Seeking Alpha

Charles Lewis S...'s  Instablog

Charles Lewis Sizemore, CFA
Send Message
Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management LLC, a registered investment advisor. He has been a frequent guest on Bloomberg TV and Fox Business News, has been quoted in Barron’s Magazine, The Wall Street Journal, and The Washington Post and is a... More
My company:
Sizemore Capital Management
My blog:
Sizemore Insights
My book:
Boom or Bust: Understanding and Profiting from a Changing Consumer Economy
View Charles Lewis Sizemore, CFA's Instablogs on:
  • Book Review: The Jewish Phenomenon
    Perhaps it was my upbringing in the American Bible Belt, but I’ve always had a fascination with Jewish culture. It has always amazed me that such a small subset of the population has produced so many high achievers. According to Steven Silbiger, author of The Jewish Phenomenon, Jewish Americans make up only 2% of the total U.S. population, yet 45% of the top 40 of the Forbes 400 richest Americans are Jewish, and most are self made. Fully one third of American multimillionaires are Jewish, 20% of professors at leading universities are Jewish, 40% of partners in America’s leading law firms are Jewish, and—perhaps most impressively—25% of all Nobel Prize winners are Jewish.

    It’s impossible, of course, to truly explain “why” Jewish Americans are so successful. The answer is complex, subjective, and at the end of the day untestable. Silbiger offers his own explanations, however, and some of these tie in nicely to a larger point I want to make on successful investing.

    According to Silbiger, himself a practicing Jew, Judaism is virtually unique among world religions in its bookishness and in its embrace of controversy and debate. Though there is some amount of debate in modern Christianity, the core tenets of the religion are generally considered unquestionable (though this obviously varies by denomination). As Silbiger explains,
    For centuries Jews have been referred to as “The People of the Book.” Jews bury religious books that have become worn with age and use, as a sign of respect for their contents and out of respect for the written word. From a very young age, Jewish children celebrate education…

    At the core of the Christian faith is what is called the “Great Mystery” with regard to the Immaculate Conception, the birth of Jesus and the Resurrection. These events are accepted on faith, and in conservative Christian circles there is not a great deal of discussion or debate on the matter… This approach to accepting one’s religious foundations without a great deal of debate is a major cultural departure from the Jewish tradition.

    This is a roundabout way of saying that, as a group, Jews study, form independent opinions, and are willing to go against the grain when they believe their view to be correct. They are the quintessential nonconformists—or what we in the investment world like to call natural contrarians.

    Jewish Americans have also mastered the art of making lemonade from lemons. For decades, Jews were more or less blackballed from prestigious law firms. After all, what would the gents at the country club say if you hired a Catholic or—gasp!—a Jew!

    As a result, Jewish lawyers formed their own firms centered on practice areas that were considered less prestigious at the time, such as taxation, bankruptcy, personal injury, and estate planning. No respectable lawyer wanted to touch those areas in 1950. But today, these are some of the most lucrative areas of law.

    The story is much the same in the financial world. American commercial banking more or less excluded Jews until well into the 20th century. Again making lemonade from lemons, Jewish financiers reacted by going into less-prestigious (at the time) investment banking, founding the firms that eventually become the modern-day masters of the universe—like Goldman Sachs.

    So what lessons can we take away from this?

    When investing—be it in stocks or in entrepreneurial ventures—it pays to be a contrarian, to go against the crowd. Investment areas that are not sexy will often times offer the highest returns over the long term. This is one reason why “vice investing” is a recurring theme in the Sizemore Investment Letter.

    Perhaps the most important lesson, however, is that it pays to read and study.

    Disclosure: No positions
    Nov 09 8:46 PM | Link | Comment!
  • A Modest Proposal For America's Unemployed

    I think I cried in my coffee a little when I read the following headline this morning in the Financial Times:

    Somali pirates' successful business model wins recruits."

    According to the FT, "Rear Admiral Hank Ort of the Netherlands Navy [the Nato commander in the region] said the allure of easy riches and absence of other opportunities was increasing the number of Somali pirates, who can expect an average of $3.3 million for a ship."

    In America, in order to avoid an honest living we buy gold or flip Miami condos or day-trade Nasdaq tech stocks -- or whatever the trendy object of speculation is that day. In Somalia, they take to piracy on the high seas. A Modest Proposal

    Might I offer a "modest proposal"? As a way of lowering the persistently high unemployment rate, why don't we encourage Americans without jobs to take to piracy or perhaps highway banditry?

    It would be a boon to the highwaymen themselves, the local retailers who benefited from the new consumer demand of the highwaymen, and to local police departments who would no doubt have to go on a hiring spree to combat the new surge in banditry. It's the perfect make-work project, and it would require no new federal bailouts for the unemployed.

    So, do I hear an "Ay, matey" for this oh-so-modest of proposals?

    Disclosure: No positions
    Tags: humor, satire
    Oct 06 12:16 PM | Link | Comment!
  • Beware the Representativeness Bias
    Today, we're going to take some historical perspective from David Dreman’s excellent book Contrarian Investment Strategies.  On "fighting the last war," Dreman writes,

    After their ignominious defeat in the Franco-Prussian War of 1870, the French General Staff attributed the loss to lack of the dash and daring that had characterized French armies under Napoleon I. The marshals and generals overreacted by stressing elan above all else, even though there had been revolutionary changes in weaponry since Napoleon’s time. For 44 years afterwards, French military maneuvers concentrated on fixed bayonet attacks in closely packed ranks, the tactic that had won the Emperor victory after victory. But 1914 was not 1812. When World War I started, the cream of the French army was slaughtered by the rapid precision fire of the German machine guns and the enormous destructive power of their artillery. The overreaction to the Prussian defeat resulted in 250,000 French dead in the first six weeks of the war alone, about the total number of American soldiers killed in action in World War II.

    While Dreman was making a point about the human tendency to overreact to relatively unimportant details and drawing the wrong conclusions—whether in military planning or investing—this is also fine example of what Kahneman and Tversky called “heuristic-driven bias” in their groundbreaking studies on the psychology of investing. More specifically, the French generals were guilty of the “representativeness bias.

    The French army under Napoleon was dashing.  The French army under Napoleon was the dominant military force in the world.  Therefore, a dashing army is a dominant army, right?  

    Of course this argument made no sense, and the German army made quick work of its flashier French adversary.  It turned out that bravado and Gallic flair were no match for the cold, hard reality of machine guns. 

    Not only did the French argument make no sense, it was also wildly inconsistent with the historical record.  In the American Civil War, General Robert E. Lee’s Army of Northern Virginia would have crushed the Army of the Potamac within a week if all that was needed was audacity and better-looking uniforms among the officer corp. 

    Like the French generals described by Dreman, investors also tend to draw the wrong conclusions from history and to pick and choose only the historical examples that support their existing belief. (This is called the confirmation bias, a different heuristic-driven bias that often accompanies the representativeness bias.)  They take mental shortcuts, use imperfect rules of thumb, and make analogies that don’t stand up to the test of reality.   

    For example, stocks “always” revert to single-digit price/earnings ratios at major bear market bottoms, right?  Well, that’s what happened in 1982.  And since the last secular bull market started with single-digit price-earnings ratios, so must the next one. 

    A more astute analyst might point out that quite a lot has changed since 1982 and that this particular year might not be the best representation of today.  Yes, like 1982, the economy today is wrecked and unemployment is high.  But unlike 1982, inflation is virtually nonexistent and returns on competing investments (like Treasury bonds) are pitifully low. In an environment of near-zero inflation, price earnings ratios should be higher, all else equal

    Investors who avoided buying stocks in 2009 because “price/earnings ratios weren’t low enough to signal capitulation” missed out on a near doubling of their money because they fell victim to the representativeness bias. 

    Today, we see these bias at work in investor behavior.  I'll start with gold.  The representativeness and confirmation biases have completely overwhelmed investors in the "barbarous relic."  Investors see that the Fed has doubled the monetary base--and thus assume that inflation and dollar depreciation is imminent as a result, often making comments that this is what "always" happens.  Always?  Really? 

    Gold bugs love to mention Wiemar Germany.  But is this really representative of our situation today?  Again, falling victim to the confirmation bias, gold bugs fail to consider the case of Japan.  Japan's monetary tinkering--politely called "quantitative easing"--is every bit as aggressive as that of the Federal Reserve today.  Oddly enough, Japan has seen deflation, not inflation, and a rising yen to boot.  This does not confirm the gold bug case, however, so it is conveniently ignored.

    Stock investors too have been overwhelmed with representativeness bias in recent years.  Looking back at the past ten years of miserly returns, investors have thrown up their hands in disgust, believing that things will never get better.  But are the past ten years representative of the following ten years?  It is doubtful.  The stock market started last decade at record-high valuations after years of bubble gains.  This decade started with stocks trading at low valuations not seen in decades and with companies across the board putting a greater emphasis on traditional sources of value--like dividends.

    As investors, we have to be cold, hard, and rational.  It is a struggle to suppress our emotions when money is at stake.  We are humans, not Star Trek Vulcans, after all.

    Looking at the market dispassionately, there is value to be had.  As I have written in a prior article (see, some of the world's biggest and best dividend payers are very attractively priced and yield more than long-term bonds.  Companies like Johnson & Johnson (NYSE:JNJ), Procter & Gamble, and Philip Morris International (NYSE:PM) will survive any renewed period of volatility should it occur.  All are currently priced attractively to offer high long-term returns.  For a "one-stop shop," investors might also consider the WisdomTree Large Cap Dividend Fund (NYSEARCA:DLN).  It is an easy and conservative way to enjoy a respectable income while we wait for the macro picture to improve.

    Disclosure: Long DLN, JNJ, PG, PM
    Aug 30 8:02 PM | Link | Comment!
Full index of posts »
Latest Followers


More »

Latest Comments

Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.