Monthly Archives: July 2013


Two major events took place this past week in the financial world. First, news came out that finance is about to become the largest industry in the S&P 500 again. The last time that happened was May of 2008. We all know how that movie ended. Second, government regulators actually managed to, get this, regulate someone on Wall Street. They indicted the massive $14 billion SAC Capital hedge fund for insider trading “on a scale without known precedent.”

On the surface, these two news items seem unrelated. But, to my mind, they’re intrinsically linked–and not in a good way.

Taken on its own, you might think that an (allegedly) crooked hedge fund getting busted is the signal of better days to come on Wall Street, with more responsible money managers and more robust oversight. But with financial companies making up such a massive portion of our economic growth–without banks, the S&P’s profits would actually be down this quarter–I am not at all optimistic that the SAC indictment will lead to anything like the reform we need. Sure, the widely publicized case might hammer the hedge fund industry, which has already been taking plenty of lumps lately for underperformance. But it’s not going to get at the core problem that led to SAC’s downfall:

Wall Street has been living through its own steroids era. And both the SAC case and the resurgence of Big Finance show that it’s not even close to being over.

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is wall street as bad everyone says it is? no. it’s far, far worse.

It’s been five full years since the financial meltdown of 2008 and it’s still fashionable to bash Wall Street. People who know nothing about finance or investing routinely blame everything from the real estate bust to the financial crisis to our crappy economy and high unemployment on Goldman Sachs and other dominant investment banks. A lot of folks in my business reflexively defend Big Finance against these attacks. But the truth of the matter is, Wall Street hasn’t gotten enough blame for the way it operates, and even though a couple of firms paid fines for their behavior during the housing mania, The Street is still reaping massive profits by screwing its own clients.

Including guys like me.

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is it time to buy big cap tech?

Way back when I started managing money in the 1980’s, technology company stocks were revered by institutional and retail investors. The perception was that tech had a much better growth outlook than the overall market. Not surprisingly, tech stocks sold at premium valuations, often twice the price-earnings ratio of the overall market. Back then, and into the 90s, technology companies rarely paid quarterly dividends, and only a handful had stock buyback programs. Investors were content to let them reinvest cash in their businesses. But after the dotcom bubble went supernova, tech valuations crashed and stayed depressed for a long time, even as the strongest survivors of the meltdown grew fantastically and consolidated their holds on their respective sectors.

Despite this trend, I stayed away from big tech stocks like Apple and Cisco and Oracle. After the collapse, I was gun shy, and I’ve historically been suspect of famous stocks with massive market caps. They’re just too heavily covered for comfort. Every analyst and trader from Berlin to Beijing pores over every syllable of every statement they issue. And as the old saying goes, “When the microscopes come out, returns get microscopic.”

But I think it might be time for me to join the herd.

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dumbed down

I’d like to expand on something I wrote near the end of my last post on the current boom in Texas. As I said, buying into or shorting secular trends is a key investment strategy for me, and Texas’ explosive growth is a major opportunity. But I don’t think most people understand why the state is doing so well. It’s not just because of its low taxes and hands-off regulatory regime. If that were the case, low-tax backwaters like Alabama and Mississippi would be thriving, too. What sets Texas apart is education, especially the public UT system, which possesses the third largest endowment in the country behind only Harvard and Yale.

Dynamic, innovative economic regions–with the highest per capita incomes–always benefit from quality educational systems. Silicon Valley and the Northeast are the most obvious examples. But other places like North Carolina’s research triangle have also been fueled by great schools. The reason for this isn’t rocket science. You simply can’t have sustained economic growth without a steady supply of smart, highly educated people.

The problem is that schools cost a lot of money. And most states these days–especially the state where I live, California–spend far more on prisoners, public employees, and old people than education. It’s a disturbing secular trend, so disturbing that if California were a stock, I’d short it.

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lone star long: cashing in on texas with capital southwest

[Note: this piece was also posted at Seeking Alpha]

For most of my thirty years in the investment business, I’ve been skeptical of closed-end investment funds. Then I flew to Dallas and shared a plate of barbecue with Gary Martin, the personable, soon-to-be-retired president of Capital Southwest Corporation (CSWC). Martin was in a good mood during our lunch meeting, and not just because it was a Friday. As he described the company’s history and its current outlook, he had the relaxed, calmly confident look of an executive with nothing to hide, sell, or prove.

“We let our numbers speak for us,” he said.

Those numbers are quite persuasive. Since Cap Southwest’s initial IPO raised $15 million in 1961, it has quietly grown 13 percent a year by buying into well-managed private companies and holding onto them for long periods of time, even after many of them go public. Like Martin and his fellow executives at Capital Southwest, the businesses they invest in are not flashy. They make things like industrial lubricants (Rectorseal), farm equipment (Alamo Group), and copper wire (Encore). They also make a lot of money, which Capital Southwest frequently shares with its stockholders. Last year, it passed along a capital gains distribution of $17.59 per share. CSWC is also surprisingly undervalued. As Philip Mause persuasively documented several months ago, the stock trades at a significant discount to the company’s net asset value.

But none of these factors explain why I set aside my longtime doubts about CEF’s and bought $3 million worth of CSWC shortly after my lunch with Gary Martin. The real reason I’m long on Capital Southwest is that familiar refrain from the real estate industry: location, location, location. Or, to be more specific, Texas, Texas, Texas.

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