“Trust takes years to build, seconds to break, and forever to repair.”
In athletics, good coaches talk to their teams about how they have to handle adversity, which is really just a way of saying when things are going poorly, stiffen that spine up and respond. If you have ever been around young kids who are terminally ill or facing serious health problems, or anyone with a trying medical condition, those circumstances are probably far more reflective of ‘adversity’ than an athletic contest. Let’s face it, there are all kinds of events and things going on across the globe that can put people in difficult positions. You can look at any third world country, or what is taking place in Venezuela, for example, if you need further examples of how difficult life can be. You can also find that here in the United States, so don’t think difficulty is confined to international geographies, as we all well know. Last week, I mentioned that the equity markets had become difficult, especially for a specific holding in the portfolio. As I recently heard, to paraphrase, there is always one problem child in the family. Relative to serious health problems, having a equity holding lose value during the course of a trading day is probably relatively a small inconvenience in the grand scheme of things, so let’s make sure some context is given. Still, if you are evaluated based on portfolio performance during any time period, if a holding loses value it certainly does not help the cause. However, one of the great things about investing is there is always the next day, as Scarlet O’Hara famously exclaimed.
Along those lines, I thought I would share with you a couple of personal anecdotes which are instructive in terms of investment implications. The first situation involved a tiny micro cap company in the financial services area. The market value is around 15 million dollars, yes, I know, not a giant at all. I really enjoy looking in this area because in the micro cap space, the mispricings can be significant and where there is more of a chance to find value than in something covered by fifteen investment banks. Still, with more opportunity there is more risk, and sifting through the debris requires plenty of patience and quite a bit of discernment, and even then, there are no guarantees. The company I looked at has no debt, is generating cash, and has plenty of opportunity to grow. Sounds lovely, right? Now for the moment of truth. On the conference call, a questioner asked the CEO what was the EBITDA for the quarter? Keep in mind, probably ninety nine percent of all companies include their EBITDA in the earnings release as it is a metric many analysts and investors focus on (in various different forms). Instead of answering the question, which is not difficult to derive from the release anyway, the CEO demured to the CFO, who said figure it out from the earnings release. Not exactly confidence inspiring. Even more problematic, every question asked on the call went the same way, from every questioner. Not a forthright answer to be found anywhere. If one looks at the stock market performance over the last few years, as you would potentially surmise, it has all the movement of a eighty five year old turtle that needs some medication. Not budging a lick, so when the company is generating cash and now growing, well, there are possibilities, until you hear the executives answer questions, and then you want to throw up. Welcome to the vagaries of investing.
The next situation is a follow up to what took place last week. As I wrote, a company which has a long track record of creating wealth at very high rates, and in multiple forms and entities, had the stock sell off. This week, the Chairman of the Board, the CEO, and the largest single stockholder all bought stock in the company. The entity is valued at nearly six billion dollars and even at that level, is still considerably cheap on any number of metrics. There is a reason why that entity is worth billions of dollars, and some of it goes to the leadership question. The people running this entity have earned the trust of investors and back their words up with their own cold hard cash, and lots of it. The entity worth fifteen million dollars and with a nice business, lacks credibility from the investment community. A good way to start building up some trust would be to simply answer questions that are asked of you. You might think about these situations when considering investment opportunities as there might not be a more important ingredient in evaluating management teams as trust.
In the markets this week, heavyweights Cisco and Wal Mart reported strong numbers that helped equities claw back losses from a six hundred point shellacking on Monday. The selloff came from more questions about the trade situation between the United States and China, a source of ongoing concern for months. Alibaba reported a very good number to make the case that whatever one thinks about the China economy, large competitors there provide plenty of proof that the world is full of big, profitable enterprises that US companies contend with across the globe. Pinterest reported its first quarter as a public entity and the market was not impressed at all, which has been the same reception that fellow IP-O’s Lyft and Uber were welcomed with. In fact, head underwriter for the Lyft IPO, Morgan Stanley, faces questions about their actions with clients and potentially not acting as a fiduciary for Lyfters. If one combines that with the billion dollar fine the EU placed on the largest investment banks in Europe for conspiring in the spot currency market (JP Morgan, Barclays, Citigroup), there is a reason many investors find it hard to believe the bankers. Yes, indeed, the trust issue rears its head yet again.
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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.