A Canadian on Wall Street

Clive Thompson links to a really interesting study on the high rate of engineering types who become terrorists. I see the “engineering mindset” daily, in many of the people I know — those who wish to view the world in very black-and-white, definitive terms. To bring it back to investing, the over-rationalization of things might be as equally detrimental to success — in that it makes it difficult to change one’s mind or have flexibility, which to me is a paramount feature of someone successful, in any area — and many an “engineer” has found him or herself dashed upon the rocks of a market that cannot be so easily bound by rules.

It’s always interesting to look back at one’s own predictions — I respect Cringely for his systematic look back at his predictions for the year, as most pundits conveniently leave theirs behind like a trail of dead leaves, a whole set of new ones growing back in to replace them. Here’s another one, Sino-Forest, that Ontario headquartered forestry company that runs plantations in China. It looks like it’s almost doubled since I looked at it, and in this volatile market it’s been pretty stable. Shows what I know! It’s amazing how many stocks one can comment on and have very little real insight into the workings of a company. Is this company being valued “correctly”? Was I wrong to stay away? Certainly it looks attractive now, in the rear-view mirror, but were my reasons for staying away invalid?

One thing always puzzles me about gold, old hedge against inflation and supposedly a storehouse of value since times of yore. Why? Are we still in an era where frightened or panicked people believe that gold is the last, best currency? If the world was riven again by wars and chaos, would having a few bars of the yellow stuff or a jewelry box full of gold chains make you some kind of king? If anything, the persistence of gold as some kind of “fundamental” currency seems to me driven by the same things that drive religious belief and, cough, technical analysis — and all the problematic areas that derive from human psychology. So the question is, do you play with that in mind? Or do you scoff at it and stay far away? I have a friend who owns some silver bricks and a nugget of gold who also believes numerous theories about September 11th and government surveillance, but ones that would make a skeptic scratch his head. Is he the kind of guy driving the gold rush?

At a practical level, gold isn’t even that useful a metal — copper by far exceeds it in terms of practical value and yet copper remains relatively unloved. Gold is a rare noble metal, to be sure, but so is platinum. (I found it interesting that gold can actually be synthesized, much like the alchemists hoped, from quicksilver (mercury) or platinum, although the spare nuclear reactor or particle accelerator required make the prospect of free and easy gold unlikely.) So why the importance placed on it? It must be historical. After all, it was about 100 years ago that people were heading for the hills, coming from all parts of the world for the pickings in California, Colorado, B.C. the Yukon and Alaska; we’re not so far removed from that mania. In fearful times, people go to their talismans, whether that be prayer or gold or magical thinking of many sorts — it’s a natural instinct, a sign that we are still animals at some deep level. Will we, in some future time, turn away from the metal, much as religion has decreased in stature in the past century? Or does the investor take this into account and try to surf the waves of human emotion that drive the gold market? I certainly keep my distance. But isn’t every market based on the weird mix of human emotion and perceived value of things? Certainly it’s difficult to apply classical value investing concepts to commodities (is there such a thing? How do you determine a commodity’s profitability?) but I suppose gold mining companies work much like software companies at a base level — after all, how do we determine the value of software, an even less tangible thing?

It’s somewhat interesting reading to occasionally look at the Google Finance message boards on a per-stock basis. The signal-to-noise ratio is often relatively high, especially when compared to Yahoo’s morass of financial discussion. You get an insight into the mind of the average investor — often somewhat well-informed and spouting various lingo that they may have picked up much the way any of picks it up, from exposure and a hobbyist’s interest. As far as I’ve seen, there are few true professionals on these boards, which makes some sense. A top stock-picker is often leery of giving away too much of the recipe to their secret sauce, for obvious reasons.

Take for instance this thread on Lululemon’s message board. I love the exactitude, the forthright assuredness of people who declare the stock “cheap” without any real indication of how they arrived at that conclusion — by what metric is it cheap? Often, it seems the only metric they use it historical; what’s cheap is something that is priced lower than at some time in the past. Or later, “Im sure we will test support in the low 30s againn so you may get your chance.” How is this person so sure? The lack of skepticism in that statement makes me wonder if they should ban stock message boards. Or perhaps study them under the aegis of behavioural finance. Flocking behaviours, etc. It seems that people are happy to absorb a few algorithms and “rules of thumb” and arrange them just so, hoping that by doing so — like the Pacific Islanders and their cargo cults — they will achieve their desired results. The thinking almost seems like: If they look or sound like they know about investing, then they must know about investing. Or “fake it until you make it?” Although it might be a long time before some of these people make it.

I’m reminded of the need for skepticism and strong justifications for buying at a certain price from re-reading Benjamin Graham and David Dodd’s old textbook “Security Analysis”. It focuses a great deal on bonds and preferred shares, while leaving common stock investment till about the midway point, and some of the conditions that it describes (a world of high dividend common stocks, with single digit P/E ratios) don’t really exist anymore, but some of the same mistakes that people make now crop up in the text. The move from investment to speculation, the insistence on a “new era” where steady earnings don’t matter, the hope for future gains. It’s tough reading this book and figuring out how to apply it to the current climate. As value investors know, it’s been slim pickings for years, as investing and stocks have gotten so much play that the amount of interest and volume means that few stocks remain cheap for long. It’s hard doing the dirty work of finding unloved, unknown and excellent gems — is it still as possible as it used to be in 1940? Graham talks about staying out of the market for long periods of time, like a three year stretch after the Great Depression. This is a difficult thing to do, when the natural instinct is always to act. Graham is almost asking us, those who believe in his philosophy, at least, to be like philosophical Taoists, detaching ourselves from everything, removing any sign of affinity. That’s even tougher in today’s marketed and PR-ed world. I speak from experience, as I originally went predominantly into cash mid-summer last year, anticipating the current situation, but ended up watching as the market continued to creep up and visions of lost opportunities danced in my head — I ended up getting back in whole hog and consequently taking a hard hit in the current market. Of course, going into cash was the right move in hindsight, but having the mental fortitude and conviction (as well as truly analytical, skeptical and unbiased reasons for a particular move) is the harder part.

There’s still room for hunches and instinct, though. But if you’re going to follow those, they better be strong and you better be able to stick to them in the face of contrary information (but also be willing to accept the contrary information if there’s a good reason). It’s a tough game, isn’t it?

A new year dawns and the ol’ Canuck Investor is not doing too well in the markets. I’m sure I could be commiserating with the numerous poor sods who are trying to eke out gains in this rough-and-tumble market but I’ll leave all that detail alone. Not one for resolutions, I’m not here to proclaim that I’ll definitely start posting with greater regularity, but I think that will be a bit of a goal for the future. In my working life, I’m planning a shift into more business-oriented realms, with an emphasis on analysis and insight and less on the entrepreneurial, and where better to continue honing this than this forum?

I expect that there will be less focus on specific companies — that’s shading too closely into the realm of stock-picking, which is what made me start to become leery of writing here — but more a sort of amalgam of themes: business, technology, finance. Trends I see, ideas I have. Some of my current writerly touchstones? Robert X. Cringely, Nicholas Carr, Miro Cernetig — all of whom you’ll find on the sidebar. I’d still like to put more emphasis on quantitative analysis, too, something which isn’t that prevalent in most punditry (and probably what characterizes it as punditry and not analysis).

Speaking of Cringely, here’s a new article by him that is typically insightful. Seeing as how Adobe and Apple practically grew up together, it would be kind of fitting if such a merger (or takeover) took place.