Sunday, January 6, 2008

2008 Investment Considerations & My Personal Biases

This blog is about investment themes that work. In case anyone ever reads this blog, here are my three core investing considerations:

1. CONSIDERATION #1 The American consumer will be consuming less.

The American consumer has over-spent and much of the economic successes of the post 9-11 economy have been fueled by debt; both government and consumer debt has risen dramatically during this "best of times" era. This is unsustainable. Many Americans soon will be forced again to view hard work, productivity, and savings as the path wealth-not the ability to take on debt. A lot of the conspicuous consumption I have seen in the past few years is debt fueled. Moreover, as people have been able to fund consumption with debt, many have worked less and invested very little in productive assets.

Here is a metaphor that about sums it up:

Two guys driving through the desert in spanking new Escalades 100 miles from the nearest gas station. One guy is 25, the other is 5o. The 25 year-old has $5 in gas in the tank and is 3 payments behind. The 50 year-old has a full tank and paid cash for his car. Who looks better? The 25 year-old of course! He's young, he's hip, he looks rich, he's cruising! Well...you know how this ends right...of course you do.


2. CONSIDERATION #2: Investing requires independent research grounded in common sense. Wall Street analysts can't be trusted.

Remember when it was OK to invest in billion dollar companies with fifty bucks in sales? Remember those sock puppets? Remember those analysts laughing privately at their own recommendations?

Now we have the "subprime" fiasco. How were billions (if not trillions) lent to people with no ability to pay? Simple, Wall Street needed the paper to build profitable products (CDO's, SIV's) for which there were plenty of ignorant buyers willng to pay fat commissions (hedge funds, pension funds, foreign central banks, petro-dollar funds, carry-traders). This was nothing more than a ponzi scheme.

Seriously, can we trust these guys to tell us where to invest?

3. CONSIDERATION #3: Fundamentals matter.

The value of a company is the discounted present value of its future cash flows. It always has been and it always will be. It is that simple.

Stable profits are good. Debt is bad. The ability to take on debt is good. Cash is king. Proven and capable management is good. Understandability is good. Dividends are good. The past matters, but the future matters more. The macro environment matters. Diversification matters (but how you do it has changed a lot). Fear and greed can crush you.

1 comment:

Anonymous said...

I read your article about etrade. I purchased shares at 5.00. I also have my accounts there. I don't understand why your long etrade after reading your article. Can you simply explain after all the money being in morgage loans and the economy looking soft why you are long? Thanks Craig
craigap1@cox.net