what’s legal is the real crime

In case you missed it, something unusual happened last week: a dishonest money manager went to prison.

Former hedge fund manager Larry Goldfarb was sentenced to 14 months in prison for pocketing $6 million from side pocket investments and diverting money for his personal use. I write about Goldfarb in my book (available for preorder here!). He was a prominent figure in the Bay Area investment world.  To his credit, he gave a lot of money to charity and worthy causes. Unfortunately, a lot of it wasn’t necessarily his to give. He was busted a couple of years ago and promised to repay his investors the money he took from his fund. But Larry couldn’t stop being Larry and now he’s going to federal prison because of it.

According to the federal prosecutor in charge of the case, “instead of paying the agreed upon restitution and disgorgement, Mr. Goldfarb spent hundreds of thousands of dollars on various personal indulgences, including Golden State Warriors season tickets, private air travel, and vacations.”

Mr. Goldfarb is a poster child for many people on Wall Street and in investment management:  smart, personable, and shamelessly unethical.  He is another example of why Wall Street, far more than corporate America, needs tighter regulation. But the truly disturbing part of Goldfarb’s career might not be the illegal stuff he was prosecuted for–it’s the legal activity one of his former employers practiced right out in the open.

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don’t cry for us short sellers, but please save your hatred for someone who deserves it

Last week, I wrote a bearish article on Tesla for Seeking Alpha–not the company, the stock. As I said in the piece (and an earlier blog post), I admire Elon Musk and I think Teslas are neat cars. I’ve even considered buying one. But the company’s stock is another story. The logic of paying more than $200 a share for a barely cash positive business with all sorts of very large challenges ahead of it seems, well, stretched to me. And yet, people keep on buying. The article came out Monday morning, West Coast time. By the end of the day, Tesla was up another eight bucks. A few days later, Tesla beat on its Q2 earnings and the stock started pushing against its all time highs again. Correction? What correction?

Even though I clearly stated in my piece that I have no positions in the company, long or short, and no plans to initiate any positions in the future, several commenters accused me of secretly shorting Tesla and trying to drag its share price down. Unfortunately, this sort of vitriol is common. Short sellers are about as popular as personal injury lawyers and IRS agents these days. In the eyes of most investors, we’re little more than greedy vultures looking to smear good companies so we can profit on their fall. This simplistic, black hat-versus-white hat understanding of the financial world might be comforting, but it’s a dangerous fantasy.

In reality, the people waving the white hats and whipping this bull market higher are the ones investors should really be fearing–or at least questioning.

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this is good news?

Last week, the Treasury Department announced that America’s budget deficit for the fiscal year ending September 30 will be roughly $500 billion, the smallest it’s been since 2008. This was hailed as good news in most quarters.

Considering that we’ve been running deficits closer to (or over) $1 trillion for the last five years, I suppose it is good news, relatively speaking. But I can’t buy into the optimism. For me, the fact that prominent people are praising our government for only spending $500 billion more than it is takes in is depressing–and scary. It’s a clear symptom of how warped our thinking on the issue has become.

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sorry but your tesla is killing the planet, too

(Update: I guess I wasn’t done talking about Tesla. I just wrote a longer piece about the company for Seeking Alpha. You can find it here.)

If Warren Buffett is right (and he usually is) that the stock market is a short term popularity contest and a long term weighing machine, you could easily argue that the most popular stock on Wall Street over the last eighteen months has been Tesla (TSLA). Elon Musk’s battery-powered car manufacturer is barely cash flow positive, but bullish investors have lifted it to a market cap of over $25 billion. That’s more than a third of the value of a little mom and pop outfit called Ford Motors.

But this past week hasn’t been kind to Tesla. First, a report from the website The Street called the Audi A8 Diesel a “Tesla Killer.” Besides bashing Tesla’s limited range and likening its interior comfort to a “Burger King” compared to the Audi’s “Buckingham Palace,” the piece also showed that, due to battery depreciation and electricity costs, the Audi is cheaper to own and operate. Then, yesterday, another Tesla caught fire. Of course,  your average Honda or Chevy is liable to go up in flames if you plow it into a light pole at 100 MPH, as the driver of the Tesla did in this case. But reports from the scene said the Tesla’s batteries were “popping like fireworks” in the middle of the street. For a car with a well-publicized history of mysterious fires, that’s the last kind of press Musk wants.

Personally, I like Teslas. I think they’re neat looking. I’ve even considered buying one, and I wish Musk the best in his attempts to revolutionize the auto industry. But I am a little weary of the hype surrounding the cars. Sure, they don’t burn gasoline, but they do suck up electricity–and in a lot of places in the United States and abroad, that’s about the dirtiest way you can power a car.

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the real mirage

Last week, I finally got around to reading The Hedge Fund Mirage. It was published in 2012, so I’m only two years behind, and the book’s main message is just as valid today as it was when it was written. Namely, the average hedge fund is the last place you should even think about putting your money. The very first sentence of the book makes this point quite persuasively:

“If all the money that’s ever been invested in hedge funds had been put in treasury bills instead, the results would have been twice as good.”

Ouch. The book’s author, Simon Lack, goes on to explain this sorry record by proving and reproving an obvious yet little-acknowledged law of money management. I discuss it in my book, as well (available now for pre-order!): asset size is the enemy of return. Hedge funds produce much better investment results when they manage a relatively small amount of money, but those returns shrink toward mediocrity (or worse) as a fund’s assets increase.

Put simply: the more capital you’ve got under management, the poorer your investors are probably going to be.

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yes, dammit, i’m going to write about texas again

I know I’ve been talking about the population boom in Texas quite a bit lately, and I promise to move to other subjects soon, but I really do feel like this is the biggest story nobody is talking about—especially if you’re on the lookout for stocks to buy.

Most investors like growth. I’m no exception. And in this era of the perpetual non-recovery recovery, the only place to find real growth (on this continent anyway) is deep in the heart of the Lone Star State.

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growth? what growth?

Yesterday the Commerce Department reported that the US economy shrank one percent in 2014’s first quarter, surprisingly worse than its initial estimate in late April of .1 percent growth. Most people blame the brutal “polar vortex” winter weather for this decline. All morning, the talking heads on CNBC have been excitedly predicting that, with the weather improving, second quarter growth will rebound to two or even possibly three to four percent. The recovery, they say, is accelerating. To which I would reply: you call this a recovery?

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i’ve been working on the railroad

When I seek new investments for my $100 million fund, I often research companies that benefit from secular changes, large shifts in society and business.  Three epic secular shifts happening right now are: the rapid adoption of cloud computing platforms, the tidal wave of growth in Texas (almost a million people a year are moving to that state), and America’s booming energy renaissance.  The last change is particularly breathtaking. We’re pulling up almost nine million barrels of oil a day now in this country. That’s almost double the amount we extracted ten years ago.  Natural gas production is way up as well, causing some analysts to predict America will be a net exporter of fossil fuels sometime in the next decade.

This growth in domestic oil and gas production is obviously good for energy companies. But how those fossil fuels get from the ground to the gas pump will strongly benefit one, very old-school mode of transportation: railroads. That’s why one of my favorite stocks these days is Trinity Industries’ (TRN). Its products were last considered “high tech” in the 19th century. But they’re going to make the company a ton of money here in the 21st.

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the biggest story nobody is talking about is very bad news for california

Yesterday, Toyota announced that it is relocating its North American headquarters from the LA suburb of Torrance to the Dallas suburb of Plano.

Toyota is far from the first company to leave California for Texas in recent months. In the last three years, public California companies Copart, Waste Connections, Primoris, Vermillion, Pain Therapeutics, and Tenant Healthcare have all joined the exodus.  Many private companies have moved as well, including Santa Monica money manager Dimensional Fund Advisors, which moved to Austin three years ago. But these previous relocations have been minor tremors in terms of employment and tax revenue. Toyota’s move is a major earthquake. It’s the kind of shift that can remake a region.

Unless California gets its act together and rethinks how it treats the private sector that drives its economy, many more vital employers are going to move and the Golden State is going to wind up looking a lot less golden.

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free labor: here’s to the beginning of the end of the ncaa

This isn’t about investing or the world of finance (though it is about one of the most profitable businesses in the world), but I’d like to take a moment to acknowledge the football players at my graduate alma mater, Northwestern. Tomorrow, they’ll be voting on whether to form a union. I hope they vote yes but no matter what happens, I admire their guts and the strength of their ideals.

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