We had a great time at our meeting, spending the better part of nearly three and a half hours in topics about the market to varied subjects like hydrogen energy and Einstein’s famous equation, E=mc2.
I feel truly honored and privileged to be able to meet and converse with such brilliant minds and comprehensive talents. I express my heartfelt thanks to all who attended: Kevin Day, for his wonderful and insightful market and trading commentary; Jeff Harrington for being literally one of the most brilliant and enlightening figures of finance I know personally; Tommy Schultz for his characteristic advise on human psychology; and Andrew Whatley for his enduring attitude of inquisitiveness. I want to welcome Niraj Arjan, who is the brother of the author of this blog entry, visiting from U.T. Austin. We had 6 attendees: (from left to right) Tommy Schultz, Jeff Harrington, Andrew Whatley, VJ Arjan, Niraj Arjan, and Kevin Day.
Sell in May and Go Away
Jeff Harrington relayed to us all the Wall Street dictum of buying equities in the beginning of the fourth quarter and then selling in May. If one put $1,000 in 1970 and played the market indices every year in this way, one would have close to $3,000,000. The adage is surely relevant as May has just passed us by.
Kevin Day, however, urged us all to take such so-called “time-tested” market truths, with caution and a pinch of salt. What has occurred in the market in the last 20 months has led Kevin to believe that the old rules, can and do, change. Kevin who used to use fundamental analysis as his Bible, is now trading the market based solely on technical indications. He continually reminded us that it was, at the end of the day, a market of stocks, and not the stock market. One cannot generalize about the market and assume it to follow ironclad rules.
Market Plays
Jeff Harrington has principally been playing three sectors: Biotechnology, Oil, and banking. His biotech plays have been sponsored by foundations and non-profit charity organizations as well as investors, such as himself, willing to take substantial risk to fund incredibly expensive research to develop a drug that may or may not work or may not get regulatory approval. Today, most drugs come in at a $100 million cost. Some of his plays include, ARNA, CTIC, ADLS, and VRTX. His companies, if they are, indeed, successful in finding a cure will become vastly profitable, given the large market provided by default. Jeff’s oil plays include RIG (Transocean), which builds the offshore oil platforms, NOV (National Oilwell Varco), which is an oilfield services company, and CHK (Chesapeake Energy), which is a large natural gas explorer and producer in the continental United States.
Kevin has been a stalwart ally of emerging markets like China (FXI), Brazil (EWZ), and Central America (ILF). He has also been considering Claymore/MAC Global Solar Index (TAN) for a potential alternative energy play. In reference to his successful play in Freeport McMoran (FCX), he initially had bought 1,800 shares at $19.90, but sold off 800 shares around $41, making 100% return; so he is left with his initial investment intact. Like he put it, it is nice to be playing with “free shares”.
Advise for the Novice Investor
Niraj Arjan, a novice in reference to the markets, was given advice as to how to approach investing in the markets. Here is what Kevin Day and Jeff Harrington had to say:
Save 10-15% of every paycheck for the rest of your life to invest
Kiss the mirror every morning; you must like the person you see
Start with $10,000 and allot it into a minimum of 10 stocks
Over the long-run, 50% of the company’s stock returns are through dividends
-Research shows that dividend paying companies have higher returns than non-dividend paying companies, which is a violation of finance theory: companies that pay dividends should have lower returns because they are reducing their ability to make investments into new growth opportunities. One reason for this is that non-divdend paying companies tend to blow up and fail.
Good management was responsible for 23% higher ROE than companies with poorly rated management; As Warren Buffett has said, 'Buy a company that can be run by idiots, because eventually it will be.'
Jim Cramer: adviser or entertainer?
CNBC has been the host of the party of one particularly excited (I use understatement here) financial advisor: Jim Cramer. Kevin Day, frankly, does not know why someone has not shut down his show, Mad Money. At the end of it, CNBC has a business to run; it is catering to the audience that enjoys excitement and the gambling spirit.
He can, however, be watched to get an introduction on the market. But it would be suspect to take his advise on trading and investment seriously. The art of investing/trading is highly individualized and cannot be generalized as Jim Cramer is doing. As Jeff Harrington noted, Jim Cramer discusses trading strategies for an audience of investors who should be getting investing. The strategies of trading versus investing are most often diametrically opposed as one is short-term based off of little knowledge versus long-term based off much knowledge about the company and its future prospects.
To sum up, Kevin noted that it is important to know your client. Mr. Cramer simply does not know his clients and therefore is reduced to nothing more than entertainment.
How to Make Money in Stocks: Throw Darts at the Wall Street Journal
Kevin Day explained how he does not understand the current rally and how it seems that if one took the financial pages of the Wall Street Journal pinned against a wall and proceeded to throw darts at it, one would have made money. There are a few things wrong with the current rally:
First of all, most of the money seems to still be waiting on the sidelines. The current rally was devoid of any really large volume; a good 80% of the money (trillions of dollars) is still NOT in the market.
Second, Jeff Harrington explained how the current market rally has had significant contributionfrom short covering by the bears. This can be clearly seen by the short interest that is published daily by the NYSE, NASDAQ, and AMEX.
Third, the US dollar has depreciated against all major currencies in the last month. Investors are fleeing to higher yield currencies. The Treasury wants to contain interest rates to the down-side and, therefore, has initiated a policy of ‘quantitative easing’, aka printing money in large amounts. As a result, Treasury yields crashed for the 1st quarter and much of the 2nd quarter, though they have recently rebounded.
Fourth, nothing has fundamentally changed for the better in our economy (an unemployment rate that is lower than the recent high but is historically still high is, nonetheless, indicative of high unemployment). The market has been ignoring bad news, and instead has been rallying off of it. It seems that the market has a mind of its own and will do what it will regardless of what any reasonable member thinks it should do.
Why Commodities Will Be the Next Bull Market
What is going to be the next greatest demands from half of the world’s population? More food and more things! The Asian bloc consisting of China, India, Indonesia, Korea, Taiwan, Thailand, and Vietnam, comprise 50% of the world’s population. These areas were once impoverished and could not afford to eat expensive foodstuffs like chicken, pork, grains, etc. The new middle classes in these areas are demanding these commodities and some more. They want new bridges and buildings, new telecommunications infrastructure, highways, and so forth. The world’s producing capacities will not be physically able to provide for the demands of these countries and the speed with which they require them.
Hence, commodities seems like the place to be. This is not to say that there may not be great opportunities in the financial and consumer staples domestic or foreign equities arena. It just means that the age of the gargantuan financial giants, the money shufflers, is over, and money must flow to a once unpopular place, namely, commodities and other tangible assets.
What About Geology?
America, in regards to its financial prowess, has hit a brick wall. But there are many geographical blessings that cannot be forgotten. The Appalachian mountains account for 25% of the world's coal supply. The state of Iowa is so fertile that it can literally feed the whole planet. And in the upcoming commodities bull cycle, America’s farmland will, indeed, play an important role. Time for the investment banker to roll up its sleeves and drive a tractor to plow his lands. Though, Jeff Harrington noted that one critical area that needs attention is the transportation infrastructure. It is not uncommong for food to rot in grain silo's (semi-exposed to the elements) while it awaits transportion via train or barge.
Why Most People Lose, And Few Win (SFPs vs. N(S)TJ(P)s)
VJ Arjan has been recently studying personality types, particularly the Myers-Briggs Jungian personality types. There are 16 such types. It turns out that the ESFPs and their related personality types (those who live in the moment without thought of the consequences of the future and who tend to live without bounds) comprise nearly 75% of the population. They tend to thrive on emotion and “opportunities”, at least ones they perceive. The NTJ/P or STJ/Ps (those who exercise caution and calculation in their actions and who hold strong personal values) comprise only 25% of the population. This is indicative of the age of story of the hare and the tortoise. The hares are impulsive and give little thought about the future. The tortoise imbibes a slow-and-steady mentality and is constantly thinking about its future goal. In the story, as in life, the hares lose time and again. The inability for these types to learn from their mistakes as they are constantly living in the moment also means that these types lose in any market environment.
The hares also have a malleable will, often to the glee of governments and corporations who keep them bound and manipulated by mass media, propaganda, and marketing. It turns out that to the hares, for example, that putting warnings on cigarettes actually makes these creatures want to smoke as they do not like to be bound. As Tommy Schultze pointed this out, these warnings serve as a reminder to current and former smoker
Personality Types: Profiles of the Current Members
It was fascinating to find that birds of a single feather tend to flock together, particularly in our group assembled. Here are the respective (observed) personality types of each member:
Kevin Day – ISTJ – the Warren Buffett mentality, strong practical and thoughtful mindset
Jeff Harrington – INTJ/INTP – a constant gatherer and evaluator of information
Tommy Schultz – ENTP – a rare personality type as he appears to actually be an introvert
Andrew Whatley – INTJ – a chess master who is ranked in the top 25 players in the state
VJ Arjan – INTJ – a tactician, a military strategist, in the market as in any other place
Niraj Arjan – ENFP – an inspirer, a bringer and nurturer of people
We immediately noticed the prevalence of Ns and Ts in our profiles. 5 out of 6 were Ts (thinkers). Also 4 out of 6 were Is (introverts) and Js (judgers/deciders).
On the Absurdities of Man
The Paradox of Water vs. Diamonds: Although diamonds are not a necessity for life and are, in fact, in total abundance (relative to other gems), they are valued much higher than water, without which the body cannot survive or function properly for more than a few days.
The Worst Times to Enter the Market: Why is it that most people lose money most of the time in the markets? It is because of the herd mentality, although they will call themselves “speculators”. Bernard Baruch, one of the greatest equity and commodity speculators of the 20th century stated that the word speculate comes from the Latin word ‘speculare’ which means ‘to observe’.
This is what JR McCulloch had to say about such individuals: “In speculation, as in other things, one individual derives confidence from another. Such a one purchases or sells, not because he has had any really accurate information as to the state of supply and demand, but because someone else has done so before him.”
The next meeting will be on Sunday, July 12th, 2009. For those who have not attended a meeting, but would like to attend, please email your wish to VJ Arjan at scarletkings@gmail.com
