Seven years of bad luck...the good things in your past. I was thinking of Stevie Wonder's Superstition yesterday as I realized that it was the seventh anniversary of my Real Money column. It certainly hasn't been seven years of bad luck for me. Quite the opposite, actually. That's nearly 700 columns under the bridge, and I have always appreciated this column as an outlet for the process I use before making any and all investment decisions. It is good to have a sounding board, and it is helpful to have a contractual requirement to practice the intellectual rigor needed to justify trading ideas -- and my coconut generates a lot of them -- before actually pulling the trigger on them.
So, what have I learned, and, more importantly, how is that knowledge useful in the present time, as Covid-19 lockdowns generate unprecedented economic pain for the global economy?
Financial media is virtually worthless when it comes to picking stocks. Yep, I said it. With the exception of the folks at RM -- veteran analysts dedicated to the practice of analyzing equities both from a technical and fundamental standpoint -- there is almost nothing on the Internet that is actually useful from a transactional perspective. I am an active asset manager for my Portfolio Guru and Excelsior Capital Partners funds. I could garner trading ideas from reading Internet articles, but at some point during the past seven years I realized how fruitless such efforts truly are. The "research" articles on Seeking Alpha range from utterly pointless to laughably bad and I find Motley Fool's "why XX stock was down XX% yesterday" articles to be amusing, not helpful. I do use both sources occasionally for conference call transcripts. Primary research is important.
Markets do move on sentiment, though. So, if I can stomach the suspension of all the academic work I did in my Wall Street career -- Series 7, 63, CFA -- just knowing what people are thinking is as important in the short term as my spreadsheet learnings. That's where the financial media can be quite useful. So, RM founder Jim Cramer has a finger on the pulse of the markets and I read his headline column on RM every morning. Also, CNBC's interviews are stock movers. The instant market reaction to David Tepper's bearish CNBC interview yesterday was more evidence of that. Finally, Fox Business' Maria Bartiromo still delivers, after all these years, interviews with decision makers that no one else can. So, watch a little TV if you wish, just don't let it dominate your day.
Inefficiencies still exist in the information age. Basically, this is why I do what I do. If I didn't have the equity research tools (thanks to a lot of late nights at Lehman, DLJ and UBS) I wouldn't be heavily invested in the oil tanker sector right now. DHT Holdings (DHT) , a name I have highlighted in many RM columns, has a SAFE 21.6% yield. That seemingly oxymoronic statement is so beyond the pale of possible outcomes that I just have to own DHT, despite having a long history in the shipping sector and knowing how volatile these names are. Cash flow never lies. When you, the investor, are in receipt of those cash flows, it can make a little volatility seem worth the effort.
The vast majority of the leaders of the U.S. economy have vested interests in making stock prices go higher. Let's face it, it's true. For the first time in ages we have a President who cares about the daily workings of the stock market, and he has a very non-subtle way -- Twitter -- of telling us about it. His Treasury Secretary, Steven Mnuchin, and, of course, his Fed Chair, Jerome Powell, also have done nearly everything possible to inflate equity values. These actions (the Fed's "not QE4," bond-buying last October, for instance) actually were in full bloom before the Covid-19 lockdowns and have reached absurd proportions today. Mnuchin and Powell cut their teeth at Morgan Stanley and Carlyle Group, respectively, and every time you see a major financial world figure on CNBC -- from Jamie Dimon to Warren Buffett to people you have never heard of -- remember that each of them has some interest in higher stock prices.
But stocks are an asset class just like any other. When you overpay on initial purchase, you will earn a lower return over the life of the asset. That's true in all asset classes, but stocks also have a nasty habit of going down sometimes, and, despite the efforts of the Fed, we are in one of those times right now.
So, be careful. Make sure to allocate a substantial portion of your portfolio to fixed-income investments. Concentrate on stocks of companies that generate free cash flow and positive returns on capital. That describes Apple (AAPL) as well it describes DHT Holdings. Size doesn't matter for economic value creation.
And keep reading RM. You'll be wiser and hopefully richer for it. I know I am.
(Apple is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AAPL? Learn more now.)
