I’ve been writing Practical Stock Investing for something over five years now.  I decided to go back through my archives so look at the most looked-at (and possibly read) posts over that time.  I’m going to re-post ten over the next two weeks.  This will give you a chance to see some of my earlier work that you may have missed.  And I’ll have time for home repairs I’ve been putting off.  I may just see a couple of baseball games and watch the basketball playoffs, though.

Here’s #10.  Back live on Monday!

the 95/5 rule

I was driving through a rural part of southern New Jersey last week and listening to Bloomberg Radio on XM.  The program I was listening to got me thinking about my first job as a full-fledged portfolio manager. On my first day (in 1984), my boss pointed to a three-foot high stack of research reports that she had received in the mail that morning.  This was an everyday occurrence, she said.  95% was trash; part of her job–and now mine–was to read through a pile like that each day looking for the 5% that wasn’t.

Something like that is why I was listening to Bloomberg.

Once in a while, though, a genuine financial expert will appear on one of the Bloomberg shows.  The interviewer will ask intelligent questions–or at least allow the expert to speak, rather than filling the air with the host’s views.  The guest will give interesting and useful answers.  This isn’t the norm.  But it happens.  Hence my thoughts about my old boss’s 95/5 rule.

But why do really knowledgeable guests appear on financial tv/radio?  Why do they fawn on their hosts in the clear attempt to be invited back?

third-party endorsements

The answer is that an analyst or portfolio manager’s appearance on TV or radio legitimizes him to his clients in a uniquely powerful way.

This doesn’t make an enormous amount of sense to me.  But it’s true, nonetheless.

The client may understand that the media personalities don’t have a particularly deep knowledge of finance.   Some have had past brushes with the law.  A few have clearly adopted a entertainment-first attitude, and make no pretense of preparation or expertise.

The expert’s client may also realize that the guest may only have been invited to appear on a show because his firm is a big advertiser.

Still, the appearance on tv or radio can carry as much weight with that client as the manager’s track record.  For retail investors, it carries more weight than the numbers.  Even better if the manager is a frequent guest or if the interviewer says nice things about him.

The bottom line:  despite evidence to the contrary, people believe the financial press is objective and knowledgeable.  At the same time, people generally distrust marketers who work for, i.e., are paid by, an investment manager.

Therefore, a press endorsement–a favorable mention in a newspaper or magazine article, an interview on tv or radio–is a huge help in selling the interviewee’s investment services.  So experts–and non-experts, as well–have a strong financial interest in courting the media, flattering the interviewers and generally twisting themselves into pretzels, if need be, to appear in print or on shows.

I’ve been writing Practical Stock Investing for something over five years now.  I decided to go back through my archives so look at the most looked-at (and possibly read) posts over that time.  I’m going to re-post ten over the next two weeks.  This will give you a chance to see some of my earlier work that you may have missed.  And I’ll have time for home repairs I’ve been putting off.  I may just see a couple of baseball games and watch the basketball playoffs, though.

Here’s #9.

I’ve had a surprisingly large amount of interest in my previous post “The fading of Bloomberg Radio.”  Some comes from fans of Ken Prewitt, wondering where he might be and if he’s well.  Some is from others who have detected the same decline in substance at Bloomberg Radio that I have.

So I decided to write about a BR program I was listening to in my car last week.  It was the middle of the day, and the topic was immigration.

The guest–over the phone–came from the Cato Institute.  As one might expect from an organization founded by the Koch family, he had a strong libertarian, conservative bent.

He started off with a number of anodyne statements about illegal immigration, like that:

–the overwhelming majority of farm workers are illegal immigrants,

–a tightening of border controls has resulted in a shortage of farm laborers that, in some cases, is causing farmers not to plant as much as they might like.  They know they won’t be able to find workers to harvest the crops

–most jobs illegal immigrants take–farm work in particular–are ones American citizens don’t want.  They’re seasonal, and they’re hard physical labor.

At this point, the host groaned her disbelief and asked about the effect of the minimum wage on American interest in farm jobs.

The guest replied that the minimum wage is not an issue here, that, for example, some apple pickers in Oregon earn $28 an hour.  (The average for farm workers, according to the Wall Street Journal, is around $10.50/hour.  The guest didn’t say this; the host apparently had done no preparation for her work that day.)

The guest then said that the government was the main factor in Americans’ aversion to farm work.  To someone collecting unemployment insurance, he continued, relocating to take a farm job made no economic sense.  A little polemical, maybe, but a subject for discussion if one thought the opposite.

Not for our host, however.  She became audibly angry   …and then HUNG UP on the guest!

Wow!!

I have to admit that this isn’t the first time I’ve heard behavior like this.  Sometimes, on a long drive I’ll choose WFAN over Bloomberg.  I listen typically when Mike Francesa (formerly part of the “Mike and the Mad Dog” duo–but the MD went to satellite radio) is on the air.  It’s a staple of this broadcast form for the host to disconnect a rambling or ill-informed caller.  In fact, some of these shows are simulcast on TV, so you can actually see the host turning to switchboard and pressing the “off” button.  He continues to talk, however, as if the caller is still on the line–but awed into silence by the host’s discourse.

The twist, in my Bloomberg case, is that the guest was the coherent, polite and well-informed one–yet all that got him was a dial tone when the host showed herself to be the unarmed opponent in a duel of wits.

A new low, in my Bloomberg Radio experience.

I’ve been writing Practical Stock Investing for something over five years now.  I decided to go back through my archives so look at the most looked-at (and possibly read) posts over that time.  I’m going to re-post ten over the next two weeks.  This will give you a chance to see some of my earlier work that you may have missed.  And I’ll have time for home repairs I’ve been putting off.  I may just see a couple of baseball games and watch the basketball playoffs, though.

Here’s #8.

first ESPN…

Over the Thanksgiving holiday my older son pointed out to me that family friend, John Koblin, had written a critical article for Deadspin on how ESPN has gradually lost its journalistic way as it chases television ratings.

The example John focusses on is the network’s apparent obsession with New York Jets football player, Tim Tebow–a legendary college football figure who appears to be the latest in the parade of Heisman Trophy quarterbacks not quite good enough to make it in the NFL.

How is Tebow a continuing story?  ESPN2’s unsuccessful morning show First Take switched format in late 2011.  The new look:  …a staged debate between two cartoonish figures who duel in vintage WWF fashion over some item of sports news.  Their favorite topic:  Tebow.

ESPN discovered that the new First Take was surprisingly popular, even taking audience share away from its mainline morning show, Sportscenter.  It reacted in two ways:

–more phony debates all over the network, complete with loud voices, exaggerated gestures and bombast, and

–Tim Tebow all the time, no matter what the ostensible topic of a given show.

I’m of two minds about this ESPN development.  As a holder of DIS shares I guess I should approve.  As a sports fan, I’ve got to find other sources of sports information and analysis.

…now Bloomberg

Yesterday I was on my way in the car to Delaware and turned on the Bloomberg Radio morning broadcast for the first time in a while.  Five years ago I used to listen every day, either live or through podcasts of important segments.  No longer.  As Bloomberg dialed down the information content and dialed up the reporter self-congratulation I began to look elsewhere.

Anyway, I caught the last part of The First Word, with Ken Prewitt, who strikes me as the only savvy professional journalist left on Bloomberg.  Then came Bloomberg Surveillance, which appears to have had a format tweaking since the last time I listened.  Mr. Prewitt is gone (…or maybe he was just taking a day off from the insanity).  What remains is a veritable First Take of loud voices and self-congratulatory glorification of trivia.

To my mind, this can’t be an accident.  The radio personalities must have been trained, à la ESPN, to speak louder, create fake “debate” and constantly tell the audience how important the topics–and the radio hosts themselves–are.

And, as with First Take, the quest for higher ratings is the most likely explanation, with Fox News and CNBC as the models.  It’s probably also cheaper to simply act as if you’re conveying relevant information rather than to do the research and analysis needed to create it.

The written Bloomberg news appears not to have been infected by this broadcast tendency.  I figure the investment professionals who pay $30,000 a year or more for Bloomberg terminals wouldn’t put up with the stuff that’s now on Bloomberg Radio.

Where is the real financial news today?  It’s in newspapers like the Financial Times  and the Wall Street Journal.  And, like sports, it’s in the blogosphere.

We may mourn the loss of Bloomberg Radio as an information source, and the fact that the search for relevant stock market information is somewhat more difficult without it.  But this also means that insights we may develop are that much more valuable–because they are less likely to have been fully disseminated into the market at the time we figure them out.

I’ve been writing Practical Stock Investing for something over five years now.  I decided to go back through my archives so look at the most looked-at (and possibly read) posts over that time.  I’m going to re-post ten over the next two weeks.  This will give you a chance to see some of my earlier work that you may have missed.  And I’ll have time for home repairs I’ve been putting off.  I may just see a couple of baseball games and watch the basketball playoffs, though.

Here’s #7.

the survey

Talk about ugly.

In the April 4th issue  of FTfm, its review of the fund management industry, the Financial Times outlines the conclusions of an as yet unpublished study by IBM of the investment management industry, Financial Markets 2020.

the findings

FM2000’s bottom line?  …the worldwide investment management industry loses US$1.3 trillion of its clients’ money every year.  That’s over $100 million during the time it takes a fast reader to reach this point in the post.  Wow!!

The main offenders?  Here they are, in order of the magnitude of client losses:

—$459 billion        credit rating agencies and sell-side research, because the analysis is weak

—$300 billion        fees paid to underperforming portfolio managers

—$250 billion        fees paid for advisory services that underachieve

—$213 billion         excess expenses caused by investment managers’ organizational inefficiency

—$51 billion           fees paid to underperforming hedge funds.

the conclusions

IBM argues that clients are gradually waking up and smelling the coffee  …and firing the offending service providers, as they work out how bad the performance has been.  The computer giant thinks upward of a third of the people involved in today’s fund management industry will be gone before clients are through with their housecleaning.  Among sell-side researchers and credit rating agency analysts, the winnowing will remove closer to half.

my thoughts

First of all, I haven’t seen the study.  I’m assuming that it’s being accurately portrayed in the FT.

In the nitpicking department, the data seem to have come from an internet survey.  If so, its conclusions represent the input of the respondents, and may not be representative of the views of clients as a whole.   In addition, the numbers are overly (maybe “ludicrously” would be a better word) precise, suggesting inexperience on the part of the IBM Institute for Business Value, which wrote the report.  The assertion that credit rating agencies et al lose their clients $459 billion a year implies the figure is not $458 billion or $460 billion.  How could IBM possibly be confident that this is right?

The general direction of the report is doubtless correct, though.  Early in my career as an investor, I remember reading the famous comment by Charles Ellis, the founder of Greenwich Associates, a pension consulting firm, that the average portfolio manager is just that–average.  At the time, I was offended.  Thirty years later, I’d be tempted to amend it to read that the average portfolio manager is just that–a little below average. The credit rating agencies have been notorious for as long as I’ve been in the business for being behind the curve.  And everyone knows, or should know, that brokers make their money by having you trade with them, not by having you achieve superior returns.

I think IBM’s idea that clients will quickly take the axe to many of their investment service providers is much too simplistic.  Yes, chronic underperformance is a big issue.  But there seem to me to be three factors IBM overlooks:

1.  The head of virtually every investment management organization is a highly polished marketer, not an investor.  A big reason for this is that investment firms are not only in the business of selling performance, they also sell intangibles–like feelings of prestige, exclusivity, reliability, safety–especially to individuals.   Some people will hire a hedge fund manager instead of buying a Vanguard index fund (which will likely provide superior returns) for the same reason they buy an $8,000 Hermès leather handbag instead of a $50 nylon equivalent, or a $150,000 Porsche instead of a $30,000 Subaru Impreza.  It’s to exhibit their wealth.  Having your yearly performance review in a major city, with dinner and a show and your favorite flowers in the hotel suite your manager provides may be just as important as the performance figures–maybe more so.

2.  Companies typically don’t want to manage their employees pension money in-house for legal reasons.  Hiring a pension consultant and a series of specialist third-party managers transfers responsibility to them.  Doing so acts as a form of insurance.

3.  Suppose you go ahead and fire all your investment advisors.  What do you do then?  What do you substitute for them?  Maybe losing a trillion dollars a year is good in comparison with the alternatives.

I’ve been writing Practical Stock Investing for something over five years now.  I decided to go back through my archives so look at the most looked-at (and possibly read) posts over that time.  I’m going to re-post ten over the next two weeks.  This will give you a chance to see some of my earlier work that you may have missed.  And I’ll have time for home repairs I’ve been putting off.  I may just see a couple of baseball games and watch the basketball playoffs, though.

Here’s #6.

The easiest and safest way to invest in emerging markets is to buy a broad index fund or ETF that covers these markets.  But if you are willing to do some work, there are four things I think you can do to to focus your money on potentially higher return areas.  All contain some risk and require that you not simply buy and forget but continue to monitor your investment regularly.   You may also find yourself limited by your broker’s ability to transact in certain areas (can you buy?  …and, more important, if you change your mind, can you get out)?.

The four are:

1.  focus on healthy countries. Stable, foreigner-friendly, government is the first requirement (leaving out places like Venezuela).  Ideally, the government budget should be balanced, or close to it.   The stock of government debt, as a percentage of GDP, should not be rising rapidly.  The country should generate enough foreign exchange through exports to comfortably cover its foreign debt service.  Imports should be mostly machinery or other items to help build up the country’s industrial base–not consumer items like TVs.  (By the way, on these criteria, except for stable government, the US and the UK would flunk the emerging markets investment test.)

2.  use the export-oriented manufacturing development model. Successful developing countries have, by and large, grown by encouraging technology transfer in support of export-oriented manufacturing.  This means the country invites foreign firms to set up manufacturing bases within the country, so the local workforce can develop their skills.  To do this, the country must offer electric power, communication, fresh water, a road network and ports.  In developing countries, these are all growth industries.

3.  reach in to the developing country indirectly, through a company in a developed market that has, say, a third of its operations in the developing world.  Many western European companies, especially in consumer staples, have subsidiaries in Eastern Europe, for example.  Most former colonial powers have trading companies or telecom firms that still operate in their former colonies.  In addition to the mainland firms listed in Hong Kong, that market also has many property and trading firms with large China exposure.

The advantage to doing this is that you get Western management, whose motivations you can easily understand, plus developing market growth potential.  One thing to watch for, though–old colonial masters may not be A-listers in a former colony.  The old Hong Kong opium firms still controlled by non-Chinese are an example.

4. find an active manager who has a consistent record of beating the index in a given area. The Matthews China Fund comes to mind as an example.  Either on a discount broker website, Morningstar, or the fund group’s website, you can see the historical record.  Make sure the same people who achieved the record are still around, though.