In Search of the Perfect Investment

Apple will bounce big-time today, but I won’t benefit. Apple reported incredible results last night. It beat on both the top and bottom lines, earning $12.30 per share on $39.2 billion in revenue. Analysts expected $10.02 on top line results of $36.9 billion. iPhone sales fueled the better-than-expected results, as the company sold 35.1 million units against forecasts for 30.5 million.

I should have figured it all out, since iPhones are the only cell phones you see around these days. But, though I observed I didn’t quite figure it. The fact is that I was focused on “risk management,” which is the art and science of cutting your losses.

Years ago, I remember asking one of my money managers (when I still had them) why I still owned a stock that was down 90%? He replied that he felt confident about the stock. But 90% down, I asked?  He said he still felt confident. Later I fired him. You can’t substitute faith for discipline in investing. Discpline in risk management is stop losses. There’s no alternative. You must sell a stock that goes down.

Later when I owned Technology Investor Magazine, we did several studies on what percentage stop loss made the most sense. At that time Investors Business Daily (the newspaper) had an inviolate stop loss rule of 8%. At that time we had a 15% rule. We did innumerable studies on stock movements in the late 1990s/early 2000 that showed categorically that a 15% stop loss would have saved you money. There were, of course, stocks that dropped, then bounced back, making new highs. And on those we would have lost by selling out. But — on balance — the odds were that a 15% stop loss worked. And worked well.

In recent years, the market has become more squirrely — my silly term for volatile. And I’ve tightened my stops. Today I’m tending to favor 8%. Your own number can vary, depending on your stomach for pain and your level of faith in and knowledge about a stock. But the key is that you must have a stop loss rule. You cannot fly blind, without discipline in the stockmarket.

Now to Apple. I had raised my stop loss to 10%. Its high was $644. When it hit 90% (i.e. the 10% stop loss) I figured it made sense to sell. It was plummeting. That price was $579.60. Today, it will trade much, much higher, proving that I’m an idiot, an incompetent stockpicker or just a bad person. I can flagellate myself and really feel bad for how much richer I’d be today if I had had faith. But I won’t because I did stick to my discipline. This one I got wrong. so be it.

Not everything is awful. I’ve been pounding the table for Apple for months in this column. And I made a handsome profit on it when I finally sold it — at the wrong price. C’e la vie.

Will I get back into Apple? Possibly. I’ll watch it today.It is, indeed, an incredible company.  Let’s say it sells for $611. That’s only a P/E of 12.6 times. That’s pretty low for a stock of Apple’s growth.

I love my Apple stuff, especially my iPhone and all the useful new apps P install on it. (More about the latest ones tomorrow.)

Store-based retailing is dead. The Internet and online, especially Amazon, is killing store-based retailing.  So the argument goes. Except it’s not fully true.

Radio Shack has been my biggest winner of late, up 27.1% on my selling it short.  It recently reported a loss and got downgraded. There are some investors, including me, who think it will fall further. How did I pick it?

Think six types of store-based retailers:

1. Stores that sell other companies’ stuff which everyone and their uncle is free is sell also. Best Buy, Barnes and Noble, Borders and Radio Shack are here.

2. Stores that sell other people’s stuff, but at huge discounts. Think Walmart and Costco.

3. Stores that sell their own sperbly designed and made stuff. LuluLemon, Apple. Ethan Allen and Tiffanys are here. Whole Foods is here also.

4. Others that are trying to achieve with branding (i.e. advertising) what they lack in unique product. Target fits in here.

5. Stores that have a huge inventory they attract shoppers simply because of the huge choice. Think Bed, Bath and Beyond.

6. Stores that hang on because of location or long hours. Think your corner all-night deli or local pharmacy.

Radio Shack fits squarely into category 1. It’s even worse than the others who’ve gone before — like Borders and Barnes and Noble. Radio Shack’s inventory is awful, except for batteries. And the batteries are way over-priced. Online battery companies, like Batteries.com, is much cheaper. You’re talking to someone who buys a lot of batteries, but no longer at Radio Shack.

The most important investing article. Please read this engrossing piece.  Send it to your friends. It will teach you more about investing and running a business than a thousand of my columns ever will. As you read this piece, think Apple. Think your own business.

The Creative Monopoly
By David Brooks, the New York Times, April 23, 2012

As a young man, Peter Thiel competed to get into Stanford. Then he competed to get into Stanford Law School. Then he competed to become a clerk for a federal judge. Thiel won all those competitions. But then he competed to get a Supreme Court clerkship.

Thiel lost that one. So instead of being a clerk, he went out and founded PayPal. Then he became an early investor in Facebook and many other celebrated technology firms. Somebody later asked him. “So, aren’t you glad you didn’t get that Supreme Court clerkship?”

The question got Thiel thinking. His thoughts are now incorporated into a course he is teaching in the Stanford Computer Science Department. (A student named Blake Masters posted outstanding notes online, and Thiel has confirmed their accuracy.)

One of his core points is that we tend to confuse capitalism with competition. We tend to think that whoever competes best comes out ahead. In the race to be more competitive, we sometimes confuse what is hard with what is valuable. The intensity of competition becomes a proxy for value.

In fact, Thiel argues, we often shouldn’t seek to be really good competitors. We should seek to be really good monopolists. Instead of being slightly better than everybody else in a crowded and established field, it’s often more valuable to create a new market and totally dominate it. The profit margins are much bigger, and the value to society is often bigger, too.

Now to be clear: When Thiel is talking about a “monopoly,” he isn’t talking about the illegal eliminate-your-rivals kind. He’s talking about doing something so creative that you establish a distinct market, niche and identity. You’ve established a creative monopoly and everybody has to come to you if they want that service, at least for a time.

His lecture points to a provocative possibility: that the competitive spirit capitalism engenders can sometimes inhibit the creativity it requires.

Think about the traits that creative people possess. Creative people don’t follow the crowds; they seek out the blank spots on the map. Creative people wander through faraway and forgotten traditions and then integrate marginal perspectives back to the mainstream. Instead of being fastest around the tracks everybody knows, creative people move adaptively through wildernesses nobody knows.

Now think about the competitive environment that confronts the most fortunate people today and how it undermines those mind-sets.

First, students have to jump through ever-more demanding, preassigned academic hoops. Instead of developing a passion for one subject, they’re rewarded for becoming professional students, getting great grades across all subjects, regardless of their intrinsic interests. Instead of wandering across strange domains, they have to prudentially apportion their time, making productive use of each hour.

Then they move into a ranking system in which the most competitive college, program and employment opportunity is deemed to be the best. There is a status funnel pointing to the most competitive colleges and banks and companies, regardless of their appropriateness.

Then they move into businesses in which the main point is to beat the competition, in which the competitive juices take control and gradually obliterate other goals. I see this in politics all the time. Candidates enter politics wanting to be authentic and change things. But once the candidates enter the campaign, they stop focusing on how to be change-agents. They and their staff spend all their time focusing on beating the other guy. They hone the skills of one-upsmanship. They get engulfed in a tit-for-tat competition to win the news cycle. Instead of being new and authentic, they become artificial mirror opposites of their opponents. Instead of providing the value voters want – change – they become canned tacticians, hoping to eke out a slight win over the other side.

Competition has trumped value-creation. In this and other ways, the competitive arena undermines innovation.

You know somebody has been sucked into the competitive myopia when they start using sports or war metaphors. Sports and war are competitive enterprises. If somebody hits three home runs against you in the top of the inning, your job is to go hit four home runs in the bottom of the inning.

But business, politics, intellectual life and most other realms are not like that. In most realms, if somebody hits three home runs against you in one inning, you have the option of picking up your equipment and inventing a different game. You don’t have to compete; you can invent.

We live in a culture that nurtures competitive skills. And they are necessary: discipline, rigor and reliability. But it’s probably a good idea to try to supplement them with the skills of the creative monopolist: alertness, independence and the ability to reclaim forgotten traditions.

Everybody worries about American competitiveness. That may be the wrong problem. The future of the country will probably be determined by how well Americans can succeed at being monopolists.

The signal from above.
The graveside service just barely finished, when there was a tremendous bolt of lightning, and then a massive clap of thunder.

The old man looked at the pastor and calmly said, ‘Well, she’s there.’

Harry Newton, who’s feeling surprisingly peaceful today, having intellectualized his stupidity with Apple. See above. Remember the objective of this game is not to get rich beyond our wildest dreams. It’s to preserve what few shekels we’ve  earned in all those 24/7 years.