Streetwise for Sunday, September 2, 2018
With the Labor Day weekend upon us and with it the start of football season, I am given to repeat of one of my favorite and most popular columns, one that is also a tribute to a cherished columnist, the late Alan Abelson of Barron’s and specifically his articulation of the similarities between the grid iron and Wall Street.
Alan pointed out that in football the offense usually huddles before each play by forming a circle around the quarterback, their bodies leaning forward, their heads bent inward and their butts pointing towards the rest of us.
On Wall Street, Alan was given to saying, a huddle consists of an analyst calling out stock plays to an assembled group of wealthy clients, their bodies leaning forward, their heads bent down and their butts pointed at the rest of us. But wait there is a proverbial flag down on the play. The defense of average investors is demanding a change in the rules to level the playing field.
Undeterred, the offense brings to the line of scrimmage its guards and tackles to counter even the slightest suggestion of change. It appears that the avarice on Wall Street is limitless.
To atone for its sins, the Street tries to confine its investment ideas to a specific client base, meaning those that generate the largest fees and commissions. The justification of course is that in doing so they prevent those of us less generously endowed, financially speaking, from undergoing the duress of information overload. One cannot help but admire such altruistic ideals.
Continuing with the football theme, Vince Lombardi’s famous “Number One” soliloquy epitomizes the way you should look at your investment portfolio. Lombardi put it well when he said, “There is no room for second place. There is only one place in my game, and that’s first place. …There is a second-place bowl game, but it is a game for losers played by losers.”
These words are pertinent to what your investment strategy should be – a selection of only the best investment candidates with judicious attention being paid to profitability and intrinsic value.
I direct my comments at investing and not trading, a polite word for speculation. A speculator is similar in many ways to a Las Vegas gambler; they both want to profit by successfully picking the correct outcome of a random event.
As in every game of chance there will be winners and losers. Yet, speculation, including flash trading, the ultimate form of speculation, has value; it brings liquidity to the markets.
Whereas an investor minimizes his or her risk through diligent research and the utilization of a reasonable time horizon. The time factor is critical because trying to forecast short-term economic trends and their effect on Wall Street is like trying to herd cats, a great idea but one with little probability of success.
Being patient will not only alleviate minor share price fluctuations, but it also enables you to benefit from a continual compounding of earnings.
All too often we try to mold our view of reality to meet our expectations when we should be doing exactly the opposite. While it is always nice to dream of a utopian corporate world, corporations must deal with many factors well beyond their control. It is the knee jerk reaction of Wall Street to those exogenous factors that often creates bargains for the astute investor.
Relying on short-term fluctuations of a company’s share price to predict a company’s future is a mistake. Share price data at a point in time is merely an indication of Wall Street’s arbitrary opinion of a company’s performance at that moment. An opinion that is again generally more emotional than logical. Hurricane Irma will create a lot of emotion on the Street.
Whereas a company’s prior and potential future accomplishments, fundamental financial data and dividend policy are ascertainable with complete certainty. From there, the problem becomes relatively straightforward. By combining the results of your research with the temporary underperformance of a company’s share price, you can potentially realize substantial capital gains going forward.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddInternational.com.