Sunday, December 14, 2014

Background and Introduction - December 2014

I am a former national public accounting firm CPA who has been an individual and professional investor since the 1970’s. I worked as a stockbroker from 1987 to 1992 in both the U.S. and Hong Kong. I also traded stocks in a family office hedge fund from 2002 to 2007 followed by a stint as an independent financial analyst to institutional investors between 2008 and 2012. I bought my first stocks in high school and college in the 1970’s. My first stock holdings consisted of two companies known as Pogo Producing Company (an oil E&P company) and Beatrice Foods (a large food processing company). I made these bets based on my view of the oil market and prospects for Beatrice. I lost money on both bets. All-in-all not a great start as an investor. As a CPA I audited public and private companies in a variety of industries for approximately eight years and also held titles such as Controller and CFO in private industry. I have been fortunate to have audited and worked for several successful companies as well as a few that have failed. I learned from both but realistically have learned more from the failures than the successes. Along the way I have traveled to conduct business in 16 countries located in Asia, Europe, the Caribbean and Central America. My career, to say the least, has been eclectic.

I learned accounting in college as an accounting major but was also serious student in economics, finance and history. As a public accountant I learned how to prepare and read financial statements of companies of varying sizes and complexity in a multitude of industries. In the late 1980’s I read an investment book about Warren Buffett titled “The Midas Touch,” by John Train. The book was my introduction to Warren Buffett. As a result of the book, Buffett became a major figure in my investment thinking and remains so today. For years I have followed Buffett, Charles Munger, Peter Lynch, Seth Klarman, Marty Whitman and John Maynard Keynes among a long list of professional investors who I admire and have learned from. I have also developed investing strategies based on the approaches of Buffett, Munger, Lynch, others and have at times mimicked their select holdings. I have also been bought out of companies by Buffett on more than one occasion in names such as Burlington Northern Railway and Heinz. I enhanced my technical investing skills by passing level 1 of the CFA exam and have also been a member of the CFA institute for about 10 years between 1999 and 2009. I do not know any of the gentlemen mentioned here but know a fair amount about their style as I have read countless books and articles about their lives, careers and approaches as investors.

My primary investment strategy has been to make long-term concentrated bets in stocks. My largest and longest term bets held over multi-year horizons have produced returns that have paid for my mistakes. Examples include Expeditors International - EXPD (1998 to 2007) and Costco -COST (2004 to present). I am a bottom up investor who is focused on finding current and future value in stocks and bonds, etc. I am attracted by what the public and other market participants often view as bad market or company news and general mayhem. I am not a market timer as I am not focused on predicting or worrying about the future direction of the economy or market. I am attracted by situations where a perceived gap exists between public market asset prices and current/future intrinsic value.

The market crash of 1987 and the financial crises of 2008 and 2009 were two of the best opportunities during my investing lifetime to find value in the markets. At the time of the 1987 market crash I had been in my financial career as a stock broker for two months. A few weeks before the crash my large book of one client had bought a stock through me that dropped 50% during the crash. I did not see the crash coming so my client suffered significant unrealized losses. I managed to talk my only client into holding onto the stock bought through me that was a large position for him. Six to nine months later the stock recovered all of the losses incurred during the fall of 1987 and went on to produce a significant gain for him. The name of the company was Nordstrom who at the time operated (if my memory serves me correctly) about 2 to 3 stores in the U.S. This real life experience taught me lessons about markets, risk taking, emotion, and volatility, etc. that have stayed with me. At the time of the 2008/2009 crises I was an individual investor doing proprietary research for institutional investors. By the time of the crash I had been investing personally and professionally for ten to fifteen years. Long enough to have experienced plenty of volatility and success/failure. By this point in my career I had evolved from an analytical stock picker to someone who had a much stronger understanding of the emotions of Mr. Market as well as my emotional self. Trial + error and experience (at times painful) were the teachers here as the market found ways of exploiting weaknesses and flaws in my approach. What I learned came from experience and study. By the time the 2008 crises erupted and stocks, high yield debt and other asset classes had collapsed, I had developed a mental inventory of companies and instruments that I wanted to be invested in for several years but had not, due to valuation concerns. In the 2008 and 2009 crises I made a series significant bets in companies with strong balance sheets. I made additional bets during 2010 and became fully invested during 2011. What was attractive to me in this period was that stocks were trading at cheap valuations on depressed forward earnings expectations. Opportunities were aplenty in some of the greatest companies in the world. Much of the merchandise presented by Mr. Market appeared to be a positive asymmetric bet because of overall liquidity issues, contagion risks and fear that existed in investors who were focused on predicting the direction of the economy, market in the U.S. and world, the European debt crises and the Japanese tsunami disaster, among other factors.

More specifically speaking, I was a large cap stock and high yield debt buyer in the U.S. during the financial crises and stock buyer in Europe during the peak of the Greek debt crises plus Japan shortly after the tsunami. Value was available as stocks and high yield debt sold at incredible discounts to then current and longer term prospective value prospects in my then humble opinion as conditions were rough. Opportunities existed in great companies with competitive advantages, superb balance sheets, high return on invested capital business models that was combined with depressed forward earnings expectations. It was also apparent by hitting the streets and experiencing these companies firsthand as a customer and/or observer that their businesses were not falling apart. Companies, instruments and asset classes that I invested in were an eclectic group that included, Wal Mart, Coke, Colgate Palmolive, CVS, Microsoft, Berkshire Hathaway, Moody’s, IGT, gaming operators (MGM at the time it was on the verge of bankruptcy), Costco (during negative comps in 2008 and 2009), High Yield debt (2008 and 2009 at 20% to 30% yields), the S&P 500 index (SPY) when the U.S. government was threatened with shutdown, the Japanese index and Hitachi (in the days following the tsunami) and European stocks (Adidas and SAP) in the midst of the Euro debt crises, among others (call me a fox and not a hedge hog as many unique bottom up opportunities presented themselves). Many if not most of the individuals I spoke to left or stayed out of the stock market during this time as they were fearful of the economy, markets, politics, the Fed and central bank actions despite my best communication effort. I am a lousy salesman.

Economic conditions in the U.S. are better today than they were in 2008 and 2009 but overall market opportunities are fewer in my opinion. More people are excited about the market today than 2008. On the other hand, while not negative, I am less excited about the markets today than I was in 2008 as there is less overall value to be found. Despite this, I do remain invested. As usual, negative headlines and negative price movements can be found in places like energy and other spots in the U.S. that may or may not provide opportunities in the future. Chaos and current day problems can also be found around the world today that may/will create opportunities for folks willing to do research who have financial and emotional staying power over a horizon.

In future entries to this blog I will attempt to provide some investing wisdom, historical perspective and insight regarding present day conditions plus “how to” insight for individual investors, among other topics. Stay tuned. I wish you success!    

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