Saturday Morning Stream of Consciousness
May 08, 2010
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RELATED TICKERS: F
, PFE
Question:
What's worse than mowing the lawn on Saturday morning when your wife and kids go have fun at the gym?
Answer:
Having it start pouring rain when you're only half way done mowing the lawn on Saturday morning when your wife and kids go have fun at the gym.
Yuck. On account of the weather I find myself with a few minutes of free time today so I thought that I would make a rare weekend appearance here on CAPS. Besides, I needed an excuse to play with my new MacBook Pro :).
Here are a few random thoughts that I have been floating around in my head.
LEVERAGE IS EVIL!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
The siren's song of the juice that leverage can add to your returns is always difficult to resist, but please never, ever buy stocks on margin. When I was younger, I dabbled in it a little myself and I always thought...what's the big deal. Well, I'll tell you. Take a look at what happened to so many of our country's banks during the recent financial crisis or what is happening countries with high levels of debt like Greece today. While leverage and debt are always fun on the upside, they are deadly if things go wrong.
You may be wondering why leverage is on my mind right now. Well, even if you didn't ask I'm going to tell you. I am in the middle of reading a book called The Billion Dollar Mistake by Stephen L Weiss. The book is a compilation of stories about terrible mistakes that famous, tremendously wealthy super investors have made over the years. Each chapter takes an in-depth look at huge mistakes that these investors have made and why they made them, from Kirk Kerkorian's ill timed bet on Ford to Bill Ackman's unsuccessful proxy fight with Target. Weiss comes up with tons of reasons why these investors ended up losing money, but the common theme that the in my opinion the book does not emphasize enough is that a huge number of these investors ran into trouble because leverage forced them to sell their investment at the bottom. If they had made their bet in an unlevered manner or had not used options to make it, they would not have lost nearly as much money in the end or in a number of cases would have ultimately ended up making money.
Is Weiss an excellent writer, in the vein of Michael Lewis, absolutely not. Any time an author starts a chapter with the cliche "Webster's dictionary define's conviction as...blah, blah, blah (a trite expression that I was taught to avoid in junior high) you know that you're not dealing with Shakespeare. Having said that, I personally believe that this book is a must read for investors. If anything it reinforces how important it is for one to avoid leverage in their personal account. Besides, I'm a sucker for books about super investors and the inside story behind why they made certain investments.
If anyone is interested, I have read a number of such books lately, including:
Fooling Some of the People All of the Time
The Big Short
The Greatest Trade Ever
I have the following similar books sitting on my shelf waiting to be read:
The Invisible Hands: Hedge Funds Off the Record - Rethinking Real Money
The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It
And I plan on buying Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff very soon.
I really like trying to see how great investors think. Why they made their investments and why they did or did not work. If any out there in CAPS land has any suggestions about similar books, I'd really appreciate them.
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A few months ago I reluctantly renewed my subscription to Barron's. I say reluctantly because I like the idea of what Barron's could and should be much better than what the publication really is. It could be an amazing tool that individual investors and professional investors could use to get great ideas about investing. Instead it's usually filled with a bunch of crap. Three quarters of the feature articles on individual stocks that they talk about have already made their moves. Barron's always seems to be a day late and a dollar short. Half of the paper is filled with freaking stock quotes and other things. A hello, have they ever heard of something called a computer? Why do they have to regurgitate stats that anyone could pull up with a few keystrokes?
One of the reasons that I decided to renew my subscription to Barron's is its interviews with fund managers. That is usually the only place tat one can get viable investment ideas from in the entire rag. So that's where I skipped to when this morning's issue came. Not surprisingly, I found some interesting information buried in an interview with the fund managers from The Appleseed Fund. This fund is a value oriented fund (which I like) that invests only in socially responsible companies (which I could care less about). The Appleseed fund shuns investments in tobacco, alcohol, porn, and weapons. What fun is that? I plan on investing heavily in alcohol when I go out to dinner this evening and I currently own a tobacco stock in my real-world portfolio. I have never invested in porn, not because I am morally opposed to it, but because public companies in that industry somehow never seem to be profitable and besides that stuff will mess up your computer.
Anyhow, back to the interview. One of The Appleseed Fund's (which has returned 41.5% over the past year and averaged an annualized return of 5.7% since inception) largest holdings is Pfizer (PFE), a stock that I currently own as well.
Appleseed loves Pfizer's cheap valuation. They call it a stock with " a lot of upside opportunity and very little downside risk." They like the fact that "while we are waiting for the market to recognize this, we're getting paid a 4.2% dividend yield."
The Appleseed folks love PFE's October 2009 purchase of pharma giant Wyeth during the market collapse. They said that the timing of the acquisition enabled Pfizer to purchase Wyeth at a very reasonable price and that the company has a much stronger pipeline of potential new products as a result of the acquisition.
Appleseed believes that analysts are significantly underestimating PFE's earning power and that investors will realize very attractive returns in the stock if its earnings come close to its internal estimates.
Well, sorry to cut this short, but the troops are home. Gotta go.
Deej
