limtex: *** OT ***
What a classy response! I reread what I had written the other day and was a little surprised by its nasty edge. Since my intent was illumination rather than snide sarcasm, please accept my apologies for the tone (but not the message).
Here is the root of my concern. My firm is now running over $2.5 billion and funds continue to pour in on a daily basis. Since we manage money for high net worth individuals, and have a $2.5mm minimum for new accounts, I try to meet with each of these new investors so that I can understand their objectives and help calibrate their expectations. Besides the professional merit of this approach, I find that I learn much about investor psychology and (hopefully) I can prevent the firm from being engaged by a "bad" client (i.e. someone whose expectations we could never meet). My great fear and concern is that there is a widening disconnect between realistic expectations and investment return probabilities. More and more really smart, really wealthy, ostensibly sophisticated people share your attitude--"just fine me a bunch of stocks that double". Most investors seem to have forgotten that it is possible to lose money in the market and, more importantly, people seem not to understand that stock prices cannot continue to advance faster than corporate earnings for an indefinite period. Details such as these are being lost in a feeding frenzy of greed and false hopes. Such was the case during the tulip craze in Holland, such was the case in Japan during the 1980's (anybody remember the book "The Japan that can say no" which was an arrogant exercise in top-of-the-market nationalism?) and such is becoming the case in the U.S.
When I look at the stocks that are currently leading the market, I find them falling into two categories: "good stories" and companies with no perceived earnings disappointment risk. Although nobody can really explain what its business model will look like in three years, Yahoo is valued at over $6 billion--supported by less than $125mm in trailing revenue. But it has a really cool story! Good God! On the other hand, fine companies like Cisco, Microsoft and Lucent and Nokia, with highly-visible, near-term earnings momentum, are trading at valuations that I cannot justify even if I extrapolate (and accelerate) their current fundamental prosperity. Such is a momentum driven market.
Such inertia-based investing used to be known as "greater fool investing". Its current adherents believe that in this liquidity driven bull market, its OK to grossly overpay for a company that is performing well because other still greater fools will bid the stock ever higher as long as the earnings momentum stays intact. Why does this phenomenon occur? Well, consider my firm as an example. We are currently sitting on almost $400mm in cash, which is earning just over 5%. If new funds continue to pour in, and I don't put the money to work somewhere, my performance will ultimately lag the market materially. At which point, presumably, some portion of my client base will conclude that my IQ has somehow declined and pull their accounts--which will cost me money personally because my firm's income will decline. Most professionals consider this to be a bad thing. Now, let's consider the cynical alternative. I could take my clients money and put it into big visible, albeit overvalued, blue chip names like Lucent, Cisco etc., if the market keeps going up, these stocks are likely to continuing performing well (remember all those greater fools). On the other hand, if the market falls apart, these big liquid names should be easier to sell, should hopefully outperform (because of their perceived safety) and, in any event, are "defensible blue chips" even if I lose money in them. This whole philosophy has more to do with maximizing the money managers' income than prudently investing client capital.
So, limtex, when I hear you grouse about Nokia's performance relative to Qualcomm, I related it immediately to the momentum investors' credo. To be honest, I basically understand why QC's stock is languishing. Near-term earnings visibility is limited, which takes out the momentum crowd. Questions about the company's manufacturing capabilities, not to mention concerns over South Korea and the rest of Asia, are off-putting to many lesser informed fundamental investors, and--for icing on the cake--there are 14mm shares sold short, so there are a legion of short-sellers trumpeting anything or everything that can be construed as negative. This collective headwind probably keeps QC's stock in a trading range until people begin to understand the license, royalty and CDMA-market implications of W-CDMA, the infrastructure group's march towards profitability, the progress that QPE is making towards improving its margins, the company's enormous, if undemonstrated, earnings power, and Irwin's commitment to increase shareholder value. When will psychology change? As early as the next week or two, when the Mexican contract gets announced or (more probably) as late as November, when the company reports its September quarter results.
The difference between your philosophy and mine is that I do not appraise the merit of my investment day-to-day. I have made a carefully reasoned, thoroughly researched, and economically significant investment in a company that I believe has exceptional management and a powerful technology advantage. I recognize that the path to economic nirvana may prove thorny and arduous, but I am patient because I am confident that my long-term return on capital (couched in three-to-five year increments) will exceed most, if not all, alternative investment opportunities. That's the way I think, that's how I invest, and that's how I believe you best protect and expand your net worth over time.
Best Regards,
Gregg
P.S. Good luck on the CFA John! |
