Category Archives: Lessons

Wait…Normal Markets Really Exist?!

etrade

I interjected in a Twitter conversation yesterday between the esteemed Josh Brown and Keith McCullough that sparked an interesting thought.  I’m currently 21 years old and have been involved in the markets (actually investing and researching) since I was a sophomore in high school – which just so happened to be the end of 2007.  Looking back on everything, I’ve learned an incredible amount and gained great experience (albeit losing a fair amount of money in the process) in some incredibly turbulent markets and tumultuous times which, frankly, have baffled a significant amount of “experts.”  Because of this, my view of normal is completely skewed from the older generations of pros and market analysts.  In fact, I don’t even know what normal is!

That said, I am certainly not at a disadvantage by being young and interacting in a market that could be considered a standard deviation or two…or three away from normal.  For starters, there is no argument that this is the best possible time in my career to have learned some of the lessons that I did.  If my (and my generation’s) first bear market were to have come much later in our careers, it could have been much more devastating to our net worth, job status, marital status, etc.  You name it.

Second, I have learned very few people can correctly time the market by calling tops/bottoms.  I’m certainly not a black swan, but going forward in my career, I can assure you I will always be cautious of unexpected events and factor these risks into my portfolio.  I still have a hard time generating scenarios through “what if” analysis because, frankly, I haven’t seen close to everything there is to see.  For example, I would never have been able to say “what if a country leaves the Euro” and plan for those risks.  However, I’ve learned how great of an asset this analysis can be for portfolio managers and frequently work on generating such scenarios.  Because I’m unaware of so many of these possibilities, I’ve taken to reading as many blogs and newspapers (from different countries) as I can in order to get a better sense of what ideas are out there.  I’ve spoken to plenty of older investors who write-off blogs like ZeroHedge as winey conspiracy theorists venting about the world, but it can be one of the greatest ways to think about ideas coming from left field and help to better prevent unnecessary risk in my portfolio.  Plan for the worst, hope for the best…lesson learned.

Most importantly, I’ve learned there’s always a bull market somewhere – it just takes some digging.  I’ve gotten the perception from older investors that emerging markets as well as asset classes other than stocks/bonds are exotic and untouchable.  Look how popular the FOREX markets have become for retail investors in the past 4-5 years.  Every book I’ve read on investing has usually focused on U.S equity and bond markets, but we’ve seen over the last few years that foreign markets and asset classes can present incredible opportunities – hence, the rise of ETFs.  I’ve never had enough capital to open an account on margin, and therefore, I’m unable to short stocks.  As a result, I’ve been forced to look for bullish markets across the globe.  I think the next generation of analysts, portfolio managers, and everyday traders/investors are going to be much more accustomed to “exotic” markets and assets given their market upbringing.

At the end of the day, being 21 during such a volatile couple of years certainly hasn’t helped my current portfolio, but going forward it will most definitely shape my investing strategy and perception of risk.  I’ll be entering the full-time workforce this summer (hopefully), and so will everyone else who began investing around the 2008 financial crisis.  Look out for some interesting investing trends in the years to come that may have been shaped by our initial experiences in the market.

Follow @zringer21 for more commentary and updates!

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A Rumble in the Billionaire Jungle

Ackman Icahn

 

 

 

 

 

 

 

 

By now, I’m sure everyone has heard of the tiff going on between Bill Ackman and Carl Icahn.  Frankly, I think it’s overrated and CNBC has done more to leverage the drama than the London Whale used in his derivatives portfolio.  That said, I was glued to my 19″ dorm room TV this afternoon to watch the slugfest unfold.  The entire bout can be seen here for anyone who missed it.

The vast majority of bloggers and TV analysts have been focusing on the rich history between these two moguls; however, I think the most important aspects of the entire debate were made by Carl Icahn and have been vastly overlooked.  Specifically:

1)  If Ackman wanted to be such a nice guy, why didn’t he just go to the SEC?

Touche, Mr. Icahn!  Obviously, there is a large motive for Ackman to make a killing for his investors if he’s right.  I highly doubt he’ll be as transparent with his tax returns to show how much of the profit actually goes to charity as he’s been with his investment thesis on $HLF.  At this point, he’s just as big of a pump n’ dumper as those lunatics on the Yahoo Finance message boards.  The lesson this taught me, though, has been no matter how right you may be about a fundamental investment thesis on a particular stock, there is no guarantee the market will realize the “truth.”  There needs to be a catalyst to move a stock price in any direction – especially if it’s going to $0.  Ackman has been on record saying he was short $HLF for the past year and a half.  We can speculate he was feeling the pressure of a lackluster year in terms of portfolio performance and needed to create the catalyst himself.  Not the most ethical route he could have taken, but it shows us how much more patient and liquid the market is compared to any portfolio on the planet.

2)  Incredibly poor risk management from the Ackman corner of the ring

Again, Ackman has been on record saying he has 20% of his entire portfolio invested in his $HLF position.  Technically, his investors can pull their money out of the fund at any time which would get him into quite the pickle.  More importantly, however, during the CNBC interview, Icahn gave the possibility of an investor stepping in and purchasing $HLF.  No matter how right Ackman may be about Herbalife, if a wealthy investor or hedge fund/PE fund disagrees with him and sees the price of $HLF cut in half, what’s to stop them from issuing a tender offer and trying to buy the company outright.  Icahn does it all the time!  It takes a great deal of time and effort for any company’s share price to fall to $0.  If $HLF gets purchased or even rumors get leaked, the share price will continue to rise and Pershing Square will be in a world of hurt.  Sure, as Ackman states on the call, that idea isn’t the most likely one out there, but it is certainly possible.  If that happens, he loses 20% of his entire portfolio and his investors will be running for the hills!  That’s terrible risk management, plain and simple.

3)  Where there’s smoke, there’s fire

Given the drama that has unfolded, we can be pretty certain that neither of these Wall Street giants are the most ethical guys on the planet, nor the most charitable.  It just goes to show you how careful one must be in this business.  Greed and self-interest can do some nasty things.  Unfortunately, we all need to learn to plan for the worst (aka lawyer up and consider every single possible risk) while hoping for the best.

While I greatly enjoyed the drama that unfolded on CNBC today, hopefully it can also be used to prevent unnecessary risks in your own portfolio or business deals.  You can learn a great deal from the mistakes of others.

PS I’m definitely putting a “shmuck insurance” clause into my next fraternity dues contract.

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