Saturday, January 26, 2013

The Market Bites Apple, Why It Is Ok to Try and Beat the Market, and Icahn vs Ackman-



We had a very interesting week in the capital markets as the big elephant in the room is clearly the poor stock performance of Apple. The stock is down nearly 40% from its high and the jump the ship analysts are running for the hills. Exxon-Mobile regained the title has the most valuable company in the world. Many investors are questioning whether Apple is the next Microsoft because the market value is so big (almost $500 billion) it will be hard for the stock to perform well. These kinds of questions are at the very heart of investing capital and require rational thinking.

You have to look at the past and the future and try to evaluate what is the most probable outcome. Will Apple's dominance suddenly be relinquished in the smart phone and tablet market? Is Samsung going to own the low end market in the emerging markets of China and India without competing products from Apple? Does Apple have the ability to create new and more innovative products which will capture the imagination of consumers on a global basis? Are there potential acquisitions Apple can make which can address product areas which are holes in their portfolio? Right now, the world is ending and the company is seen as a broken growth company. However, they just sold 50 million devices in three months and they have a cash hoard of nearly $150 billion. I should also point out if you have own one Apple in your lifetime you are very fortunate. It will probably be impossible for them to duplicate the kind of stock performance they had last 15 years. People are going to make up their minds one way or another, and it is really will be fascinating to watch how it plays out over the next one, three, and five years.



When people ask me what they should invest in now, I always like to start out by asking them what do they have expertise in? The reason why I ask that is because any time you have a knowledge advantage in specific business areas, you have an opportunity to benefit from your special background or training. Over the last few months, there were a few companies in a specific area of the market which I have a great deal of experience in. In fact, I am very confident no matter how many analysts there are on Wall Street, I am just as familiar with these industries and specific companies as they are. Consequently, when a few businesses were offered at attractive prices, or at least what I thought were good value, we spent our capital. The greatness of Warren Buffett is he emphasizes thinking for yourself and making decisions based on evaluating businesses. Many people who invest adopt the strategy of buying the same companies as other well known investors. If you are really a true practitioner of value investing using Buffett

type strategies, you find your own investments which offer compelling value. So an important point to consider is why even bother trying to beat the market?



The answer is actually very simple. When you look at investment results over a long period of time, lets say 5 years or more, the rewards an investor gets from doing better than a market index like the Dow, S&P 500, or Nasdaq by even 1% per year are incredibly large. There is a statistic from one of Buffett's annual shareholder letters which says that over 65 years, if you invested 10K and got the S&P return, your total market value would be around 950K. If you had beat the market by 10% a year, your market value would be around 95 million. So each percentage point per year is worth 9 million bucks of increased net worth. Many people say buy indexes and be happy with the market return, and in a lot of situations this is sound thinking. However, because the benefits of good performance are so large, if you can even do a little better than the market, I think the effort is certainly worth making (if you want the exact numbers I can send you the passage- just email me at information@y-hc.com)

One of the more fascinating events on Wall Street this week was the confrontation which took place on CNBC between two legendary investors, Carl Icahn and Bill Ackman. If you want to see what happened, you can watch it here-http://www.cnbc.com/id/100408608. I would just say both are great investors, and each uses their own methods very successfully. They have a long history together, and there is plenty of animosity in their relationship. If you add the Herbalife short position which Ackman is involved in, the potential for conflict is genuine and it could only get worse. The Herbalife short position is another great story which most investors will be following over the next year. The Super Bowl has nothing on the conflict between Ackman and Icahn. Personally, I think ultimately Ackman will be proved correct.



Apple is revising the way it forecasts earnings-http://go.bloomberg.com/tech-blog/2013-01-23-apple-conservative-forecast/



Retailers are making large inroads in attracting customers to their apps-http://techcrunch.com/2013/01/25/mobile-shopping-apps/



Every time I read CFO.com I get valuable insight. If you are a business person, I cannot recommend it highly enough-

http://www3.cfo.com/article/2013/1/forecasting_cash-horde-crowdfunding-big-data-obamacare-small-to-medium-sized-business-revenue-recognition-lease-accounting

Thank you for reading, and I hope you have a great weekend and are happy and healthy.

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 charter holder.

Saturday, January 19, 2013

Earnings Season, Energy, and Startups-

It has been a while, so please indulge me as I bring to the table a nice assortment of topics. First, let's consider what is happening in the capital markets, specifically the stock market. Earnings season is upon us, and the large money center and investment banks generally have reported results which are reflective of their specific situations. The same cast of characters give us the same roles in the same movies. Should we be surprised? No, of course not.

The one area which was interesting was in the investment banking world where Morgan Stanley indicated they are looking forward to concentrating on growth. With the improvement in the housing industry, one would think the large banks focused on consumer credit, mortgage underwriting, and commercial lending would stand to prosper. Shareholders in these companies would certainly welcome better performance as the stocks have been so bad for so long any kind of return to normalized earnings power would boost the entire sector. In fact, they were so beaten down that in 2012 financials were the best performing industry in the stock market.

I just had to bring up the fact that Berkshire Hathaway is rebounding strongly and has had a big move recently. Just to show you how well Mr. Buffett has positioned Berkshire, their ownership of the Burlington Northern railroad was a great investment. Burlington now carries approximately 35% of all the oil in North America which is not moved by pipeline. With a five year backlog on railroad cars, profitability for Burlington is guaranteed for as far as the eye can see. Equity markets reward profits, and about 6 months or a year ago Berkshire's stock was languishing and the critics of Buffett were out in full force. If the energy boom is even remotely as strong as many suggest, it will be a long time before Berkshire Hathaway's stock performs poorly.



I found it interesting that Dell is now discussing a transaction which might take the company private. In the same domain, Hewlett-Packard decided to pay Meg Whitman 14 million dollars for her work last year. My own opinion is the boards of both companies are making big mistakes with these decisions. Dell faces challenges but to go private with a small premium in the hopes of coming back to the public markets in a few years is stupid. As for the board of the largest computer company in the world, maybe they think Meg has stabilized the situation. Still, if you take into consideration the mood of the public for entities like banks which pay executives big compensation packages for poor performance, it is hard to see how this is any different. With the stock at decade lows and questions about how HPQ will compete in tablets and smartphones, as well as being a second tier competitor in enterprise consulting, it would be smart of Mrs. Whitman to reconsider accepting the pay package.



The events in Algeria again point out the importance of energy in the global marketplace. It even further underscores the increased demand of large multi national corporations for security information and services. During this week I read a report on energy trends by a large oil company. The report mentioned the increase in fuel standards (by yes, the Obama Administration) as helping improve efficiency. A few key points were straightforward:

First, there is a massive shift occurring because of the improved capability of producing oil and gas in North America. In 2012, North America produced more energy related resources than ever before, up by about 15% over 2011. Second, emerging countries in Asia are where the vast majority of demand growth in energy will take place. Countries like China and India are going to be dependant on the rest of the world for energy supplies. As much as I hate to admit it, Russia is in a very strong position with respect to energy. The issue there is how effective their companies can be in getting the resources out of ground and to the market. Just as pertinent, the sources of energy production are going to be pretty stable for a long time. Even though the current administration loves to talk about alternative energy investment, the facts indicate materials like oil, natural gas, and coal will remain dominant for a long time. A great deal of the growth in supply will come from alternative energy areas like solar, wind, and nuclear, but they only make up about 7% of total inputs. With energy, the time frames to be considered are decades, not months or years.



Recently, I have been looking into the investment merit of startup companies. My rationale for doing so is the current investment climate is one where income is being taxed at a slightly higher rate than in 2012. In any taxable account, investors will keep less of their dividend income. You might reinvest the dividends, but you will pay a higher tax on that income. One way to counteract the higher tax rate is to own companies which don't pay dividends, but use their income to buy back their own stock more aggressively. Certainly, we own plenty of companies which already do that. However, if you are faced with higher tax rates on your investment capital, why not invest in startups? A startup might be a situation which takes a long time to become a good business, but if it flourishes you stand to eventually reap the rewards. In the meantime, your capital has to go somewhere and you can choose what areas look promising and leaders you want to take a chance on. So how has it gone so far?



Having contacted a few interesting startups, I must say I think a lot of the founders have a much in common. First, they are enthusiastic about their opportunity. Many are very highly educated with impressive resumes and backgrounds. In most cases, the markets they are targeting are massive. Where the wheels come off the track is the ability to provide or communicate a business plan which shows how the company will grow and attain profitability. Many startups are looking for investors with high-profile networks who can help them reach their goals. Of course they should be discerning about who they get involved with. However, many of these individuals are not realistic about how much their companies are worth. I find venture capitalists and startup founders are completely delusional about the valuations they afford their prospects. At a time where you can find all kinds of situations in the public markets which are very interesting with respect to valuation, to go invest a ton of money on a startup would be giving up potentially great situations in seasoned companies. Perhaps in time the situation may change.

Finally, the debt ceiling negotiations will probably heat up after the inauguration and State of the Union address. It appears as if Republicans will extend the ceiling for 3 months in return for a discussion about how to reform entitlement spending. You wonder if some sense of rationality will ever prevail in Washington?

Maybe the politicians could use some help to find a way to agree?http://www.nytimes.com/2013/01/19/business/negotiation-experts-consider-how-to-reach-a-budget-deal.html?ref=business



The building blocks of our society are in databases-http://techcrunch.com/2013/01/19/your-database-is-probably-terrible/

A nice story on why the future is always bright-http://techcrunch.com/2013/01/18/the-weekly-good-the-problems-of-today-will-be-solved-by-the-minds-of-tomorrow/

Thank you for reading the blog and hopefully I will be more timely in getting my posts up. Have a happy and healthy week!

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 charter holder.

Sunday, January 6, 2013

Welcome 2013, Is Change A Comin?, the Fiscal Cliff, and More!



Happy New Year!!! 2013 is upon us and the Mayan calendar was wrong, we made it through 2012 ok. Investors even survived the fiscal cliff, and apparently all is well in the world as the stock market gained 5% last week. I don't think anyone should expect 5% weeks to be normal, but it is consistent with how the market performs. One of the best investors ever, Peter Lynch of Fidelity, always emphasized being fully invested, among other principles like doing a whole lot of homework. Lynch believed you had to be fully invested because history proved that something like 80% of all market gains occur on less than 5 days during the year. If you are trying to time the market by buying and selling, the small number of days when it roars are literally impossible to predict. If you are always fully invested, you participate in full and reap the entire benefits. Certainly, much depends on the individual circumstance and as one gets older, many should not be risking capital they need to live on. Still, the results from last week are important as there may be some big changes occurring in the capital markets.

So what exactly am I referring to? First, last week bond yields rose and the notes the Federal Reserve released showed many members of that board being inclined to start getting hawkish at the first signs of economic growth. Indeed, if the economy starts to perform better and grow quicker, employment and inflation tick up at all, the Federal Reserve will start to walk back their (low) interest rate targets. Now, the caveat is we saw this last January as well, when money poured out of the bond market and into stocks. Money also left gold and went to oil. The important question is will this continue? Earnings reports will start to roll in next week so there is quite a bit to pay attention to in the equity markets.

My two cents on the fiscal cliff deal is it is more evidence of how poor of a job our elected leaders perform. Waiting until the last minute to get deals done is awful for work product and what you get is the result. Essentially, the key issues of spending and entitlement reform were not addressed. Many corporate leaders were very disappointed in the deal. The ex-CEO of Wells Fargo, who ran a very disciplined company when he was in charge, said the country was going to hell and it was a joke that they spent months negotiating to come up with such a poor result. It is more indication we need to have term limits for Congress, not pay for their retirement packages and benefits, and elect better leaders (as President, for example- my editorial comment).

Even worse, it now sets up the end of the February and March as deadlines for a debt limit negotiation between the warring parties again. Pretty much the same bunch arguing about the same issues they have for the last 3 years. For investors, the market focuses on moving from one problem to another. Of course, it is illustrative that long term success in the stock market, like Berkshire Hathaway's recent out performance, is dependant on profits and not political events.

Costco, Sam's Club, or BJ's- I know which one I favor-http://finance.yahoo.com/news/best-warehouse-store-bj-costco-104106736.html

The new Obamacare health care law is not changing the long term trend of health care insurance costs- all they do is keep going up. There are quite a few issues to consider in health care and the following article brings many of them up-http://www.nytimes.com/2013/01/06/business/despite-new-health-law-some-see-sharp-rise-in-premiums.html?pagewanted=2&_r=0&hp
David Rosenberg is a perpetual bear on the stock markets and always talks up bonds, but you need to pay attention to all points of view so here is his 2013 outlook-http://www.businessinsider.com/david-rosenbergs-2013-outlook-2012-12
math
The idea of traction capital in venture capital is illustrative of the idea to wait until you have proof of concept-http://techcrunch.com/2013/01/06/iterations-traction-capital/
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 charter holder.

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