Learning from History, A Calm Market?, Pokes, and 5G-

History is a great subject because it is full of all kinds of great stories, events, people, and situations which actually took place. Many of these events caused great sorrow and destruction, like World War One and Two, the murders of the Holocaust, and the massive loss of human life during the Civil War and Crusades. It is instructive to pay attention to these events because you can learn how the world came to be where it is today, and how countries and regions were shaped from previous generations.

Just as important, you can also digest how people have been successful in various different situations or industries. I think the whole process of learning encourages and stimulates growth in many different ways. There is much in the media about how college costs, especially student loans, are so great that it has renedered a generation saddled with so much debt it will be hard for them to get out from under the loan repayment burden. However, there is always another perspective. Knowledge can be gained in many ways, and growing as an individual is a never ending process. Part of the growing process is meeting and socializing with people who have different backgrounds and knowledge bases than you do. They can help you discover worlds which you may not have known existed. Most people change jobs many times during their lives. Yet, in many instances, the group you meet and become friends with in college or high school are your most cherished acquaintances and may even become part of your immediate family. Can one really put a price or value on those relationships? I think not.



As my focus usually involves the equity markets, this week I spent some time learning about some of the legends in the financial world and how they approached investing. Many are people I am very familiar with or had extensive knowledge of before this weeks quest. Still, what I found interesting about many is the mindset they had in their approach to the market and life in general. The common theme was staying optimistic, constantly learning about new companies and industries, and to not worry about broader problems in the global or domestic economy. In addition, having a healthy lifestyle and a robust social life were important as well. Many of these individuals lived very long lives, made huge fortunes, and are a shining example of good for their communities. All of these attributes are noteworthy for anybody and if I can have a smidgen of their success I will consider myself very fortunate.



In the financial world, the major events of last week included the focus on the fiscal cliff negotiations, as well as Bill Ackman's announcement and presentation of his best investment idea ever, the short of Herbalife. Herbalife's stock, as well as those of similar ilk (Avon, Nu Skin Enterprises), suffered losses of over 30% during the last two days. Yes, 30% in the last two trading sessions. Mr. Ackman has what is called market credibility. Having seen many of Mr. Ackman's presentations, he is incredibly thorough and spent a year researching Herbalife. Not all of Mr. Ackman's investments have had great success, as Border's and Target come to mind. Many are openly skeptical of how his position in J.C. Penny's will fare, and as of today, it remains to be seen how the famous department store can turn their financial performance around. However, I would not want to take the other side of the Ackman trade because he is like a dog with a bone. He will not exit the position if he feels he is right. It took him many years to take down MBIA, yet he ultimately prevailed and made a ton of money doing so. The position with Herbalife all goes to charity, so he really has no personal skin in the game. Still, it is a situation I will definitely keep my eye on.



The fiscal cliff situation remains unresolved and most analysts believe it will not get solved before 2013 arrives. During the presidential election, I commented to friend's and family the same belief I have today, only I will apply it our entire political leadership in Washington. Please take no offense at the language as it is harsh. If it is bothersome, I am sorry. THEY COULD NOT LEAD A WHORE TO BED. A major problem is neither side cares that the positions they take and will affect the other side. The President does not want to cut spending for fear it will hurt his group of constituents. John Boehner does not want to raise taxes as it is a bedrock principle of Republicans. So what do they do? They do what they do best- go on vacation, and next week they will probably give themselves a raise. Fabulous. (Sorry for the sarcasm)



Many believe market participants are way too calm given the number of problems facing the global and U.S. economy. If the answer is cash, CD's or Treasuries, I would rather be calm-



http://www.businessweek.com/articles/2012-12-19/in-a-world-full-of-risk-why-are-investors-so-calm

Don't look now, but look what is the number one free application- http://techcrunch.com/2012/12/22/its-a-facebook-and-google-world-on-apples-app-store-poke-hits-1-a-day-after-its-release/



A pretty cool article on where mobile networks are headed-

http://www.businessweek.com/articles/2012-12-19/the-future-of-mobile-networks-beyond-4g



If you are really into the tax situation, an interesting editorial commentary on the capital gains debate. I do not agree with the reasoning at all because it does not take into consideration incentives, but that is just my two cents-

http://www.bloomberg.com/news/2012-12-19/the-capital-gains-tax-a-tragedy-in-two-acts.html

Finally, I hope you have a great weekend. In addition, I hope the holiday season is a happy and healthy one for you and your family!!!!

Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital
. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charterholder.

Innovation and Why It Matters, Contenders vs Pretenders, a Broken Market?

One of the great things about the investment business is it constantly forces you to learn. You have to keep abreast about what is going on all over the world, and in many different industries. The longer you are a market participant, the more you experience situations where you wake up one day and something happened in the world which affected the price of one of your positions. Interestingly enough, what usually builds wealth over time is the consistency and predictability of business performance. When you see revenues and profits marching in a pretty chart that slants upward and to the right, you have found exactly what you want. However, it is not easy to find these companies, and with the advent of new technologies and innovative thinkers all over the planet, markets are the least static they have ever been.


Industries change, and sometimes very quickly, which affects individual enterprises dramatically. For example, if you look at the coal industry today, almost every analyst believes it faces huge challenges competing with natural gas, regulations which make it hard to compete, and issues about scale relative to substitutes. Coal companies have been going out of business for the last year, and still, even today, coal makes up almost 30% of all energy produced. The only constant is change, and it has a dramatic effect on how to view the investment world.


Still, nobody wants to hear about the challenges, what people are interested in is how to succeed. As a result, I believe you have to allocate capital to companies who have management teams who are leaders and not imitators. Imitation not only does not work, it is actually a very sloppy and lazy way to approach business. The risk is immense, when you do not innovate, do not push the envelope, do not think about new products or new ways to be more efficient. A company can now literally disappear in a few years. For example, look at what Apple has done to Microsoft, or what Netflix did to Blockbuster, or Amazon.com has done to Sears or Best Buy. You can also extend this to LinkedIn vs Monster.com, Facebook vs Myspace, or Apple (again) vs Sony or Nokia. So when I see Microsoft and Hewlett Packard attempting to imitate Apple with a new smartphone, I have to think in these instances, they are going to fail, and flame out miserably. Innovation can take many different forms, from new materials being uses, to new processes developed, or a new way of approaching the supply chain. Let me offer a few examples to help illustrate my point.



Having been a shareholder of Starbucks for many, many years, and hopefully for many more, I believe they are an innovative company. I also believe McDonald's is an imitative company. Yes, both have done very well for shareholder's, but if we are talking about taking chances on new products, or new acquisitions, or integrating new concepts into your business methods, it is not even a contest. Starbucks has failed with some of its innovative ideas- like the infamous Chantico (heavy chocolate drink), or an attempt at italian ices. Still, if you look at their new attempts at buying a juice company to compete in health and wellness (Evolution Fresh), or in tea (buying Teavana), or buy buying La Boulange (French Bakery) to help improve their food offerings, Starbucks is thinking, searching, striving for improvement. Some of their new store designs (more mobile for hard locations), the introduction and improvment of the Starbucks card, and the integration and investment in Square, are illustrative of using new methods to become more efficient in all areas. Pushing into new countries like India and Vietnam, show more aggressiveness about growing their business in untapped markets. On the other hand you have McDonald's, which I believes just copies what others try. You have a new smoothie, ok, McDonald's introduces a new smoothie. Got coffee? Ok, McDonald's now has that too. On Wall Street, the investment world worships both Starbucks and McDonald's, but it was not always that way. I think it will be fascinating to see how these two companies perform over the next decade. (Please know in no way am I recommending anyone invest in either or any company- see the disclosure at the end of the blog) Latte or Quarter Pounder?


A company I am not a shareholder of and made a big mistake with is Google, which I believe is as enterpreneurial as any large public business in the world. I just think they try all kinds of different ways of improving and growing their business. They were originally a search engine, and have bought Youtube, and then they purchased Motorola (among others). The development of the Android operating system may yet prove to be Apple's undoing, and certainly poses a huge threat to Microsoft as well. I just read where Google has a trial in Kansas City for fiber into the home for 70 bucks a month. Something like that could displace the telecom and cable companies if it were ever to catch fire on a large scale, maybe five to ten years out. Certainly, a few of their efforts have not paid off, which is the nature of trying new things. Typically, they do not pay off. The important question is if it does work, what is the potential benefit? Fiber in the home could be a 10-50 billion dollar business, so if Google invests $50 million and has a potential winner, they could make 100-1000 times their investment. Innovation makes it possible, whereas the copycat approach is just a way to cover the backside.


The fiscal cliff approaches and our political leadership remains wedded to idealogy. More speeches, more tv appearances, more of the same nonsense. The only guaranteed action will be to vote themselves raises and take a vacation. Forward huh?


Square is a very interesting company and will probably be an emerging leader in the payments space-http://techcrunch.com/2012/12/09/square-introduces-gift-cards-the-slow-death-of-physical-credit-cards-and-cash-continues/



Now more than ever, and increasingly so going forward, online personal data becomes a critical area of focus. Here is an interesting approach to this subject-
http://www.nytimes.com/2012/12/09/business/company-envisions-vaults-for-personal-data.html?ref=business&_r=0



Is the stock market broken? It looks like the ex-CFO of the NYSE feels it is-http://www.bloomberg.com/news/2012-12-02/stocks-markets-that-flummox-masses-do-no-one-any-good.html

I hope you had a great weekend. In addition, I hope the holiday season is a happy and healthy one for you and your family!!!!

Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charterholder.