Malcolm Gladwell, Popularity, and
Investing
**The following is taken from our client quarterly newsletter. Certain
sections have been removed that contain client only information.
One early morning while I was out running I was listening to an iTunes
podcast by Malcolm Gladwell. It was published on June 29 and is called “The
Big Man Can’t Shoot.”
Almost the entire time found myself saying, “Our clients need to hear this!”
So with that in mind our quarterly commentary will have a Malcom Gladwell
twist.
In the podcast Mr. Gladwell details Wilt Chamberlain and his famous record
setting 100 point game in 1962. In that game he shot 32 free throws sinking
28 of them (this is still a NBA record). What few people remember about those
free throws was that fact that he shot them “granny style.” In other words,
his arms would hang down by his knees and he would flick the ball up
underhanded rather than shooting them with his hands over his head. That year
he had the best free throw percentage of his career, 61.3%.
What makes this an interesting is that 1962 was the only year he shot free
throws “granny style.” The next year he would revert to shooting free throws
with his hands over his head, which he admits wasn’t as good as “granny
style.” The rest of his career he would shoot with his hands over his head
and would average 51% from the line. His lowest average was 38% in 1967-68.
The reason why he would revert back to a more unsuccessful style of shooting
despite knowing it wasn’t best for him, he said “I felt silly, like a sissy.”
The other example that Mr. Gladwell details in the podcast relates to the NFL
draft and value. Gladwell interviews a famous economist, Robert Thaler.
Thaler has conducted studies on the NFL draft and has even consulted with
many NFL teams about it. His studies have the following conclusions about the
first round vs. the second round draft picks.
• One first round draft pick can be traded for six second round draft
picks.
• The players are similar in terms of talent and productivity on the
field.
• The best scenario for value is to trade your first round draft pick for
second round draft picks the following year. (A first round pick this
year is overvalued by 138% compared to a second round pick the following
year.)
His advice to all NFL owners, trade your first round picks for second round
picks. You will gather more talent, quicker and will have more value over
time by trading the first round pick.
What’s interesting is that while Thaler has consulted with NFL teams about
this research, none of them have implemented his advice despite knowing they
should! In fact, one team he consulted with (the Redskins) traded their
second round draft picks to move higher in the first round, the exact
opposite of what he said they should do! (The Redskins results speak to their
overpaying for picks.)
Okay, so what in the world do either of these stories have to do with
investing?
For the last two years the market has gone nowhere. The S&P 500 has been in a
trading range and has returned close to nothing for the last two years. The
lack of significant gains has caused two things to occur in the investment
world, 1) following the crowd and 2) avoiding risk all together.
People, including many investment advisors, are abandoning what they know is
best in the long run (shooting free throws underhanded) and are instead
chasing returns and yield (income) or avoiding risk all together. There is a
fear that if Advisors don’t do something outside of what they normally do to
capture returns, clients will leave and go elsewhere. This mentality leads
to following the crowd or “herd” mentality (as we often talk about). In the
Gladwell podcast, a behavioral psychologist said –
“. . . (when) people get into a crowd their independent judgement went
out the window and that they somehow became creatures of the crowd and
that some kind of miasma of irrationality would settle over people and
they would act in ways that they would never act if they were by
themselves or they weren’t influenced by the mob mentality.”
Think about the billion dollar business of dieting as an example. People are
always looking for a cure to being overweight, besides the old fashioned
eating right and exercising (which could be the only thing that really
works). The Atkins, Hollywood, and South Beach diets, along with Phen Phen
and HCG shots are examples of the fads that come and go. People look for a
short cut, rather than the old fashioned hard work and patience. As a result
they often do more harm to their bodies than good.
So it is investing. People abandon what they know works, good old fashioned
value investing and patience, to chase the “in thing” or “popular idea.”
Think about the Owner of an NFL team that trades all of his second round
picks just to move up one or two spots in the NFL draft. He completely
overpays (by 138%) in the short term, gambling his future away because of the
peer pressure of his fans or fellow owners.
The most recent example of this in the stock market is the F.A.N.G. stocks
(Facebook, Amazon.com, Netflix and Google). Last year these were the hot
spots in the market. They carried the S&P 500 to positive gains while most
other stocks were down. In fact these five companies comprise 6% of the S&P
500. Think about that, an index with 500 different companies and these five
make up 6% of it!
The current P/E (price to earnings) ratio of these stocks are as follows
(keep in mind that the higher the number the more expensive, overvalued the
stock):
Facebook – 70.15
Amazon – 299.36
Netflix – 333
Google – 29.89
To put this in perspective, the S&P 500 as a whole has a P/E of 19.58. (The
only stock that is even close to a value is Google which we own in many of
our portfolios.)
Unlike many investors (and NFL Owners), there is no way that we are going to
follow the herd and chase returns by overpaying for investments. Not only
does it go against our process, it simply not in the best interest of our
clients.
The contrast to overpaying for an investment is the Wilt Chamberlain
philosophy, I don’t want to look “like a sissy” so I will completely remove
risk mentality. What people forget is that if you remove risk your remove
reward as well. Let me explain.
Our research department recently did an analysis on some very popular
portfolios that TD Ameritrade pushes clients into called Amerivest. Sales
people at TD Ameritrade push clients into these portfolios because they
receive commissions for doing so. (If you’re a TD Ameritrade client you’ve
probably been hammered by sales people to put money in these portfolios.)
The big sales point for pushing people into these funds is the fact that if
they have two quarters in a row of losing money they will not charge clients
the quarterly management fee. When people hear this they love it, and who
wouldn’t? In fact, when I first heard it I thought it was an interesting and
attractive idea. I also wondered how they could do that? How could they even
run their business and serve clients without being paid? With that question
in mind, we decided to do some research.
It turns out that all of the Amerivest portfolios, including the most
aggressive ones, are significantly less risky than the stock market.
Remember, the less risk a portfolio contains, the less reward potential
clients will receive. Even those people that want and need growth have less
risk and reward opportunity than the stock market.
The less risk that is taken in these portfolios means that there is a higher
probability that they will squeak out small positive returns so they can
charge clients the fee. Forget the goals of the client and the fact that most
of them need to produce great results to grow their portfolios to live
comfortably in retirement or to not outlive their money.
The results of our research (which we will share in our blog in more detail)
made us furious! A so called “independent” brokerage pushing people into
products that won’t make them money so they can charge fees! They are
purposely removing risk for the fear of negative returns. I guess you could
say they don’t want to look “silly.”
Staying True to Our Process
Every month in our Market Commentary video we show the following image
followed by a familiar quote.
“At Iron Gate Global we don’t chase returns, we have a process for investing
that we know is best for our clients. We focus on the probabilities of
investing and make those decisions in portfolios that have a higher
probability of making money over time than losing. It’s not always perfect,
but we know it works over time.”
A combined 45 years
of experience in
this industry has taught us these principles. There are many times when old
fashioned principles are called outdated, unpopular or wrong for current
market conditions. There are also times when those old fashioned principles
may underperform the market.
However, we know that if we stay true to our core investing principles that
our clients will ultimately come out on top.
Since our firm began investing in 1999, we have outperformed the market by
and impressive 4.78%*.
The home page on our website states the following, “Our firm is guided by two
core principles:”
1. We work one-on-one with our clients to help them accomplish their
financial goals.
2. We provide the services, transparency, and results we would want if our
roles were reversed.
We will never stop doing what is right for our clients for fear of “looking
silly.” We will never overpay for investments because it’s the popular thing
to do. Nor will we remove risk from a client that needs that risk to build
wealth.
Market at a Glance
In case you have missed our weekly emails (please contact Brett at
[email protected] if you’re not receiving them), we have explained why we are
still optimistic about the overall economy and markets.
Here’s a few bullet points to summarize those weekly emails:
Brexit, which caused the market to fall 6% in two days, was a complete
overreaction to a political shift in Europe. England leaving the
European Union was done for political reasons not monetary. England was
sick of being told what they had to do by people in Brussels. The media
made this story into something it wasn’t with the headlines, “Will
Brexit cause a Global Recession?” or “The Beginning of the Next
2008.” What Brexit did do is provide many opportunities. With a market
down 6% in two days we were able to put some cash to work for clients
through stocks and options. The market quickly rebounded and in five
days made up the 6%. This media driven fear created great opportunities
for our clients.
In terms of value, the market as a whole is at fair value (remember P/E
ratio mentioned above) at a 19.58 P/E. While some stocks are extremely
expensive (utilities, technology, dividends), we are still finding
plenty of opportunities in the financials and energy sectors in
particular. Brian Hunsaker (our stock expert) spends hours and hours
each day looking for the next stock to add in our portfolio.
Lastly, while no one can predict the future of the stock market, it’s
interesting to note that historically since the early 1900’s July
(+.09%), August (-.01%) and September (-.5%) are relatively flat months
in terms of returns. We wouldn’t be surprised to see more volatility in
the coming months before hopefully a strong end to 2016.
*For more information regarding historical returns please reach out to Brian
Hunsaker or Brett Pattison.
Information presented is gathered from sources to be reliable. However, Iron
Gate Global Advisors does not attest to its accuracy and is not responsible
for errors and /or omissions. Please notify Brian Hunsaker or Brett Pattison
of any change in your financial circumstances or investment objectives. Past
performance does not guarantee future results.
A Short Term Market Rainstorm
One of our favorite places in all the world to vacation is the Garden Island
in Hawaii, Kauai. There is nothing better than hiking the famous Kalalau
Trail that overlooks the famous the Nepali coast. It’s one of the most
beautiful places we have been which keeps us going there over and over.
The one thing we’ve learned through our multiple trips is to prepare for
anything. One minute the weather will be beautiful, the next minute you could
be in the middle of a jungle rainstorm (they call it the Garden Island for a
reason!).
A saying that we have come to know through our time there is “if you don’t
like the weather, wait five minutes.” This is because the rain normally
doesn’t last long before the beautiful weather comes again.
The stock market acts in a similar way.
As we enter 2016 it has been raining. The market has left some people to
wonder, “am I going to lose money in 2016?”
Similar to the rainstorms in Kauai, the market does rain occasionally for a
short period of time. Maybe even for a year or two (which in the markets time
frame is a short period of time).
I recently talked to a client who’s account was down $10,000 during the
August market pullback. Needless to say he was not happy about it. His fear
was that his account would go to zero and never rebound. His fear, I suppose,
could become reality if every stock went bankrupt which would be a highly
unlikely outcome.
The interesting thing about his fear was that the markets rebounded 5.4% in
October. The rain had stopped. Selling out of fear would have hurt him more
than waiting out the rainstorm.
One of our favorite investors is Howard Marks. He runs one of the biggest
debt firms in the world and is a fantastic investor. He discuss the
difference between volatility (rain) and true risk. Paraphrasing Mr. Marks .
. .
Volatility (rain) is the ups and downs
requirement that investors have to pay
Risk is the permanent loss of capital.
fundamentals of a company have changed
stomach.
of the markets. It’s a
for the potential reward.
It’s selling assets because the
or the volatility is too much to
Currently portfolios are experiencing the volatility. The last thing we
want to do is turn that volatility into risk.
Think about it this way. If you invested in a business, a business that you
know very well. You trust management, you know the in’s and out’s of the
business and know it’s true value. For example purposes let’s say the value
of the company is $100,000 million.
Now let’s say that someone comes to you day after day wanting you to sell the
company for $50,000 million. In fact that someone flashes all sorts of lights
at you and goes on the news saying all sorts of things about your business
trying to get you to sell.
What would you do?
It’s simple, you would wait for the buyer to realize the true value of the
company. You would wait for them to buy the company at hopefully a lot more
than $100,000 million before you sell. It might take a year or two or three
for that buyer to realize it, but you would wait.
Right now that is what’s happening in the market. The market values some
businesses that we have invested in to be worth a lot less than what they
actually are. We don’t want to take the risk (permanent loss of capital) on
those investments. That would hurt clients more than help. The key is
ignoring the short term rain storm and waiting for the market to realize that
the company is worth more than it’s value. That’s what a good business owner
would do.
This week we will be mailing out quarterly statements to our clients. These
quarterly statements are short term in nature. We explain and show the
current market’s value of the businesses that our clients own. That’s the
first number that you will look at. The key is understanding that it’s a
short term view. We urge everyone to not get caught up in the short term
market’s value of the assets. Focus on the long term.
The other side to the rainstorm and to the market volatility is that
it creates tremendous opportunities to buy some businesses at very cheap
prices. There are many businesses who’s value is greater than the market
currently says it is. We will be looking to buy those businesses knowing that
in the next two to three years those business will be worth a lot more
creating wealth for our clients.
Although the rainstorm gets in the way for the short term, it is necessary.
Think of what Kauai would be like if there was no rain. It’s also true for
the market. In order to see the green you have to experience a little bit of
rain.
A famous stock market parable: Mr.
Market
One of the greatest stock market parables was given by the famous Benjamin
Graham and reiterated by Warren Buffett in his 1987 shareholder letter. It’s
a parable that puts the day to day, week to week and month to month stock
market movement into perspective. Below is a copy of that parable from Mr.
Buffett’s 1987 shareholder letter. We hope you enjoy it as much as we do!
The why is best explained by the great Benjamin Graham.
Warren Buffett
quoted it in his 1987 shareholder letter. The following is taken from that
letter (our emphasis added):
Ben Graham, my friend and teacher, long ago described the mental attitude
toward market fluctuations that I believe to be most conducive to
investment success. He said that you should imagine market quotations as
coming from a remarkably accommodating fellow named Mr. Market who is
your partner in a private business. Without fail, Mr. Market appears
daily and names a price at which he will either buy your interest or sell
you his.
Even though the business that the two of you own may have economic
characteristics that are stable, Mr. Market’s quotations will be anything
but. For, sad to say, the poor fellow has incurable emotional problems.
At times he feels euphoric and can see only the favorable factors
affecting the business. When in that mood, he names a very high buy-sell
price because he fears that you will snap up his interest and rob him of
imminent gains.
At other times he is depressed and can see nothing but trouble ahead for
both the business and the world. On these occasions he will name a very
low price, since he is terrified that you will unload your interest on
him.
Mr. Market has another endearing characteristic: He doesn’t mind being
ignored. If his quotation is uninteresting to you today, he will be back
with a new one tomorrow. Transactions are strictly at your option.
Under these conditions, the more manic-depressive his behavior, the
better for you.
But, like Cinderella at the ball, you must heed one warning or everything
will turn into pumpkins and mice: Mr. Market is there to serve you, not
to guide you. It is his pocketbook, not his wisdom that you will find
useful. If he shows up some day in a particularly foolish mood, you are
free to either ignore him or to take advantage of him, but it will be
disastrous if you fall under his influence. Indeed, if you aren’t
certain that you understand and can value your business far better than
Mr. Market, you don’t belong in the game. As they say in poker, “If
you’ve been in the game 30 minutes and you don’t know who the patsy is,
you’re the patsy.”
Ben’s Mr. Market allegory may seem out-of-date in today’s investment
world, in which most professionals and academicians talk of efficient
markets, dynamic hedging and betas. Their interest in such matters is
understandable, since techniques shrouded in mystery clearly have value
to the purveyor of investment advice. After all, what witch doctor has
ever achieved fame and fortune by simply advising “Take two aspirins”?
The value of market esoterica to the consumer of investment advice is a
different story. In my opinion, investment success will not be produced
by arcane formulae, computer programs or signals flashed by the price
behavior of stocks and markets. Rather an investor will succeed by
coupling good business judgment with an ability to insulate his thoughts
and behavior from the super-contagious emotions that swirl about the
marketplace. In my own efforts to stay insulated, I have found it highly
useful to keep Ben’s Mr. Market concept firmly in mind.
Big Week at the Fed & the Santa Claus
Rally
Will the market take a June vacation?
Big News Surrounding China
Will Spring be kind to investors?
Below is our short market commentary video for March. In it we will discuss
the following:
February global markets review. Where are the hot areas of the market
globally?
Are we bullish or bearish on the markets?
What may happen in the month of March?
https://www.youtube.com/watch?v=TQscG7PMxQo
Early Volatility to Begin the New Year
Half way through the first month of 2015 the S&P 500 is down 2.5%. Terrorism,
a European recession, bad earnings and other headlines have investors across
the globe are running into safe investments like government bonds. This
January move actually reminds me of what happened just a year ago in 2014.
The S&P 500 finished January of 2014 down -5%. That was the low point of the
year as the U.S. market rallied to finish the year up 14%.
This volatility to begin the year shouldn’t cause anyone to panic. It
shouldn’t cause people to worry that the six year bull market is over. Rather
it should be an opportunity. Let me explain . . .
There is a “fear index” in the market known as the VIX (S&P 500 volatility
index). To keep it at a very, very basic level, when it spikes higher there
is “fear” in the markets. When the VIX spikes higher the S&P 500 is usually
pulling back. When this spike in the VIX occurs smart investors should be
considering buying those stocks or ETFs that they have been waiting to buy.
Let me illustrate . . .
Below is a chart of the VIX and the S&P 500. I have highlighted those moments
when the VIX has spiked along with the corresponding rally in the S&P 500. As
you can see that when the VIX approaches or breaks through 20 it’s typically
a good time to build a long position or perhaps sell some puts.
Let me make one thing very clear . . . no one ever knows exactly what the
market is going to do. However, if the current uptrend in the market stays
intact we will use the VIX to help us know what to do. You no doubt have
heard the term “buy the dips” . . . this indicator helps you in the
application of that famous saying.
Successful investing!
This is not a recommendation to buy or sell a security. This is for
educational purposes only and is generic in nature. It is not suitable for
everyone’s goals and objectives. If you have questions please contact Brett
Pattison at [email protected]
Stick the fork in October! Will we be
thankful for November?
Brett Pattison from Iron Gate Global Advisors reviews what transpired in the
month of October in the global markets. He then discusses what may happen in
the month of November based on historical market cycles.
http://youtu.be/MtaNWe6PdqY
Market Commentary: Will we finish 2014
strong?
Coming off of one of the best bullish years in recent memory (2013), the
question entering 2014 was whether we would sustain the bullish move. Well,
so far the answer is wholesale nfl jerseys a resounding “YES!” The S&P 500 is
currently sitting at a 9.8% return year to date. Healthcare, Technology and
Consumer Staples have led the market with 22.02%, 14.55% and 10.04% returns
respectively.
Despite these positive returns in 2014, this . year hasn’t been without some
market volatility. October saw the market pull back 10% for the first time in
two years causing some to wonder whether the end to the bull-run has finally
run its course. Listening to the mainstream media potentially enhanced these
fears and created undue concern. It is our job as your Financial Advisors to
look at the global markets and lay out the facts in an attempt to answer the
question, “Will we finish 2014 as strong as we started it?”
United States of America: The good ole’ US of A has been rocking. It has
outperformed the global markets all year long and it appears as though it
will continue. cheap nba jerseys For our U.S. allocations we will maintain
our overweight stance for the following reasons:
More people are working. Unemployment has dropped to 5.9% from 7.2% a
year ago.
The US economy is growing. GDP (Gross Domestic Product), which is a
gauge of the health of the US economy, grew at a 4.6% annual rate in Q2
and a 3.5% rate in Q3.
Consumers have more money to spend. Gas prices are the lowest level they
have been since 2010 (see image courtesy of GasBuddy.com) falling below
wholesale nba jerseys $3.00.
Historically we are entering into the most bullish time of the year.
November starts what is historically the best three month stretch for
market returns (November – January). Since 1928 November, December and
January have averaged .6%, 1.5% and 1.2% returns. Although there is
never a guarantee that this will continue, we firmly believe in managing
money based on probabilities not possibilities. These probabilities are
based on history and certainly history is bullish for the next few
months.
The markets applauded the Federal Reserve and it’s ending of
Quantitative Easing (QE). One of the biggest concerns investors had was
the notion that as soon as the Federal Reserve stopped its QE program
the markets would fall. This concern was answered on October 29 when the
Fed announced the end of the program. The market immediately moved
higher and continues to move higher even as I type.
Developed Non-U.S. Markets (Europe, Asia and Australia): These areas of the
globe have been the laggards of 2014. The index that tracks the Developed
Non-US markets is (MSCI EAFE index) is down 2.97% YTD. The bright spot has
been Australia which is up 5% YTD. The low light has been Germany which is
down 11% YTD. Despite attempts by the ECB to spur growth, the outlook for
Europe is not as strong as the U.S. as our friends across the pond seem to be
getting weaker and weaker.
We are underweight these areas of the globe and will remain so for the rest
of 2014. We will continue to keep our eyes on these Developed Non-U.S.
markets simply due Current. to the fact that it is cheap and Up hated. When
things are cheap and hated is often when you find the best investment
opportunities.
Emerging Markets: As a whole the Emerging Markets cheap jerseys Index (MSCI
EM) is up 4.88% YTD. India has been the bright spot of the Emerging Market
countries. It is currently up 40% YTD. India’s newly elected Prime Minister,
to Narendra Modi, is wholesale nfl jerseys viewed as the one that will
finally unleash Look the growth potential of India’s markets. As a result we
have seen incredible returns in that country. Russia has been the biggest
bear (for obvious reasons . Effects . . namely Putin’s attempt to rule the
world) and is down 23% YTD.
We are equal weight this area of the globe and will continue to maintain that
posture for the rest of 2014. It continues trading at attractive multiples
and is trending in the right direction.
In Summary: It is our belief that we will finish 2014 strong. Everything we
study, read and research points to a bullish end to 2014. This stance is in
no way a guarantee of future returns, but it does provide the foundation for
us as we continue to work hard for you.