When my fist clenches, crack it open
Before I use it and lose my cool
When I smile, tell me some bad news
Before I laugh and act like a fool
If I swallow anything evil
Put your finger down my throat
If I shiver, please give me a blanket
Keep me warm, let me wear your coat
The Who, Behind Blue Eyes
. . .
The average American attends school for 15 to 19 years. His education often ends at that point.
This can be troublesome when coupled with our love of action. Gittin' her done. Accomplishment. When things go wrong, we often expect others to step in. Bail us out.
Rarely do we learn enough to avoid making the same mistakes. We are doomed to repeat most everything. In this respect, we have much to learn from children.
Consider my eight year old son. He recently fixated on the idea of acquiring a snake. Not just any snake. His obsession? Ball Pythons.
My wife's phobia towards reptiles notwithstanding, there are many reasons not to purchase a large, predatory snake with the capacity to strangle its owner. None of which satiate my son's obsession.
So, in the spirit of continuing education, I instructed him to draft an essay on Ball Python Ownership. And so he set to work.
Four minutes later, he turned in his essay. Half a page, hand written, three sentences. Upon seeing the angle of my eyebrow arch, he discerned the inadequacy of his initial foray. So, he redoubled his effort.
Three minutes later I received his next attempt. It bore a remarkable resemblance to the first--with two additional sentences.
That process was repeated four times when I decided on a different tack.
I asked my son to pretend I am a Martian visiting from another planet. One that had no comprehension of many earthly things. Like snakes.
This aligned perfectly with the current image of his old man and helped him greatly.
The following day, my son called the office. He wanted to read his essay. Upon hearing it, I asked a couple of questions. Lauded his effort. Hung up and smiled. I was proud of his effort. He learned what needed doing. Then did it.
In return, we will soon domicile a Ball Python, in addition to the cat, dogs, frog, hamsters and humans.
Investing in capital markets is much like an eight-year old's obsession with Ball Pythons.
Eight year olds don't simply want any snake. They want a Ball Python. Investors don't simply seek to invest. They seek to make money. Anything short of that is unacceptable.
Yet, eight year olds will study, take instruction, make incremental enhancements and persist in their efforts.
Investors, on the other hand, can be impatient automatons who do not take instruction, are apt to quit early and rarely learn from past mistakes.
Most investors don't even bother to understand the core principal of investing.
When purchasing anything with the intention of making a profit, simply figure out the value of the thing and then pay less. With stocks, the value of most companies consists of the sum of all earnings over a lifetime (or a holding period), discounted back in today's dollars.
One can argue other means of arriving at a valuation: relative value, liquidation value, sum-of-the-parts value or acquisition value. All helpful. None the less, to truly arrive at a reasonable assessment of current value, you must determine what the business will make in the future, and discount it back.
Buffett. Gabelli. Graham. Greenblatt. Miller. Eveillard. Each has been remarkably successful at determining future cash flows, discounting back, and paying less. They invested in things they could understand. Place a value upon.
Still, the phone rings weekly with callers wishing to discuss wind farms. Non-invasive vascular surgical equipment. Nanotechnology. Fracking. Cloud-based data storage systems. East European real estate.
Many of those will make money. But, most investors will not. They invest too early. Choose poorly. Exit early. Or late. Good timing is not within our DNA.
Plentiful are the well-worn, time-tested concepts that have borne profitable fruit. Even Neanderthals utilized tools for hunting. Materials for shelter. Resources for food storage. Accessories to appear more attractive.
Still, we'd rather invest in Vastexyldyne Micro Technology than Kroger. Proctor & Gamble. Smuckers. Each of which made more money last quarter than Vastexyldyne ever will.
So, if we ignore fundamental investment principals, refuse to learn from mistakes and rarely listen to the experts, by what principal do we base most of our investing?
Explains a lot. Things linked to sex have brought human beings to all depths of stupidity since the Greek sailors followed the sirens' song right into the cliffs. When one has an appetite for destruction, the objects of desire often represent the seeds of destruction.
That in mind, one understands the vitality of the advertising industry. Advertisers utilize sex appeal like my college roommates utilized Drakkar Noir. Liberally. You understand why when you consider the innumerable mistakes, misdeeds and misappropriations we have made when faced with sex appeal.
Tulips during the Dutch Golden Age? Sexy.
Cool Aid at Jamestown? Sexy.
Cigarettes in the Forties? Sexy.
Bee hive hairdos in the fifties? Sexy.
Bell bottoms during the sixties? Sexy.
Tech stocks in the late nineties? Sexy.
Real estate in 2007? Sexy.
I have never seen a lemming. But I am certain that there is something about the cliff over which they march that just radiates sex appeal.
Children? Not so much. My son finds nothing sexy about Ball Pythons. His fascination originates from the same source as his love of baseball. It's amusing. Challenging. Fun.
And whether he's learning to hit a fastball or writing an essay on snakes, he's focused. Not distracted by sexy. At least, God willing, not for another seven to eight years.
. . .
Europe could be close to the tipping point. A contraction looks increasingly likely. And if Europe goes, then the U.S. may be close behind. Both economies appear to be hitting stall speed.
Given all of the media attention and political disappointment, perhaps it is our fate. A month ago, the economic data was pretty good. The media banter was depression-esque. When the news affects reality's protagonists to the point of indecision, uncertainty and fear, eventually reality begins to resemble the news.
If another recession occurs--and we're not saying it will, then stocks typically correct an average of 39%. That's a big drop. One that brings opportunities. But you will have to be decisive. Tactical. Attentive to details.
There is a pervasive lack of faith in governments and their institutions. And the media disseminates information so quickly that market actions that once occurred over months now transpire in days.
Still, this is not a 2008 sequel. At 17, the S&P 500 was then overvalued. Today, at 11, it is not. The onus will be on investors to ensure proper asset allocations. Why? So that they are not forced to sell at the worst possible times.
That said, we are being proactive. If S&P 1100 is compromised, take cover. Our plans include a contingency for a precipitous decline in risk assets. Yours should too. Stay tuned.