The Stock Market Is Still for Suckers
blogmaverick.com
blogmaverick.com
A while back Buffett said that he thinks he could average 50% annually if he only had a small sum of capital. Here are some of the things he would likely be doing:
1. Go where the big investors can't
Many large institutional fund managers cannot go below certain market caps. Typically you can find a rich hunting ground of undervalued and ignored companies below $100M.
During the crisis I found it pretty useful to actually screen for negative enterprise value stocks. These were companies where they were trading BELOW the cash they had on their balance sheets. (EV = Market Cap + Debt - Cash). Some of these companies were pretty tiny, $10 to $50M mkt cap, but they worked out well. You have to be willing to deal with illiquidity though.
2. Odd lot tender offers
You can find situations where a company wants to go private and delist. To do that they need to buy out shareholders and get below 300 public shareholders. To do that sometimes they will pay a premium for you to tender shares if you have below 100 shares. Again, this is an area where a small investor can do well but where large institutions are precluded from being active.
3. Look for areas where institutions are forced to sell
Spinoffs are the classic example. Academic research has shown that spinoffs will in general outperform the greater market. Why?
Many index funds are mandated to only hold stocks that are a part of the index. Sometimes an index member will spinoff a smaller unit which cannot make it into the index. The index funds will be forced to sell that company and so its pricing may get below its actual value. That's why spinoffs tend to outperform the market in their 2nd and 3rd year of trading.
---
There are plenty of other areas too. These are just a few but it is all pretty well publicized.
When it comes to picking out frauds, you can usually tell by looking at the accounting who is playing loose and who is not. That wont give you an indication of whether or not a company is necessarily a fraud, but it will give you the opportunity to know who is being aggressive with their accounting. And if they are being aggressive you should probably stay away.
There are a ton of books out there on forensic accounting (Financial Shenanigans, Creative Cash Flow Reporting, Quality of Earnings, Financial Fine Print -- Along with changes to GAAP and IFRS) where if you have read all of them you should be able to pick out weird issues with accounting.
The other benefit of investing in small companies is you can in general get better access to CEOs and managers. If you were to invest in JNJ, the chance of you getting to talk to the CEO is slim. But with a lot of nano-cap companies you can actually go visit with the CEO and start quizzing him to see if he is BSing you or if he is actually smart and competent. I like to ask the same questions to two competing CEOs and see how their answers differ. You can really go as deep as you want when investigating some CEOs. You can start visiting their community, talking to people who are active with them in organizations. Just a lot of work to really scrub their background and get at who they are. Plus, these businesses tend to have fewer moving parts too, so you can analyze them in greater detail.
Also, I am just starting out in trading. Any literature you would recommend in general for the field?
Actually I've been buying them for their dividends, with the hope that the stock price itself will just keep pace with inflation.
I both invest and trade, but I consider them different activities. Many don't.
But, companies must eventually give out dividends. There's a certain point at which the company's cash hoard gets so large that investors become unhappy (see Microsoft).
Companies tend to announce buybacks when things are going well and their stock is fully priced. How many companies were announcing buybacks in December 2008 when it would have really made sense?
It's nice to own stock in a company that's currently profitable and get a share of its current profits; it also makes sense to own stock in a company you expect to become profitable in the future and get a share of its future profits. Stocks can be a good investment even if they don't presently give off dividends.
Stocks that will never give off dividends are a bit different. I suppose they give you "ownership" of some portion of the company's assets, so if the price is less than the value of the current or future assets represented by a stock, that can also be a good investment.
What doesn't make sense is buying stocks that don't pay dividends, won't pay dividends, and are priced high in comparison to the company's current and expected future assets. Buying stocks in that category is like buying a house as an "investment" in 2008.
EDIT: HN user jakarta said it better a couple weeks ago: http://news.ycombinator.com/item?id=1581366
Taleb slams Obama & the media, prefers recession over high deficits, advocates clawbacks, slams forecasting models when high debt levels are present and predicts the broad failure of public companies due to fundamentally misaligned incentives.
That said, here are two (rather discomforting) counter arguments to both Cuban and Taleb:
1) A warning against credit derivatives
(or betting the market will go down):
"The market can stay irrational longer
than you can stay solvent." - Keynes
2) In an inflationary environment, high levels of
long-term debt can actually be a good thing for the
issuers. It's the short-term debt that must be rolled
over that creates most of the problems (e.g. ARM mortgages
and a majority of commercial loans).Of course, it might just be that random chance has caused the author of the post to do badly in the market and me to do well - causing us both to be biased. You should always diversify your investing and its probably a good idea to put most of your stock money into index funds.
With inflation on the horizon, stocks are a way better hedge than cash or bonds.
And that said, if you go hunting for value and well priced stocks, you will be way better off.
I've found a much better portfolio allocation that gives similar long term returns to being invested in equities, but without the wild swings:
http://crawlingroad.com/blog/2008/12/22/permanent-portfolio-...
That's a huge presumption considering we've just done the same things that historically create deflation and resulting depressions.
Trillions in questionable debt is still outstanding, and the Fed and Govt's intervention is far from clearly solving that.
It's very possible we could end up like Japan in the 90s - deflating - or worse since they had household savings then and we don't.
It's also possible we could get some unholy combination of currency inflation and debt deflation, which I have no idea what that looks like, but I imagine it ain't pretty. Only thing I'm certain of is that stocks outperforming bonds and cash over the next 20 years is not a certainty. The past 50 years is not enough data to know that for sure.
Inflation is when the money supply grows, deflation when it shrinks. The person your responding to is correct to point out out money supply is being inflated, and inflation has been increasing in rate.
This may well lead to economic troubles which will cause some businesses to lower prices out of desperation.
You can call that price deflation if you want.
But don't forget the qualifier and then claim the other guy is wrong when you equate one economic phenomena with another by misunderstanding the terms.
I know you probably haven't heard about this, most mainstream economics talk is acutallu political talk that tries to pretend inflation is measured in price (an effect of, not the cause of inflate.)
For instance it is correct to say inflation was one of the causes of the great depression which resulted in price deflation. Also a major effect there was the real deflation of the criminalization of gold that literally made the us currency illegal eliminating much if the money supply -- while inflating paper money.
Price deflation is just a symptom of underlying problem/s, not the actual problems. It's the canary in the coal mine, not the gas leak that's about to blow it up. Prices can deflate or inflate for a number of reasons, from supply:demand imbalances (typical business cycle), change in money supply (which changes demand for goods and services relative to supply), or some other structural change in aggregate demand. Price inflation/deflation is only interesting to me in that regard as a vaguely-specified warning light urging further investigation/troubleshooting, but not as the underlying problem.
I agree with Steve Keen's hypothesis that jwhite linked here, Bernanke can print all he wants, and drop interest rates all he wants, but there's a realistic chance that it won't have the effect he intends. Banks won't start issuing new credit until they are confident the economy can support both the old credit (at an acceptable, pre-crisis default rate) and the new credit.
With the government and Fed propping up a significant percentage of our GDP right now, the odds of banks regaining that confidence aren't great.
Steve Keen has an interesting article on endogenous money at www.debtdeflation.com. Bernanke has increased M0 drastically in an effort to stave off deflation (I guess asset price deflation is the key in this case), but Keen believes it won't work because our system is not a true fiat money system but a credit money system with a fiat money subsystem tacked on, and in the current circumstances banks/companies are not going to expand credit no matter what happens to M0. That is, banks lend money first, then go hunting for reserve supply (M0) to back it up, opposite to the text book theory for how the money supply works.
For the last 10 years, the S&P 500 is down 2.5% on an annual basis. You could have done better w/ govt bonds & CD ladders.
I think the 20 year plan assumes a greater will power than the greater investing community possesses.
Typical investment advisors tell you to buy stocks and then point out that over the last century stocks have done very well. The problem is that none of us are investing on 100 year long timelines. We are usually investing on 30-40 year timelines and hoping to have a good amount saved when we retire. If you happen to need to retire and start pulling money out in a bad year like 2008, you're screwed.
Check out this allocation for returns as good as stocks without the huge downside risk: http://crawlingroad.com/blog/2008/12/22/permanent-portfolio-...
Financial people love to say that the stock market grows at roughly 9% historically, and that is money in the bank. But if you look at any historic chart these days, the massive amount of wealth and trading volume that has been generated over the past 10 years has made it obvious that we are in uncharted waters for future equities growth.
The Internet has been the game changer here. It has allowed access to equities to a class of investors that really never had access purchase these types of assets. This changed the game.
Cuban is probably right when he tells us to be weary of the market, but I think there are different reasons to be weary than those he states.
The lesson is not to avoid the stock market, but to avoid overpriced stocks.
It is human nature to follow the crowd. Savvy investors can make several hundred % returns buying during crashes and bear markets.
The main keys to success: 1) Never use margin (market day-to-day is too unpredictable 2) Leverage with Options 3) Try to remove emotion from the investment
I agree that individual investors can't continue to try and play in the big leagues. When you're competing with bankers, you're going to lose because they're doing it 24/7, like Mark said.
However, there is a significant amount of the market (30%? Tried to google the figure and couldn't find it) that Wall Street doesn't cover, analyze or do much of anything about. For the most part, this is the playing field for the individual investor.
My only other advice is buy at a profit. Use value investing tenets to buy stocks that are significantly discounted to their fair value. It's much easier to calculate the value of a company than most think.
Is "a couple of hours per week" enough to do the research necessary to perform well in that area?
like cuban i do wonder why individuals think they can beat the market. well connected and well capitalized groups have access to far more information than is publicly available. with the rise of hft and the like not only are you under attack by players who understand the fundamentals better but also by people who can game the exchange platforms themselves.
Indicates the author knows little to nothing.
"It is pretty much impossible for some man or woman or child who devotes a couple of hours per week to the market to outperform the professionals who spend 24×7 doing this for a living and when they are asleep"
There are so many people performing so poorly - even professionals, that working 24x7 obviously doesn't buy you much "performance". While it's true you're competing against everyone else on the market, that doesn't mean there's a large group of professionals performing so well that you can't compete. In fact it's the opposite.
"So what does this mean for you ? It means that I don’t know if the market will go up or down, or by how much."
I'm thanking God that what it all means to me is not dependant upon what this author knows.
As for the remaining "scarcity of capital" argument - it's like the author can only see one point in time, and not the big picture. There's a reason why all the capital being made available is not being borrowed. It's because smart companies know growing for the sake of growing, without demand is a bad reason to borrow, thus they don't. It's your job to determine who they are, and the fact you can't does not mean that it can't be done.
There's more to comment on, but overall - I couldn't find much I could agree with.
Compare this to John Z. Rigos, who sold his dotcom for $42 million and walked away with $8 million of stock. Between the day of the sale until the day when he could legally sell his shares, the stock tanked, and Mr. Rigos was left with virtually nothing. Mr. Cuban came from a poor Jewish family; Mr. Rigos from a poor Greek family. Same story, two outcomes...
Today Mr. Cuban's net worth is more than $2 billion. I'd say he knows more than "little to nothing" about the market.
In the very near future, cash (different currencies, precious metals) will be king.
When everyone panics, and gold goes up, that will be the beginning of the bull market in gold.
the part i don't get is why we should be putting our money in the bank. our government is printing money at a record pace and our money is being devalued by the minute. as much as i hate having my money in the stock market, at least it has some protection against inflation.
If you have a very pessimistic view of the stock market's future, reducing risk by being in cash make a lot of sense.
Aggregate price inflation has been low over the past several years. A big part of that is that energy prices are much lower than they were three years ago (remember $4+ gas?). That is only a very temporary phenomenon (long term supply is constrained, demand is exploding as Asia develops), and in any case energy is only one part of the economy.
But asset inflation is a real problem. That is why the price of gold has tripled in the last half dozen years. If you put money into either stocks or cash 5, 10, 15 years ago, you're way behind where you would be having put the money into a store of wealth that is portable and not subject to inflation.
Suppose you had some completely arbitrary asset. Kneezles. Over the last few years, the price of kneezles have tripled. The kneezle-bugs come out of the woodwork and say, "Look, if you had invested in a store of wealth that is not subject to inflation, you'd be doing better. Your kneezle-denominated wealth has fallen greatly."
Well, what are kneezles anyway? They're lumps of metal that don't do anything. Hey, sounds familiar...
Gold is a store of value. Stores of value provide a useful function in society. Very few things actually qualify as stores of value, and gold is the most known of them so I used that, but you could replace the string 'gold' with 'store of value' in my argument without changing the substance of my argument.
Something is a store of value because you expect that other people will value it as highly in the future as they do now. (Or at least some predictable fraction less, accounting for inflation.) Whether it's gold or dollars, it's still based on investor psychology, and is still just as subject to whims of herd behavior. Ask people who bought gold in 1979 how well it stored its value.
Neither do paper dollars - it's an abstraction that has been historically coveted and accepted as money, and that's why it's valuable. I'd take gold alternative to paper money if someone wanted to pay me in it and had proof of its purity.
Gold is used by several industries. Gold is found in every cellular phone!
The reason gold is used as a metric against currencies is because its scarcity is NOT illusory. USD's scarcity is dictated by the FED. Gold's scarcity is dictated by the earth's limited supply of gold, and the socioeconomics of gold mining.
If you're risk averse, broader market decline is a bigger worry than inflation IMO.
The problem is that no one actually knows if we're heading towards inflation, as you think, deflation, as some economists fear, or something in the middle. Economists, naturally, are split: http://www.nytimes.com/2010/08/06/business/economy/06deflati... . Regarding deflation or not, part of the story happens in the labor market, about which see this: http://www.marginalrevolution.com/marginalrevolution/2010/08... .
Anyhow, there's a real danger that you're worried about inflation and might get hit with its opposite.
Or not.
While I think cash is definitely safer than stocks, you could make pretty good money investing in US treasury bonds or other "safe" investments, if you're worried about getting a better return than 1% or whatever the banks are paying for CDs right now.
Who else here has sold a company for $5.9 billion?
Same shit happens with Blogs, SEO and Internet in general.
The conventional wisdom is you need someone to manage your money for you because you can't beat the market, and because that is such a common belief, I find it easy to beater the market.
The thing I like about gold is that it responds well to all types of financial crisis. Inflation risk? Gold goes up. Deflation/deleveraging risk? Gold goes up as well.