3/10/2006 newsletter
*** Market
Speaking of Google, it has been quite volatile lately. The market is correcting this week, especially on the small-cap side, which drags down my portfolio by 2-3%. The large-cap shakes but did not drop too much. There are a lot of talks about the interest rate. And the fact that Berkshire is buying foreign stocks is making people uneasy about the fate of US stock market in light of large trade deficit (Buffett is patriotic about his country. But he is even more loyal to his shareholders. He will do what is best for his company, even that means to short on the country's currency).
NYSE (NYX) and AX merger has completed. The stock has been there for a year and all of sudden the name is changed and people want to buy it... It is crazy that NYX rose 24% on the first day of trading with 20 million shares (that is 1/3 of the company). It is a merger, not an IPO. But people treated it as a hot IPO. It rose to become my top holding now (~5%). Although I made some money, I am not happy about the irrationality. The high valuation of NYX also make other exchanges more expensive. London Stock Exchange turned down a bid from Nasdaq
today, citing not giving it enough valuation. This could become the next exchange bubble if you are interested in bubbles.
I hope you enjoy Mr Buffett's latest commentary. I like the paragraph on CEO pay and the Gotrock family. I share a similar view on CEO pay although you need to face the fact that it is not going to change soon, especially in those lousy companies, which high pay only accelerates the fall. CEO is very similar to the money manager on Wall Street, their first priority is to make money out of the company and shareholders, the second priority (if any) is to bring value to the
table. That is why I insist a fatpitch approach, which I prefer to invest in companies where large major investors is present. This will somewhat eliminate the conflict of interest between management and shareholders. (Remember the pure math -- each dollar given out in salary is substracted from the earning on the balance sheet.)
The Gotrock story is particularly alarming. I have studies hedge funds lately and I have been puzzled how can hedge funds (as benchmark shows) bring any value to investors if they charge 20% fee. Buffett expounded it very well. There is no way that hedge funds as a whole can outperform common stocks as a whole by a large margin like 20% (remember mutual fund managers charge about 1-2%). In order to gain such large advantage, hedge funds have to be highly leveraged, which lead to a very short life span of 3 years. That is, they will
outperform for a few years and take your 20% incentive pay. All of sudden, the fund will collapse during a trend reversal and they just close the fund and walk away. Sorry, you have lost ~100%. This is the fameous saying, "No matter how much your asset is, it multiplied by zero is still zero." Typical fund managers are not interested in going through the hard time with you because they do not make any money if the return is negative. They whould just dump the
fund and go establish a new fund. What are you going to do here?
And I also notice the largest sector of hedge funds is still in the stock market (long/short equity). Therefore, it is not very convincing to me, by having the ability to short and use option, the hedge funds can do much better than mutual funds. If it is so easy to do, why not common stock companies do that? Then that advantage will be reflected on the long side as well. About
leverage, companies use leverage already (bonds). The fact that fund managers use leverage is saying CEO does not take enough risk. Why not the borrowing implemented at the company level, instead of fund level? (It is less expensive). Long/short eliminates the market risk, and the performance is solely dependent on the fund managers choice. But it also eliminates the growth
of the market, which by far has been recognized as the only long-term driver of capital growth. Sometimes, I do not understand why one wants to eliminate the market (risk). Bear market... yes. But not bull market. And SP500 is a long-term bull.
My axiom is, Let those managers who know how to make money do their job. Don't try to become the manager of those CEOs. Become their partner. (Buffett uses "partner" if you ever notice.) All you need to do is to find out who are the good guys and stick with them. Leave the bad guys alone. I am not interested in shorting them, nor timing them (option).
--Steve
Speaking of Google, it has been quite volatile lately. The market is correcting this week, especially on the small-cap side, which drags down my portfolio by 2-3%. The large-cap shakes but did not drop too much. There are a lot of talks about the interest rate. And the fact that Berkshire is buying foreign stocks is making people uneasy about the fate of US stock market in light of large trade deficit (Buffett is patriotic about his country. But he is even more loyal to his shareholders. He will do what is best for his company, even that means to short on the country's currency).
NYSE (NYX) and AX merger has completed. The stock has been there for a year and all of sudden the name is changed and people want to buy it... It is crazy that NYX rose 24% on the first day of trading with 20 million shares (that is 1/3 of the company). It is a merger, not an IPO. But people treated it as a hot IPO. It rose to become my top holding now (~5%). Although I made some money, I am not happy about the irrationality. The high valuation of NYX also make other exchanges more expensive. London Stock Exchange turned down a bid from Nasdaq
today, citing not giving it enough valuation. This could become the next exchange bubble if you are interested in bubbles.
I hope you enjoy Mr Buffett's latest commentary. I like the paragraph on CEO pay and the Gotrock family. I share a similar view on CEO pay although you need to face the fact that it is not going to change soon, especially in those lousy companies, which high pay only accelerates the fall. CEO is very similar to the money manager on Wall Street, their first priority is to make money out of the company and shareholders, the second priority (if any) is to bring value to the
table. That is why I insist a fatpitch approach, which I prefer to invest in companies where large major investors is present. This will somewhat eliminate the conflict of interest between management and shareholders. (Remember the pure math -- each dollar given out in salary is substracted from the earning on the balance sheet.)
The Gotrock story is particularly alarming. I have studies hedge funds lately and I have been puzzled how can hedge funds (as benchmark shows) bring any value to investors if they charge 20% fee. Buffett expounded it very well. There is no way that hedge funds as a whole can outperform common stocks as a whole by a large margin like 20% (remember mutual fund managers charge about 1-2%). In order to gain such large advantage, hedge funds have to be highly leveraged, which lead to a very short life span of 3 years. That is, they will
outperform for a few years and take your 20% incentive pay. All of sudden, the fund will collapse during a trend reversal and they just close the fund and walk away. Sorry, you have lost ~100%. This is the fameous saying, "No matter how much your asset is, it multiplied by zero is still zero." Typical fund managers are not interested in going through the hard time with you because they do not make any money if the return is negative. They whould just dump the
fund and go establish a new fund. What are you going to do here?
And I also notice the largest sector of hedge funds is still in the stock market (long/short equity). Therefore, it is not very convincing to me, by having the ability to short and use option, the hedge funds can do much better than mutual funds. If it is so easy to do, why not common stock companies do that? Then that advantage will be reflected on the long side as well. About
leverage, companies use leverage already (bonds). The fact that fund managers use leverage is saying CEO does not take enough risk. Why not the borrowing implemented at the company level, instead of fund level? (It is less expensive). Long/short eliminates the market risk, and the performance is solely dependent on the fund managers choice. But it also eliminates the growth
of the market, which by far has been recognized as the only long-term driver of capital growth. Sometimes, I do not understand why one wants to eliminate the market (risk). Bear market... yes. But not bull market. And SP500 is a long-term bull.
My axiom is, Let those managers who know how to make money do their job. Don't try to become the manager of those CEOs. Become their partner. (Buffett uses "partner" if you ever notice.) All you need to do is to find out who are the good guys and stick with them. Leave the bad guys alone. I am not interested in shorting them, nor timing them (option).
--Steve
posted by Steve at 5:49 PM
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