the revamped Google Finance

I hadn’t realized how dependent I’ve become over the past ten years on the Google Finance page.  Google Finance’s debut coincided closely with my retirement from my job as a global equity portfolio manager.  I found that GF met enough of my personal money management needs that I didn’t miss my $26,000/year Bloomberg terminal much at all.  (The ability to see a company income statement dissected in a way that revealed major customers and suppliers–and their relative importance–came to
Bloomberg later.  Assuming it’s still there, that’s a really useful feature for a securities analyst.)


What I liked about the old GF:

–everything was on one page, so I could take in a lot of information at a single glance

–it contained information about stocks, bonds and currencies, so I could see the main variables affecting my investment performance grouped together

–there was a sector breakout of that day’s equity performance on Wall Street

–I could add new stocks to a portfolio list easily, and thereby be able to see what was going up/down for a large group of stocks I was interested in

–I could compare several stocks/indices on a single chart, and vary the contents of that chart–and its timeframe–easily.


The charts themselves were not so hot.  But I could either live with that or use Yahoo Finance.  (I have a love/hate relationship with charts, in any event.  My issue is that stretching the price and/or time axes can change a bump in the road into a crisis and vice versa.)


The new Google Finance?


–All of the stuff on my “likes” list has disappeared.

–The Dow Jones Industrials–a wacky, irrelevant index whose main positive point is that it’s easy to calculate–features prominently in coverage of the US.

–The Sensex has been consistently listed as a top-five world index, even though India is an insiders market that’s extremely difficult for foreigners to access.  Same for Germany, where there’s no equity culture and little of the economy is publicly listed.  No mention of Hong Kong or Shanghai or Japan or (most days) the UK.  Yes, the UK economy is smaller than Germany’s.  But London’s significance comes from its being the listing hub for many European-based multinationals.


My conclusion:  the new page has been put together by people who, whatever their tech smarts, have no clue at all about what an investor needs/wants.  Its overall tone seems to be to provide information that an investor will like to hear, based on browsing history.  Put a different way, the new page strives to turn users into the prototypical “dumb money.”  Actually, now that I’ve come to this realization, maybe the new page isn’t so counterproductive after all.  Just don’t use it.



lessons from J C Penney (JCP)

preliminary 1Q13 results

In conjunction with arranging a five-year $1.75 billion loan through Goldman, JCP has filed an 8-k in which it gives preliminary information about the April 2013 quarter.

–Sales were $2.635 billion, down 16.4% year-on-year (comp store sales = -16.6%).  Looking at a two-year comparison, sales are down by 33.2% from (the pre-Ron Johnson) 1Q11.

–Cash on hand at the end of 4Q12 was $930 million.  During 1Q13, JCP borrowed an additional $850 million, by drawing half its beefed-up bank credit line.  As of May 4th, the company had cash of $821 million.  In other words, JCP has blown through the entire $850 million, plus another $109 million in three months.


1.  When things go wrong, they often have a runaway train character.  Ron Johnson joined JCP in late 2011.  Almost immediately, sales went into a tailspin.  By mid-2012 it was clear that something was desperately wrong and needed to be fixed.

But no one acts right away.  There’s always the temptation to wait just a little while longer in hopes the tide will change.

In addition, a company’s plans may be set in stone months in advance.  There are advertising campaigns, construction plans, and billions of dollars of (the wrong) merchandise in the stores–with more of the same on order.

In this case, nine months after starting to back away from the Johnson strategy, JCP is still losing cash at the rate of over $250 million a month.

2.  Cash tells the story, in a trouble company.  That’s cash flow, cash on hand and cash the company can borrow.

In the JCP case:

–cash flow is -$250 a month,

–cash on hand is $821 million, and

–borrowing power is $2.6 billion (the $1.75 billion loan arranged by Goldman plus the remaining $850 million in JCP’s bank credit line).

Assuming its banks don’t get cold feet and withdraw the credit line, JCP has total cash available of $3.4 billion.  That’s enough to sustain a cash drain at the 1Q13 rate for another 13 months.

3.  Riding coattails is a risky business.  The Financial Times website posted an article last evening titled “Tips from Wall Street gurus fail to reward faithful.”  In it, the FT looks at the performance of the hedge fund “best ideas” presented at last year’s Ira Sohn conference in New York.  In the aggregate, the tips underperformed the S&P 500.  Some, like JCP, were unbelievable clunkers.

Two factors:

–even the best equity managers are wrong 40% of the time, and

–some managers become celebrities mostly through their own aggressive marketing efforts rather than by having stellar performance.  Or they parlay a one- or two-year hot streak into an entire career.  Caveat emptor.

why is it so hard to stay ahead of a rising market?

staying ahead of a rising market is difficult

That’s the cliché, anyway.  And, for what it may be worth, my experience is it’s true.  It’s much harder to stay ahead of a rising market than a falling one.

but why?

Let’s first get a technical, or maybe a definitional, point out of the way.

The world consists of growth investors and value investors–both, by the way, claiming to be in the minority (because that’s cooler than being run-of-the-mill).  Value investors stress defense.  They’re more risk averse.  As a result, they typically make their outperformance during the part of a market cycle when stocks are going down.  Of course, they’d like to outperform an uptrending market.  But because they put defense first, deep down they know they should be satisfied (even ecstatic) to keep pace in a rising market.  Their approach to the stock market, their longer term strategy, is to protect against possible downside.  So they know that not falling too far behind is the best they can realistically hope for. Let’s not count them.

So our question really is:  why is so hard for growth investors, whose strategy calls for them to make their outperformance in an up market, to do so?

I think a lot is due to the fact that a rising market attracts substantial amounts of new money to stocks.  Not only that, but the new money doesn’t come in all at once; it arrives at different times.  depending on timing, new money can create demand for many stocks, not necessarily those best positioned to benefit from the bull run.

For example:

— (Almost) every professional investor is taught from day one not to “chase” stocks that have already risen a lot before he starts to look at them.  Instead, he’s told, look for stocks that may not be quite as good but which haven’t moved yet.

Someone late to the smartphone party might not buy Apple or ARM Holdings.  He might buy Qualcomm instead.  Money arriving later still might gravitate toward a contract manufacturer like Hon Hai, or to Intel, or maybe even Verizon or Sprint, on the idea that smartphones or tablets will add oomph to those businesses.

These latter stocks may not necessarily be the purest plays or the greatest companies, but buyers will tell themselves (sometimes rightly, other times wrongly) that the risk/reward tradeoff is better for them than for the more expensive “pure play” stock like AAPL or ARMH.

Put another way, when the leading lights of an industry make a major move upward, they tend to drag a lot of the lesser lights along with them–at least to some degree, from time to time and with a lag.  It’s very hard psychologically–and arguably not the best idea financially–for someone who has identified a trend early and holds all the major players to rotate away from them and dip down into second-line stocks to play these ripples.  But during a period while others are playing catch-up by bidding up the minor stocks, the holder of industry leaders will underperform.

–There’s also a more general arbitrage in an up market–in any market, really, but more so when stocks are moving up.  It’s not only among relative valuations of participants in an industry which is on Wall Street’s center stage, but between that industry and other sectors/ industries/stocks.

Let’s say that tech stocks have gone up 40% in the past six months, while healthcare names have lost 5% of their value.  At some point, even tech investors will start to say that healthcare stocks look relatively cheap.  As this perception spreads, the market will direct its new money flows to healthcare.  Investors may even begin to rebalance–selling some of their tech stocks, and using the funds to buy healthcare, until a better relationship in valuation is restored.  While this is going on, anyone overweight tech and underweight healthcare will probably underperform.

should you want to outperform all the time?

If there were no tradeoffs, the answer would be easy.  But there are.

–All of us have different goals and objectives.  Younger investors, for instance, will probably want maximum growth of capital.  Older investors may want preservation of income, instead.  The former objective is consistent with trying to shoot the lights out in a bull market.  For the latter, that strategy is too risky.

-Not everyone has the temperament to be good at investing.  That’s just the way it is.  Someone who falls below the market return year in and year out should realize that for him active management is an expensive hobby.  Index funds would be a better wealth-building alternative.

–We also have different knowledge bases, aptitudes and interests.  That may make us better at defense than offense, or better at value investing than growth.  As in just about everything else, we should play to our strengths, not our weaknesses.

–Contrary to the wishes of the marketing departments of investment firms, no investor–not even the best professional–outperforms 100% of the time.  The other team eventually gets a turn at bat.  If you can outperform for two or three years out of five, and if your overall results match or exceed the market return for the half-decade, that’s more than enough.  That would put you deep in the top half of all professionals.

I don’t think this last is a crazy expectation for a non-professional.  Investing is a craft skill, like, say, baseball or shoe repair.  It can be learned.  Knowing a few things better than the market does will likely bring better than average long-term returns, even with occasional bouts of underperformance.

developing competence as an equity investor


The teachers of many sports or craft skills use a Zen-like scale to rate students on their progress toward mastery of their specialty.  The scale typically has four levels, that are often expressed as:

–unconscious incompetence

–conscious incompetence

–conscious competence

–unconscious competence.

…and investing

I think these classifications have some relevance for us as individual investors.  Here’s my take on each–

1.  unconscious incompetence.  This is where everyone starts out.  You know you’re smart–certainly smarter than most of the people you see on stock market cable shows.  You’re successful at your career.  You’re informed about economics.  You read the financial press.  You look at stock prices every day.  You think that’s enough.

People at this stage misunderstand two related things (at the very least I did):

–investing is a craft skill.  Almost every concept is easy to understand.  Complexity comes from the way simple ideas are repeated and combined into intricate and less-than-obvious structures.  Here, experience is more important than having a stratospheric IQ.

–the person on the other side of the trade knows much more than you suspect.  Typically, it’s someone who has served a five-year apprenticeship under an experienced professional investor and has maybe ten years of experience working on this own.  That translates into 50 hours a week gathering information about stocks.  More than that, the person probably spends most of that time focusing on a single stock market sector–or even a single industry, or a subsection of that industry.  Yes, some of these professionals actually have two years experience 7.5 times (meaning they’ve been spinning their wheels for most of their careers–thank goodness for that).  But even so, that’s 5000 hours studying the stocks they tend to buy and sell.  How good is the hot tip from your buddy Charlie in comparison?

2.  conscious incompetence.   Some people remain in stage one forever.  They either don’t evaluate their investment performance vs. their objectives or a benchmark, or their underperformace doesn’t register because it doesn’t square with their self-image.

Others–here I’m much more familiar with what starting-out professionals do that with ordinary individuals–begin to understand that this activity, like almost any other where professionals are involved, is harder than it seems.  They react to the situation in two ways:

–they stop doing the things that lose them the most money, and

–they begin to work harder at learning the ropes.  If they can, they find a successful investor who is willing to teach and who will take them as an apprentice.

3.  conscious competence. At this stage, an investor knows:

–enough accounting to read company financial statements with ease and understands the important financial variables in a company’s success

–enough microeconomics (which is mostly common sense, in my view) to evaluate a firm’s competitive strengths and weaknesses

–how to create a detailed spreadsheet to estimate future earnings (or to forecast other relevant metrics)

–from reading 10-Ks or elsewhere, the financial history of the companies and industries he’s interested in

–that his research process, and his plan for monitoring the key variables his research has uncovered, generally lead to success.

4.  unconscious competence.  This is the Zen stuff.  In sports, it’s the idea that after you’ve done enough conscious practicing, you’ve engrained knowledge deeply enough that you can/should cultivate “the zone.”  You try to stop thinking out what you intend to do and let your unconscious run the show.

In the most literal sense, I don’t think there’s a place for this in investing.  The reason?  –the activity is much more complex than any sport, so accumulated experience isn’t enough to rely on.

Nevertheless, there is something analogous.  For example:  you may encounter a new investment idea.  You know it will easily take a month or more to do the research you need to make an informed decision to buy or not (for me, it usually takes me over a year to become completely comfortable with a stock).  On the other hand, you see that the stock is already beginning to outperform as others become aware of it.  What do you do?

At some point I think every seasoned professional develops a sense of what research tasks are crucial and which amount to crossing the ts and dotting the is, and can be done after buying a small position in the stock.  In effect, you develop a feeling of confidence that a stock has a chance to be an outstanding performer that’s based in part on unconscious processing of information that you aren’t yet able to articulate consciously.

Some veteran investors (me among them) consider this a competitive advantage.  They rarely, if ever, talk about this.  On the other hand, some use “hunches” as a substitute for doing basic research work.  That’s very bad.  If investors like this are not “managed” by their subordinates–analysts or portfolio managers–they threaten to bring down whole investing operations.  Still others shy away from the idea of unconscious thought completely, and remain at stage 3.  I think it’s foolish not to use all the tools at your disposal, but such investors may simply be recognizing their limitations and acting accordingly.