Tag Archives: seeking

SAT Investing

Can investors learn something from the SATs? It may be only a few more days to Christmas, but it’s also college application season. A lot of high-school seniors are filling out the Common App, writing and re-writing essays, and anxiously awaiting their latest test scores. And there’s a test-taking technique that kids use to improve how they do on standardized tests that can help investors. It’s elimination. When they come to a question to which they don’t know the answer, they can improve their scores by eliminating what is most clearly wrong. In a multiple-choice test, someone just filling in the circles gets 20 or 25% correct by random chance. But by eliminating the obviously wrong answers, students can better their odds. They won’t guess right every time, but they’ll do better than if they had left the answer blank. In the same way, investors can do better by eliminating what’s wrong. If a company’s business model makes no sense – if you can’t figure out how they earn their money – then don’t own that business. If management seems to be focused more on politics and celebrity than capital investment and HR, don’t buy the stock. This is a variant of The Loser’s Game by Charlie Ellis. We can be smart by avoiding dumb ideas. For example, in December of 2000, Enron employed 20,000 people and claimed revenues of over $100 billion. But some analysts started looking in depth at their derivative books and couldn’t figure out how the company was earning all their money. There was a gap between what was reported and what they could confirm. We know how this story ends: Enron filed for bankruptcy in December 2001. The executives used a willful, systematic, and intricately planned accounting fraud to inflate their earnings. (click to enlarge) Enron stock. Source: Bloomberg Investors would have improved their relative performance by avoiding Enron. That was difficult to do: the company was a media darling, considered a high-flying harbinger of the new economy. It had tremendous price momentum. But it was hard to see how they could turn 2% growth in utility revenues into consistent double-digit earnings growth for themselves. By looking under the hood – understanding the business, reading the financials – investors can sometimes avoid the big flops. And just like when kids take the SATs, if you can improve your odds – in a low-return world – that just might be enough.

Investing Through Stories

Analyzing stories can lead to good, long-term investments. Entrepreneurs spin myths that teach employees values and lead to economic power. What happens when the founder dies? Here at Seeking Alpha we have a love of numbers. The best analysts here compare balance sheets, tease out EBITDA, or throw prices on charts in a continuing search for market advantage. But the best longer-term investments aren’t like that. The best places to put your money for five or 10 years are in entrepreneurs, and what entrepreneurs do is tell stories. Many numbers-oriented analysts don’t like to hear this. They listen to Jeff Bezos at Amazon.com (NASDAQ: AMZN ), or Elon Musk at Tesla (NASDAQ: TSLA ), and they say, this can’t be right. The numbers don’t add up. But the stories do. And when the stories make sense in the world, when they make sense of the world, when the entrepreneur can lead a team to scrupulously follow a true trend, the numbers will follow. This is how transformative change happens. Want an equation? Here’s one: M x V = P. Myths times values create power. Entrepreneurs create myths. The myths are meant to teach values, and create a corporate culture that can hold economic power. The myth is where the company came from, the values are what the company – by extension its employees – represent to the market. Through myths teaching values, corporations can have power even after the entrepreneur has left the scene if the story they tell remains true. I understand that analyzing companies through their stories is counter-intuitive to Seeking Alpha readers. It doesn’t yield short-term buy or sell recommendations. It doesn’t tell you how to trade assets against one another, or account for quarterly performance. But it can tell you where to invest. Stories can, of course, lead you astray. Many people bought the Enron story Ken Lay told. Many people bought the MCI story Bernie Ebbers told. Some investors even bought the stories that Martin Shrkreli told. Stories, and story-tellers, are compelling. As a journalist, I am in the business of analyzing stories. What I try to do is to match story against performance, against reality, and against the story itself. · Does the company’s performance indicate that the story needs to change, or are transitory effects in the market just putting it in the market’s shade? If it’s the former, sell. If it’s the latter, buy. · Does the story have any chance of becoming true? Does it match the longer-term trends within the market? Does the story describe things as they are, or more important as they will be? · Is the story being followed? Is the company on the path of the story, or has it lost its way? Does the story describe a world that no longer exists, like the story of James Cash Penney (NYSE: JCP ) does today? General Electric (NYSE: GE ) has stayed on the Dow Jones list since Charles Dow first created it in 1896 thanks to stories. Each CEO tells a story, transforms the company to match the story, and is then followed by a new leader with a different, transformative story of their own. The GE of Reginald Jones was not the GE of Jack Welch, and the GE of Jack Welch is not the GE of Jeff Immelt. The usefulness of a story can run out. The IBM (NYSE: IBM ) story, first told 100 years ago by Thomas Watson Sr., is about salesmen leading managers toward better ways of doing things. But technology changes so fast today that salesmen can’t lead this process. Thus IBM has lost its way. Every great entrepreneur is, first and foremost, a story teller. Warren Buffett (NYSE: BRK.A ) (NYSE: BRK.B ) tells the story of value investing. Larry Page (NASDAQ: GOOG ) ( NASDAQ: GOOGL ) tells the story of search. Intel (NASDAQ: INTC ) has followed Moore’s Law for over a half-century. My beat is technology, and what I’ve learned is that the dominant tech stories get under trends and drive them. Microsoft (NASDAQ: MSFT ), under Bill Gates, understood that if you control the operating system, you control everything above it. Apple (NASDAQ: AAPL ), under Steve Jobs, is about devices being central to the technology experience. Salesforce.com (NYSE: CRM ) is a story stock, about applications driving the cloud. Every story has a sell-by date. As the world changes, so stories must change, and a founder’s story will often die with the founder. This can set a company on auto-pilot, as in the case of Wal-Mart (NYSE: WMT ), unless new leaders find new ways to tell that story. A founder’s death, or retirement, thus becomes a crucial moment in corporate history. Can their story be re-interpreted? Will the company allow such a re-interpretation? Does that re-interpretation hold up? This is what Satya Nadella is trying to do with cloud at Microsoft. It’s what Tim Cook is trying to do at Apple. The point is my investment strategy is to measure stories, not numbers. Do they hold up? Do they make sense? Are these myths building values that have lasting economic power? I admit it’s not for everyone, but it works for me. And that’s my story.

RSX: My Prediction For 2016

The next year is around the corner, and it’s high time to look at RSX prior to the Russian holidays. Oil stays low and poses a major threat to the economy. At current oil price levels, RSX is overvalued. Those who follow the Market Vectors Russia ETF (NYSE: RSX ) closely probably know that I’ve been bearish on Russia the whole year. Lately, I’ve been commenting on the tensions between Russia and Turkey , the impact of the continuing oil price decline on the Russian economy and the exchange rate of the Russian ruble. As the year ends, it’s logical to make a prediction for 2016 and leave the topic to develop until the end of January. Why the end of January? First and foremost, the Russian Central Bank will announce its key interest rate on January 29, 2016. In its next meeting, the Central Bank won’t have the luxury of waiting and will have to either support the economy by cutting the 11% rate or choose the course of supporting the ruble and leave the rate or even increase it. I think that this will be the pivotal moment. Also, keep in mind that Russia has long New Year holidays that last from January 1 up to January 10. In practice, low volume trading and muted business life typically last from the last week of December up to the “Old New Year” on January 14. To those interested, the “Old New Year” date is the New Year date in Julian calendar, which was observed in Russia until 1918, when Gregorian calendar was implemented. Expect increased volatility and false moves during this period. It is clear that the main determinant for both the Russian market and the Russian economy is the oil price. If you believe that oil will go to $70 – $80 per barrel in 2016, then you should clearly buy RSX or other Russian ETF. I am in the bearish camp for oil, at least for 2016. My base-case scenario for Brent oil is $40 at best, and I think that oil will first go lower and could rebound only at the end of 2016. My main point is that if oil stays at current levels, the Russian market is significantly overvalued and will drift lower. Here’s why. We’ve yet to see more action from the Central Bank, but I think that at current oil levels we will not get to the ruble-denominated oil price of 3150 which is needed for the budget. This will lead to extreme devaluation of the national currency. For example, if this was to happen right now, the ruble would have dropped from 71 rubles per dollar to 85 rubles per dollar. This is too much, as Russia still depends heavily on imports (this statement was previously challenged by some readers, but I stand by my views and tried to explain them in more detail in the comments sections of previous articles). I think that the resulting exchange rate will likely be a compromise between the needs of the budget (and all the export companies, which are the majority of the Russian stock market) and the needs of curbing inflation. My prediction is that the ruble will settle in the area which allows 2900 – 3000 rubles per barrel of oil, implying 10.5% – 14% downside for the currency and for the dollar-denominated RSX. Also, I believe that constraints that low oil puts on the Russian economy are not fully reflected in the price of RSX. The Central Bank is predicting that GDP contraction will slow to 0.5% – 1.0%, but I think that these are optimistic figures. In the current oil price environment, there is no way to balance the interest of export-oriented companies, which are the majority of RSX holdings , and the economy. This problem will result in damage to every Russian company. All in all, I think that RSX is overvalued by 15% – 20% at current oil price levels. The downside increases if oil drops further, and such a drop will likely lead to a catastrophic liquidations of positions and a huge drop of RSX. On the other hand, if oil manages to deliver a major rally, the whole thesis will go bust. The next year is already behind the corner, so we will soon know how the thesis plays out.