reading the FT in the PA woods

My wife and I are spending the weekend in our cabin in eastern PA near Scranton.

Things are really looking up around this hardscrabble area. The “Electric City” itself, that 19th-century plaything of the steel/coal/railroad magnate Scranton brothers, is showing signs of economic life for the first time since the early 1950s (when the underground coal mines flooded). There’s intense activity around the Lehigh Valley, as well, building more distribution warehouses to take advantage of the area’s road network. (I’m on a visual arts advisory committee for an area technical high school (my website is: This increasing demand for industrial sites was a big pre-meeting topic of discussion a week or so ago.) Lots of remote-work refugees from NYC and Philadelphia, as well.

Virtually all the Trump signs have disappeared, a process I think started after the 2021 coup attempt and really picked up steam last year. I haven’t been to see friends in the Endless Mountains yet, though. This was a shockingly poor area before the Marcellus shale began to be developed. Fracking is the major political issue there, so it’s like Trump central. Btw, zero evidence of DeSantis support.

Anyway, in Friday’s FT issue:

–the American National Conservativism institute held its annual conference in London recently. Ex tech, which the UK is an important source for but not a center of, both the UK and US are mature, slow growth, anti-immigration economies, whose right wings live in fever dreams of past glory. A receptive audience, you might think. Not so, however. According to the FT, local attendees were shocked at the naked racism and the Christian fundamentalism of the speakers, who assumed the audience was of like mind. Turns out that despite spawning the US slave culture centuries ago, the current British right wing is comparable to our Democratic centrists

–celebrity columnist Mohamed El-Erian, wrote an (uncharacteristically coherent) account of the current questioning of the US dollar-based world monetary system that we’ve had since the 1970s.

What makes El-Erian important, in my view, is not that he’s a leading edge thinker but that his views an already solidly formed international consensus. He cites two issues: the 2007-08 world financial crisis, which was centered in deep corruption in the major US banks; and the unilateral imposition of tariffs by the Trump administration. He–and by extension, the rest of the OECD–might also worry about, ex an heroic Liz Cheney, the Republican Party’s placid acceptance of Trump’s coup attempt and his continuing false assertions that the 2020 election was rigged.

Luckily for the US, the Deng era is over and Xi is in charge in China. Otherwise, I think, the dollar era might already be in the rear view mirror (or camera)

–the Lex section, which talks about stocks and is consistently good, has a strange article about the ARK funds, titled “Tech funds: the cult of Cathie Wood.”

If I had to guess, the article originally focused on “cult,” and made the (sensible, in my view) point that Ms. Wood has done a brilliant job of marketing her firm, with the result that fund net redemptions have been miniscule despite delivering unusually deep underperformance well into a third consecutive year. Add the fact that most of the money she manages came in at her relative performance top, as is usually the case, and the feat is more impressive.

I suspect that what triggered the writer was the media to-do about ARKK having sold its Nvidia (NVDA) holding at the lows of late last year. Since then, the stock has come close to tripling (I’ve owned a bunch of NVDA for years; my idea now is to buy more on decline). That fuss makes a good headline, but no sense. As I read Wood’s strategy–through her portfolio structure–she’s hitched her star to her top tens holdings, which make up 2/3 of the portfolio. (you could argue that it’s the top 6, which make up over half). NVDA was relatively miniscule at about #25 when she sold. Had she continued to hold, the position as it was back then was too small to have moved the performance needle even a percentage point.

The article asserts that large-cap tech stocks are especially sensitive to interest rate movements. Generally, maybe yes. But the real issue is a high PE, not the underlying business. And why, if the FT is correct, is the NASDAQ 100 up by 9.9% over the past year of rising rates …and the wider NASDAQ up by 7.0%? ARKK, in comparison, was down by 13.9% over the same period.

The article points out as a plus the fact that ARKK has beaten the S&P 500 so far this year. Yes, ARKK has gained 25.2% vs the S&P’s +8.1%. The trouble here is that 2/3 of the S&P is non-tech, which has been a big drag on that index’s performance. The tech portion of the S&P–IT + Communications Services–is up by 33.6% in 2023. The NASDAQ 100 is 30.7% ahead.

Maybe the point is supposed to be that ARKK is pulling out of its tailspin. Maybe so, but we’re talking about relatively small periods of time–especially for such a highly concentrated portfolio. And the past three months show ARKK slightly in the minus column, with the NASDAQ 100 up by almost 19%–with NVDA accounting for something like three of those percentage points. Microsoft made about four and Apple two or so. Take those three out and the NASDAQ 97 would be up by about 10%. My take is that while expectations about interest rates may play a part, this move is more about valuation levels and earnings growth prospects.

valuation and concept (iv): intangible assets

Warren Buffett is one of the most intriguing figures in the modern investment world, and a major contributor to the development of professional securities analysis.

The big insight on which his reputation is based came about a half-century ago. It’s the observation that, although brand names and distribution networks are among the most powerful assets a company can have, they appear nowhere on the balance sheet and only as an expense on the income statement. (One exception: brands and networks are obtained in a takeover often appear on the buyer’s balance sheet as intangible assets.)

The quintessential example of this is a long-time Buffett holding, Coca Cola (KO):

–Over the past decade, KO has spent almost $40 billion world-wide on advertising, or about 15% of the company’s current market cap. Presumably, a new market entrant would have to spend at least this much if it hoped to create a similar awareness among customers. And even then the newcomer would likely be at best the #3 behind Coke and Pepsi.

–In addition, there are the costs of creating a distribution network. The actual KO distribution network is is complex and has changed over time. To offer a much-too-simple example, take the supermarket channel in the US. Red Coca Cola trucks regularly pull up to supermarket locations. A driver unloads product, takes it inside and stacks it on the shelves. A would-be competitor would need a similar distribution network and a similar set of agreements with customers. Again, a very significant expense.

Financial accounting works this way, I think, because it’s the simplest solution. The alternative would probably be to consider these expenses as assets and set up an amortization schedule for expensing them. This would be complicated, potentially highly subjective, and certainly open to abuse.

The power of brands and distribution are well-understood now. The today’s-world analogue, I think, is the value of the intellectual property in software creation and computer chip design.

valuation/concept (iv)

not much time today, so just a short note

In down markets, valuation is king and concept goes out the window. The major focus of the market is on avoiding future losses rather than make future gains.

In up markets, it’s the opposite. Valuation takes a back seat and the driving force is the concept or story behind a stock.

People who go all in on either extreme have a few moments in the sun but find it tough going when the mood of the market changes. Professional investors who elect to specialize so narrowly have to sell themselves to clients as, in a sense, an insurance policy. Clients may end up with one of each persuasion.

valuation/concept (iii)

a footnote on valuation

Although I’m now a died-in-the-wool growth investor, I started my career at Value Line, a firm that has seen better days but was founded right after the 1929 Wall Street crash on the principle that the “value line,” i.e., the stock’s price/cash flow ratio overlaid on a price chart, was the key to investment success. I also spent ten years as the sole growth product in a sea of value advocates. By far the strongest of them had the mantra that if a company could generate sales (even if there were no profits) it deserved consideration as a value-style investment.

I think that’s right.

My footnote is that there are groups of companies–financials and natural resource owners, in particular–where we’ve got to be especially careful about what the balance sheet and income statement actually say.

The recent problems with mid-sized banks like Silicon Valley Bank (SVB) or First Republic Bank (FRBC) are good examples. Both banks decided, for reasons best known to themselves, to invest depositors’ money in long-term Treasury bonds at a time when those bonds’ yields were at historic lows. This was in effect a huge bet that pandemic conditions that required such accommodative Fed policy would continue for a very long time.

As the pandemic came under control and interest rates began to rise, however, the value of these bonds began to shrink. I’ve read reports that suggest that in the case of FRBC its bond losses were large enough to wipe out all of its net worth. But accounting rules allowed mid-sized banks to continue to carry such bonds at their acquisition price, which meant that to the casual eye everything looked ok–which it wasn’t.

There are quirky rules for companies that drill for oil and gas as to how they account for unsuccessful wells. The more conservative method is to write the costs off immediately; the more liberal is to carry them on the balance sheet, in the hope that future successes will mitigate them. I only discovered this myself as a starting-out oil analyst, when one of my companies that appeared to have hefty profits cut its dividend because it was running out of cash.

Mining companies have a similar accounting issue. Typical practice is to mine low-grade ore when prices are high, and high-grade ore only when prices are low. A company that chooses to do the opposite may look great when prices are high, but could easily be forced to cease mining when they’re low.

more tomorrow

valuation/concept (ii)

I think successful professional investors, whether they want to admit it or not, use both valuation and concept in making their investment decisions.

People who identify themselves as value investors are thereby linking–some closely, some more loosely–their investment styles to the Great Depression-era insights of Graham and Dodd, the fathers of modern equity securities analysis. This lends a certain gravitas to what they do. On the other hand, Graham and Dodd were writing and teaching during a major train wreck of a world economy.

My summary of their advice is: assume all the assets of a company, except cash, are worthless. If the company can repay all liabilities and still have 2x the current stock price in cash left, then buy it and sit back and wait.

Sage advice. The issue is finding a company like this in today’s world where it’s possible to obtain control and force liquidation.

Still, even if there are no Great Depression-style bargains around, the general idea is valid. Find a company that looks broken, and is already priced for being broken, but that is fixable. Sooner or later, either a professional fixer will come along or the economic winds will change and the world will discover that the company isn’t really broken after all, just very sensitive to changes in the business cycle.

It seems to me the best place to look right now for bargains of the type value investors prize is in the junk pile of failed pandemic-era IPOs.

The biggest caveat, I think, is that we have to take very seriously the possibility for change of control. The means dual-share class companies are highly suspect (SEC filings should reveal conditions where insiders can lose their voting control [although I was involved in one case like this where these conditions were practically impossible to find]), as are companies listed in foreign countries where US attempts at change of control are frowned on (just about anywhere, I think).

more tomorrow