Posts tagged ‘growth’

Standing on the Shoulders of a Growth Giant: Phil Fisher

Sir Isaac Newton

Sir Isaac Newton

It was English physicist, astronomer, philosopher, and mathematician Sir Isaac Newton who in 1675 stated, “If I have seen further it is by standing on the shoulders of giants.” Investors too can stand on the shoulders of market giants by studying the timeless financial knowledge from current and past market legends. The press, all too often, focuses on the hot managers of our time while forgetting or kicking to the curb those managers whom are temporarily out of favor. Famous and enduring value managers typically have gained the press spotlight, rightfully so in the case of current greats like Warren Buffett or past talents like Benjamin Graham, because they managed to prosper through numerous economic cycles. However, when it comes to growth legends like Phil Fisher, author of the must-read classic Common Stocks and Uncommon Profits, many people I bump into have never heard of him. Hopefully that will change over time.

The Past

Born on September 8, 1907, Mr. Fisher lived until the ripe age of 96 when he passed on March 4, 2004. Fisher was no dummy – he enrolled in college at age 15 and started graduate school at Stanford a few years later, before he dropped out and started his own investment firm in 1931. His son, Ken, currently heads his own investment firm, Fisher Investments, writes for Forbes magazine, and has authored multiple investment books. Unlike his dad, Ken has more of a natural bent towards value stocks.

Buy-And-Hold

Philip A. Fisher

Phil Fisher’s iconic book, Common Stocks and Uncommon Profits, was published in 1958. Mr. Fisher believed in many things and perhaps would have been thrown under the bus today for his long-term convictions in “buy-and-hold.”  Or as Mr. Fisher put it, “If the job has been correctly done when a common stock is purchased, the time to sell it is – almost never.” Not every investment idea made the cut, however he is known to have bought Motorola (MOT) stock in 1955 and held it until his death in 2004 for a massive gain. Generally, he gave initial stock purchases a three-year leash before considering a change to his investment position. If the conviction to purchase a stock for such duration is not present, then the investment opportunity should be ignored.

Fisher’s concentration on growth stocks also shaped his view on dividends. Dividends were not important to Fisher – he was more focused on how the company is investing retained earnings to achieve its earnings growth. Like Fisher, Peter Lynch is another growth hero of mine that also felt there is too much focus on the Price/Earnings (PE) ratio rather than the long-term earnings potential. 

“Scuttlebutt”

Another classic trademark of Fisher’s investing style was his commitment to fundamental research. He was focused on accumulating data covering a broad range of areas including, customers, suppliers, and competitors. Fisher also emphasized factors like market share, return on invested capital, margins, and the research & development budget. What Mr. Fisher called his varied approach to gathering diverse sets of information was “scuttlebutt.”

Buying & Selling Points

Although Fisher believed firmly in buy and hold, he was not scared to sell when the firm no longer met the original buying criteria or his original assessment  for purchased was deemed incorrect.

When buying, Fisher preferred to buy stocks in downturns or temporary problems – contrary to your typical momentum growth manager today (read article on momentum).  Fisher has this to say on the topic: “This matter of training oneself to not go with the crowd but to be able to zig  when the crowd zags, in my opinion, is one of the most important fundamentals of the investment success.”

Learning from Mistakes

Like all great investors I have studied, Phil Fisher also believed in learning from your mistakes:

“I have always believed that the chief difference between a fool and a wise man is that the wise man learns from his mistakes, while the fool never does.”

He expanded on the topic by saying the following:

“Making mistakes is inherent cost of investing just like bad loans are for the finest lending institutions. Don’t blindly accept dominant opinion and don’t be contrary for the sake of being contrary.”

I could only dream of having a fraction of Mr. Fisher’s career success – he retired in 1999 at the age of 91 (not bad timing).  As I continue on my investment journey with my investment firm (Sidoxia Capital Management, LLC), I will continue to study the legendary giants of investing (past and present) to sharpen my investment skills.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

 

DISCLOSURE: Sidoxia Capital Management (SCM) or its clients owns certain exchange traded funds, but currently has no direct position in MOT or BRKA/B. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

November 17, 2009 at 2:00 am 4 comments

Style Drift: Hail Mary Investing

Hail Mary

The mutual fund investing game is extraordinarily competitive. According to The Financial Times, there were 69,032 global mutual funds at the end of 2008. With the extreme competitiveness comes lucrative compensation structures if you can win (outperform) – I should know since I was a fund manager for many years. However, the compensation incentive structures can create style drift and conflicts of interest. You can think of style drift as the risky “Hail Mary” pass in football – you are a hero if the play (style drift) works, but a goat if it fails. When managers typically drift from the investment fund objective and investment strategy, typically they do not get fired if they outperform, but the manager is in hot water if drifting results in underperformance. Occasionally a fund can be a victim of its own success. A successful small-cap fund can have positions that appreciate so much the fund eventually becomes defined as a mid-cap fund – nice problem to have.

Drifting Issues

Why would a fund drift? Take for example the outperformance of the growth strategy in 2009 versus the value strategy. The Russell 1000 Growth index rose about +28% through October 23rd (excluding dividends) relative to the Russell 1000 Value index which increased +14%. The same goes with the emerging markets with some markets like Brazil and Russia having climbed over +100% this year. Because of the wide divergence in performance, value managers and domestic equity managers could be incented to drift into these outperforming areas. In some instances, managers can possibly earn multiples of their salary as bonuses, if they outperform their peers and benchmarks.

The non-compliance aspect to stated strategies is most damaging for institutional clients (you can think of pensions, endowments, 401ks, etc.). Investment industry consultants specifically hire fund managers to stay within the boundaries of a style box. This way, not only can consultants judge the performance of multitudes of managers on an apples-to-apples basis, but this structure also allows the client or plan participant to make confident asset allocation decisions without fears of combining overlapping strategies.

For most individual investors however, a properly diversified asset allocation across various styles, geographies, sizes, and asset classes is not a top priority (even though it should be). Rather, absolute performance is the number one focus and Morningstar ratings drive a lot of the decision making process.

What is Growth and Value?

Unfortunately the style drift game is very subjective. Growth and value can be viewed as two sides of the same coin, whereby value investing can simply be viewed as purchasing growth for a discount. Or as Warren Buffet says, “Growth and value investing are joined at the hip.” The distinction becomes even tougher because stocks will often cycle in and out of style labels (value and growth). During periods of outperformance a stock may get categorized as growth, whereas in periods of underperformance the stock may change its stripes to value. Unfortunately, there are multiple third party data source providers that define these factors differently. The subjective nature of these style categorizations also can provide cover to managers, depending on how specific the investment strategy is laid out in the prospectus.

What Investors Can Do?

1)      Read Prospectus: Read the fund objective and investment strategy in the prospectus obtained via mailed hardcopy or digital version on the website.

2)      Review Fund Holdings: Compare the objective and strategy with the fund holdings. Not only look at the style profile, but also evaluate size, geography, asset classes and industry concentrations. Morningstar.com can be a great tool for you to conduct your fund research.

3)      Determine Benchmark: Find the appropriate benchmark for the fund and compare fund performance to the index. If the fund is consistently underperforming (outperforming) on days the benchmark is outperforming (underperforming), then this dynamic could be indicating a performance yellow flag.

4)      Rebalance: By periodically reviewing your fund exposures and potential style drift, rebalancing can bring your asset allocation back into equilibrium.

5)      Seek Advice: If you are still confused, call the fund company or contact a financial advisor to clarify whether style drift is occurring in your fund(s) (read article on finding advisor).

Style drift can potentially create big problems in your portfolio. Misaligned incentives and conflicts of interest may lead to unwanted and hidden risk factors in your portfolio. Do yourself a favor and make sure the quarterback of your funds is not throwing “Hail Mary” passes – you deserve a higher probability of success in your investments.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Wade W. Slome, CFA, CFP is a contributing writer for Morningstar.com. Please read disclosure language on IC “Contact” page.

November 3, 2009 at 2:00 am 2 comments

Calamos Still “Growing” Strong

Calamos

Calamos Investments recently came out with their quarterly Market Review and Outlook.  John P. Calamos, Sr., the Company founder, began investing his family’s money over 50 years ago and is well known for their successful “growth” style of investing. Calamos founded Calamos Asset Management in 1977, and won BusinessWeek’s best manager for 2003 and 2004. Over the years, the company diversified from its bread and butter convertibles into equity, enhanced fixed-income, global and international, core bond, cash management and alternative strategies.  Overall, the newsletter offers a fairly sobering outlook (“Longterm Scared”); however there are some excellent investing nuggets, especially when it comes to the firm’s current positioning:

“Because we are not in a secular bull market, investing discipline is even more important. We believe these are the rules for today’s environment”:

1. Washington D.C. is the new growth city

2. Valuations will not get as stretched in the equity markets and growth expectations will be revised down considerably

3. Old-fashioned dividends mean something

4. G7 competitive devaluations and protectionist legislation will become the norm

5. To grow, emerging nations must become consumption driven and attempt to become independent of the developed nations

6. Knowledge is free, but capital may be much harder to get

7. Real returns after tax will take on new meaning

8. Baby boomers will reprioritize spending

9. The rules will change often!

Technology Exposure: For those that have followed my writings in the past, you are familiar with my positive bias towards technology. The technology sector is littered with land mines and risks. Nonetheless, through technology, our country has and will continue to innovate new products and services that will improve our standard of living. The “Technology Revolution” is not only benefiting our society, we are exporting the fruits of our discoveries to developing countries across the world. Take Intel Corporation (INTC) for example – it garnered about 85% of its revenues in 2008 from international markets.

Here is what Calamos has to say about their “Significant Overweight” exposure to the Technology sector:

“Productivity enhancement and cost controls should help technology spending.”
  • We see consumers remaining willing to purchase certain “special” products such as iPhones, laptops and flat-screens.
  • We have found software companies offering stable revenue streams, strong balance sheets with lots of cash, and products that offer solutions for cost reduction and productivity.
  • The sector will also benefit from global infrastructure stimulus spending.
  • Stock valuations are attractive and the risk/reward is compelling.
  • The sector may be re-establishing its leadership position in the equity market for the first time since last decade’s collapse.”

Materials and Energy Exposure: Developing countries are joining the party too, albeit later than the rest of the partygoers.  The price of admission to the party is access to valuable commodities. Calamos has other reasons to be overweight the Materials and Energy sectors:

  • Muted recovery implied in stock valuations.
  • Further U.S. dollar devaluation and global stimulus spending should help boost commodity prices.
  • The small capitalization of this sector and volatility of commodity prices will again make it prone to large price swings.
  • U.S. dollar devaluation should help support energy prices.
  • Mid-East turmoil adds to the attractiveness of this sector as it can hedge unforeseen energy price spikes.
  • Stock valuations appear reasonable but government intervention will make this a difficult sector to value.

 

Like all great managers, Calamos has taken his lumps, but through it all his firm is still “growing” strong.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

July 29, 2009 at 4:00 am 1 comment

Ron Baron Swinging for Long Term Home Runs

Growth Guru Ron Baron

Growth Guru Ron Baron

Click Here to Watch Ron Baron CNBC Interview

The CNBC interview is a tad long with the first eight minutes better than the last eight. I can’t say I agree with a lot of his political rants, but his long-term success (BPTRX) is difficult to argue with despite his challenging track record over the last few years.

Ron Baron is considered one of the greatest growth investors of all-time, but unlike many of his modern growth peers he chooses not to play the quick trigger, momentum-based, “buy high, sell higher” strategy that merely purchases what’s working and sells what’s not. Rather he is investing in growth businesses that create long-term value, and focusing on those securitities trading at attractive prices. Seems like a very reasonable strategy to me, and an approach other historic investors like Peter Lynch followed. Like Lynch, Baron appreciates the impact of long-term home run stocks (Lynch called them “multi-baggers”). For example, in the interview Baron talks about the 30x return he earned on his Devry (DV) investment from the early 1990s; his 50x return on Charles Schwab (SCHW) from 1990; or Manor Care, up 100x from 1969 to its acquisition. Lynch enjoyed similar successes, but had an itchier trading trigger finger – his multi “bucket” strategy was quite unique (another day, another blog post). 

When it comes to passive investing, Ron Baron like other active fund managers discredits the powers of index investing:

“With index funds, you are going to be investing in the most successful businesses at that point in time, and at the top of the market you will be massively over-weighted in those companies.”

 

Like the scarce number of .300 hitters in baseball, I believe there are a select few investment managers who can consistently outperform the market (a study in 2007 showed only 12 active career .300 hitters in Major League Baseball). I believe Baron is one of those .300 hitters in the investment world. The problems with analyzing manager performance are luck and “law of large numbers.” These phenomena wreak  havoc on the examinations of short-run performance. The wheat ultimately gets separated from the chaff over the long-haul, but with the “Great Recession” of 2008-2009, many long-term investors are still hiding or shaking in their boots.

Ultimately, I believe the horse trading game of actively managed funds is a tough game to win. Most investors end up chasing performance and rotating in and out of positions at the wrong times. Nonetheless, Ron Baron has proved his ability to generate above average returns over the long haul.  Taking a swing with Ron Baron might not be a bad idea.

Wade W. Slome, CFA, CFP

Plan. Invest. Prosper.

July 22, 2009 at 4:00 am 3 comments

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