The Story Hasn’t Changed

I haven't posted in a while.  It's been a frustrating year.  I was getting excited when the S&P started the year down 5%. I thought "This is it!"  And of course, I was wrong. I keep reading more and more people say that we are in the beginning parts of a new secular bull market.  I actually get upset when I read that.  It's so unbelievably dangerous.  Secular markets start and end based on valuation.  We are at all-time historical highs in valuation.  Higher values than even 1999 and 1929, in many regards.  Secular bull markets have started, in the past, when the stock market to GDP ratio has been sub 50%, and right now we are at 130%! Patience is a virtue and I lack it in every aspect of my life...except investing.  I've been blessed with that ability to be patient.  Has it been trying?  Of course.  But these cycles do take time.  As John Hussman said in his post tonight, and as a former partner of mine always says "Market tops aren't just points...They are processes.  We are in the process, hopefully, of this.  I say "hopefully" because I have been wrong for quite some time. But I do feel good knowing that the longer I am wrong, the more likely the devastating result that will follow.  Thinking that another 50% drop (3rd in 15 years) is not likely is a fool's wish.  History has shown that during times of immense overvaluation, prices fall, fundamentals don't rise. For those reading this who think I'm kooky, keep on thinking it.  It's been hard thinking otherwise.  But again, please don't say "it was so obvious" in a few years when the market has fallen 40%.  It's just insulting....
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Survey Results – What is the Best Asset Class to Invest In?

As you have seen on the site, you get a survey popping up when you visit. This is not meant to annoy but I genuinely want to see what my readers think of things in the economy and investing. On March 28th, I put the question up: What is the Best Asset Class to Invest In?  Here are the results BestAssetClass                   I am not going to lie. I was surprised. 48% said Real Estate! So let's think back to 2009.What would investors have said about this five years ago? Real estate and stocks would have been at the bottom, right? So my point here is this:  People follow investments usually in the later stages of their big increases in price.  The key is to find these assets when others don't want them.  Gold, a few years ago, was untouchable! Now it's only the favorite of 12% of my readers. Think independently people.  You can't chase returns.  You have to think and look at true value and not care what others think.  That's the only way to get above average returns.  If someone tells you otherwise, they are lying to you to get your money and charge you fees or commissions.  Plain and simple....
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When Value Buying Can Bite You in the Ass

Ten years ago, I was given the option to buy shares in an IPO for a small company called Google. You may have heard of it.  I looked at the financials and thought, "Jeez, this thing is overpriced." So I ignored it.  The IPO price for early buyers was $60, I believe.  It currently sits at $1200 per share.  1900% increase.  Drats. So here is one of the rare examples of when value buying ends up having you lose out in the long term.  First off, I think Google is worth around $650 a share right now.  I know I know.  That's almost 50% lower than it sells for today...but it does sell for a premium. But in 2004, Google had $3Billion in sales and last year it had $60Billion in sales.  So clearly they are a growth machine.  They have done a great job meeting expectations and leading the industry in ads and it prints money.  Who would have guessed that back then?  Not many, I would presume. So do I beat myself up over this?  Yes and no.  Of course I wish I had done this, so I am upset about that, but if I had invested in Google back in 2004 based on what I saw, then I would have lost TONS more money on other IPOs now and in the future hoping for the same result and would have probably given back all of the Google gains over time. Having a plan and sticking to it...assess your work over years and years and many investments, not the short term and a few investments.  Warren Buffett and Ben Graham and all of the investing greats didn't beat the market each year...in fact, when years were good for the stock market, they tended to lag.  But they stick to their system and when times are bad, they tend to fair pretty well....
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Updated CIO Index

Getting close to some playoff action here.  We are about 20 games out and teams are starting to roll. So of course, we must do an update on the best players in the CIO Index from overall standpoint and from a cost standpoint. Here are the top 10, with minimums of $5MM salaries, 45 games played, and 400 shots taken so far this season. Overall Screen Shot 2014-03-10 at 10.49.41 PM                 Salary Efficiency Screen Shot 2014-03-10 at 10.46.11 PM...
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Short Term News Doesn’t Mean Long Term Value

When discussing the current stock market valuation, so many people tell me that since current earnings are putting the market at 15 times earnings, I am off my rocker for thinking it's overpriced.  What people always forget is that the current profit margin as a % of GDP is at 11%, which is almost double the historical average.  Of course, everyone wants to extrapolate that out, but when looking at profit margin levels in the last 10 years, this 11% rate is even an anomaly. So I ask this question: Back in 2008, the earnings on the S&P 500 got as low as $13 per share, I believe.  If you extrapolate out a 15X earnings on that, historically, it said the S&P 500 should have been at 195. Instead it bottomed at 666 or so.  So was the 666 level really worth 3.5 times more than the market should have been selling at? Of course not, and no one who I ask that question to says it was. Their response is some variation of "Well, that was an extreme one time situation."  Why can't the same extreme one time situation occur on the upside too!?!?! Every other Friday, I teach a class at my old high school where I teach investments.  One of the analogies I always make is that if you were always a C student but suddenly, you got an A on a test because the teacher let you use an open book, are you going to apply to colleges and say you are a straight A, 4.0, student?  Of course not! If you are a solid 4.0 student and all of a sudden you forgot, from some fluke occurrence, that you had a test today, and upon taking it, you earned an F, is your high school going to kick you out for poor grades?!?! Of course not.  Yes yes, one test may be too short of an example, so make it 1 quarter of grades...1 semester...1 year.  Whatever.  The bottom line is that if your fundamental study habits haven't changed, why would your outlook change drastically? There are good years and bad years in everything in life.  This is why we can't extrapolate one good year to infinity and beyond and we can't extrapolate one bad year to infinity and beyond. You have to look at fundamentals of why things are the way they are. If there is a shift in some sort of supply or demand, then I can understand that. But that's not the case here. In fact, the thing driving profits is low interest because of massive Fed spending.  We can all agree that that will not occur in perpetuity.  Well, we don't know that for sure, but every time it does happen, it leads to bad economic outcomes which would then, in turn, drive stocks down. Please don't think short sided when things are GOOD or BAD....
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WhatsApp – How Facebook isn’t spending as much as you think

I really dislike the idea of writing a blog post on WhatsApp because it has, by far, been the biggest news of the last week, I think.  WhatsApp has VERY SMALL revenue but they can charge their users $1 per year after the first year of free use, so with the 450MM users they have now, that's $450MM per year in revenue. Big woop. But of the $16Billion initial acquisition price, $12Billion of that was being done with Facebook stock.  So what you may ask?  Well, it matters big time and it tells me that even Facebook execs think their stock is overvalued. Think about it...if you feel your stock is undervalued, you will never ever give that stock away to make acquisitions.  You would use cash because you feel like your stock will eventually go much higher.  On the flip side, if you think your stock is OVERVALUED, you will want to buy as much as you can with that stock because you feel the stock will go down in price, so you really aren't paying as much. To break it down further.  Let's say, in a wonderful world, God came down and told you that your stock is going to be worth $20 per share in 1 week because everyone will realize how great your company is...But it is currently selling for $10 per share...would you EVER buy $10 worth of stuff with that $10 share?  No! God just told it was worth $20 per share in a week, so you wouldn't be paying $10, you would be paying $20 since the share will be $20 in one week (yes, there are time value considerations here, but let's not overcomplicate it). Again, on the flip side, let's say your stock is selling for $50 per share, but God said "Next week, your shares will be selling at $20."  So anyone selling you anything for $50, you will try like hell to get them to take your shares because, really, you are only spending $20 in next week's dollars to buy that stuff. I hope it makes sense because it is a very telling sign when people are making acquisitions with shares.  It shows either a lack of liquidity or concern over stock price, or both. So let's say that Facebook, who is selling at over 100 times earnings, is actually worth 1/3rd of its current stock price after you account for growth in revenue and earnings.  Revenue and earnings increase nicely over the next year or two and they are able to justify the high valuation and sell at a reasonable multiple.  If the shares were to drop to the $20 mark, which could very well happen, their $12Billion in stock that they gave up is actually only $4Billion.  Add to that the $4Billion in cash and you have a total acquisition of $8Billion instead of $16Billion.  Not a bad way to make acquisitions when everyone is so high on your stock.  The company acquired believes they are getting shares in an awesome company that is high flying, while the CFO of Facebook knows that they are just giving away overpriced stock to fund expansion....
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Yellen and the Stock Market

A heading today on CNN Money was "Can Yellen Push S&P 500 to Record High?"  WTF?!?!?! It is NOT the Fed chair's job to even worry about that.  I am getting a bit annoyed with the expectation of the Fed Chair to keep rates low in order to keep stocks elevated.  At some point in the future, rates will have to go higher and then, by the assumption that stocks will go down because of that, stocks will have to decrease. So let's just get it over and done with! Unless, of course, the low rates are needed to keep the economy humming along and inflation higher. Remember, the low rates will be needed to drive inflation higher so that all of this debt that we have can be buried in higher GDP growth due to higher inflation. Let Yellen do her job which is to worry about inflation (stable prices), full employment, and long term interest rates.  Everything else will take care of itself.  The economy, if it needs to, will go through its problems and fix themselves, as they have done over the past few hundred years.  The stock market will go through bull and bear cycles, as it has for the last 145 years of history that I have at my fingertips.  It's ok for bad times to occur....
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Deja Vu all over again…all over again

Facebook buys WhatsApp yesterday for $19Billion...Banks are back to lower down payment loans on houses and interest only again. Can everyone PLEASE see what is becoming so obvious?!?! That's all I have to say....
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CIO Index Update – February 13 2014

Going into the All-Star Weekend, I wanted to update the CIO Index.  I am going to concentrate this one with one specific aspect:  $10MM+ Salary guys who have played in at least 30 games The top guys are a bit surprising, but it is what it is. Notice where my good friend and motivator of this index, Carmelo, stands...27th out of 41.  Hmmm.     Screen Shot 2014-02-13 at 6.42.52 PM          ...
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Sometimes Par is Good Enough to Win – Tin Cup

If you have ever seen the classic movie, Tin Cup, there is a scene in which Cheech is talking to Roy and he says “Sometimes par is good enough to win.”  Basically he is saying that you don’t need a birdie or eagle on every single hole in order to win.  And that makes sense doesn’t it? If you agree with that, then you’re going against all the people out there who are buying into this stock market and into this hot real estate market because the “other options” for investment are low yield bonds.  That is ridiculous though.  Yield is a concern but what should be of MORE concern is long term value.  Chasing yields will only result in problems when values finally revert and if you are standing there holding assets, which you will be, then you will get hurt at some point. I am not trying to be Debbie Downer here, I am just stating that keeping your capital preserved on short term treasuries yielding 0.15% per year may be good enough for now! Markets can turn on a dime and if that happens, are you going to be smart enough to get out and see that bigger losses are ahead?  If you say “yes” then you’re delusional.  It ain’t gonna happen. So again, look at values. Buy on value.  Then you never have to worry about yield.  Yield will take care of itself over the long haul.  If you just want yield, go buy a bunch of high risk debt and collect high yield there, but you don’t for a reason, right? So it’s not just about yield.  It’s about capital preservation…...
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