In a trio of articles posted over the weekend via @SeekingAlpha, Modernist showed what might be the best quality a long-term investor can have: Vision.
- Sirius XM Trial Offers Cannot Overcome Demographics
- Rediscovering Pandora's Price
- The Honey Badger And Starbucks
I strongly suggest reading all three. It's always a sound move to increase the time you spend reading Seeking Alpha, plus the articles can help inform several segments of your investment psyche. Do I agree with everything he said in each article? Almost, but not to a word. Even if you do not agree one bit, focus on picking up the knack Modernist has for visioning the future.
In response to that sentiment, another equally-as-able Seeking Alpha contributor, Stephen Faulkner, noted in a comment:
To be fair, Rocco, that "vision" has not worked out so well for these "visionaries" in terms of investing.
From the "visionary" trying to play the proposed run up before September earnings last year, to the "visionary" stating that Sirius XM would not hit $2 again any time soon, to the "visionary" stating that people should get ready to "short Sirius XM below a buck" to the "visionary" repeatedly calling for Sirius XM's failure, to the "visionary" selling at $2.15 saying Sirius XM is fairly valued, to the "visionary" saying Sirius XM is a great short under $2.10, to the "visionary" who repeatedly cried that the stock's performance last year just "didn't make sense," to the "visionary" who shorted out the stock on the huge run up last May, to the "visionary" who covered the short and bought back in near the high, to the "visionary" that was calling for $2.75 and even $3 in the middle of last year ... and on and on and on ....
And these self proclaimed visionaries are looking more and more like the crazy drunk screaming doomsday predictions on the street corner. It's a sunny day, not a cloud in the sky, yet "the prophet" calls for a tornado to wipe us all off the face of the earth at any moment ...
I'd say to be careful of visionaries. Some can't see beyond the tips of their own ego :) ...
That comes from a self-proclaimed "novice investor." And, "with all due respect," that's an important fact to consider.
With that in mind, I welcome, appreciate and even love spirited debate when it's done well. Stephen brings value, adds sound insight and a healthy dose of entertainment to Seeking Alpha, both as an author and commenter. Take it from somebody who has been writing on SA for over a year and doing various forms of media for roughly 25 years, it's not easy to put those three things together and write well.
Faulkner also manages to move the conversation along in his own clever and creative way. The intersection we came to together, even if unknowingly, represents a crucial issue facing long-term investors. How do you value and balance the short-term predictions you read, hear and make on a daily basis with the long-term convictions you have and consider?
Nightly, Jim Cramer throws out short-term predictions. His "lightning round" considers little more than off-the-cuff buy, buy, buys and sell, sell, sells. That's not to say that Cramer does not have a basis behind these near-term contentions. I am certain he does. For the sake of television, however, he just condenses his rationale down to entertaining one- to two-sentence snippets. For most investors, this snap analysis should barely even serve as a starting point for due diligence.
Each evening, Cramer also stops down and spends a considerable amount of time providing actual insight investors can sink their collective teeth into. He does pretty good CEO interviews. He also has a knack for looking into the camera, toning down the sound effects a bit and letting you know that this is the serious part of the show. When he does that, he often shares his long-term vision. Generally, it's not long or "visionary" enough for me, but it can help inform and sometimes inspire future research.
That's where the distinction lies. At the juncture between short-term predictions and long-term vision. Let us consider an analogy.
I am a Toronto Maple Leafs fan. The team collapsed in the second half of the season after an excellent start. Folks calling for General Manager Brian Burke's demise fail to recognize several things. First, the great start should have been a surprise, not a fulfilled expectation. The Leafs overachieved. It's not the team's fault that its fans feel self-entitled. Second, it takes time and the vision of a man like Burke to build an average hockey team into a contender. As the great Greg Wyshynski writes over at Yahoo Sports:
That's not to say Burke doesn't care, because he cares more about winning than most care about breathing. It's just that he wants to win on his terms, under his conditions, while other GMs in the NHL attack the trade deadline and play hardball on no-trade clauses.
In hockey, I consider the season the stock and the culmination of draft, season and trade deadline over several years the company. During the season, things happen that cause a hockey team to surge. For the Leafs, it was the emergence of one of the League's top tandems (Phil Kessel and Joffrey Lupul). And the magic they threw together at the beginning of the season was likely a combination of several other factors we'll never be able to precisely identify.
With a stock, you have dozens of near-term catalysts, short-term weaknesses and broader market burps that create and/or contribute to upside and downside. Often, the present state of a company bears scant relation to the near-term trajectory of its stock. The market tends to do one of two things. For a while, for one reason or another, it undervalues a stock. Apple (AAPL) probably provides the best example. Heck, it's probably still a great example. Given its low P/E, Time Warner (TWX) probably fits in a similar category. The present and the future at both companies should allow for a loftier stock price today.
On the other end of the spectrum, the market prices other stocks not only on present success, but on expectations for the future. Often, it gives presently "unsuccessful" (based on conventional quantitative metrics that largely ignore revenue growth as an isolated data point) companies seemingly lofty valuations on the basis of future expectations.
The problem comes in when investors have difficulty distinguishing between short-term predictions and long-term vision. There's no doubt that Wall Street analysts often make the distinction tough to sniff out. It gets incredibly tricky when you have companies like Amazon.com (AMZN) and Netflix (NFLX) receiving bullish analyst calls during times of near-term pressure (see, e.g., AMZN) or outright ineptness (see, e.g., NFLX).
Every analyst recommendation should come with a somewhat lengthy disclaimer. Not something that simply says don't sue me if I'm wrong, but something that says, here's why I think this unprofitable company or this firm with crappy margins will reach $100 or $200 or $300 in 12 or 24 months. Yeah, it's got something to do with everything I wrote in this report, but, in a nutshell, I discount today's troubles in favor of my confidence in how tomorrow will turn out. And tomorrow equals X number of months or years.
Using this logic, as a fan, I rate the Toronto Maple Leafs a short-term sell and a long-term strong buy. By a similar token, I tend to shift, rating Sirius XM (SIRI) a short-term sell one day, a short-term buy the next and a short-term sell shortly thereafter. It's mainly about close-in factors that often have very little to do with the company. In many respects, I don't care what a company does today. I want to know what it plans on doing tomorrow.
To have any handle on what a company will do tomorrow you have to put the past in its proper place. Without doubt, the past influences the future almost as much as it impacts the present. That said, if management does not clearly outline or you cannot easily ascertain where a company sees itself over the long-term, I am not sure the underlying stock makes for a worthy long-term investment. This holds particularly relevant in ultra-competitive spaces, such as the broad media sector.
First, here's how I define a long-term investment. Making a considerable lump-sum purchase in a stock or scaling into a considerable position over time with the intent of holding that position for a minimum of one year, but generally as long as or beyond two to five years. You do not change course unless financial circumstances change materially in your life or a company's long-term story disintegrates in a meaningful way.
Using this philosophy, you could trade NFLX to your heart's desire. It, like SIRI and, even more so recently, Pandora (P), makes for a fantastic trading stock. These types of stocks, from time to time, are made for swing trades on the long or short side. I tend to dabble in that type of trading very little these days. Generally, if I would not feel comfortable holding a stock long (or short) over the long-term, I will not enter a short-term trade on it. Simply put, if the trade turns against me, I want to be in a stock I feel will come around over time and will not wipe me out in the interim.
I would not initiate a long-term long on NFLX, however, unless I believed in the company's story going forward. As I see it, Netflix needs to achieve great success in a relatively short period of time as a producer of original programming. It needs to accomplish, in a year or two, what it took Time Warner's HBO decades to get done. Sex and The City, The Sopranos, Flight of the Conchords and Bill Maher do not happen overnight. Couple this impossibility (as I see it) with other persistent headwinds, mainly the components of a misguided business model, and I just cannot see Netflix as a relevant part of new media's future.
At the same time, I share Reed Hastings' vision of the future. I believe in the things he says about "smart television," targeted advertising, appointment viewing and multi-platform delivery. There's no question the guy gets it. He's a visionary. We part ways, though, when the CEO includes Netflix as a somehow integral part of that vision.
And when I vision the future, some companies appear to be positioning themselves to dictate and own it. Others, not so much. I hope the Netflix example adds color to the ongoing debate involving Sirius XM and Pandora.
Many SIRI bulls like to focus on an apparently well-run business with plentiful free cash flow and an thus-far impressive and resilient subscriber base. It's quite a bit more difficult for them, however, to articulate what Sirius XM thinks it will be or can be 5, 10, 15 years from now. We often only hear about satellites taking over every imaginable task or operation and Apple salivating over the possibility of embedding satellite radio into its iPhone. Pipe dreams do not equal vision. Nor do they constitute the foundation of a long-term investment.
And that's why I can get behind and methodically enter a position in a stock like P. The company not only openly and clearly sets its cards out on the table, but it expresses a vision of a future it's well-situated to be a major actor in.
If large numbers of members in our society are indeed moving more and more toward mobile entertainment, personalized content and advertising that's relevant to them, Pandora's version of radio should take the lead as the decade morphs in that direction. My article history on the company builds the case from each each one of these standpoints.
At day's end, most of us can only get enough of a handle on the future to feel truly confident about a couple of spaces. As such, we're probably best off only making a handful or two long-term investments. It is just not possible - based on time, resources and intellectual capacity - for most of us to stretch ourselves beyond those limits. As such, picking for winning long-term plays are slim and the margin of error is wide.
That's why I keep a majority of my portfolio in two areas - dividend-paying and media stocks. Often, the same stock owns both traits, but not always. I feel like I give myself a better chance of coming out ahead, over time, by harnessing the power of dividend reinvestment. I also feel like I give myself a better chance at success if I am invested in current and/or future leaders in a space I know well and like to follow.
Additional disclosure: I am long P, TWX. I am long NFLX June $40 put options.