This blog is not a forum for my political views but, rather on what we can glean from the way the victory unfolded.
I once read a book titled “Winning the Loser’s Game” by Charles Ellis. I don’t recall if I ever finished it—probably not—but one of the major themes of the book is that investing is a game for Losers, much like tennis.
The idea is not that only Losers partake in these activities. Indeed, that cannot be the case in tennis unless one’s opponent is brick wall. Rather, the author espouses the notion that it is the action of the Losers, not the Winners, that determine the eventual outcome. In other words, you win by making the fewest mistakes. In tennis, it means not double-faulting, not slamming an opportunity for a power shot into the middle of the net, and not trying to be too precise into placement of a lob.
In investing, it could be argued that the best way to come out ahead is not to lose capital, even if means foregoing the advice of bartenders, cab drivers and hairstylists. It means recognizing that losing capital means, quite possibly, being out of the game, whereas losing an opportunity still means that the game is afoot.
This idea has always been a part of the CastleMoore investment philosophy, as a firm and as individuals before the firm was created. But in the aftermath of the Obama victory, when reflection is all that’s left, it occurs to me that the President-elect ran his campaign using a very similar blueprint.
He understood that the way to win was to avoid losing. He was aware that: (i) most of the time the party of a two-term president loses; (ii) the economy was in upheaval; (iii) unpopular wars were being fought on two fronts. In other words, he knew that the election was his to lose. Thus, the worst strategy he could have pursued would have been to be too explicit in his policies, thereby opening himself up to direct attack. Indeed, a large part of the criticism leveled against during the campaign was targeted to his vagueness in his policies.
He also managed to maintain composure in the face of market panic, another important attribute not likely lost on investors.
However we feel about President-elect's policies, we must acknowledge the near flawlessness of his campaign and lessons that can be learned from them, especially investors.
Tuesday, November 11, 2008
Monday, October 6, 2008
Babies, Bathwater, and Trends
By now you have likely read your September statements, and have internalized most of the bad news. I say “most” of the bad news because, so far, October has not started off as the type of month of opportunity that typically follows an untypical month such as was September.
As I sit here watching the screen, the TSX is down 600 points…no, wait, make that 650….no, now 800…what? back to only down 500?…well, you get the idea.
If one were try to make sense of it all one would have to begin with an understanding of what type of sense one can expect of the market during more normal periods, whatever THEY are.
We all understand that equity markets, to use the most prominent example, are driven by the emotions of greed and fear. Fear taken to an extreme is called “panic.” Greed taken to an extreme is so rare an occurrence that we never really had a term for it before Mr. Greenspan came along and favored us with “irrational exuberance.”
I doubt that the latter term is on too many investors’ minds these days, but it does help to explain why markets tend to rise at a much slower pace than they drop. When stocks are on the rise, the typical investor may not be in such a hurry since the only potential loss is one opportunity, and that is easily replaced. Alternatively, the investor may already be invested and is now looking to enhance returns by scoping out the next market leaders. So there is usually ample time for research, the weighing of alternatives, and the implement of investment strategy.
When markets are in a free fall, as is the case now, investors are suddenly—and I do mean suddenly—faced with real losses. In a panic scenario there is no time for any of the processes referred to above. There is no time, in fact, for any thinking at all, just for potential-loss-induced reflex of selling.
By necessity, this means that things get sold where calm, rational reasoning would dictate otherwise. This is generally good news for those who able to pick up assets at fire sale prices, whether it be strong companies buying up the assets of the weak, companies buying up their own stock, or portfolio managers buying discounted stocks.
On the last point I should mention that I myself consider myself to be a quantitative portfolio manager, having cut my teeth at fundamentalist firm ABC Funds, and having since added many technically-based weapons to my arsenal. During my last year at ABC, we earned a rate of return of over 120% in our more aggressive of the two funds. Even then we understood that general market conditions played an essential role in the future returns of stocks and portfolios. If there were no individual bargains, then the market was no bargain either.
But as many value managers have discovered to their dismay, cheap stocks can get cheaper, often much cheaper. That’s why I’ve devoted much of my time in the last several years learning to identify the trend of the market. Once that is done, we can expect continuance of the trend rather than a reversal. That reversal will eventually come, of course, at which time there will be plenty of bargains with which to fill our hats.
For the record, we identified the downtrend sometime around last June, and have been pretty much in cash every since. We had no idea that the crisis in the market would have been so dire, and who knows if it’s over yet? Trends don’t offer a timeline for their own end, just a means of letting us know when it’s occurred.
Sheldon Liberman,
Portfolio Manager.
As I sit here watching the screen, the TSX is down 600 points…no, wait, make that 650….no, now 800…what? back to only down 500?…well, you get the idea.
If one were try to make sense of it all one would have to begin with an understanding of what type of sense one can expect of the market during more normal periods, whatever THEY are.
We all understand that equity markets, to use the most prominent example, are driven by the emotions of greed and fear. Fear taken to an extreme is called “panic.” Greed taken to an extreme is so rare an occurrence that we never really had a term for it before Mr. Greenspan came along and favored us with “irrational exuberance.”
I doubt that the latter term is on too many investors’ minds these days, but it does help to explain why markets tend to rise at a much slower pace than they drop. When stocks are on the rise, the typical investor may not be in such a hurry since the only potential loss is one opportunity, and that is easily replaced. Alternatively, the investor may already be invested and is now looking to enhance returns by scoping out the next market leaders. So there is usually ample time for research, the weighing of alternatives, and the implement of investment strategy.
When markets are in a free fall, as is the case now, investors are suddenly—and I do mean suddenly—faced with real losses. In a panic scenario there is no time for any of the processes referred to above. There is no time, in fact, for any thinking at all, just for potential-loss-induced reflex of selling.
By necessity, this means that things get sold where calm, rational reasoning would dictate otherwise. This is generally good news for those who able to pick up assets at fire sale prices, whether it be strong companies buying up the assets of the weak, companies buying up their own stock, or portfolio managers buying discounted stocks.
On the last point I should mention that I myself consider myself to be a quantitative portfolio manager, having cut my teeth at fundamentalist firm ABC Funds, and having since added many technically-based weapons to my arsenal. During my last year at ABC, we earned a rate of return of over 120% in our more aggressive of the two funds. Even then we understood that general market conditions played an essential role in the future returns of stocks and portfolios. If there were no individual bargains, then the market was no bargain either.
But as many value managers have discovered to their dismay, cheap stocks can get cheaper, often much cheaper. That’s why I’ve devoted much of my time in the last several years learning to identify the trend of the market. Once that is done, we can expect continuance of the trend rather than a reversal. That reversal will eventually come, of course, at which time there will be plenty of bargains with which to fill our hats.
For the record, we identified the downtrend sometime around last June, and have been pretty much in cash every since. We had no idea that the crisis in the market would have been so dire, and who knows if it’s over yet? Trends don’t offer a timeline for their own end, just a means of letting us know when it’s occurred.
Sheldon Liberman,
Portfolio Manager.
Wednesday, September 17, 2008
Hurting Days Hath September
I’ve always loved the month of September. The weather was usually agreeable, the pennant races were in the home stretch, hockey was becoming more the buzz (go Habs!) and the NFL season was kicking off.
It was also a month of new beginnings, as the school year got underway with a chance to improve upon the sorry performance of the previous year. This goal was usually doomed from the start, since September is also the month all the new TV shows came out, as well as new seasons of the old favorites.
As I matured (don’t say it!), sports became less important to me and spirituality took over at the top of my priorities list. For members of the Jewish faith, September, or the month of Elul, is generally a time of reflection and spiritual opportunity, just ahead or coincident with the holiest days of the Jewish year, Rosh Hashanah.
For investors, September is significant—some would say infamous—for another reason: it has historically been the worst month in terms of performance, period. For instance, dating back to 1928, the average return on the Dow Jones Industrial Average for the month of September has been -1.40%, far worst than the average return for May, the second worst month. May is the only other month with a negative return (-0.16%) But at least May gives a positive return most of the time (52.5% of the time). September has been profitable only 39.2% of the time, the only month batting less than .500. October seems to grab the headlines with the big, dramatic days, including 1929 and 1987.
In case you’re wondering December is the best month in which to be invested, with an average gain of 1.44% and a 72.5% “success” rate.
This point hit struck a chord with me as I sat here deciding what to write about this month. The Dow is off about 4.1% so far this month, although most Canadian investors would gladly change positions with their US counterparts these days. As we wrote in a weekly commentary (www.timingthemarket.ca, see guest column by the site’s market master Don Vialoux in this newsletter), we hope Canadian investors had a restful Labour Day, because the rest of the week saw nothing to write home about: down 11.2% as of this writing.
At our shop, we do consider seasonal tendencies, as well as the fundamentals of markets, sectors and individual securities, but these factors are considered adjuncts to our most valuable investment tool: KNOW THY TREND. Only by doing so can an investor master the most difficult task he or she will ever have: selling. After all, it’s market declines that separate the contenders from the pretenders in this business. Selling, not only preserves confidence, but also capital, two dear resources which allow investors to carry on.
Throughout my career as a Portfolio Manager, I’ve always considered risk reduction and capital preservation to be my Prime Directive. Hence, I’ve never to my knowledge, had a problem selling any security, save for one:
After having sold Microsoft, I quickly found that my Excel didn’t, my Outlook became cloudy, my Power Point became pointless, and suddenly my Word wasn’t good enough. Moreover, after using Microsoft’s Flight Simulator, my luggage went missing.
Just kidding of course. I can truly say that Microsoft has added value to my life just as it has added value to thousands of portfolios over the years.
As for the month of September, I am happy to report that it only has 30 days, and we’ve held the line for client portfolios so far, edging them up slightly to date.
To all our Jewish friends, may the New Year bring Peace, Health, and, of course, Prosperity.
-Shel
sheldon@castlemoore.com
1.416.306.5770 or toll free 1.877.289.5673
It was also a month of new beginnings, as the school year got underway with a chance to improve upon the sorry performance of the previous year. This goal was usually doomed from the start, since September is also the month all the new TV shows came out, as well as new seasons of the old favorites.
As I matured (don’t say it!), sports became less important to me and spirituality took over at the top of my priorities list. For members of the Jewish faith, September, or the month of Elul, is generally a time of reflection and spiritual opportunity, just ahead or coincident with the holiest days of the Jewish year, Rosh Hashanah.
For investors, September is significant—some would say infamous—for another reason: it has historically been the worst month in terms of performance, period. For instance, dating back to 1928, the average return on the Dow Jones Industrial Average for the month of September has been -1.40%, far worst than the average return for May, the second worst month. May is the only other month with a negative return (-0.16%) But at least May gives a positive return most of the time (52.5% of the time). September has been profitable only 39.2% of the time, the only month batting less than .500. October seems to grab the headlines with the big, dramatic days, including 1929 and 1987.
In case you’re wondering December is the best month in which to be invested, with an average gain of 1.44% and a 72.5% “success” rate.
This point hit struck a chord with me as I sat here deciding what to write about this month. The Dow is off about 4.1% so far this month, although most Canadian investors would gladly change positions with their US counterparts these days. As we wrote in a weekly commentary (www.timingthemarket.ca, see guest column by the site’s market master Don Vialoux in this newsletter), we hope Canadian investors had a restful Labour Day, because the rest of the week saw nothing to write home about: down 11.2% as of this writing.
At our shop, we do consider seasonal tendencies, as well as the fundamentals of markets, sectors and individual securities, but these factors are considered adjuncts to our most valuable investment tool: KNOW THY TREND. Only by doing so can an investor master the most difficult task he or she will ever have: selling. After all, it’s market declines that separate the contenders from the pretenders in this business. Selling, not only preserves confidence, but also capital, two dear resources which allow investors to carry on.
Throughout my career as a Portfolio Manager, I’ve always considered risk reduction and capital preservation to be my Prime Directive. Hence, I’ve never to my knowledge, had a problem selling any security, save for one:
After having sold Microsoft, I quickly found that my Excel didn’t, my Outlook became cloudy, my Power Point became pointless, and suddenly my Word wasn’t good enough. Moreover, after using Microsoft’s Flight Simulator, my luggage went missing.
Just kidding of course. I can truly say that Microsoft has added value to my life just as it has added value to thousands of portfolios over the years.
As for the month of September, I am happy to report that it only has 30 days, and we’ve held the line for client portfolios so far, edging them up slightly to date.
To all our Jewish friends, may the New Year bring Peace, Health, and, of course, Prosperity.
-Shel
sheldon@castlemoore.com
1.416.306.5770 or toll free 1.877.289.5673
Tuesday, March 18, 2008
Chickens Do Come Home to Roost
The man who has fed the chicken every day throughout its life at last wrings its neck instead, showing that more refined views as to the uniformity of nature would have been useful to the chicken (Bertram Russell).
I’d like start out by expressing sorrow over the plight of Bear Stearns, notably its employees. Collectively, they owned at third of the firm and, like other shareholders of the firm, saw the value of their holding disappear in less time than that it took to execute a trade.
Of course, some of those employees were in fact seven-figure income earners, and some of them made the decisions that eventually caused the firm to succumb to the harsh reality of the credit markets: that the excessive encouragement of risky asset creation often leads to discouraging results for the last people owning them.
However, most BSC employees were honest, hard-working employees of an investment dealer, just as I used to be (I’m still honest).
I imagine that a large portion of the discount from book value JP Morgan will receive in its purchase of BSC—if, indeed the sale goes through—will be written off, and large write-offs often portend large lay offs. And, as a professional who manages the wealth of other, herein lies a lesson worth learning.
Consider: the average person’s primary means of sustaining him/herself and dependants is her/her employment. A person’s secondary means of sustenance is his/her savings. But what happens if an employee’s savings is, to a large extent, tied up in ownership of the employer, as is frequently the case with companies that offer stock purchase plans? Then those factors which affect his job security will also influence the value of his/her savings as well. The Bear Stearns episode will long serve as a classic example of the too-many-eggs-in-one-basket idiom.
Of course, this is not they type of thing one tends to think about when things are going well, and have for awhile (see chicken quote, above). But then, that’s how the current problem began, by believing the profits earned from sub-prime mortgage generation and securitization would last forever.
It’s incumbent upon financial advisers to consider issues pertaining to diversification (and being over diversified has its costs as well).
The Winter of Our Discontent
Winning may not be everything, but losing isn’t anything. –Charles Shultz [Charlie Brown]
The severity of this winter in Ontario has, on occasion, invited comparison to the winters I experienced growing up in Montreal. Yes, we received more snow, and temperatures were, on average, more frigid. In fact, there is a section of town called “Snowed-in.” Yes, they spell it S-N-O-W-D-E-N, but they’re not fooling me.
As I recall, however, Toronto is a windier town, and wind can add more discomfort to the winter experience than either temperature or snow levels (unless, of course, you have a car, but I exclude that case because our family car typically winters in Florida).
As an aside, I’d like explain why I believe that most Jews believe in the effects of global warming: it’s because we have Jewish mothers who like to tell us how much colder the weather was when THEY had to walk to school. This applies in Montreal, Toronto, Miami…
Yiddishe mamas notwithstanding, once you get to thinking about winters in Montreal, you can’t help but to thing it’s known for: hockey, either the playing of it, or the almost-required-by-law devotion to the Canadiens—the “HABS”.
Of course, the Habs were easy to be devoted to. No North American professional team has won more champions, besides the New York Yankees of baseball. So it would be fair to say that winning wasn’t something Montrealers were accustomed to, it was something we expected. This applied only to hockey.
Well, I wasn’t good enough to play for the Habs, or even for the other Canadian-based professional hockey team that existed at the time, but I moved to that city anyhow and eventually became a portfolio manager (more about my career path in an upcoming issue).
Of course, as I grew out of adolescence and developed other interests, hockey—all sports, really—took on a reduced role in my life. I maintain an interest in sports in general, and not necessarily for the usual reason. I find that sports often serves as a useful microcosm for society in general. Put another way, societal change are often visible in the sports universe in a more easily understood way.
I could cite many examples, but the one that strikes as close to home as any of them is the issue of short term gratification. You see, when I followed hockey closely, I noted that coaches were hired for the long haul. Names like Toe Blake, Emile Francis, Punch Imlach, Harry Sinden, Sid Abel, and Billy Reay each managed his respective team for what seemed to me to be an eternity. And the overall winning (or losing) percentage wasn’t any different than as now.
Many years later, the point stays close to home. Portfolio Managers are expected to outperform their respective benchmarks each and every quarter, despite that fact that no investment methodology has ever done that, no matter how successful its long term track record has been. Last year was a tough one in the business, and I know of portfolio managers with good long term records who lost customers for one off year, and under circumstances beyond their control.
The bottom line: if you must fire something, try a puck
More from Shultz:
My life has no purpose, no direction, no aim, no meaning, and yet I'm happy. I can't figure it out. What am I doing right?”
“Life is like a ten speed bicycle. Most of us have gears we never use.”
“Don't worry about the world coming to an end today. It is already tomorrow in Australia.”
“There's a difference between a philosophy and a bumper sticker.”
The severity of this winter in Ontario has, on occasion, invited comparison to the winters I experienced growing up in Montreal. Yes, we received more snow, and temperatures were, on average, more frigid. In fact, there is a section of town called “Snowed-in.” Yes, they spell it S-N-O-W-D-E-N, but they’re not fooling me.
As I recall, however, Toronto is a windier town, and wind can add more discomfort to the winter experience than either temperature or snow levels (unless, of course, you have a car, but I exclude that case because our family car typically winters in Florida).
As an aside, I’d like explain why I believe that most Jews believe in the effects of global warming: it’s because we have Jewish mothers who like to tell us how much colder the weather was when THEY had to walk to school. This applies in Montreal, Toronto, Miami…
Yiddishe mamas notwithstanding, once you get to thinking about winters in Montreal, you can’t help but to thing it’s known for: hockey, either the playing of it, or the almost-required-by-law devotion to the Canadiens—the “HABS”.
Of course, the Habs were easy to be devoted to. No North American professional team has won more champions, besides the New York Yankees of baseball. So it would be fair to say that winning wasn’t something Montrealers were accustomed to, it was something we expected. This applied only to hockey.
Well, I wasn’t good enough to play for the Habs, or even for the other Canadian-based professional hockey team that existed at the time, but I moved to that city anyhow and eventually became a portfolio manager (more about my career path in an upcoming issue).
Of course, as I grew out of adolescence and developed other interests, hockey—all sports, really—took on a reduced role in my life. I maintain an interest in sports in general, and not necessarily for the usual reason. I find that sports often serves as a useful microcosm for society in general. Put another way, societal change are often visible in the sports universe in a more easily understood way.
I could cite many examples, but the one that strikes as close to home as any of them is the issue of short term gratification. You see, when I followed hockey closely, I noted that coaches were hired for the long haul. Names like Toe Blake, Emile Francis, Punch Imlach, Harry Sinden, Sid Abel, and Billy Reay each managed his respective team for what seemed to me to be an eternity. And the overall winning (or losing) percentage wasn’t any different than as now.
Many years later, the point stays close to home. Portfolio Managers are expected to outperform their respective benchmarks each and every quarter, despite that fact that no investment methodology has ever done that, no matter how successful its long term track record has been. Last year was a tough one in the business, and I know of portfolio managers with good long term records who lost customers for one off year, and under circumstances beyond their control.
The bottom line: if you must fire something, try a puck
More from Shultz:
My life has no purpose, no direction, no aim, no meaning, and yet I'm happy. I can't figure it out. What am I doing right?”
“Life is like a ten speed bicycle. Most of us have gears we never use.”
“Don't worry about the world coming to an end today. It is already tomorrow in Australia.”
“There's a difference between a philosophy and a bumper sticker.”
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