Go Low Sweet Balance Sheet, No Alpha and Psychology
Is this the bounce you should be selling/shorting into? Today is looking like a strong up day and that should take the XJO to the left shoulder of a potential head and shoulders top. Can the world spend itself out of debt? The G20 think so.
I know it’s only fours months since I posted this, but there’s lots of new readers, nah just joking, there still only the three of you 
Cameron posted this at TMF.
I had this discussion with a hedge fund manager as part of an interview.
It was a strange interview, but I explained to him how I typically look for good balance sheets. I explained a specific stock that I liked that had $6 per share in cash.
He said, “That’s too bad.” I said, “huh?” He said, “Well if you were investing $5m in a $25 stock with $6 per share in cash, you could buy 20% more shares if they only had $1 per share in cash with the same $5m of capital.” And I said, “but the balance sheet is pretty.” And he said, “well if they’re really generating as much cash as you say they are, then they have no need to have a pretty balance sheet. They’re likely to do something stupid with that cash like overpay for a crappy company that the CEO’s brother owns.”
Three great points; another reason to concentrate on EV instead of market cap, cash is more a risk than an asset and show us the money. Stop hording our cash!
Graham recommending putting the dividend payout to a vote each year and management having to justify any capital expenditures. I implemented capital investment management in, gosh at least a dozen companies, and truth be told not one really had a tight grasp of or even a good process for managing their major expenditures. Even something as simple as a helicopter view of all their projects ranged from difficult to almost impossible to obtain.
I kid you not, there is not a culture of business within the heart of most businesses. There is a culture of working and self interest.
No Alpha
As I’m starting a Masters of Applied Finance in 2010 people keep asking me what I’m going to do after. I get blank looks when I say generating alpha. Called a tosser when I reply ‘I enjoy the ride and achieve more by focusing on the present’. Bored looks soon after I start listing the paths the Masters could take me down.
I think analysts/PMs are set up to fail (in the sense of generating alpha for clients) in most big investment management shops, mutual funds or hedge funds, but if you are willing to treat this as a job and punch the timecard like many, you will have a “successful” career without adding any alpha. via TMF:gocanucks
I doubt whether the author, gocanucks, would ever treat his work as a job. He’s getting well paid to do what he loves. Sadly, if common wisdom is to be believed no alpha still gets you admission into top quartile performance! i.e. 75% of funds under perform their index.
Psychology
I think it was Jeff Saut who said the stock market is human psychology, fear and greed, ONLY LOOSELY CONNECTED TO THE BUSINESS CYCLE.
The Contrary Investor thinks it’s credit cycles rather than business cycles. As always I say go beyond your monotone and embrace high quality surround sound. The market is incredibly complex with myriad inputs; business cycles, credit cycles, fear and greed cycles, everything cycles and interconnects. I’m a simple guy so my primary lens is fear and greed. The greed cycle has regained control. I sell greed.
This post has been bought to you courtesy of I’m glad I’m here and not there!
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I did an MAF at Maquarie, Sydney about a decade ago. I can say in retrospect that it didn’t help my investing at all. Income wise, I make a lot more now, but it’s not related to that degree in any way. So for me, it wasn’t a worthwhile investment. If you want to transition to finance then it might be useful. But why would you want to do that ?
The thing that helped most to boost my income was to work for myself.
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