Posts tagged ‘media’
Stock Talk: The Value of Media in Finance
I recently caught up with 50-year investment veteran Bill Kort to answer his questions regarding the media’s impact on the financial industry. After working for Kidder Peabody, A.G. Edwards, Wachovia, and Wells Fargo, Bill called it quits and decided to retire. Besides enjoying retirement with his wife, children, and grandchildren, Bill now also devotes considerable time to his blog Kort Sessions (www.KortSessions.com).
In a recent interview published on his Kort Sessions blog (KS), here’s what we discussed:
KS: Today, when you recommend a client take on, or increase equity exposure, what are the most common push-backs that you get? Have these changed in the past few years? If so, could you explain.
Wade Slome: “Given the events that have transpired over the last 15 years, I expect to receive a healthy dosage of pushback. Many investors have naturally been scarred from the 2008-2009 Financial Crisis, so convincing certain people that the 100-year flood will not occur every 100 days can be challenging. Regardless of the skepticism I receive, I feel it’s my duty to provide the best possible advice I can to existing clients and prospective clients. I can lead a horse to water, but I believe it’s not my job to force clients into a single investment option. At Sidoxia, we customize investment plans that meet clients’ risk tolerances, time horizons, and overall objectives.
With regard to sentiment changes in recent years, it is true that the tripling in equity market values since early 2009 has changed investor moods. Risk appetites have definitely increased. Nevertheless, cynicism is still rampant. Surveys done by Gallup show that stock ownership is near 15-year lows and despite stocks at or near record highs, ICI fund flow data shows money fleeing U.S. stock funds in 2014. With generational low interest rates, I see many long-term investors being too imprudently conservative. However, on the other hand, my responsibility is to also prevent other clients from taking on too much risk, especially if they have shorter investment time horizons or have limited funds in retirement.”
KS: When you speak with clients today, what are prominent worries do they have about their investments: The general level of the market, valuation, the economic backdrop, U.S. political issues or geopolitical concerns (all of the above)? Could you rank or tell me which concerns seem to be paramount.
Wade Slome: “In this 24-hour news cycle society we live in, an avalanche of real-time data gets crammed down our throats daily through our smartphones and Twitter-Facebook pages. As a result, the overwhelming barrage of news gets disseminated instantaneously, which in turn spreads fear like wildfire by word of mouth. In this type of environment it comes as no surprise to me that the general public is on edge. Every molehill is made into a mountain by media outlets for a simple reason…fear sells! Before the internet 20 years ago, virtually no one could find the location of Cyprus, Syria, Ukraine, or Gaza on a map – now we have Google and Wikipedia to show us or the Twitter feed scrolling at the bottom of our television sets reminds us. As far as concerns go, it’s tough to rank which ones are paramount. One day it’s the elections or Iran, and then the other day it’s the stock market crashing or the Ebola virus. Eventually the emotional pendulum will swing from fear and pessimism to optimism and euphoria, it always does. Like a lot of different professions, one of best strengths to have as an investment manager is the experience in knowing what noise to filter out and the ability to identify the relevant factors that drive outperformance.”
KS: Could you share the short-form responses that you might give to your clients when addressing the aforementioned issues.
Wade Slome: “The best advice I can give investors is to ignore the headlines. This principle is just as true today as it was a century or two ago. Mark Twain famously said, “If you don’t read the newspaper, you are uninformed. If you do read the newspaper, you are misinformed.” This is obviously presented a little tongue-in-cheek, but the main point being is headlines should not drive your investment decisions. It’s perfectly fine to be informed about the economy and politics, but people must realize the stock market often moves independently and in contrarian directions to prevailing media stories. Rather than emotionally react to news flow, it is much more important to create an objective, long-term investment plan that takes advantage of market noise, hype, and volatility.”
KS: Finally, this is a little bit of a leading question that I hope you might run with. Do you find any useful purpose being served by the financial, general or political media that might aid an individual’s investment process?
Wade Slome: “In my view of the financial markets, there are a few underlying principles that drive stock prices over the long-term, and they include such basic factors as earnings, valuations, interest rates, and market psychology. What I would objectively try to argue is that the financial, general, or political media have little to no impact on the first three factors and only modest influence on the last one (market psychology). Part of the reason I have been so constructive on the markets on my Investing Caffeine blog over the last five years is because all these factors have generally pointed in the right direction. I will become nervous when earnings decline, valuations get stretched, interest rates spike, and/or psychology turns euphoric. Right now, I don’t think we are seeing any of that occurring.
With that said, I do believe there are exceptions to the rule that the “media is evil.” If you have the time, interest, and patience to stagger through the endless desert of financial media, you can find a few rare flowers. Although I do consume mass amounts of media, 99% of it ends up in the trash or ignored. I do my best to reserve my media consumption to those successful investors who have lived through multiple market cycles and have a winning track record to back it up. It is possible to find sage investment bloggers; Warren Buffett interviews on CNBC; or newspaper interviews of thriving venture capitalists, if you properly dine on a healthy media diet. Unfortunately there is a lot of junk food financial content out in media land. What should generally be avoided at all costs are rants from economists, journalists, analysts, commentators, and talking heads. No matter how eloquent or articulate they may sound, the vast majority of the people you see on television have not invested a professional dime in their careers, so all you are getting from them are worthless, vacillating opinions. I choose to stick to commentary from the tried and true investment veterans.”
Bill, thanks again for the thoughtful interview questions, and continued success with your Kort Sessions blog!
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own GOOG/GOOGL, and a range of positions in certain exchange traded fund positions, but at the time of publishing SCM had no direct position in TWTR, FB, WFC, 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.
Confusing Fear Bubbles with Stock Bubbles
With the Dow Jones Industrial Average approaching and now breaking the 16,000 level, there has been a lot of discussion about whether the stock market is an inflating bubble about to burst due to excessive price appreciation? The reality is a fear bubble exists…not a valuation bubble. This fear phenomenon became abundantly clear from 2008 – 2012 when $100s of billions flowed out of stocks into bonds and trillions in cash got stuffed under the mattress earning near 0% (see Take Me Out to the Stock Game). The tide has modestly turned in 2013 but as I’ve written over the last six months, investor skepticism has reigned supreme (see Most Hated Bull Market Ever & Investors Snore).
Volatility in stocks will always exist, but standard ups-and-downs don’t equate to a bubble. The fact of the matter is if you are reading about bubble headlines in prominent newspapers and magazines, or listening to bubble talk on the TV or radio, then those particular bubbles likely do not exist. Or as strategist and investor Jim Stack has stated, “Bubbles, for the most part, are invisible to those trapped inside the bubble.”
All the recent bubble talk scattered over all the media outlets only bolsters my fear case more. If we actually were in a stock bubble, you wouldn’t be reading headlines like these:
From 1,300 Bubble to 5,000
If you think identifying financial bubbles is easy, then you should buy former Federal Reserve Chairman Alan Greenspan a drink and ask him how easy it is? During his chairmanship in late-1996, he successfully managed to identify the existence of an expanding technology bubble when he delivered his infamous “irrational exuberance” speech. The only problem was he failed miserably on his timing. From the timing of his alarming speech to the ultimate pricking of the bubble in 2000, the NASDAQ index proceeded to more than triple in value (from about 1,300 to over 5,000).
Current Fed Chairman Ben Bernanke was no better in identifying the housing bubble. In his remarks made before the Federal Reserve Board of Chicago in May 2007, Bernanke had this to say:
“…We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well.”
If the most powerful people in finance are horrible at timing financial market bubbles, then perhaps you shouldn’t stake your life’s savings on that endeavor either.
Bubbles History 101
Each bubble is unique in its own way, but analyzing previous historic bubbles can help understand future ones (see Sleeping Through Bubbles):
• Dutch Tulip-Mania: About 400 years ago in the 1630s, rather than buying a new house, Dutch natives were paying over $60,000 for tulip bulbs.
• British Railroad Mania: The overbuilding of railways in Britain during the 1840s.
• Roaring 20s: Preceding the Wall Street Crash of 1929 (-90% plunge in the Dow Jones Industrial average) and Great Depression, the U.S. economy experienced an extraordinary boom during the 1920s.
• Nifty Fifty: During the early 1970s, investors and traders piled into a set of glamour stocks or “Blue Chips” that eventually came crashing down about -90%.
• Japan’s Nikkei: The value of the Nikkei index increased over 450% in the eight years leading up to the peak of 38,957 in December 1989. Today, almost 25 years later, the index stands at about 15,382.
• Tech Bubble: Near the peak of the technology bubble in 2000, stocks like JDS Uniphase Corp (JDSU) and Yahoo! Inc (YHOO) traded for over 600x’s earnings. Needless to say, things ended pretty badly once the bubble burst.
As long as humans breathe, and fear and greed exist (i.e., forever), then we will continue to encounter bubbles. Unfortunately, we are unlikely to be notified of future bubbles in mainstream headlines. The objective way to unearth true economic bubbles is by focusing on excessive valuations. While stock prices are nowhere near the towering valuations of the technology and Japanese bubbles of the late 20th century, the bubble of fear originating from the 2008-2009 financial crisis has pushed many long-term bond prices to ridiculously high levels. As a result, these and other bonds are particularly vulnerable to spikes in interest rates (see Confessions of a Bond Hater).
Rather than chasing bubbles and nervously fretting over sensationalistic headlines, you will be better served by devoting your attention to the creation of a globally diversified investment portfolio. Own a portfolio that integrates a wide range of asset classes, and steers clear of popularly overpriced investments that the masses are talking about. When fear disappears and everyone is clamoring to buy stocks, you can be confident the stock bubble is ready to burst.
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 TWTR, JDSU, YHOO 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.
Hammering Heads with Circular Conversations
This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (July 1, 2013). Subscribe on the right side of the page for a complete monthly update.
Deciphering what is driving the markets on a day-to-day, week-to-week, or month-to-month basis can feel like repeatedly hammering your head. In order to grasp the reasons why financial markets go up and down, one must have a conversation with your brain explaining that good news can be bad for asset prices, and bad news can be good for asset prices. Huh…how can that be? These circular conversations are what keep newspapers, magazines, media commentators, and bloggers in business… and what baffle many investors.
For example, headlines often reflect sentiments such as these:
- “Unemployment Figures Disappoint…Dow Jones Rallies +200 Points on QE3 Continuation Hopes”
- “Unemployment Figures Delight…Dow Jones Tanks -200 Points on QE3 Discontinuation Fears”
- “Economic Figures Revised Lower by -0.2%…Dow Jones Skyrockets +200 Points as Lower Interest Rates Propel Stock Prices.”
- “Economic Figures Revised Higher by +0.2%…Dow Jones Plummets -200 Points as Higher Interest Rates Deflate Stock Prices.”
On rare occasions these headlines make sense, but often online media outlets are frantically changing the headlines as the markets whip back and forth from positive to negative. News-producing editors are continually forced to create ludicrous and absurd explanations that usually make no sense to informed long-term investors.
It’s important to recognize that if the financial markets made common sense, then investing for retirement would be simple and everyone would be billionaires. Unfortunately, financial markets frequently make no sense in the short-run. Stocks are volatile (often times for no rational reason), which is why stocks offer higher returns over the long-run relative to more stable asset classes.
Explaining the latest spike in stock/bond price volatility has been exacerbated in recent weeks as a result of the nation’s banker (the Federal Reserve) and its boss, Ben Bernanke, attempting to explain their future monetary policy plans. In theory, bringing light to a traditionally mysterious, closed-door Washington process should be a good thing…right?
Well, ever since a few weeks ago when Ben Bernanke and the FOMC (Federal Open Market Committee) disclosed that the stimulative bond buying program (QE3) could be slowed in 2013 and halted in 2014, financial markets globally experienced a sharp jolt of volatility – stock prices dropped and interest rates spiked. Counter-intuitively, Bernanke’s belief that the economy is on a sustained recovery path (expected GDP growth of +3.25% in both 2014 & 2015) spooked investors. More specifically, in the month of June, the S&P 500 index declined -1.5% in June; Dow Jones Industrial Index -1.4%; and the 10-year Treasury note’s yield jumped +0.3% to 2.5%. Greedy investors, however, should not forget that the stock market just posted its 2nd best quarter since 2009 – the S&P 500 climbed +2.4%. What’s more, the S&P 500 is up +13% and the Dow up +14% in the first half of 2013.
Bernanke Threatening to Take Away Investor Lollipops
Another way of looking at the recent volatility is by equating investors to kids and stimulative QE bond buying programs (Quantitative Easing) to lollipops. If the economy continues on this improvement trajectory (i.e., unemployment falls to 7% by next year) and inflation remains benign (below 2.5%), then Bernanke said he will take away investors’ QE lollipops. But like a pushover dad being pressured by kids at the candy store, Bernanke acknowledged that he could continue supplying investors QE lollipops, if the economic data doesn’t improve at the forecasted pace. At face value, receiving a specific timeline given by the Fed should be appreciated and normally people are happy to hear the Chairman speak rosily about the economy’s future. However, the mere thought of QE lollipops being taken away next year was enough to push investors into a “taper tantrum” (see also Investing Caffeine – Fed Fatigue article).
With scary headlines constantly circulating, a large proportion of investors are sitting on their hands (and cash) while staring like deer in headlights at these developments. Rather than a distracted driver texting, investors should be watching the road and mapping out their future investment destinations – not paying attention to irrelevant diversions. Astute investors realize that uncertainty surrounding Greece, Cyprus, fiscal cliff, sequestration, presidential elections, Iran, N. Korea, Syria, Turkey, taxes, QE3, etc., etc., etc., have been a constant. Regrettably the fear mongers paying attention to these useless headlines have witnessed their cash, gold, and Treasuries get trounced by equity returns since early 2009 (the S&P 500 index is up about +150%, including dividends). Optimists and realists, on the other hand, have seen their investment plans thrive. While the aforementioned list of concerns has dangled in front of our noses over the last year, we will have a complete new list of concerns to decipher over the coming weeks, months, and years. That’s the price a long-term investor pays if they want to earn higher returns in the volatile equity markets.
As strategist Don Hays points out, “Nothing is certain. Good investors love uncertainty.” Rather than getting consumed by fear with the endless number of changing uncertainties, the real risk for investors is outliving your savings. Paychecks are being stretched by inflationary pressures across all categories (e.g., healthcare, gasoline, utilities, food, movies, travel, etc.) and entitlements like Social Security and Medicare will likely not mean the same thing to us as it did for our parents. Unless investors plan on working into their 80s as greeters at Wal-Mart, and/or enjoy clipping Top Ramen coupons in a crammed apartment, then they should do themselves a favor by taking a deep breath and turning off the television, so they can be insulated from the constant doom and gloom.
So as intimidating, circular conversations about good news being bad news, and bad news being good news continue to swirl around, focus instead on building a diversified investment plan that can adjust and adapt to the never-ending list of uncertainties. Your head will feel a lot better than it would after repetitive hammer strikes.
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) and WMT, 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.
Dow Déjà Vu – Shining Rainbow or Bad Nightmare?
Excerpt from Free January Sidoxia Monthly Newsletter (Subscribe on right-side of page)
The Dow Jones Industrial Average is sitting at 11,577 points. Dick Fuld is still CEO of Lehman Brothers, AIG is still trading toxic CDS derivative contracts, and the $700 billion TARP bailout is a pre-idea about to be invented in the brain of Treasury Secretary Hank Paulson. Oops, wait a second, this isn’t the Dow 11,577of September 2008, but rather this is the Dow 11,577 of December 2010 (+11% for the year, excluding dividends). Was the -50% drop we experienced in the equity markets during 2008-2009 all just a bad dream? If not, how in the heck has the stock market climbed spectacularly? Most people don’t realize that stocks have about doubled over the last 21 months (and up roughly +20%-25% in the last 6 months) – all in the face of horrendously depressing news swirling around the media (i.e., jobs, debt, deficits, N. Korea, Iran, “New Normal,” etc.). Market volatility often does not make intuitive sense, and as a result, many market observers have been caught flat-footed.
Here are a few basic factors that average investors have not adequately appreciated:
1) Headlines are in Rearview Mirror: News that everyone reads in newspapers and magazines and hears on the television and radio is all backward looking. It’s always best to drive while looking forward through the windshield and try to anticipate what’s around the corner – not obsess with backward looking activity in the rearview mirror. That’s how the stock market works – tomorrow’s news (not yesterday’s or today’s) is what drives prices up or down. As the economy teetered on the verge of a “Great Depression-like” scenario in 2008-2009, investors became overly pessimistic and stocks became dramatically oversold. More recently, news has been perking up. Previous recessions have seen doubters slowly convert to believers and push prices higher – eventually stocks become overbought and euphoria slows the bull market. I believe we are in phase II of this three-part economic recovery.
2) Ignore Emerging Markets at Own Peril: We Americans tend to wear blinders when it comes to focusing on domestic issues. We focus more on healthcare reform and political issues, such as “Don’t Ask, Don’t Tell,” rather than the billions of foreigners chasing us as they climb the global economic ladder. Citizens in emerging markets are more concerned about out-competing and out-innovating us through educated workforces, so they can steal our jobs and buy more toasters, iPods, and cars – things we Americans have already taken for granted. The insatiable appetite of the expanding global middle class for a better standard of living is also driving ballooning commodity prices – everything from coal to copper and corn to cotton (the 4 Cs). This universal sandbox that we play in offers tremendous opportunities to grasp and tremendous threats to avoid, if investors open their eyes to these emerging market trends.
3) Capital Goes Where it’s Treated Best: Many voters are fed-up with the political climate in Washington and the sad state of economic affairs. The great thing about the global capitalistic marketplace we live in is that it does not discriminate – capital flows to where it is treated best. On a macro basis, money flows to countries that are fiscally responsible, support pro-growth initiatives, harbor educated work forces, control valuable natural resources, and honor the rule of law. On a micro basis, money flows to companies that are attractively priced and/or capable of sustainably growing earnings and cash flow. Voters and politicians will ultimately figure it out, or capital will go where it’s treated best.
Today’s Dow 11,577 is no bad dream, but rather resembles the emergence of a bright shining rainbow after a long, cold, and dark storm. The rainbow won’t stick around forever, but if investors choose to ignore the previously mentioned factors, like so many investors have overlooked, portfolio performance may turn into an ugly nightmare.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, AAPL, and an AIG derivative security, but at the time of publishing SCM had no direct position in GS, 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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