I’m back!
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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Mark Cuban
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.
Portfolio Wreckage
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.
Dividend Stocks
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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Tech Stocks
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 dunno.
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.
Cash
Sigh
<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.
Short positions
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.
Mission accomplished!
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!
Great post. While I do think having money available for a dip is good, I think he takes it to an extreme. He’s actually been saying these things for years and the market is still going. But like you said, maybe he knows something we don’t!
Yeah, who knows what he knows (or doesn’t know). Thanks for commenting Steve.
I happened to see the interview live yesterday. Cuban mentioned he was long Amazon and Netflix, but glossed over the names of his other positions. Cuban has a huge ego. Is it possible Cuban hopes his fans will go buy those 2 stocks, and help inflate their price, so he can sell?
It could be inspired by the Elon Musk tweet caused crazy moves in Tesla a few days earlier.
Good luck on the exam.
Ha ha, good theory on the stock picks! I like it. And as always, I appreciate your time in visiting Mr J
I also do not understand why he shorting anything in this bull market. A billionaire keeping some cash isn’t a bad idea cause they can buy a dip or crash better than a middle class person. Look at warren buffets cash position in BRK. It’s almost like all billionaires only buy individuals and never the index. I hold 2-3% of my portfolio in Visa which has turned out outperforming the index. Will it continue? Probably not, but I’ve been watching this stock since graduating high school and missed out on a lot by opting for SPX and Total Market Index Funds starting out.
Thanks for dropping by Malik!
I’m glad his preposterous strategy spurred you to post this. You are such a gifted writer, halfway through I found myself asking, “why can’t I write this well?” Yeah, I know, lack of talent, but that isn’t important. Great post and yeah, what’s he thinking? Offers hope that all of us must be smart enough to become crazy rich.
Thanks for the kind words! I think a lot of writing is simply practice and just doing it. Just try and put down on the page what you would like to read in a way that you would like to read it. The chances are that others will similarly like it. Then over time you start to find your own voice. That’s what I’ve found.
I was equally taken back by Mark’s recent quote on his “approach” to investing. He definitely comes off as a guy who has a whole bunch of play money, but doesn’t really need to be in the market to grow his nest egg. It comes off as a pompous rich guy who will ride the coattails of Bezos as far as it will take him, and forgot everyone else. And also a guy who also hates the current administration and therefore has an irrational fear of a crash.
I think if you assembled his ‘portfolio’ back in a high school investing club, you’d be laughed out of the room or asked to leave. And if you were doing it for a graded assignment, you’d be lucky to earn a D+.
*forget* everyone else. excuse the typo.
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Two interesting things to note:
1. Charlie Munger has mentioned not caring about diversity if you find great companies at great prices
2. Index funds are still buying individual stocks, just in small doses based on what the index has weighed them. Yes the market itself rises, but I don’t see anything wrong with having some of your portfolio in indexes, while you weigh more into specific stocks you find more valuable or buy when there is a dip.
Overall general investors should rely on index funds, but they too have some of their own problems since so many people are using them these days. The loss of using money to vote for a company that you believe is doing well and benefitting society is one that shines. Either way we are always glad to hear people are investing to grow their nest eggs :).
Outcomes matter. Cuban’s high-risk approach has worked for him and that’s why he’s where he is and others are writing blog-posts about how to save money with Costco sales.
I work with some folks who can’t stomach ANY market exposure and just buy real estate and collectibles, both of which would my own guts churn.
To each their own, but Mark’s track record and existing holdings are such that I’m sure he could get wiped out in his AMZN and NFLX positions and it STILL WOULD NOT impact his lifestyle.
“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.”
just so I understand this. The equity manager has done their research and came up with just 20 companies they feel are worth investing in. But the risk department wants to reduce the risk to the portfolio by going out and buying stocks that the equity manager didn’t think were worth buying in the first place? Isn’t that more risky?
Someone on here mentioned Charlie Munger. I think it was Buffet that said, “diversification is for people who don’t know what they are doing” if you do your research and you only come up with a handleful of companies that you think are worth investing in, why would you go out and invest in other companies just to diversify?
“Companies that pay dividends are not investing the money in their business. They are likely not growing”
Have to disagree here. MSFT, AAPL, just to name a few pay dividends and invest money back in their company. They have to. If you buy non paying dividend stocks, you at some point have to sell to capture your gains. You could buy a stock at $2 a share, and in 5 years it goes to $100, than in year 10, it’s back to $2 a share. Over 10 years you have nothing to show for it. But if they were paying dividends, you would have been paid 10 years worth of dividends. You would have something to show for it.
I think the hardest part of investing in stocks is, when to buy, and when to sell. Buying good quality companies that pay dividends, and raise their dividends each year, takes out the selling part.
I did enjoy your article, and I appreciate you sharing your thoughts.
There are a few things missing from this. There’s no mention of what percent of his network is in these few stocks, shorts, and cash. If this is 90% of his net worth, then yes, there is a problem with his strategy. If it’s only 10% of his net worth, the points you’re making are valid but don’t really have drastic effects on Cuban given his remaining asset base. Additionally, the article seems to live in a vacuum where Cuban doesn’t own an NBA team, real estate, or various interests in private businesses. This specific piece of his portfolio may not be significantly diversified, but when taken with his other assets, he may be on the right track.
If you follow Mark Cuban, he’s never been one to advocate investing in the stock market. His advice always has driven investors crazy. He’s preached holding cash for many years now. I am surprised he owns any stocks at all. Remember, he didn’t make his money like most of us through long term buy and hold investing in stocks and mutual funds. He made it by creating and selling his businesses for large amounts of cash (or stock in the cash of Yahoo that he quickly sold to convert to cash) so I would never ask him for investing advice. Business advice? Absolutely.
Respectfully, I think you are missing some of the point.
Obviously Mark’s approach isn’t for everyone. It might, perhaps, be appropriate for someone like him who is ALREADY RICH. The standards you apply to critique his approach and advocate for other approaches is irrelevant to him. He doesn’t need or care about ‘growing his capital’ or ‘de-risking through diversity’.
He doesn’t care about what you or 99% or average public market investors care about.
Now, I’m not a huge fan of his specific ideas and choices either. But I understand them. The reason I understand them is because I’m ALSO RICH.
Not Mark Cuban rich by a long short, but I can understand it.
When you are rich, use you public markets to create income and enhance your wealth, not create it. More specifically, I would say you invest to: earn incomes, create a few explosive upside opportunities that might pay back disproportionately, and manage your risk. Since a rich person’s public market investments are typically only a portion of their wealth, they can do whatever they want really. It doesn’t matter to them the same way it matters to you.
That is what Mark is trying to do. I’m not saying he’s done optimally, but that is his approach, love it or hate it.
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That’s some strong opinions on both stocks and MC.
Although I have not followed him anytime for stock investment portfolio designing, I do understand the pitfalls of holding to a lazy stock that has been bearish for months or even weeks. I have also heard that his tactics are slightly bullshit, but then again there’s no right or wrong way even if you hate him or someone similar.
Welcome back! Cuban is playing a poker hand strategy, or a game theory strategy, not an investing strategy. You could have bought AMZN in 1998 for 5 bux. It has risen to 1800 bux a 36000% increase. At 1800 bux what’s the worst that can happen? Let’s say it falls in half, 18000% increase. falls by 75%, 9000% increase. It’s not going to 9000% increase over night, you have plenty of time to take profit. It will likely never go to to 9000%. AMZN is a market disrupter. It’s premium is based on creative destruction not typical fundamentals. It’s Conan the destroyer. In a game it’s good to be Conan. NFLX. In 2003 you could buy NFLX for a buck. Today 350 bux a 35000% increase. It loses half? 1750% increase, half again? 8000% increase, cry me a river! Once again there is a lot of time between 36000 and 8000. What can you do on the way down beside sell it? You can short it. You’re short can cover a huge part of your “loss” which is actually a just a smaller gain anyway. Again NFLX is a disrupter. Creative destruction at it’s finest. In 2003 Block Buster was the rage, but then broad band happened and Block Buster’s business model failed. You could have owned Block Buster. Block Buster IPO’d in 1999 at 15. It went to 31, today it’s worth .005. Block Busters biz model was a buggy whip, too much overhead NOT a disrupter, just another brick and mortar business model. BTC is the same thing a disrupter. I bet Cuban owns some.
It’s like playing Monoply when you get far out ahead it’s hard to lose if you apply risk management. This is not an absurd trading model. George Soros made his billions trading in this fashion. The commodities market is all about this kind of trading. You balance with leverage and cash, systemic trades and a clear understanding of risk. The trades are done by robot/AI Robots aren’t risk averse and emotional like humans. They stick to their knitting. They also learn. An AI learns by narrowing the SD. When you narrow the SD the likelihood of success increases A LOT. AI’s win by a ton of base hits. Enough base hits creams home runs over time. I’m not saying be like Mark, the guy is insufferable but it’s worth understanding his strategy because that is the strategy of the future. Creative disruption. Your next trading partner is going to be an AI. It’s advantage? It don’t care. Good luck on the test