I’m always amazed—and a little horrified—at how poorly my industry treats its customers. Unlike many service professions, the licensing requirements for financial advisors are minimal, and far too many so-called “wealth managers” manage their own wealth first by promoting what John Bogle calls “salesmanship over stewardship.” Like real estate agents or used car salesmen, they push big ticket, financially destructive products with sizable embedded commissions.
But as incompetent and flat out dishonest as folks in my business can be, John and Jane Q. Public are often their own worst enemies. Through greed, gullibility, or gross negligence, people routinely blow large sums of their hard-earned savings. These five mistakes are, by far, the best ways to torch your net worth:
Jim Cramer has been talking up what he calls the “FANG” stocks again: Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOG). Cramer has touted these stocks for several years now, and for good reason. They’ve far outpaced the market in that time. Throw in a second world-beating “A” stock, Apple (AAPL), and the five companies are worth a staggering $1.8 trillion in combined market capitalization, or roughly 17 percent of the NASDAQ composite and 9 percent of the S&P 500.
There’s no doubt about it: if you haven’t been in these stocks over the last few years, it’s been damn near impossible to beat the indexes. (And God help anyone who dared to short them.) But, past results aside, will the FANG stocks continue to bite off big gains in the future? Investors certainly seem to think so. Facebook’s early struggles as a public company seem like ancient history. Last week, Google added almost $60 billion in market cap in a single day and Netflix popped ten percent on strong user growth. As for Amazon, it just keeps heading higher and higher, profits be damned.
I’ve been buying and shorting tech stocks since floppy disks were floppy. In all that time, I’ve always been amazed at the steep premium investors are willing to pay for anything even remotely tied to the sector. In the 1990s, all you had to do to command a massive valuation was slap a “.com” onto your name. That is not an exaggeration. In 1998, I shorted a company called 7th Level that was two weeks away from running out of cash. It changed its name to 7th Level.com and its stock jumped from $2 to the mid-teens in a single day. These days, private companies in the tech space–so-called “unicorns”–are all the rage. Few, if any of these billion dollar babies have earned a cent. Commonsense says most of them never will. And yet, VC firms and other private backers are perfectly willing to throw more cash at them in round after round of financing.
Investors justify these lofty valuations with fanciful TAM guesstimates and accelerating revenue projections. This is nothing new. It’s the same wishful thinking that drives all manias, tech or otherwise. But what seems different to me about the current tech boom is just how un-technological most of the players are. Uber lets you hail someone else’s car, AirBnB lets you sleep in someone else’s bed, and Snapchat lets teenagers erase naughty messages before their parents see them. It’s hard to see any significant technological moats around those ideas.
I do not short debt. But, on paper at least, shorting the sovereign debt of poorly managed European nations not named Greece sure seems like a great investment right about now. Aside from the negligible cost of the coupon, the downside to shorting the bonds of places like Portugal, Spain, and Italy seems to be almost nil. We’re talking about heavily indebted countries with aging populations and staggering unemployment, and yet, thanks largely to QE measures, their bond yields are shockingly low. This is clearly an unsustainable situation. QE will have to end eventually and if EU leaders finally develop a backbone, yields might return to double-digit levels more quickly.
Geez. I’m almost talking myself into this idea. Then again, it’s impossible to predict when (or if) the global pandemic of bailout fever will finally end.
We’re in the middle of a buyout frenzy for the ages. Every day brings news of another mega deal, either real or imagined. On Sunday, Cigna rebuffed Anthem’s $47 billion offer. This failure-to-merge is a rare exception. Many large and established companies have successfully gobbled up other large and established companies in recent weeks, especially in the tech space. In March, NXP Semiconductor bought Austin-based Freescale for almost $12 billion. Singapore’s Avago paid a whopping $37 billion for Broadcom a few months later, and Intel recently completed its $16.7 billion acquisition of Altera.
This merger mania is partly a product of record low interest rates around the globe. Profitable, cash rich firms can sell bonds with vanishingly low interest rates, making major acquisitions relatively easy (and cheap) to finance. Furthermore, the US tax code encourages firms to borrow money, as interest costs are treated as a deductible business expense. Add it all up and it’s little wonder that every company out there is starting to seem like a viable takeover candidate.
Late last month the Commerce Department revised first quarter economic growth from its initially tepid .2 percent estimate to a putrid negative .7 percent. There was no shortage of excuses for these results. The West Coast port slowdown was cited, as was the usual whipping boy, severe winter weather. In April, CNBC analyzed 30 years of GDP data and showed that first quarter growth persistently underperforms expectations. Whatever the reason, or reasons, the fact remains that –seven years in–we are still mired in the slowest post-recession recovery in US history.
And, to paraphrase Humphrey Bogart, things are never so bad that they can’t get worse.
Buying into secular trends can be a powerful investment strategy. It can also be very tricky. I’ve missed my share of winners over the years by talking myself into believing that a trend had peaked or that stocks benefitting from a secular shift were already overbought. In fact, I’ve learned (from often painful experience) to embrace a better-late-than-never mentality when it comes to trend investing, even if it means buying seemingly “expensive” stocks.
Last week NY hedge fund manager John Paulson took a lot of grief for his record $400 million gift to Harvard University, his business school alma mater. Personally, I admire Mr. Paulson for supporting higher education. It is a noble gesture. He could have spent that cash on private jets or his own third world island nation. But Mr. Paulson made a glaring mistake: he gave his money to a school that does not need, and does not deserve, that money–and the $200 million or so he’ll save on taxes would do America and the state of New York more good than Harvard University.
Another week has brought yet another much-publicized call for the Federal Reserve to delay raising interest rates. Yesterday, the International Monetary Fund opined that the Fed should hold off on a rate hike until 2016.
Two weeks ago, I flew to my old stomping grounds in Houston and visited seven energy companies in three days. The mood around town and in corporate offices was far more upbeat than my last few trips down there, and not just because the Rockets were in the midst of pulling off one of the biggest comebacks in NBA playoffs history.
Despite what you might have heard, the oil business is rebounding.