Monday, April 3, 2017

Housing Prices and Wages

The Economist magazine published a chart today that shows housing prices to average income for New Zealand, Australia, Britain, Canada and the United States (U.S.). The chart indicates that home prices are currently 30% to 60% above long-term averages for all of the countries listed except for the U.S. which appears to be close to it's long term average after hitting a low several years ago. 

The U.S. housing market is a big market with significant differences in individual cities and regions. Despite the overall market being near it's long-term price to income average, differences do exist in individual markets. Affordability and valuation appear to be issues in some markets.

Home prices to wages in Las Vegas (where I reside and write from today) have now reached 2007 levels of 8 to 9 years indicating that new homes have reached near peak historic valuation levels based on this metric. So this question is, can home prices go higher, will they go lower, etc. in the near future? The answer is unknown and bulls and bears have different opinions.

I recognize that this snapshot does not take into account the myriad of factors that affect wage growth and housing prices which include, household debt levels, population and demographic trends, consumer spending, business migration, employment trends and interest rates, among other factors. On the other hand, I have also found the relationship to be useful for thinking about valuation and forward looking expectations. I also know that housing prices have moved up at a faster rate than wages since the bottom which can continue, but not indefinitely, in my opinion.

Sunday, November 27, 2016

Trump's Thesis on Jobs and Trade Restrictions

Trump says he will cancel trade agreements on his first day in office as his anti-trade approach to bring back jobs rhetoric is supported by his voters.

We live in interesting times as the Republican party has been pro trade and anti trade restriction since Ronald Reagan was President. We will see how this issue plays out as the interests of the business wing of the Republican party are at odds with Trump and his voters who believe he will bring back jobs through trade restrictions. His voters are likely to be disappointed.

In reading the research, I find no credible evidence that significant job growth will be created by trade restrictions and barriers. The research I am referring to leans Republican. I also looked at the evidence on this topic from multiple points of view. Trump's argument on this topic appears to be the least credible I can find.

For folks who lean right that are interested in learning more about free trade and jobs, I would recommend the most well known Republican leaning think tanks, The CATO Institute (CATO) and The Heritage Foundation (Heritage). These organizations extensively cover this topic and have published Republican leaning pro trade arguments and research for years.

It will be interesting to see how the battle plays out within the Republican party.

For folks who would like to go beyond CATO and Heritage on this topic, feel free to reach out to me.  

Thursday, May 26, 2016

Costco - Mr. Market Miscalculates

The book title "Mr. Market Miscalculates," written by James Grant came to mind as I witnessed the strong positive market reaction to Costco's recent earnings release.(1) This came after the pros sold off Costco in earnest during recent weeks in front of the earnings release due to challenges reported by several other well known traditional land based retailers and the assumption that Costco was suffering a similar fate. The market misjudged Costco as reported results were better than expected. Costco indicated that customer behavior was unchanged.

My local store visits prior to the earnings release revealed no significant changes in visible metrics like store traffic and parking lot occupancy. Gasoline lines were also present as they have been for months. In short, I observed no change in a business with ongoing robust traffic and significant customer loyalty. Customer loyalty is apparent as evidenced by the consistent significant check out lines in my local stores and the published 90% membership renewal rate. As a customer you clearly understand why you renew each year which may or may not be the case for the professional money management crowd. If you own a piece of this business via the equity market it pays to know something about its competitive position, in my humble opinion. Being a customer is helpful on this front. If you are a friend of mine you already know that I am a customer and exhibit an obnoxious pride in ownership as I acquired my equity stake at just under $30 per share more than a decade ago. You also know that I have been a buyer in this stock for years. My latest buy before the earnings release was in the low $140's which meant that the market was pricing the equity near estimates of the intrinsic value of the company based on forward assumptions I was willing to bet on. Costco remains my biggest position.

In September 2015 I disclosed many of my holdings. I continue to hold onto most of the names mentioned although the position sizes have changed. Recent buys include Costco (discussed here) as well as Disney and Apple acquired post the most recent company earnings releases that disappointed Wall Street.

(1) James Grant, Mr. Market Miscalculates, November 2008

Sunday, October 11, 2015

Investing is a Personal Journey

What do you want to do? What do you want to own? What is your approach? These seem like simple but are actually complicated questions. Although you and I can study the processes of great investors like Warren Buffett for example and even own some of the same securities, we cannot be Warren Buffett as we have to follow our own journey and live with the results. The investing world is outcome oriented, but to be successful over time an investor's decision making process must be personal, disciplined, adaptable and process oriented.

Michael Mauboussin illustrated this concept in a 2004 research paper where he categorized the process used to make decisions (in the probabilistic field of investing) and outcomes as; (a) good decision making process = deserved success or bad break; or (b) bad decision making process = dumb luck or poetic justice.(1)

To survive over the long-term, a successful investor's decision making process and overall approach must fall into category (a) which says bad breaks will come and go but deserved luck will eventually emerge over time. So if you have not done so already, you will need to develop a sound process, knowing that your short-term results will not be indicative of long-term results. Since you are completely responsible for your results over time you must take this to heart in your decision making process.

In an age of information overload, you must learn to source and process information effectively as well as focus only on what is truly meaningful. This is an acquired skill that is influenced by your investment process, background and personal circumstances.

Through experience as an individual investor that will include losses and setbacks you will have the  opportunity to figure out what advantages and disadvantages you have compared to professional investors on Wall Street. It is important to have this awareness or to develop this understanding. While individual circumstances vary, there are some advantages and disadvantages generally common to all individual investors which include but are not limited to:


1) Ability to enter or exit a position or market at your will assuming you have staying power with your capital. Professionals do not have this level of flexibility;
2) option to hold onto investments for the period of time you choose (minutes, hours, days, weeks, months, years and decades, etc.). Professionals do not have this flexibility due to the fund flows of their investors which they do not control, among other factors;
3) ability to not be focused on meeting or beating performance benchmarks in the near term or over time; 
4) flexibility to pursue a strategy that matches up with your strengths, weaknesses and circumstances. Professionals cannot do this as they must live within the constraints of their asset class and investment mandate; and
5) ability to self critique your process and performance in private along with the ability to avoid chasing performance.


1) In general, less skill and training;
2) less access to timely and quality information along with less knowledge about how to use it;
3) potentially higher information and transaction costs;
4) typically less access to company management teams, experts and centers of influence, among other factors; and
5) performance risk that exists due to lack of sound approach and quality decision making.

My recommendation is that as you develop, alter or refine your process-approach you take the above and other personal circumstantial issues into consideration. Doing so will increase the odds of  achieving better long term results. There is also a massive amount of information available on investment approach and process that I will highlight over time. Savvy consumption and application of this information is critical to long term success as investor. The journey is yours.

(1) Michael J. Mauboussin, "Decision-Making for Investors, Theory, Practice and Pitfalls," Legg Mason, Mauboussin on Strategy, May 24, 2004.

Saturday, October 3, 2015

Not Quite Peter Lynch and Neither is Your Expert

Earlier this week I had a chance to spend some time with an estimated 200 professional investors (pros) at an institutional investment conference.(1) The pros were there to listen to and engage in Q&A with the senior management from well known and widely followed companies in the gaming industry that included MGM, BYD and WYNN, among others. The pros represent the largest and most sophisticated institutions in the markets. The pros were mostly men without ties who updated company models-notes on their laptops while listening to the company executives speak about issues of the day within their companies and industry. This gathering was closed to the public and had the typical look and feel of similar events with the companies selling their scripted stories designed to put forth the message they want to tell the pros (i.e. the market). The pros in turn, listened for any hint of new information that might impact their company models and forward looking assumptions.

Company executives know the drill here as conferences like this occur year round with the pros. The pros (who know the drill as well) are a highly educated, talented and hardworking group of individuals who possess high level analytical skills were there as part of their ongoing effort to figure out the potential future value of these companies by focusing on any new information that might impact the value of company debt and equity. The pros know the detailed company stories, numbers and models far better than individual investors can imagine. Their collective model assumptions and opinions represent what is known as the "consensus" which drives stock and bond prices of these companies. In other words. the decisions and actions of this group act as a key price setting mechanism for debt and equity issued by the companies who presented this day.

If you do not understand this already, you need to understand the pros set the market price as you and I, as individual investors do not. The other thing you must understand is that this crowd is smarter than you and I. In other words "fuggedaboutit" if you think you can beat the pros (i.e. market) over time using less sophisticated thought processes, strategies and analytical techniques.

The relevant point here is that the majority of this talented group cannot beat the market despite industry expertise, access to the companies and the skill they possess. In August 1975 Charles Ellis wrote a now famous article for the "Financial Analysts Journal" titled "The Loser's Game."(2) In the introduction the article Ellis wrote the following:

"Gifted, determined, ambitious professionals have come into investment management in such large numbers during the past 30 years that it may no longer be feasible for any of them to profit from the errors of all the others sufficiently often and by sufficient magnitude to beat the market averages."

His point was that the professionals were not beating the market as the market was beating them. This remains true today as the overwhelming majority of active fund managers (i.e. the experts) do not beat the market despite their superb skill level. The question here today is that if the probability of the pros beating the market in any given year today is 10% or less and lower for consecutive years, what is the probability you can beat the market over time based on your skill level? The answer is near zero to zero. On this point Ellis argues that the premise professional money managers can beat the market is false. Ditto for the overwhelming majority of individual investors in spite of psychological resistance to this reality by some.

So one of the basic questions you the investor must answer is do you want your money to be actively or passively managed? In other words, if you and your professional guru(s) cannot beat the market, join it. If you do, the odds are that you will beat 90% or more of professional money managers as well as your own performance as an active investor.

The advantage of passive investing is low cost diversification compared to active management, among other factors. Passive investing has been around for a while and has taken off since the 2008 financial crises as most managers (i.e. experts) have not kept up with the market. Warren Buffett also recommends this approach. It is also worth noting that in this day and age, the related strategy of smart beta funds have emerged that have some combined characteristics of both passive and active investing but may impose higher fess than purely passive investment options. There are a number of sponsors that offer passive and smart beta instruments and lot's of information available today on these important topics. I include some sources below related to passive investing as a starting point.

Passive investing is an important strategy and one that deserves serious consideration. If this concept is new to you, I would start with Charles Ellis's book, "Winning The Loser's Game."(3) Even if it is not, I strongly recommend the book. I would also spend time on the Vanguard website and in John Bogle's writings on this subject as well as the "Wealthfront"(4) website.

I have been and remain both an active and passive investor. Peter Lynch of Fidelity beat the market for 11 out of his 13 years as an active professional investor and made Magellan one of the most successful funds in history. His record is near impossible to beat by most professional or individual investors.

(1) Deutsche Bank and UBS Gaming Investment Forum, September 28, 2015.
(2) Charles D. Ellis, "The Loser's Game," The Financial Analysts Journal, July/August 1975.
(3) Charles D. Ellis, "Winning the Loser's Game, Timeless Strategies for Successful Investing," Sixth Edition, July 9, 2013.

Saturday, September 26, 2015

Are You a Market Forecaster and/or Market Timer?

This is what I often hear on Main Street and by so called experts about the economy, market, stocks and bonds, etc.

1) The market has gone up, so I like stocks;
2) the market is going down/up based on my opinion which is based on my favorite expert's opinion. He hates/loves stocks, so I hate/love stocks;
3) I can't admit that I don't understand stocks so I avoid stocks. To feel comfortable with myself, I look for forecasters and experts who support this view and advocate avoiding the stock market;
3) the Fed has manipulated the stock market and stocks will eventually crash, so I continue to avoid stocks;
4) the economy is bad, sluggish and risky so I will wait for things to get better and then buy stocks;
5)  the economy is bad and will stay bad forever so I only own treasuries at 2% yields. This is what my bond guru and/or favorite economist is saying, so I believe it. I have been in bonds and out of stocks since 2008;
6) because of Central Bank actions in recent years, I strongly believe inflation is going to take off so I am betting on this in the bond market by buying TIPS and avoiding stocks.
7) I only buy stocks when the side I am on wins the White House after the country has gotten back on track and regained its sanity after opposition is run out of office;
8) the U.S. is in a state of decline as it is not what it used to be in general, so I am avoiding stocks;
9) I am forecasting that the economy is going into decline so I continue to avoid stocks;
10) I believe the economy in the U.S, is going to significantly expand so I am going to buy stocks now or in the future;
11) China is in decline so I am avoiding stocks and commodities;
12) the economy has been sluggish, risky or in decline for several years so I have avoided stocks for several years;
13) I have missed the stock market move since 2008/2009 but do not want to miss anymore of the gains so I am getting into the market;
14) my favorite market guru has turned bullish so I am now bullish and will jump in the market;
15) I strongly believe the stock market is going up so I want to buy stocks.

Do one or more of these statements sound familiar? If so, then you may very well be a market forecaster and/or timer. The sobering truth is that if your investment decision making is based on forecasting and/or market timing you have no chance of beating the market over time. It is also true that if you consume market and economic forecasts and timing views, follow expert predictions and believe in forecasts you will be flooded with largely useless information that you do not know is useless and waste your time doing so.

In the book "Investment Fables, Exposing the Myths of "Can't Miss" Investment Strategies," 2004,  Aswath Damodaran (the highly regarded professor at NYU's Stern School of Business) said the following about market timing:

"If you can time the markets you can make immense returns, and it is this potential payoff that makes all investors into market timers. Some investors explicitly try to time markets by using technical and fundamental indicators, whereas others integrate their market views into their asset allocation decision, shifting more money into stocks when they are bullish stocks. Looking at the evidence, though, there are no market-timing indicators that deliver consistent and solid returns. In fact, there is little proof that the experts at market timing-market strategists, mutual funds and investment newsletters, for example-succeed at the endeavor.

Notwithstanding this depressing evidence, investors will continue to time the markets. If you choose to do so, you should pick a market-timing strategy that is consistent with your time horizon, evaluate the evidence on its success carefully, and try to combine it with an effective stock-selection strategy."

There has been a large amount of material written about forecasting. For a recent quality read on forecasting and the futility of predicting economies and stock markets see, "The Signal and the Noise: Why Most Predictions Fail - but some don't," 2012 by Nate Silver. I also recommend Philip Tetlock of the University of Pennsylvania who is an expert on the limitations of forecasting. Great investors such as Warren Buffet and Peter Lynch are known for spending little if any time on economic forecasts and market predictions. They are also not known as market timers.

For what it is worth, my real world experience lines up with the view of Damodaran, Silver and Tetlock as well as Buffet and Lynch.

Tuesday, September 22, 2015

How to Start

The best way to start is to put your toes in the water after you have done some reflection and made some basic decisions based on your homework and the knowledge foundation you have built. I started by buying stocks in high school. I lost money. I did not lose money because they were bad stocks or companies. I lost due to inexperience and lack of knowledge. I did not know how big my deficits were at the time as I was ignorant and did not know it. Looking back years later I eventually came to this realization.

Achieving proficiency as an investor takes at least a decade in my opinion and possibly longer. Along the way, many successful investors I know lost money in their first decade as an investor as they lived through the process of figuring out what style and approach worked for them. It is not easy sticking it out this long if you are achieving sub par results. Developing the skills required for eventual long term success takes time and losses. Charlie Munger's quote about investing hits the nail on the head as he says something along the lines of: "investing is not supposed to be easy. Anyone who finds it easy is stupid." Howard Mark's of Oaktree Capital Management recently published a fantastic easy titled "It's Not Easy" that deconstructs Munger's quote and describes why making money by investing is so difficult. I would highly recommend Mark's essay which was published recently and can be found on the Oaktree website.

I know that losing money while you become seasoned is not appealing but a necessary ingredient for future success. In my opinion a necessary part of the learning process. The key is to figure out why you lost (and no it is not the market, economy, the US president or your neighbor's fault, etc.). The responsibility for your losses, decisions and results lie squarely with you. Once you internalize this reality you will have a chance to make progress. Some folks get here faster than others. Some folks never get here.

There are ways to shorten the learning curve to make the process less painful. One of the best methods I know is to stand on the shoulders of giants by studying what they have done and how they did it. Education and open mindedness go a long way here. However, even if you study successful investors you will ultimately be required to find your own way in this journey by making your own decisions and taking responsibility for the results.