I wish I was the fish, he thought, with everything he has against only my will and my intelligence.
- Ernest Hemingway, The Old Man and the Sea
Subscriber,
Once again last week, the markets inched upward though there were many more stocks languishing at 52-week lows than basking in annual highs. So kind of a yawn, unless you happen to be a car dealer in North America, in which case it was an absolutely awful week because you probnably got hacked via your enterprise software provider (CDK) via one of their subcontractors (Snowflake or Epam Systems, reportedly). The great car robbery follows the recent hacks of Ticketmaster, Santander Bank and UnitedHealth. In the latter alone, over 300 million patiend records were allegedly stolen. That’s ninety percent of the US population(!) So it’s no longer about some corporate data being stolen but industries being frozen and entire popularions being stressed. I wonder if hacks can really be considered black swans any longer. They seem more and more like a cost of doing business, like shareholder lawsuits.
It’s nearly impossible to know how robust a company’s defenses are (or are not). Personally I think that companies should be required to do a cost-benefit analysis of storing their customers’ data. The assumption is that more is more but personal data is now clearly as much a liability as an asset, isn’t it? Interesting that the company with which Amazon is obsessed, Trader Joe’s, has zero interest in getting to know you digitally, much less feed your life history into a large language model of some sort. Granularity is all the rage these days but the law of averages has worked out pretty well for both companies and investors and for much longer.
Does anyone really believe that Apple and Microsoft are protecing their privacy by handing over their entire digital histories to a third party for scraping? “We value your privacy” feels like the new, “We only use the finest ingredients.”
There is the old adage that a little bit of knowledge is a dangerous thing but there is no such truism for a lot of data and the notion that a machine can possess perfect information about a human being rings even more hollow than the efficient markets hypothesis. Because there is no such thing as “perfect” knowledge, there is only more or less of the imperfect variety, every investor must weigh the benefits of knowing nothing against the benefits of knowing something, while knowing that knowing everything is simply impossible. The fundamental conundrum of investing is that all of the data is from the past but all that matters, once you buy a stock, is what happens in the future—not only what happens to the company but what happens to the market and, most important of all, what the investor does about it all. Thus Ben Graham argued that temperament is more important than analytical skills or memory and Warren Buffett parroted. Knowing what you cannot know is essential.
But long before I studied Ben Graham and Warren Buffett, there were the books of George Soros and his friend/arbitrageur /adrenaline junkie and all around Renaissance Man Victor Niederhoffer. The latter’s memoir, The Education of a Speculator, is a terrific read, though Graham might have observed that the title hints at impending doom, and indeed Niederhoffer the speculator ended up losing it all—twice. Soros is a different story. Like Graham, he was a student of philosophy who landed on Wall Street ambivalently. An accidental legend. Soros has bragged about his terrible memory but he has also written several books that draw on his childhood extensively, so it’s more like a selective memory, but better than most of ours. Soros’ tomes are interesting but often abstract, with some notable exceptions. One is Soros’ assertion, oft quoted here, that you cannot borrow your way out of a debt crisis.
Soros is famous for running The Quantum Fund, which famously achieved a 30% annual return for three decades (1970-2000) which is a lot better than Ben Graham or Warren Buffett did over twenty years and sixty-eight years, respectively. What was their secret? Soros and his co-manager Jim Rogers used to attend industry gatherings when they considered the industry nascent. Then they’d go long the leader and short the laggard. Repeat.
In other words, when it came to the stock market Soros was agnostic. This distinguishes him from most market mavens, who have devoted so much time and energy attempting to smooth returns, not only because that’s what their customers want but also it makes life much easier for them. The current bit of financial alchemy is the equity premium income fund (EPI) and there’s an interesting article in this weekend’s Wall Street Journal calling it “boomer candy.” I’ve written about the most popular of these, symbol: JEPI, in the past, so I won’t repeat myself. Suffice it to say that the only money manager I know of who managed to smooth out his returns was Bernie Madoff. Because the returns were phony. Beware strangers with candy and all that.
Ben Graham’s solution to volatility—or, as he called it, vicissitudes—was to ignore it but most people cannot, psychologically speaking. For his part, Soros observes that the investor’s bias infects the market and then the market reflects it back at them, creating boom and bust cycles, aka volatility. Stock pickers create a bias for a stock the moment they buy it and if the stock goes up, their bias is reinforced and then amplified beyond reason—or at least beyond their calculus for buying the stock in the first place.
Which is, I assume, why Soros and Rogers picked businesses rather than companies. It’s possible to fall in love with a business, but it’s a lot easier to do so with a company. Soros and Rogers’ solution (go long the best and short the worst) is clever in that it offers protection against choosing the wrong business as well as falling in love with the wrong company. Warren Buffett’s solution eliminates the shorting: buying in blocks. For example, he bought five Japanese trading companies with generous dividends several years ago. More recently, he purchased a handful of homebuilders in the United States. Both recalled a classic Buffett quote: “Buy a business any idiot can run because eventually one will.”
Buffett has said that poor management is the investor’s biggest risk. Buying in blocks may not eliminate that risk entirely, but it does provide some mitigation. The alternative is a deep dive into management, but judging someone’s character or management skills is hardly an objective pursuit and management’s skill (or lack thereof) should be revealed in the numbers anyway. More important, even if the investor is correct in his or her judgment, they risk losing the forest for the trees. Many talented executives have worked wonders at one company and failed utterly at the next. E.g.: Ron Johnson, who built Apple,’s retail business then nearly destroyed JCPenney’s; or Greg Brenneman, who turned around Continental Airlines and Burger King before sending Quizno’s into bankruptcy; or Andy Mooney, who built Disney’s consumer products business into a behemoth only to preside over Quiksilver’s demise.
Why bet on one jockey when there are good, durable businesses out there that Wall Street is offering at a discount, i.e. when there are entire races where the odds are in one’s favor? Like marine, contract electronics, staffing and steel business, for example? Ironically, the reason these industries are unpopular (for the moment) may be a dearth of superstar companies or executives. There are far more stock pickers than investors after all, even if history has proved that picking winners is nearly impossible over time.
James
p.s. the cigar butts and wallflowers below are no longer “fresh,” meaning that I am publishing the names of any issues that fit our methodologies at the end of the week, even if they have been published before.
52-Weeklings
Cigar butts and/or wallflowers among the 51 US-listed companies trading at 52-week lows this weekend:
AGCO Corp (AGCO)
Atlanta-based designer, manufacturer and distributor of agricultural machinery and precision agriculture technology.
Earnings Yield: 13.0%
Dividend Yield: 1.15%
Haverty Furniture Companies Inc (HVT)
Furniture retailer.
Earnings Yield: 17.1%
Dividend Yield: 5.12%
Myers Industries Inc (MYE)
Industrial equipment manufacturer and distributor.
Earnings Yield: 9.2%
Dividend Yield: 3.85%
Solventum Corp (SOLV)
Healthcare company spun off from 3M.
Earnings Yield: 15.3%
Dividend Yield: -
Sturm Ruger & Company Inc (RGR)
Gun manufacturer.
Earnings Yield: 10.4%
Dividend Yield: 2.25%
Investable(s) culled from NASDAQ’s short list of small cap value stocks:
Ingles Markets Inc (IMKTA)
Regional family-owned grocery store operator.
Earnings Yield: 18.3%
Dividend Yield: 0.95%
Guess? Inc (GES)
Eurocentric fashion apparel and accessories.
Earnings Yield: 12.7%
Dividend Yield: 5.85%
WARNING: GRAPHIC CONTENT!