loan Modifications, typically involving a reduction in the interest rate on the loan, an credit extension, a different type of loan or a combination of the three.

Advice:
Don’t bet on capital gains any time soon. If you’re an investor, focus instead on cash flow by making more in rent than you pay on your mortgage.

Better a bad job than no job. During good times people quit for better opportunities. Today there’s strong reason to remain where you are at least until employment picks up.

The fact that many are losing confidence is a plus for conservative and patient investors. Stock yields from dividends are becoming the most attractive in over a decade and with fear of opportunity comes an abundance of it.

On Stock Values

07/17/2009
Some Stock Advice from Dan Ferris, editor of Extreme Value

I don’t expect investors will make much money in stocks on the long side from current price levels. Dividend cuts, weak earnings, and unattractive valuations are telling you to be careful. Most long term returns in stocks have come in from dividends, not capital gains (because arbitrageurs and institutions make it too hard for the majority of investors). On the dividend side, Procter & Gamble has raised its dividend every year for 53 years. ExxonMobil has done so every year for 27 years. Most stocks are just too expensive compared to earnings. The S&P 500 is trading around 16x earnings. And with banks failing, 10% unemployment, and the middle innings of a once-a-century meltdown. With housing and debt in charge of the economy now, this means a worse outlook for earnings and stocks. In the 1970s valuations sank for a decade through the Great Inflation.

Year P/E
1974 7.3
1975 11.7
1976 11.0
1977 8.8
1978 8.3
1979 7.4
1980 9.1
1981 8.1
1982 10.2
1983 12.4
1984 9.9
Average P/E 9.5

Based on historical standards, the ultimate bottom could be another 39% below the March 2009 low of 667 (12x S&P 500 earnings estimate).

For more information on P/E ratios see:
Investopedia – The P/E Ratio
About.com – Understanding Price to Earnings Ratio
Sentiment of Success – What is the Price To Earnings Ratio

Some Market Analysis

07/03/2009
Some readers are looking for investment ideas. I suggest we go over each asset class one by one:

Precious Metals: Everyone MUST own gold and silver because of what’s coming. Inflation IS a problem, it just hasn’t had an impact, but it’s built into the system. It’s simple: get some cash, go to your local coin shop (www.find-your-local-coin-shop.com) and load up on however much you could afford. (Bars only, no coins please).

Real Estate: In America? Forget about it. The real estate market remains overvalued on many scales and will recover when either no one has any money to buy a home or when interest rates are at 20%. Until then its like chickens without heads trying to catch a hat on a windy day. Ain’t gonna happen. (Buying foreclosures: Good strategy, bad timing).

Stocks: Many people did extremely well over the past few months. But the past is the past. I think markets will disappoint over the next few months, due to lack of volatility and motion, making traders mad. They say: 3/4 of stocks follow the major indexes. If you want to do make money stay in the other 1/4. (Biotech comes to mind).

Bonds: You mean lending money for zero return? Not my style. Or do you mean lending money to financially insolvent companies? Definitely not my style. The only reason people buy bonds is for safety and today most don’t even fit that category.

Commodities: This is probably the trickiest of all. It is after all the decade of commodities and with inflation around the corner it should payoff. Maybe its the hated and contrarian trade everyone is looking for. Maybe we’ll look back in 5 years and say “Commodities! Duh!”. Then again, maybe not. If commodities do rally, you’re better off in a concentrated position like gold.

My suggestion: Just take in your dividends and save your paycheck. Buy silver if you don’t have any. Jim Rogers says “I want someone to put money in the corner and then I just go over and pick it up”. I like stupid investments – ones that are so obvious yet mostly ignored, even ridiculed. That way I don’t have to think much and I make also make money.

Some Stock Market Perspective…

06/30/2009
Draw your own conclusions. Mine is that while the worst in terms of severity may be behind us, (note the only decline exceeding 66% was during the Depression), in terms of real value and bear market length we have much more to look forward to.

Note how the illustration adjusts for inflation. If, when rather, inflation come back, probably due to better market conditions, true value for stocks will take a big hit.

Also note how during the Depression, stocks shot up, plummeted down as fast as they came, recovered and then grinded down before staging the next bull market in the 1950s. We see a similar downward grind during the 70s (mostly inflation related). This may again play out in our current bear market.

Invest Like Sam Zell

06/26/2009
If you’re don’t know who Sam Zell is, just Google him. He has a net worth of over $3 billion mostly from the sale of his real estate business in 2005 (right before the crash). He started investing in the early 80s, when interest rates were through the roof and home sales through the floor. With his veracious buying amidst a terrible housing market he became known as the “gravedancer”. Here are Sam Zell’s five rules for successful investments:

1. Don’t Just Look At the Financials: Zell says investors should always study a company’s key assets, not just its financial statements. As a private equity investor, Zell has the opportunity to take a hands-on role in a company’s management and operations. But every shareholder should dig deeper into a company before investing. It’s not enough to know sales and profit margins. Always ask: Who are the managers, and what is their motivation? Who are the competitors? Who are the customers? What are the regulatory and/or political hurdles facing the industry?

2. Management Should Always Be Aligned With Shareholders: Zell demands that management be aligned with shareholder interest. At its most basic, this means that management should own large positions in the company’s stock. Still, Zell cautions, “Management that is obsessed with stock price is worrisome. I want them to obsess about the business,” he says. Zell also recommends avoiding companies that have anti-takeover devices. “As someone responsible for a public company, I’m responsible for the public’s capital. If someone comes along and wants to buy it at the right price, why not?”

3. Think Long Term: If you are going to invest in a company, you should always be in it for the long haul. “When you own a company and the company is doing well, then keep going. You don’t make exponential profits by going short.”

4. Be Able To See the Future: Zell always has an opinion about where a company he has invested in will be in the future. This forecasting allows him to assess how much risk he is willing to take in the present.

5. Invest In Companies with Staying Power: Zell requires that companies he invests in have “staying power”–in other words, that there will be continuous future demand for their product. He particularly likes situations where he does not have to spend any money on marketing because consumers already have a need for what is being offered. “The demand for my product should be facilitated by other people’s consumption.”

The Next Leg… Down?

05/10/2009
Some Investment Advice

Looking at the big picture, something I do often, one recognizes that the world ain’t all that it’s made out to be. I have a heavy hunch (based on educated analysis) that the stock market rally won’t last another month and that another wild flight to safety is about to begin.

But what would set this off? So what if companies are overvalued for the moment? Buy and hold would still pay off over the long term. Even (perma-bull) Jeremy Siegel will tell you, had you bought after the rout in 1929 when the Dow fell over 50% – even before the next 60% leg down – you’d still be making a profit by the following year, and by 5 years out you’d be looking at gains over 7% annualized. Not bad you say!

But as the old man in Jesse Livermore’s pub would tell him “In bull markets you buy, in bear markets you trade”. And this is no bull market. Not by a long shot! But who says this bear market rally is over?

One must remember that the sentiment changes drastically between super bull and bear market decades. In bull markets its all about competition, about the best stock tips, about the nicest home in Monte Carlo. In bear markets, it’s about your skin, about not losing as much and about being able to make rent or payroll.

While the speculative cards have all been set out on the table, the actual dealing has yet to begin on a grand scale. Corporate bankruptcies will rise, and with them, some of the greatest companies of our time. So far, this has mostly been in the financial sector; Bear Sterns, Lehman and a pileup of of small banks. But what about infrastructure, manufacturing, retail? Not to mention more commercial real estate losses.

It seems that together with people’s loss of fear for Dow 6,800, they have also lost all sensitivity to the fact that their companies may not make it all together. In bull markets there are companies that do well and those that do better.

In bear markets there are also two types of companies; those who make it and those who don’t.

“Caveat Emptor” (Buyer Beware).

Time to sell your shares in XYZ?

05/04/2009

We all know how Mr. Market chooses to run his place, not very orderly. When everyone is on the buy bandwagon he’ll dump half his shares, only to start bidding them up again a few days later. Have a look at the last bear market. (You try predicting all that!)

While I do believe what we saw back in March was indeed an interim bottom, I don’t think its the last time we’ll see Dow 6,800. So if you didn’t make your 658% yet, its ok. You’ll have another chance. Just please, don’t go down with your own ship.

I suggest, at least, that you start taking profits. The rally may continue for a couple more days, maybe even diving down and coming up for even more air before this bear-market rally is through.

As they say on the Street, you don’t buy bear markets, you trade them, and while the profits have been truly awesome, it’s time to lock in our gains.

When people begin to become skeptical of whether or not this really is a bear-market rally, you can be sure it is.

02/23/2009
Stop and Focus!

Those are the words business guru Michael Gerber uses often when expressing to the up and coming entrepreneur what he should do almost always. “Stop. Focus!”.

I want you to consider stocks. Not because we are going to buy, but just to get an idea of how perception, risk and reward aspects have altered over the past few months.

When we shorted the Dow at 13,00 and then again at 14,000, we did so because stocks, in every major form, were a losing proposition.

Technically, they were being overbought and overvalued on every level. The run from 10-14,000 was simply unsustainable.

Fundamentally, they offered a dividend yield that only a madman would accept, especially considering the downside risk they entailed. Book value was high, earnings were equal to historic highs, and thus p/e ratios were both high and overstated.

Sentimentally, people still couldn’t have been more optimistic on stocks than on any other asset class. Analysts kept proselytizing for higher prices, (one even dared to promote Dow 16,000), 401k’s continued to get their monthly distributions, and for the most part risk was entirely priced off the table.

Economic foresight was warning of a serious downturn in the economy, one which would definitely hurt earnings, possibly wiping out companies altogether. But no one cared to notice, saying that the nay-sayers were the same people who had missed out on the 4,000 point rally altogether.

So we had no other choice, and we did what we always do when people are pricing out something which seems inevitable. We shorted.

Now fast-forward almost a year and a half later…

Technical analysis has virtually no meaning today, which we would consider a good thing! This means that people should start focusing more on fundamentals.

Notice I say “should”. At 7,000, the Dow now offers a dividend yield of 4.5%. That itself in such an economy should whet investor’s tongues. Sure there will be many more corporate bankruptcies, but hold a conservative basket of interest bearing stocks and the future is due to be rewarding.

As earnings have plummeted the 17.5 P/E ratio seems almost too conservative. With debt being paid back book valued and balance sheets have improved drastically as well.

Unfortunately, most speculators are paying little attention to fundamental value, but rather to price motion. Sentiment has worn down and has little additional resistance before the market enters panic mode and we see a final capitulation from the share market. This bear in mind would mark, a definite bottoming process.

It should be noted that markets do not bottom in a day. Unlike their Topping counterparts, the trough could take months to form. This offers just enough time to drive the last speculators from the market and allow investors to position themselves properly for the coming multi-tier bull.

So have we seen the bottom? No. Have we seen the worst the market has to offer? We think also no. But one thing is damn certain. Someone who wouldn’t have touched a share for years may suddenly be having a change of heart.

Yes Gold, Silver and Short-term cash is the place to be for right now. But keep your other eye on the ball! One of the greatest equity investment opportunities, possibly over the next 35 years, is just around the corner!

09/24/2008
If the Bailout Should Fail

Remember these words:

“It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal… There is no Plan B”.

Those are the words of Warren Buffett. A man who has his money where his mouth is. Buffett seems to have a lot of faith in America, in its Government, in Hank Paulson and definitely in his old Wall Street associates, Goldman Sachs.

But one thing should remain crystal clear. This is not a matter of recession or no recession. This is a matter of depression or a recession. In the event that the bailout would not go through, in the words of the greatest investor in the world “The entire financial system would break down and take years to restructure”.

It seems that investors should have one fundamental question on their minds: Will the bailout go through or not. If it doesn’t the financial system is obsolete and we have a breakdown 1929-32 style: The Dow loses 90% and everything starts over. If it does all work out then we have inflation 1970s style, possibly worse ($1 trillion is a lot), the Dow has a standard consolidation that lasts a few years and the economy sucks for a while.

Thus, we look at the Dow. What the stock market is saying is “I don’t want to be a seller. I want to buy and hold, even if my gains aren’t all that good”. The simple these are mostly the same investors who bought when things were attractive in the first place. Consider the fact that they may still be getting 8-10% on dividends, why should they sell? You’ll never hear any value investor tell you he wants the Dow to go to 20,000. That’s preposterous! Why would he want the only asset he knows to buy cheaply rise in value?

But then there is the speculative crowd. And I say speculative not because they don’t know what they’re buying, many do. But because they buy for appreciation. They believe the Dow will soon go to 20,000, and they want it to. They buy and hold betting that tomorrow some new idiot will come and buy their stock at a premium to their cost. These are the people who will be selling when the sailing gets tough, because their ships are made of cardboard. They will sell and they will be the ones to send the Dow down, possibly to 8,000. Furthermore, they won’t have the gall or bladder to buy at such times. Investors will for once in many years be euphoric.

In the meantime stocks are in a rush-hour-like grid-lock. Speculators won’t sell because its against the whole foolish buy-and-hold mentality they live with. Investors won’t sell a) because they haven’t been buying in ages, b) they already would have, or c) they are the new bulls, ready to step in as soon as things get bloody. Short sellers are out of part of the game altogether.

How do I know all this? Simple: Silver. I owned it from 21 all the way down to 10.50. Does it hurt? Well that depends. If you are out of a job with your life savings invested then probably. If you are a working man, putting more and more of your life’s toil into hard assets, it will mpay off immensely over the long run, so why worry?

The Dow right now should be priced at about 8,000 if it were looking 5 years out. But it isn’t. The market is looking at the next few days. Yes bailout or no bailout. As soon as that’s confirmed, hopefully that there will be a bailout and that the economy will only experience a bad recession at worst, then the next issue is for the Mice and the Buffalo.

The Mice are the risk-takers. The ones who thought they have their cheese and eat it too. They put too much money into too short-term of a gamble and lost. They will sell not because they want to but because they have to.

Buffalo travel in herds. Buy-and-hold today, run for the hills tomorrow. These folk would be better off owning gold. Its just as stupid as they are. They make when everyone makes more and lose more when the smart money takes losses.

It’s Caveat Emptor as they say in Latin, or Buyer Beware. Maybe they should say Seller Beware.

You can’t always change lanes while driving even though the other lane is better ,so too with investing. Sometimes you have to swallow losses. But don’t sell because others are. That’s juts plain foolish. And we are, or at least would love to think we are, Intelligent Investors.

The Funniest Channel on XM Radio: CNBC

02/26/2008

 

Indeed, they are one funny bunch of folks. I did a lot of driving today so I spent that time listening to “Street Squawking” and “Bell Calling”. I love this network because it gives such an honest and upfront analysis on the predicament of the markets while at the same time those offering us this knowledge seem oblivious.

For instance in one session, a few hosts were sitting around discussing what was the means for seeking a considering bottom in the stock market. One guest began explaining how a) he was looking for a more pessimistic view from traders and b) that the media was driving the attitude of the market. I don’t even know if he understood the irony of his own statements.

Regarding market sentiment, we all know that the market never makes everyone happy. A “Bubble” is simply a term used to describe when the market rewards those who know nothing about investment whatsoever, and is followed by its respective “Bust” when the market rewards those who sat and the sidelines choosing not to trade in hysteria.

You’re either a long-term trader or a short-term speculator.

As far as the media is concerned, anything broadcast to millions of people free of charge is called media. What George Soros thinks, says or does in the privacy of his own office is personal and would not effect the judgment of the majority. However, the minute he proclaims his ideas, speculations or theories over public airwaves it is now media and any information relayed is immediately priced to market.

Anyway… here’s what I did learn

 

  • We are nowhere near an absolute bottom in the stock market. Yes, we may see a short-term rally but this will be concise, insignificant and for most traders unprofitable.
  • Individual sectors may see a rising in share value due to the fact that most sellers have sold and few buyers have stepped in from the sidelines. These include select homebuilders, small banks, health care and possibly tech stocks. It must be taken into evaluation however that while the market corrects it will drag down with it expectation of these sectors as well. Hence while a P/E ratio of 22 may have been adequate a year ago, today 15 should be a more apparent support of fair value.
  • The Commodities Bull strong as we have entered into the second phase of investment. This is when institutions, trading funds and large investors come into the market. While the media does have a much less pessimistic view on oil, commodities and precious metals, it does come with a high level of skepticism and caution.
  • One guest who was on today said “We know when the decline is over when stocks no longer suffer from bad news”. I think this is a great point. Stocks have further to fall because sentiment has simply gone from “good” to “semi-good” with many investors seeking ways and reasons to hold onto their portfolios. When they realize how far these stocks could fall (one analyst put Citi at $16) that’s when the real selling begins. We are at around that stage.
  • Stagflation worries are surprisingly under-rated. While the street has a clue of what may come they have not yet experienced a solid dose of it. Many producers are only now seeing the necessity to raise consumer prices on everything from wheat to milk. As one businessman I spoke to put it “We can no longer afford to keep our current prices”.
  • Unless we see a resurgence of the income wage hikes that we saw in the 70s, the consumer is in some serious trouble. This means that instead of being inflationary for all, it may end up stationary for few and ultimately deflationary for many. Remember that ‘flation refers to monetary availability or lack thereof.

All in all I say business is good for he who takes the time to understand the big picture. To step away from the hubris and good fortune we’ve seen in recent (all 25) years and accept a more conservative yet enterprising value based orientation of the markets, whichever they may be.

As for myself my portfolio’s up over 30% year-to-date so… 🙂

From Employee to Investor

12/25/2007
Again moving forward with some of Kiyosaki’s thoughts on business, investing and entrepreneurship, together with some of my own humble opinions.

The Four Quadrants of the employment ladder.

E = Employee – Earns wages through labor for another.
S = Self-Employed (or Small Business) – Earns wages through labor for himself.
B = Business Owner – Starts a system for business growth through others’ labor.
I = Investor – Buys into Assets and Businesses.

Once you categorize yourself as a B or an I, it is important to recognize whether you are more of an Entrepreneur (start business and then transfer or sell to more competent management), Investor (passive owner), or Officer (involved with day to day operations of the business).

The Entrepreneur prides himself in being a great leader and initiator, as well as a big thinker. He has a great idea, plans on how to implement it and goes in. He often comes across all four roles.

The Investor often sits on the sidelines accumulating wealth with the growth of the business, thus his income is passive. The business pays people to do the work.

The Officer is the one who goes all the way from founder or buyer to active management. He builds a successful business with his ability to lead and then enables his ability to manage it properly. His income is both active as well as passive.

Leadership is the ability to initiate an idea of goodwill and influence people around you to achieve that goal.

Management is the ability to work together with people and at the same time complete the necessary tasks of operations.

Taxes are the cost of living in a safe and prosperous society. These are nevertheless deferred for the Business Owner and Investor, particularly when they serve a common good (such as creating jobs or homes). This is why E’s and S’s are taxed first and at much higher rates, while B’s and I’s are taxed last and at lower rates.

Charity stems from the old adage “Give a man a fish and he’ll have food for a day. Teach him to fish and he’ll have food everyday.” To properly reap the benefits of success one must also contribute. The greatest of businesses were often solutions to problems and contributions to a better and more efficient economy.

The Greatest Fears we are often faced with are the “Fear of Rejection” – the whole world will never love you – and “The Fear of Failure” – you can’t win every time. The greatest of mankind are those who strive to conquer these two emotions. After that life is nothing but wonderful.

The advantages of the business owner are immense. As a corporation an individual enjoys a sense of security and protection, as well as a tax-efficient method for increasing wealth through entrepreneurship and enterprise.