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Its Not My Fault…But Then Its Never My Fault

Whilst sitting at my local this afternoon enjoy a cuppa and a Kit Kat I spied someone reading a piece about a company called SurfStich which to be honest I had never head of as it doesn’t sit within my universe of tradeable stocks. To save you the trouble of reading the article I can summarise it quick quickly. SurfStich lists in 2014, the listing is a bit lacklustre but price recovers from the $1 listing price to hit a high of $2.13. Stock then dies in the arse and shareholders crack the sad’s and want to sue the company. I have dropped a chart of the price action  below.

Capture

On the chart I have plotted the listing price of $1.00 and as you can see the stock spent a good year above the listing price before beginning its precipitous fall from grace. I can guarantee you that when the stock price passed through $2.00 the investors who are now suing the company considered themselves to be absolute geniuses and when the stock began to fall those who ran the company were apparently complete dickheads for letting it happen. Here is a news flash for investors who operate on this sort of deflection of personal responsibility – you are responsible for your own actions and all the consequences that flow from them. You had ample time to exit the stock with a substantial profit but you didn’t – the decision not to was your fault – no one else is to blame.

I understand the notion of personal responsibility is an anathema to a lot of people but if ever there was a cornerstone principle for being successful at anything it is being able to accept your role in the events as they unfold. You cannot consider yourself to be the best investor in the world when price is running your way but then somehow seek to blame the company for your failure to take any form of defensive action when things do not go your way. This just paints you as a childish amateur.

This Really Shits Me

This little rant has nothing to do with trading so if you are not interested tune out now. I came across the article below whilst looking for something else and I thought it would be a good primer piece for people who wanted to know a little bit more about statistics since it uses neither mathematical notation nor formula and then I saw that I had to fork out EUR41.94 (about $AUD63.00) for the privilege of simply downloading.

research

This sort of thing along with the rise of bullshit journals, pay to publish, citation mining and the general drop in quality of cornerstone publications such as Science and Nature are some of the reasons why I am glad I left this life behind.

A Lesson In Here

Whilst I was in New York and LA last year I took to looking at the price of real estate in the US.  The US real estate market is fascinating for anyone who has an interest in the way price distributes itself in various sectors. Real estate in Manhattan is staggering expensive, yet you can get set on Roosevelt Island for about what you would pay here for inner city living. LA is the same some pockets are expensive but the majority of the city is cheaper than Melbourne or Sydney. However, I have never been a fan of LA but do like San Diego where the countryside is fabulous and you can be near the water if you wish – all for much less than you would pay for a home in Brighton or Potts Point.

As part of my investigation I discovered that land rats in the US were more professional and savvy than their local counterparts, whose main skill seems to be in trying to spell your name correctly and handing you a brochure. As a case in point the graphic below is from an agent in San Diego who emails her other clients on an almost daily basis with market updates. You can see from the graphic that this house has had a price reduction – you know exactly what the price was and exactly the price you will pay and the amount of the reduction.

RE

I was going to finish by saying that there is a lesson in this for local land rats but that would be pointless. Why change when you have managed to do very well for years without actually doing much at all.

The Final Clarke and Dawe


 

Downer EDI

Here is a chart of Downer EDI (Dow)

Dow

If you bounced into this on the breakout from congestion well done, you got a nice trade and then it all went pear shaped. DOW have apparently launched a bid for Spotless which I mentioned last week. This bid entails a capital raising whereby for every 5 existing DOW shares you own you get another 2 at $5.95. This brings the true adjusted price to $7.01. Now as sometimes happens things dont always go as planned. The market is a giant voting machine and in this instance it has decided that the takeover of Spotless has knobs on it but that is not the point. The point is that I have heard that people who have been recommend DOW have been moaning and whinging that it has gone down.

Well, here is a news flash for all of you who take a trip to Brown Gouge to get your pants cleaned every time things dont go perfectly…..SUCK IT UP.  The market is not perfect, it is an odd, organic, sometimes self correcting, maddeningly chaotic system that in no way has to conform to your belief structure. This sort of event will happen at least once in your trading career and if you cannot handle that without blaming everyone else in sight then this business is not for you. So step aside and leave it to the grown ups.

Financial Disclosure

The disclosure statement below is currently doing the rounds and it is apparently from a long defunct fund called the IPS Millennium Fund. Apparently it is being lauded as being an honest example of what a disclosure statement should be instead of the usual corporate speak that these things are comprised of.  However, the tone of the language indicates to me that the fund was always going to go broke simply because of the cavalier attitude of the funds owners with other peoples money. The statement seems to indicate no understanding whatsoever of trading and risk management. Granted corporate speak is a pain in the arse and once you are subject to any sort of regulatory regime it becomes part of the territory. However, it is not an excuse to be a dickhead with other peoples money and the way you do one thing is the way you do everything. If you are a dickhead in the way you frame your understanding of risk then you are going to be a dickhead when it comes to managing that risk.

First of all, stock prices are volatile. Well, duh. If you buy shares in a stock mutual fund, any stock mutual fund, your investment value will change every day. In a recession it will go down, day after day, week after week, month after month, until you are ready to tear your hair out, unless you’ve already gone bald from worry. It will insist on this even if Ghandi, Jefferson, John Lennon, Jesus and the Apostles, Einstein, Merlin and Golda Maier all manage the thing. Stock markets show remarkably little respect for people or their reputations. Furthermore, if the fund has really been successful, you might be buying someone else’s whopping gains when you invest, on which you may have to pay taxes for returns you didn’t earn. Just try and find somewhere you don’t, though. Dismal.

While the long-term bias in stock prices is upward, stocks enter a bear market with amazing regularity, about every 3 – 4 years. It goes with the territory. Expect it. Live with it. If you can’t do that, go bury your money in a jar or put it in the bank and don’t bother us about why your investment goes south sometimes or why water runs downhill. It’s physics, man.

Aside from the mandatory boilerplate terrorizing above, there are risks that are specific to the IPS Millennium Fund you should understand better. Since most people don’t read the Prospectus (this isn’t aimed at you, of course, just all those other investors), we thought we’d try a more innovative way to scare you.

We buy scary stuff. You know, Internet stocks, small companies. These things go up and down like Pogo Sticks on steroids. We aren’t a sector tech fund, we are a growth & income fund, but right now the Internet is where we think most of the value is. While we try to moderate the consequent volatility by buying electric utility companies, Real Estate Investment Trusts, banks and other widows-and-orphans stuff with big dividend yields, it doesn’t always work. Even if we buy a lot of them. Sometimes we get killed anyway when Internet and other tech stocks take a particularly big hit. The “we” is actually a euphimism for you, got it?

We also get killed if interest rates go up, because that affects high dividend companies badly. Since rising interest rates affect everything badly, we could get killed even worse if the Fed raises rates, or the economy in general experiences higher interest rates beyond the control of those in control, or gets out of control. Whatever.

Many of the companies we buy are growing really fast. Like, 50% – 100% per year sales growth. Many of them also don’t make any money, although they may be relatively large companies. That means they have silly valuations by traditional valuation techniques. We don’t know what that means any more than you do, because we have never seen anything like the Internet before. So we might overpay for these companies, thinking we are really smart and can get away with it because they are growing so fast. It doesn’t take a whole lot for these companies to drop 50% or more, because nobody else knows what they are worth either. Received Wisdom can turn on a dime in this business, and when that happens prices fall off a cliff.

Even if we were really smart and stole these companies, if their prices run way up we are still as vulnerable as if we were really dumb and paid that high a price for them to start with. If we sell them, you will get pretty irritated with us come tax time, so we try not to do any more of that than we have to. The pole of that strategy, though, is that if we are really successful, you will have a lot of downside risk in a recession or a bear market. Bummer.

Finally, if you haven’t already grabbed the phone and started yelling at your broker to sell our fund as fast as possible, you should understand the shifting sands of technology. It doesn’t take billions of dollars to start a high tech company, like it did U.S. Steel or Ford Motor. Anybody can do it, and everybody does. Many of our companies are small, even though they dominate their market niche. It’s much easier for a new technology to blow one of our companies out of the water than it was in the old days of canal, mining, railroad and steel companies.

Just so you know. Don’t come crying to us if we lose all your money, and you wind up a Dumpster Dude or a Basket Lady rooting for aluminum cans in your old age.

 

The Misguided Beliefs of Financial Advisors

Below is the abstract from this paper – The Misguided Beliefs of Financial Advisors

A common view of retail finance is that conflicts of interest contribute to the high cost of advice. Using detailed data on financial advisors and their clients, however, we show that most advisors invest their personal portfolios just like they advise their clients. They trade frequently, prefer expensive, actively managed funds, chase returns, and under-diversify. Differences in advisors’ beliefs affect not only their own investment choices, but also cause substantial variation in the quality and cost of their advice. Advisors do not hold expensive portfolios only to convince clients to do the same—their own performance would actually improve if they held exact copies of their clients’ portfolios, and they trade similarly even after they leave the industry. These results suggest that many advisors offer well-meaning, but misguided, recommendations rather than self-serving ones. Policies aimed at resolving conflicts of interest between advisors and clients do not address this problem.

This paper is interesting because it posits a parallel explanation as to why the advice that individuals receive from financial planners is so poor. Traditionally it is thought that poor advice stems simply from a conflict of interest. Planners put their own financial interests ahead of the clients and recommend high fee rubbish. As the paper mentions measures are now being put in place in various domains to prevent this from happening – a move the financial planning industry has resisted with profound vigour. My reading of the paper is a somewhat cynical interpretation of this sentence from the abstract –

These results suggest that many advisors offer well-meaning, but misguided, recommendations rather than self-serving ones (See Dunning -Kruger, authors addition)

My interpretation of this is that financial planners as a population are simply stupid and unaware of the intricacies of either providing accurate, timely and relevant advice to clients and therefore they provide themselves with the same stupid advice. It is probably somewhat unreasonable to expect someone who gives themselves rubbish advice to demonstrate a schism between what they tell a client and what they tell themselves. The way you do one thing is the way you do everything.

General Advice Warning

The Trading Game Pty Ltd (ACN: 099 576 253) is an AFSL holder (Licence no: 468163). This information is correct at the time of publishing and may not be reproduced without formal permission. It is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs.