It would be nice if someone would create an app for PCs, mobile electronic devices and televisions that would flash a large ‘Red BS‘ (mid-screen) every time the media went overboard or off the track on a news item. The downside for those who watch CNBC would be the screen flashing red all the time.
I was immediately reminded of the above quote from session 64 (“The Killer App”) when I read a post from a former client, Wade Slome, Founder and President of Newport Beach, CA, based Sidoxia Capital Management.LLC. Wade is a kindred spirit when it comes to the media and investing. In Sidoxia’s August Monthly investment letter, “Psst…Do you want to join the club?” (The Successful Investors Club), Wade offered to two rules for admittance:
“Don’t waste your time listening to the media.”
By way of background, I met Wade in the late 1990’s when he was working as an equity analyst with the American Century Funds in Kansas City. Subsequently he rose to the position of senior portfolio manager on the team that managed the $20 billion American Century Ultra Fund, at the time one of the largest ‘large-cap’ growth funds in the country. He left American Century in 2007 to return to his home turf in California and build his own firm.
I reconnected with him through some favorable articles that he wrote about one of my personal holdings for the web site “Seeking Alpha.” Of course, anyone who likes one of my stocks is an outright genius!
I thought it would be interesting to get his take on the sentiment of his clients in the current market environment…what kind of issues are they raising with him, their concerns? Are they ebullient or fearful? Here is my Q & A with Wade Slome:
KS-Today, when you recommend a client take on, or increase equity exposure, what are the most common push-backs that you get? Have these changed in the past few years? If so, could you explain?
WS – Given the events that have transpired over the last 15 years, I expect to receive a healthy dosage of pushback. Many investors have naturally been scarred from the 2008-2009 Financial Crisis, so convincing certain people that the 100-year flood will not occur every 100 days can be challenging. Regardless of the skepticism I receive, I feel it’s my duty to provide the best possible advice I can to existing clients and prospective clients. I can lead a horse to water, but I believe it’s not my job to force clients into a single investment option. At Sidoxia, we customize investment plans that meet clients’ risk tolerances, time horizons, and overall objectives. With regard to sentiment changes in recent years, it is true that the tripling in equity market values since early 2009 has changed investor moods. Risk appetites have definitely increased. Nevertheless, cynicism is still rampant. Surveys done by Gallup show that stock ownership is near 15-year lows and despite stocks at or near record highs, ICI fund flow data shows money fleeing U.S. stock funds in 2014. With generational low interest rates, I see many long-term investors being too imprudently conservative. However, on the other hand, my responsibility is to also prevent other clients from taking on too much risk, especially if they have shorter investment time horizons or have limited funds in retirement.
KS – When you speak with clients today, what are prominent worries do they have about their investments: The general level of the market, valuation, the economic backdrop, U.S. political issues or geopolitical concerns (all of the above)? Could you rank or tell me which concerns seem to be paramount?
WS – In this 24-hour news cycle society we live in, an avalanche of real-time data gets crammed down our throats daily through our smartphones and Twitter-Facebook pages. As a result, the overwhelming barrage of news gets disseminated instantaneously, which in turn spreads fear like wildfire by word of mouth. In this type of environment it comes as no surprise to me that the general public is on edge. Every molehill is made into a mountain by media outlets for a simple reason…fear sells! Before the internet 20 years ago, virtually no one could find the location of Cyprus, Syria, Ukraine, or Gaza on a map – now we have Google and Wikipedia to show us or the Twitter feed scrolling at the bottom of our television sets reminds us. As far as concerns go, it’s tough to rank which ones are paramount. One day it’s the elections or Iran, and then the other day it’s the stock market crashing or the Ebola virus. Eventually the emotional pendulum will swing from fear and pessimism to optimism and euphoria, it always does. Like a lot of different professions, one of best strengths to have as an investment manager is the experience in knowing what noise to filter out and the ability to identify the relevant factors that drive outperformance.
KS – Could you share the short-form responses that you might give to your clients when addressing the aforementioned issues?
WS – The best advice I can give investors is to ignore the headlines. This principle is just as true today as it was a century or two ago. Mark Twain famously said, “If you don’t read the newspaper, you are uninformed. If you do read the newspaper, you are misinformed.” This is obviously presented a little tongue-in-cheek, but the main point being is headlines should not drive your investment decisions. It’s perfectly fine to be informed about the economy and politics, but people must realize the stock market often moves independently and in contrarian directions to prevailing media stories. Rather than emotionally react to news flow, it is much more important to create an objective, long-term investment plan that takes advantage of market noise, hype, and volatility.
KS – Finally, this is a little bit of a leading question that I hope you might run with (as it is the second rule of entrance to “the club”). Do you find any useful purpose being served by the financial, general or political media that might aid an individual’s investment process?
In my view of the financial markets, there are a few underlying principles that drive stock prices over the long-term, and they include such basic factors as earnings, valuations, interest rates, and market psychology. What I would objectively try to argue is that the financial, general, or political media have little to no impact on the first three factors and only modest influence on the last one (market psychology). Part of the reason I have been so constructive on the markets on my Investing Caffeine blog over the last five years is because all these factors have generally pointed in the right direction. I will become nervous when earnings decline, valuations get stretched, interest rates spike, and/or psychology turns euphoric. Right now, I don’t think we are seeing any of that occurring. With that said, I do believe there are exceptions to the rule that “media is evil.” If you have the time, interest, and patience to walk through the endless desert of financial media, you can find a few rare flowers. Although I do consume mass amounts of media, 99% of it goes in the trash. I do my best to reserve my media consumption to those successful investors that have lived through multiple market cycles and have a track record to back it up. You can find sage investment bloggers, Warren Buffett interviews on CNBC, or newspaper interviews of winning venture capitalists, if you properly filter your media diet. What should generally be avoided at all costs are rants from economists, journalists, analysts, commentators, and talking heads. No matter how eloquent or articulate they may sound, the vast majority of the people you see on television have not invested a professional dime in their careers, so all you are getting from them are worthless, vacillating opinions. I stick to commentary from the tried and true investment veterans.
Actually, from my point of view, Wade’s Rule #2 should be Rule #1, and Rule #2 should be don’t forget Rule #1.
Thank you Mr. Slome!
The most wonderful feature of my 42-year career in the investment business were the good and talented people (both on the BUY side and SELL side) that I had the opportunity to meet and work with. I have been truly blessed.
So, what about a Killer App #2?
Like Killer App #1, Killer App #2 has not been created yet. But, rather than using app #1 (The Red Flashing BS), maybe someone could create an APP that operates thus: when an investor moves to access any dubious media source on any electronic conveyance, that device would impart a non-lethal electric shock to the user. After being shocked several times, the investor will not go there anymore. They would be happier, sleep better and be smarter: not to mention the potential for better investment results.
Would you buy this APP and how much would you pay?
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.