Well not really.
After a blogging hiatus I’m coming out of temporary blogging early-retirement to rail against some of the most cretinous investment advice I have ever come across. But first…
I’ve been laying low from blogging over the last few months due to work pressures and the dismal news that I have to take a professional exam. FINRA (Financial Industry Regulatory Authority) requires that I now take a big-ass exam in order to continue giving investment advice to large institutions (like corporate pension funds). It’s an insane amount of work and features such gems as:
Rule G-13: Dealers can publish quotations only for bona fide bids or offers. Nominal quotes (informational only) are permissible if identified as such. No dealer participating in a joint account may distribute a quotation indicating more than one market for that security.
There is over 700 pages of this stuff and the exam will be six hours. So spare a thought for me, and light a candle.
As per standard exam technique; this evening I have fed the dog, walked the dog, cleaned the fridge, unloaded and loaded the dishwasher, cooked dinner and now started this blog post. All in an effort to avoid doing any study.
I really should not be blogging and should be devoting every spare minute to study, but a CNBC article on Mark Cuban’s investment strategy caught my eye and caused my blood pressure to rise.
Have you read the important notes before proceeding? It’s a condition of the blog.
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The offending article can be summarized with one particularly objectionable paragraph:
“I’m down to maybe four dividend-owning stocks, two shorts, and Amazon and Netflix. I’ve got a whole lot of cash on the sidelines,” Cuban said on “Fast Money Halftime Report.” “[I’m] ready, willing and able if something happens” to invest.
Oh. Dear. God.
Where to start on this? Other than – “Don’t”!
Let’s pick apart the wreckage of this portfolio.
Firstly he has 9 separate positions, including cash. This is a very (very) concentrated holding and subject to a lot of idiosyncratic risk and volatility.
As an example, an active equity manager running a highly concentrated portfolio might hold around 20 stocks. These would represent the manager’s best ideas, but even then the manager’s risk department would get a bit antsy and demand more stocks to give the portfolio some balance.
So these are big bets. It’s like putting all your chips on red instead of prowling around the casino and putting small sums on many different games.
Actually we need a better analogy than that. Imagine you had a load of eggs that you needed to transport. And all you had was a single basket… You get it… right?
Mark obviously does not.
Mark holds four dividend stocks and two tech stocks – Amazon and Netflix.
I suspect that by specifying that his particular stocks are dividend paying, he is trying to solicit some kind of admiration for his canny positioning in “safe stocks” to ride out his perceived future economic bumps in the road.
There is nothing wrong with dividend paying stocks. But there is also nothing magic about them. Hold dividend paying stocks, I don’t care. Just don’t tilt 2/3 of your portfolio that way. Companies that pay dividends are not investing the money in their business. They are likely not growing. They might be companies with significant cash reserves and so relatively able to weather a future downturn.
But don’t you think the market doesn’t know that?
The market prices in these factors and so the return expectations change appropriately.
If the market sees a “safe” company with significant cash reserves and a history of stable dividends then the market will price the stock to assume relatively low future returns. You can’t expect the same return for a stable dividend stock as for a go-go stock.
And as rates rise, the lure of bonds start to be relatively attractive to dividend stock holders….
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I wrote about the outsize impact that tech stocks have on the market – Beware the FANGs of Passive Investing. But Mark is taking it to new levels by having a super-concentrated tech position on top of a super-concentrated equity position.
I’m sure Netflix and Amazon have done great. I don’t follow any single stocks so I wouldn’t know. In fact I just looked, and wow, they have done great!
So they must be a great bet – right?
Or perhaps all the juice is spent and they’ll just bump along?
I don’t have any additional information that the market as a whole does not have. I don’t have any special insights to bring to these stocks other than to observe that my daughter will watch Netflix all day if left unattended. I guess that makes the stock a “buy”, right? (Note that’s not a solicitation to buy a stock. At least not until I pass my FINRA exam!)
My point is that unless you have any special insights into a stock that the market does not have, then you probably should not be making a bet on individual companies.
Now Mark is a well-connected man, and probably has friends who know things. So let’s give him the benefit of the doubt. Perhaps he knows something seriously insightful about these two tech stocks that is telling him these stocks have got a lot of runway left. And he is so confident about this information that he is willing to double and treble-down on this bet and eschew the market as a whole and put all his money there.
Or maybe not.
<Shakes head despairingly>
Why do people feel the need to keep “dry powder”. Did they not read my article? That Dry Powder You Have? (You’re Better off Snorting It)?
Mark is sitting out the current market and will decisively step in when everyone else is panicking and he’ll sweep up a load of tasty bargains. I can only marvel at his skill.
But he obviously did not make his millions from investing.
The S&P500 is up about 6.5% year to date, and over the last five years up over 12.5% a year. That is a serious bull market to sit-out in the expectation that you might suffer the occasional crash.
But we could be charitable here and assume that he needs a load of cash and cannot tolerate short-term volatility. Perhaps he needs the cash to buy a new jet, or a sports team, or a small country, or whatever billionaires buy with their money.
However in my dispiriting research on Mark Cuban’s investment strategies I came across this quote from an interview with Entrepreneur
“The market could go up for years, and you could think you’re well off,” he told Entrepreneur, “and then, in a millisecond with high-frequency trading, a flash crash can take it all away. That’s why you want to have that money in the mattress, that savings, so you’re protected in case something goes wrong.”
So maybe not.
Everything about Mark’s portfolio screams alpha male. Holding a couple of high octane tech stocks, parking cash “on the sidelines” – these are all signaling that this guy knows what he is doing.
But two speculative short positions?
This is the investment equivalent of chasing down an antelope running through Times Square, sitting astride your prey and spitting great bloody gobs of meat at horrified tourists.
This is truly the eat or be eaten of investment positions.
A short position is one that profits if the stock falls, or loses if the stock rises. So Mark will profit if the two stocks he has chosen to ‘short’ go down.
Remember that in general stocks go up. Real economic productivity tends to rise, see the chart below from the Fed.
Yes, there are some bumps from recessions (marked in grey), but in general it’s a pretty steady climb. This is mainly due to increasing industrialization and technology gains along with greater population.
So taking a short position is like King Canute trying to hold back the tide. In the end you will usually lose.
However, again Mark must have some preternatural sense that these two stocks are severely mis-priced. He must know something that we don’t about these two companies; that they are destined for doom.
There is a saying that the market can remain irrational longer than you can remain solvent.
The corollary is that a stock can go up longer than you expect. Just ask the hedge fund manager Bill Ackman who lost a massive amount on Herbalife being a pyramid scheme. Instead the stock has risen 50% and destroyed Ackman’s bet.
Short position speculations are really for professionals. If you are a fulltime long/short hedge fund, then ok. If you are Joe Schmo, then no.
So there you have it. The most heart-breakingly awful investment portfolio peddled as advice from an ‘expert’. It’s not. It really is not. Please don’t do it.
Wow! In my desire to avoid studying I have managed to write 1,500 words on the appalling wreck of Mark Cuban’s investment advice. I feel fulfilled, but slightly soiled.
Thanks, as always, for reading. Apologies for the sparseness of posting in recent months, but I hope you will understand. And thanks to those who wrote a number of very kind emails – you’re the best!