Recreational Reading, Morons And Semi-Degenerate Gamblers

The following was originally published on The Community Bank Investor. 

The week has been a fairly quiet one. Both Carl Hiassen and James Lee Burke have had novels out in the past week and a half, and both are home runs of the highest order. If you are familiar with these two authors, make sure you get the latest as soon as possible. Both are great reads. If you are not familiar, go ahead and start back at the beginning and work your way forward with both of them. You will thank me as both are prolific talented writers who tell a great story.

New releases form John Sanford, the next instalment of the Jesse Stone series started by the late Robert parker and carried on in fine fashion by Reed Farrel Coleman and the newest Badge of Honor offering form W.E.B. Griffin are all due out on the next few weeks, so it is going to be a great month for recreational reading.

I guess I should turn towards markets and the economy at some point. This is yet another week in which Janet Yellen has one of the worst jobs in the country. All the positive buzz from the July jobs report was pretty much destroyed by the August report. The carefully manufactured unemployment rate refused to go down, wages didn’t go up and we are right back to creating a bunch of low paying jobs and the Labor Force Participation Rate is back where it was before women began to enter the work force in earnest back in the 1970s. The Institute for Supply Management’s Service measure dropped to a 6-year low and the Manufacturing Index is signaling economic contraction.

At the same time the market is not cheap as the S&P 500 is trading at 25 times earnings, almost 3 times book value, 2.3 times sales and 27 times free cash flow. Earnings have been down for 5 straight quarters and I really don’t see a strong demand driver that will bring these numbers substantially higher in the second half of the year.

There is nothing in the data that makes me want to end my buyers strike and each morning when I sit down to start my day is look for companies to sell and raise my cash levels. The only exception is community banks, and I continue to buy any and all community banks below 92% of book that have an activist or bank specialist as a shareholder.

An associate called me out for being a pessimist the other day and nothing could be further from the truth. I look at the future and I see great things in fields that will offer huge returns in the future. I see technology that will make us more productive and enable us to have an ever-improving lifestyle. I see medical advances that make us live better longer. The only thing that can stop the American economy and people are the morons we consistently elect to lead us. The biggest threat to continued progress and innovation is our own government and I don’t see anyone in either of the two big parties smart enough just yet to get the hell out of the way without trying to control things or wet their beak by taxing anyone so foolish as to earn a decent profit. That will change eventually but it will take time. In the meantime even the brightest of futures has a right price and right now markets are overpricing so I will stand aside until I get my price.

It will shock you to know that I have several friends that are semi-degenerate gamblers, and I have been known to spend a smidgen of time at poker tables and race tracks. One longtime friend who has had a great deal of success betting on the ponies told me that most people lose money at the track because they either bet the right horse at the wrong price and or the wrong horse at the right price. Investing is exactly like that. You can overpay for a good company and end up losing money when valuations come back into line with reality or you can, as I have done on far too many occasions to count, buy a bad company that looks cheap and lose money as bad gets worse. The trick is to buy the right company at the right price and at the moment the stock market just is not letting us do that. 

The time to buy will come and it will be when hedge funds are puking, margin clerks are working overtime and derivative salespeople are back to waiting tables. We aren’t there yet.

At the racetrack and in the market it’s important not to be these guys.