Category: Pain & Suffering

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Buffett & Pain & Suffering

(Travis’s Note: I originally wrote this full post on February 2nd, 2017, and I wanted to use/emphasize this excerpt as a reminder of the difficulties that value investors have to endure to see a thesis out).

This correction has been trying on investor’s patience, and it reminded me of a paraphrased quote from an article by Charlie Bilello that our esteemed Contrarian Member from New Zealand, “Motu”, provided a link to earlier in “Live Chat”, essentially saying that, “to be a good investor; you have to be good at suffering”.

In the article, Bilello referenced the famous under-performance of Berkshire Hathaway (NYSE:BRK.A), (NYSE:BRK.B), whose shares declined roughly 50% from June of 1998 to March of 2000, while the Nasdaq 100 rose 270%. Here is the chart of Berkshire’s under-performance, replicated from the article, over that time-frame.

I was an active market participant during this time frame, and made a small fortune from 1995-1999, but as a value investor, I have my painful war stories from this era, which hurt many legendary value oriented investors, including Buffett, Grantham, whose firm GMO lost roughly two-thirds of their clients, and Julian Robertson, who closed his famous Tiger Fund.

My personal learning experience from the late 1990’s including shorting stocks like Intraware and Digital Island too early (November of 1999), and missing out on the downside, while losing significantly, as these aforementioned stocks, and others, doubled in mere days, sometimes in a single day, before ultimately crashing to nothing. This was a painful experience to participate in, and learn from, as my research analysis proved to be right, but my timing and implementation proved to be wrong.

Ultimately, value stocks, particularly small-cap value stocks, and REITs (which ironically are overvalued today), significantly outperformed in the ensuing 2000-2002 bear market. Not surprisingly, Buffett materially outperformed, recapturing the performance gap, and enhancing his already considerable reputation as a legendary value investor.

Wrapping up this opening missive, as a veteran, contrarian, value investor, I can attest to the veracity of the statement that to outperform, you must be good at suffering.

While the most difficult suffering, in my opinion, is waiting for the inflection point in a market, particularly if you are early, there also can be significant suffering once the turn arrives, and a bull market is in bloom.

Building on this narrative, ironically, some of the worst suffering happens during pullbacks in bull markets, as the bull markets want to throw investors off the market, and out of their positions.

Fortunately, bull markets have a way of resolving to the upside after they try to throw the most investors they can off the bull market.

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Benefits Of Failure

(Travis’s Note: This article was originally published on January 17th, 2018, and I am re-posting today, October 28th, 2018 to add to the archives, and remember the challenges of 2017 as a Learning Lesson).

  • I have learned more in life through my failures than my successes.
  • 2017 was an excruciating, challenging year and I made significant, critical mistakes.
  • Capital was destroyed, which is precursor for what the broader market is going to do to many investors from today’s valuations.

“We all go through trials and tribulations, and when you see how a person handles it, that really says a lot.”

            – Chris Mullin

While most investors and speculators celebrated a fortuitous 2017 in the investment markets, I managed to have one of the worst years relatively, and absolutely, that I have had in my two decade plus career actively investing & speculating.  It was made even more painful, by the fact that this occurred after our terrific 2016, when it appeared that out-of-favor, value-oriented equities turned the corner in significant way.

The non-stop, relentless rise in the broader investment markets, specifically the S&P 500 Index (SPY), which only trades up nowadays, poured salt in the open wound, and all year, it felt like I was fighting uphill, which was the opposite of the remarkable reversal and rebound that we captured in 2016.

Looking back, I made clear, significant mistakes, and I severely, negatively impacted the investment portfolios of people close to me, destroying capital, which has to be one of the worst feelings in the world.

The silver lining to this unexpected turn of events is that I have found in life, that I learn more from my failures than I have from my successes, even the significant ones that I have been fortunate to enjoy (I have had my share of significant challenges too).

Specifically, I have found that, through failure, you learn more about relationships than you do in success, as successes can paper over cracks, fault lines, or real feelings, while failures tend to spur a “circling of the wagons” for those that are truly close to you, which makes eventual victories sweeter when/if they do occur.

On that note, I am very thankful for the members of “The Contrarian“, and everyone I work with directly and indirectly, as we continue to build a special community of members that aims to take advantage of historic price anomalies in the investment markets.

In summary, as a market historian, I have rarely seen price dislocations like we see in today’s markets.

Frankly, the price dislocations today rival the greatest price anomalies in modern market history, including the important calendar dates of 1929, 1973, 1999, and 2007.

Reading that and inferring from the dates mentioned, you may think that I am only focused on the downside, which is significant, but that is only partially true.  There are enormous upside opportunities too, as both long and short trades are enormously crowded right now, in my opinion.

Given today’s valuations, most investors, in traditional stock and bond portfolios, would be better going to cash (where short-term interest rates will rise) and taking a five-year vacation, checking in periodically, perhaps once a quarter, for better buying opportunities.  I will write more about this in the future, as it is the least I can do to preserve capital.

To close, in a picture, this is how I felt about 2017.

Looking forward to 2018, and moving forward from a despondent, depressing year (entirely of my own doing), where almost all common sense with regard to valuations has been thrown out the window.

Thank you for reading, and please be mindful of the rare investment environment that we are in today,

WTK

Disclosure: I am/we are short SPY as a Market Hedge.

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

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Want Better Trading Or Investment Results – Avoid The News

  • Avoid the news.
  • Rarely is trading news profitable.
  • Find a long-term investment thesis & stick with it, even if it requires some pain & suffering.

(Travis’s Note:  I originally published this article on March 23rd, 2017, however it is one of my favorites, a foundational article, thus I am re-posting it today).

As I was checking the newswire this afternoon, looking for news about today’s congressional vote, after completing some errands, I had to stop for a minute, and remind myself, that looking for the news is often a bad idea as an investor, speculator, or trader.

There are two reasons for this, from my perspective.

First, the news is often priced in, and thus when it occurs, financial securities often move in the opposite direction that most are anticipating. The U.S. Dollar tanking on the latest Fed interest rate increase, with precious metals equities rallying, think Barrick Gold (NYSE:ABX), is one example of this all too common occurrence.

Second, it is near impossible for investors to compete against sophisticated trading algorithms on a short-term basis. The advantage an investor, or even a trader, has over these short-term “news” hyperactive traders is time, and a longer-term investment view.

Simply put, trading the news, or even consuming the news, is bad for our brains. Don’t take my word for it, read this white paper by Rolf Dobelli, which can be accessed by clicking the aforementioned link, or clicking on the screenshot below. Even if you do not want to read the full article, simply read the prologue below.

Consuming the news is bad for our health, but like most things that are bad for us, (go ahead and think for a minute about your own vices), the news is addictive.

Building on this narrative, while trading off of short-term news can be addicting, it is generally a losing battle unless you are a high frequency trader armed with the right computer equipment. If you do not fall into this category, my suggestion is to look for other areas of opportunity in the markets, and I say this from my hard earned, personal experience over a long, active investment career.

As a contrarian, value-focused investor, I do not have too much in common with dividend growth investors, at least today, since I believe dividend stocks are overvalued and too much in-favor at the moment.

However, while I believe dividend growth stocks are in a bubble, amidst a series of bubbles that could get bigger before they burst, and I believe dividend growth stocks are set for a long period of under-performance, after completing a long period of out-performance, I will say that at least most dividend investors get two things right.

Specifically, they “avoid the news”, sparing themselves unnecessary trading costs, and additionally, they have a longer-term investment strategy.

In summary, it is paramount, from my perspective, for investors, speculators, and traders to have a long-term investment strategy, or at least an intermediate-term investment thesis, and then stick to this strategy, even if it goes against you initially.

In fact, consider averaging in to a losing position, if you have a high conviction in your thesis. Another word for buying something at a discount is value investing. The temporary pain and suffering will be worth it, if your intermediate-term, or longer-term thesis is correct.

Have a good weekend,

WTK

P.S. Look closer at The Dallas Morning News image above, which is from the March 27th, 2012 issue, and scan your eyes to the bottom middle of the page. What do you see? Five years and nothing has changed, yet everything has changed.

(Click the picture below for more information…)

Disclosure: I am/we are long ABX, AND POSITIONS IN “THE CONTRARIAN” PORTFOLIOS.

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

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Bruised, Beaten, And Battered, But Not Yet Broken

  • Resilience is one of the keys to market success.
  • It has been a long, difficult stretch, yet there is light at the end of the tunnel.
  • Prepare accordingly for the opportunity.

(WTK’s Note: This picture shows how I want to feel after downtrodden, out-of-favor value equities reclaim their rightful mantle of the stock’s markets best performers…actually poor Andy suffered long after this scene…so really I want to feel how he felt upon reaching Zihuatanejo..for more of my take on the Shawshank Redemption and how it applies to investing…read this post).

When I was sixteen, which is now twenty-five years ago, I bought a brand new GMC Sonoma blue pick-up truck, which I drove right until it died on me in an apartment parking lot roughly a decade later.

The blue GMC pick-up truck was partially funded from my paper route, which I had since the age of 9, and partially funded through ongoing work during high school, including as a dishwasher, cook at a restaurant (Schoops in NW Indiana…I could grill a hamburger with the flattened edges to perfection), and as a jack-of-all trades at St. Anthony’s Hospital, with much of my time as a stock boy.

Not that kind of stock boy, but rather actually stocking shelves, though I was already knee-deep in the stock market, actively trading at that time (without the technology comforts, or access to the markets, of today…perhaps that was a good thing).

One night when I was 16, after a long shift cooking, and closing at the restaurant, I was driving home around midnight, on an almost empty four-lane road, and I looked down briefly to adjust the radio.

Before I could look up, a car had veered in front of me, taking a sharp angle to a convenience store, that I had not anticipated.

Boom…my new blue GMC Sonoma pick-up truck rear-ends the car.

Thankfully, nobody is seriously injured.

It is my fault.

I have insurance, but what a night.

To my credit, I took responsibility.  The car was fixed, lessons were learned, though I did hit a mailbox driving with my friend Marc Vassallo to work out later that summer, which was the last car accident that I had, hopefully I do not jinx myself with my remembrance.

Note to self.  Be careful with oldest children (daughters) as they get close to driving age.  They are too close already.  Some in our family think they should not drive until 18 or 19, however, there is merit in diving in and learning, though perhaps not in a new car.  They need to take risk driving to learn, to be independent, at least that is my view.

Similar to my accident when I was 16, the last several years, really a long stretch since 2012, with the notable exception of 2016, have been very difficult for my investing style, coming out of nowhere after my most successful stretch trading and investing, as value and concentrated investing approaches have been out-of-favor, and trend following, and passive investment strategies have been dominant in their performance.

Looking back, I have to take responsibility for the wrecks I have caused, meaning investing mistakes, and believe me, these hit home, as I have invested millions and millions of my own capital into what I believe are the best equity return candidates.

Eating my own cooking is the only way I know.  It has worked for me before to a degree I never would have imagined, and it has failed me too, even when I was sure of something that ended up being right, but I was still wrong.

That is the cruel irony of markets, and of life too I suppose.

Additionally, I am stubborn to a fault, loyal to a fault, and competitive to a fault, while having the drive and ambition to research something for years if need be, all ingredients for big successes and big failures.

One lesson I have learned in the stock market, after 25 plus years speculating, and investing, is that you have to ask, “what may go wrong?“, even in seemingly the best situation.

Opposite, and not natural when thinking about the aforementioned question above, but a necessary ingredient too, is that investors and speculators must keep in mind “what could go right“.

Looking back on this note, my biggest mistakes in Dollar terms, has been selling something too early, after building a big position, typically in a value equity, and initially thinking I was right, and then taking profits too early.

Hubris and a need to do something are enemies in the stock market.  Personally, every time my ego has ballooned, something happens to let out the air.

Patience, and acting when presented with an opportunity, are allies in the stock market.

Most importantly, though, in my opinion, is resilience, and the tenacity, and persistence to stick with an idea.

What is the point of my late night reminiscing and rambling?

It boils down to a couple things.  We are all going to make mistakes investing and speculating (and in life too).  Sometimes these are big mistakes.  When this happens, we have to take responsibility, learn from them, and then, and this is key, not be afraid to take risk.

What is risk anyway right now?

Is somebody fully invested in the stock market very risky?  I would say so, given my views on market valuations, which are echoed in this long running table that I have put together that I get laughed at now for posting.

Looking at the table above, the broad U.S. equity market looks historically risky to me, with the caveat that I would have said this, using the same information, for a long time now.

So to me, U.S. equities are historically risky, with strangely many very cheap bargains, however, another person may say someone all in cash is risky.

This question of risk is all in the eye of the beholder, however, I would say after nearly a decade of the “winner’s” winning, there may be more risk in these winning equities that investors, speculators, and long-time holder imagine, and alternatively, there may be a good risk/return reward ratio (say that five times fast) in many of the out-of-favor, downtrodden equities that have generally not participated in the bull market the last decade.

Ironically, many investors would not touch these equities today, and really, who could blame them.

You would have to have the patience of Andy Dufresne, the famous flawed, resilient protagonist in Shawshank Redemption to be interested in many of these downtrodden, out-of-favor equities.

“Not participated”, by the way, is a kind term, as many out-of-favor equities, even some household names, have been crushed, far out of sight of the shiny, roughly decade long bull market in the S&P 500 Index (SPY).

The discussion of where to invest, what is risky, and what is historic opportunity, is a lively topic at The Contrarian, which is my premium research service platform on Seeking Alpha.

I am biased, of course, but I think we have the best group of investors and traders anywhere, seasoned by nearly three years of commentary for some members, with many members actively contributing their unique perspectives to a robust Live Chat discussion on a daily basis, particularly when volatility surfaces.

Right now, we have an open free trial at The Contrarian, so if you have ever had an interest in test driving our group, now is a good time.

From my perspective, as I said in my blog post yesterday, it would be worth taking a look, simply to view the Live Chat dialogue.

The price point of The Contrarian is a little steep, coming in as one of the more expensive services in SA’s Marketplace.

Over the years, I have had quite a few requests for a lower-priced, more streamlined research product, and over the last several months, I have slowly put together a more traditional research newsletter.

To celebrate this official launch, which includes a deep-dive research report on what I believe is an extremely timely equity (delivered via email upon membership), I am offering a limited time $299 annual membership for the first 100 members. To get this discounted price, simply use the coupon code “first100”.

Ultimately, I think we are now at a major inflection point in the financial markets, which has been ongoing in slow motion for three years, but which could suddenly accelerate. Being different, being contrarian, has been extremely painful for a long time now, however, resilience and persistence, two necessary qualities for success in contrarian investing, in my opinion, are leading to what I believe is an upcoming golden age for active investors.

Hope you enjoyed my trip down memory lane as much as I did (I still remember running stairs every morning at the high school football field trying to build up calf strength to dunk a basketball…different worries today),

WTK

Disclosure: I am/we are short spy as a market hedge, and have put more money into commodity equities that i ever should have, yet the opportunity remains IMO.

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.