“The Stock Market is A Device for Transferring Money From The Impatient to the Patient.”
In the middle of a hot summer, individuals and families often go on vacation. As we all know, the air travel experience is, shall we say, truly les miserable. Nearly half the citizens in our fair land get to enjoy the timeliness and customer service of those dependable airlines. Maybe as a consequence, many level headed and clear thinking people decide, you know what, let’s do the driving thing, because it has to be better than flying. Taking a road trip on the west coast usually involves a four to five hour excursion, especially if you are doing Vegas to California or Vegas to Utah, or Vegas to Arizona. For anyone with kids, there are a few common questions you get when you get on the road. The first is related to relieving one self. The second, more frequent, especially when you are an hour and a half into the trip, is when are we going to get there. You see, patience is not the strength of a young person, and you could make the argument of most adults as well. If you know about the Stanford test with cookies, it is the same principle. Anyway, patience is one of those attributes that many investors talk about, but is much more difficult to actually have, especially if you have any understanding about another important principle, which is the time value of money.
For example, if you are in the merger arbitrage business, many of your investments take six months to a couple of years for an outcome to occur. Once completed, you move on, but you have specific timelines. So, comparing a relatively quick return to the idea you should own something for many years does not seem too attractive for that class of investors. Now, let’s take an area of investing which is often not brought up, but comprises an interesting realm, especially if you are interested in potentially mispriced securities. It is the OTC area, where the bastards of the investment world reside, micro cap, mini-cap, foreigns companies with no ADR (think Nestle), companies with listings in Canada and the US, blank check investment vehicles, you name it, the OTC has it. Many of these stocks trade quite infrequently, and with very little volume. As a result, sometimes they can have big moves, think 20-50%, where nothing has happened with the underlying business. The same holds true in the major markets in terms of volatility, but think even more extreme on the OTC. So, if you own stocks there, you have to be willing to wait long periods of time to ride out these volatility bouts. Over five or ten years, the ability of a company to show its true worth, typically by growing a great deal, is going to either happen or not. In terms of patience, and clearly a strong stomach and plenty of conviction, if you don’t have it on the OTC, well, best of luck. Clearly, Mr. Buffett’s wise advice still applies, imagine that.
In the markets this week, the major grouping that reported were the largest money center banks. JP Morgan, Citi, and Wells Fargo all pretty much met expectations. Goldman Sachs and Morgan Stanley both beat estimates, but if you compare JP Morgan to either of those entities, you get a clear understanding of how big Jamie Dimon’s monster truly is. Jamie’s juggernaut does about 40 billion in operating profit per year, whereas Goldman Sachs (the number one equity underwriter), will do about 10 billion. Enough said. Another massive company that reported was Blackrock, the largest asset manager in the world, which missed estimates, but don’t feel sorry for Mr. Fink. In technology, the highest profile companies to report were Netflix and Microsoft, which had dramatically contrasting results. Netflix missed badly, while Microsoft’s cloud business remains incredibly strong (up 68% year over year). The Microsoft numbers show what the rest of the market is up against in terms of attracting capital, because like a few other large tech companies, they are growing a great deal (12% revenue expansion year over year) and you can own them without much financial risk. In other areas, Chewy, a recent IPO, disappointed a bit, while Snap On snapped to attention with a little beat. In the energy space, the Straits of Hormuz remain quite volatile with Iran seizing a ship carrying oil as one of it’s drones was reportedly shot down by the United States. Geopolitical risk remains in the price, while the the International Energy Agency foresees weak oil demand putting a ceiling on prices even as OPEC decides to probably extend production cuts. Next week will be a big week on the earnings front as hundreds of companies will bare all, including McDonald’s. Anyway, I hope the summer is treating you nicely and stay cool.
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Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation. The fact that Yale Bock has earned the right to use the Chartered Financial Analyst in no way means or guarantee performance better than market indexes.