p.s. I've put in a bid for the DIA ETF at $70/share. I currently have a bid that will probably be filled soon for $40/share of NVS, one of my favourite pharm companies. I've been waiting to buy NVS for a long time this cheap.
When the general market rises on a hope and a dream rather than any tangible fundamentals, I use the opportunity to sell some of the companies I've been holding that meet any of the following criteria:
the share price is at or near the target (usually 90% my estimated fair market value)
the management, business plan or prospects for the business has changed materially and most likely, permanently
Mea culpa--->I identify a mistake I made in the original analysis that either significantly diminishes the FMV of the company or makes it too difficult to determine.
With the recent rally (and even more recent crushing of that rally), I had a good, long look at my portfolio and decided which positions I should pare down or exit completely.
PHG-- Royal Phillips Electronics-- I sold my entire stake for a loss of 40% (not including dividends collected over 18 months). Compelling valuations, a generous dividend and the "green" angle (the LED arm) were more than offset by the inherent complexity of a large conglomerate, onerous competition (like GE and Siemens), a deteriorating balance sheet and a management that had a questionable record of execution. Although I liked what I saw initially when I first evaluated this business, I overlooked how complicated its corporate structure was and I certainly didn't have a feel for the committment and long term goals of the management. Mason Hawkins obviously doesn't agree and has increased his stake to 28M shares in December
UNH-- United Health Group (an HMO)-- I sold my entire stake for a gain of 30%, not including dividends. Very attractive valuation and what I thought was a overblown market reaction to political risk lead me to take a position. I sold because of a continuously deteriorating medical cost ratio, management with shaky ethics (I value reputation and this is one of the most hated companies in the world... hated by its customers!) and increasing competition from UNH's not-for-profit peers who will likely be more favourably treated in the upcoming reform measures (if they actually happen). I notice that many of my favourite gurus have sold recently as well including Warren Buffett, Seth Klarman, David Einhorn and Jean-Marie Eveillard.
LYG Lloyd's TSB Group and HOG Harley Davidson have both been thoroughly trashed but I continue to hold on to my stakes (despite the termination of the dividend in LYG and the cut in Harley's) as I remain to be convinced that either business will completely fail and instead emerge down the line in even a more dominant position than prior to the crisis. I am considering adding carefully to both positions although I'm more likely to do so for HOG than LYG. Buffett's almost usurious loan to HOG makes it less likely that their financial division will drag down their rather decent balance sheet. LYG's fate seems to be less to do with the market and what a solid, conservative bank it used to be and more to do with backroom deals with the UK government who pushed them into the HBOS merger and then on to the possibility of nationalization down the line. It's really impossible to have an edge in this kind of situation so I'm going to have to think long and hard about what to do about LYG.
Recent new positions:
LUK Leucadia National at $14
BLZ.TO Belzberg Technologies at $1.75
FTP.TO Fortress Paper Ltd. at $4.60
Addition to existing positions:
BBSI at $9.00
I'm actively researching:
IIC.TO Ing Canada JOE St. Joe Company BIP Brookfield Infrastructure Partners KSW KSW Inc. BNI Burlington North Santa Fe railroad
See the article in Barron's below. One thing you can say about Jim Cramer is that very few people who watch him feel neutrally about his abilities and his attitudes. In other words, either you hate him or you love him.
I have to admit that I do enjoy watching the show.... that is, when my wife lets me watch it (his antics give her a headache). I certainly don't pay much attention to his specific buy and sell advice which changes wildly over very short periods of time... something he readily admits to. I have been surprised by calm, rational and independent insight he very occasionally offers. It's usually near the end of the show. The CEO interviews are definitely worth listening to. Jim will often ask them very tough and surprisingly incisive questions.
Unfortunately, the rest of the material he offers is as inconsistent as the market. I believe that Todd Kenyon referred to him as actually being the insane "Mr. Market" Graham refers to in "The Intelligent Investor". I think that this is spot on. Mr. Cramer and his support staff are obviously well informed and very intelligent. The problem is that he is obviously a very emotional man and this extends into his investment psyche. If you don't know what I mean, see the video below. It doesn't bode well for his followers.
He often refers to himself as a "value investor" (sorry, I just can't keep a straight face typing that) who chooses stocks because of their "fundamentals" and compared himself earlier this week to Warren Buffett and Benjamin Graham! Hmmm.... I wonder if he realizes that he is a momentum investor who almost routinely buys high and sells low?
When I research potential companies, I try to take on the same sort of psychological approach that I find is optimal in my medical practice: a cool, mostly detached and perpetually skeptical tack. If I feel myself getting excited or depressed about a particular position I will force myself to invert (along the lines of Charlie Munger's advice) the feeling, usually by presenting both sides of the argument to an intelligent but uninformed person. Just articulating the bull and bear case to an interested party who has no bias on the subject (otherwise this may influence you) will often clear your head of irrational, emotionally based noise.
In other words.... you want to be the Anti-James J. Cramer.
You can read the Barron's article below. As always, take it with a grain of salt as I suspect the author's objectivity isn't exactly up to my standard.
from Barrons - SATURDAY, FEBRUARY 7, 2009 Cramer's Star Outshines His Stock Picks By BILL ALPERT
JIM CRAMER'S CELEBRITY IS BIGGER THAN EVER. As financial markets came apart in October, more than 600,000 viewers turned to his Mad Money show -- the biggest crowd since the Nielsen Company started tracking the CNBC series. He is giving advice to huge audiences on NBC's Today Show and getting awestruck coverage in Esquire magazine.
And why not? An earthquake has hit Wall Street, and the 53-year old broadcaster has spent more time there than most any TV journalist. The guy is a hardworking genius with a word of advice for everyone...many words of advice, actually. He dispenses thousands of Buy/Sell recommendations a year and has declared that those stock picks will help you get rich.
In 2007, when we questioned Cramer's performance, he told viewers we were know-nothings and assured them his Mad Money picks had "killed" the S&P 500. The only regrettable thing about any of this is that CNBC and Cramer won't meaningfully discuss how his advice pans out.
Cramer's recommendations underperform the market by most measures. From May to December of last year, for example, the market lost about 30%. Heeding Cramer's Buys and Sells would have added another five percentage points to that loss, according to our latest tally.
To his credit, Cramer's Sells "made money" by outperforming the market on the downside by as much as five percentage points (depending on the holding period and benchmark). His Buys, however, lost up to 10 percentage points more than the market.
These batting averages represent his stock-picking over a stretch of time, but Cramer is wildly inconsistent, and the performance of individual picks varies widely. So widely, in fact, that it is impossible to know with confidence that any sample of Cramer's recommendations will enable you to outperform the market.
These facts don't mean that viewers should avoid his informative and entertaining show -- they should just be wary of his stock picks.
OTHER CAREFUL, HONEST EXAMINATIONS of the CNBC star showed the same underperformance -- including several independent studies by finance researchers, and a 2007 review by Barron's that found the only way to reliably profit from Cramer's stock picks was to short them (see "Shorting Cramer," Aug. 20, 2007).
That seems to be what smart traders have done, from the evidence of options-market activity examined by a finance professor, who found that betting against Mad Money's Buy recommendations can yield 25% in a month.
The recent performance of Mad Money's stocks resembles past periods in another striking way. Our research reveals that the stocks Cramer picks as Buys have been rising versus the market for several days in advance of his show, while his Sells have been falling. This doesn't prove there is a leak in the tight security surrounding CNBC's show. It could merely mean that Cramer and his staff are heavy-footed in their research. Or it could mean that his stocks are primarily momentum plays. That is the network's explanation. "Jim likes to recommend 'what is working'," said CNBC communications vice president Brian Steel in a written response Friday. "So it is no surprise there would be movement in these stocks prior to Jim mentioning them."
In any event, these pre-show moves are the probable cause of Cramer's underperformance. As the stocks revert to the market's trend in the weeks after the show, Cramer's followers get hurt [See chart below]. Like any active-investing strategy, Cramer's advice must always be measured against the market return that his viewers could get in an index fund.
IT IS RARE THAT ANYONE BEATS the market over time, so there is no disgrace in the underperformance of Mad Money's stocks. The stocks featured in Barron's bullish stories did even worse than the market last year. ("Oops! We Missed the Mark in '08," Jan. 19)
Yet the last time Barron's inquired about Cramer's stock-picking, CNBC responded with cherry-picked success stories; lawyers; calls to Dow Jones executives; and an end to Barron's regular presence on CNBC. Cramer shouted to his viewers that we were know-nothings and assured them that his Mad Money picks had "killed" the Standard & Poor's 500 index. This time around, CNBC wouldn't let us near their headliner and said our questions were aimed at helping CNBC's less-watched rival, Fox Business News (owned by News Corp. , as is Barron's).
"You wrote a premeditated hatchet job to curry favor with your new bosses at News Corp.," said CNBC's Steel on Friday. "[Cramer] doesn't consider you a journalist."
The pre-show moves made by Mad Money stocks relative to the market were first observed by doctoral students at Northwestern's Kellogg School in a 2006 working paper. After hearing from an indignant CNBC, co-author Joseph Engelberg stopped labeling the moves "information leakage." When Barron's asked in 2007 about the pre-show moves we had found in Mad Money stocks, CNBC scrambled $100,000 worth of lawyers and sternly explained the broadcast lockdown procedures at the Mad Money set.
In the recent seven-month period, the pre-show runs are still the most dramatic thing about Cramer's stocks. We found that his bullish picks had risen 4% against the S&P in the two weeks ahead of his recommendation, while his bearish selections had dropped more than 7%. This action looks all the more interesting when compared with the pre-show activity in stocks that Cramer considers only when asked by a caller during the show's "Lightning Round." As the chart below shows, there are almost no market-excess moves before he tells a Lightning Round caller to Buy, while the Lightning Round Sells make but a fraction of the pre-show moves of previously prepared Sells.
MEASURING SUCH MOVES was easy, thanks to the tools available at EventVestor.com, a startup created by Wharton Business School and Merrill Lynch alumnus Anju Marempudi, with the advice of finance professors. Hedge funds and investor-relations firms are using EventVestor to study the returns of stocks around events like dividend cuts and earnings preannouncements.
So we got a record of the Mad Money recommendations from a source that Cramer endorses as the definitive way to track his performance. It is a trailing six-month database updated daily at TheStreet.com, the Website that Cramer brought public in the dot-com boom (see it yourself at MadMoney.TheStreet.com).
We then poured Cramer's data into EventVestor. Event-study tools like EventVestor aren't hard to understand. They simply track the performance of stocks over identical periods; for example, 10 trading days before through 45 trading days after each Mad Money show (as illustrated in the chart). You can leave out the impromptu advice he gives callers during the Lightning Round -- which Cramer has said shouldn't count toward his performance, even though the next-day stock moves show that Lightning Round watchers take him at his word when he tells them to Buy.
Looking at just the 650-odd recommendations Cramer prepared for the show's Discussion or Feature blocks between June and December, his bullish picks underperformed the S&P by about 3.5 percentage points over the 45 trading days after each show. His bear calls turned a slim profit of one point versus the market -- with all of the profit coming the day after broadcast, so viewers would do well to ignore Cramer's occasional urging that they wait five days before following his calls. You can even isolate the stocks of companies whose executives Cramer interviews and usually endorses -- those endorsed stocks dropped six points versus the S&P in the 45 days following the interviews. Considered separately, Cramer's Lightning Round Sell recommendations did better than those he prepared, while his Lightning Buys did even worse than those he prepped. [For charts of these results, and others, see Barrons.com.] It is reasonable to measure Cramer's stocks over such a relatively brief interval because -- as CNBC points out -- he isn't running a fund in which he reviews each position daily.
But the network and Cramer have alternatively argued that his picks are meant as long-term investments, so we also measured their performance from each show date through the end of the year. On that basis, Cramer's Buys finished five percentage points behind the Nasdaq and 10 points behind the Dow, while his Sells were one point less profitable than the Nasdaq but five points more profitable than the Dow.
Cramer bashers and acolytes typically argue in anecdotes. His critics remind you that he scolded a caller "No! No! No! Bear Stearns is fine! Do not take your money out!" just days before the firm collapsed in March. But boosters brag of his Oct. 6 market call on the Today Show, when he said: "Whatever money you may need for the next five years, please take it out of the stock market. Right now!"
That Oct. 6 advice saved investors "millions," said CNBC's Steel, by allowing folks to escape the market's 15% plunge through December. In fact, says Steel, that single piece of advice means Cramer beat the market, if you credit the 15% to his performance through Oct. 6. Of course, Cramer went on to make 800 more recommendations through December -- most of them Buys. Cramer would have saved investors even more, said Steel, had they put 20% of their assets in cash on Sept. 19, as he suggested. "Jim made two of the greatest prepared bearish calls of all time," crowed Steel.
We gamely worked through the details of CNBC's argument: Ending the measurements on Oct. 6 makes Cramer look worse, with his recommendations losing eight percentage points against the S&P. If you then spot him the Today Show 15%, as Steel insists, Cramer would finish the year seven points ahead of the market.
If readers don't buy CNBC's complicated argument, it has others. "Jim's advice is nuanced, complex and often qualified on either a future price or a specific market event," said Steel, who says that even Cramer's official Mad Money database misses nuances. It is kind of bizarre to hear the network impugn the Website that carries Cramer's endorsement as the record of "exactly what I say, when I said it, and how I feel about each stock now." He urges -- "passionately" -- that his show's performance be measured with those data.
When Barron's asked CNBC for their own preferred database of Mad Money recommendations, we heard something equally strange: The investment news channel keeps no track record of its stockpicker's Buys and Sells. "The show as it is currently produced," said Steel, "isn't set up to track every stock Jim mentions every day as if it was a fund."
Instead, Steel demanded that Barron's join him in watching six months of recorded shows so that he could decide whether Cramer really meant that viewers should buy or sell a stock. He said Cramer's Website had misinterpreted recommendations on four dates- for example, putting down a Buy recommendation when Cramer meant it sarcastically.
The Bottom Line
By most measures, Jim Cramer did worse than the market, but CNBC and the TV journalist have taken few steps to clarify his exact performance for his show's growing audience.In other words, CNBC wanted to debate its horse bets after knowing how the races ended. There is no way such a post hoc selection could be as credible as the record made at the time of each show (and before the recommendation's outcome is known) by Cramer's official Website. That would also be the time for Cramer to correct confusion in the record he tells viewers to rely on. Still, we recalculated Mad Money's returns without the four dates that Steel says had errors: Cramer's performance was precisely as bad without them.
The finding that Mad Money lags the market has been replicated using other records of Cramer's picks, too. University of Dayton finance professor Carl Chen used the third-party Website called MadMoneyRecap.com to study options-market trading in stocks that Cramer recommended. Chen found signs that the smart money bets against Cramer's Buy recommendations by using short-term in-the-money puts. Those bets could earn over 25% in a month, Chen concludes, at the expense of Cramer's fans.
CNBC's evasiveness about Mad Money's performance can't be attributed to Cramer, since the network wouldn't let us talk to the star. We were scolded that we didn't understand the mind of a genius. "Barron's and News Corp.'s repeated attempts to take Jim down have been a complete and utter failure," said spokesman Steel.
A little demonstration of what an intensely emotionally guy he is:
(although in retrospect he appears to have been right on this one):
Published: January 30 2009 18:26 | Last updated: January 30 2009 18:26
Over the 42 years that Warren Buffett has been in charge of Berkshire Hathaway, the company has earned an average compound rate of return of 20 per cent per year. For himself. But also for his investors. The lucky people who have been his fellow shareholders through all that time have enjoyed just the same rate of return as he has. The fortune he has accumulated is the result of the rise in the value of his share of the collective fund.
But suppose that Buffett had deducted from the returns on his own investment – his own, not that of his fellow shareholders – a notional investment management fee, based on the standard 2 per cent annual charge and 20 per cent of gains formula of the hedge fund and private equity business. There would then be two pots: one created by reinvestment of the fees Buffett was charging himself; and one created by the growth in the value of Buffett’s own original investment. Call the first pot the wealth of Buffett Investment Management, the second pot the wealth of the Buffett Foundation.
How much of Buffett’s $62bn would be the property of Buffett Investment Management and how much the property of the Buffett Foundation? The – completely astonishing – answer is that Buffett Investment Management would have $57bn and the Buffett Foundation $5bn. The cumulative effect of “two and twenty” over 42 years is so large that the earnings of the investment manager completely overshadow the earnings of the investor. That sum tells you why it was the giants of the financial services industry, not the customers, who owned the yachts.
So the least risky way to increase returns from investments is to minimise agency costs – to ensure that the return on the underlying investments goes into your pocket rather than someone else’s.
The effect of these costs on returns depends on the frequency with which you deal. Online trading is so inexpensive and easy that you may be tempted to trade often. But only one thing eats up investment returns faster than fees and commissions, and that is frequent trading. Do not succumb. Do not accept the invitation to subscribe to level two platforms or direct market access. The total costs of running your own portfolio should be less than 1 per cent per year.
Investing in actively-managed funds will cost you more. The choice of funds, both open and closed-end, is unbelievably wide. There are more funds investing in shares than there are shares to invest in. This situation doesn’t make sense, and is both cause and effect of the high charges. Costs need to be high to recover the expenses of running so many different, mainly small, funds that all do much the same thing. At the same time, the high level of charges encourages financial services companies to set up even more funds.
The proliferation of funds means that choosing a fund may be no easier than choosing individual investments. The problem seems to multiply itself, as do the fees. The fees attract more advisers, and so on. This plethora of choice would be less confusing if all funds, managers and advisers were excellent, but most are not.
The underlying problem is one of information asymmetry. The marketing of financial services emphasises quality, not price, and for good reasons. It would be worth paying more – a lot more – to get a good fund manager. But since it is hard to identify a good fund manager, good and bad managers all charge high fees, with the consequences described above.
If you own a mainstream British unit trust for five years, it is likely that the direct and indirect costs and charges you incur in buying, holding and selling that investment will total 3 per cent a year. Other investment funds may cost you more. The total charges on a fund of hedge funds are such that it might yield less than a government bond even if the underlying investments returned more than 10 per cent per year.
There may be hope of better value from funds. In the US, the Vanguard Group, a not-for-profit company with a messianic founder, John Bogle, has become market leader in retail fund management with charges substantially lower than the norm.
The most attractive equity-based funds for small investors are generally indexed funds, exchange traded funds, and investment trusts (closed-end funds) with low charges and significant discounts to underlying assets. These funds provide more than sufficient choice for normal purposes. All of them can be accessed through your online execution-only share-dealing account.
Extracted from John Kay’s new book ‘The Long and the Short of It: Finance and Investment for Normally Intelligent People who are not in the Industry’, published by Erasmus Press. Next week: Diversifying
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