Posts tagged ‘Sidoxia’
The Only Thing to Fear is the Unknown Itself
Martin Luther King, Jr. famously stated, “The only thing we have to fear is fear itself,” but when it comes to the stock market, the only thing to fear is the “unknown.” As much as people like to say, “I saw that crisis coming,” or “I knew the bubble was going to burst,” the reality is these assertions are often embellished, overstated, and/or misplaced.
How many people saw these events coming?
- 1987 – Black Monday
- Iraqi War
- Thai Baht Currency Crisis
- Long-Term Capital Management Collapse & Bailout
- 9/11 Terrorist Attack
- Lehman Brothers Bankruptcy / Bear Stearns Bailout
- Flash Crash
- U.S. Debt Downgrade
- Arab Spring
- Sequestration Cuts
- Cyprus Financial Crisis
- Federal Reserve (QE1, QE2, QE3, Operation Twist, etc.)
Sure, there will always be a prescient few who may actually get it right and profit from their crystal balls, but to assume you are smart enough to predict these events with any consistent accuracy is likely reckless. Even for the smartest and brightest minds, uncertainty and doubt surrounding such mega-events leads to inaction or paralysis. If profiting in advance of these negative outcomes was so easy, you probably would be basking in the sun on your personal private island…and not reading this article.
Coming to grips with the existence of a never-ending series of future negative financial shocks is the price of doing business in the stock market, if you want to become a successful long-term investor. The fact of the matter is with 7 billion people living on a planet orbiting the sun at 67,000 mph, the law of large numbers tells us there will be many unpredictable events caused either by pure chance or poor human decisions. As the great financial crisis of 2008-2009 proved, there will always be populations of stupid or ignorant people who will purposely or inadvertently cause significant damage to economies around the world.
Fortunately, the power of democracy (see Spreading the Seeds of Democracy) and the benefits of capitalism have dramatically increased the standards of living for hundreds of millions of people. Despite horrific outcomes and unthinkable atrocities perpetrated throughout history, global GDP and living standards continue to positively march forward and upward. For example, consider in my limited lifespan, I have seen the introduction of VCRs, microwave ovens, mobile phones, and the internet, while experiencing amazing milestones like the eradication of smallpox, the sequencing of the human genome, and landing space exploration vehicles on Mars, among many other unimaginable achievements.
Despite amazing advancements, many investors are paralyzed into inaction out of fear of a harmful outcome. If I received a penny for every negative prediction I read or heard about over my 20+ years of investing, I would be happily retired. The stock market is never immune from adverse events, but chances are a geopolitical war in Ukraine/Iraq; accelerated Federal Reserve rate tightening; China real estate bubble; Argentinian debt default; or other current, worrisome headline is unlikely to be the cause of the next -20%+ bear market. History shows us that fear of the unknown is more rational than the fear of the known. If you can’t come to grips with fear itself, I fear your long-term results will lead to a scary retirement.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold long positions in certain exchange traded funds, 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.
Stocks Winning vs. Weak Competitors
This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (June 2, 2014). Subscribe on the right side of the page for the complete text.
Winning at any sport is lot easier if you can compete without an opponent. Imagine an NBA basketball MVP LeBron James driving to the basket against no defender, or versus a weakling opponent like a 44-year-old investment manager. Under these circumstances, it would be pretty easy for James and his team, the Miami Heat, to victoriously dominate without even a trace of sweat.
Effectively, stocks have enjoyed similar domination in recent years, while steamrolling over the bond competition. To put the stock market’s winning streak into perspective, the S&P 500 index set a new all-time record high in May, with the S&P 500 advancing +2.1% to 1924 for the month, bringing the 2013-2014 total return to about +38%. Not too shabby results over 17 months, if you consider bank deposits and CDs are paying a paltry 0.0-1.0% annually, and investors are gobbling up bonds yielding a measly 2.5% (see chart below).
The point, once again, is that even if you are a skeptic or bear on the outlook for stocks, the stock market still offers the most attractive opportunities relative to other asset classes and investment options, including bonds. It’s true, the low hanging fruit in stocks has been picked, and portfolios can become too equity-heavy, but even retirees should have some exposure to equities.
As I wrote last month in Buy in May and Dance Away, why would investors voluntarily lock in inadequate yields at generational lows when the earnings yield on stocks are so much more appealing. The approximate P/E (Price-Earnings) ratio for the S&P 500 currently averages approximately +6.2% with a rising dividend yield of about +1.8% – not much lower than many bonds. Over the last five years, those investors willing to part ways with yield-less cash have voted aggressively with their wallets. Those with confidence in the equity markets have benefited massively from the approximate +200% gains garnered from the March 2009 S&P 500 index lows.
For the many who have painfully missed the mother of all stock rallies, the fallback response has been, “Well, sure the market has tripled, but it’s only because of unprecedented printing of money at the QE (Quantitative Easing) printing presses!” This argument has become increasingly difficult to defend ever since the Federal Reserve announced the initiation of the reduction in bond buying (a.k.a., “tapering”) six months ago (December 18th). Over that time period, the Dow Jones Industrial Average has increased over 800 points and the S&P 500 index has risen a healthy 8.0%.
As much as everyone would like to blame (give credit to) the Fed for the bull market, the fact is the Federal Reserve doesn’t control the world’s interest rates. Sure, the Fed has an influence on global interest rates, but countries like Japan may have something to do with their own 0.57% 10-year government bond yield. For example, the economic/political policies and demographics in play might be impacting Japan’s stock market (Nikkei), which has plummeted about -62% over the last 25 years (about 39,000 to 15,000). Almost as shocking as the lowly rates in Japan and the U.S. and Japan, are the astonishingly low interest rates in Europe. As the chart below shows, France and Germany have sub-2% 10-year government bond yields (1.76% and 1.36%, respectively) and even economic basket case countries like Italy and Spain have seen their yields pierce below the 3% level.
Source: Dr. Ed’s Blog
Suffice it to say, yield is not only difficult to find on our shores, but it is also challenging to find winning bond returns globally.
Well if low interest rates and the Federal Reserve aren’t the only reasons for a skyrocketing stock market, then how come this juggernaut performance has such long legs? The largest reason in my mind boils down to two words…record profits. Readers of mine know I follow the basic tenet that stock prices follow earnings over the long-term. Interest rates and Fed Policy will provide headwinds and tailwinds over different timeframes, but ultimately the almighty direction of profits determines long-run stock performance. You don’t have to be a brain surgeon or rocket scientist to appreciate this correlation. Scott Grannis (Calafia Beach Pundit) has beautifully documented this relationship in the chart below.
Supporting this concept, profits help support numerous value-enhancing shareholder activities we have seen on the rise over the last five years, which include rising dividends, share buybacks, and M&A (Mergers & Acquisitions) activity. Eventually the business cycle will run its course, and during the next recession, profits and stock prices will be expected to decline. A final contributing factor to the duration of this bull market is the abysmally slow pace of this economic recovery, which if measured in job creation terms has been the slowest since World War II. Said differently, the slower a recovery develops, the longer the recovery will last. Bill McBride at Calculated Risk captured this theme in the following chart:
Despite the massive gains and new records set, skeptics abound as evidenced by the nearly -$10 billion of withdrawn money out of U.S. stock funds over the last month (most recent data).
I’ve been labeled a perma-bull by some, but over my 20+ years of investing experience I understand the importance of defensive positioning along with the benefits of shorting expensive, leveraged stocks during bear markets, like the ones in 2000-2001 and 2008-2009. When will I reverse my views and become bearish (negative) on stocks? Here are a few factors I’m tracking:
- Inverted Yield Curve: This was a good precursor to the 2008-2009 crash, but there are no signs of this occurring yet.
- Overheated Fund Inflows: When everyone piles into stocks, I get nervous. In the last four weeks of domestic ICI fund flow data, we have seen the opposite…about -$9.5 billion outflows from stock funds.
- Peak Employment: When things can’t get much better is the time to become more worried. There is still plenty of room for improvement, especially if you consider the stunningly low employment participation rate.
- Fed Tightening / Rising Bond Yields: The Fed has made it clear, it will be a while before this will occur.
- When Housing Approaches Record Levels: Although Case-Shiller data has shown housing prices bouncing from the bottom, it’s clear that new home sales have stalled and have plenty of head room to go higher.
- Financial Crisis: Chances of experiencing another financial crisis of a generation is slim, but many people have fresh nightmares from the 2008-2009 financial crisis. It’s not every day that a 158 year-old institution (Lehman Brothers) or 85 year-old investment bank (Bear Stearns) disappear, but if the dominoes start falling again, then I guess it’s OK to become anxious again.
- Better Opportunities: The beauty about my practice at Sidoxia is that we can invest anywhere. So if we find more attractive opportunities in emerging market debt, convertible bonds, floating rate notes, private equity, or other asset classes, we have no allegiances and will sell stocks.
Every recession and bear market is different, and although the skies may be blue in the stock market now, clouds and gray skies are never too far away. Even with record prices, many fears remain, including the following:
- Ukraine: There is always geopolitical instability somewhere on the globe. In the past investors were worried about Egypt, Iran, and Syria, but for now, some uncertainty has been created around Ukraine.
- Weak GDP: Gross Domestic Product was revised lower to -1% during the first quarter, in large part due to an abnormally cold winter in many parts of the country. However, many economists are already talking about the possibility of a 3%+ rebound in the second quarter as weather improves.
- Low Volatility: The so-called “Fear Gauge” is near record low levels (VIX index), implying a reckless complacency among investors. While this is a measure I track, it is more confined to speculative traders compared to retail investors. In other words, my grandma isn’t buying put option insurance on the Nasdaq 100 index to protect her portfolio against the ramifications of the Thailand government military coup.
- Inflation/Deflation: Regardless of whether stocks are near a record top or bottom, financial media outlets in need of a topic can always fall back on the fear of inflation or deflation. Currently inflation remains in check. The Fed’s primary measure of inflation, the Core PCE, recently inched up +0.2% month-to-month, in line with forecasts.
- Fed Policy: When are investors not worried about the Federal Reserve’s next step? Like inflation, we’ll be hearing about this concern until we permanently enter our grave.
In the sport of stocks and investing, winning is never easy. However, with the global trend of declining interest rates and the scarcity of yields from bonds and other safe investments (cash/money market/CDs), it should come as no surprise to anyone that the winning streak in stocks is tied to the lack of competing investment alternatives. Based on the current dynamics in the market, if LeBron James is a stock, and I’m forced to guard him as a 10-year Treasury bond, I think I’ll just throw in the towel and go to Wall Street. At least that way my long-term portfolio has a chance of winning by placing a portion of my bets on stocks over bonds.
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.
The Buyback Bonanza Boost
With the S&P 500 off -1% from its all-time record high, many bears have continued to wait for and talk about a looming crash. For the naysayers, the main focus has been on the distorted monetary policies instituted by the Federal Reserve, but as I pointed out in Fed Fatigue is Setting In, QE and tapering talk are not the end-all, be-all of global financial markets. One need not look further than the dozen or so countries listed in the FT that have bond yields below the abnormally low yields we are experiencing in the U.S. (10-Year Treasury +2.75%).
Although there are many who believe a freefall is coming, much like a trampoline, a naturally occurring financial mechanism has provided a relentless bid to boost stock prices higher…a buyback bonanza! How significant have corporate stock repurchases been to spring prices higher? Jason Zweig, in his Intelligent Investor column, wrote the following:
In the Russell 3000, a broad U.S. stock index, repurchased $567.6 billion worth of their own shares—a 21% increase over 2012, calculates Rob Leiphart, an analyst at Birinyi Associates, a research firm in Westport, Conn. That brings total buybacks since the beginning of 2005 to $4.21 trillion—or nearly one-fifth of the total value of all U.S. stocks today.
To further put this gargantuan buyback bonanza into perspective, a recent Fox Business article described it this way:
Companies spent an estimated $477 billion on share buybacks last year. That’s enough to buy every NFL team 12 times over, run the federal government for 50 days or host the next nine Olympic Games with several billion left to spare. This year, companies are expected to ramp up buybacks by 35%, according to Goldman Sachs.
The bears continue to scream, while purple in the face, that the Fed’s QE and zero interest rate program (ZIRP) shenanigans are artificially propping up stock prices. The narrative then states the tapering and inevitable Fed Funds rate reversal will cause the market to come crashing down. While there is some truth behind this commentary, history reminds us that not all rate rising cycles end in bloodshed (see 1994 Bond Repeat or Stock Defeat?). Even if you believe in Armageddon, this rate reversal scenario is unlikely to happen until mid-2015 or beyond.
And for those worshipping the actions of Ms. Yellen at the Fed altar, believe it or not, there are other factors besides monetary policy that cause stock prices to go up or down. In addition to stock buybacks, there are dynamics such as record corporate profits, rising dividends, expanding earnings, reasonable valuations, improving international economies, and other factors that have contributed to this robust bull market.
At the end of the day, as I have continued to argue for some time, money goes where it is treated best – and generally that is not in savings accounts earning 0.003%. There is no reason to be a perma-bull, and I have freely acknowledged the expansion of froth in areas such as social media, biotech, Bitcoin and other areas. Regardless, there is, and will always be areas of speculation, in bull and bear markets (e.g., gold in the 2008-2009 period).
Magical Math
Investing involves a mixture of art and science, but with a few exceptions (i.e., fraud), numbers do not lie, and using math when investing is a good place to start. A simple but powerful mathematical formula instituted at Sidoxia Capital Management is the “Free Cash Flow Yield”, which is a metric we integrate into our proprietary SHGR (a.k.a.,“Sugar”) quantitative model (see Investing Holy Grail).
Quite simply, Free Cash Flow (FCF) is computed by taking the excess cash generated by a company after ALL expenses/expenditures (marketing, payroll, R&D, CAPEX, etc.) over a trailing twelve month period (TTM), then dividing that figure by the total equity value of a company (Market Capitalization). Mechanically, FCF is calculated by taking “Cash Flow from Operations” and subtracting “Capital Expenditures” – both figures can be found on the Cash Flow Statement. The Free Cash Flow ratio may sound complicated, but straightforwardly this is the leftover cash generated by a business that can be used for share buybacks, dividends, acquisitions, investments, debt pay-down, and/or placed in a banking account to pile up.
The great thing about FCF yields is that this ratio (%) can be compared across asset classes. For example, I can compare the FCF yield of Apple Inc – AAPL (+9.5%) versus a 10-Year Treasury (+2.75%), 1-year CD (+0.85%), Tesla Motors – TSLA (0.0%), Netflix, Inc – NFLX (-0.001%), or Twitter, Inc – TWTR (-0.003%). For growth and capital intensive companies, I can make adjustments to this calculation. However, what you quickly realize is that even if you assume massive growth in the coming years (i.e., $100s of millions in FCF), the prices for many of these momentum stocks are still astronomical.
An important insight about the current corporate buyback bonanza is that much of this price boost is being fueled by the colossal free cash flow generation of corporate America. Sure, some companies are borrowing through the debt markets to buy back stock, but if you were the Apple CFO sitting on $159,000,000,000 in cash earning 1%, it doesn’t make a lot of sense to sit on the cash earning nothing. It also doesn’t take a genius (or Carl Icahn) to figure out borrowing at record low rates (2.75% 10-year) while earning +10% on a stock buyback will increase shareholder value and earnings per share (EPS). More specifically, when Apple borrowed $17 billion at interest rates ranging from 0.5% – 3.9%, a shrewd, rational human being would borrow to the max all day long at those rates, if you could earn +10% on that investment. It is true that Apple’s profitability could drop and the numerator in our FCF ratio could decrease, but with $45 billion smackers coming in every year on top of $142 billion in net cash on the balance sheet, Apple has a healthy margin of safety to make the math work.
Where the math doesn’t compute is in insanely priced deals. For example, the recent merger in which Facebook Inc (FB) paid $19 billion (1,000 x’s the estimated 2013 annual revenues) for a 50-person, money-losing company (WhatsApp) that is offering a free service, makes zero financial sense to me. Suffice it to say, the FCF yield on WhatsApp could cause Warren Buffett to have a coronary event. Yes, diamond covered countertops would be nice to have in my kitchen, but I probably wouldn’t get much of a return on that investment.
Share buybacks are not a magical elixir to endless prosperity (see Share Buybacks & Bathroom Violators), but given the record profits and record low interest rates, basic math shows that even if stock prices correct (as should be expected), the trampolining effect of this buyback bonanza will provide support to the market.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold long positions in certain exchange traded funds (ETFs), AAPL and a short position in NFLX, but at the time of publishing SCM had no direct position in TSLA, TWTR, FB, Bitcoin, 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.
Market Expands and So Does Sidoxia’s Team
This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (March 3, 2014). Subscribe on the right side of the page for the complete text.
After a brief pause at the beginning of the year, the stock market built on the tremendous gains of 2013 (S&P 500 up +30%) by reaching record highs again in February by expanding another +4.3% for the month. My investment management and financial planning firm, Sidoxia Capital Mangement, LLC, has been expanding as well. Just this last month, we added a key investment and financial planning professional (Keith C. Bong, CFA, CPA Press Release) with more than 25 years of experience in the fields.
The Record Setting Advance Continues
Now entering the sixth year of this record setting bull market, many investors and pundits have been surprised by the strength and duration of the advance. At the nadir of the financial crisis, the stock market reached a multi-year low of 666 on March 9, 2009. For comparison purposes, the S&P 500 recently closed at 1,845, almost tripling in value since the crisis lows. Pessimists and skeptics, who locked in losses during the crisis plunge, have watched the explosive gains while sitting on their hands. While I freely admit, the low-hanging fruit has been picked, many of the doubters are still calling for a collapse as “troubling news continues to pour in from all over the planet.” However, what the naysayers neglect to acknowledge is the fact that S&P 500 reported profits, the lifeblood of bull markets, have also tripled in value. Despite what the bears say, not everything is a speculative house of cards.
Late to the Party Because of Uncertainty
Although the stock party has lasted five years thus far, individuals have only begun buying for about one year (see ICI fund flows data in Here Comes the Dumb Money) – about +$28 billion of new money in 2013 and another +$12 billion so far this year (ICI data through February 19th). After approximately six years and -$600 billion in stock sales (2007-2012), it’s no wonder investors have been slow to reverse course. Adding to the angst, investors have been bombarded with an endless stream of political and economic concerns on a daily basis, leading to the late arrival of most individuals to the stock investing party. While it’s true that more people have joined the party in recent months, floods of investors are still waiting outside in the cold. Here are a few reasons for the tardiness:
- Geopolitical Concerns: Most recently it was Syria, Iran, and Argentina that got short-term traders chewing their fingernails…now it’s the Ukraine. Just yesterday, I had to spend about 10 minutes locating the Ukranian province of Crimea on a map. For those who have not been keeping track, after days of civil unrest that left some 75 protesters dead, Ukrainian President Viktor Yanukovych fled the capital city of Kiev and agreed with opposition leaders to reduce his powers and hold early presidential elections later this year. For context, in 1954, the former Soviet Union leader Nikita Khrushchev transferred Crimea from the Russian Soviet republic to Ukraine on the basis of economic ties that were closer with Kiev than with Moscow. Prior to that transfer, Russia seized Crimea from the declining Ottoman Empire in the 18th century. Fast forward to today, and fresh off a successful Olympics in Sochi, Russia, Russian President Vladimir Putin hasn’t been happy about the citizen uprising in neighboring Ukraine, so he has decided to flex his muscles and move Russian troops into Crimea. The situation is very fluid and the U.S., along with other global leaders, are crying foul. Time will tell if this situation escalates into a military conflict like the 2008 Georgia-Russia crisis, or if cooler heads prevail.
- Fed Policy Concerns: Federal Reserve Chair Janet Yellen gave her inaugural address last month before Congress, where she signaled continuity in policy with former Fed Chair Ben Bernanke. Indications remain strong that the reduction of bond buying stimulus (i.e., “tapering”) will continue in the months ahead, despite mixed economic results. The “Polar Vortex” occurring on the East Coast, coupled with a record draught on the West Coast contributed to the recent reduction of Q4-2013 GDP growth figures, which were revised lower to +2.4% growth (from +3.2%).
- Domestic Politics: In a sharply politically divided country like the U.S., is there ever a complete hugs & kisses consensus? In short, “no”. How can there be 100% agreement when sharply divisive issues like Obamacare, immigration, tax reform, entitlements, budgets, and foreign affairs are always in flux? Layer on a Congressional midterm election this November and you have a recipe for uncertainty.
Because of all this uncertainty, there are still literally trillions of dollars in cash sitting on the sidelines, waiting to come join the fun. But uncertainty is a relative term because there is always doubt surrounding geopolitics, economics, and Washington D.C. Sentiment moves like a pendulum from fear to greed. Eventually panic/fear sways back the other direction as business/consumer confidence overshadow the deep scarred emotions of 2008-09. As the stock markets have grinded to record highs, fear and skepticism have slowly begun to erode.
Sidoxia Uncertainty
Speaking of uncertainty, I too encountered many doubters and skeptics when I started my firm, Sidoxia Capital Management, LLC in early 2008. Great timing, I thought at the time, as our economy entered the worst recession and financial crisis in a generation and the walls of our nation’s financial system were caving in.
With virtually no company assets or revenues at the time, this was the backdrop as I embarked on my entrepreneurial journey. Seemingly secure investment banking pillars like Bear Stearns and Lehman Brothers, which each had been around for more than a century, crumbled within the blink of an eye. As bailouts were occurring left and right, in conjunction with recurring multi-hundred point collapses in the Dow Jones Industrial index, cynics would repeatedly ask me, “Wade it’s great that you have a lot of experience, but how are you going to gain clients?” It was a fair and reasonable question at the time, but perseverance and hard work have allowed Sidoxia to beat the odds. Publishing several books, conducting numerous media appearances, and gaining thousands of social media followers (InvestingCaffeine.com) hasn’t hurt in building Sidoxia’s brand either.
After achieving record growth in the first five years of the firm, Sidoxia more than doubled its assets under management again in 2013. More important than all of the previously mentioned achievements has been our ability to service our clients with a disciplined, customized process that has demonstrated strong long-term results and helped solidify our valued relationships.
A Few Party Animals Getting Reckless at the Stock Party
Success for Sidoxia or any investor has not come easy over the last six years. As I wrote in a Series of Unfortunate Events, we’ve had to navigate our clients’ investment assets through the following events and more:
- Flash Crash
- Debt Ceiling Debates-Brinksmanship
- U.S. Debt Downgrade
- European Recession
- Arab Spring – Tunisia, Libya, Egypt
- Greek Crisis and Potential Exit from EU
- Uncertain U.S. Presidential Elections
- Sequestration
- Cyprus Financial Crisis
- Income Tax Hikes
- Federal Reserve Tapering
- Syrian Civil War / Military Threat
- Government Shutdown
- Obamacare & Its Glitches
- Iranian Nuclear Threat
- Argentinian Currency Collapse
- Polar Vortex
- Ukrainian Instability
It is no small feat that stock markets have made new records in the face of these daunting concerns. But simply ignoring scary headlines won’t earn you an investing trophy. Successful investing also requires controlling temptation and greed. At a celebratory bash, there are always irresponsible party animals, just like there are always reckless speculators gambling in the financial markets. It certainly is possible to party responsibly without getting crazy during festivities and still have fun. Even though the majority of investors currently are behaving well, as substantiated by the reasonable P/E ratio being paid (15x’s estimated 2014 profits) there are a few foolish players. Pockets of speculative fervor can be found in several areas of the financial markets. Here are a few:
- Bitcoin Breakdown: The world’s largest Bitcoin exchanged filed for bankruptcy after it lost 750,000 Bitcoin units, worth about $477,000,000, based on current exchange rates. The popularity of this speculative virtual currency seems eerily similar to the great Dutch Tulip-Mania of the 1630s.
- Biotech Bliss: Ignorance is a bliss, and apparently so is buying biotech stocks. There’s no need to speculate on gold or Bitcoins when you can invest in the Biotechnology Index (BTK), which has already advanced +21% this year on top of a 51% gain in 2013. Over the last 5+ years, the index has more than quadrupled.
- Facebook Folly: WhatsApp with Facebook Inc’s (FB) $19 billion acquisition of the cellphone texting company? CEO Mark Zuckerberg is claiming he got a bargain by paying almost 1,000x’s the estimated annual revenue of WhatsApp ($20 million). When only a fraction of the 450 million users are paying for the service, I’m OK going out on a limb and calling this deal kooky.
- High Ticket Tesla: Tesla Motors Inc (TSLA) has become a cult stock. The company has a price tag of $30 billion despite burning $7 million in cash last year. The announcement of a $4-5 billion battery “Gigafactory” added to the company’s recent hype. To put things into perspective, General Motors (GM) has revenues 75x’s larger than Tesla and GM generated over $5 billion in 2013 free cash flow. Nevertheless, GM is only valued at 1.9x’s the market value of Tesla…head scratch.
- Social Media Silliness: Maybe not quite as wacky as the $19 billion price tag paid for WhatsApp, but the $30 billion value placed on Twitter Inc (TWTR) for a company that burned $30 million of cash in their most recent financial report is silly too. Yelp Inc (YELP) is another multi-billion valued company that is losing money. I love all these services, but great services don’t always make great stocks. Investors from the dot-com era vividly remember what happened to those overvalued stocks once the bubble burst.
Fear and greed are omnipresent, and some of these speculative areas may continue to appreciate in value. However, controlling or ignoring the powerful emotions of fear and greed will help you in achieving your financial goals. As the markets (and Sidoxia’s team) expand, our disciplined investment process should allow us to objectively identify attractive investment opportunities without succumbing to the pitfalls of panic-selling or performance-chasing.
Other Recent Investing Caffeine Articles:
Retirement Epidemic: Poison Now or Later?
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 FB, TWTR, YELP, TSLA, BTK, 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.
Sidoxia Adds 25-Year Veteran to Team
NEWPORT BEACH, CA – (Wire-Business) – Keith C. Bong, CFA, CPA, has recently joined Sidoxia Capital Management, LLC (“Sidoxia”) as Vice President of Investments and Financial Planning. Keith brings over 25 years of experience to Sidoxia’s investment team, having worked as a Financial Consultant with Merrill Lynch, before founding the investment firm Topper Capital Management in Irvine, California.
“We are truly excited to bring such a high caliber individual like Keith on board,” stated Wade W. Slome, CFA, CFP®, President and Founder of Sidoxia Capital Management. “We’re confident that Keith’s unique experience and knowledge will bring tremendous value to Sidoxia’s clients as our firm continues to expand.”
For over a decade, while managing his former advisory firm, Keith has worked closely with business owners, corporations, and individuals, assisting these clients with critical investment planning, tax planning, and financial planning goals.
“I believe my experience in building corporate retirement plan solutions meshes well with Sidoxia’s successful investment platform,” noted Keith. “I’m thrilled to join an independent firm like Sidoxia that places clients’ needs first, unlike some other financial institutions.”
To learn more about Sidoxia and Keith Bong’s background, please visit http://www.Sidoxia.com and reference the “Investment Team” section.
Click here to download a copy of the press release.
Plan. Invest. Prosper.
DISCLOSURE: No information provided here 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.
Take Me Out to the Stock Game
This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (October 1, 2013). Subscribe on the right side of the page for the complete text.
The Major League Baseball playoffs are just about to start, and the struggling U.S. economy is also trying to score some more wins to make the postseason as well. In 2008 and early 2009, the stock market looked more like The Bad News Bears with the S&P 500 index losing -58% of its value from the peak to the trough. The overleveraged (debt-laden) financial system, banged by a speculative housing bubble, swung the global economy into recession and put a large part of the economic team onto the disabled list.
Since the lows of 2009, S&P 500 stocks have skyrocketed +152%, including an +18% gain in 2013, and a +3% jump in September alone. With that incredible track record, one might expect a euphoric wave of investors pouring into the stock market stadium, ready to open their wallets at the financial market concession stand. Au contraire. Despite the dramatic winning streak, investors remain complacent skeptics, analyzing and critiquing every political, economic, and financial market movement and gyration.
Unfortunately, as stock prices have scored massive gains, many market followers have been too busy eating peanuts and drinking beer, rather than focusing on the positive economic statistics in the scorebook, such as these:
15/16 Quarters of Positive GDP Growth:
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| Source: Crossing Wall Street |
Precipitous Drop in Unemployment Claims: The lowest level since 2007 (7.5 million private sector jobs added since employment trough).
 |
| Source: Bespoke |
All-Time Record Corporate Profits:
 |
| Source: Ed Yardeni |
Financially Healthier Consumer – Lower Debt & Higher Net Worth:
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| Source: Scott Grannis |
Improving Housing Market:
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| Source: Scott Grannis |
While you can see a lot of financial momentum is propelling Team USA, there are plenty of observers concerned more about potential slumps and injuries emanating from a lineup of uncertainties. Currently, the fair-weather fans who are sitting in the bleachers are more interested in the uncertainty surrounding a government shutdown, debt ceiling negotiations, Syrian unrest, Iranian nuclear discussions, Obamacare defunding, and an imminent tapering of the Federal Reserve’s QE bond purchasing program (see Perception vs. Reality). The fearful skepticism of the fans has manifested itself in the form of a mountain of cash ($7 trillion), which is rapidly eroding to inflation and damaging millions of retirees’ long-term goals (see chart below). The fans sitting in the bleachers are less likely to buy long-term season tickets until some of these issues are settled.
 |
| Source: Scott Grannis – $3 trillion added since crisis. |
The aforementioned list of worries are but a few of the concerns that have investors biting their nails. While there certainly is a possibility the market could be thrown a curve ball by one of these issues, veteran all-star investors understand there are ALWAYS uncertainties, and when the current list of concerns eventually gets resolved or forgotten, you can bet there will be plenty of new knuckle-balls and screw-balls (i.e., new list of worries) to fret over in the coming weeks, months, and years (see Back to the Future I, II,& III). Ultimately, the vast majority of concerns fade away.
Yoooouuuuuu’rrrreee Out!
The politicians in Washington are a lot like umpires, but what our country really needs are umpires who can change and improve the rules, especially the silly, antiquated ones (see also Strangest Baseball Rules). The problem is that bad rules (not good ones) often get put in place so the umpires/politicians can keep their jobs at the expense of the country’s best interest.
When umpires (politicians) cannot agree on how to improve the rules, gridlock actually is the next best outcome (see Who Said Gridlock is Bad?). The fact of the matter is that deficits and debt/GDP ratios have declined dramatically in recent years due in part to bitter political feuds (see chart below). When responsible spending is put into action, good things happen and a stronger economic foundation can be established to cushion future crises.
 |
| Source: Scott Grannis |
There is plenty of room for improvement, but the statistics speak for themselves, which help explain why patient fans/investors have been handsomely rewarded with a homerun over the last four years. October historically has been a volatile month for the stock market, and the looming government shutdown and $16.7 trillion debt ceiling negotiations may contribute to some short-term strike-outs. However, if history proves to be a guide, stocks on average rise +4.26% during the last three months of the year (source: Bespoke), meaning the game may just not be over yet. With plenty of innings remaining for stocks to continue their upward trajectory, I still have ample time to grab my hot dog and malt during the 7th inning stretch.
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 TSLA, PBI, 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 the information to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Sports, Stocks, & the Magic Quadrants
Picking stocks is a tricky game and so is sports betting. With the NFL and NCAA football seasons swinging into full gear, understanding the complexity of making money in the stock market can be explained in terms of professional sports-betting. Anybody who has traveled to Las Vegas and bet on a sporting event, understands that choosing a winner of a game simply is not enough…you also need to forecast how many points you think a certain team will win by (see also What Happens in Vegas, Stays on Wall Street). In the world of sports, winning/losing is measured by point spreads. In the world of stocks, winning/losing is measured by valuation (e.g., Price/Earnings ratios).
To make my point, here is a sports betting example from a handful years back:
Florida Gators vs. Charleston Southern Buccaneers (September 2009): Without knowing a lot about the powerhouse Southern Buccaneers squad from South Carolina, 99% of respondents, when asked before the game who would win, would unanimously select Florida – a consistently dominant, national franchise, powerhouse program. The question becomes a little trickier when participants are asked, “Will the Florida Gators win by more than 63 points?” Needless to say, although the Buccs kept it close in the first half, and only trailed by 42-3 at halftime, the Gators still managed to squeak by with a 62-3 victory. Worth noting, had you selected Florida, the overwhelming favorite, the 59 point margin of victory would have resulted in a losing wager (see picture below).
If investing and sports betting were easy, everybody would do it. The reason sports betting is so challenging is due to very intelligent statisticians and odds-makers that create very accurate point spreads. In the investing world, a broad swath of traders, market makers, speculators, investment bankers, and institutional/individual investors set equally efficient valuations.
The goal in investing is very similar to sports betting. Successful professionals in both industries are able to consistently identify inefficiencies and then exploit them. Inefficiencies occur for a bettor when point spreads are too high or low, while investors identify inefficient prices in the marketplace (undervalued or overvalued).
To illustrate my point, let’s take a look at Sidoxia’s “Magic Quadrant“:
A-B-Cs & 1-2-3s
What Sidoxia’s “Magic Quadrant” demonstrates is a framework for evaluating stocks. By devoting a short period of time reviewing the quadrants, it becomes apparent fairly quickly that Stock A is preferred over Stock B, which is preferred over Stock C, which is preferred over Stock D. In each comparison, the former is preferred over the latter because the earlier letters all have higher growth, and lower (cheaper) valuations. The same relative attractive relationships cannot be applied to stocks #1, #2, #3, and #4. Each successive numbered stock has higher growth, but in order to obtain that higher growth, investors must pay a higher valuation. In other words, Stock #1 has an extremely low valuation with low growth, while Stock #4 has high growth, but an investor must pay an extremely high valuation to own it.
While debating the efficiency of the stock market can escalate into a religious argument, I would argue the majority of stocks fall in the camp of #1, #2, #3, or #4. Or stated differently, you get what you pay for. For example, investors are paying a much higher valuation (~100x 2014 P/E) for Tesla Motors, Inc (TSLA) for its rapid electric car growth vs. paying a much lower valuation (~10x 2014 P/E) for Pitney Bowes Inc (PBI) for its mature mail equipment business.
The real opportunities occur for those investors capable of identifying companies in the upper-left quadrant (i.e., Stock A) and lower-right quadrant (i.e., Stock D). If the analysis is done correctly, investors will load up on the undervalued Stock A and aggressively short the expensive Stock D. Sidoxia has its own proprietary valuation model (Sidoxia Holy Grail Ranking – SHGR or a.k.a. “SUGAR”) designed specifically to identify these profitable opportunities.
The professions of investing and sports betting are extremely challenging, however establishing a framework like Sidoxia’s “Magic Quadrants” can help guide you to find inefficient and profitable investment opportunities.
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 TSLA, PBI, 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 the information to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Confessions of a Bond Hater
Source: stock.xchng
Hi my name is Wade, and I’m a bond hater. Generally, the first step in addressing any type of personal problem is admitting you actually have a problem. While I am not proud of being a bond hater, I have been called many worse things during my life. But as we have learned from the George Zimmerman / Trayvon Martin case, not every situation is clear-cut, whether we are talking about social issues or bond investing. For starters, let me be clear to everyone, including all my detractors, that I do not hate all bonds. In fact, my Sidoxia clients own many types of fixed income securities. What I do hate however are low yielding, long duration bonds.
Duration…huh? Most people understand what “low yielding” means, when it comes to bonds (i.e., low interest, low coupon, low return, etc.), but when the word duration is uttered, the conversation is usually accompanied by a blank stare. The word “duration” may sound like a fancy word, but in reality it is a fairly simple concept. Essentially, high-duration bonds are those fixed income securities with the highest sensitivity to changes in interest rates, meaning these bonds will go down most in price as interest rates rise.
When it comes to equity markets, many investors understand the concept of high beta stocks, which can be used to further explain duration. There are many complicated definitions for beta, but the basic principle explains why high-beta stock prices generally go up the most during bull markets, and go down the most during bear markets. In plain terms, high beta equals high octane.
If we switch the subject back to bonds, long duration equals high octane too. Or stated differently, long duration bond prices generally go down the most during bear markets and go up the most during bull markets. For years, grasping the risk of a bond bear market caused by rising rates has been difficult for many investors to comprehend, especially after witnessing a three-decade long Federal Funds tailwind taking the rates from about 20% to about 0% (see Fed Fatigue Setting In).
The recent interest rate spike that coincided with the Federal Reserve’s Ben Bernanke’s comments on QE3 bond purchase tapering has caught the attention of bond addicts. Nobody knows for certain whether this short-term bond price decline is the start of an extended bear market in bonds, but mathematics would dictate that there is only really one direction for interest rates to go…and that is up. It is true that rates could remain low for an indefinite period of time, but neither scenario of flat to down rates is a great outcome for bond holders.
Fixes to Fixed-Income Failings
Even though I may be a “bond hater” of low yield, high duration bonds, currently I still understand the critical importance and necessity of a fixed income portfolio for not only retirees, but also for the diversification benefits needed by a broader set of investors. So how does a bond hater reconcile investing in bonds? Easy. Rather than focusing on lower yielding, longer duration bonds, I invest more client assets in shorter duration and/or higher yielding bonds. If you harbor similar beliefs as I do, and believe there will be an upward bias to the trajectory of long-term interest rates, then there are two routes to go. Investors can either get compensated with a higher yield to counter the increased interest rate risk, and/or they can shorten duration of bond holdings to minimize capital losses.
Worth noting, there is an alternative strategy for low yielding, long duration bond lovers. In order to minimize interest rate risk, these bond lovers may accept sub-optimal yields and hold bonds to maturity. This strategy may be associated with short-term price volatility, but if the bond issuer does not default, at least the bond investor will get the full principal at maturity to help relieve the pain of meager yields.
Now that you’ve survived all this bond babbling, let me cut to the chase and explain a few ways Sidoxia is taking advantage of the recent interest rate volatility for our clients:
Floating Rate Bonds: Duration of these bonds is by definition low, or near zero, because as interest rates rise, coupons/interest payments are advantageously reset for investors at higher rates. So if interest rates jump from 2% to 3%, the investor will receive +50% higher periodic payments.
Inflation Protection Bonds: These bonds come in long and short duration flavors, but if interest rates/inflation rise higher than expected, investors will be compensated with higher periodic coupons and principal payments.
Shorter Duration: One definition of duration is the weighted average of time until a bond’s fixed cash flows are received. A way of shortening the duration of your bond portfolio is through the purchase of shorter maturity bonds (e.g., buying 3-year bonds rather than 30-year bonds).
High Yield Bonds: Investing in the high yield bond category is not limited to domestic junk bond purchases, but higher yields can also be earned by investing in international and/or emerging market bonds.
Investment Grade Corporate Bonds: Similar to high yield bonds, investment grade bonds offer the potential of capital appreciation via credit improvement. For instance, credit rating upgrades can provide gains to help offset price declines caused by rising interest rates.
Despite my bond hater status, the recent taper tantrum and interest rate spike, highlight some advantages bonds have over stocks. Even though prices declined, bonds by and large still have lower volatility than stocks; provide a steady stream of income; and provide diversification benefits.
To the extent investors have, or should have, a longer-term time horizon, I still am advocating a stock bias to client portfolios, subject to each investor’s risk tolerance. For example, an older retired couple with a conservative target allocation of 20%/80% (equity/fixed income) may consider a 25% – 30% allocation. A shift in this direction may still meet the retirees’ income needs (especially if dividend-paying stocks are incorporated), while simultaneously acknowledging the inflation and interest rate risks impacting bond positions. It’s important to realize one size doesn’t fit all.
Higher Volatility, Higher Reward
Frequent readers of Investing Caffeine have known about my bond hating tendencies for quite some time (see my 2009 article Treasury Bubble has not Burst…Yet), but the bond baby shouldn’t be thrown out with the bath water. For those investors who thought bonds were as safe as CDs, the recent -6% drop in the iShares Aggregate Bond Index (AGG) didn’t feel comfortable for most. Although I am still an enthusiastic stock cheerleader (less so as valuation multiples expand), there has been a cost for the gargantuan outperformance of stocks since March of ’09. While stocks have outperformed bonds (S&P vs. AGG) by more than +140%, equity investors have had to endure two -10% corrections and two -20% corrections (e.g.,Flash Crash, Debt Ceiling Debate, European Financial Crisis, and Sequestration/Elections). If investors want to earn higher long-term equity returns, this desire will translate into more volatility than bonds…and more Tums.
I may still be a bond hater, and the general public remains firm stock haters, but at some point in the multi-year future, I will not be surprised to hear myself say, “Hi my name is Wade, and I am addicted to bonds.” In the mean time, Sidoxia will continue to optimize its client bond portfolios for a rising interest rate environment, while also investing in attractive equity securities and ETFs. There’s nothing to hate about that.
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), including floating rate bonds/loan funds, inflation-protection funds, corporate bond ETF, high-yield bond ETFs, and other bond ETFs, but at the time of publishing, SCM had no direct position in AGG 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.
Women & Bosoms on Wall Street According to Jones
Billionaire hedge fund manager of Tudor Investment Corporation, Paul Tudor Jones, recently suffered from a case of foot-in-mouth disease when he addressed a sensitive subject – the lack of female traders and investors on Wall Street. Rather than provide a diplomatic response to the mixed audience at a recent University of Virginia symposium, Tudor Jones went on an unambiguous rant. Here’s an excerpt:
“You will never see as many great women investors or traders as men. Period, end of story….As soon as that baby’s lips touch that girl’s bosom, forget it. Every single investment idea, every desire to understand what’s going to make this go up or gonna go down is going to be overwhelmed by the most beautiful experience, which a man will never share of that emotive connection between that mother and baby.”
A more complete review of his unfiltered response can be found in this video:
Clearly there is a massive minority of females on Wall Street, but why such an under-representation in this field relative to other female-heavy professional industries such as advertising, nursing, and teaching? I addressed this controversial subject in an earlier article (see Females in Finance)
If there are 155.8 million females in the United States and 151.8 million males (Census Bureau: October 2009), then how come only 6% of hedge fund managers (BusinessWeek), 8% of venture capitalists, and 15% of investment bankers are female (Harvard Magazine)? Is the finance field just an ol’ boys network of chauvinist pig-headed males who only hire their own? Maybe cultural factors such as upbringing and education are other factors that make math-related jobs more appealing to men? Or do the severe time-demands of the field force females to opt-out of the industry due to family priorities?
Although I’m sure family choices and quality of life are factors that play into the decision of entering the demanding finance industry, from my experience I would argue women are notoriously underrepresented even at younger ages. For example, anecdotal evidence coming from my investment management firm (Sidoxia Capital Management – www.Sidoxia.com) clearly shows a preponderance of internship applications coming from males, even though it is premature for these students to fully contemplate family considerations at this young age.
If under-representation in the finance field is not caused by female choice, then perhaps the male dominated industry is merely a function of more men opting into the field (i.e., men are better suited for the industry)? More specifically, perhaps male brains are just wired differently? Some make the argument that all the testosterone permeating through male bodies leads them to positions involving more risk. If you look at other risk related fields like gambling, women too are dramatic minorities, making up about 1/3 of total compulsive gamblers.
Women Better than Men?
The funny part about the under-representation of females in finance is that one study actually shows female hedge fund managers outperforming their male counterparts. Here’s what a BusinessWeek article had to say about female hedge fund managers:
A new study by Hedge Fund Research found that, from January 2000 through May 31, 2009, hedge funds run by women delivered nearly double the investment performance of those managed by men. Female managers produced average annual returns of 9%, versus 5.82% for men and, in 2008, when financial markets were cratering, funds run by women were down 9.6%, compared with a 19% decline for men.
The article goes onto to theorize that women may not be afraid of risk, but actually are better able to manage risk. A UC Davis study found that male managers traded 45% more than female managers, thereby reducing returns by -2.65% (about 1% more than females).
Regardless of the theories or studies used to explain gender risk appetite, the relative under-representation of females in finance is a fact. Many theories exist but further thought and research need to be conducted on the subject.
However, before Paul Tudor Jones is completely demonized or sent to the guillotine, let’s not forget Tudor Jones is obviously not your ordinary, heartless, cold-blooded Wall Street type, as evidenced by his recent philanthropic profile on 60 Minutes. Thanks to his generous efforts, Tudor Jones and his Robin Hood Foundation charity have raised more than $400 million for worthy causes since 1988.
While Paul Tudor Jones may not have harbored any malicious intent with regards to his comments, it may make sense for Tudor Jones to take a course on gender sensitivity. Bosoms and women may be an interesting subject for many, however he might consider filtering his commentary the next time he speaks to a large symposium recorded on the internet.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
See also:
BusinessWeek article on female fund managers
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.
Fine Tuning Your Stock Fishing Skills
If you are one of those fishing hobbyists crowded among a large group while hunting for a big fish, mathematics dictates your odds of reeling in a grand prize are significantly diminished. Expert fishermen are generally the first to arrive because they understand once the masses appear the opportunities will disappear. Like big fish, colossal stocks are rarely discovered by a large herd of investors. Financial bubbles occur in this manner, however these periods are usually short-lived and the investor pack often ends up losing more money on the way down relative to the profits earned on the way up. Successful investors are usually the ones following a disciplined systematic approach that is often contrarian in nature. In other words, not chasing performance requires patience, an elusive quality in these fast-paced, frenetic financial markets.
More prevalent in these markets are impulsive day-traders, unruly high frequency traders, and tempestuous hedge funds. Why own stocks, if you can rent them? Like a fisherman who constantly casts his/her bait in and out of the water, a short-sighted investor cannot realize outsized gains, unless the bait is given sufficient time to lure (find) the next winning idea.
Like many professions, experts often optimally mix the quantitative science and behavioral art of their craft. Whether it’s a teacher, doctor, accountant, attorney, or bus driver, the people who excel in their profession are the ones who move beyond the statistical and procedural basics of their trade. Practicing and understanding the nuts and bolts of your job is important, but developing those intangible, artistic skills only comes with experience. Unfortunately, many investing hobbyists don’t appreciate these artistic nuances and as a result go on destroying their portfolios, even though they act as if they were experts.
On the flip-side, decisions purely based on gut instincts will also lead to sub-par outcomes. The fisherman who does not account for the wind, temperature, geography, light, and seasonal differences will be at a distinct disadvantage to those who have studied these scientific factors.
In the fishing world, there is no miracle GPS device that will guide fish onto your hook, and the same is true for stocks. No software package or technical pattern will be a panacea for profits, however having some type of scientific tool to assist in the identification of investment opportunities should be exploited to its fullest. For us at Sidoxia Capital Management (www.Sidoxia.com), our tool is called SHGR (pronounced “SUGAR”), or Sidoxia Holy Grail Ranking. The name was created tongue-in-cheek; however its purpose is crucial. Following a quantitative system like SHGR ensures that a healthy dosage of discipline and objectivity is factored into our investment decisions, so inherent biases do not creep into our process and detract from performance. Specifically, our proprietary SHGR model incorporates multiple factors, including valuation, growth, sentiment indicators, profitability, and other qualitative measurements.
Although we use a “Holy Grail” ranking system, the fact of the matter is there are none in existence – for fishermen or investors. Experience teaches us the best opportunities are found where few are looking, and if proper quantitative tools are integrated into a multi-pronged process, then you will be uniquely positioned to catch a big fish.
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 CMCSA, but at the time of publishing SCM had no direct position in BRKB, HNZ, HRL, UL, T, VZ, CAR, ZIP, AMR, LCC, ORCL, APKT, DELL, MSFT, RDSA, Repsol, ODP, OMX, HLF, BUD, STZ, GE, 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.
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