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Investing, Philosophy And The Federal Reserve With Doug Kass

Investing, Philosophy And The Federal Reserve With Doug Kass

“I think it’s very important for investors to invest with their head, not over it.”

Author and television personality Doug Kass, whose book “Doug Kass on the Market: A Life on The Street” came out recently, granted an exclusive conversation with Benzinga.

To read the first part of this interview, click here.

Kass offered his take on the relationship between the words of 17th-century English poet and cleric John Donne and the stock market today.

Related Link: Doug Kass' Top 11 Favorite Books

‘No Man Is An Island’

According to Kass, investors need to invest logically and ascertain their own personal risk profile.

“I’m reminded of a quote by John Donne,” the former philosophy major said. “‘No man is an island entire of itself; every man is a piece of the continent, a part of the main.’”

“When your broker tells you that the U.S. is an oasis of prosperity and that we are insulated from the goings on around the world such as the recessions in Japan, Brazil, Italy and Russia,” Kass said, “please consider John Dunne’s quote above.”

More Advice For Investors

“When your broker tells you to ignore global macroeconomic events, please consider the Great Recession of 2007 and 2009 and its causes,” Kass said.

“When your broker tells you to rejoice at the rear view mirror of the last quarter’s earnings of your favorite investment because there’s more to come, please consider that this is a lagging indicator not a leading one.”

The Bottom Line On The Bottom Line

“Consider that the bottom line has been importantly influenced by financial engineering, share buybacks and fixed cost reduction which typically have a finite life,” Kass said.

“Above all be objective, independent in view, avoid being a perma-bear, avoid being a perma-bull, always reward versus risk and again consider your risk profile and timeframes.”

Less Than Meets The Eye

When it comes to management, Kass said he believed it to be far from infallible.

“It’s my view that managements, wildly heralded, are just human beings. They make mistakes just like the rest of us. You’d be surprised at how much ‘momentum based’ corporate investing there is and how little variant view there is.”

Asked directly whether all that means there isn’t a lot to be gleaned from the goings-on in the C-Suite, Kass said, “That’s correct. There’s less than meets the eye.”

On Shorting

When it came to shorting, a technique Kass famously applied to such names as Tesla Motors, The Coca-Cola Company and International Business Machines, among others, he had this to say:

“It [shorting[ is only for the most nimble. It’s only for those that understand the importance of discipline and stopping losses.”

“Remember,” he added, “reward versus risk is asymmetric. You can only make 100 percent on your money if you find a bankruptcy, but you can lose a multiple of your capital investment on any individual stock by shorting.”

Something Kass said he discussed in his book involved one of his most basic tenets of investing – avoiding stocks with large short-interest positions, which he said was a non-starter for him.

Here’s how Kass put it: “If the amount of short relative to the float (the outstanding shares less what is owned by insiders) is more than 7 or 8 percent, I don’t short the stock. If it’s a multiple of average daily trading volume it’s a non-starter for me. These have kept me from getting trapped in short squeezes which can decimate one’s portfolio and one’s career.”

On The Fed

Finally, Kass discussed the Federal Reserve.

“The Fed,” he said, “has made a mockery of fundamentals. There is limited honest price discovery as the price of many asset prices have been distorted.”

“This is very important,” he said. “Ultra low interest rates are the father of mal-investment. And bubbles are the outgrowth children of easy money. Interest rates are the investment traffic symbols of a free economy. They set investment hurdle rates in which we value asset classes like stocks.”

Related Link: Should Investors Ever Bet Against Warren Buffett?

The Solution

Fixing the problem, Kass said, involves letting “free markets become free” by letting “the real economy set the tone for equity and bond prices.”

Kass was not optimistic this would happen.

“I think we’re at a very important pivot point for the markets,” he said. “Global growth is slowing relative to expectations. With a quarter of the world either in recession or experiencing a flat-lining of growth, we’re seeing mal-investment in all areas - social media - energy credits - and it’s sowing the seeds for the next business downturn.”

Future Forecast

“I’m going to guarantee you,” he said, “that 10 years from now investors are going to be scratching their heads as to what the Fed has been doing.”

Noting that “the most important commodity on Wall Street is optimism,” Kass said, “Never before has growth been so beholding to monetary policy.”

Kass, as he so often does, closed the conversation with a quote – this time from Warren Buffett.

“It’s time to be fearful when others are greedy.”

At the time of this writing, Jim Probasco  had no position in any mentioned securities.


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