Posts tagged ‘Mark Cuban’
Building Your All-Star NBA Portfolio
Image by © Royalty-Free/Corbis
You may or may not care, but the NBA (National Basketball Association) playoffs are in full swing. If you were an owner/manager of an NBA team, you probably wouldn’t pick me as a starting player on your roster – and if you did, we would need to sit down and talk. I played high school basketball (“played” is a loose term) in my youth, and even played in my early 40s against other over-aged veterans with knee braces, goggles, and headbands. Once my injuries began to pile up and my playing time was minimized by the spry, millennial team members, I knew it was time to retire and hang up my jockstrap.
The great thing about your investments is that you can create an All-Star NBA portfolio without the necessity of a salary market cap or billions of dollars like Mark Cuban. You can actually put the greatest professional players in the world (stocks/bonds) into your portfolio whether you invest $1,000 or $10,000,000. Sure, transactions costs can eat away at the smaller portfolios, but if investors are correctly managing their funds over years, and not months, then virtually everyone can create a cost-efficient elite team of stocks, bonds, and alternatives.
Now that we’ve established that anyone can create a championship caliber portfolio, the question then becomes, how does an owner go about selecting his/her team’s players? It may sound like a cliché, but diversification is paramount. Although centers Tim Duncan, Dwight Howard, Chris Bosh, Marc Gasol, and DeAndre Jordan may get a lot of rebounds for your team, it wouldn’t make sense to have those five starting centers on your team. The same principle applies to your investment portfolio.
Generally speaking, the best policy for investors is to establish exposure to a broad set of asset classes customized to your time horizon, risk tolerance, objectives, and constraints. In other words, it is prudent to have exposure to not only stocks and bonds, but other areas like real estate, commodities, alternatives, and emerging markets. Everybody has their own unique situation, and with interest rates and valuations continually changing, it makes sense that asset allocations across all individuals will be very diverse.
In basketball terms, the sizes and types of guards, forwards, and centers will be dependent on the objectives of the team’s owners/managers. For example, it is very logical to have Stephen Curry (see great video) as the starting guard for the fast-paced, highest scoring NBA team, Golden State Warriors but Curry would not be ideally suited for the slow, grind-em-up offense of the Utah Jazz (one of the lowest scoring teams in the NBA).
In order to build a consistent winning percentage for your portfolio, you need to have a systematic, disciplined process of choosing your all-star-team, which can’t just consist of picking the hottest player of the day. Not only could it be too expensive, the consequences of over-concentrating your portfolio with an expensive position can be painful….just ask Los Angeles Laker fans how they feel about overpaying for Kobe Bryant’s $23.5 million 2014-2015 salary. Investors who chased the overpriced tech sector in the late 1990s, with stock prices trading at over 100 times trailing 12-month earnings, understand how painful losses can be in the subsequent “bubble” burst.
Having a strong bench of players is crucial as well. This requires a research process that can prioritize opportunities based on quantitative and fundamental processes (at Sidoxia we use our SHGR model). Sometimes your starters get injured, fatigued, or bought out by a competitor. Interest rates, valuations, exchange rates, earnings growth rates and other economic factors are continually fluctuating, so having a bench of suitable investment ideas is critical for different financial environments.
Beating the market is a challenging endeavor, not only for individuals, but also for professionals. If you don’t believe me, then check out what Dalbar had to say about this subject in its annual report entitled, Quantitative Analysis of Investor Behavior:
Dalbar found that in 2014, the average investor in a stock mutual fund underperformed the S&P 500 by a margin of 8.19 percent. Fixed-income investors underperformed the Barclays Aggregate Bond Index by a margin of 4.81 percent.
Ouch! If you want to generate winning returns matching the likes of the 1,000-win club, which includes Gregg Popovich, Phil Jackson, and Pat Riley then you need to avoid some of the most common investor mistakes (see also 10 Ways to Destroy Your Portfolio). Chasing performance, ignoring diversification, emotionally reacting to news headlines, paying high fees, and over-trading are sure fire ways to get technical fouls and ejected from the investment game. Avoiding these mistakes and following a systematic, objective process will make you and your investment portfolio a successful all-star.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing, SCM had no direct position in any other security referenced in this article. 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.
Netflix: Burn It and They Will Come
In the successful, but fictional movie, Fields of Dreams, an Iowa farmer played by actor Kevin Costner is told by voices to build a field for baseball playing ghosts. After the baseball diamond is completed, the team of Chicago White Sox ghosts, including Shoeless Joe Jackson, come to play.
Well, in the case of the internet streaming giant Netflix Inc (NFLX), instead of chasing ghosts, the company continues to chase the ghosts of profitability. Netflix’s share price has already soared +63% this year as the company continues to burn hundreds of millions in cash, while aggressively building out its international streaming footprint. Unlike Kevin Costner, Netflix investors are likely to eventually get spooked by the by the stratospheric valuation and bleeding cash.
At Sidoxia, we may be a dying breed, but our primary focus is on finding market leading franchises that are growing cash flows at reasonable valuations. In sticking with my nostalgic movie quoting, I believe as Cuba Gooding Jr. does in the classic movie, Jerry Maguire, “Show me the money!” Unfortunately for Netflix, right now the only money to be shown is the money getting burned.
Burn It and They Will Come
In a little over three years, Netflix has burned over -$350 million in cash, added $2 billion in debt, and spent approximately -$11 billion on streaming content (about -$4.6 billion alone in the last 12 months). As the hemorrhaging of cash accelerates (-$163 million in the recent quarter), investors with valuation dementia have bid up Netflix shares to a head-scratching 350x’s estimated earnings this year and a still mind-boggling valuation of 158x’s 2016 Wall Street earnings estimates of $3.53 per share. Of course the questionable valuation built on accounting smoke and mirrors looks even more absurd, if you base it on free cash flow…because Netflix has none. What makes the Netflix story even scarier is that on top of the rising $2.4 billion in debt anchored on their balance sheet, Netflix also has commitments to purchase an additional $9.8 billion in streaming content in the coming years.
For the time being, investors are enamored with Netflix’s growing revenues and subscribers. I’ve seen this movie before (no pun intended), in the late 1990s when investors would buy growth with reckless neglect of valuation. For those of you who missed it, the ending wasn’t pretty. What’s causing the financial stress at Netflix? It’s fairly simple. Beyond the spending like drunken sailors on U.S. television and movie content (third party and original), the company is expanding aggressively internationally.
The open check book writing began in 2010 when Netflix started their international expansion in Canada. Since then, the company has launched their service in Latin America, the United Kingdom, Ireland, Finland, Denmark, Sweden Norway, Netherlands, Germany, Austria, Switzerland, France, Belgium, Luxembourg, Australia, and New Zealand.
With all this international expansion behind Netflix, investors should surely be able to breathe a sigh of relief by now…right? Wrong. David Wells, Netflix’s CFO had this to say in the company’s recent investor conference call. Not only have international losses worsened by 86% in the recent quarter, “You should expect those losses to trend upward and into 2016.” Excellent, so the horrific losses should only deteriorate for another year or so…yay.
While Netflix is burning hundreds of millions in cash, the well documented streaming competition is only getting worse. This begs the question, what is Netflix’s real competitive advantage? I certainly don’t believe it is the company’s ability to borrow billions of dollars and write billions in content checks – we are seeing plenty of competitors repeating the same activity. Here is a partial list of the ever-expanding streaming and cord-cutting competitive offerings:
- Amazon Prime Instant Video (AMZN)
- Apple TV (AAPL)
- Hulu
- Sony Vue
- HBO Now
- Sling TV (through Dish Network – DISH)
- CBS Streaming
- YouTube (GOOG)
- Nickelodeon Streaming
Sadly for Netflix, this more challenging competitive environment is creating a content bidding war, which is squeezing Netflix’s margins. But wait, say the Netflix bulls. I should focus my attention on the company’s expanding domestic streaming margins. This is true, if you carelessly ignore the accounting gimmicks that Netflix CFO David Wells freely acknowledges. On the recent investor call, here is Wells’s description of the company’s expense diversion trickery by geography:
“So by growing faster internationally, and putting that [content expense] allocation more towards international, it’s going to provide some relief to those global originals, and the global projects that we do have, that are allocated to the U.S.”
In other words, Wells admits shoving a lot of domestic content costs into the international segment to make domestic profit margins look better (higher). Longer term, perhaps this allocation could make some sense, but for now I’m not convinced viewers in Luxembourg are watching Orange is the New Black and House of Cards like they are in the U.S.
Technology: Amazon Doing the Heavy Lifting
If check writing and accounting diversions aren’t a competitive advantage, does Netflix have a technology advantage? That’s tough to believe when Netflix effectively outsources all their distribution technology to Amazon.com Inc (AMZN).
Here’s how Netflix describes their technology relationship with Amazon:
“We run the vast majority of our computing on [Amazon Web Services] AWS. Given this, along with the fact that we cannot easily switch our AWS operations to another cloud provider, any disruption of or interference with our use of AWS would impact our operations and our business would be adversely impacted. While the retail side of Amazon competes with us, we do not believe that Amazon will use the AWS operation in such a manner as to gain competitive advantage against our service.”
Call me naïve, but something tells me Amazon could be stealing some secret pointers and best practices from Netflix’s operations and applying them to their Amazon Prime Instant Video offering. Nah, probably not. Like Netflix said, Amazon wouldn’t steal anything to gain a competitive advantage…never.
Regardless, the real question surrounding Netflix should focus on whether a $35 billion valuation should be awarded to a money losing content portal that distributes content through Amazon? For comparison purposes, Netflix is currently valued at 20% more than Viacom Inc (VIA), the owner of valuable franchises and brands like Paramount Pictures, Nickelodeon, MTV, Comedy Central, BET, VH1, Spike, and more. Viacom, which was spun off from CBS 44 years ago, actually generated about $2.5 billion in cash last year and paid out about a half billion dollars in dividends. Quite a stark contrast compared to a company accelerating its cash losses.
I openly admit Netflix is a wonderful service, and I have been a loyal, longtime subscriber myself. But a good service does not necessarily equate to a good stock. And despite being short the stock, Sidoxia is actually long the company’s bonds. It’s certainly possible (and likely) Netflix’s stock will underperform from today’s nosebleed valuation, but under almost any scenario I can imagine, I have a difficult time foreseeing an outcome in which Netflix would go bankrupt by 2021. Bond investors currently agree, which explains why my Netflix bonds are trading at a 5% premium to par.
Netflix stockholders, and crazy disciples like Mark Cuban, on the other hand, may have more to worry about in the coming quarters. CEO Reed Hastings is sticking to his “burn it and they will come” strategy at all costs, but if profits and cash don’t begin to pile up quickly, then Netflix’s “Field of Dreams” will turn into a “Field of Nightmares.”
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), AAPL, GOOGL, AMZN, long Netflix bond position, long Dish Corp bond, and a short position in NFLX, but at the time of publishing, SCM had no direct position in VIA, TWX, SNE, or any other security referenced in this article. 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.
King of Controversy Reveals Maverick Solution
Mark Cuban, provocative and brash owner of the Dallas Mavericks basketball team and #400 wealthiest person in the world ($2.4 billion net worth), according to Forbes, has never been shy about sharing his opinion. In fact, this multi-billionaire’s opinions have been discouraged on multiple occasions, as evidenced by the NBA (National Basketball Association) slapping Cuban with more than $1.6 million in fines for his outbursts.
Cuban doesn’t only provide his views on basketball, as a serial entrepreneur who cashed in his former company Broadcast.com to Yahoo! (YHOO) for $5.9 billion, he also is providing his thoughts on Wall Street and the 1,000 point “fat finger” trading meltdown from last week. What does Cuban say is the answer to the rampant speculation conducted by idiot financial engineers? “Tax the Hell Out of Wall Street,” says Cuban in his recent blog flagged by TRB’s Josh Brown.
A Taxing Solution
Specifically, Cuban wants to tax investors 25 cents per share (and 5 cents per share for stocks trading at $5 per share or less) in hopes of encouraging myopic speculating traders to become longer-term shareholders. Cuban believes this approach will weed out the day traders and investment renters who in reality “don’t add anything to the markets.” Seems like a reasonable belief to me.
According to Cuban’s math, here are some of the benefits the tax would bring to the financial system:
“If the NYSE, Nasdaq, Amex and OTC are trading 2 Billion shares a day or more, like today, thats $ 500 Million Dollars PER DAY. If there are 260 trading days a year. Thats about 130 Billion dollars a year. If volumes drop because of the tax. It is still 10s of Billions of dollars per year. Thats real money for the US Treasury. Thats also an annual payment towards the next time Wall Street screws up and we have a black swan event that no one planned on.”
Practically speaking, a flat rate 25 cent tax per share is probably not the best way to go if you were to introduce a transaction tax, but the crux of Cuban’s argument essentially would not change. Creating a flat percentage tax (e.g., 1%) would likely make more sense, even if complexity may increase relative to the 25 cent tax. Take for example Citigroup (C) and Berkshire Hathaway Class A (BRKA). Cuban’s plan would result in paying 1.2% tax on a $4.17 share of Citigroup versus only 0.00022% tax for a $116,000.00 share of Berkshire Hathaway. Simple accounting maneuvers such as reverse stock splits and slowing of stock dividends, along with reducing company dilution through share and option issuance, may be methods of circumventing some of the tax burden created under Cuban’s described proposal.
Politically, adding any tax to investing voters could be re-election suicide, so rather than calling it a trading tax, I suppose the politicians would have to come up with some other euphemism, such as “charitable administrative fee for speculative trading.” The financial industry has already become experts in taxing investors with fees (read Fees, Exploitation and Confusion), so maybe Congress could give the banks and fund companies a call for some marketing ideas.
Step 1: Transparency
The murkiness and lack of transparency across derivatives markets is becoming more and more evident by the day. Some recent events that bolster the argument include: a) New CDO (Collateralized Debt Obligation) derivative allegations surfacing against Morgan Stanley (MS); b) The SEC (Securities and Exchange Commission) charges against Goldman Sachs (GS) in the Abacus synthetic CDO deal (see Goldman Sachs article); c) The collapse of AIG’s Credit Default Swap (CDS) department and subsequent push to transfer trading to open exchanges; and d) Now we’re dealing with last week’s cascading collapse of the equity markets within minutes. The brief cratering of multiple indexes points to a potential order entry blunder and/or absence of adequate and consistent circuit breakers across a web of disparate exchanges and ECNs (Electronic Communication Networks).
The mere fact we stand here five days later with no substantive explanation for the absurd trading anomalies (see Making Megabucks 13 Minutes at a Time) is proof positive changes in derivative and exchange transparency are absolutely essential.
Step 2: Incentives
In Freakonomics, the best-selling book authored by Steven Levitt, we learn that “Incentives are the cornerstone of modern life,” and “Economics is, at root, the study of incentives.” Incentives are crucial in that they permeate virtually all aspects of financial markets, not only in assisting economic growth, but also the negative aspects of bursting financial bubbles.
Michael Mauboussin, the Chief Investment Strategist at Legg Mason (read more on Mauboussin), also expands on the role incentives played in the housing collapse:
“Many, if not most, of the parties involved in the mortgage meltdown were doing what makes sense for them—even if it wasn’t good for the system overall. Homeowners got to live in fancier homes, mortgage brokers earned fees on the mortgages they originated without having to worry about the quality of the loans, investment banks earned tidy fees buying, packaging, and selling these loans, rating agencies made money, and investors earned extra yield on so-called AAA securities. So it’s a big deal to watch and unpack incentives.”
Regulation, penalties, and fines are means of creating preventative incentives against improper or unfair behavior. Just as people have no incentive to wash a rental car, nor do high frequency traders have an incentive to invest in equity securities for any extended period of time. Adding a Cuban tax may not be a cure-all for all our country’s financial woes, but as the regulatory reform debate matures in Congress, this taxing idea emanating from the King of Controversy may be a good place to start.
Read full blog article written by Mark Cuban
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and an AIG subsidary structured security, but at the time of publishing SCM had no direct positions in YHOO, C, AIG, LM, GS, BRKA, or any security referenced in this article. 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.
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