Monday, November 16, 2015

Do Nothing

Leo Tolstoy

A "do nothing" gets a bad rap in a busy bee world obsessed with constant updates, feedback, postings…a proverbial deluge of activity. The reality is, it a takes a lot of effort to do nothing.

Long-time, and long-term, financial farmers will appreciate and validate the soundness of this theory. One of the great modern philosophers of our time was Yogi Berra who had innumerable "yogisms" over the years. One of the best? "You can observe a lot by watching."

For those readers lucky enough to have read Tolstoy's masterpiece "War and Peace," the value of doing nothing is often featured as a prominent theme when faced with making a decision without enough data or confidence. "When in doubt, do nothing."

Finally, one of my favorite trading books of all time is Reminiscences of a Stock Operator which is a loosely veiled biography of the stock trader Jesse Livermore, who throughout his career had many massive ups and downs, is quoted as saying that he made most of his money by "sitting." That is to say, he made his move into an equity position and waited. And waited.

It takes a lot of effort to do nothing; there are multiple temptations, earnings releases, perceived opportunity costs, and yet to those who wish to Invest Like A Farmer, to "do nothing" is something indeed.

Sunday, November 15, 2015

The Startup IPO vs. The Established

In this land of amber waves of grain, one look at the above chart and it is obvious; investors should plant all their money into IPOs rather than established companies…or should they? Hmmm…I think financial farmers know a thing or two about what REALLY constitutes a viable business. Is an established company going public or has a company been established to go public? Those are two different things indeed; one is wheat, and the other chaff.

Established companies going public typically have significant track records of EARNINGS and increasing revenues. They may have been in business for years, if not decades. They have the three "Cs" locked up; cash, competence, and clients. This actually is a business that generates positive cash flow, has barriers to entry, and a validated business model. Many investors consider them boring businesses.

The flip side of this IPO coin, however, is the company with a limited track record, possibly increasing revenue (but no profits), and concentrated ownership with shocking compensation numbers. They often have complex business models with "new" metrics outside of GAAP (Generally Accepted Accounting Principles.) They are generally NOT considered boring by any means; indeed they are often labeled "disruptive."

These are two different scenarios indeed, and if you separate the proverbial wheat from the chaff, financial farmers will find that the former typically are actually established companies making a debut onto the public markets, while the latter are in fact dumping grounds to get founders, VCs, and banks paid on the backs of retail investors.

Make sure you're buying wheat, and not the chaff, as more and more companies come to market due diligence is essential.

Monday, November 9, 2015

Traditional Recipe for Disaster

As Thanksgiving rapidly approaches, I thought I would share a recipe I was given long ago. As I transitioned from Middle School to High School I was entrusted with this hardy document. Today I'd like to share it with you in the hopes that my fellow financial farmers make sure this recipe never makes it to their tables for any type of celebratory dinner.

No doubt readers of this prestigious blog also read lesser publications like the Wall Street Journal or Barron's that have featured in recent days numerous hedge fund meltdowns, all of them seemingly following the Traditional Recipe for Disaster to a tee; troubling given the immense asset bases they are entrusted with and also kind of odd given that a hedge fund by definition should have a HEDGE against the very position(s) they are long. (But what do I know, I'm just a lowly financial farmer investing in boring industries that pay me consistent dividends, have strong left to right charts, and I'm knowingly biased towards companies that report GAAP earnings.)

So download, print, and post this recipe somewhere you can enjoy the year-round; it's never to early to learn what can destroy your financial farm!

Tuesday, November 3, 2015

Pay Yourself First

One of the most challenging aspects of being a financial farmer is cashflow; that monthly ritual of deciding who gets what from your till. 

Pay yourself first. The reason for this is both mathematical and psychological; by paying yourself first you are entering on the leading edge (front) of the compounding cycle verses at a later, disadvantageous time. All things being equal, "now" is better than "later" regarding the time value of money.

Psychologically, as financial farmers we can usually justify paying other expense before ourselves, but that expense can usually be met somehow. We often justify waiting for saving or investing in our financial farm because it doesn't rank high on the priority list. That is a mistake. Pay yourself first, otherwise your expenses take on a higher compounding priority than your survival.

Finally, by paying yourself first you also are imposing a scarcity of resources which in reality mirrors the challenges of life. Running a successful financial farm involves feeding a lot of mouths, fixing equipment, and spending funds on a variety of unanticipated bills. The least you can do is pay yourself first; it will ultimately prove to be the resource which carries the day down the line.