Activity Below the Surface
As the stock market continues its smooth glide-path higher to the surprise of many, there are indications of nervousness underneath. Similar to the late ‘90’s, reactions to fairly straight-forward quarterly earnings announcements have been quite dramatic. The stock price of the reporting company will often fluctuate 5 to 10% or more the next day. I believe this is due to nervousness and impatience of investors focused on just today and not necessarily the coming years. Markets are heathier when investors are patient and look beyond the here and now.
Bonkers for Blockchain
Bitcoin was the investment phenomenon of 2017. Well, at least some call it an investment–particularly those who owned it and saw it rocket in value during the year. Other investors, including me, who have observed from the sidelines are prone to call it a speculation (though a successful one, so far).
There are certainly elements of Bitcoin (and cryptocurrency in general) that are reminiscent of the dot.com bubble of the late ‘90’s. Back then, companies renamed their firms to include ‘dot.com’ simply to increase their company’s excitement factor and stock price. Today, we’re seeing a similar practice. Some companies have decided to include ‘blockchain’ (the technology behind cryptocurrency, which does seem a promising concept and application) in their corporate name, even non tech companies.
The makers of Long Island Iced Tea recently changed their corporate name to Long Blockchain.Corp. Almost instantly the stock more than doubled (though the new name doesn’t sound very tasty to me). Kodak, the old-school film company that went bankrupt not long ago, has reorganized and now announced they are looking to issue a cryptocurrency for the photographic community called KodakCoin. Formerly sleepy Kodak’s stock price tripled in days. This leads me to an obvious conclusion: Stockboy needs to create and issue its own cryptocurrency (perhaps called CryptoBoy). I’m not sure what I’ll do with it or why, but that doesn’t seem to matter, simply the idea is the important thing….at least for now. When investors put in money first and ask questions later, danger lurks.
Valuation Violations
I have written many times about private equity and hedge funds’ natural conflict of interest in valuing their own assets since they can improve their performance numbers. Their managers’ pay – both directly and indirectly – is based on that performance. It’s an obvious problem that hasn’t been properly addressed by regulators and ultimately hurts investors.
Recently, as reported by the Wall Street Journal, N.P. Narvekar, the new head of Harvard University’s endowment (the largest in the country) cut the value of many of Harvard’s natural resource investments to a valuation he thought more accurately reflects current prices. Very much to his credit, this proposal resulted in Harvard’s endowment performance falling by almost 3 percentage points, for the sake accuracy and full disclosure.
Harvard’s endowment performance has been at the bottom of the Ivy League, which is a sore point for fair Harvard on the Charles, both for the opportunity costs and their pride in being seen as the best, which clearly they haven’t been recently.
Interestingly, Narvekat wanted to cut valuations further to reflect his view of the actual worth of those investments, but the endowment’s board opposed it. Why did they resist? It’s possible they believe Narveket is being too pessimistic in his valuation. However, one could easily wonder if it’s simply because they wanted the numbers to look better and not because they truly believe the higher prices they wanted to report were objectively justified.
This concept is a big problem in the financial world. It becomes obvious over time and through numerous news stories that too many executives will bend or break rules to improve their stake, often to the detriment of customers and stakeholders. Because some in power bend or break the rules, it makes us have to question others who may not be. Strong character and backbone seem in too short supply when money and power are involved.
Mr. Lincoln was Right
Abraham Lincoln said “nearly all men can stand adversity, but if you want to test a man’s character, give him power.” Power can push some away from their ‘better angels’ and toward muddled thought, indulgence, a lack of common sense and reduced empathy for others
When you look at the problems I’ve addressed in recent Stockboys, from executives involved in the Wells Fargo new account scandal to JP Morgan’s misleading sales practices to rogue hedge fund managers, Lincoln’s quote rings true. It also rings true when you consider certain politicians, entertainers, and even some religious leaders, not only in the news today but throughout history. How many kings and queens through history are now considered crazy. It is why our founding fathers set up a system of checks and balances. Power gone unchecked can quickly create problems. Apparently, the human psyche is not built well to handle power, at least for many and perhaps particularly for those that seek it.
Mutual Fund Myopia
As each year ends, major financial publications list the best performing mutual funds, by category, for that year. Beside curiosity, there’s basically no reason to look at this list. ‘One year wonders’ don’t help investors. To find the hot mutual fund to invest in is asking for trouble. Studies have overwhelmingly shown that mutual funds that have dramatic performance in one year usually revert to the mean (cool off) in future years as their lucky picks or approach prove unsustainable.
A much better approach for finding quality mutual funds is to 1) look at mostly long-term returns, 2) make sure the fund’s approach is consistent and long-term focused, 3) the manager(s) should have long tenure and 4) the fund has relatively low fees. Studies also show that funds where the manager invests a substantial amount of their own money in the fund do better over time. Amazingly, there a number of funds where the manager has invested little or none of his/her money!
Great Expectations
The stock market has gone up (or has been flat) for 9 years and 13 of the past 14. Thus, it would be wise to temper expectations for coming years – we could see further big gains, but history would suggest otherwise. With investing, as with many things, it’s better to look out the windshield rather than the rear window.
Brian H. Weisman, CFA®, CPA, CFP®, CMA
(734) 665-1454
brian@columbiaasset.com
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