“Here’s the only way I can think of making money off of all the suggestions I’ve gotten based on “the only investment advice I’ll ever need”. For each person making the suggestion, tell this new fount of wisdom to give you $500 in cash and assure them you will follow this investment advice to a tee. There’s only one catch. You will keep the $500 no matter what happens but split the profits 50/50 from this “only investment advice you will ever need”. See how many of these gurus telling you about this wisdom will whip out their wallet and fork over the $500. My guess is they will suddenly become far less confident in their “only piece of advice you will ever need”.
 
                                                                                                 -      Bob Tyson III      

Over the years, individual investors and money managers will read a lot about possible technique, style, and process in their investment career. Along the way it’s impossible to keep track of the amount of times you might have heard “this is the only investment advice you will ever need”. In my case, I made my first investment in 1999 as part of Nintai Partner’s corporate internal fund investment program. Since then, I’ve received so many examples of “the only investment advice you will ever need”, I’d be a millionaire if I got a nickel for each time it was brought up.  
 
I’ve found over time, the basis for these claims is a some get-rich-quick scheme based on several core concepts. These include investing in thinly traded penny stocks, placing bets on rare metals or other commodities, or getting in on the “ground floor” of some new investment venture with a highly dubious claim such converting ore obtained in western Ireland to tons of silver from a 2000-year-old peat bog.
 
There are other versions of what was once called “the projector’s pitch[1]”. These are proprietary trading systems based on phases of the moon (just kidding!), technical chart patterns known as the “double ended pricing helix” or the “inverted energy power trade” (not kidding!).
All of these suggestions may be the only ones I – or you – might need to lose a lot of money quite quickly in the markets.   
 
There is one last category of individuals who sometimes give the “only investment you need” speech and that is your financial advisor. Occasionally I will have clients who tell me of former financial advisors insisting on a proprietary process that assures a client of a certain return. Many will claim to beat the S&P 500 Index on a regular basis or outshine the BBgBARC US Government TR bond fund each month.
 
I feel strongly that all of these pieces of advice - some well-meaning and some not – have a glaring omission in their design and claim.  The best investment advice should be developed exclusively for the investor’s needs and goals. It doesn’t matter much if investment performance beats the MSCI world index but doesn’t allow the retired investor to pay his Medicare Part B premiums. While much investment advice is relative (meaning measured against some other organization’s or index’s performance, many investors need advice about investing with absolute returns.   
 
The best investment advice I ever received was from a Board of Directors member at Nintai Partners. We had just decided to create an internal fund in which retained earnings would be invested and owned by the employees of the firm. As we pondered the goal of the fund, many ideas centered on performance metrics that measured returns versus the major market indices such as the S&P 500. After one contentious meeting, the Board member asked why relative performance versus the S&P 500 Index was so important. He proceeded to ask a series of questions. When did we need to access proceeds from the fund? What returns were necessary to meet individual retirement needs of the employees? Were there specific dates and times when a draw down might be necessary? He pointed out that none of these were entirely relevant to the S&P 500 returns. Indeed, in some cases, the company’s needs might be in direct contrast to the S&P 500 returns. The best advice was to ignore what all the talking heads cited as successful investment returns, and focus on what met our needs. In regards to how to achieve this, it occurred to me there are several core concepts investors should keep in mind.                                                                                                                                                                                                                                                                                                                                                                                          
 
To Thine Own Self Be True
No matter how much shouting, prognosticating, or tales of woe/exuberance one might be blasted with while watching financial news networks, nearly none of this noise has an iota to do with your investment goals or strategy. If you can’t sleep at night after purchasing that triple leveraged oil short fund you heard about on “Trader Nation”, then don’t buy it. No amount of trash talking gibberish by so-called trading experts is going to enhance your investment returns or ability to get a good night’s sleep. Either you fully understand your investment thesis and it meets your investment goals or you don’t buy it.
 
Your Goals Should Drive Investment Decisions
There’s a classic story told by Jack Bogle that’s several individuals were discussing their investment returns over drinks. After one boasted that his investment manager had beaten the S&P 500 by a wide margin, he asked his tablemate how his returns were over the past year. He said, “How the hell do I know? I just know I have enough money to golf every day, go fishing, and spend all the time I want with my grandchildren.” The game of trying to beat the markets has nothing to do with this individual’s performance measures. Never forget you invest for your goals – not Wall Street’s.  
 
The Measure of Performance is My Clients’ Outcomes
As a professional investment manager, my fiduciary responsibility means that I choose the most appropriate investment vehicles to meet my investors’ goals. This means there are no cookie cutter solutions for my clients. Some have 50 to 100-year time horizons where growth is required to keep up with their Trust’s ever-expanding financial commitments. Another client might have a nest egg vital to supplementing their Social Security and pension income. They simply can’t accept substantial drops in their portfolio. Whatever their situation, the best investment advice I can give is to design a portfolio that specifically meets their financial needs. Anything less is a failure in my fiduciary responsibilities.    
 
Conclusions
 
If you Google “best investment advice” today, you are likely to find hundreds of articles from major publications (Forbes), websites (Motley Fool) or investment managers (Ken Fisher). If you read any of these articles, you will likely get a list of stocks or industries completely detached from any investment goals you might have for you and your family. What help is this? How does this help any person get closer to their personal financial goals? My investment advice? Turn off the TV, switch off the computer, and draw up a list of your financial needs, your risk tolerance, and what investment strategy most meets your personality. Some people love to invest on their own, others are most happy using index funds. Whatever the strategy, make sure it’s your own. Because in the end, only you will know whether you met your financial goals or not.
 

[1] In the late 16th and early 17th century a “projector” was defined in the Oxford English Dictionary as “a schemer; one who lives by his wits; a promoter of bubble companies; a speculator, a cheat.”. Perhaps the most famous literary account of projectors is that offered by the author Jonathan Swift in “Gulliver's Travel”. Gulliver is introduced through an entire troupe of projectors in his tour of the Grand Academy of Lagado which is a think-tank populated by inventors of perfectly useless or insane conceptions and contraptions.
 
 

​“When the markets crash, how do you discern between a good stock and a bad stock? Is it total returns? Is it beta relative to the general markets? Or is it something quite different, quite deeper in nature? Is it about the company and not the stock?”
 

• Alex Beauharnais

 
“We spend a lot of time looking for systemic risk; in truth, however, it tends to find us."
 

•  Meg McConnell

 
I think investors make a terrible mistake when they ask “what’s a great stock to own during a bear market?”. One thing you want to own during a bear market is a great company, not necessarily a great stock. In fact, it might be a great company AND a terrible stock. Great companies really show their star qualities when the capital markets crash. They have tendency to not need access to the capital markets, they continue to excel at superb allocation of capital skills, and they use the tough times to invest in future profitable growth (note I say profitable). They don’t build empires, they build better businesses with wider moats.  
 
Over time I’ve come to realize that great companies might not prevent losses in time of capital market crashes, but they often prevent permanent loss of capital during those times. In these last weeks of 2018, investors have fervently looked for the best means at avoiding such grievous losses. Great companies have some common attributes that allow investors to avoid those catastrophic losses which cripple long-term returns. Several of these are an ability to access to capital markets, outstanding capital allocation (even in downturns), and using tough times to increase long-term profitability and growth.
 
Access to Capital Markets
 
There’s an old saying that says only borrow money when you don’t need it. A tremendous number of investors found out in 2007-2009 that some of their core holdings were wholly dependent upon short term paper to survive and to conduct daily operations. Think of Bear Stearns or Lehman Brothers. Companies that survive – and even thrive – in bear markets are those that borrow only when they don’t need it. A great example of this is the difference between Goldman Sachs (GS) and Berkshire Hathaway (BRK.A) in the 2007-2009 market crisis. Goldman was forced to go to Warren Buffett with hat in hand and proffer a truly outstanding convertible debt offer to Berkshire to show Wall Street it had the capability to conduct business in a system under such stress.  
 
The Ability to Keep Up Outstanding Allocation of Capital
 
In 2011 my old firm Nintai Partners did a study on return on capital in the technology sector during the 2007-2009 market crash. During that time frame, the top 100 technology companies by market cap saw their return on capital drop by roughly 40-45% in that 48-month period. On average it took roughly 24-36 months to recover their previous (higher) returns on capital. These numbers reflect a substantial hit to the very business structure and strategy when the capital markets swooned. Businesses with deep competitive moats, robust and reactive corporate strategies, and outstanding management were able to ride out these difficult times with little or no impact to their return on capital.
 
Use Difficult Times to Build Long Term Profitability
 
Great companies have the sense to use down times in the economy and markets (which frequently go together) to make investments for sustainable – and profitable – growth in the future. Whether it is maintaining budget levels in research and development or completing bolt-on acquisitions at reasonable prices, great management teams find ways to use depressed market prices or economic slow downs to further build on to their competitive advantages and moat.     
 
A Working Example
 
An example of a company that meets these criteria is a long term holding of mine (both in the Nintai Charitable Trust as well as individual client accounts) – Manhattan Associates (MANH). Manhattan Associates is a software solutions provider to manage supply chains, inventory, and omni-channel operations for retailers, wholesalers, and manufacturers. Its supply chain services provide tools to manage transportation costs. The omni-channel solutions provide a central platform to manage inventory availability across channels. The inventory solutions provide distributions the ability to forecast inventory demand and plan future investments. The software plays a vital role in inventory management, production scheduling, and enterprise resource planning.
 
MANH is the prototypical type of company that I’ve invested in all my career. Revenue has grown roughly 14% annually over the past 10 years. Free cash flow and earnings have grown 22% and 23% respectively over the same period. The company has no short or long-term debt. The company is a free cash flow giant converting roughly one-quarter of every dollar in revenue to free cash. All of these statistics help illustrate a story of an extremely profitable company that steadily uses bull and bear markets to solidify its competitive position, balance sheet strength, internal operations, and overall gross and net margins.
 
One example is Manhattan Associate’s outstanding share count. Going from 130.400,000 shares in 2003, the company has reduced these by over one-half with only 65,100,000 shares trading in late 2018. Another is Manhattan’s growth of 14.5% return on equity in 2007 to 68.9% in 2018. Even during the height of the Great Recession in 2008-2010, MANH generated free cash flow ratios of 16.7%, 22.7% and 14.8% respectively. During that same period, the company only slightly reduced their R&D budget spending $48.4M, $36.7M, and $40.5M respectively. Additional figures are seen below.    

Have all these attributes saved the company from poor returns over the last year? Absolutely not. Through December 24 2018, the stock’s year-to-date return has been down -17%. Its 5-year cumulative return through 2018 has been only 32%. Owning a company such as Manhattan Associates doesn’t guarantee you great returns over the short or medium term. But I would argue the characteristics of the company – from management’s capital allocation skills to its balance sheet strength – provide an opportunity to reduce your chances at permanent capital impairment during a bear market.   
 
Conclusions
 
I have written over the years that the outperformance of my Nintai Partners and Dorfman Value Investment (neither of which I personally manage any more) portfolios has been about losing less in bear markets rather than making more in bull markets. This recent bear market reinforces my thesis with my individual managed portfolios at Nintai Investments LLC losing roughly -4.5% YTD versus the S&P 500’s -12.8% through December 24 2018. As Beauharnais said, purchasing great companies (along with not overpaying or holding cash) can make all the difference in a bear market. The companies in my portfolios – like Manhattan Associates - make downside protection a priority. By seeking out such companies yourself, you might not just ride out a bear market with better results but also sleep better at night. 

“The point of economic profit is for the both the company and the shareholder to make money in the context that both have choices in capital allocation. If a corporation and shareholders can make sufficient returns – measured against other investment options and risk – then management has met its ultimate responsibility”.
                                                                                              -     Wilhelm Reinhardt 

In 1981, the Business Roundtable issued its “Statement on Corporate Responsibility”[1] in which they stated, “Corporations have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts ­investment to continue and enhance the enterprise, provide jobs, and build the economy. The long-term viability of the corporation depends upon its responsibility to the society of which it is a part. And the well-being of society depends upon profitable and responsible business enterprises.” This thinking reached its apex in the decades following World War II and was best captured in Charles Wilson’s (General Motors CEO) statement to Congress that “what was good for our country was good for General Motors and vice versa.” It's only in the past 25 years that the focus has shifted dramatically from that of a corporation’s social responsibility and accounting profits to that of providing economic profits to its shareholders. Indeed – in 2013 - Ralph Gomory & Richard Sylla[2] went on to entirely contradict Wilson by stating, “We cannot, therefore, ignore the possibility that the interests of our (global) corporations and the interests of our country may have diverged.”
 
One of the major drivers in this change has been the movement of stressing not only accounting profits but measuring economic profits as well. This hasn’t been just in corporate management. Savvy institutional investors are also adding this to their quiver of value calculation.
 
Accounting profit is generated by using Generally Accepted Accounting Standards (GAAP) in which expenses and costs are subtracted from revenue. It includes the direct costs of conducting business, such as all operating expenses, interest, taxes, and depreciation. Economic profit is the same as accounting profit except opportunity costs are included in the calculation. My definition has a slight twist that doesn’t appear in most economic profit calculations. I utilize two key measures to calculate whether a company is creating economic profits. The first is that return on invested capital (ROIC) must be greater than weighted average cost of capital (WACC). This tells you whether the company has historically generated economic profits. The second is that earnings must not only exceed accounting costs but also opportunity costs. It’s important to point out that a potential investment can have a significant accounting profit but no economic profit.
 
A Working Example
 
As an example of this, let’s use Acme Rubber Band company as an example. The company has traditionally been in the office supply business with two core industry segments – healthcare and automotive. Both industry focuses have developed over the past 30 years in business. In the past year on revenue of $100 million the company has a net profit of $20 million dollars. This is their accounting profit. But let’s assume the company has the opportunity to purchase a smaller supplier - Bobo’s Rubber Bands - that focuses on the technology sector. Step one is to ascertain whether Acme’s return on invested capital is greater than its weighted average cost of capital. This can be found in Gurufocus’ 30-year corporate financial data. Under ratios, simply subtract WACC from ROIC. If this number is greater than 15% I’m interested. Second, you have to ascertain the economic profit derived from allocating or not allocating capital towards an acquisition of Bobo. Bobo’s does $25 million in business and generates $5 million in net profit. Acme decides to pass on the acquisition believing it should focus on its core markets. Acme’s economic profit would be its accounting profit ($20 million) less Bobo’s potential/opportunity profit of $5 million. Thus, Acme’s economic profit would be $15 million. After modeling this, a potential investor can see in general whether a company has a tradition of generating economic profits and what opportunities may lie ahead to improve them.       
 
On paper this process sounds like a relatively easy concept. But in reality, it is an extraordinarily difficult task to complete as you begin to investigate a potential investment. Ascertaining whether a company has historically generated accounting profits is the easy part (revenue less costs essentially). Modeling potential future economic profits requires a great deal of company and industry expertise as well as understanding the financial and profitability of new opportunities. The ability to identify, quantify, and allocate capital in the context of economic profits is an intense process. Someone like Warren Buffett can complete such an analysis in a matter of seconds while most mortals like us require far more effort.

Why This Matters
 
This may seem like a rather esoteric discussion in which an investor might quickly peruse and move on. But the difference between accounting profits and economic profits can be potentially huge for the long-term value investor. High accounting returns don’t always guarantee high investment returns. If a company generates significant accounting profits but produces no economic returns, investors may see very little long-term value generation through stock price appreciation. Companies that have been the largest gainers over my investing career have been those that generate great accounting and economic profits. Outstanding managers will keep an eagle eye on economic profits equally – if not more – than his/her accounting profits.
 
I’ve learned that mastering economic profit calculation can take an extra intellectual elbow grease, but is worth the effort in the long run. It requires you to know nearly everything about the company and how it generates an accounting profit or loss. On top of that, it forces you to think as an owner trying to calculate the best means in allocating capital. Any way to widen the gap (in a positive way!) between ROIC and WACC can potentially increase investment return over the long term.
 
I will generally try to engage management in a discussion related to economic profits. Great managers intuitively understand you are asking about their methods of allocating capital, weighing the cost/benefit of potential new ventures or acquisitions, and how these choices impact long-term growth strategies. Anybody who doesn’t understand the difference between accounting and economic profits is simply not worth partnering with in my view.
 
Conclusions
 
Economic profit isn’t a subject matter covered very much in investment books. That’s a shame. The idea that making astute capital allocation choices produces significant value over the long-term is a vital concept to understanding the future potential of your investment. Much like getting your discount rate wrong in a discounted free cash flow model, not understanding your investment’s economic profit can really skew your valuation estimates. What’s interesting is we calculate economic profit in our head all the time – if I go to grad school and have to take two years off is it worth it? If I purchase this 56” wide screen TV, will I need to sleep on the couch for the next 6 months? Making it part of your investment valuation process may not generate an accounting profit for you, but it just might just juice your economic profits.


[1] The Business Roundtable, “Statement on Corporate Responsibility,” October 1981. This view changed dramatically so that by 1997 the statement was revised to read, “The principal objective of a business enterprise is to generate economic returns to its owners. If the CEO and the directors are not focused on shareholder value, it may be less likely the corporation will realize that value.”

[2]  Ralph Gomory & Richard Sylla , “The American Corporation”, Dædalus, the Journal of the American Academy of Arts & Sciences, 2013 

“One should always be thinking in term of allocating capital with the twin ideas of minimizing risk and maximizing returns. Not counting shorting, derivatives or hard assets, there are three vehicles for an investor to do this – stocks, bonds, and cash. Every investor should realize that each of these has the chance to be king for a day.  The chances aren’t equal, but they are there. A truly gifted investor knows how to employ each at the time of their reign.”

                                                                                     -    Stewart Salisbury    

Over the past year the amount of cash I’ve held in individual client accounts has risen to roughly 25-30% of total AUM. That’s significantly higher than the average percentage over my career as an investment manager. It’s not easy holding so much cash. My partners pay me to invest - and that doesn’t mean sitting around thumb sucking refusing to swing at a pitch. I’ve written previously about my strategy of holding cash – ranging from its use as an anchor in crashing markets to holding it in reserve when prices are such I can find no opportunities in the market. As this bull market gets a little long in the tooth, it’s important to look at the amount and role of cash in your portfolio.
 
Over time, I’ve found that holding a significant amount of cash has been helpful in three specific cases. History never repeats itself exactly, but as Mark Twain said, it can certainly rhyme.
 
Inverted Yield Curve
 
When short term bond yields exceed those of longer-term bonds, markets generally perceive this as a warning of impending recession. In a normal yield curve, the short-term bills yield less than the long-term bonds. Investors expect a lower return when their money is tied up for a shorter period. They require a higher yield to give them more return on a long-term investment. This is the simple concept of time-value of money at play. Yield curves invert when investors begin to lose confidence in the economy of the near future. They ask for a higher yield for today’s market than the future. Because the perception is the economy will be better in the future than the present, investors prefer locking in their capital for a longer period of time at a lesser rate.   During these times, it makes sense to hold more cash as short-term debt instruments yield more than similar longer-term investments. Additionally, stocks – in general – perform poorly as the yield curve inverts.
 
Hedging versus Excess Price
 
Another reason to hold significant amount of cash is simply because there are no investment opportunities. For instance, here at the end of 2018 after a nearly decade long bull market, I simply can’t get excited about many valuations of companies I’d love to own. This inability to allocate capital is a perfectly valid reason to let cash build. That said, investors generally don’t pay their investment managers to hold cash. Getting a statement that shows 25% of their hard-earned savings earning very little in a cash sweep account rarely makes my investment partners jump for joy. Here, individuals have a huge leg up on institutional investors. Like Warren Buffett said, individual investors are at bat in a game where no one calls strikes. Take advantage of that when you can.    
 
Taking Advantage of Mispricing
 
I generally run a very focused portfolio of 20-25 stocks that I hold for (sometimes) decades. My watch list is quite small consisting of roughly 25-50 additional companies. I usually keep 2-3 slots open in my portfolios for companies on the watch list I would love to own but just can’t get the discount to fair value I require. Having a significant amount of cash allows to pounce on those rare opportunities when they arise. For instance, I’ve had a stock that remained on my watch list for 6 years until I was able to make a significant purchase in 2016 when the markets misread (or I thought they did) management’s outlook. I could not have taken advantage of that situation should I have had less than 10% in cash at the time.
 
Why This Matters
 
What’s important to draw from these three justifications is that none of them are driven by how the general markets are performing (the first is driven by bond markets not equity markets). Cash position is – and as a value investor should be – agnostic to general market valuation. Is there a correlation between finding individual investment opportunities versus market levels? Sometimes and sometimes not. Warren Buffett wrote in his 1961 Partnership semi-annual report[1] 
 
“Our holdings, which I always believe to be on the conservative side compared to general portfolios, tend to grow more conservative as the general market level rises. At all times, I attempt to have a portion of our portfolio in securities as least partially insulated from the behavior of the market, and this portion should increase as the market rises. However appetizing results for even the amateur cook (and perhaps particularly the amateur), we find that more of our portfolio is not on the stove.”
 
Buffett has mentioned how he hates to hold cash, but given the choice of overpaying for an asset or holding cash, he will pick the latter every time. Not only do his securities look conservative compared to the general markets, his cash position grows significantly as well. His stove top has only so much room.
 
I also want to point out the decision to hold cash is as active a decision in capital allocation as purchasing a new investment holding. Taking no action is just as powerful as taking action through the purchase of some new asset. Some of my investment partners have said they don’t pay me to hold cash. But when you look at non-action as a choice in capital allocation – or taking that capital off the stove top as Buffett would say – then the decision to build up cash is as powerful a strategy as being fully vested.
 
Conclusions
 
As I write this, the markets are just coming off a week where they lost roughly 4% of their value. Nearly a trillion dollars’ worth of value has evaporated over the past 30 days. Even after all of that, I’m finding few opportunities that shout out as great investment opportunities. Unfortunately, I found myself stuck in the first two buckets I discussed (inverted/inverting yield curve and excess prices) and eagerly awaiting the third (taking advantage of mispricing). Until the latter becomes a reality, I will be holding a significant amount of my AUM in cash. For now, the old adage holds true – cash is king. Long live the king.


[1] Warren Buffett, 1960 Buffett Partnership Ltd Semi-Annual Report, page 1. 

​I am pleased to announce the opening of Nintai Investments LLC. Before going into any detail, I want to thank John and Katherine Dorfman for having the faith to let me join the firm, manage client assets, and even write about my experience. You couldn’t ask for two more classy, savvy and ethical investment managers than John and Katherine. They aren’t just co-workers, but also friends. I wish them nothing but the best going forward.  
 
With the great improvement in my health, I’ve decided to create a new investment firm based on the investment philosophies I’ve discussed in my writings – companies with high returns on capital, assets, equity, little/no debt, great management, wide competitive moats, and trading at a discount to my estimated intrinsic value. If you are interested in investing, please feel to contact me at [email protected] or visit our website at www.nintaiinvestments.net. 

“Experience is simply the name we give our mistakes.”        -   Oscar Wilde

“A man must be big enough to admit his mistakes, smart enough to profit from them, and strong enough to correct them.”        -  John C. Maxwell

Over the course of my twenty odd-year investing career, I blanch sometimes when I think about the mistakes I made. Overpaying, not understanding value, making rash/emotional decisions, and not understanding competitive strength. The list could go on and on. Some have worked out okay in the long run – such as when a competitor swooped in and snatched victory from the jaws of defeat by paying triple the closing price of an investment where I was down 35% and likely headed lower. There were others where no white knight could save me from my own imbecility. After each failure, I have tried to go back to the very beginning and analyze the process from moment one. I generally find these mistakes can be broken into one of several buckets. The more buckets each individual fiasco touches, the greater the losses. 

Inadequate Research on the Investment, Competition, or Market Tends
One investment that sticks out instantly when I think of this type of mistake is Thompson Creek Minerals (now owned by Centerra Gold TSX: CG). I first purchased the stock when molybdenum was selling at a premium and China was peaking in its infrastructure build up. After holding the stock for about 6 months it occurred I knew nothing about the China government’s industrial policy, mining technology, import/export regulations, or metals pricing and markets. My ignorance went on to a remarkable extent. I was down 3% when I sold it and realized I was lucky to come out of it with anything at all.  

Making the Investment Case Fit…Facts Be Damned
The older I get, the less this is a problem. Certainly, in my younger days I would play with free cash flow numbers to such an extent to make my estimated values worthless for investment decisions. It starts with bumping revenue by 1% to meet the discounted value that meets your purchase price and goes down hill from there. If the number I use comes in over 75% of the previous ten-year growth rate, I simply don’t invest these days. Underestimating protects me on the downside, overestimating almost always takes on risk with few rewards.   


No…Really. I Do Know More than the Markets! 
Over time one begins to recognize there is a tremendous dichotomy in the markets. The first is that – in general – markets have a great deal of wisdom to impart. For instance, when bond yields invert (meaning that short-term interest rates are higher than long-term rates), it is generally a strong indicator of the potential of an oncoming recession. This information can be of tremendous value as an investor looks into the future for market trends. On the other hand (and hence the dichotomy) markets can get pricing on individual stocks terribly wrong. For instance, in 2000 there was a plethora of stocks pricing 50% revenue growth for the next 25-50 years. (You can do the math yourself, but suffice it to say this leads to companies of truly biblical scale). So - dependent on the day and your mood - it’s easy to sometimes think you can outsmart the markets with one hand tied behind your back. One piece of advice – never, ever think that. 

Why This Matters

I bring these tales of woe up because there has been in the past few months, investors have been whipsawed between new market heights and sickening 2-3% drops on what seems like a weekly basis. During these times of emotional high and lows, all of us can let our hearts rule our brains – usually to our detriment. Wall Street and its vast marketing machine doesn’t make it any easier. Preying on investors’ uncertainty and greed, we have seen an explosion in the amount of advertisements and articles that talk about generating nearly impossible returns, how to double your income, or any other such bogus claims. In a study completed at my old firm Nintai Partners, we estimated for every percent the market exceeded our estimated fair value, the amount of misleading or generally false adds increased by 12.5%. For instance, in 2000 we estimated that nearly 87% of all financial industry commercials were fundamentally flawed/false claims, or not based in any market reality. An example was one where an individual discussed he made enough money to buy two yachts by trading in penny stocks based in Hong Kong. Incredibly you could as well by simply sending in a check for $395 or just call in a credit card right now.  

Somebody once said the real losses weren’t made in down markets, but rather the up markets just before the down markets. I actually buy into that theory. I think after long bull markets we all get a little more complacent and a little more indolent in our analysis.  So, what can you do starting today to prevent falling victim to both your internal weaknesses and marketing ploys of Wall Street? I suggest two actions.

Hasty Decisions are Generally Poor Decisions
At Nintai investments, I run a very focused portfolio of roughly 20-25 stocks. I don’t short, use derivatives, or develop esoteric trading programs. I own small pieces of great companies that I know intimately – from balance sheet strength to free cash flow drivers to main competitive strategies and product development. Decisions I make on each holding can take months before I pull the trigger. Adding or removing a holding can take even longer. In these days when we new highs followed by huge drops in individual stocks, it’s vital you know everything possible about your companies. More importantly, know exactly when and why you think you should pull the trigger. Don’t make decisions based on a whim, but well thought out fact-based reasoning. Every decision to allocate capital can make or break your long-term returns.     

Lost “Opportunities” Can Sometimes Add Positive Returns
If I had a dime for every time I heard “I bought it on Monday and Tuesday it was up 11%”, I would be a very rich man. Hasty decisions made on newly acquired data – such as a suggestion you heard from a broker or read in an investment newsletter – supposedly offset the risk of lost opportunity costs. It’s important to realize that lost opportunities are just as likely to be losses as gains. When Wall Street says that cash returns nothing, I take exception. Making a hasty investment decision and avoiding idea of the lost opportunity can sometimes be offset by simply holding cash. A flat return can be a real improvement over a 20% loss. Losing that opportunity to invest in the latest and greatest stock might just be the best investment decision you ever made. 

Conclusions

I’ve found over my investing career, the better my performance, the worse my efforts are at reducing risk. Since just about every decision has paid off, I make choices faster, with less data, and less discernment. These are all the marks of an investment disaster waiting to happen. In these times of emotional highs and lows, its critical to slow your evaluation process down, check and double check your data, and make mindful and deliberate choices.