Monday, August 31, 2009

Think Today

One of the most common mistakes investors make is living in the past. It is essential to think today, not yesterday and not tomorrow. This is not to say we don’t utilize information from yesterday and make forecasts about tomorrow, but more to point to the internal biases we develop and maintain that interfere with rational evaluation of the current situation, e.g. I can’t sell that stock, it’s has too large a gain, it belonged to my father, it was the company that made our fortune, it’s a part of the family, it’s gone down so much surely it will bounce back, it’s blue chip it must be safe, and so on.

In the meltdown of 2008, a host of wealthy investors lost fortunes in bank stocks. Many of them were holding shares that had resulted from mergers which completely changed the operating metrics of the original holding company. The industry had changed, the management had changed, the risk of the business had changed but the names were not changed, just everything relevant to the value of the business. So why did so many people hold onto these time bombs? I suspect it was not because they were “thinking today”.

Issues of leverage and asset concentration were a major contributor to bank stocks demise. The departure from traditional banking practices and entry into derivatives and other extremely complex securities compounded those issues. What people remembered or thought they owned was in fact not at all what they owned—they weren’t thinking today, but thinking yesterday.

Thinking today does not mean adopting a trading mentality but rather recognizing the moment, the situation you are in, and its context. The people who hold concentrated positions are making a decision of great importance whether or not they choose to think about it today. Holders of concentrated positions are making a probability assessment of market value. They also usually underestimate the consequences of their assessment. In Atlanta I know the failure or near failure of two different companies cost our community well over a billion dollars in market value. The true consequences of the losses are still vastly misunderstood—both by the losers and their observers. Those that do understand are mad as hornets about the recent admissions by Hank Paulsen—but that’s a blog for another day.

Tuesday, August 25, 2009

The Low-basis Stock Dilemma

The dilemma we face as taxable investors has big horns: if we hold on to our appreciated assets long enough we can die with them and create a new cost basis for our heirs, bypassing capital gains taxes. This horn leads investors to hold on to companies earning subpar returns holding out for the hope “good times” will return and justify the hold by avoiding tax erosion. Should we sell, pay taxes and then redeploy in an asset that does not meet our objectives we are stuck again and with 20 to 30 percent less? This issue drove many investors to invest in absolute return strategies aiming for minimal volatility and 1% monthly returns (which rapidly became 0.50% monthly returns). Taxes are maximized but downside seemed minimal which is more important - sort of like the devil you know is better than the one you don’t.

That didn’t work well either, as of last year investors that capitulated with this strategy in the last 24 months lost 50 to 80 percent of their capital and likely are hung with non-performing investments in long term lock-ups.

So what does a shrewd investor do? Structuring your holdings in partnerships can provide a great solution. Following estate planners’ main theme “live well and die poor,” developing investment partnerships between different family generations can allow for holdings to be managed for maximum tax efficiency and ultimately better returns.

Don’t allow tax consequences to drive your investment decision process, but it's OK for them to sit in the front seat with the business merits driving the deal.

Friday, August 14, 2009

Kick it Open... takes too long to heal the broken, if the door is locked kick it open.

Jeanette Sears wrote the words and her husband Pete Sears wrote the music for this fabulous song recorded by Moonalice. Pete is an amazing keyboard artist and all around musician and I applaud their musical philosophy. If you are my age you likely remember less and less, but you should remember in high school how the songs of the day seemed to reflect exactly how you felt about that crush or that sporting event or about that connection you had. I had a friend in high school who must have ended up as a DJ, he had written a love letter to some girl that incorporated the first line of nearly every top 40 song of that year 1974. I was blown away at the creative connections he made between popular music and real life.

The Sears’ call to kick down the door to heal the broken is incredibly relevant today. We have experienced a giant move to the left as a country, and yet the left is as incapable as the right at developing rapid fixes for the less fortunate. It is time to kick open the locked doors of entrenched bureaucracy, whether its corporate America, the Sierra Club, Congress, the public education system, etc. and speed up the process of mending America. The 1960’s were full of protests about the Establishment and yet today the Establishment is as pervasive as ever - its not necessarily a WASP-oriented press and government, its an organizational culture that seeks to protect itself no matter what, to maintain the status quo while all the time paying lip service to continuous quality improvement and other unmeasurable management techniques. The music and freedom of the 60’s did a lot for the reinvention of our culture, our business models, and most of all our leadership position in the free world. It's time to rethink how open we are to a change of mind, and a better direction. It's time to kick it open. Let's get efficient, let's get green, let's get America going again.

Mike Aronstein is one of our nation’s greatest thinkers and he makes some great comments in his Marketfield quarterly report about the current government legislative surge: “the legislation that emerges from today’s congressional retrospective will be completely irrelevant in influencing the next cycle of excess and may, in fact, contribute to its development. Proper incentives rather than regulation are the only way to shape behavior. If the directors and officers of all insured depositary institutions were personally liable for any loss to depositors or the FDIC, attitudes toward risk would change overnight.”

Edmund Burke had a Kick It Open statement a mere 300 years ago: “All that is necessary for the forces of evil to reign in this world, is for enough good men (and women) to do nothing.” What do you need to do to Kick it open?

Saturday, August 8, 2009

Metamorphosis: Is Your Head in the Sand?

I expect many of us will continue along a bit like ostriches, not knowing what they are missing - not necessarily scared, just don't want to be bothered by this new aggressive intruder I call the digital dimension of our life. I am embracing it finally: the advent of HD, the six- hour laptop battery, and network television's inability to compete are all noted contributors to my own metamorphosis.

I hope you'll join me on this journey through the digital age.

Thursday, August 6, 2009

Connecting Your Future to Your Present

For those of you who haven't read The Tipping Point by Malcolm Gladwell yet, you should (at least the first half). It's a really useful summary of why our communities behave the way they do. Gladwell defines types of people, and per his book, I am a connector. Right now I'm connecting you and me, and if you stay in touch I will connect you to some unusual and helpful perspectives on life and how to get what you want, be it business or personal. I will connect a lot of data points and help you connect your future to your present.

I'm also a story teller. I will make analogies I hope will inspire a grin as well as a new perspective. One of my favorite movie lines comes from Kung Fu Panda: “Yesterday is history, tomorrow is a mystery, today is a gift, which is why it’s called the present.” Connecting your future to your present is an exciting process, made more possible than ever before because of the digital dimension. This bridge connecting present and future is strategy. Hopefully my sharing a perspective from this perch in our digital world will be my third thing I try to be: helpful.

Wednesday, August 5, 2009

Introductions: Letter to a crowd

This is about me and it's about you. It's about me and you and it's about a new aspect of our lives which has grown so powerful we can hardly comprehend it. Welcome to the digital dimension, where there are no waiting lines, no shortages, and no lack of anything but time to absorb what we can. It's changing everything. The formula for life success used to be 10% inspiration and 90% perspiration, and now its about 10% perspiration, 45% inspiration, and 45% IPhone or PRE Apps (which are 90% inspiration and 10% perspiration), so the net net is life success in the digital age is largely about inspiration.