WEIGHING THE EXPECTED VALUE OF LONG-TERM DECISION MAKING IN FINANCE
At any given point, an investor faces the decision to buy, sell or hold an investment. When those decisions are isolated, without any reference of price or time, then they can be viewed as having an identical expected value (EV) over the long term. In other words, they can be viewed as being random in nature. It is only when referenced against time, price, performance, history and other variables that dictate an investor's behavior that the long-term EV of each decision will cause the necessary edge to outperform or in a negative scenario, the undesirable disadvantage of underperformance. The long-term EV of adding, reducing or remaining steady in exposure is up to each investor to determine. There is no black and white definition of what adds EV because each investors method of investment, psychology and decision making process varies. There is one standard, however, that should be at the forefront of an investor's mind with each decision: Is the long-term expected value of this decision positive? That means that each decision you make is made against a framework of 100, 500 or 1000 similar decisions that are made during an investor's tenure as market participant. If the decision has a negative EV over the long-term then it doesn't matter if you feel you will be successful this one time. What is important is that you know that your nature, framework, psychology or whatever you decide to classify it as is such that over a period of time, the decision will prove harmful. Let's look at EV as it applies to everyday life: Today I walked by a fancy jewelry store that had lots of glistening diamonds, intricate watches and ornate bracelets in the window. Let's assume that instead of walking by I decided to pull my shirt over my face and proceeded to rob that jewelry store. Let's also assume that I was somewhat savvy in my approach, pulling off this robbery with minimal detection and therefore, no obvious consequences. The long-term EV of this approach to the jewelry store is multi-faceted. First, given the short-term satisfaction and ease with which I was able to "come up," my perception of jewelry stores would change. This change in perception from a jewelry store being somewhere you shop at to a profit center with infinite returns would permanently shift every other decision I make that has a positive EV. The relative returns of these positive EV decisions simply wouldn't carry weight versus the infinite returns of the jewelry store. It would then become inevitable that I repeat the decision with the negative long-term EV, which is to not simply walk past...
THE OBSESSION WITH VOLUME MUST END NOW
Investors need to get over the volume comparisons to bull markets of the past. These comparisons, being relied upon to dictate investment attitude towards the market, have single-handedly been causing investors to either tread lightly or not at all for the entirety of this rally. There is no scientific explanation for why index volume has been steadily decreasing as this rally has progressed. The absolutists that make up the world of high finance don't seem to want to contend with the fact that markets are in a perpetual stage of change. There is no correct analysis, only the correct analysis of the time. There is no rule that says a rally must come on progressively higher volume, such as what we experienced in the 90s. To pacify the minds of those who are always searching for the Why? in things, I propose the following list of explanations as to why volume has been steadily decreasing since this rally commenced: 1. ETFs have altered the technical framework of gaining exposure, hedging exposure or outright speculation in the markets. The amount of volume ETFs are attracting by themselves is enough reason to believe that the volume framework for which we are used to as investors will change in this post-crisis world. 2. There isn't enough genuine interest in the markets to cultivate the type of volume increase that comes with true belief in a market. This perpetual state of volume decrease is a testament to how devastating the past decade was to investor sentiment. In speaking to investors on a weekly basis, there isn't one I have come across that isn't skeptical of some or all facets of Wall Street at this point. The distrust is as deeply ingrained in the psyche as the optimistic love bubble that popped in 2000 and was set ablaze in 2008. Perhaps two reasons is not exactly list, but there are only so many ways to explain a participation based indicator. In essence, continued utilization of volume as an excuse not be long following years of data suggesting that it doesn't matter is the crutch from which dismissive acts of bearish rebellion are born. Give it up before the market forces realization....
THE COMPARISONS TO 1995 ARE ACCURATE BECAUSE THIS IS 1995
Business Insider published an article today titled "The Stock Market Is About To Do Something It Hasn't Done Since 1995" In the article it points out the following: "All 10 sectors of the S&P have posted double-digit gains year-to-date, a rare market trait considering that it has been nearly 20 years since all 10 sectors of the S&P have registered annual gains of 10% or more," he added. "Indeed, the last and only time it happened was in 1995, following the equity blood bath in 1994, when the Federal Reserve brutally raised the Fed Funds rate six times." I bring your attention to this piece of research because the faded memory of 1995 should be retuned and brought to the forefront of the investor consciousness for the remainder of 2013. A little over one month ago I posted a study comparing the Dow of 1995 to today's market. We'll get to the technical points in minute. Investor psychology of that time was very similar to today. Equities had just started to warm the hearts of the investing public again after contending with a post-1987 crash and early 1990s recession. The jaded memories of losses suffered in the past were still too fresh for investors fully commit, however. They were skeptical of Wall Street. Skeptical of future economic calamity. The professional investors, fund managers, traders, analysts of the time were not much better. Much like today, they were confusing what was really the beginning of a bull run with what they perceived to be the end of a bull market. After all, from the low of the 1987 crash up to November of 1995 the Dow had risen close to 130%. Not unlike the Dow of today that has risen a little over 100% from the 2009 lows to November of 2013. The truth of the matter, as investors of all pedigree were soon to find out, was that the markets were only getting started. From a technical standpoint, the most pertinent information as it relates to Q4 of 2013 is that during Q4 of 1995 the Dow experienced a powerful Q4 rally that drove the Dow up 8% following an extended consolidation. I outlined that point in this chart included in that article from September. A majority of those gains were experienced in November of 1995. We are in an extended consolidation for the Dow. It is November of 2013. The correlations are vast and deep in nature. It is not a coincidence at all. Look into the trajectory points. Look into the sentiment at the time. Look into the attitude towards equity...
OCTOBER PERFORMANCE SUMMARY AND LOOKING AHEAD TO NOVEMBER
*This is my monthly letter to investors summarizing the month of October. The full PDF version of the summary, including managed account performance data as well as a few added components is only available via email. Return data will no longer be published as a part of the summary. If you would like to be added to the monthly email list, please contact me at mail@t11capital.com - Largest winning position in October: CIDM +19.33% – Largest losing position in October: WMIH -9.84% – New additions to portfolio: BFCF – New liquidations in portfolio: HMPR Portfolio Highlights For October: – CIDM was the leading gainer in the portfolios during the month of October. The company announced a transformative acquisition during the month that completes their transition from a cinema services company to a leading digital content distributor. The acquisition is immediately accretive, with only a mild level of dilution taking place with a $13 million stock offering. The acquisition does provide CIDM with enough cash flow from operations going forward to avoid further dilution in the future, which has been the major concern among investors. The company acquired Gaiam's “GVE” unit for $51.5 million. The most alluring part of the deal is GVE's licensing agreements with major entertainment brands such as WWE, NFL and Discovery, which immediately transforms CIDM's library, as well as their clout in the marketplace. Following the acquisition, CIDM now has over 32,000 titles, relationships with every major retailer from Netflix and Amazon to Walmart and Target. This transaction turns CIDM into a company with $320 million in revenue. That revenue number is miniscule when taking into account the market share that the company can command as a result of their newly found dominant position. Digital content distribution is the engine of the current entertainment business model. Those who deliver content to the homes of consumers will come to rely on companies like CIDM at an ever increasing rate to deliver the content consumers demand on an ongoing basis. This leaves CIDM with a highly-reliable, beginning stage, recurring revenue model that can be leveraged to the hilt to gain further market share. The aggressive nature of management, along with their diligent nature when it comes to tending to the debt structure makes for some outstanding possibilities going forward. 2014 should produce some noticeable results for the company as their efforts of the past few years start becoming reflected in the top and bottom line numbers, resulting in a dramatic increase in share price. – EVOL posted a gain of close to 9% for October. This is another portfolio holding that announced an acquisition during...
OCTOBER WAS A CURMUDGEON
The 4% plus gain the S&P 500 managed to glue together for October was a bit deceiving. October was a curmudgeon anyway you look at it. In fact, it was difficult enough that you could get the direction of the market right, but still end up with a flat month. This was the first time in 5 months that my managed portfolios underperformed the S&P 500. They did it in spectacular fashion, allowing a near 500 basis point catch up for the S&P. Nobody cared about my investments during October. That’s the gist of what occurred. I sat and watched what amounted to a snails pace trajectory of lowered bids and offers. CIDM, which managed a 19% gain for the month, couldn’t gain its footing beyond one vertical day which caused a majority of the gains. The company announced that it is on its way to becoming a leader in the world of digital entertainment to a chorus of crickets. That’s what a 19% gain is in contrast to their merger and glistening new business model. The tone of the CEO alone during the conference call following the merger announcement made me want to keep clicking the buy button until my mouse broke. But then I remembered he was just granted a tidy stock compensation package just a month before the merger was announced. Not a coincidence. In fact, it is a testimony to the fact that he knew following this merger the stock wouldn’t see 1.50 again, which is the strike price of his options. It’s a transformative move. Management knew it. And I think they expected more pop in the price to at least $2 by this point. I know I did. The S&P got a chance to catch up to me this month. But who was leading that parade? And is it a parade that I should be jealous of not being invited to or glad that I didn’t get an invitation? Let’s look at the leaders over the past month: - Greece was up 19% - Basic materials were up 5% for the month - Real estate index up 4% for the month - Healthcare was another leading gainer - Utilities and Consumer Goods round it out Big cap tech and retail were also in that list. As we all know, big cap tech was selective and choppy during the month. The rotation from the new school of momentum into the old school of momentum caught a lot of investors off-guard. Once in awhile a retiree that reads Investor’s Business Daily religiously is going to make me look like a rank amateur just by sitting on...
NEWEST RESEARCH REPORT
The latest research report is on BFCF and is available here in PDF format.