I Was Dreaming When I Wrote This

I was dreaming when I wrote this,
Forgive me if it goes astray.

1999: Prince

LinkedIn Doubles On IPO, Yandex Up Over 50%:

A couple of standout IPO's this week, that have a lot of people partying like its 1999. You remember 1999, right? While Prince wrote this song to capture the unwarranted angst being generated by the irrational fear of the calendar, it also served as a metaphor for the 1999 IPO market. Back in 1998 & 1999 we had a tech/telecom bubble, that was based on a real explosion of advancements in both fields. But as any hot-air balloonist will tell you, the balloon won't inflate without some type of fuel. Enter Alan Greenspan. Alan, as head of the Federal Reserve, decided that the markets needed some extra fuel, to make sure that when the calendar page turned everything would continue to work smoothly. Sure enough, the tech bubble inflated, and after time moved on and there were no catastrophes, the bubble popped. 

Fast forward to today. We have LinkedIn trading at a $9 billion market cap, which is 30x sales and 666x earnings. We also have Russian internet search company Yandex trading at a $10 billion valuation. Sane people can argue about what the "right" valuation is for these companies, are they overvalued or undervalued. Me, I'm a firm believer that "today" stocks are worth whatever the market says they are worth. So today LinkedIn and Yandex are worth $9 & $10 billion respectively. What they'll be worth tomorrow or the next year, is anyones guess. According to fundamental analysis, a stock is worth its future stream of cash flows (earnings & dividend growth) discounted back to the present at some appropriate growth rate. This is where security analysis gets a bit tricky, assumptions. What is the assumed growth rate of the company, the prospects for the countries it operates in, the strength of their competitors, new technologies, etc? Also, what is the appropriate discount rate? The general rule of thumb, the more unknown a companies future the lower the valuation.

Well, just like 1999, 2011 is a bit out of the normal. We have a Fed that is purposefully manipulating the markets. Their ZIRP (zero interest rate policy) has created massive distortions in how capital is being allocated. If you buy US Treasuries today you get negative real returns for the next 7 years. One year paper yields 0.04%, which is about -2.50% on an inflation adjusted basis. These artificially low interest rates cause capital to be misallocated. Capital runs towards anything with the promise of higher returns. Right now it has been running to high yield and growth. Enjoy the party while the music's playing, but remember your hangover remedies.

Is The Rise In Commodity Prices Real Or Transitory?

Our Fed Chairman says that commodity prices are higher due to increased emerging market demand, but then goes on to say that these price increases are transitory. I'm not sure how he gets there. The only way commodity price increases are transitory is if you think there is going to be some huge decrease in the growth of emerging markets, or that global population growth turns negative, or that we discover some new fuel source very soon. He made these comments before last weekends non-rapture, so maybe now he doesn't expect the worlds population to shrink.

Sometimes a picture is definitely worth a thousand words, and sometimes two pictures are worth more.

Here is a graph by Bianco Research showing the price level for the CRB Index (Commodity Research Bureau) going back to 1749. Notice how the upward tragectory starts to take-off in the 1940's.

 

This next graph shows global population since 1800. Again notice the sharp uptick around 1940. 

Sometimes in this business we often tend to over think issues (my wife calls it "big-heading-it").

As the worlds population grows and becomes more and more industrialized, we use more stuff, thereby causing prices of stuff to increase. Pretty simple huh.

Enjoy your Memorial Day weekend, and please raise a glass in memory of those no longer able too.

Be careful out there, and keep the lights on,

Chris Wiles, CFA

412-260-7917

www.rockhavencapital.com

For prior Rockhaven Views visit:

www.rockhavencapmgmt.blogspot.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

The Answer Is Blowin' In The Wind

Yes, how many times can a man turn his head
Pretending he just doesn't see ?
The answer my friend is blowin' in the wind
The answer is blowin' in the wind.

Bruce Springsteen (NOT Bob Dylan) - Blowin' In The Wind

There's clearly something blowin' in the wind, and the answer, my friend, is change. All around the world we are going through unprecedented change in a very short period of time. Technological, demographical, environmental, and political...change. For decades the US sought to promote stability in the Middle East, and in 45 minutes last Thursday, Mr. Obama changed all that. It appears that Americas new goal is to reward those who bring change, not those who provide stability. Israel, Egypt, Tunisia, Libya, Syria, must all embrace change (no mention of Saudi Arabia, yet). As a money manager, when I hear the word change, I think volatility.

Europe has undergone massive change in the last four years. First the banks failed assets were placed on the books of the government, and now the governments are shifting that weight to the backs of the people. Not surprisingly the people are opposed to the added burden. 

Here in the US we are faced with a similar story of change. The Fed's zero interest rate policy (ZIRP), has rewarded the debtors at the expense of the savers. The banks were bailed out by the government, and now that burden is being transferred onto the backs of the citizens. Change is a certainty.

The emerging markets of the world, (China, India, Brazil, and Africa) are growing more rapidly than expected, putting further stress on our already tight natural resources. 

Environmental change on the third rock from the sun has always been a certainty, some years it just feels a bit more intense. Earthquakes, tsunamis, floods, tornados, and drought are constant sources of change.

What's an investor to do when faced with so much change/volatility? Stay the course in your fixed asset allocation? Or adapt, and change to reflect your ever changing environment. I've never believed in the old adage that when you are 40 you should have a 60/40 stock-bond mix, 50/50 at age 50, and 40/60 at age 60, etc. This is just nonsense. Assets should be widely diversified (US & Int'l Stocks, US & Int'l Bonds, US & Int'l Real Estate, Gold, Commodities, Currencies, and Cash), and actively allocated based on triggers caused by change. As John Maynard Keynes so eloquently stated, "When the facts change, I change my mind. What do you do, Sir?"

For months now we have been nearly fully invested in all risk assets, and underweight in US fixed income. Events of the last few weeks have changed this. We are now seeing the risk trade come off, and our indicators are pointing to a more cautious allocation. We are lowering some of our commodity, and gold exposure to neutral, and increasing our US fixed income exposure to neutral. Nothing too severe, yet, but if trends persist we will continue to get more conservative. 

The answer my friend is blowin' in the wind...

Be careful out there, and keep the lights on,

Chris Wiles, CFA

412-260-7917

www.rockhavencapital.com

For prior Rockhaven Views visit:

www.rockhavencapmgmt.blogspot.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Glory Days Well They'll Pass You By

Glory days well they'll pass you by
Glory days in the wink of a young girl's eye
Glory days, glory days

Bruce Springsteen - Glory Days

It's that time of year again, graduation season, when we remember those "Glory Days" of our youth. Hopefully they weren't our only "Glory Days", and hopefully the young graduates we celebrate with will have many more in their future.

Thirty-four years ago, when I was 17, I remember entering Penn State Shenango Valley Campus, with the sole goal of getting some education in business, and getting out into the "real world" as soon as possible. I went the two year associate degree in business administration route, graduated and immediately went to work. First, I got my real estate brokers license. 1979, not a great time for a 19 year-old to attempt to sell real estate; what with double-digit interest rates and double-digit unemployment. So while I wasn't selling real estate I decided to start a body-builders gym. This venture into the world of entrepreneurship wasn't half bad, as long as you didn't calculate my income on an hourly basis. These foray's into the "real world" were priceless, and they helped me realize that "work" isn't all it's cracked up to be. Six years later, with an MBA and CFA under my belt, I was managing money (OPM - Other Peoples Money). 

Occasionally at this time of year, I get asked about how I got into the business of investment management, and what subjects junior should study in college. Surprisingly, Money Management isn't a typical major. Sure there is "Business Administration" but it's focus is on running companies, not investing in them. There are concentrations and degrees in accounting, economics, and finance, but rarely nothing more than a class or two on investing. Many books have been written about "Great Investors", and one trait that seems to stand out is the fact that they were good at many things, they were great generalists.

If I were to design a curriculum for aspiring money managers, it would look something like this:

First and foremost, Psychology. Every great investor has to understand the psychological makeup of the market, as well as their own psychology. Understanding, and controlling fear and greed are the keys to long-term success. One question that I often ask myself is, what do you think you know that isn't already priced into the market? 

One example of market psychology is "mimetic theory", which simply stated says, we humans have a strong inclination to imitate other people. We like to be liked, so we tend to imitate each other. Understanding this simple theory helps us anticipate bubbles, mass delusions where everyone imitates everyone else.

Not understanding your own psychology has been the downfall of many an investor. You have to find out how you react in periods of severe emotional distress, unfortunately this is very difficult to simulate in a campus environment.

History. History doesn't always repeat, but it often rhymes. By having a good understanding of world history, you will have a good understanding of what could happen again. Investing is all about probabilities, and having a thorough knowledge of what has happened in the past, will help you set appropriate probabilities for what might happen in the future. 

Just because house prices haven't declined since the 1930's doesn't mean that they will never decline again. Just because the US dollar has been the world's reserve currency since WWII, doesn't mean it will continue in that role forever. History opens our eyes to the realm of possibilities, and various scenarios that may come to be.

Mathematics & Statistics. There's no getting around it, investing is filled with math; probabilities, percentages, valuation metrics, and return calculations. It is the language we speak. Back when I started in the business we used to talk in eighths and teenies (stocks were priced in 1/8's, 1/16's, and 1/32's), fortunately today we talk in BP's (basis points, 0.01%). 

You don't need an advanced degree in mathematics, many of the more advanced mathematical formulas are dubious at best, but you do need to understand the basic concepts. With the power of todays computers you will not need to do much heavy lifting, but you still need to understand the inputs and outputs. You should be able to look at a set of numbers and know whether they make sense or not. A basic understanding of probabilities would have had a lot more people questioning the track record of Bernie Madoff.

Accounting. Again, you don't have to be an accountant, but you have to know your way around financial statements. You are buying stocks, bonds, or other bits of paper issued by companies and/or governments, and you need to be able to discern fact from fiction. There are some investors who are more like forensic accountants, they tear apart reams of financial statement filings looking to sniff out fraud. While this is great, if you are into that kind of thing, it is not necessary to make you a great investor. All you really need is an above average understanding of what makes sense. I remember selling all of our holdings in Worldcom near the top of its valuation, not because I sensed some fraud, but simply because I couldn't justify their numbers when compared to other telecom companies. Something just wasn't right. 

I don't mention economics because I have yet to meet an economist who was a great investor. Sure, some economics classes would be OK, simply because what economists do at the Fed and other government organizations does move markets, but too much economics could definitely be a bad thing. Just look how well the Nobel Laureates at Long-Term Capital Management did.

I would also recommend getting the CFA (Chartered Financial Analyst) designation. It is the industry standard, that separates those who want to manage money, from those who are serious about managing money. It will greatly increase your odds of employment.

Hopefully this will be of some use in seeing that your "Glory Days" aren't all behind you.

And I hope when I get old I don't sit around thinking about it
but I probably will

Be careful out there, and keep the lights on,

Chris Wiles, CFA

412-260-7917

www.rockhavencapital.com

For prior Rockhaven Views visit:

www.rockhavencapmgmt.blogspot.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.