The question of why not just own an index is a profound one and one that a lot of people ask. If one is insensitive to what he owns, then, why not.
An indexed portfolio consists of a bunch of companies selected because on average it is believed they represent its world at large as defined by the index. If it is my goal or I feel comfortable relying on a bunch of companies selected on this basis, then the index is just fine. But we look at a portfolio as representing a group of companies that we would feel comfortable relying on to support us in our retirement, taking care of our wife’s needs, having something left over for the kids, and hopefully fulfilling our other wishes. That is what a proper portfolio does to justify its existence.
More narrowly defined indexes are selected to represent their narrow definition in the hopes that the aggregate value will change with, let us say, its industry. To be sure of that the index will consist of everything in the industry which will make this movement happen, regardless of whether the individual companies are companies one would care to rely on.
We have repeated the words, rely on, a few times. We look at a portfolio, as we define it, to mean a group of companies that can survive through thick or thin, who are important, who have integrity. It is not a group of companies that moves up or down with some exogeneous events and relegates its owners to the aggregate risks associated with something built to represent the middle of the road, mediocrity.
If one can feel comfortable owning some index or custom index that consists in large part of companies that are part of the index because they are painted the same color, live on the same street, or dance to the same tune, all of which might move up or down together irrespective of their specific merits, then, again, just buy the index.
If I were closing my eyes for what was to be the last time, I would try to keep them open if this is what I was leaving to take care of those whom I have loved and cared for.
We look at our portfolio and ask ourselves whether or not we feel confident that these companies in balance can and will take care of us and our estate for a long time. Our portfolio is a portfolio and not an index. It is subject to refined individual selection, intellectual review and hands on research. With this portfolio we will feel comfortable closing our eyes for the last time.
https://fundamentalsfirstfund.com/current-musings/
Because of our size, we have bought and sold securities for such a small commission for such a long time that commissions have always been a non-factor. Now many trades are officially commission free or commissions are so small as to be insignificant.
The brokerage end of the business supports hundreds of thousands of people, maybe millions, we are not sure. Are we to assume that all of these people are relying on a weekly check from mom? They must be getting their money from somewhere in order to live, but where? They are getting their money somewhere and somehow, but it is hidden from immediate sight. We do not like, hidden. In the old days, a broker would buy a stock for $50, add on a disclosed commission, and that was the invoice to the customer. Now the broker buys the stock for $50, and sells it to the customer for whatever and the $50 cost plus this whatever difference is the total cost to the customer as it appears on the customer’s invoice, with no detail, a cost that is ostensibly commission free.
https://fundamentalsfirstfund.com/current-musings/
Don’t lend money to companies that need the money to stay alive.
There are three C’s to lending money. They are Character, Capacity, Collateral. The first C, character, is the most important. If you have doubts about the borrower’s character, the other two C’s will not count for they are in the hands of someone you do not trust.
The difference between the small guy and the big guy is the small guy makes small mistakes and the big guy makes big mistakes.
For every situation that pertains to life there is in the formula a symbol “T” for time. No matter what you do, no matter how deep your algebra, this T cannot be factored out. It has to play itself out on its own internal and external clock.
Maybe the reason a technology has not been disrupted is that those who are in it know more than you.
No one knows a company as well as the people who now own or run it. The reason they are selling may not be the reason they swear they are selling.
The consultant experts do not make a living telling well-paying managements that they are wrong.
If a company moves its headquarters to another city for good, rational and justifiable reasons, often this list neglects to mention the new city is where the head man’s girlfriend lives.
The most important people to a business in order of importance are, first, the customer without whom there is no business. The employees without whom the customer cannot be served. Then the many and varied and valuable suppliers on whom every business relies, ranging from the electric company to the delivery man. Then the stockholder who is assuming all the risk but who will usually be just fine if attention is paid to the other categories in that order.
Things just don’t happen. There is a reason for everything in this world. The question is what.
It was observed early on by Confucius that there was nothing more important or more valuable than one’s reputation and keeping one’s word, but nowadays this seems to have fallen into question for the biggest no-gooder’s often have nine lives.
https://fundamentalsfirstfund.com/current-musings/
The news is full of reports of works of computer art that are available for anyone to see and for someone to buy that are being sold for huge sums. The payment, the medium of exchange, is bitcoins. A lot of well-meaning analysts and pundits have presented varied explanations of how this can happen. Our analysis is more cynical and we believe more realistic.
There are those who have a need to launder lots of money. They buy bitcoins and once the dollars are converted into bitcoins all is then anonymous. These people can get the money into the bitcoin system via a whole lot of operatives whom they are already using for other things. But getting the bitcoins out of the system in the form of clean dollars is not at all anonymous, and especially if one wants to get big slugs of cash out and into the conventional banking system.
So, one of their many entities/operatives/or people produce a work of computer art and then their other entities bid the price of this art up to whatever price they wish. The artist, or so-called artist sells the artwork to one of the boys who are all, of course, bidding anonymously in bitcoins. The artist then redeems the bitcoins he received in payment for real dollars, pays the tax on the profit from selling the artwork, which he or they are happy to do, and now they have beautifully, artistically laundered their money with an equally beautiful audit trail: I produced the art, I publicly auctioned off the art, I paid my tax, so leave me alone. To get the artist who has dutifully paid his tax to reveal upon simple request how he spent the money or to whom he gave it would attract every civil liberties lawyer in the United States who would gladly work pro bono.
https://fundamentalsfirstfund.com/current-musings/
A loss is a pretty serious thing, for it takes four gains to cover one loss. This does not mean that one should be so timid as to never take a risk, but one should consider the potential consequences. Generally speaking, money lost is more important than opportunity lost, for money is hard to replace, and you know what it took to earn it, but opportunities come down the pike all the time. So, if you are going to take a calculated risk, ask yourself how much you can lose and not how much you can make. If the possible loss is more than you can stand, then reduce the investment to a suitable size.
If you are interested in why four gains are needed to cover a loss, read on. One gain is needed to simply cover the absolute amount of the loss. A second gain is needed to cover the time it took to lose it and to make it back, assuming you succeed in making it back. The whole process can easily take a few, even several years. After all, who is so lucky, so to speak, to invest on Monday and find out on Friday that they made a big mistake and then take their loss? A third gain to cover the minimum gain you should expect from any reasonable, conservative investment. A fourth gain is needed to cover the aggravation. The last item is the most significant, for big losses affect you emotionally: I could have bought a new car for what I lost, I could have paid a tuition, I could have given to charity and someone would have gotten some good out of it, maybe I had better bet even more on the next hot deal in the hopes of making it all back, and these thoughts follow you around and do not necessarily leave while you are living your life. And, there is no guarantee, no assurance, or maybe no hope that you can make all these necessary gains. This is not to say that you should be so timid as to never take a risk, but ask yourself in advance, how much can I lose and can I afford to take such a loss and brush it aside with the wave of the hand.
https://fundamentalsfirstfund.com/current-musings/
There are approximately 100 million vehicles in the United States which travel maybe thirty miles per day. This means that in the United States vehicles are traveling 3 billion miles every day. That’s a lot of miles and they are driven under vastly different conditions dictated by geography, terrain, season, weather, day of the week, time of the day, and naturally, type of venue which might be New York City or Austin, Texas. In turn, most of these thirty miles are driven within a small radius of a person’s home, mostly inside of twenty-miles, which implies that each trip is less than thirty minutes. This is a statistic confirmed by tons of complimentary research. It would be nice if the autonomous driving crowd could find one place in the United States that would be a pure and accurate statistical sample of the rest of the country. No such place exists.
This means that who knows how many samples will be needed. After all, just because an autonomous car is mostly driven in Austin, this does not mean it will work great in New York City. With the United States being so big, so varied, and so parochial it is not hard to imagine needing a 20% sample each day which translates into 600 million miles of sample, and that is, theoretically, for each day of the year. If you make the reasonable assumption that not each and every one of the 365 days in the year is completely different but maybe some can be combined, it would still mean 600 million miles multiplied by some unknown number of days in order to have a sample of such size that they had covered all possible circumstances. In other words, one needs the autonomously driven automobiles to be tested for billions of miles. So far, they have not been driven even one million miles in total (1) and none of these are Level 5 miles which is to say, all by itself with no person in the car- just telling it to go to the supermarket.
So, based on reasonable reasoning, there is a lot of testing to come, even if one may disagree with some bits and pieces of my reasoning. Let us assume one has successfully put their autonomous driving system through the exercise and got a passing grade. Who is going to use an autonomously driven car? One thing we do know is that most of the trips driven consume less than thirty minutes and that is right around a person’s home. I have a hard time imagining mom telling her car to pick up little Martha at school and telling it to bring her home, or sending the car to the supermarket where it will get in line, pick up the groceries, and then take them home. If it will be necessary for a driver-person to be in the car (Level 4), it will be more trouble for someone to program the car and watch what it is doing than to just get in and pick up Martha. The autonomous service might be a convenience to those on a long-distance trip, but is the family-world ready to travel down the highway at 75 miles per hour while daddy plays a board game with little Martha? Nonetheless, it certainly will prove a convenience to some, to some a convenience- and they will use it, but what will it take to ensure safety and reliability? The developers will do their best but all it will take is one disastrous accident and everyone will shut off their autonomous driving application.
We can guess why so much of industry is spending so much on autonomous driving. It is expected, it is easy to raise money for the cause, it pays a lot of salaries, it contributes to a lot of retirement accounts, and it is popular. We appreciate the aggregate effort and we appreciate that it is providing challenging employment for scientific types, but in the end, we think it will result in write-offs and very niche usage.
https://fundamentalsfirstfund.com/current-musings/
When a company lays off large numbers of people, it is saying one or a combination of:
Business is poor and will stay poor long enough that I will never need them.
Our business has been run with too many people and we did not even know that was the case.
These people being laid off were coming in each day, were productive and useful, but we will try to get by without them however we can- such as by doubling the next desk’s workload.
We will quietly replace them with cheaper, less experienced people and be just as well off, or we will secretly replace them with contract labor.
Inertia will allow us to continue on without mishap or with better results for long enough to show better earnings, to sell out, to get bigger bonuses, and to enable ourselves time to get another job
Whatever the reason, it does not reflect well, or stated in the reverse, it speaks ill of the management unless a set of specific circumstances resulted in legitimate redundancies and the people deemed redundant are treated with dignity and appreciation for the time they were with the company.
https://fundamentalsfirstfund.com/current-musings/
In the 1500’s and 1600’s in Holland they would trade barrels of herring which were very important, for they contained preserved fish. This fish was used on sailing ships and also stored in warehouses for periodic sale to retail land merchants. These barrels would change hands with most of the trading taking place at a designated coffeeshop. At the end of each day, the traders would settle up much like the present-day clearing house, and wagons would crisscross Amsterdam with barrels of herring in order to settle up the net balance of the purchases and sales.
At a point for whatever reason the price of a barrel of herring went from around 2 to 18 and at the end of each day wagons were crisscrossing Amsterdam at a gallop. One of the warehousemen decided to open some barrels. He found all the herring was spoiled. He informed his boss of what he thought was bad news, but his boss responded, “These barrels of herring are not meant for eating, they’re meant for buying and selling.”
The bitcoins you are reading about are much the same. They represent nothing except the willingness of a buyer to pay a price for what is essentially an empty barrel. If you have a slug of bitcoins, you cannot use them to directly pay for anything except for a few tailormade items designed to illustrate that bitcoins are accepted here and there; but try to buy a refrigerator with bitcoins and see what happens. Many commentaries made by the cognoscenti make note that bitcoins have gone mainstream. The mainstream to which they refer is that buyers and sellers are now willing to buy and sell them in volume on designated exchanges.
We are not sure why bitcoins would be apt to replace the U.S. dollar which has the backing of the U.S. government which in turn has the backing of over 330 million people like you and me. Well, there is actually one real, non-trading reason for the original and continued existence of bitcoins- anonymity or near anonymity. Once a person buys and registers his bitcoins via the process of blockchain, he can then transfer the balance to whomever he wishes and no one will know where it came from or to whom it went. The newspapers have covered this subject well enough such that I only have to refresh readers to the accepted keyword- money laundering; but in the end, if one cannot actually directly exchange the bitcoins for merchandise then he has to in turn exchange it for real money and upon this event, there is an audit trail. In this world there is no shortage of imagination, so there has developed many imaginative ways to accomplish this latter exchange from bitcoins to real money with maximum disguise. We might cover this on some other musing. In the meantime, bitcoins are all they are cracked up to be as a vehicle for speculation, a place to hide laundered money, or what has become the accepted way to pay off hackers.
https://fundamentalsfirstfund.com/current-musings/
You have probably known people who respond in such a way to certain things that you are immediately inclined to say to them, you do not know what you are talking about, you are being selfish, you are being stubborn, you are being egocentric, you do not care about. . . When you do respond in such a natural way, they inevitably say, no I am not and you say, yes you are and the situation escalates to inevitable unpleasantness. It took a long time to realize that upon saying you do not know what you are talking about, or one of the other typical knee-jerk responses, one is unrealistically assuming the person will stop, pause, think, and say to the effect: why didn’t someone tell me that before, where have you been all my life, why didn’t you point that out to me sooner, I never realized that I was behaving in such an unpleasant way, I am having an epiphany, I shall now change for ever and everyone will live happily ever after.
It took an even longer time to realize that it is best to remain silent and let the matter go, for sometimes the other person in addition to being ill-informed gets pleasure from bugging you. But this remaining silent and letting the matter go is a lot harder to do than it is to say. It has taken me a long time down a rocky path to get myself to the point that I can do it, and I cannot say that I am able to do it each time. So, before responding in such a situation, ask yourself if what you are about to say is more likely to start an escalation to unpleasantness or more likely to cause the type of epiphany to which I referred. There may be something in between, but not much.
If you are thinking that an epiphany is possible, perhaps it will be useful to ponder on an everyday definition of epiphany. Epiphany in literature refers generally to a visionary moment when a character has a sudden insight or realization that changes their understanding of themselves or their comprehension of the world. It’s a nice definition and one that works in literature, but so far in my life, I have occasionally seen gradual change but I have never seen an epiphany. Another time tested and time worn approach is to respond to the adversary with a question or a series of questions designed to subtly force the other person to realize he is wrong. This was the approach effectively employed by Socrates, and we all know what happened to poor Socrates. For those who may have forgotten, he was forced to drink a cup of hemlock, not exactly a sports drink.
https://fundamentalsfirstfund.com/current-musings/
Back toward the beginning of 2021 we wrote a paper on the prospects of the industry and commodity related prices for 2021. This was based on a plethora of data provided by the Oil & Gas Journal which has been around forever and is highly respected. They have a large, qualified staff and are the source of tons of accurate data which is provided by and to the community. The data suggested that oil and gas production would increase a bit as would demand and that the balance of supply and demand would more likely be in balance or even a little short, depending on what some of the big controlled producers decided to do. My conclusion at the time based on the data was that oil and gas prices would be firm enough all year to justify holding stock in companies more or less directly involved. This turned out to be the case in spades, but the spades were derived just from circumstances and not from prescience. Now the Oil & Gas Journal has provided some more up to date data looking forward into 2023. Assuming the Journal’s data is basically accurate, at least in terms of the macro elements, this is how we see the market for hydrocarbons looking ahead a year. The demand for liquified natural gas emanating from the United States, generally referred to as LNG, and going to worldwide points will likely follow the same course that such demand enjoyed all of last year and the last several years during which shipments abroad increased 3-4 times. We are confident because such contracts require ships that cost over $200 million and last a good three decades; so, as you can imagine the production and shipment of LNG abroad consists of numerous back-to-back contracts with parties who have near perfect credit and these contracts stretch out over long periods. These contracts in turn each take a few years to organize. This is by way of saying that future LNG shipment can be easily estimated, so demand for natural gas from this source will continue to increase. The increase will not be as dramatic as in 2022, but in absolute terms- plenty. Exports of LNG, however, represent a relatively moderate amount of the total US production, so increased export demand compared to overall US production will not be so great as to spike prices. Prices should be firm enough to represent good business for those in the business with a good hunk of the profits continuing to go toward the repair of those companies’ balance sheets. These companies will carefully control capital expenditures as has been confirmed through public press releases. Individual companies will mostly focus on replacing the natural decline in field production and perhaps a bit more. So, producing and selling natural gas should be a wholesome occupation for 2023. The market for oil is not quite the same as for natural gas, for crude can easily be shipped most anywhere in most any quantities, so prices are based on several accepted marketplace exchanges. It appears based on the plans of the companies in the business, they will not be hell bent on drilling new holes. The number of new wells drilled approached around 2,000 a year at one point in time, but that rate is now under 500 and it should stay around that level. Keep in mind that you cannot find oil or gas unless you drill a hole. The reason that companies in the industry are so careful is that this is a hazardous business which has survived and prospered for over 125 years because the participants have been disciplined. Without going into details, such discipline did not save a good part of the industry from going through a death or near-death experience which they are loath to re-experience. So, the industry is reacting conservatively and it looks like production of oil will be around the same as last year and demand will also be about flat, or maybe a bit better than flat. What some of the big guys who are centrally controlled (such as Saudi Arabia and Russia) will produce will depend on what they want to do, but we will for the moment go on the assumption that in the long run they will protect their own best self-interest which means protecting the price. Some countries have so much oil that they can afford to dissipate some of these depleting assets for a while and not notice, but driving down prices is an expensive way to regulate supply. It therefore appears that crude oil supply will be in rough balance with demand and that prices will therefore be reasonable. This will represent good business for those in the industry. The current commodity price recovery simply reconfirms what has been going on in the industry from the beginning: the industry as a whole undertakes the risky exploration for oil and gas using profit dollars, not with borrowed money. Borrowed money is used to develop production that has already been found. No profits, no searching for new fields, and no searching means no finding. Production from oil and gas fields declines over time, so it is just a matter of time before shortages start to emerge unless profits are enough to justify and finance new exploration drilling. We think the overall real-world balance at this time suggests good business for those directly in the business and one would be well served owning some of these participants.
https://fundamentalsfirstfund.com/current-musings/
The observation was made that if a diversified portfolio has a fair number of names and the position sizes are about the same, then performance will revert to plus or minus the mean with the difference reflecting the ability of the fund managers. If the position sizes range all over the lot, than all bets are off for the big positions will dictate the overall performance, for good or for bad. The latter situation is much the case with the portfolios of many investment vehicles that are technically diversified but highly dependent of a few names, for the managers either do not much care about position size or use position size to give themselves what they perceive as an edge. If the portfolio has enough names, if the position sizes are controlled, and if the selection process is controlled to represent the best of a specific universe, the performance will ultimately be the mean for that group of companies adjusted for informed selection. We in fact agree with this and recognize that the likelihood and the degree that such a portfolio will outperform or underperform the basic trend depends on the specific selections including the emphasizing or deemphasizing of certain industry categories.
This conclusion seems obvious, but there are some who while believing in the conclusion are not willing to transfer this basic conclusion, namely that a portfolio’s performance will over time reflect its inbred risk, to different portfolio arrangements. Their belief is that the only way to make it big is to use a few names that have been uniquely selected and concentrate this into a narrow list. They believe that one will inordinately prosper because one has enough big bets to taste it big should they work.
What they are actually saying, though, is that the only way to importantly outperform is to run a portfolio that performs outside its own basic risk profile.
It is a paradox, They believe that the diversified portfolio is destined to perform close to the average as dictated by the composition of the portfolio but on the other hand they ignore that a narrow portfolio which carries far more risk because of its narrowness will be immune to such an effect. We believe that what is sauce for the goose is sauce for the gander.
We believe that one cannot pick and choose which statistic to apply or pick and choose whether to believe or not believe in basic probabilities. We believe that if one works in an environment that carries on average a certain degree of risk, one’s performance will reflect this risk plus or minus some amount based on the manager’s specific talents which in turn will dictate not the bell shaped curve but rather the specific shape of the curve, especially its extremes. Historically high-risk portfolios on average have not succeeded; namely because high risk is immutably associated with high risk. And being practical and realistic, if one were unlucky in his timing and bought into a high risk portfolio at the wrong time, he would not be around when the good times came
It would be sophistic reasoning to claim that a high-risk portfolio can perform as well as a low-risk portfolio, for if one did accept such a claim, then the high-risk portfolio would in fact be a low-risk portfolio.
This is not to say that just because one runs a high-risk portfolio one will lose, but it does say that on average, over time the returns will revert to that risk profile. Getting back to the bell shaped curve, everyone that is not fortunate enough to find himself right in the middle will be a loser, on average. Otherwise, one is claiming that at a roulette wheel the chance of winning is the same if betting on a single number as it is betting on black or red. If one walks across the Massachusetts Turnpike with one’s eyes closed, it is possible to safely get to the other side, and maybe a few times, but as a steady risk, the risk profile of the activity will catch up.
Also, back to the portfolio, as noted, if the hoped-for big gain does not occur at the beginning, one may not be able to survive and be around to even recover to the average for he might run out of money. The high-risk portfolio is narrow and void of any attempt to rationally spread risk, so practically one could easily find oneself initially betting on the wrong horses .
We are not against taking high risk or concentrating risk, but this risk has to be tempered and controlled so that the overall risk profile of the portfolio is not compromised. This can be done in a number of mathematical ways, but in the end what makes or breaks the day is objective judgement and experience. This management and judgement cost money. We know, for we paid.
https://fundamentalsfirstfund.com/current-musings/
https://fundamentalsfirstfund.com/current-musings/
This little guy didn’t make it. Too bad for I could have found room for him.
https://fundamentalsfirstfund.com/current-musings/
