Tag Archives: momentum

Review – Professional Investor Rules (#investing, @harrimanhouse, #WallSt)

Professional Investor Rules: Top Investors Reveal The Secrets of Their Success (buy on Amazon.com)

by various, introduction by Jonathan Davis, published 2013

A “valueprax” review always serves two purposes: to inform the reader, and to remind the writer. Find more reviews by visiting the Virtual Library. Please note, I received a copy of this book for review from the publisher, Harriman House, on a complimentary basis.

The many faces of money management

A 1948 Academy Award-winning film popularized the slogan “There are eight million stories in the Naked City”, and after reading the eclectic “Professional Investor Rules”, I’m beginning to think there are almost as many stories about how to manage money properly.

Value and growth, momentum and macro-geography, market-timing and voodoo superstition; all these major investment strategies and themes are on display, and many more to boot, and all come bearing their own often-tortured metaphors to convey their point.

What’s more, it seems the pacing and style of the book change along with the advice-giver: while some of the entries follow the books eponymous “rule” format for organizing their thoughts, others involve myths, lengthy prose paragraph-laden essays and headings with sub-headings. Some have charts, and some do not.

One things consistent, at least– all the advisors profiled contradict one another at some point or other, and some even manage to contradict themselves in their own sections.

But it’s got this going for it, which is nice

Those are some of the glaring cons to the book. It’s not entirely without it’s pros, however.

One of the things I liked about the book is, ironically, also one of its flaws– the great variety of personas. They run the gamut from the known to the unknown, the mainstream to the contrarian, the sell-side to the buy-side. This book is published by a UK outfit (Harriman House), which means many of the professional soothsayers will be unfamiliar to US audiences, but it also means you get a selection of icons from the Commonwealth and former British territories (such as Hong Kong and other Asia-based managers) that you’d likely never hear about on CNBC or other American publishing sources.

Following this contrarian inversion theme, I liked that all the phony  fuzzy thinkers were right there next to the sharper pencils because it made their baloney that much more rotten. I think this is a great service for an uninformed investor picking up this book. If they had come across some of the more foppish money dandies on their own, elsewhere, they’d be liable to get taken in and swindled like the thousands of others who sustain such frauds. But at least in this case you’ve got a go-go glamour guy saying no price is too high for a growing company right next to a value guy warning that that way lies the path to certain, eventual doom.

And maybe this isn’t a big deal to others but I like the packaging on this hardcover edition I’ve got– it’s truly a HANDy size, the fonts and color scheme are modern and eye-catching and the anecdotal organization of the book makes it easy to pick up and put down without feeling too upset over whether or not you’ve got the time to commit to a serious read right then.

Fave five

Here are five of my favorite ideas from the book, along with the person(s) who said it:

  1. At any one time, a few parts of your portfolio will be doing terribly… focus on the performance of the portfolio as a whole (William Bernstein, Efficient Frontier Advisors)
  2. Far more companies have failed than succeeded (Marc Faber, The Gloom, Boom and Doom Report)
  3. Fight the consensus, not the fundamentals (Max King, Investec Asset Management)
  4. When someone says ‘it’s not about the money,’ it’s about the money (H.L. Mencken… consequently not actually a money manager and not alive, but it was quoted in one of the in-betweens spacing out the chapters)
  5. Academics never rescind papers and never get fired (Robin Pabrook and Lee King Fuei, Schroeders Fund, Asia)

Conclusion

Who is this book for? Accomplished, well-read pro-am investors will find nothing new here and much they disagree with, so I’d recommend such readers stay away. Someone completely new to investing and the money management industry might find the book valuable as a current snapshot of the gamut of strategic strains present in the money management industry.

Overall, while “Professional Investor Rules” has its moments, overall I came away less enthused than I did with Harriman House’s earlier offering, Free Capital. For anyone looking to learn investing techniques from accomplished, self-made millionaires, that’s the book I’d point them to– the advice therein is worth multiples of that being given by the mass of asset gathering managers of OPM contained in this one.

Review – Billion Dollar Lessons (#failure, #strategy)

Billion Dollar Lessons (buy on Amazon.com)

by Paul B. Carroll and Chunka Mui, published 2008, 2009

A “valueprax” review always serves two purposes: to inform the reader, and to remind the writer.

The seven deadly business sins

The authors of Billion Dollar Lessons identified seven “failure patterns” that typify the path to downfall of most businesses:

  1. synergy; overestimating the cost savings or the profit-enhancement of synergy
  2. aggressive accounting; becoming addicted to creative accounting practices which eventually invites outright fraud to keep up with
  3. rollup acquisitions; assuming the whole is greater than the sum of the parts
  4. blindness to catastrophe; dancing on the deck of the Titanic, ignoring that the ship is sinking
  5. uneconomic adjacency acquisitions; assuming there are benefits to combining similar businesses which are actually dissimilar
  6. disruptive technology; committing oneself to the wrong technology and betting it all
  7. consolidation indigestion; assuming that consolidation is always the right answer and that it solves all corporate problems

In Part I, each chapter addresses one of these failure patterns, explaining the principles and problems of the failure pattern, giving numerous real-world examples of the pattern in action and finishing with a list of tough questions for managers and shareholders/board members to ask before pursuing one of the potentially flawed strategies mentioned.

In Part II, the authors offer a behavioral/psychological explanation for why companies and individuals routinely make these same mistakes, basing their assertions on the idea of “human universals.” The idea is that being aware of them is not enough– one must also put into place processes and self-check systems that are independent of any one person’s self-honesty (or lack thereof) to allow a company to essentially “check itself before it wrecks itself.” The most important corporate institution suggested is the Devil’s Advocate.

Illusions of synergy

According to the text,

A McKinsey study of 124 mergers found that only 30 percent generated synergies on the revenue side that were even close to what the acquirer had predicted… Some 60 percent of the cases met the forecasts on cost synergies

In general, there are three main reasons why synergy strategies fail:

  1. synergy may exist only in the minds of strategists, not in the minds of customers
  2. companies typically overpay for an acquisition, meaning the benefits from synergies realized are not enough to overcome the initial investment cost
  3. clashes of culture, skills or systems often develop following an acquisition, killing the potential for synergies

Double-check your synergy strategy by asking yourself the following tough questions:

  • Do you need to buy a company to get the synergies, or could you just form a partnership?
  • How do you know that customers will flock to a new product, service or sales channel?
  • If you think you’re going to improve customer service, then how exactly will that look from the customer’s perspective?
  • What could competitors do to hurt you, especially during the transition while you integrate the company you’re taking over?
  • Who in the combined organization will resist the attempts for revenue synergies? Whose compensation will be hurt?
  • What are the chances you’re right about revenue synergies?
  • What percent of your customer base might go elsewhere following this corporate change?
  • Acquisition cost:
    • What is the target company worth on a stand-alone basis?
    • What would the business be worth if you achieved all synergies mapped out?
    • What would the business be worth if you discounted the synergies, based on the fact that few companies achieve all the synergies planned?

Faulty financial engineering

Many companies find themselves in hot water because they believe their own creative accounting too much. They let sophisticated financial legerdemain conceal the uneconomic nature or riskiness of their business. Managers often become addicted to this accounting, finding themselves stuck on the “treadmill of expectations” and give in to the temptation to commit outright fraud to keep it going, destroying the business in the process.

There are four primary risks to financial engineering strategies:

  1. encourage flawed financial products which are attractive to customers in the short-term but expose the seller to incommensurate risk of failure over time
  2. hopelessly optimistic levels of leverage
  3. aggressive and unsustainable financial reporting
  4. positive feedback loops which cause the system to implode

Double-check your financial engineering strategy by asking yourself the following tough questions:

  • Can the strategy withstand sunshine? (Would you be embarrassed if it was widely known and understood?)
  • Can the strategy withstand storms? (Is it fragile and susceptible to being tipped over by less-than-perfect conditions?)
  • Will that accounting generate positive cash flow or just make the profit-and-loss statement look better?
  • Does the strategy make any sense? (ex, does it make sense to offer long-term financing on short-term depreciating assets?)
  • When does it stop?

Deflated rollups

According to business research,

more than two-thirds of rollups fail to create any value for investors

The rollup strategy is initially attractive because

the concept makes sense, growth is unbelievable, and problems haven’t surfaced yet

But they rely a lot on positive momentum to succeed because

Rollups have to keep growing by leaps and bounds, or investors disappear, and the financing for the rollup goes with them

There are four major risks to a rollup strategy:

  1. rollups often wind up with diseconomies of scale
  2. they require an unsustainably fast rate of acquisition
  3. the acquiring company doesn’t allow for tough times in their calculations
  4. companies assume they’ll get the benefits of both decentralization and integration, when in reality they must choose between one or the other

Double-check your rollup strategy by asking yourself the following tough questions:

  • Will your information systems break down if you increase the size of your business by a large factor?
  • What other systems might break down at the new scale?
  • How much of senior management’s time is going to go to putting out fires, coordinating activities, etc.?
  • How much business will you lose in the short run as competitors use takeover confusion to try to poach business?
  • What regulations might change and how will they affect the business?
  • Will your cost of capital really decline? If so, how much? How do you know?
  • If you think your pricing power will increase, why?
  • What will you have to spend, both in time and money, to get the efficiencies you expect from a takeover?
  • Who has a vested interest in keeping you from achieving all the efficiencies you expect?
  • How much will prices of acquisitions rise over time, as your rollup intentions become clear?
  • If you’re financing with debt, just how big a hit to your business can you withstand? What if you take a hit to cash flow for a period of years? If you’re buying with stock, what do you do if your stock price falls by 50%?
  • How do you prevent people from cooking the books when the bad times come?
  • Have you discounted the gains you expect to get from integration?
  • How much loss of revenue are you assuming if you replace local managers and systems?
  • What is the end game? How big do you need to get?
  • How slowly can you go?
  • Do you have to be a national rollup, or would a regional one make sense? Can you at least start as a regional rollup and work out the kinks?

Staying the (misguided) course

Businesses often adhere to a failed strategy or a dying technology because they either can’t envision how they’d adapt or can’t admit that they’re on a failed business course.

The three main risks to staying the course are:

  1. tend to see the future as a variant of the present
  2. tend to consider whether to adopt a new technology or business practice based on how the economics compare with those of the existing business
  3. tend not to consider all their options

Double-check your core strategy by asking yourself the following tough questions:

  • Are you considering all your options?
  • Declining business model, based upon Michael Porter’s five forces:
    • does your industry have a favorable structure for decline, where, like steel, it will provide profits even as it declines? Or, is your industry like traditional photography, which would mostly disappear once digital took hold?
    • can you compete successfully for the remaining demand, like Kodak, with a great brand? Or do you not only lack a brand but also lack other assets, such as a low cost structure?

Misjudged adjacencies

Adjacent market expansion entails attempting to sell new products to existing customers, or existing products to new customers, by building on a core organizational strength to expand the business in a significant way.

But sometimes, businesses expand into markets that seem adjacent, but are not– just because your branded-sunglasses customers like your sunglasses brand, doesn’t mean they’ll necessarily like it on their sportscar tires, or on their surfboards, because you imagine your market is “sport lifestyle.”

There are four fundamental risks to an adjacency strategy to be aware of:

  1. the move is driven more by a change in a company’s core business rather than by some great opportunity in the adjacent market
  2. lack of expertise in the adjacent market, causing misjudgment of acquisitions and mismanagement of the competitive challenges of the new market
  3. overestimation of the strengths of importance of core business capabilities in the new market
  4. overestimation of the hold on customers, creating expectations of cross-selling or up-selling that won’t materialize

Double-check your adjacencies strategy by asking yourself the following tough questions:

  • How do the sales channels differ in the new market?
  • How do the customers differ?
  • How do the products differ?
  • Are the regulatory environments differ?
  • Do you have at least a 30% advantage on costs before entering the new market?
  • What if the economy goes seriously south?
  • What if the sector you’re moving into goes into decline?
  • What if your expectations about opportunities for efficiency and revenue growth don’t happen?
  • How much do you have to be off in your estimates of cost savings or revenue increases for the adjacency strategy to be a bad idea?
  • What don’t you know about your new market?
  • What don’t you know about making acquisitions?
  • How many of your acquisitions will be lemons?
  • Will your customers really follow you into your new market?

Fumbling technology

Businesses often bet the farm on a technology that turns out to be nowhere close to as profitable and revolutionary as they initially expect it to. Often, market research is created which suffers from “confirmation bias”.

There are three important technological “laws” to be mindful of, which are often ignored, as well:

  1. Moore’s Law; computer processors double in power every eighteen to twenty-four months
  2. Metcalfe’s Law; the value of a network is proportional to the square of the number of users
  3. Reed’s Law; new members increase a network’s utility even faster in networks that allow arbitrary group formation

There are four major mistakes businesses make when evaluating a technological strategy:

  1. evaluate their offering in isolation, rather than in the context of how alternatives will evolve over time
  2. confuse market research with marketing
  3. false security in competition, believing the presence of rivals equates to a validation of the potential market
  4. design the effort to be a front-loaded gamble instead of developing it piece-by-piece

Double-check your technology strategy by asking yourself the following tough questions:

  • What will your competition look like by the time you get to market? What if you’re six months late? A year?
  • How does your performance trajectory compare with the competition’s?
  • Do your projections incorporate Moore’s Law, for both yourself and your competition?
  • Have you allowed for Metcalfe’s Law and what it says about the relative value of networks? Is Reed’s Law relevant?
  • Is the market real?
  • Do you have to do it all at once? Or can you try things a bit at a time and learn as you go along?

Consolidation blues

Consolidation seems to be a fact of maturing industries. As an industry matures, smaller companies go out of business or are acquired. Most business people figure they want to be the acquirer; in the process, they ignore the possibility that they might be more valuable as a target, or by sitting and doing nothing (neither consolidating, nor selling out).

There are four main issues that tend to muck up consolidation strategies:

  1. you don’t just buy assets as a consolidator, you buy problems
  2. there may be diseconomies of scale
  3. assumption that the customers of the acquired company will be held
  4. may not consider all options (being an acquisition target, doing nothing)

Double-check your consolidation strategy by asking yourself the following tough questions:

  • What systems might fail under the weight of increased size? How much would it cost to fix them? How long would it take? What revenue might be lost in the interim?
  • What relationships might be harmed?
  • What departments are too small, or are for some other reason not up to the task of handling the new size? Which people aren’t up to the task?
  • How much will be lost as people jockey for position in the new organization?
  • How much drag will develop as you try to find efficiencies by standardizing processes?
  • Who will resist change? How effective will they be?
  • What are all the reasons why customers might defect?
  • How does consolidation benefit the customers?
  • What percentage of customers do you think might leave? How much do you think you’ll have to pay to entice these customers to stick around?
  • What are some potential results if you sold out or did nothing, instead of consolidating?

Coda

In summary, the most common problems that result in business failure are:

  • Underestimating the complexity that comes with scale
  • Overstating the increased purchasing power or pricing power or other types of power that come from growing in size (beware of “critical mass” strategies)
  • Overestimating your hold on customers
  • Playing semantic games (any strategy that relies on a turn of phrase is open to challenge)
  • Not considering all the options
  • Overpaying for acquisitions

Avoiding these mistakes: the Devil’s Advocate

How can you avoid these mistakes?

Put in place a process for reviewing the quality of past decisions.

Watch out for cohesive teams who develop the traits of dehumanizing the enemy and thinking they’re incompetent; limiting the number of alternatives they will consider; show even more overconfidence than members would as individuals; create “mind guards” who stomp out dissent.

Probably most important, establish the institution of Devil’s Advocate. Either assign an in-house, permanent DA (who gains experience with each episode, but carries the risk of being labeled as the “naysayer” and ignored) or assign the role on a rotating basis with each new decision (preferable).

The Devil’s Advocate is a powerful tool for avoiding business failure because

More often than not, failure in innovation is rooted in not having asked an important question, rather than having arrived at an incorrect answer

Latest VPX Momentum Research Report: Banco Santander, STRONG BUY ($SAN)

NOTICE!

VPX Momentum Research is out with a new report on one of our favorites, Spanish mega-bank Banco Santander.

Current rating: STRONG BUY

Thesis: If you’ve been a customer of VPX Momentum Research you know we’ve been following this hot stock for some time. With all of the fear and talk of financial armageddon in Europe and Spain recently, the surprising strength of this stock has told us all along that there could be a big breakout in the mix.

Now, it’s here! Today, one of our favorite picks, Banco Santander, SA ($SAN) is up a mind-blowing 1,085% as of this writing– and we think it’s just the beginning. Clearly, this stock has momentum and it’s time to climb on.

At its newest market cap of $668B (that’s nearly 70% of $1,000,000,000,000, or one trillion), Banco Santander has catapulted into the ranks of the world’s largest companies by market cap, taking the position of #1 from $AAPL without even looking back. And with this kind of size, it can gobble up the next 5 largest banks by size as an appetizer. We think there’s a lot of room to run on this one and you should put in your buy order now before you miss out on 2,000% returns.

Enter a buy order anywhere at current prices. For those with a small risk appetite, consider a stop at $65/share, or a trailing stop of 20%.

And tell your friends!

(this post is written entirely for comedic effect and is not an actual research report nor an actual recommendation to buy this stock or any other. it is sad that we live in such a litigious and stupid society that I’d have to cover my ass like this, but there it is, just in case you’re a moron or trigger-happy with the “sue” button)