Category Archive: Psychology

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Mea Culpa

I’ve been meaning to write this for awhile, but I think now is a good time to write this.

I have been very wrong the past year. I’ve been wrong on specific stocks and the direction of the market. I’ve lost my investors and others lots of money despite my hard work and research. After 10 years of never having a down year, I was crushed last year. I apologize if you listened to my advice or stock research and lost money. However, you should always do your own research and never rely upon someone’s advice without doing your own due diligence.

So with that being said, what have I learned and gleaned from the past 12 months?

1) Financial meltdowns crush microcap valuations no matter what the fundamentals are.

Two holdings of mine are of public record as I own more than 5% of each through my firm. Those two positions have both continued to grow are both profitable, where they were losing money in the past and have bright futures with a lot less risk than when I found them 2-3 years ago. Yet, both have lost more than half their values. Why?

Liquidity evaporated and many colleagues and fund managers had to go out of business, were fired or lost their clients and assets they managed. There is significantly less money floating in the microcap and small cap space than there was 12-18 months ago. So, when the selling came and crushed these stocks, there has been little rebound or buyers to cushion the fall. These stocks have started to form a bottom, but a substantial recovery has yet to happen. It is starting to happen, but it may take time. Liquidity is a risk and a valuation discount should be applied to any microcap position. I plan to incorporate this into my analysis in the future.

2) I did not assess the risks to some of my positions well enough

On at least one position, I did not appreciate how the psychology of the economic collapse would affect this traditionally non-correlated part of the economy. Further, this position did not have as robust a distribution network as competitors and was directly exposed to a fall-off in orders.

In the future, I plan to do a lot better job of focusing and highlighting the risks in any position I buy or recommend.

3) I did not fully appreciate the severity of the crisis in October

I had a naive approach and thought that this would be a bad recession, but it wouldn’t be a depression. I did not pay attention to how bad things were and how severe the situation was. More importantly, I tried to call the market bottom instead of managing risk and focusing on individual positions. Anytime I have done this in the past I have lost money. The fall of 2008 was no different.

4) Relative valuation does not help when everything is plummeting

A few positions were “value” because of relative valuation. The problem with this approach is that if the comparisons to your investment start collapsing, there goes your “value.” Relative valuation should be used but only in concert with other valuation metrics proved throughout time, such as low price to book, low price to earnings, etc.

5) Research Recommendations Need Less Enthusiasm and More Negatives

I get very excited about many things. Great food, friends, music, stocks, etc. I need to make sure that people understand that my enthusiasm for things is not hype or pump and dump activity, but just my regular way of expressing things. In the future, I plan to add a lot more caveats for downside, negativity and pitfalls in future recommendations in any report.

Those are just some of what I’ve learned in the past year and I have a few more that I’m ruminating on. I’m really thankful for my wonderful clients who continue to support me despite last year’s debacle. I’m glad that I know each of them and that they know me and how I think. And I’m really glad about my long term performance, which despite last year’s performance is still excellent.

I will make mistakes in the future and I will learn from this and I hope to become a better investor in the future.

The Attraction of Gold

Really interesting blog post about the attraction of gold: Attraction of gold

Life Lessons From the Family Dog

New York Times editor Dana Jennings is coping with prostate cancer and wrote a blog post about his dog. I feel the same way about my dog, Frankie. Here is a snippet:

In spending so much time with Bijou, I began to realize that our dogs, in their carefree dogginess, make us more human, force us to shed our narcissistic skins. Even when you have cancer, you can’t be utterly self-involved when you have a floppy-eared mutt who needs to be fed, walked and belly-scratched. And you can’t help but ponder the mysteries of creation as you gaze into the eyes of your dog, or wonder why and how we chose dogs and they chose us.

Here is the link: Life lessons from the family dog

I feel sorry for Microsoft

I feel sorry for Microsoft. They sooooo want to be liked and be cool, it is painful to watch. Like the awkward, dorky kid who does all of the wrong things, they just want to fit in. The latest announcement that they will open stores like Apple is particularly telling. Instead of coming out with cool, innovative new products, they are trying desperately with advertising and now with retail stores to get the world to realize how cool they are.

“The purpose of opening these stores is to create deeper engagement with consumers and continue to learn firsthand about what they want and how they buy,” Microsoft said in a statement.

Who exactly is going to go into these stores and why?

Much like the Zune, this strategy of copying Apple is doomed to fail as well.

Here is a Wall Street Journal article link about the new stores: MSFT’s new stores

What happens when money and business define you?

The economic crisis descending upon us is having a profound impact on many people’s lives. One of the most troubling things to witness is the rise in suicides, especially high profile suicides. The past two days news of US property mogul, Sheldon Good, and the German business magnate, Adolph Merckle, have graced the front pages of newspapers. They join the French investor who was conned by Bernie Madoff, Thierry Magon de La Villehuchet. This news is very sad not just because they are dead, but more sad that they chose to end their lives as if there was no more point to living.

These men were described as honest, hard working and generally good, smart people. I didn’t know know them when they were alive, but they chose to end their lives once their businesses and fortunes collapsed. Why just because your money is gone, your life is forfeit and has no value? How utterly sad is that? How sad is it that these people only defined themselves by business, materiality and money?

There is so much more to life than the material things we accumulate only to give up later when we die or give away before we die. There is family and friends. There is nature and beauty. There is love and goodwill. And most importantly is service to others.

Our ego mind lies to us. It convinces us that what is important is the kind of clothes on our backs, the shoes that we wear, the car that we drive, the house that we live in is paramount in our lives. The ego mind convinces us that our business stature and how other people regard us is what is important. But this is all a lie. Is this what our soul really wants? Is this who we are? Of course not, but years of listening to our ego and worrying what other people think create habits of mind and this is what we become. So that in the end, if suddenly our business, money and fame is taken from us, we are left with nothing. And what else is there to live for?

Imagine instead what these three very capable, very smart men could have done in terms of service to investors, their families, friends or just one person if they hadn’t killed themselves. What lessons could they teach investors? How could they be of help to family members or friends in need of help, advice or just someone’s presence? What help are they now? How much suffering has their deaths caused?

What if even in their hour of darkness, they had broken out to volunteer or do service for another person? This is one selfish reason, I volunteer. In one of my darkest times in 2003, when my love life, business career and health all failed at once, I’m convinced that volunteering at the Children’s Healthcare of Atlanta hospital kept me grounded and functioning, and it kept me from the darker thoughts that obviously consumed the three men mentioned above.

In 2008, I had the worst business performance of my life. It was terrible and it hurt me greatly that the clients that had entrusted money to me had lost so much money. And things are very uncertain now in many ways in my life. But what I have learned is that I can only do my best, work hard, learn from my mistakes and move forward. In the meantime, there is way too much for me to do that isn’t business, including: service, volunteering and good deeds. There are friends and family that may need me for a myriad of problems or advice or just to listen.

My advice to those that are hurting economically is to get out of your ego for a moment and do service for someone else. In times like these, I can guarantee you that there are people in circumstances that are much worse than yours. Try to help someone else. And in the end your giving of yourself will end up helping you in ways that are so much more important than material possessions and money. The meaning and the joy that you will receive will make you richer than you can possibly imagine.

Pondering Madoff

David Kotok is the chief investment adviser and writes a market commentary for Cumberland Advisors. I love anything that quotes the Mishnah:

“For this reason, man [i.e. the first human being] was created alone to teach that whoever destroys a single life is as though he had destroyed an entire universe, and whoever saves a single life is as if he had saved an entire universe. Furthermore [the first man was created alone] for the sake of peace among men, so that no one could say to another, ‘My ancestor was greater than yours.’”

Mishnah: Sanhedrin 4:5

Here is the link: David Kotok on Madoff

Mauboussin on Strategy

This is a great writeup by a Michael Mauboussin who is a strategist for Legg Mason. I agree with his conclusions and the similarity between the flack Buffett received in 1999 is very similar to the flack he is getting today.

Mauboussin on Strategy

Separation

I am reading a wonderful new biography about William Wilberforce, the great British anti-slave trade campaigner. As part of the book, the author, William Hague, describes the slave trade, how slaves were kidnapped and transported in the most brutal conditions with no regard to health or humanity.

One of the more disgusting stories describes how disease spread on one ship and many slaves died. The captain realizing that the trip was no longer profitable decided to throw the remaining slaves overboard to drown in order to collect insurance on them.

I thought to myself: how is that possible? How is it possible for one human being to do such a thing to another human being? This is not a new thought for me or other people for that matter. I’ve often wondered it when I read about slavery, the Holocaust, the Inquisition, genocide in Rwanda or events such as the Rape of Nanking. Unfortunately there are many, many examples of human atrocities.

But the thought that always gets me, is that beyond evil, how is it that a mass group of people who often believe in God and are decent people in their home setting to their families and friends can turn around and spear a baby with a bayonet or shoot a helpless old person. For any normal person to do this to another person is not natural. Then why has it happened so often throughout the history of mankind?

I believe that separation is the key. What do I mean by separation?

We feel separate from the other. We don’t look like them, we don’t act like them, and we don’t pray like them. They aren’t us. They are different. We are we and they are they. I believe this is where it starts. This is the very first step in dehumanizing or degrading someone into something. For example, I’m a Protestant and you are a Catholic, I must fight you, you aren’t me and not only are you different, you aren’t anything like me. Do Christians understand how weird and bizarre it is to Jews that Protestants and Catholics kill themselves over what seems like very small differences in beliefs? Do you think Jesus, if you believe he is God or God’s son, thinks it’s bizarre?

Just because something is different doesn’t mean it has to be separate. Your hand is different than your foot, the sky is different from land, or a trumpet is different from drums, yet they go together. There is a connection.

And this is the point I would like to make: we aren’t really separate at all. We may be different, but we are all connected by one big thing. And this thing is bigger than all of our petty differences: God. If God breathes life into us, creates us and endows us with a divine spark, then we are all connected by God. The problem is that if we don’t see that divine spark or recognize it in ourselves, then all we are is an ego mind with no real connection to each other or to God.

Until we can see that connectedness we will remain separate and will remain hostage to an inauthentic life, filled with petty differences and made up separations. We need to see, act and live the connection we have with each other.

If you were truly connected, you wouldn’t steal from yourself or kill yourself, would you? Because that is what the other person is, that person isn’t the other or separate, he is a part of you, he or she is connected to you. And the people that do hurt themselves and commit suicide do so because they feel separated or estranged from God, society, and more importantly their souls or divine sparks.

Imagine we are tiny cells or atoms that make up God’s body. If we don’t communicate to each other and help each other then how can the body function? Further, if we attack other cells, doesn’t that lead to disease? And wouldn’t a group of cells attacking other cells be considered cancer? In this analogy, is it possible that when we fight each other and kill based upon silly differences that we are killing or harming God? This is not to say that self-defense is wrong or that bad cells shouldn’t be fought, quite the contrary a body only works if its immune system is strong and works.

My request to you is to try to imagine every person you encounter as having the spark of God inside of them, even if it is hidden. Make that your very first reaction and go from there. So what if they are different. Don’t immediately make them separate, because separate starts the process of dehumanizing and devaluing that spark of God, something powerful you are connected to. At a minimum, you should start to see people in a different light. This is what has happened for me.

And maybe then you will start to see that people aren’t good or bad, but instead shades of gray and that a lot of “bad” people are instead people that are actually experiencing dysfunction and hurt, and are struggling to find God or their soul in their own life. And when you see someone less fortunate than you, maybe you will realize that it is your responsibility to help that other, connected person. Or simply help that person so you can strengthen your own connection with God, for yourself and for God.

In the Bible, when the Israelites finish building the Mishkan (the Tabernacle), they place the ark inside, in a place call the holy of holies. The ark is built with wood and inlaid with gold and inside holds the Ten Commandments. On the top were built two cherubim, or human/angel creatures facing each other from opposite ends.

In Exodus 25:22, God tells Moses he will be in the space above the ark and the Ten Commandments and between the two cherubim. One of the best commentaries I’ve ever heard taught that what God tells us he will reside in the space between two people as they face each other.

Stop separating yourself from other people. You have a connection to them and you don’t even realize it. Instead, imagine you are searching for or connected to God through other people. If more and more people believed this, then maybe atrocities and crimes against each other would slowdown or stop. Maybe people would realize they are really only hurting themselves and God.

Who owns these stocks?

After months of internal debate at Goldman, the seven top executives at the firm, including Chief Executive Officer Lloyd Blankfein, asked the board’s compensation committee to grant them no bonuses. The board approved the request on Sunday.

The executives will only be eligible for their base salaries, $600,000 for each. A firm spokesman said the executives felt it was “the right thing” to do.

So says an article from the Wall Street Journal: Goldman Execs give up bonuses

I want to ask a different question than the article is answering. My question is why would you own a stock where earnings are made up at of thin air, executives get bonuses no matter what the results of the company is, and execs reluctantly give up bonuses despite the stock being down 70%.

The problem here is not the executives. The problem is the institutional shareholders and investors who let this compensation go on. Its one thing to make an investment where your stock goes down and you make a mistake. It is quite another thing when you are investing in a company that is screwing shareholders and you just ignored it. If anyone of the following firms were managing my money I would pull my money and terminate the relationship:

Barclays Global Investors UK Holdings Ltd
MARSICO CAPITAL MANAGEMENT, LLC
STATE STREET CORPORATION
FMR LLC
VANGUARD GROUP, INC. (THE)
WELLINGTON MANAGEMENT COMPANY, LLP
AXA
JANUS CAPITAL MANAGEMENT, LLC
PRICE (T.ROWE) ASSOCIATES INC
Bank of New York Mellon Corporation

These firms are the top holders of Goldman Sachs. I would do this because if they aren’t worried about executives giving themselves egregious and undeserved bonuses and salaries, they are probably not good stewards of your money and are probably charging you an arm and a leg for their services. And if you own these firms yourself, I would recommend you read the following book:

Where are the Customers’ Yachts?

Adversity and Underprivilege

There is a fascinating article in the New Yorker by Malcolm Gladwell on how outsiders and the underprivileged sometimes have an an advantage. He profiles Sidney Weinberg, the guy who transformed Goldman Sachs into a powerhouse, and how he came from a very poor upbringing. Its a really good read.

Malcolm Gladwell on adversity