The Stockboy is a quarterly investment
advice newsletter written by
Brian H. Weisman, CFA, CPA, CFP, CMA, and president of Columbia Asset
Management. Brian began the Stockboy in 1990 and its readers include
Columbia Asset Management clients, well-respected financial advisors
across the United States, and those interested in savvy financial
advice.
This site provides first-page excerpts of recent editions of the Stockboy, with the current edition's first page featured below. To subscribe to the newsletter and receive the entire print copy, please contact
Winter '10 Yr. 17 Issue IV
Being Wrong--The Important and Valuable Other Side to the Equation:
Experts at Being Experts
The notion of ‘expert’ nowadays appears way too low a bar to jump. Often it means just someone who gets their face and opinion broadcast on television.
Sometimes simply getting paid a lot suggests expert status. Don’t be fooled. By that measure, most every U.S. CEO is an expert many times over. We know that’s not the case given what has happened on Wall Street in the past couple years.
Take another field, one of the most successful and lucrative markets of all: The National Football League (NFL). Teams split billion-dollar television contracts and can force communities to build huge new, very expensive stadiums to stay in the local team’s good graces.
Hundreds of millions are spent cumulatively on unproven top draft picks. And this is where the idea of ‘expert’ takes a significant left turn into the ditch.
The NFL draft– where teams select college players to build their future teams – is a stunningly inexact science with a fortune (or many) on the line and ‘experts’ spending countless hours in an attempt to be right. The results are underwhelming, if not shockingly bad, given the time and resources spent…and, of course, experts utilized.
Often the top picks (who remembers Heath Shuler? Charles Rogers?) are not only paid immediately tens of millions of dollars but also become the people most integral to the success or failure of a team for the next 5 to 10 years—end up being failures. Conversely, over the years many of the proven stars in the league were not highly prized during the draft and came from relatively unknown football programs. Quick – where did Brett Favre go to college? Jerry Rice? LaDanian Tomlinson, Howie Long? Michael Strahan? (Southern Mississippi, Mississippi Valley State, Texas Christian, Villanova, Texas Southern).
What does this say? It says that experts are often wrong…or perhaps weren’t experts to begin with. It says that mainline thinking is often shockingly flawed. It says money spent is not highly correlated to success.
To relate this to investing is rather simple. Many of the experts you read about or listen to are often wrong. It’s not because they’re not smart, don’t work hard nor aren’t knowledgeable. It’s because investing is an inexact science. Further, sometimes these experts are looking out the front door when a lot of action is occurring at the back door. NFL experts look at workout statistics and testing information but overlook other factors that are extremely important – such as how a player ‘fits’ with his teammates or how strong his work ethic is. Investment experts often look only at recent success and find it hard to look beyond the next quarter.
Sometimes, experts purposely choose the simple route. The goal often ends up being ‘what is the safe choice’ versus ‘what is the wise choice’.
Finally, a significant issue is that experts in any field are often loath to admit they don’t know something. In drafting football players, as with investment selections, it is simply the case that sometimes you will be wrong. If you don’t factor that into the equation, you will more than likely be well off the mark. This is one of the great strengths of Warren Buffett. He is quick to admit when he is wrong or just doesn’t know something. Ironically perhaps, this appears to add to his brilliance. In the investing world, it’s important to understand the many ways you can (and likely will be) wrong. Ironically, this allows you a greater chance at success long term and ultimately appearing ‘right’.
Current investment ideas/themes
As measured by the S&P 500, the past decade has been the worst in U.S. stock market history. Investors have ultimately had little to show for their efforts, investment approach and patience over the past ten years. Does this mean that the stock market is no longer a place to make money? No. In fact, just the opposite, I believe, has a reasonable chance of happening. The next decade might well be a very prosperous period in the stock market. The reasons include that no 20 year period has ever been down in the market and that things currently must look murky for the market to have a good deal of potential to rise (as perceptions change from negative to positive). Investors usually get this wrong, even the ‘experts’. And the pattern is usually the same: investors react primarily to what happened most recently. In fact, 70% of investors were bearish in March of ’09 (when the market was at its low), and now that the market has gone up well over 50%, the number of bears had fallen to almost 25% by the end of 2009. This is far from a long term perspective.
From Two Years Ago...
As Wall Street bonuses get congressional scrutiny, it’s worth noting this is new, per this excerpt from Stockboy Winter ’08:
It’s hard to read the business pages (or front page) and not see a major financial firm taking a big hit, writing off billions of dollars and/or having its stock price dramatically fall. The average financial stock was down about 20% in 2007.
However, in the wake of all this, some of these beaten up firms are handing out big bonuses to their employees.
What? Are these firms unaware of what their shareholders see in their monthly statements?
There is a disconnect between the haves and the have-nots. It is one thing to reward people for great results but quite another to reward disappointment.
Sadly, you see this phenomenon regularly: from outgoing CEO’s, to celebrities to Wall Street types. What it seems to say is that performance is not truly important—you’ll be rewarded anyway. As long as you’re in a field where money is in large supply, you’ll get yours regardless. I believe his concept eats at the foundation of democracy since position counts more than results.
Southwest – No Baggage Fee?
As most domestic airlines again raise their baggage fees, it’s hard to not shake your head. The fee was first added when fuel prices spiked. When prices later fell, the fees not only stuck, but now have been increased? This appears to be simply an easy way for mediocre management to increase revenue. The best run airline in the U.S.—the only one that consistently makes a profit—is Southwest Airlines. Interestingly, Southwest does NOT charge a baggage fee. Hmm…..once again common sense appears (and wins), but is not widely exercised.
-- Brian Weisman, CFA, CPA, CFP, CMA
(734)665-1454 brian@columbiaasset.com
Other Recent Editions of the Stockboy
This site provides first-page excerpts of recent editions of the Stockboy, with the current edition's first page featured below. To subscribe to the newsletter and receive the entire print copy, please contact
STOCKBOY
Columbia Asset Management, LLCWinter '10 Yr. 17 Issue IV
Being Wrong--The Important and Valuable Other Side to the Equation:
Experts at Being Experts
The notion of ‘expert’ nowadays appears way too low a bar to jump. Often it means just someone who gets their face and opinion broadcast on television.
Sometimes simply getting paid a lot suggests expert status. Don’t be fooled. By that measure, most every U.S. CEO is an expert many times over. We know that’s not the case given what has happened on Wall Street in the past couple years.
Take another field, one of the most successful and lucrative markets of all: The National Football League (NFL). Teams split billion-dollar television contracts and can force communities to build huge new, very expensive stadiums to stay in the local team’s good graces.
Hundreds of millions are spent cumulatively on unproven top draft picks. And this is where the idea of ‘expert’ takes a significant left turn into the ditch.
The NFL draft– where teams select college players to build their future teams – is a stunningly inexact science with a fortune (or many) on the line and ‘experts’ spending countless hours in an attempt to be right. The results are underwhelming, if not shockingly bad, given the time and resources spent…and, of course, experts utilized.
Often the top picks (who remembers Heath Shuler? Charles Rogers?) are not only paid immediately tens of millions of dollars but also become the people most integral to the success or failure of a team for the next 5 to 10 years—end up being failures. Conversely, over the years many of the proven stars in the league were not highly prized during the draft and came from relatively unknown football programs. Quick – where did Brett Favre go to college? Jerry Rice? LaDanian Tomlinson, Howie Long? Michael Strahan? (Southern Mississippi, Mississippi Valley State, Texas Christian, Villanova, Texas Southern).
What does this say? It says that experts are often wrong…or perhaps weren’t experts to begin with. It says that mainline thinking is often shockingly flawed. It says money spent is not highly correlated to success.
To relate this to investing is rather simple. Many of the experts you read about or listen to are often wrong. It’s not because they’re not smart, don’t work hard nor aren’t knowledgeable. It’s because investing is an inexact science. Further, sometimes these experts are looking out the front door when a lot of action is occurring at the back door. NFL experts look at workout statistics and testing information but overlook other factors that are extremely important – such as how a player ‘fits’ with his teammates or how strong his work ethic is. Investment experts often look only at recent success and find it hard to look beyond the next quarter.
Sometimes, experts purposely choose the simple route. The goal often ends up being ‘what is the safe choice’ versus ‘what is the wise choice’.
Finally, a significant issue is that experts in any field are often loath to admit they don’t know something. In drafting football players, as with investment selections, it is simply the case that sometimes you will be wrong. If you don’t factor that into the equation, you will more than likely be well off the mark. This is one of the great strengths of Warren Buffett. He is quick to admit when he is wrong or just doesn’t know something. Ironically perhaps, this appears to add to his brilliance. In the investing world, it’s important to understand the many ways you can (and likely will be) wrong. Ironically, this allows you a greater chance at success long term and ultimately appearing ‘right’.
Current investment ideas/themes
As measured by the S&P 500, the past decade has been the worst in U.S. stock market history. Investors have ultimately had little to show for their efforts, investment approach and patience over the past ten years. Does this mean that the stock market is no longer a place to make money? No. In fact, just the opposite, I believe, has a reasonable chance of happening. The next decade might well be a very prosperous period in the stock market. The reasons include that no 20 year period has ever been down in the market and that things currently must look murky for the market to have a good deal of potential to rise (as perceptions change from negative to positive). Investors usually get this wrong, even the ‘experts’. And the pattern is usually the same: investors react primarily to what happened most recently. In fact, 70% of investors were bearish in March of ’09 (when the market was at its low), and now that the market has gone up well over 50%, the number of bears had fallen to almost 25% by the end of 2009. This is far from a long term perspective.
From Two Years Ago...
As Wall Street bonuses get congressional scrutiny, it’s worth noting this is new, per this excerpt from Stockboy Winter ’08:
It’s hard to read the business pages (or front page) and not see a major financial firm taking a big hit, writing off billions of dollars and/or having its stock price dramatically fall. The average financial stock was down about 20% in 2007.
However, in the wake of all this, some of these beaten up firms are handing out big bonuses to their employees.
What? Are these firms unaware of what their shareholders see in their monthly statements?
There is a disconnect between the haves and the have-nots. It is one thing to reward people for great results but quite another to reward disappointment.
Sadly, you see this phenomenon regularly: from outgoing CEO’s, to celebrities to Wall Street types. What it seems to say is that performance is not truly important—you’ll be rewarded anyway. As long as you’re in a field where money is in large supply, you’ll get yours regardless. I believe his concept eats at the foundation of democracy since position counts more than results.
Southwest – No Baggage Fee?
As most domestic airlines again raise their baggage fees, it’s hard to not shake your head. The fee was first added when fuel prices spiked. When prices later fell, the fees not only stuck, but now have been increased? This appears to be simply an easy way for mediocre management to increase revenue. The best run airline in the U.S.—the only one that consistently makes a profit—is Southwest Airlines. Interestingly, Southwest does NOT charge a baggage fee. Hmm…..once again common sense appears (and wins), but is not widely exercised.
-- Brian Weisman, CFA, CPA, CFP, CMA
(734)665-1454 brian@columbiaasset.com
Other Recent Editions of the Stockboy
