If stock market experts were so expert, they would be buying stock, not selling advice.
—Norman Ralph Augustine
Stock market talk is cheap; investors and traders are inundated by information flow on the markets these days.
Rigor is the sine qua non, however, and the common thread of value-added investment analysis and superior portfolio management.
Reading everything you can is important but so are your relationships. Contacts steer us in the right direction of potential investment ideas that must be followed up by hard work and analysis.
I have had the good fortune of rubbing elbows, working and being friends with some of the most fascinating personalities—some of them the brightest and wealthiest money managers on Wall Street. Initially in my career, “Scarsdale Fats” (a.k.a., Bob Brimberg) introduced me to many of these iconic figures when I was just starting out in the investment business.
But some of the most interesting personalities are not that well known. For instance, Boca Biff, the quintessential odd lotter, who gets trapped into every possible fad. In the process, he has made and lost tens of millions of dollars. See also the Bearded Prophet of the Apocalypse, who, afraid of the world as we know it, left the hedge fund business to reside on a farm in New Hampshire.
In this chapter, I profile not only one of the greatest hedge-hoggers ever, George Soros, but I also write about Barron's Alan Abelson, our country's journalistic treasure, who became an important influence on me over the three-decade period before his death, as well as Jim Cramer, my friend/buddy/pal who resides at the epicenter of TheStreet.
In its online edition Saturday, the Wall Street Journal reported that “after a year of turning his back on the risky game of hedge-fund investing…legendary investor George Soros is actively looking for a chief investment officer to replace Stanley Druckenmiller and take the helm at Mr. Soros's firm, Soros Fund Management.”
This news got me to thinking about something that happened between George Soros and me in the early 1980s.
This anecdote (or should I call it my nightmare?) is true.
And, above all, remember the poor judgment that I exercised 20 years ago, when you consider my stock recommendations and market strategy. In 1981, George Soros's hedge fund empire was flailing. His partner, Jimmy Rogers, had left, and George seemed out of sorts. His main investment vehicle, the Quantum Fund, was down measurably. He needed help, and one day I received a telephone call from him to discuss the possibility of joining him in the big job. I mean “Soros big.”
In my infinite wisdom I turned him down—not once, but twice that year. You see, I asked George to show me his portfolio. And he did, showing me a computer printout of his holdings during a leisurely walk we took through Hyde Park in London, England.
I thought it was far-flung and bereft of any central themes (from 13-D filing positions in American technology stocks to sizeable, esoteric commodity holdings), and I concluded that it would be near impossible for him to turn Quantum around.
That, my friends, was the single dumbest decision (investment or otherwise) I, or nearly anyone else, have ever made.
After I turned down George, he ultimately offered the job to a well-known money manager who, rumor has it, accepted the job and lasted one week, earning an amazing $500,000 for his week's efforts.
Months later, George began to parcel out his hedge fund's money to several outside managers. I was the recipient of one of the earliest Soros distributions.
I remember asking George if he wanted a diversified portfolio, or only my “foremost five or 10 picks.” In a husky voice, laced with his unmistakable Hungarian origins, George replied, “I want your single best idea. Just one stock, Douglas.” (George rarely minces words).
So I put millions to work, in one stock: First Charter Financial, the largest publicly traded savings and loan in the United States. At that time, the yield curve was inverted, loan originations were low, and industry capital and surplus were dwindling. As a contrarian, that's just the time to buy the sector (something like buying technology stocks in early April).
Several weeks later, George called me and said that he was having a Quantum board meeting at his West Side apartment in New York City. He asked whether I could attend and make a presentation regarding my First Charter Financial investment. It was my pleasure, and a few nights later, I was talking thrifts to a bunch of London- and Geneva-based bankers at George's dinner table.
To put it mildly, the members of the Quantum board of directors didn't agree with my premise that things would turn around for First Charter and the savings and loan industry. Nor did they understand American accounting conventions that did not mark mortgages to market.
The next morning I received a call from George Soros ordering me to liquidate the First Charter Financial investment, which I did. I had purchased the stock for about $9.50, and sold the position for about $8.75.
Five weeks later, Charlie Knapp's Financial Corporation of America bid $35 per share for First Charter Financial. Two months later the acquisition was completed.
And, now, as radio commentator Paul Harvey would say, “you know the rest of the story.”
Let me explain how I first met the Bearded Prophet.
After leaving Boston's Putnam Management in 1977, I joined a New York-based firm, Glickenhaus & Company, where I, along with two others (including the legendary Seth Glickenhaus), started an equity management business that became quite successful over time.
About six months after my return to New York City, I and a couple of my buddies formed an investment group in which ideas were exchanged, the First Tuesday of the Month Club.
This wasn't your grandmother's ordinary investment club, as it included a number of up-and-coming money managers who would become quite well known over time.
Included in the First Tuesday of the Month Club were Omega Advisors' Leon Cooperman (he was running Goldman's institutional research product at the time), Rocker Partners' David Rocker, Gabelli and Company's Mario Gabelli, Westwood Management's Susan Byrne and Fran Bovich (now at Morgan Stanley), Lou Margolis (who headed up Salomon Brothers' options business), Kynikos's Jim Chanos and several other equally talented investors, including the Bearded Prophet of the Apocalypse (who at the time was the head trader of the best hedge fund extant).
This was some brilliant and stimulating group—almost 25 years ago!
Fast-forward to May 2002, and an interview by Morgan Stanley's chief investment strategist, Barton Biggs, in his weekly Global Investment Research piece.
In that May interview, Biggs pointed out the Bearded Prophet's strength in some amazing long-term calls, which included predicting the acts of terrorism two years ago, recognizing that a developing and pervasive streak of corruption and corporate greed (CEO compensation has risen from 40× average workers' income to over 530×!) falsified corporate profits, predicting that bond yields would decline from 15% in the early 1980s to less than 5%, and forecasting that when the Dow was selling at only 9×, it would rise to more than 30×. The Bearded Prophet shorted the Nifty Fifty in the early 1970s, he argued correctly that President Reagan's policies spelled disinflation and said that the price of oil would plummet in the early 1980s.
Biggs ended his interview with the Bearded Prophet (he used the name Jimmy) with the declaration that Jimmy is an imaginary composite who does not resemble anyone he knows.
I know for a fact that the Bearded Prophet is a real person. His name also has two syllables, like Jimmy, and ends with the same letter. And he is not Greek, as Barton Biggs suggested, in an obvious attempt to conceal his identity—rather he was born in Italy.
I originally met the Bearded Prophet through one of my great pals who passed away many years ago, the legendary Bob Brimberg (who was given the moniker Scarsdale Fats in Adam Smith's wonderful book The Money Game).
The Bearded Prophet never went to college. He is a warm and compassionate friend and father, eccentric, iconoclastic and, at times, a bit mysterious.
And he practices what he preaches. A while ago, fearing terrorism and an economic apocalypse, the Bearded Prophet moved out of a tony neighborhood in Long Island to a rather secluded area of New England. He left the investment business (though he still manages a hedge fund that consists mainly of his own wealth).
I rang up the Bearded Prophet on Wednesday to get his view of the world and following are the things that he told me.
The valley between the haves and have-nots in this country and around the world sow the seeds for social and financial change that has only just begun.
The first serious blow to the bow of social, financial, and geopolitical change occurred on September 11, 2001. There will be others that will transform the world's social order. (The Bearded Prophet is best in looking at the big picture.)
There is an inevitability to the world's intemperance and much more dramatic change, reflecting, in part, the technological advances in communication (Internet, advancements in television in less developed countries). And more extensive and timely communications systems demonstrate to those have-nots that the schisms between the wealthy and the indigent have grown wider and wider.
The Bearded Prophet believes that the bear market and the corporate corruption and greed have contributed to a lost generation of investors. Trust will be slow to rebound.
The rebound in the economy will also be most disappointing. Growth will be kept in check by a leveraged consumer, the absence of confidence in our institutions and social unrest.
The Bearded Prophet's portfolio has 91% of his assets in Treasury bills (with less than a one-month maturity) and the balance in a couple of speculative dollar stocks and short index positions—it's been that way for about three years.
To summarize the Bearded Prophet's specific forecasts:
I am not a suck-up. Indeed, in the past, Jim and I have disagreed on a host of subjects regarding the markets and individual stocks. We have frequently debated each other.
Back a couple of years ago, our disagreements were ugly. Then we got to know each other, and a mutual respect for our differences emerged.
We certainly disagree on the market and economic outlook today. But after our disagreements—when each of us cogitates over the other's view—we learn from each other. (I know this is sappy, but it is true.) Our relationship is symbiotic. On occasion, we will alter our views as a result of the polemic.
Just ask Jim when he stopped selling Toll Brothers at my suggestion in April. And Jim was influential in my decision to cover some AOL Time Warner two months ago. And we have agreed on many other issues, like on the duct-tape bottom.
Because of his extraordinary and documented investment successes, Jim's views are important—and to me, will always require scrutiny.
I would much rather consider and dissect Jim Cramer's views on the basis of his real-time investment successes than consider the views of any other investment strategist, who has not been in the trenches like Jim and has not achieved his accomplishments and material wealth.
Jim is a public persona with a personality that is unique and at times defies description. He is, however, no more idiosyncratic than other successful hedge fund managers I know. He is just a bit more visible, as his views are articulated with frequency over many platforms. That is unusual in our field.
As such, criticism against him is rampant. And the temptation for his critics to selectively bring up his failures is understandable but wrong.
It is also wrong to consider Jim's bullish market outlook as a contrarian indicator.
Look at the Investor's Intelligence figures or Merrill Lynch's internal put/call ratio, but don't use Jim Cramer as a contrary tell.
If you do, it might be dangerous to your financial health.
Late last week, I asked Jim Cramer for permission to write a column in response to what I would describe as an abusive and ad hominem attack on him, “Cramer vs. Cramer: Will His Crazy Confession Destroy His Career?” written for Slate.com on March 22 by former Merrill Lynch Internet analyst Henry Blodget.
Though I did send a draft of today's column to him last evening, Jim gave me permission to respond to Blodget on my own terms. I give Jim credit for being willing to have me resurrect a story I am sure he is very angry about and wishes was never written. Nevertheless, he provided no input for today's opening missive nor was he given the opportunity by me to edit or make recommendations for this column.
Before I respond specifically to Henry Blodget's article, I would like to make some general observations about disseminating one's views in the public arena and lay out the reality of Jim Cramer's decision to take the road he has taken.
According to Blodget's own pen, he writes a column “about bad investment advice.” As such, Blodget felt compelled to write about Cramer and “to comment on what just might qualify as the worst financial counsel ever offered.” The author refers to an interview on TheStreet.com's “Wall Street Confidential” between Aaron Task and Jim Cramer three months ago that Blodget says “can be read as recommending that hedge funds boost returns by orchestrating stock prices and spreading false information.” Quoting Cramer as saying that “this is the way the market really works” and those who don't do these things “shouldn't be in the game.” Blodget notes that “it raises questions not only about Cramer's activities as a hedge fund manager, but about his judgment. It also, I think, threatens Cramer's career.”
Blodget specifically argues that “Cramer endorsed the idea of creating a level of activity before the market opened that could drive the futures down. Similarly, if I were long, and I wanted to make things a little bit rosy, I would go in and buy a bunch of stocks and make sure that they were higher…I would encourage anyone in the hedge fund game to do it. Because it's legal. And it is a very quick way to make money.” Blodget goes on to describe how Cramer would hit offers (if he wanted a stock to go down) and take bids (if he wanted a stock to go up) in Research In Motion and quotes Cramer “that it might cost me $15 to $20 million to knock RIMM down to beleaguer the longs.” Then Blodget reiterates Cramer's comments made in TheStreet.com interview in which he states that hitting RIMM down will “get the Pisanis (CNBC) of the world” to say something lousy about RIMM, reinforcing its price decline. In other words a “vicious cycle” develops in a stock and “we now know where some of it (his hedge fund record) came from.”
Blodget concludes that Cramer (1) is “giving terrible advice” because “his practices might be illegal”; (2) could be interpreted as “orchestrating a price decline”; (3) “is undermining everything he says” on Mad Money because he is suggesting that small investors take his advice; and (4) is “putting his employers (TheStreet.com, General Electric, and CNBC) in a bind.”
Blodget ends his Slate column with the following observation, “Jim Cramer has committed professional suicide.”
I disagree with nearly every point made by Blodget in the Slate piece, and some of the allegations show limited knowledge of investing. But before I do, let me frame the context under which Jim operates on Mad Money, Real Money, in his publications and in his interview with Aaron Task that is attacked by Henry Blodget.
I view Jim as a good, colorful teacher (of investment advice). Jim is the polar opposite of Ben Stein's role as the colorless and boring economics teacher in Ferris Bueller's Day Off (“Bueller?…Bueller?…”). In contrast to Stein's character, a good teacher (in order to get the attention of his students)—like Jim Cramer—tells a good, entertaining and memorable story. By communicating an interesting and animated story, often using hyperbole (and even exaggeration), his students (including the television audiences, book readers and TheStreet.com subscribers) more readily get the message of his lecture (or investment advice). Cramer's interview with Aaron Task was filled with exaggeration, as his storytelling was clearly designed, in part (as Jim is always wont to do), to provoke Task and make the piece more memorable. It is in this context that the “Wall Street Confidential” interview should be viewed and judged.
In conclusion, Henry Blodget is far off base on most of his accusations, and he loses sight of the context of how Cramer differentiates his message from the generally uninformative universe of market gurus. His Slate column is nothing more than an ad hominem attack on a very visible, often excitable, entertaining and value-added Cramer. Indeed, the game works differently than Henry Blodget seems to believe. Jim Cramer's capacity and reservoir of investment knowledge (manifested in his Lightning Rounds on Mad Money) are almost unparalleled and unchallenged. He is providing a value proposition for many investors. And being able to call on his investment knowledge base while on his feet—and on the fly (again, like in Mad Money's Lightning Round)—is a particularly unique quality that gets the message across crisply, succinctly and entertainingly. His body of knowledge and history in the hedge fund business makes him especially qualified to educate investors as host of Mad Money, as an author of three books on investment techniques, as a contributor to Real Money and TheStreet.com and as an adviser of an Action Alerts PLUS portfolio (which likely mimics what he would be doing if he still operated a hedge fund). His informed, animated, hyperbolic, and humorous style segregates him from any other commentator extant. And in the course of his peripatetic and exaggerated style of delivery, Jim extols sound advice that is not only memorable but whose principles and tenets should not be forgotten—they should be memorized.
There is a constant thread in Henry Blodget's “Cramer vs. Cramer.” It is a tempest in a teapot probably provoked for the purpose of disgracing Jim Cramer. It is also a blatant attempt to receive publicity. From my perch, Henry Blodget continues to be an expert on bad advice, just as Jim Cramer is an expert on good advice.
In the past, I have come to the defense of Jim Cramer against a host of media attacks. I do this not because I write for TheStreet.com—I view myself as an independent person who speaks his mind regardless of the consequences—rather, I have defended Jim because I strongly believe that he provides a value-added contribution to the individual investor in navigating an increasingly difficult investment terrain.
Jim does this not only on CNBC's Mad Money but, importantly, in the publication of his books, Jim Cramer's Mad Money: Watch TV, Get Rich, Jim Cramer's Stay Mad for Life: Get Rich, Stay Rich (Make Your Kids Even Richer), and Jim Cramer's Real Money: Sane Investing in an Insane World, which provide more pensive analytical tools and recommendations in approaching one's investment portfolio.
Bullish media and Wall Street analyst hype are legendary and, to some degree, represent the proximate cause for many investment miscues on the part of individual investors whom have historically behaved in a Pavlovian fashion in their reaction to perma-bullish pablum, so, when someone like Jim Cramer provides a more thorough and objective educational outline to navigating the market, it should be welcomed by the media, not criticized.
Over the weekend, Barron's published the story, “Cramer's Star Outshines His Stock Picks.”
The thrust of the article is that “Jim Cramer's celebrity is bigger than ever,” but the “stock picks featured on Mad Money don't live up to the host's hype.” The Barron's article is critical of his opinions on an enormous number of stocks and suggests that “in the days leading up to their mention on Mad Money, stocks start to move in the direction of his recommendation. Post-mention, they revert to their previous trend, short-changing investors.” The piece goes on to suggest that Jim's staff is “heavy-footed in their research” and the subject matter of many shows appear to be leaked because of that process.
As I have defended Jim Cramer from attacks by the media in the past, I will do so again today, hopefully as an impartial and independent observer.
My basic point has been that, above any other media pundit, Jim provides a value-added educational experience for the average individual investor.
He does this in several ways:
Jim qualifies almost every investment recommendation with the caveat that investors should not take, prima facie, his word on a stock. He says that every investor has an obligation to do his own homework.
Jim qualifies almost every investment recommendation with another caveat: Don't buy on the spike or strength following his mention. Wait until things calm down, he says.
As to potential leaks, that is an occupational hazard if one is going to carefully research an idea and cover multiple sources. A more comprehensive research approach by Mad Money staff is far more preferable than superficial preparation. The same phenomenon occurs in Barron's, the source of this weekend's criticism, as trading desks often hear about rumors of Barron's cover stories. Most are specious, but now and again, they are accurate.
The Barron's article analyzes “650-odd” Cramer recommendations and concludes that “his bullish picks underperformed the S&P by about 3.5 percentage points over the 45 trading days after each show.”
To that, my response is: So what? Not only is the statistical error broad vis-à-vis the underperformance and the degree of underperformance modest within the context of the volume of recommendations but this analysis presumes a buy-and-hold strategy, which, particularly in today's volatile times, is plain silly and not the intention that Jim necessarily recommends.
Finally, many of Jim's investment recommendations are indeed nuanced and qualified. Treating every investment recommendation as the same and compiling an investment performance is, to some degree, comparing apples to oranges.
In my final analysis, individual investors are better served listening to Jim Cramer, both with regard to his recommendations and his methodology, than any other business commentator extant. His body of investment knowledge is remarkably broad and lacks the superficiality of most of his brethren.
Jim is an investment populist who, unlike many in my hedge fund cabal, has forsaken that financial rainbow for a greater cause—namely, helping out the individual investor.
Jim is an easy target, but from my perch, he should not be vilified; he should be admired.
While James Brown never captured the zeitgeist of the Beatles, Rolling Stones, or Elvis, he bettered them all in volume (100-plus albums), originality, endurance, and breadth of influence. Only Elvis Presley has sold more records, and Brown holds the distinction of selling the most rhythm and blues records ever. Interestingly, none of the singles ever recorded by James Brown got to No. 1, and only two were in the top five on Billboard's Top 40. This arguably reflects worse on the pop audience than it does of his music.
Most remember James Brown (who died two days ago on Christmas Eve), as the Godfather of Soul who sang “Living in America” in the movie Rocky IV.
I remember James Brown as something more than a great recording artist; I remember him as the hardest-working performer in show business and one who overcame adversity (much of which was self-imposed).
I first heard of James Brown when I was 19 years old and listened to his album, Live at the Apollo. He was brought up by his Aunt “Handsome Honey” Washington, a madam in a Georgia brothel. He rose above poverty, jail, drug addiction, and a world's changing view of the type of music that was to be in vogue—especially in the 1970s with the popularity of disco—and worked tirelessly, breaking numerous records of singing performances (recordings and live concerts). Nothing, it seems, could keep him down or keep him from his appointed task of entertaining.
For obvious reasons (somewhere over the hedge fund rainbow can be a huge payday), competition is keen in the hedge fund industry, just like the entertainment biz. While many hedge hogs are well schooled in the country's leading business and finance programs, I have learned from some of the best hedge hogs that the way to differentiate one's performance is through really hard work, which was characterized by most of James Brown's career. As evidence of his peers' view of his talent, Brown is the most sampled entertainer in R&B history.
The best example of a superior work ethic that I have personally experienced (and one of the best hedge fund practitioners extant) is Leon Cooperman, my old boss at Omega Advisors. Prior to forming Omega, Leon ran the institutional research department at Goldman Sachs for many years before he established his hedge fund in the early 1990s.
If James Brown was the Godfather of Soul, Leon has become (over the following 15 years) the Godfather of Stock Picking, and (like James Brown) the best single example of hard work in the investment business that I have ever met. No doubt Leon would cringe about my observation that his work ethic parallels that of the King of Soul!
Leon would routinely be the first in the office at Omega (almost always by 6:00 A.M.), and inevitably, he would be one of the last to leave. When things went wayward—as occasionally happens to the best of them—he would sleep in his office in a roll-up bed!
In Hedgehogging, Barton Biggs writes that “great investment managers are intense, disciplined maniacs.” And in Chapter 14, I believe, though I could be wrong, Biggs writes about Leon's remarkable work ethic in his thinly veiled discussion of “Greg, who runs Mega.”
Don't believe me? Just ask Jim Cramer, who worked with Leon for several years at Goldman Sachs.
James Brown, like today's hedge fund managers, underwent a stressful life filled with intensity, dedication, foibles and insecurities. Throughout his life, Brown experienced the ecstasy and elation inherent in his craft, as do hedge hogs who deliver sustained and superior investment performance. He also experienced the agony and despair of his personal demons, similar to hedge hogs who are on the wrong side of Mr. Market.
Though honored by the Kennedy Center in 2003, James Brown's loss will be conspicuous this evening, but his legacy of perseverance and hard work has not been lost by me. Nor will his constant rebounds from the jaws of defeat be lost on this observer.
In Leon Cooperman and James Brown—the Godfathers of Hard Work—we can learn from the best.
From my perch, one of the most astonishing features of the recent decline in stocks and rise in credit spreads is the smug rejection of the notion that things have changed—particularly of a credit nature.
No better view of the ostrich-in-the-sand mentality was delivered than by warm and cuddly actor/lawyer/columnist/comedian/economist/
Clear Eyes shill Ben Stein in this weekend's business section of the New York Times, and then again on CNBC Monday evening.
In the past, I have admired the common sense and logic of argument in Stein's writings. Maybe Stein was acting this week, as he did in the role of the economics teacher in the classic movie Ferris Bueller's Day Off. After all, on Sir Larry Kudlow's show, Stein suggested that the mortgage lenders will “end up fine,” and he concluded that the subprime mess is a media hoax in an attempt to “talk America into a panic.” Excuse me?
Tell that to Thornburg Mortgage, which is temporarily ceasing loan production, Countrywide Financial, American Home Mortgage, Accredited Home Lenders or the millions of individuals who are about to lose their homes and those that can no longer get a mortgage. Or tell it to the investors in the Bear Stearns hedge funds and the Sentinel Cash Management Fund.
Tell it to the homeowners who live next to foreclosed homes who are about to rein in their own spending for fear that they might be the next foreclosure. Or tell it to the Wal-Mart customers and mall customers who are no longer buying. Or tell it to the U.S. banks that are caught with hundreds of billions of dollars of illiquid bridge loans. Or tell it to the foreign banks that are taking multibillion-dollar write-downs and are reining in their credit activity. Or tell it to the employees at brokerage firms, banks and retailers who will soon be laid off.
The subprime market is not an isolated problem as suggested by Stein; it is only the beginning of the chain.
The global credit bubble of leveraged financial engineering (and ownership of risky assets) has been pierced. Wall Street sold arcane and illiquid products with promises of limited risk and fat profits.
Our financial and investment world is so tightly wound and levered that the likely fallout is going to be far broader than almost anyone expects. What had been a liquidity problem is now morphing into a solvency problem in a wide and surprising array of assets and companies, including money market funds, Canadian trusts, cash management funds, mortgage companies, investment bankers, and so on.
The price discovery in the credit markets will inevitably result in further wealth destruction, bankruptcies and an ever-increasing risk aversion, regardless of central bank behavior. The excessive use of cheap, mispriced credit is the source of the problem, and providing more liquidity (as central bankers do) can hardly be considered a healthy solution.
Stein seems to endorse the ludicrous notion that there remains a negativity bubble. Many were wrong three months ago, and Stein is wrong today, as stocks and credit don't fall in the manner that they have in the past month if there is broad-based pessimism. Rather, with the benefit of hindsight, it is now clear that there was a bubble in optimism, as disbelief had been suspended on the part of buyers of credit, buyers of homes and buyers of stocks.
In his now-famous interview with Erin Burnett, Jim Cramer went on a rant in which he expressed his idea that certain members of the Fed didn't understand the severity of the current credit problem.
Jim Cramer knows how bad the situation is.
Ben, pardon my French (and my reference to Ferris Bueller's Day Off's Cameron Frye), but on the subject of credit, you are clueless.
The credit event that you dismiss is already morphing into an economic event.
What follows is an e-mail I sent to Ben Stein yesterday after reading his column in Sunday's New York Times Business section, “It's Time to Take a Deep Breath.”
Dear Ben,
Well, the first days are the hardest days,
Don't you worry anymore
When life looks like Easy Street
There is danger at your door.
Think this through with me
Let me know your mind
Wo-oah, what I want to know
Is are you kind?
—The Grateful Dead, “Uncle John's Band”
I read with interest your New York Times column in the Sunday Business section.
It might be time to take a deep breath. But for another reason, to recognize the dramatic and the cumulative impact of excessive debt/leverage creation on our citizenry (especially the consumer kind) and to consider the ramifications of the black swan credit event that awaits the unwind.
In your article, you have basically recounted the same argument that you have used in prior columns. You write that “the percentage of those who have defaulted is still fairly small.” In other words, all will be well, as market participants are overreacting to an isolated credit situation, and the Fed will pull us out of this limited mess.
Disappointingly, you added Cramer to your criticism, using him as a symptom of the overzealous media. Jim is an easy target, too easy, and you take advantage of it in a derisive comment. I, too, have been at odds with Jim but, quite frankly, have defended him over the last few years because he is generally well informed; he educates the individual investor (who believes too much of what he hears in the media) and has actually walked the walk (not just talked the talk) in running a successful hedge fund.
Not lost is the irony that you are critical of Jim Cramer for making a negative market comment, whereas most in the press have derided him for being too bullish.
Quite frankly, Ben, the media is imbalanced almost universally on the side of optimism. They, to quote Cramer, generally (like administration cheerleaders who “know nothing”) are “talking” from their platforms in the press box; they are not on the field. And the “field players,” like the CEOs at YRC Worldwide, AutoNation, and many others know the real truth. Economic conditions are a lot worse than you suggest as even our mutual friend, Larry Kudlow, had reduced the usage of his “greatest story never told” line because he, too, recognizes the direction the economy is taking.
You have consistently dismissed the notion that the subprime credit event would morph into an economic event. And, based on Sunday's column, you continue to hold to this view. Quite frankly, I am surprised that the recent signs of broader economic weakness (like Friday's job number) are so readily dismissed by you.
If you don't believe this ursine greybeard, I would suggest that you sit down with Howard Marks, the head of Oaktree Management (a $30 billion hedge fund). He is out on the West Coast with you and has written some succinct pieces on the pendulum shift of credit, the lemming-like search for yield, and he has chronicled a number of other financial abuses of the new millennium. His firm's telephone number is in the Los Angeles yellow pages, and I am sure he will take your call.
Some say the world will end in fire,
Some say in ice.
From what I've tasted of desire
I hold with those who favor fire.
But if it had to perish twice,
I think I know enough of hate
To say that for destruction ice
Is also great
And would suffice.
—Robert Frost, “Fire and Ice”
Finally, you also appear too quick to dismiss the alternative of “ice” in your column, claiming “Some strict disciplinarians want to let the markets go through hell and let borrowers and investors suffer,” which suggests that the Fed can reignite the economic “fire.” And, with the exception of your reference to a dollar crisis, you don't seem to think that too much can go wrong in our overlevered and unregulated (derivatives) financial world.
Apparently, you have missed some news out of Barclays, Deutsche Bank, Citigroup, all of the leading U.S. investment bankers and others who are up to their eyeballs in structured investment vehicles, bridge loans to private-equity deals and unsold junk bonds.
I could not disagree more with your conclusion that “If I were the editor of the business section for just one day, I would run one immense headline: ‘Everything Is Going to Be Fine. Go Back to Work.’”
Ben, the world has changed—and not for the better. Arguably, the Fed might be pushing on a string.
Curb your enthusiasm, Ben, because many of our friends in the financial and banking communities will not have a job when they return to work in the months ahead.
With Respect,
Doug Kass
Seabreeze Partners
These traders, not economists or securities analysts, can turn the world upside down, make governments tremble, give central bankers colitis and ruin the lives of ordinary men and women saving for their children's college education or their own retirement. In America today, it is the traders, not the politicians or the generals or the corporate bosses, who have the power.
—Ben Stein, New York Times, “Can Their Wish Be the Market's Command?”
My Sunday morning routine is usually cast in stone. I typically wake up at around 5:00 A.M. and spend an hour or so writing my opening missive for Monday. Then, I read the obituaries—I am, after all, still a short-seller!—and then the Sports, Week in Review, and Business sections in the New York Times. Thereafter, I work on solving Sunday's New York Times crossword puzzle. (I am proud to say that I have completed the last five in a row.) Next, I watch NBC's Meet the Press, ESPN's Sports Reporters, and ABC's This Week with George Stephanopoulos.
Finally, my regular day starts, and these days, it is filled with thoughts about the stock market, cogitating over the week that was and what to do next and why, in addition to calls or e-mails between other hedge-hoggers.
Yesterday morning, I was prepared to write a column preliminarily entitled “The Case for a Bull Market: What Could Go Right and How.” I was going to emphasize the latent buying power of sovereign wealth funds and make the case that the equity market might be discounting a far deeper recession than might occur. I had planned to underscore that interest rates remain subdued, that the curative process of restoring capital bases at leading financial institutions continues apace and that a negative sentiment bubble seems to be emerging coincident with lower share prices. I was even going to highlight that there might be some light at the end to the tunnel of housing as fiscal and monetary stimulation is moving into overdrive.
That is, until I read Stein's column—“Can Their Wish Be the Market's Command?”—in Sunday's New York Times Business section. No one has the concession on the truth, especially as it relates to investing. But rigorous analysis, logic of argument, power of dissection, weighing sentiment, and modeling remain good ways to try to find that truth.
I have chronicled Stein's general lack of realism in his series of New York Times articles, in communicating and recognizing growing economic problems and in improperly isolating and laying blame on the stock market's poor showing to his list of imaginary ne'er-do-wells.
From my perch, Stein's assertions have been consistently wrong and continue to be poorly reasoned.
I even submitted one of my columns to the New York Times' editorial staff as a rebuttal to Stein's articles. Rejected!
My Grandma Koufax taught me to be nice, though she was a killer in her children's wear business (and in her stock market trading). She used to regularly say, “Dougie, he is a nice boy, and he is good to his mother.” And I am sure Ben is and was.
I have tried to respond to Mr. Stein's words in a professional and respectful manner—I even share my columns with him via e-mail—and I have avoided anything that resembled an ad hominem attack on him by addressing, point by point, his misguided observations and underlying assumptions of economic causality and his views regarding the stock market's outlook.
“In the short run, the market is a voting machine. In the long run, it's a weighing machine.”
—Benjamin Graham
Stein and I both agree that statistics show, in the long run, stocks rise and economies prosper—though that was not the subject of yesterday's column. And, yes, daily market volatility of 2% to 3% is occurring because of trigger-happy hedge fund traders' buying and selling. But it is a broad list of economic uncertainties (and daily headline risks) that generate indecision and lack of confidence in their trading actions that seem to be producing this volatility.
Traders influence volatility, but they cannot control stock prices over any reasonable time frame. Investors do.
Wild intraday price moves are unsettling to most investors, but the history of stocks shows that yearly market moves more often than not do produce meaningful price changes. Though sometimes impacted by an exogenous event, outsized changes are dependent upon the degree of confidence or certainty in economic outcomes. When uncertainties exist, stock prices and economies can stall for years (and sometimes even for a decade or more) and vice versa.
The view of a favorable long run is all well and good, but in the highly competitive world of hedge funds/personal money management, properly identifying and navigating monthly and yearly trends/moves (as well as finding superior individual stocks) can result in superior and differentiated investment performance.
Just ask investors who have prospered and outperformed and money managers who have demonstrated a consistent ability to time buying/selling and identify value in markets, sectors and stocks—namely, Ken Heebner, Stanley Druckenmiller, Leon Cooperman, George Soros, and Steve Cohen.
Back to Ben's vision of our economy and the markets.
Over the past two months, many previously bullish economic/market commentators have incorporated the reality of the economic, credit market and stock market situation by scaling back their optimism. Brokerage firm economists and strategists at Morgan Stanley, Goldman Sachs, Merrill Lynch et al. have adjusted their extrapolations of prosperity toward more realistic goals and assumptions.
While Stein has questioned the motivation of some of this (especially at Goldman Sachs), we all know that massive capital and people commitments are made to insure accuracy of those predictions. And, if wrong, again, as my Grandma Koufax used to say, “Dougie, they'll have less bread to be buttered.”
Even Dr. Arthur Laffer did an about-face on CNBC's Kudlow & Company and has turned cautious, and several other of Sir Larry Kudlow's Band of Merry Men have grown less cheery.
At Wharton, I learned that the basis for determining market valuation lies at the foot of security analysis and modeling—as delivered by Benjamin Graham and David Dodd in Security Analysis—not on the part of the whims of traders.
As Ben Graham wrote, in the fullness of time, stocks move toward the weight of value. Investors use many rigorous and disciplined methodologies in valuing stocks and in determining fair market value:
Today, the aforementioned underlying dependent variables that support some of the model assumptions above are either being downgraded or are uncertain in their outcomes, and this is pressuring stocks.
Because I usually write about finance, I have come to believe in the theory of what I would call “financial realism,” or what might more accurately be called “trader realism.” Under this theory, on which I have an imaginary patent, traders can see masses of data any minute of any day. They can find data to support hitting the “buy” button or the “sell” button. They don't act on the basis of what seems to them the real economic situation, but on what's in it for them.
—Ben Stein
Stein's major assertion is that what his brother-in-law Melvin (a Harvard Law School graduate) taught him about legal realism applies to the stock market and to the traders running the stock market. Mr. Stein cites the following:
What really happened (in the legal system) at the appellate level and probably at the trial level, too, was that judges made up their minds based on their predilections, their biases, which lawyer was their friend, what they had for breakfast that day.
He gives little rigorous documentation to his assertion. It is simply his feel that the traders set prices, as suggested in the following quote from his article, based on the magnitude of the stock market damage inflicted relative to his view of the economic damage that has occurred.
It is simply more B.S. from B.S.
Note that the losses in United States markets alone are on the order of about $2.5 trillion in recent weeks. How can a loss of roughly $100 billion on subprime—with some recoveries sure to come as property is seized and sold—translate into a stock-market loss 25 times that size? The answer is trader realism.
The losses in the stock market since the highs of October 2007 are about 14%. This predicts—very roughly—a fall in corporate profits of roughly 14%. Yet there has never been a decline of quite that size for even one year in the postwar United States, and never more than two years of declining profits before they regained their previous peak.
And earlier in the article, he provides a synopsis of his almighty trader theory:
More than that, they trade to support the way they want the market to go. If they are huge traders like some of the major hedge funds, they can sell massively and move the market downward, then suck in other traders who go short, and create a vacuum of fear that sucks down whatever they are selling.
Note what is happening here: They are not figuring out which way the market will go. They are making the market go the direction they want.
The above demonstrates such a degree of naïveté that I am really shocked that the New York Times published the article.
For example, when a company misses its earnings guidance by a penny or two, the same disproportionate impact occurs on its share price. The equity capitalization loss is vastly in excess of the miss to profits. That is because, generally speaking, the miss to expectation can sometimes be seen as a warning of larger misses to come.
The same observation is true with regard to the economy or to the credit markets.
More broadly, the subprime problem (originally expected to be contained) has metastasized into a global credit crisis that neither Ben (Stein or Bernanke) nor any of us mere mortals have ever experienced. With it has come hundreds of billions of dollars of permanently lost capital that has disappeared.
What concerns investors is that it has occurred at the time that the financial system (and the U.S. consumer) has never been more levered. The multiplier effect is unknown, though they have been accompanied by massive write-downs at the world's largest financial institutions, and markets hate the unknown.
Stein continues to dismiss the all-too-obvious economic and stock market problems that litter the world, many of which I have detailed ad nauseam. Rather than recognizing those risks, Mr. Stein prefers to simply place the blame on the body of avaricious and self-motivated traders who control and overwhelm the markets over the very short term.
I respectfully suggest to Ben that he listen to the Coach and Target conference calls—they are still available on replay—and read the MBIA, Countrywide Financial, and Merrill Lynch 10-Qs in order to get out of the fourth estate's ivory tower.
Moreover, who are these “traders” that Stein blames? (Honestly, he is beginning to sound like Senator Clinton in 1998, with her “vast right-wing conspiracy” argument.) The traders I know are getting killed these days—sometimes on both their long and short positions.
The dedicated short community manages less than $5 billion in total—that's under 10% of the size of the Fidelity Magellan Fund—and most long/short managers, an asset class that dominates today's investment landscape, are substantially long-biased. (According to Ed Hyman's ISI surveys, they are about 55% net long.)
For Stein to be correct that the market's drop is simply a conspiracy of traders, test his hypothesis in reverse. Is the market ever dear? When it goes up, is it only a conspiracy of buyers as most traders are long-biased?
My conclusion? Stein is simply suffering from a conformational bias of the worst order.
Not surprisingly, I prefer the more substantive economic reality portrayed in other pieces in Sunday's New York Times—those written by Gretchen Morgenson, Dr. Robert Shiller and Jim Grant—to Stein's nonrigorous assertions regarding the power and culpability of the trading community.
In summary, one thing is certain to me: Ben continues to fiddle in the New York Times while the world's equity markets burn.
The answer to the investment mosaic is always complicated. (I certainly don't possess the answer.) Market prices are based on numerous influences, generally grounded in market psychology, corporate profit expectations, and the term structure of interest rates.
Investors are staring into a financial abyss caused by real-world problems, yet Stein pooh-poohs it all, almost dismissing the issues out of hand by blaming the whole thing on “traders”—the definition of which I don't really understand, and Ben has not explained who exactly they are.
If Stein has only influenced one single investor to ignore today's market and economic headwinds, he is doing a disservice to that reader and to the New York Times.
I expect more.
“Short-sellers can push the market down forever.”
—Ben Stein on last night's “Kudlow & Company”
Last night, Ben Stein blamed the drop in equities on the short-selling community.
I simply can't let Stein's comment go unanswered. My intention is not to make an ad hominem attack on him but rather to set the record straight.
I have responded to Ben Stein's blame game over the past eight months with facts not opinions. In the interim interval, Stein has alternatively blamed the media, Goldman Sachs and its economist, traders and, now, short-sellers.
I admire analytical acuity, investment rigor and logic of argument, but Stein's recent diatribe is astonishingly naïve, nonrigorous and materially incorrect.
The dedicated short community is small, estimated to be less than $6 billion, which is down dramatically over the last decade's bull market. To put this into perspective, the dedicated short pool is less than 10% the size of Fidelity's Magellan Fund.
As to the short portion of traditional long/short managers (which, according to Stein, is capable of exerting huge downside influence on stocks), it is completely overshadowed by the long portion.
On last night's show, Stein specifically mentioned the Citadel Investment Group, founded by the lynx-eyed Kenneth Griffin, as one of the funds capable of committing massive amounts to the short side in an attempt to impact stocks to the downside. I spoke to several people close to Citadel, and their short-selling exposure (and return attribution) is dwarfed by their long-biased investments.
Maybe it was inevitable that the short-sellers would be blamed for the egregious use of debt/leverage in the world's financial system. After all, why blame the entrenched ratings agencies (which, cycle after cycle, fall flat on their analytical faces), Wall Street firms (which exist to sell product) or the buyers of junk credit like the commercial banks (which abandoned their due diligence and common sense) when there is such a convenient scapegoat?
Quite frankly, if more investors and politicians had listened to Gary Shilling's pronouncements on the housing industry, Nouriel Roubini's dire analysis of the world's credit system, Pershing Square's William Ackman's comprehensive admonition of the monoline insurers or, even back in time, Kynikos's Jim Chanos's keen analysis of the shady accounting at Enron, billions of dollars in losses could have been avoided, and public policy solutions to systemic problems would have been encouraged before it was too late.
I am a hard worker and motivated by the opportunity afforded me by our capital system. Professionally, I labor for analytical truth for the sole purpose of delivering superior returns to my investors. If my investment theses are founded on faulty premises, I will perform poorly and my investors will flee.
That being said, I outlined (ad nauseam) my specific concerns on housing two to three years ago, subprime one and a half years ago and the emerging credit problems one year ago with clarity and rigorous analysis well before they entered the court of popular opinion.
My forecasts were largely ignored on my many appearances on “Kudlow & Company,” and, even up until the fall of 2007, those concerns were roundly dismissed by some of Larry's Band of Merry Men.
So, Ben:
Blame the market's decline on the Bossa Nova.
Or blame the market's decline on the fundamentals.
But don't blame the market's decline on the short-sellers.
“I am ugly, but I have a beautiful mind.”
—Nouriel Roubini
Yesterday afternoon, Nouriel Roubini was the speaker at the Summer Institute lecture series at the Jewish Center of the Hamptons.
I attended Nouriel's talk on Sunday, having previously presented my own talk at the Temple's Summer Institute lecture series exactly a year ago in the same forum and on the same subject: the economy and the stock market.
In the interests of full disclosure, I have been critical (perhaps, at times, too critical) about:
In keeping with his reputation, Nouriel was escorted by a young, attractive girl, with a skirt nearly up to her pupik. (She was clearly not a congregant at the Temple!)
After that entrance, things went downhill, as there was little in the way of added value (at least to this observer) extracted from his presentation, since I have heard all of it before.
Nouriel gave his standard talk: The United States is entering either a “U” (at best) or a “W” (at worst), while over there, he estimates 0% growth in the eurozone over the next 12 months.
Reduced fiscal and monetary stimuli, the cessation of temporary benefits (inventory build, Cash for Clunkers, homebuyer's tax credit, etc.) and diminished confidence (consumer and corporate) spell subpar growth (1.5% estimated second-half domestic growth). Deflationary pressures remain the mainstay in the aftermath of the last economic and credit cycle and in the face of tax policy (higher January 2011) and the obliteration of the shadow-banking system and securitization markets.
In the United States, Nouriel says we are kicking the can down the road and that we face a fiscal train wreck with no visible exit strategy in sight.
The one part of his talk that stood out to me was in the section of his speech in which he talked about some possible solutions to our fiscal imbalances. Specifically, he feels that we, as a nation, have been overly preoccupied with housing-central policy. He argued that housing provides little in the way of sustained productivity and growth and that many of the benefits of home ownership (such as the mortgage-interest deduction) should be reassessed.
In the Q&A session, I asked Nouriel three questions:
On the first question, Nouriel agreed with my observation that, unlike the May swoon, risk metrics had stabilized. I was delighted to hear that he said he now recognizes that his principal role is as an economist, as he has learned over the past few years that there are other influences that affect the equities market and that the stock market and the economy are often (especially on a short-term basis) out of sync. On the second and third questions I asked, he felt that the stock markets were still discounting higher and unrealistic economic growth and corporate profits. I responded that my impression is that economists have ratcheted down economic and profit forecasts—many of whom are not materially higher than him now. On question three, he admitted that, absent another dislocation, stocks might be cheap relative to history.
Before Sunday, I had never met Nouriel Roubini. I came away from yesterday's lecture not learning more than when I entered but thinking that he is more well intentioned and perhaps even more studious than I previously thought. He is an engaging speaker, and he seems to be a very nice guy.
So, in the future, I plan to go easy on the guy—perhaps in the hope that he will invite me to one of his infamous parties!
Party on, Nouriel!
Here we are, with 91% of all equity holdings in the U.S. held by the top 20% income group in the country. The top 1% own 38% of all the equity valuation. The lower 80% of the income strata own the asset class that the Fed wants so desperately to reflate (and with unmitigated success to be sure!). That same 80% are now being crushed by the indirect impacts of monetary policy—the ones that Bernanke dismisses—and are also ones that are seeing their cash flow drained by the surging gas and grocery bill. Geez—real wages deflated 0.5% in November, by 0.1% in December, and by what looks like at least 0.3% in January. The last time real work-based income fell three months in a row was when the economy was plumbing the recession's depths from April to June of 2009.
—David Rosenberg, Gluskin Sheff
I have been raising orchids for more than 20 years, ever since I began studying them while I was recovering from a harness racing accident in 1990. As a result, I know many of the local growers in South Florida.
I had a long conversation with one of my main guys, Orchid Bob, on Saturday morning at a local green market.
An orchid is a generally disposable purchase and, as such, is a reasonably good gauge of the state of consumers' discretionary spending patterns.
Orchid Bob's business has taken a dramatic turn for the worse over the last few months.
Bob did about $15,000 of business in November 2009 and approximately $20,000 in December 2009.
His business starting weakening three months ago: He did only $8,000 to $10,000 in November 2010 (down nearly 40% year over year). In the following month, the seasonally strong December 2010 period, Orchid Bob only sold $5,000 worth of orchids (down by an enormous 75% year over year).
Orchid Bob's business has continued to weaken, as during last month (January 2011), he sold a measly $3,000 during the first 30 days of this new year.
Bob's business is a local one, so he would have been unaffected by the Northeast and Midwest snowfalls and by the numerous flight cancellations. His clientele are generally not fancy Palm Beachers but rather middle classers.
Orchid Bob's business weakness has been confirmed by poor sales at the other growers I met with or spoke to over the weekend; I plan to stay on top of my orchid channel checks in the months ahead.
This highly anecdotal and small sampling may be meaningless or it might be meaningful. My suspicion is that many small businesses face a fate similar to Bob's.
Time will tell whether screwflation will or already is starting to take hold.
What I do know is that Bob the Orchid Man has met screwflation head-on and his orchid business is now in a depression.
We should be closely monitoring the relative and absolute performance of the Retail HOLDRS in the weeks ahead to judge whether, as I continue to suspect, the consumer will be the Achilles' heel of the current domestic economic recovery.
Look out the window. More and more Americans are being left behind in an economy that is being divided ever more starkly between the haves and the have-nots. Not only are millions of people jobless and millions more underemployed, but more and more of the so-called fringe benefits and public services that help make life livable, or even bearable, in a modern society are being put to the torch.…
Standards of living for the people on the wrong side of the economic divide are being ratcheted lower and will remain that way for many years to come. Forget the fairy tales being spun by politicians in both parties—that somehow they can impose service cuts that are drastic enough to bring federal and local budgets into balance while at the same time developing economic growth strong enough to support a robust middle class. It would take a Bernie Madoff to do that.…
The U.S. cannot cut its way out of this crisis. Instead of trying to figure out how to keep 4-year-olds out of pre-kindergarten classes, or how to withhold life-saving treatments from Medicaid recipients, or how to cheat the elderly out of their Social Security, the nation's leaders should be trying seriously to figure out what to do about the future of the American work force.
Enormous numbers of workers are in grave danger of being left behind permanently. Businesses have figured out how to prosper without putting the unemployed back to work in jobs that pay well and offer decent benefits.
Corporate profits and the stock markets are way up. Businesses are sitting atop mountains of cash. Put people back to work? Forget about it. Has anyone bothered to notice that much of those profits are the result of aggressive payroll-cutting—companies making do with fewer, less well-paid and harder-working employees?
For American corporations, the action is increasingly elsewhere. Their interests are not the same as those of workers, or the country as a whole. As Harold Meyerson put it in The American Prospect: “Our corporations don't need us anymore. Half their revenues come from abroad. Their products, increasingly, come from abroad as well.”
American workers are in a world of hurt.
—Bob Herbert, “A Terrible Divide” (New York Times op-ed, Feb. 7, 2011)
The schism between the middle class and flush corporations is growing ever more conspicuous. This is not meant to be a statement of class warfare or a political view; rather, it is meant as an accurate economic statement.
The market has clearly looked through and dismissed this issue and is ignoring its potential consequences, as it focuses on more constructive developments (corporate profit growth, an expansion in merger and acquisition activity, positive stock price momentum, etc.).
Stay tuned to see whether screwflation plays out and challenges the self-sustaining recovery thesis that has provided the foundation for the current bull market.
“When I see memos from Howard Marks in my mail, they're the first thing I open and read. I always learn something, and that goes double for his book.”
—Warren Buffett
Howard Marks has recently produced a tour de force, an exceptional and seminal book on behavioral finance (and investing) entitled The Most Important Thing: Uncommon Sense for the Thoughtful Investor (Columbia Business School Publishing, 2011).
Just published this month, it is the single-best investment primer I have read since the two classics:
And, similar to the aforementioned investment classics, it is likely that Howard's book will find its way, in the fullness of time, to the classrooms of the leading business school and MBA programs.
Among the many extraordinary features of his book is that it will likely appeal both to investment novices as well as investment experts.
In a manner, The Most Important Thing is much like reading Warren Buffett's annual letters to Berkshire Hathaway's shareholders, but it takes Buffett's witticisms several steps further in developing a broad framework and investment philosophy of how to think about the markets and how to differentiate one's investment performance especially during times of uncertainty.
I have learned over my career that there is no surefire recipe for investment success; there is no magical elixir. Those who simplify investing in how-to books or list glittering generalities in the business media do their audience a great disservice.
Howard recognizes that the investment mosaic is a complicated one when he writes, “In actuality, successful investing requires thoughtful attention to many separate aspects—all at the same time. Omit any one and the result is likely to be less than satisfactory.”
And it is that complexity that Howard Marks embraces with 20 chapters of most important things.
Above all, Howard recognizes the importance of having an investment perspective:
One's investment philosophy is formed and accumulated over lengthy periods of time—it is not only a combination of nuts and bolts and qualitative and quantitative educational instruction received but it includes life's lessons and, most importantly, the willingness to go through one's investment life with your eyes open. You must be aware of what's taking place in the world and of what results those events lead to. Mark Twain once said and Warren Buffett has often repeated the phrase that “history may not repeat itself but it rhymes.” Only in this way can you put the lessons to work when similar circumstances materialize again. Failing to do this—more than anything else—is what dooms most investors to being victimized repeatedly by cycles of boom and bust.
And Howard has formulated his perspective after having seen most, if not all of it, over his career:
Living through the 1970s was especially informative, since so many challenges arose. It was virtually impossible to get an investment job during this period, meaning that in order to have experienced the decade, you had to have had a job before the decade started. How many of the people who started by the sixties were still working in the late nineties when the tech bubble rolled around? The answer is not many as most professional investors had joined the industry in the eighties or nineties and didn't know a market decline could exceed 5%, the greatest drop seen between 1982 and 1999. It also helps to explain why so many got caught so badly in 2008.
Investment perspective and lessons aplenty are weaved with terrific anecdotes and powerful prose throughout Howard's work:
A wise friend once said to me that: “Experience is what you got when you didn't get what you wanted.” Good times teach only bad lessons: that investing is easy, that you know its secrets and that you needn't worry about risk. The most valuable lessons are learned in tough times. In that sense, I have been “fortunate” to have lived through doozies: the Arab oil embargo, stagflation, nifty 50 stock collapse and the death of equities in the 1970s. Also, Black Monday in 1987, when the DJIA dropped by 23% in value in one day; the 1994 spike in interest rates that put rate-sensitive debt instruments into free fall; the emerging-market crisis; Russian default and the meltdown of Long Term Capital Management in 1998; the bursting of tech stock bubble in 2000–01; the Enron accounting scandal in 2002; and, of course, the worldwide financial crisis of 2007–08.
Howard lists 20 most important things:
Of all the most important things, I thought Howard's chapter on the ingredients of developing a variant view (or edge) was possibly the most informative and useful.
The author underscores that investment approaches cannot be routinized—to succeed, we have to be less mechanistic and more adaptive. When the environment changes, so must we as investors.
To this observer, above all, the investment lessons in The Most Important Thing were what Howard describes as “second-level thinking”:
You must think of something others haven't thought of, see things they miss or bring insight they don't possess. You have to react differently and behave differently. In short, being right may be a necessary condition for investment success, but it won't be sufficient. You must be more right than others, which by definition means your thinking has to be different. Let's call this second-level thinking.
First-level thinking says, “It's a good company: let's buy the stock.” Second-level thinking says, “It's a good company, but everyone thinks it's a great company, and it's not. So the stock's overrated and overpriced: let's sell.”
First-level thinking says, “The outlook calls for low growth and rising inflation. Let's dump our stocks.” Second-level thinking says, “The outlook stinks, but everyone else is selling in panic. Buy!”
First-level thinking says, “I think the company's earnings will fall; sell.” Second-level thinking says, “I think the company's earnings will fall by less than people expect and the pleasant surprise will lift the stock: buy.”
In other words, first-level thinking is simplistic and superficial—second-level thinking is deep, complex and convoluted. The difference in workload between first- and second-level thinkers is massive.
Finally, second-level thinkers ask the following questions:
- What is the range of likely future outcomes?
- What outcome do I think will occur?
- What is the probability I am right?
- What does the consensus think?
- How does my expectation differ from the consensus?
- How does the current price for the asset comport with the consensus view of the future and with mine?
- Is the consensus psychology that's incorporated in the price too bullish or bearish?
- What will happen to the asset's price if the consensus turns out to be right and what if I am right?
When I received a copy of The Most Important Thing two weeks ago, it came with a personal note from Howard Marks that said, “We think so much alike, you could have written this (see p. xii).” I proceeded to p. xii in the book's Introduction to find the following passage:
I've also benefited from my association with Peter Bernstein, Seth Klarman, Jack Bogle, Jacob Rothschild, Jeremy Grantham, Joel Greenblatt, Tony Pace, Orin Kramer, Jim Grant and Doug Kass.
While I don't deserve that reference (and certainly don't deserve to be included in the class of such brilliant investors), I wanted to, in the interest of full disclosure, point out the mention.
That said, I can honestly say that his reference (to me) had nothing to do with the praise and effusive comments I have for his wonderful book—a book that I literally could not put down and one that I have already read twice!
Run, don't walk, to purchase Howard Marks's The Most Important Thing: Uncommon Sense for the Thoughtful Investor.
“We must base our asset allocation not on the probabilities of choosing the right allocation but on the consequences of choosing the wrong allocation.”
—Jack Bogle
Barton Biggs is a former creative writing major at Yale University, a former Morgan Stanley head strategist and research director—he was responsible for the formation of the investment management business at Morgan Stanley—author of Hedgehogging (my personal favorite book on the hedge fund industry) and founder of hedge fund Traxis Partners.
Barton is an iconic figure, similar to Peter Lynch, Lee Cooperman, George Soros, Stanley Druckenmiller and Jim Chanos. But unlike Omega's Lee Cooperman and ex-Fidelity's Peter Lynch, whose strength is (and was) going belly to belly with company managements in an intense bottom-up approach, Soros Management's George Soros and Duquesne's Stanley Druckenmiller, whose wheelhouse is speculating in foreign exchange and interest rates, and Kynikos's James Chanos, whose strength is on the short side, Barton's turf is in macroeconomic investing and in asset- and geographic-allocation strategy.
Barton is incredibly smart, his investment knowledge base is broad, and he doesn't suffer fools gladly. He can be daring in market view and aggressive in portfolio structure, but he has learned over the years to be disciplined in controlling risk and respectful of Mr. Market.
I have routinely communicated with Barton over the years, and he is nice enough to send me his irregular commentary about the investment turf. That commentary is usually a combination of investment philosophy and a view of the markets rooted in macroeconomic investing. His most recent essay, “It's Never Easy,” crossed my desk last week, and I want to summarize his comments, as they represent true pearls of wisdom.
“Serving on the front lines of this investment discipline for the past forty years with some of the most influential investors of our time, Deemer provides a front-row seat on some fascinating history, rich with insights and anecdotes and, of course, loaded with wisdom. His true gift is making the arcane world of technical analysis accessible and relevant to all investors. If Warren Buffett is the Oracle of Omaha, Deemer is the Prophet of Port St. Lucie.”
—Sandra Ward, senior editor, Barron's
In Port St. Lucie, Florida, lives a longtime friend of mine, Sir Walter Deemer, a technical analyst par excellence who recently authored an excellently written new book, Deemer on Technical Analysis: Expert Insights on Timing the Market and Profiting in the Long Run (McGraw-Hill, 2012).
I am proud to have endorsed the front cover of Walt's book.
But first, some details on how I met Walt.
Back in the mid-1970s, I was working for Larry Lasser (who was then director of research) and Jerry “The Chief” Jordan (who ran the aggressive funds) at the Putnam Management Company in Boston. Larry and The Chief were tough to work for, but never in my career did I learn so much as under their tutelage. And I will forever be grateful for that.
At that time, Walt Deemer was the technical analyst at Putnam. He was deeply respected, having learned his craft from the best there ever was, Bob Farrell, Merrill Lynch's legendary technical analyst.
“I'm glad General Motors stock didn't go down in vain.”
—Walt Deemer, technical analyst for The Putnam Management Company (1975)
My favorite story about Walt was back in 1975, when General Motors (GM) cut its dividend, and two of Putnam's portfolio managers in total panic wanted to sell the stock. In fact, they were apoplectic after the announcement. Walt, a man of dry wit and strong technical moorings, remarked in the halls of Putnam that morning (repeatedly so that all could hear), “I'm glad General Motors stock didn't go down in vain.”
Walt turned out to be very right on General Motors' shares. (He usually turned out right!) After the dividend cut, the shares subsequently doubled in 1975 and added another 47% in 1976.
Now back to Walt's new book!
To me, Deemer on Technical Analysis is not only an informative tour (of 25 Chapters and 300 pages) through Technical Analysis 101 but it is filled with lively and witty anecdotes and investing lessons that are invaluable, even to the fundamental investor!
My favorites include a discussion of Bob Farrell's 10 lessons (plus one!) of investing and the fable of the fishing boat. (Readers will relish the appendix, which lists free Internet sources of information on technical analysis and some valuable and free charting sites.)
Here are Bob Farrell's official 10 rules as related by Walt:
And Walt offers a new rule from Bob:
Then there was the time in 1978 when the bear market was taking its toll on Putnam's holdings. Walt just couldn't make the portfolio managers understand that bear markets trump even the best fundamentals.
So he circulated the following memorandum to Putnam's investment department, which he considers the best thing he ever wrote:
Once upon a time, there was a big fishing boat in the North Atlantic. One day the crew members noticed that the barometer had fallen sharply, but since it was a warm, sunny and peaceful day, they decided to pay it no attention and went on with their fishing.
The next day dawned stormy and the barometer had fallen further, so the crew decided to have a meeting and discuss what to do.
“I think we should keep in mind that we are fishermen,” said the first to speak. “Our job is to catch as many fish as we can; that is what everyone on shore expects of us. Let us concentrate on this and leave the worrying about storms to the weathermen.”
“Not only that,” said the next, “but I understand that the weathermen are ALL predicting a storm. Using contrary opinion, we should expect a sunny day and, therefore, should not worry about the weather.”
“Yes,” said a third crew member. “And keep in mind that since this storm got so bad so quickly, it is likely to expand itself soon. It has already become overblown.”
The crew thus decided to continue with their business as usual.
The next morning saw frightful wind and rain following steadily deteriorating conditions all the previous day. The barometer continued to fall. The crew held another meeting.
“Things are about as bad as they can get,” said one. “The only time they were worse was in 1974, and we all know that was due to the unusual pressure systems that were centered over the Middle East that won't be repeated. We should, therefore, expect things to get better.”
So the crew continued to cast their nets as usual. But a strange thing happened: the storm was carrying unusually large and fine fish into their nets, yet at the same time the violence was ripping the nets loose and washing them away. And the barometer continued to fall.
The crew gathered together once more.
“This storm is distracting us way too much from our regular tasks,” complained one person, struggling to keep his feet. “We are letting too many fish get away.”
“Yes,” agreed another as everything slid off the table. “And furthermore, we are wasting entirely too much time in meetings lately. We are missing too much valuable fishing time.”
“There's only one thing to do,” said a crew member. “That's right!”
“Aye!” they all shouted.
So they threw the barometer overboard.
(Editor's Note: The above manuscript, now preserved in a museum, was originally discovered washed up on a desolate island above the north coast of Norway, about halfway to Spitsbergen. That island is called Bear Island and is located on the huge black-and-white world map on the wall in Putnam's “Trustees Room” where weekly investment division meetings took place.)
What differentiates Walt's book and sage advice is that he was on the front line—he walked the walk in leading Putnam Management's technical analysis effort when Putnam was one of the premier money management firms extant.
I want to close by repeating what I view as my buddy/friend/pal Walt Deemer's most famous words of wisdom—these words are always relevant, perhaps even more so in today's markets.
“When the time comes to buy, you won't want to.”
—Walt Deemer
It was early 1992.
I was still recovering from a July 1990 harness racing injury that left me in a wheelchair and in a full-body cast.
I was going stir crazy at home and I decided to write a research report on Marvel Entertainment Group, a recently minted initial public offering (IPO) that was majority owned by Ron Perelman.
I spent a few weeks calling comic book retailers, distributors, Marvel's competitors and even some comic book writers who worked at the company and elsewhere.
I had been reading Alan Abelson's column in Barron's since the early 1970s, when I was an MBA student at the Wharton School. I dutifully read Barron's by 7:00 A.M. each Saturday, and I have been running to buy it every Saturday since. My first stop was always “Up and Down Wall Street,” Alan's signature page.
I decided to show my critical analysis of Marvel to Alan Abelson.
Upon its completion and when I could physically leave my New York City apartment, I ventured into a van with my full-time nurse to Alan's office on the sixteenth floor of the Dow Jones building in downtown Manhattan.
I had never met Alan—I had no appointment.
I wheeled up to the receptionist (with exterior fixation rods in my left leg and still in a full-body cast) and asked if I could meet with Alan Abelson. I had a critical analysis on Marvel Entertainment, I told her.
The receptionist asked if I had scheduled an appointment, and I replied no.
She told me that Mr. Abelson only sees people by appointment and most certainly wouldn't see someone who had come in off the street and who he didn't know.
Fortunately for me, Alan was walking out of the men's room near the elevator bank and was walking by us on the way back into his office.
I appeared to be in rough shape—I suppose I was—and I imagine that this elicited some pity for me from Alan. He asked, annoyed and rather briskly, what did I want.
He actually didn't use those words. I don't know if it was just with me or with others, but this most erudite writer, had, well, a colorful vocabulary. I don't remember so many expletives in one question! (Those curse words often infiltrated his conversations with me over the next 21 years.)
Alan said he would give me 10 minutes (no more) and to proceed into his office.
I started by praising him, telling him how devoted a reader I was, but he summarily cut me short. “Get down to the [expletive deleted] reason you are here; I don't have all day,” he admonished me.
I said that I had written an analysis on Marvel Entertainment Group. Marvel, I explained to Alan, was the comic book industry leader, accounting for 57% of the entire market. Second-place D.C. Comics has 17.6%; nobody else topped 10%.
Marvel, was a famously successful IPO several months earlier, majority owned by Ron Perelman's MacAndrews & Forbes Holdings. The stock (trading at nearly $70 a share) was riding the wave of comic book collecting—it was a huge winner after being taken public at $16.50.
I asked him if he had ever heard of Marvel. He grinned and pointed to the prospectus for the Marvel IPO on his office table. It was clear he was already doing work on the company.
Our meeting was less than 10 minutes. He asked me for my home telephone number and said that he would get back to me.
It was a Wednesday afternoon. At nine that evening, Alan called my home and said that he thought it would be an interesting cover story for that weekend's Barron's.
I was in shock. I mean, are you kidding? Alan Abelson from Barron's likes my idea? I am going to be published in Barron's!
The next morning, I received a call from a Barron's fact checker, and the rest, as they say, is history.
On Saturday morning, my column, “Pow! Smash! Ker-plash!—High-Flying Marvel Comics May Be Headed for a Fall,” was featured in Barron's, and that article marked the beginning of my relationship with Alan and with his magazine.
The thrust of my column was that Marvel's growth was about to stall, the debt load would weigh on the company's future returns and that the company's comics “increasingly resort to gimmickry to break down consumer resistance” to price increases. I also cited the likelihood that independent comic books that took more risks were beginning to gain market share and to attract mainstream comic book writers. Indeed, I suggested that some high-level defections from Marvel were imminent. On cue, the following week after my column was published, eight top Marvel artists and writers defected to rival Malibu Graphics (with an industry market share of only 4%), where they were given unprecedented editorial and financial control over the characters they created and formed their own imprint, Image Comics. Going to Malibu were Rob Liefeld (who worked on The New Mutants, X-Force and Youngblood), Jim Lee, Chris Claremont (X-Men), Erik Larsen and Todd McFarlane (Spider-Man).
The following Monday was a federal holiday, and when the market opened on Tuesday, Marvel's shares went into a tailspin, dropping by over $11 a share, to $54.65, and Perelman lost nearly $100 million on paper.
Marvel lashed back at my article, calling its assertions “inaccurate and highly misleading.” Terry Stewart, the company's CEO said my Barron's feature had a lot of “erroneous conclusions.” The company sued me for a great deal of money for authoring such an “inflammatory article.” Marvel lost the suit and paid my incurred legal expenses.
Alan was angry about the suit. Soon after I won the judgment/verdict, he wrote a column that Marvel's listing on the New York Stock Exchange gave Perelman a sense of entitlement and the notion that he was immune to criticism (or something to that effect).
Within a year, Marvel bought Fleer baseball cards, which had also benefited from the interest in collecting.
Soon thereafter Alan interviewed me, and I reported that the acquisition would be Marvel's downfall—adding more corporate debt and owning two businesses (comics and baseball cards) was a huge mistake. Moreover, there was no synergy between the two businesses, both of which appeared to be peaking in popularity. I said in the interview with Alan that in real life my cousin was Dodgers' Hall of Famer Sandy Koufax. Did that mean I could play baseball? No. Indeed, baseball was one of my worst sports!
In early 1993, Marvel purchased 46% of ToyBiz, which possessed the right to sell Marvel toys. In the meantime, Perelman upstreamed huge dividends to his companies, and he sold $500 million of bonds secured by Marvel's shares. In 1994, Marvel purchased an Italian sticker company (Panini), and the following year it bought SkyBox International.
Throughout these events, Alan kept on writing, with me as the source, about what a mess Marvel was getting into, and each time he supported my original analysis on the company.
In December 1996, the debt-laden Marvel filed for bankruptcy, and my reputation as a short-seller was cemented.
Later, Ike Perlmutter and Avi Arad snatched the company from Perelman and from Carl Icahn, who had accumulated a large position in Marvel's bonds.
In 1997, a lawsuit claimed that Perelman and Marvel's board of directors diverted $550 million to MacAndrews & Forbes prior to the company's bankruptcy. A decade later, Perelman agreed to an $80 million settlement.
In 1998, Marvel came out of bankruptcy. Eleven years later, a much different Marvel Entertainment was acquired for over $4 billion by Disney.
Alan and I would routinely talk on the telephone almost every Thursday afternoon. He would often fall back on the Marvel article and how marvelous and prescient the conclusions were.
When he wasn't around, I spoke to Shirley Lazo. Throughout the week, Alan and I routinely exchanged faxes and calls. (It has only been over the past few years that Alan has used e-mail.)
Alan was to interview me another 20 to 30 times in his column over the next two decades—way more than any other Wall Streeter during that period.
As most are aware, Alan Abelson passed away on Thursday.
I wrote a tribute to Alan for next weekend's Barron's, in which I said that Alan was a national journalistic treasure—I hope they publish it.
Alan was a wordsmith and dear friend who championed the individual investor.
My condolences to Reed Abelson and the other members of Alan's family.
I will miss him very much.
“We believe that free market capitalism is the best path to prosperity!”
—The Kudlow Creed
Dear Sir Larry,
I just read the CNBC announcement that you are retiring from The Kudlow Report at the end of March.
I wanted to write to you and say that you have been a beacon for me and many others throughout nearly a decade and a half (on The Kudlow Report, Kudlow & Company, Kudlow & Cramer, and America Now).
You are bigger than just a commentator and host of The Kudlow Report; you are a man who has faced headwinds and adversity and has conquered them all.
You are among the handful of beautiful people I have been associated with who have known trials, known struggles, have known loss and have found their way out of the depths to rise to new heights.
My Grandma Koufax used to say, “Dougie, it's not where you start that counts; it's where you end up. If the road was smooth, you have likely taken the wrong route. And, remember, never to suffer would never to have been blessed.”
Hardship either makes or breaks people. It made you.
To me, you have ended your role as host of The Kudlow Report at your professional apex.
You have been a forerunner in the integration and analysis of politics, policy and markets in the media.
Your delivery has always been fluid, your point of view always substantive, not easy tasks.
You are by far the best dressed in the Fourth Estate.
You have had the rare ability to bring out the best in investment debate and from experts with markedly opposing viewpoints. Despite spirited debates, you managed to end every segment on high, courteous and respectful notes.
I will forever treasure my many appearances on The Kudlow Report. Most were filled with exciting sparring against the bullish cabal. Some even ended up with a historic calculus, like my early-March 2009 “generational bottom” call I made on your show.
You also brought me back together with old friends during that period, like with Uncle Vinnie Farrell, Joe Battipaglia, Mikey Holland and many others.
On a more personal note, your mentoring of my son Noah will never be forgotten by me, him, or my family.
Now with Noah getting his doctorate at the University of Pennsylvania, I am sure he is on the way to an even more exciting career than when he originally met you that first time over dinner at Nicolas Restaurant in New York City. You, in part, are responsible for some of Noah's great successes in print (Huffington Post and TheStreet), on television (MSNBC) and in his important role in addiction treatment.
To myself, Noah, and so many others that you have helped, you are a personal role model.
I am a former “Nader Raider”; you are a former member of the Reagan administration. Our politics are diametrically opposed, but our debates have always been lively and respectful of view.
You are my favorite Republican, ever.
I call you Sir Larry because of the esteem I hold for you.
Like members of my family, I like to think that you call me Dougie because of the fondness you have for me.
Wherever you are and whenever you call, Sir Larry, Dougie is there for you.
With Love and Fondness,
Dougie
“Those who do not remember the past are condemned to repeat it.”
—George Santayana
In January 2004, Boca Biff made his debut in my diary.
Boca Biff is a real person. He is not a composite of individuals I have met over the years.
Boca Biff's investments, both in name and in dollar size, were all actually made by him.
It is fair to write that Boca Biff lives by the investment credo that man's greatest glory is not in never falling, but in rising every time we fall, because fall is Boca Biff's middle name.
No character (and there have been many characters) I have written about has elicited such a response from so many subscribers and contributors.
Over the past 15 years, Boca Biff has embodied the mentality of the day trading and speculative community who worships at the altar of price momentum in the church of what is happening now. As such, Boca Biff has become a better market/sector/asset class barometer than the put/call ratio, Investors Intelligence, mutual fund/hedge fund exposures or any other sentiment indicator.
The Boca Biff indicator has become a wonderful measure of the very embodiment of speculation during Mr. Market's frequent speculative bouts.
I suppose we can say is that what Boca Biff has learned from history is that he hasn't learned from history.
But let's begin by framing Boca Biff's speculative diary of trading over the past 15 years.
It all started with that once-in-a-generation orgy of speculation in the late 1990s as a new class of investors emerged on the market's stage—namely, day traders.
The 1997–2000 time frame held a historic precedent that took day trading to a new art form. As most recall, the bubble began to burst in the first half of 2000—almost, it seemed, as quickly as it surfaced. In time, the Nasdaq fell by about 75% from its highs.
Over nine years ago, I introduced readers to the true story about my favorite day trader, Biff Marksman. I subsequently changed his name to Boca Biff in order to protect his anonymity better and in order to protect our innocent subscribers from him.
Biff is an old acquaintance—we have had a love/hate relationship over the years. He operates out of his home in Boca Raton, Florida. You can almost see his dwelling from the entrance of the Boca Raton Hotel, a locale that former Securities and Exchange Commission (SEC) Commissioner Breeden once described as a town where there are more sharks on land than in the waters surrounding it. The city's name comes from boca de ratones, a Spanish term meaning “rat's mouth,” that appeared on early maps and referred to hidden, sharp-pointed rocks that gnawed or fretted ships' cables. It is a town where the Ferraris, mansions and over-the-top conspicuous consumption are known to sometimes run wild.
As significant, Boca Raton has always been the capital of the day trading community and ground zero for brokerage boiler rooms—many of the sons and daughters of Stratton Oakmont found their way to the area (e.g., Biltmore Securities, LH Ross, and the Harriman Group)—that inhabit the resort area.
Boca Raton is Boca Biff's home base.
As I mentioned previously, I first wrote about Biff in 2004.
I hadn't heard from Biff since 2000, as I thought that he was cured from the leveraged day-trading influence that took the United States and the markets by storm in the mid- to late 1990s, contributing to a mushrooming in margin debt, the ultimate speculative rise in our markets and the eventual—or should I say inevitable?—piercing of that bubble. Of the day traders, there were few that played as intensely as my friend Biff.
Biff's first plunge into day trading was in early 1996 with Iomega. Biff became a certified Iomegean, as Iomega became the “it” stock back then with a market capitalization that peaked at $6 billion as investors believed it was the future of digital storage. The shares peaked out at over $100 a share in 1996 and sold down to $2 a share by January 2000. Biff didn't play hard at that time, but he clearly got the speculative fever.
Unlike most day traders in the late 1990s, Biff had a real job—he owned a high-end window and door company—but as stocks mounted their speculative (but short-lived) ascent in 1998, his primary gig took a back seat to trading stocks.
Biff operated out of his den office and turned about $500,000 into almost $15 million in a matter of 24 months by day trading the most speculative stocks extant and by purchasing and trading dot-com IPOs.
During that period (1998–2000), I spoke to Biff 5 to 10 times a day. In most of our conversations, Biff ridiculed me for not getting on the bandwagon and trading the most speculative four-letter stocks on the Nasdaq. Our conversations were one-way, as Biff did the talking or, in most cases, the gloating, as his disinterest in the companies' business models was legion.
Coherence of investment thought and clarity of expression were not Biff's forte.
After Biff made the first $10 million day trading Internet stocks and playing the IPO market, I suggested that, after all our conversations, he had absolutely no knowledge of his trades/investments and that he should stop trading and book his profits and place them into municipal bonds. His response to my recommendation is not suitable for these pages, and off on his day trading merry way he went, adding another $5 million or so of profits into late 1999–early 2000. His original trades of 5,000 to 10,000 shares in size quickly turned into investments of 150,000 to 200,000 shares in some of the most speculative stocks extant.
His investment vocabulary and stock holdings included such beauties as eToys, Pets.com, e.Digital, theGlobe.com, Kozmo.com, Boo.com, Exodus, and Xcelera.com, a group of companies that quickly disappeared from sight and caused a generation of day traders and speculators to return to their original professions.
In time, Biff lost not only his $15 million of profits but an additional $5 million, leaving him in a deep financial hole. He also had a tax problem as he received extensions on his tax returns because he wanted to defer paying taxes on his short-term gains in order to “have more capital to play with.”
Humbled and broken, he went back to his old day job on a full-time basis—that is, after selling a minority interest in his company to a well-to-do relative in order to raise funds for federal taxes he owed.
Though at one time he was up $15 million, his cumulative loss from 1997 to 2000 now stood at $5 million (before federal tax penalties and interest charges).
In 2004, I received a telephone call from Biff, as if nothing had happened and as if we had maintained a dialogue over the previous four years. (We had not.) Biff was back day trading in force, seduced back by the emerging speculative forces (and his animal spirits) and the rewards he reaped from them.
The emergence of “worldwide liquidity” and low interest rates were the watchwords of his faith in the U.S. stock market.
Back was Biff, touting those four- and five-letter stocks sans business models and purpose—except possibly to briefly enrich the day traders and reward the insiders who were selling their holdings to the day traders. At that time, in my numerous conversations with Biff, it was almost as if he believed that the 1990s was a dress rehearsal for the mid-2000s.
In 2004, his stock du jour, Taser, replaced his infatuation with his original spec venture in Iomega in 1996–1997 and then the Internet stocks back in 1999. (Most of his holdings back then went to zero.) He more doubled his money in Taser, which climbed from $15 to $35 in 2004 only to fall back to $5 a share later that year.
From Taser he parlayed his profits into a package of homeland security stocks. Here is what I wrote in 2004:
[I] just picked up the telephone to hear the shrieking, hysterical voice of Boca Biff, who is all over the homeland security rage.…His stocks (IPIX, Mikron Infrared, and Mace Security International) all sounded like he was bellowing about his speculative choices of yesteryear.
Unfortunately, the outcome was the same. The air fell out of Biff's speculative homeland security universe as the year came to a close. Very soon thereafter, all of these plays disappeared from the face of the stock pages.
Biff made a slight recovery in Google's shares after the homeland security debacle, but forays into crude futures, Overstock.com's shares and a large investment made in Pulte Homes and some other tertiary homebuilders were his undoing. By the end of 2005, he was wiped out again.
His cumulative loss from 1997–2004 now stood at about $15 million.
By December 2006, an unrepentant Boca Biff returned to the markets in force for the third time in nearly a decade.
During that time, I wrote the following on these pages:
He's back! Last night, here I was, minding my own business on the cold linoleum floor, drinking cheap tequila, when the telephone rang. It was Boca Biff!
Boca Biff has been licking his wounds.…
He promised his family, which apparently could no longer tolerate the ups and downs, that he wouldn't again venture into the stock market. Nor would he speculate in homes and land. After casually responding to one of those spam e-mails to refinance his home, however, from an eager mortgage broker that was about to go out of business—he's got a beautiful old Mizner-style home in Boca—he found himself very soon thereafter (in early 2006) with about $1.5 million of loose change.
His wife forced him to give the proceeds of the refinancing cash out to a mutual friend (Baron Von Broker) who dutifully put these monies in a money-market account and far from the hands of Boca Biff. When the market bottomed in the spring, Baron Von Broker turned bullish and encouraged Boca Biff to buy conservative oil and large gold mining stocks (two sectors that he correctly felt had promise). True to his promise to his wife, Boca Biff demurred and kept his monies in the money-market account.
As Boca Biff related in our telephone conversation last night, he watched and watched the market's unrelenting rise through the summer and into the fall until he couldn't take it anymore and finally made the plunge last week (on margin). Stated simply, Boca Biff is trying to make back his accumulated $15 million-plus loss—this is the truth!—by purchasing a package of out-of-the-money calls on a group of high-beta stocks that recently have made a 52-week high, including Apple Computer, Goldman Sachs, Merrill Lynch, Google, First Marblehead, Fairfax Financial, Research In Motion, Allegheny Technologies, U.S. Steel, Baidu.com, and Las Vegas Sands.
He tells me the notional value of his calls (if exercised) exceeds $30 million! When asked why now, Boca simply said, “Don't be a moron, Dougie: It's global liquidity. Don't you get it?” And then he actually said to me that he heard from his driver that General Electric will receive a bid by a private-equity firm sometime in the next six months.
I should add that Boca Biff transferred all his money from the money-market fund from Baron Von Broker (who being a conservative and intelligent fiduciary, refused to accept Biff's aggressive strategy) and purchased the call positions from a newly formed, Boca Raton, Florida-based brokerage, Penny, Shark & Oakmont.
I should also add that Boca Biff is currently being divorced by his wife.
While this venture back into stocks (and call options) proved profitable, he recaptured only about one fifth of his losses as his capital base had been depleted and limited his exposure.
Fortunately, sales at his window and door business collapsed a few months before the Great Decession of 2008–2009 became a reality, and with that warning sign, Biff cashed out well before the collapse in the U.S. stock market.
His cumulative loss from 1997–2007 now stood at about $11.5 million.
With more lives than an alley cat, Biff, the ultimate plunger and that paragon of speculation, was back, resurfacing in the early winter of 2009 as the markets rallied off of the generational bottom in March and began to stabilize.
Biff and I hadn't spoken in a while; I think he was embarrassed to call me. He had been licking his wounds, which included unprofitable forays in the stock market, large losses from speculating on homes in South Florida, a collapse in his window and door business and, after all of this, a failed marriage.
As Boca Biff related in a telephone conversation with me, he got remarried in 2008 to a woman who had received a reasonably large divorce settlement. Biff went on to say that he watched and watched the market's unrelenting rise through the summer and into the fall until (again) he couldn't take it anymore and finally made the plunge last week—(again) on margin.
Boca Biff was back in the game.
“I asked, “Why now?”
He responded, “Don't be a moron, Dougie. It's global liquidity. Don't you get it? Moreover, I am getting 11 basis points currently in my cash reserves at my brokerage account with Baron Von Broker.” He went on. “Importantly, I have remarried, and my new wife not only comes with some money but she has no clue regarding my investing mistakes of the past. I managed to keep my Mizner home in Boca. She loves it here, and she adores me.”
His favorite stock? AIG.
“Why?” I asked.
“Are you nuts?” he replied. “I heard from my new brokerage firm, Kennedy, Fitzpatrick and Gould [a Boca Raton–based brokerage named after the first three commissioners of the SEC] that AIG has normalized earnings power of $40 a share. And FMG (my brokers) tell me the government will be forced by Hank Greenberg (who is coming back to the board of directors) to help renegotiate their debt with the company.”
“What qualifies them to make that analysis?” I asked.
“I'll tell you what, dope. Two of the guys still have their Ferraris, so they've gotta be smart. And they have tripled my accountant's brokerage account with them in the last three months after buying the private mortgage insurers, PMI Group and MGIC Investment. That's why! Oh, they had been out of business until seven months ago; they had a little problem with the authorities and were barred from doing brokerage business for a couple of years, so they are hungry and aggressive and need to make their new clients some ca-ching. I forgot to tell you that they are so confident that they will make me money that they didn't even charge me commissions for the trades; they said all they wanted was 10% of the profits.”
I told Boca that was illegal. His response? “Whatever, loser. They've gotta live.”
“What else?”
“Fannie Mae and Freddie Mac are going into double digits on the heels of a ‘V’ recovery in housing. And they have huge short positions. The government is saving everybody. You can't lose.”
“Anything else?”
“Yeah,” said Boca Biff, “but my brokers told me they would break my legs if I mentioned them. They haven't finished buying yet.”
“Come on, Biff,” I said, “Give at least one name up.”
“There's one, Kennedy bought me 4 million shares at $2.12 last week. He has a lot of confidence in it. I think he put over three-quarters of my account in it. It's run by Kennedy's niece. She's young (I think 28 or 29), but she was a really big mortgage broker in Delray Beach in the day, and the company she runs is now buying subprime mortgages from a bunch of banks in South Florida. After the housing markets blew up, she went to Nova Southeastern University in Ft. Lauderdale and got an associates' degree in real estate in May. She's a smart one, I tell you.”
“What's the name of the company and the symbol?” I asked.
“It's called Boca Industries; I don't know the symbol. It's on the pink sheets or something. I can only get a quote from Kennedy, my broker. I think his firm owns most of the float, so he has to know something.”
Suffice to say, Boca Industries was a total fraud and soon went belly up, and it turns out that Biff was buying his brokers' stock position that they had received to promote the company. Biff was forced to liquidate his other stock holdings after once again blowing up, and Kennedy and his broker partners along with the management of Boca Industries all went to jail as they were convicted of a three-year pump-and-dump scheme.
Biff lost another $8.5 million on Boca Industries plus another $5.0 million in the other trades/investments.
His aggregate losses in day trading and investing over the course of the 12-year period (1997–2009) were back up to about $25 million.
I hadn't heard from Biff again until late 2010. I thought that perhaps his last unprofitable foray from 2004 to 2009 (and the credit crisis that stamped out his profits) coupled with a near $9 million loss from an investment in Boca Industries that he purchased in late 2009 were enough to rid him of his stock market jones.
After yet another divorce, however, Boca Biff, who obviously has a way with the opposite sex, married the young daughter of a well-known New York City real estate magnate who owns a professional sports team.
In [another telephone] conversation, Biff told me that he has been purchasing out-of-the-money calls in his new wife's name (and with his wife's money) on only two stocks: Netflix and Apple. For a total investment of “only” $4 million, Boca Biff tells me he has calculated that when the securities rise by another 50%, he will recoup his entire losses since 1997.
When I questioned the wisdom of putting all his eggs into two baskets, he laughed at me.
“Moron, these stocks go up every day whether the market rises or falls. An idiot can see that these stocks will go up another 50% in the next few months. And maybe I am too conservative; they could double. Jim Cramer hasn't even put the symbols on his knuckles the way he used to do with Google on his Mad Money show! Just you wait for that!”
“How do you know for sure that they will continue to rise, Biff? Isn't holding out-of-the-money calls on only two stocks very risky?” I asked.
“My stock broker is my new stepson. Do you think he would hurt his mother? Dougie, don't you read Warren Buffett's rules of investing? He says that wide diversification is only required when investors do not understand what they are doing. I know what I am doing! Anyway, how else can I get my money back?”
He advised me to tell you that he is, “laughing all the way to the bank with his Netflix and Apple out-of-the-money calls.” With his profits he bought Amazon out-of-the-money calls and made some more money.
On a roll, Boca Biff was getting more and more cocky.
He suggested that if I have a blog, then his recent picks should entitle him to his own blog next to Jim Cramer's.
I told him that it was a good idea and that it should be labeled, “Over the Cliff with Biff.”
He hung up on me!
Biff made back $11 million in the call foray—he would have made more, but a health scare forced him to cash out (profitably).
His cumulative loss since 1998 now stood at slightly under $14 million.
Let's fast forward to March 2012 when I caught up with Boca Biff as his guest at a lavish dinner at Trump's Mar-a-Lago Club in Palm Beach, Florida.
Twenty months ago, Biff and The Donald became new BFFs and Biff became a new member of Mar-a-Lago; they initially became friendly when Biff's company provided the 145 doors and windows in a renovation of Trump's palatial estate.
Our conversation went something like this:
“My cancer is licked now, but it has been a rough road,” Biff said. “Between the hospital visits and a debt restructuring at my window and door business [he had expanded too aggressively and couldn't withstand the South Florida construction drop], I had no time for the markets, which kind of sucked.
“But my new stepson is this genius who attended the California Institute of Technology. He and his pals started some kind of company—I am still not sure what it does—that I invested only $400,000 in. They sold it to Google late last year and I cleared $9 million! I put $1.5 million into three new Silicon Valley startups with my stepson. (He is running one of them.)
“I am a Silicon Valley angel now. I go out to the West Coast twice a month, and I am part of a group that listens to these 25-year-olds talk about their startups. They call me Biffy the Angel.
“And I am now back in the game, Dougie.”
“Please don't tell me you are speculating in pinksheet tech stocks now or in the latest craze in the stock market.” I implored.
“What, do you think I am an idiot? This venture stuff is ‘free money.’ It's hard to lose; the appetite for these companies is growing exponentially!
There is one and only one stock I want to invest in: Apple! But this damn stock is a money burner at almost $600 a share, so I have been buying these weekly call options. I trade thousands of ’em every day. A lot of action. The premium hurts and I haven't made any money yet, but I am feeling more confident in this play than any other I have done in the last few years. I know ’cause I even read Walter Isaacson's biography on Steve Jobs.
Well, maybe there are two stocks to invest in. To be conservative and diversify a bit, I am buying a few thousand out-of-the-money Priceline calls.”
You just can't make this stuff up.
With his venture capital score (the sale to Google) and some modest gains in his Apple call play, Biff's cumulative loss was reduced to only $2.5 million—after losses of about $25 million three years ago.
Boca Biff's Silicon Valley startups didn't do as well as his original $9 million score, but he only had a relatively small amount of money invested in them.
September 2012 Biff had made another $9 million in Priceline and Apple options, remarkably bringing him back into the black after losses of almost $25 million by early 2009.
While the bottom fell out of Apple's shares in late September, Biff lost about $7.5 million in Apple calls. After the big swings (in profits and losses), he was now dead even from his crazy trading since 2004.
Biff called me sporadically in the interim interval, just to shoot the breeze, though we did have a serious conversation in early October 2012 to discuss my bear case for Apple—at the time he was long thousands of Apple calls.
Boca Biff was now about flat in his investment account from 1997 to present—but what a ride (up and down) it had been.
We didn't talk investments at all until I spoke to him last Thursday night.
His door and window business he told me was expanding rapidly—he was rolling up competitors through stock acquisitions (under the promise that he will go public), but he had recently decided to make the single largest speculation in his life.
Boca Biff, he explained to me, invested $15.5 million in bitcoins. And he invested another $3 million to $5 million in a San Francisco-based company called Coinbase, a bitcoin wallet company that recently raised $25 million (led by the well-regarded venture capital firm, Andreessen Horowitz).
As Biff reasoned, central bankers are debasing all currencies, and with real interest rates rising, gold has little interest for him. Bitcoin will, according to Biff, become the only peer-to-peer payment network of digital currency in the world. “This is the ground floor,” exclaimed Biff.
He has not only done a great deal of work on his theory, but according to Boca Biff, “Satoshi Nakamato” (the pseudonymous developer of bitcoin) has been his houseguest over the past few months in Boca Raton, Florida.
During one weekend, Nakamato explained the “blockchain” to Boca Biff, a transaction ledger that assured the integrity of bitcoin as a digital currency. And that bitcoin has first-to-market mover advantage over other crypto currencies such as litcoin, peercoin, namecoin, quarkcoin, megacoin, and feathercoin.
Citing his new consultant on his bitcoin investments, economist Dr. Tyler Cowen, the future of bitcoin, Boca Biff explained, was in China, where the digital currency provides an easy path to avoid strict capital controls and the exportation of currency out of their country.
Our conversation was cut short, as Boca Biff was off to have dinner at the Four Seasons Hotel in New York City with Cameron and Tyler Winklevoss and his daughter. His daughter, let's call her “Boca Lilly,” in real life is currently a second-year student at Harvard Business School. She was introduced to the Winklevoss twins after they gave a lecture at Harvard.
Eighteen years later, Boca Biff's investing saga continues.
If a cat has nine lives, Boca Biff might be on his twelfth life.
Boca Biff has become one of my most reliable market/asset class tells.
I personally can't wait for the next chapter of “The Tales of Boca Biff.”
It is probably coming sooner than we think.