Why I don’t work in a big city

A question I regularly get from clients, prospects, family and friends is: “if you’re so good at what you do, why don’t you work in a big city like New York, Boston, Chicago or San Francisco like all other investment managers worth their salt?”

It’s a great question, and highlights what most people think: a) people who are good at what they do need to go to the biggest stage to do it, b) those who don’t go to that stage probably aren’t as good as they say.

Fair point.  No truly great baseball player plays pick-up games on weekends.  No virtuoso pianist only plays in her basement. 

Investing, however, is different.  With investing, all you have to do to compete against the best is buy or sell securities directly.  Each time you buy, you may be buying from the best; when you sell, you may be selling to the best.  You never know who is on other side of your trade, but the best are all participating in the same markets.

So, it’s not necessary to go do New York, London or Hong Kong to compete with the best.  All you have to do is decide to buy securities directly.  I do. 

The reason why I’m not in a big city can be summed up in one word: independence.

To be a great baseball player, you have to compete against the best.  To become a virtuoso pianist, you have to play against the best.  Direct competition makes each individual better.

Investing, however, requires independence.  Groupthink is the source of poor performance.  So are marketing departments. 

If you’re pressured to sell products because you work on commission, you’re not independent and unlikely to beat the market.  If you’re boss is pressuring you to post good quarterly results to increase assets under management, you’ll lack the independence required to out-perform.

If you’re surrounded by people who represent the market, it’s very hard to resist being affected by their thinking.  If you meet and talk daily with people who disagree with you and think you should follow the herd, you’re almost certain to be worn down and comply. 

Or, as Benjamin Graham, Warren Buffett’s mentor, put it in the Intelligent Investor, “To enjoy a reasonable chance of continued better than average results, the investor must follow policies which are (1) inherently sound and promising, and (2) are not popular in Wall Street.”

Sound and promising means long term oriented.  Marketing departments hate that because short term results are what sell. Not popular on Wall Street means contrarian.  But, that’s difficult when you’re amidst the Wall Street herd day in and day out.

I believe I have and will beat the market over the long term because I’ve kept my independence.  Being in Colorado Springs and without a marketing department breathing down my neck is an asset, not a liability. 

Keep in mind that Warren Buffett spent his first 10 years operating out of the sun room in his Omaha home.  He, too, saw the benefit of independence.  Perhaps he was on to something.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Advertisements
Why I don’t work in a big city

Less bad than expected

This is the time of year when companies report how they did last quarter. It’s referred to as “earnings season.”

There’s nothing magical that happens in a single quarter to business in general, but Wall Street pays a lot of attention to quarterly reports.

Its amusing to watch.

Wall Street analysts try to guess (and I use that term intentionally) what companies will earn in a quarter. There is a lot of focus on these estimates because most people trade securities every 6 months.

If a company beats Wall Street “expectations,” the stock price tends to jump. If a company misses “expectations,” its price usually tanks.

Keep in mind that the fundamental value of a business changes very little over a single quarter. A company is worth it’s earnings into the infinite future. What it does this quarter is, at best, meaningful to less than 5% of a company’s value.

But, if you hold a stock for only 6 months, like most market participants do, then those quarterly estimates and price moves become vitally important. Why play that game?

I don’t. I pay attention to long term business value. I tend to hold companies for 3 to 5 years on average. The reason I buy is because a company seems to be selling far below its mathematically assessed value. I sell because someone is willing to pay much more than think it’s worth.

I don’t guess what will happen in one quarter. I don’t hold for 6 months. I don’t play that game.

This quarter has been particularly amusing to watch because companies are reporting earnings that are less bad than Wall Street expects.

That wording is also intentional. The companies aren’t doing a lot better, they are just doing a lot less bad than Wall Street expects.

These are meaningful moves. When USG (full disclosure: my clients and I own shares of USG) reported earnings on Tuesday, its price jumped 25.4% in one day. When Mohawk (full disclosure: my clients and I own shares of Mohawk) reported earnings today, its price jumped over 33% (as of 1:51 Mountain Standard Time).

Did these companies report record earnings? No, they reported big losses. Did they forecast huge sales and earnings increases in the short term future? No, they both said the economy looks terrible and they don’t know when end demand will pick up.

Did these two companies become 25-30% more valuable simply by reporting losses and dire outlooks? No, of course they didn’t. They just reported less bad earnings and expectations than expected.

If you ever think markets are rational and that most market participants thoughtfully consider the prices they buy and sell securities, just remember these examples of how short term and silly Wall Street and most market participants can be.

I must admit, its amusing to watch….

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Manhattan

On a lighter note, I made my first trip to New York City, and Manhattan in particular, last weekend.

Considering I grew up in Washington, D.C., and love investing and history, it’s startling that I made my first trip as a 37 year old.

Wow. Wow! WOW!!! I had an absolute blast (although flying with a 7 month old was a challenge)!

What an amazing place. I did touristy things, like Times Square, Empire State Building, Grand Central Station, Statue of Liberty, Ellis Island, the Metropolitan Museum of Art, Central Park, but I also enjoyed some outstanding dining and just hanging out.

Of course, I made the obligatory pilgrimage to Wall Street. I was awestruck standing in front of the House of Morgan, the NYSE and just being in the financial district of the financial capital of the world.

It’s a wonderful place and I’m already looking forward to going back.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.