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Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 46 years of investment... More
My company:
Strategic Stock Investments
My blog:
Investing for Survival
  • The Morning Call

    The Market

    Technical

    Fundamental

    Thoughts on Investing

    A Dozen Things I've Learned from Michael Price abut Investing

    1. "Of course, the macro questions are the hardest ones to figure out. I am not trained to be an economist, and I don't think economists get it anyway. I am left with the bottoms-up, 10Q by 10Q analysis, and hope I have enough sense of where we are in the cycle…" Michael Price is another successful investor who ignores macro forecasts in favor of a bottoms-up analysis.

    2. "Never, never pay attention to what the market is doing. … Stay away from the crowd." Mr. Market is not always wise. He sometimes will sell you a stock at a bargain or pay you more than it is worth. The art of knowing the difference is value investing. Falling in with the crowd will put you under the sway of Mr. Market because Mr. Market is the crowd.

    3. "The key question in investing is, what is it worth, and what am I paying for it? Intrinsic value is what a businessman would pay for total control of the business with full due diligence and a big bank line. The biggest indicator to me is where the fully controlled position trades, not where the market trades it or where the stock trades relative to comparables." By thinking like a business owner Michael Price becomes a better investor. Buying share of stock in a business is owning a partial stake in a business. If a share of stock is not a partial stake in a business, what exactly is it? Anyone who thinks a share of stock is a piece of paper that people trade back and forth is in deep trouble as an investor.

    4. "We like to buy a security only if we think it is selling for at least 25% less than its market value." It is refreshing to hear an investor assign a number of a "margin of safety". My assumption is that this 25% figure is a rule of thumb. Many value investors would say that the margin of safety they are looking for is relative based on the risk of the particular business (e.g., the risk of a bakery business is not the same as the risk of a biotechnology company).

    5. "If you really [want] to find value, you [must] do original work, digging through stuff no one else [wants] to look at. …The really important thing is to eliminate the Wall Street consensus, the Wall Street research. You need to understand where the company is in the world and what the competition is for the products, whether the products are any good, and whether or not the company has any pricing power or barriers to entry. … Think about the business, think about what you see without any input from Wall Street, do [your own] primary research." To generate alpha in investing you must occasionally be contrarian and be right about that contrarian view. In short, you must find a mispriced bet. To find a mispriced bet you are best positioned if you are looking where fewer people are looking.

    6. "You can get lost in the spreadsheets. You can't rely on the projections that you put in the spreadsheets alone… Depending too much on the Excel spreadsheet and forecast of discounted cash flows is a big mistake." Extrapolating the past into the future is a parlor trick favored by consultants and analysts. This process may seem logical to many people but it is pregnant with danger. Complex adaptive systems produce changes that can't be extrapolated. Things that can't go on forever, don't.

    7. "The worst mistake investors make is taking their profits too soon, and their losses too long." This is classic "loss aversion" at work. People hate taking a loss even if it is sunk. Unless you are a trained investor your emotions can get the best of you.

    8. "A good time to start in [the investing] business is when markets are terrible…. We wait for bad news… I love to read about losses." A value investor likes prices to fall, especially when they have dry powder and can take advantage of the drop. A classic value investor looks at a price drop of a stock they like as a chance to buy more, whereas the ordinary investor may panic and sell.

    9. "I couldn't care less about getting zero on my cash. That's ammunition." Cash has optionality. Yes, that optionality has a cost which includes inflation. Especially when inflation is low and prices of stocks are high, the price of the optionality can be well worth paying.

    10. "For rates of return, smaller is better. Returning excess returns at $20-$30 billion is not so easy." The more money an investor must put to work, the harder it is to generate investing alpha. Many opportunities are small in size relative to a big fund. People only get so many investable ideas during the course of a year and some of them are not very big. Another risk is psychological since sometimes an investor will compromise their principles on a big investment just to be able to put money to work.

    11. "We know it's easy to get swept away in a growth market. But I've been in this business more than 25 years and I've watched investors figure out a way to justify incredible multiples, only to see valuations collapse back to the underlying worth of the company. The key in the business is weathering the bear markets, not outperforming the bull markets." Value investing shines brightest when stocks are falling in price since they were purchased based on value. Value investing principles can also help you avoid the flip side of bubbles (panics).

    12. "A lot of people have the brains. It is the judgment with the brains that matters, and that comes with experience and from thinking about things in the right way." Intelligence without judgment and the right temperament won't make someone a good investor. Intelligence can actually be a problem since the smarter you think you are, the more you may get into trouble trying to predict things that are not predictable.

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    Other

    Politics

    Domestic

    International War Against Radical Islam

    Dec 19 8:52 AM | Link | Comment!
  • Another Brief Morning Call

    The Morning Call

    12/18/14

    The Market

    Technical

    Helped along by a more dovish than expected Fed statement, the technically oversold market bounced early in the day and then short covering pushed on the afterburners in the afternoon. Both indices (17356, 2012) closed back above their 50 day moving averages and the Dow finished back above its former high support level---which are quite positive. However, before we can assume that the current downtrend is over, the Averages, at the very least, have to trade back above the upper boundaries of their developing very short term downtrends (circa 17483, 2023).

    ***overnight, the Swiss central bank imposed negative interest rates on foreign capital inflows. For all practical purposes that is an easing move on top of the Fed meeting.

    The main reason for the euphoria over the Fed statement/Yellen news conference was that (1) the Fed weaseled its way out of corner---raising interest rates next year. Not that it won't lift rates next year, it just gave itself more room not to without looking like is changing its policy and (2) Yellen downplayed the decline in the price of oil and its potential impact on the economy and the banking system---which as you know has been a driving force behind the recent Market decline. How you can be so nonchalant about a 50% reduction in the price of one of the primary economic inputs and its impact is frankly a bit unsettling. Her statement is very reminiscent of a similar one by Bernanke in 2008 about how little risk there was in the housing and mortgage markets. Not that all will turn out the same; but the circumstances seem hauntingly familiar.

    Dec 18 9:07 AM | Link | Comment!
  • The Morning Call & Subscriber Alert--A Weak Bounce

    The Market

    Technical

    The indices (DJIA 17596, S&P 2035) bounced back from Wednesday's losses, though much of the advance had been lost by the end of the day. Both remained within uptrends across all timeframes: short term (16197-18943, 1866-2230), intermediate term (16184-21149, 1709-2425) and long term (5360-18860, 782-2071). Both remained above their 50 day moving averages.

    Volume declined; breadth improved. The VIX was up another 8%, closing within a short term trading range, an intermediate term downtrend and above its 50 day moving average.

    Looking at the VIX as a sign for year-end stock performance (short):

    http://jlfmi.tumblr.com/post/104856245410/this-signal-has-perfect-record-of-forecasting

    Update on sentiment (short):

    http://www.bespokeinvest.com/thinkbig/2014/12/11/bullish-sentiment-rises-as-market-declines.html

    The long Treasury was up again. It finished within a very short term uptrend, a short term uptrend, above its 50 day moving average and above the upper boundary of its intermediate term trading range for the second day. If it remains above this boundary through the close next Monday, the intermediate term trend will re-set to up.

    GLD declined fractionally, but ended above the upper boundary of its short term downtrend for the third day. Under our time and distance discipline, that confirms the break of the short term downtrend and re-sets it to a trading range. It also remained above the lower boundary of its former long term trading range for the fourteenth time in the last seventeen days. As a result, I am calling the recent break of this trend a false flag and re-setting it to the former long term trading range. It also finished above its 50 day moving average and within an intermediate term downtrend.

    http://www.ritholtz.com/blog/2014/12/why-gold-oil-are-trading-so-differently/

    Bottom line: after the buy the dippers failed to show up in Wednesday's carnage, they came back strong at yesterday's open and then faded during the day. I think this pen action continued to mirror my call yesterday: 'I assume means that the 'buy the dippers' are at least starting to get a bit fidgety. Not that they are going away, maybe just taking a time out.'

    Further, the price action in bonds (yields falling), gold (breaking negative trends) and the VIX (soaring after a brief break of its short term uptrend) also suggest that investors may be starting to discount something other than an improving US economy and QE forever.

    Global stock markets are still correcting (short):

    http://shortsideoflong.com/2014/12/global-stocks-still-correcting/

    More on the fallout in the oil patch (medium):

    http://www.zerohedge.com/news/2014-12-11/massive-correction-energy-stocks-coming-why-us-wont-bail-out-its-oil-industry

    The latest from Lance Roberts (medium):

    http://www.zerohedge.com/news/2014-12-11/3-things-worth-thinking-about

    Inflation/deflation and stock prices (medium):

    http://www.zerohedge.com/news/2014-12-11/russell-napier-has-never-happened-without-drop-stock-prices

    Fundamental

    Headlines

    More improving US economic news yesterday: weekly jobless claims were down slightly; the November retail sales headline number was very strong though (1) ex autos and gas it was up only marginally and (2) it included the third largest seasonal adjustment ever; finally, October business inventories were up less than anticipated and sales fell. The big number was retail sales (a primary indicator); and while it would have been better if there weren't some ambiguous components, it was still up in a rough global economic environment. And that is a whole lot better than a sharp stick in the eye.

    Meanwhile, down the rabbit hole, the FY2015 budget deal suddenly hit a snag (it passed with two hours to spare) as (1) democrats [led by Elizabeth Warren and Nancy Pelosi] are objecting to the provision freeing banks from having to spin out their derivatives operations and (2) republicans who are pissed that there are a number of pork barrel add ons and that they haven't been given a chance to read the 1600 page bill. Remember all the GOP propaganda against earmarks and the democrats' lack of transparency (we have to read the bill to see what's in it). Is there any doubt that the American people have just substituted one group of self-interested morons for another group of equally self-interested morons? This whole thing is legislative malpractice and they should all be recalled. It also raises the question, will we ever get meaningful spending, regulatory and tax reform?

    http://www.zerohedge.com/news/2014-12-12/presenting-303-trillion-derivatives-us-taxpayers-are-now-hook

    Overseas, well, it was more of the same. I know that this sounds like a broken record; but I am just reporting the news. It doesn't alter, in fact it keeps making worse, the risk that at some point global events could impact the US economy. Anyway, Norway's central bank lowered its main interest rate as fears of an oil related recession mount; the ECB held its second round of bank asset repurchase agreements which was better than the first but still well short of expectations; and Greece remains in a political crisis that could result in a default or it exiting EU.

    There was one bright spot: the Bank of China added to banking reserves. That said, this bank has been giving off some mixed signals of late; and when you couple that with the fact that these guys lie like a rug about their data, it doesn't give me great comfort that China is going to contribute to global QEInfinity in any meaningful way.

    ***overnight, both Chinese and EU industrial production numbers were below expectations.

    However, not to be denied its rightful place in the headlines, oil took another leg down, closing below the $60 a barrel mark. The big question at this point, is it going lower and will it take stocks with it? I am no oil expert; but there has, of course, been an endless stream of 'experts' yakking about the future direction of prices. Most seem to think that there is more downside though opinions vary on the driving factors as well as the magnitude of decline.

    One thing they do agree on---the fracking business was built on credit (much of it subprime) which if not serviced by the terms of the debt, will bankrupt companies. It is the risk that David Stockman so eloquently detailed in the article I linked to yesterday. The risk here is not temporarily lost production or jobs, it is the loss of companies and investment assets.

    Bottom line: this week's economic data so far has provided ammunition for those forecasts of an improving US economy. Yesterday's November retail sales number was particularly encouraging. That said, forces outside the US continue to make our progress ever more difficult. The rest of the world simply can't get a break---the data is deteriorating, concerns are now being raised that the oil price decline may not be as positive as everyone originally thought and the mainstay of investor optimism, QE, even assuming that it works (which it doesn't), is now less assured than it was a month ago.

    Nevertheless, stocks remain priced to near perfection. For the life of me, I can't figure out why anyone wouldn't want to take at least some money off the table in any stock that is selling at historic absolute and relative highs.

    I can't emphasize strongly enough that I believe that the key investment strategy today is to take advantage of the current high prices to sell any stock that has been a disappointment or no longer fits your investment criteria and to trim the holding of any stock that has doubled or more in price.

    Bear in mind, this is not a recommendation to run for the hills. Our Portfolios are still 55-60% invested and their cash position is a function of individual stocks either hitting their Sell Half Prices or their underlying company failing to meet the requisite minimum financial criteria needed for inclusion in our Universe.

    Subscriber Alert

    The stock price of Chevron (CVX-$106) has fallen below the lower boundary of its Buy Value Range. Hence, it is being Removed from the Dividend Growth Buy List. It remains above its Stop Loss Price and therefore is being retained in the Dividend Growth Portfolio.

    The stock price of ExxonMobil (XOM-$89) has fallen below the upper boundary of its Buy Value Range. Accordingly, it is being Added to the Dividend Growth Buy List. The Dividend Growth Portfolio already owns a full position in XOM. However, even if there was room for additional shares, no shares would be Bought at this time.

    This kind of action, i.e. stocks trading into their Buy Value Range then trading through not only the lower boundaries but also their Stop Loss Prices is not atypical during severe Market declines. The oddity here is that the Market is near highs but energy stocks are falling to bear market levels. The clear question is which one gives? Will the Market follow oil stocks down or will they pull them back to higher levels? In my opinion, it is no time to make a bet on either. Patience.

    Investing for Survival

    Four investment lessons from 2014 (medium):

    http://blog.alliancebernstein.com/index.php/2014/12/10/lessons-learned-in-2014/

    Thoughts on Investing from Crosshairs Trader

    Way back when, long before there were live data trading platforms for mere mortals, before gurus printed weekly newsletters, before Stock Twits and Twitter, even before Cramer and Fast Money, there were the likes of Edwards, McGee, R.W. Schabacker, and Charles Dow, to name a few. These are the guys who invented and developed the standards followed by present day chartists. Wherever technical analysis is employed you will find, my dear reader, the fingerprints of the aforementioned standard bearers.

    It is very interesting to note that the forefathers of technical analysis, unlike many snake oil salesmen of today, while espousing the benefits of technical analysis, went to great lengths to warn future chartists of the many dangers inherent in charting, such as the desire to be right. Schabacker, in his classic Stock Market Profits, published nearly 80 years ago, writes in an eloquent prose few today can match

    No trader can ever expect to be correct in every one of his market transactions. No individual, however well he may be grounded, no matter how much experience he has had in practical market operation, can expect to be infallible.

    There will always be mistakes, some unwise judgments, some erroneous moves, some losses. The extent to which such losses materialize, to which they are allowed to become serious, will almost invariably determine whether the individual is to be successful in his long range investing activities or whether such accumulated losses are finally to wreck him on the shoals of mental despair and financial tragedy.

    It is easy enough to manage those commitments which progress smoothly and successfully to one's anticipated goal. The true test of market success comes when the future movement is not in line with anticipated developments, when the trader is just plain wrong in his calculations, and when his investments begins to show a loss instead of a gain. If such situations are not properly handled, if one or two losing positions are allowed to get out of control, then they can wipe out a score of successful profits and leave the individual with a huge loss on balance.

    It is just as important, nay, even more important, to know when to desert a bad bargain, take one's loss and count it a day, as it is to know when to close out a successful transaction which has brought a profit.

    The staggering catastrophes which ruin investors, mentally, morally, and financially, are not contingent upon the difference between a 5 per cent loss limit and a 20 percent loss limit. They result from not having established any limit at all on the possible loss.

    Any experienced market operator can tell you that his greatest losses have been taken in those, probably rare, instances when he substituted stubbornness for loss limitation, when he bought more of a stock that was going down, instead of selling some of it to lighten his risk, when he allowed pride of personal opinion to replace conservative faith in the cold judgment of the market place.

    It would behoove each of us to remember that cup handles can and will be broken, necklines ignored for a return gaze at the head, flags folded and put away. Triangles do and will turn into rectangles; breakouts into breakdowns. If you do not believe me, the next time you stay in a series of trades, or one over capitalized trade much longer than necessary, remember the immortal words of Edwards and McGee:

    If we can learn from the charts at what points to buy and under what conditions to sell, we have acquired the basic machinery for successful trading. On the other hand, obviously, if your buying and selling are at points which more often than not result in net losses, then it makes no difference how you divide up your capital or apply it to the market, for it will be bound to shrink until, eventually, it has all disappeared.

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    October business inventories were up 0.2% versus expectations of up 0.3%; sales fell 0.1%.

    November PPI fell 0.2% versus estimates of down 0.1%; ex food and energy, it was flat versus forecasts of +0.1%.

    Other

    Politics

    Domestic

    The shame of a crumbling infrastructure (medium):

    http://www.bloombergview.com/articles/2014-12-11/the-shame-of-americas-rotting-roads

    International

    Michael Hudson on US foreign policy (medium):

    http://www.nakedcapitalism.com/2014/12/michael-hudson-u-s-new-cold-war-policy-backfired.html

    Disclosure: The author is long CVX, XOM.

    Dec 12 8:44 AM | Link | Comment!
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