• The difficulty lies not so much in developing new ideas as in escaping from old ones.

    John Maynard Keynes

Iron Capital Insights

Our insights, reflections and musings on the most timely topics relevant to managing your investments.
  • Iron Capital Insights
  • February 3, 2016
  • Chuck Osborne

Capitulation

Markets are unpredictable in predictable ways. This malaise which set in at the beginning of this year just won’t go away. Even with the benefit of some positive days and even weeks, this selloff isn’t over yet. And it won’t be over until we get a capitulation.


  • Iron Capital Insights
  • January 15, 2016
  • Chuck Osborne

Miss Proprietary Trading Yet?

History will look back at the aftermath of the financial crisis of 2008 as a glaring example of the dangers of reactionary regulation. Don’t get me wrong; regulation – rules, if you will – is absolutely necessary, but like many things in life it needs to be treated with respect. The danger in regulation is […]


  • Iron Capital Insights
  • January 7, 2016
  • Chuck Osborne

Happy New Year? Bah Humbug!

The December “Santa Rally” in the market came just in time for Christmas and then faded in the low volumes of the week between the holiday and the New Year. So far 2016 is looking like a dud. Saudi Arabia is not a big fan of Iran and North Korea is testing nuclear weapons. Those […]


  • Iron Capital Insights
  • November 24, 2015
  • Chuck Osborne

What Can You Do?

We live in a crazy world. Every time one sees the news he sees a world in turmoil. When we see the events in Paris and manhunts throughout Europe, the natural response is fear. For those of us fortunate enough to grow up in an era when world history was still taught, this is scary […]


  • Iron Capital Insights
  • September 23, 2015
  • Chuck Osborne

Integritas!

“I will not lie, cheat or steal and I will discourage others from such actions.” That is the honor code at my alma mater Culver Military Academy. There are similar codes at other schools, and while the language varies slightly, the message is the same:  I not only will act with honor myself but also […]

  • Markets are unpredictable in predictable ways. This malaise which set in at the beginning of this year just won’t go away. Even with the benefit of some positive days and even weeks, this selloff isn’t over yet. And it won’t be over until we get a capitulation.

    Capitulation is the last emotional stage of every market cycle. Markets go up on apprehension, grow on optimism and peek on exuberance. They begin the downward leg of the cycle on denial, fall on fear, and finally hit bottom once people have capitulated. That is the pattern. It is easy to recognize in hindsight, but not so easy when we are in the midst of things.

    We are not there yet. Everyone is in a bit of a funk, but I’m not sure I would call it fear. No two downturns are exactly the same, but this one reminds me a bit of 1998. In 1998 I had not quite lost all my hair but was getting close. The hair on the sides was a little less gray. Russia was in big trouble. The giant hedge fund, Long-term Capital Management, which had not one but two Nobel laureates on staff, was collapsing. Asia was having a financial crisis. We, however, were just fine, except for the stock market.

    It isn’t exactly like that now, but there are problems out there in the broad world. China is growing more slowly; oil’s plunge is hurting many commodity-based emerging market economies; the developed world is already stuck in a slow growth rut brought on by too much debt. We keep slogging along, but not fast enough to hold up the global economy.

    Having said that, unemployment has gotten much better. Low oil prices may be rough on oil companies and emerging market countries but it is pretty nice for the average person commuting to work who now has a few extra bucks in the pocket to use elsewhere. That isn’t a bad thing. We are just fine.

    Most stocks are not expensive. We have talked about the fact that last year’s market was dominated by very expensive stocks flying high, but when one looks beyond those few, the rest of corporate America is on sale. That is a good thing for longer-term investors.

    There seems to be a consensus that this early year selloff has been overdone from the start, so why won’t it just go away? Well, this selloff has nothing to do with investors. It has been driven from the start by speculators, mostly computerized speculators, and they will not stop selling until they see a sign: Capitulation. The big wash-out. It is knowledge like this that makes trying to time the market so tempting. Everyone knows it has to happen.

    The problem is there is no set schedule. We could have another rally like the one we had in the fourth quarter (which in hindsight seems like a false rally) before falling again, or it could happen tomorrow and be over by week’s end. This is why timing never works.

    No, all the prudent person can do is check and double check the quality of her holdings and take comfort in the knowledge that this too shall pass. What we own is solid and will be valued higher within a relatively short period of time.

    Hindsight is an interesting thing. The market downturn in 1998 seems like just a blip now, but it didn’t when we were in it. That feeling, that this will last forever, is what eventually brings on the very capitulation which then leads to the next leg up. Waiting is the hard part. But this will indeed pass.

    Chuck Osborne, CFA
    Managing Director

    ~Capitulation

  • History will look back at the aftermath of the financial crisis of 2008 as a glaring example of the dangers of reactionary regulation. Don’t get me wrong; regulation – rules, if you will – is absolutely necessary, but like many things in life it needs to be treated with respect. The danger in regulation is the regulator. Who is regulating them? Who is holding them accountable?

    To believe that they had no role or responsibility for what happened is to be either incredibly naïve or completely partisan. I’m not defending the behavior of bankers; I am simply stating what should be common sense, that there was plenty of blame to go around. Why is this important?

    It is important because the reaction to the financial crisis gave us new regulation, which instead of replacing or fixing things that were really wrong simply attacked phantom villains, such as proprietary trading. People were mad when some Wall Street banks profited from the downturn as they had taken positions that were opposite of many of their clients. But, that is what they are supposed to do – they are broker-dealers, their goal was to give their clients what their clients wanted. If a client wished to buy something, the banks are supposed to either find someone else who wishes to sell (broker) or sell it to them themselves (dealer).

    The banks also made markets in the securities that they sponsored. They stepped in when people wanted to sell quickly and when they wished to buy quickly. They made markets work more smoothly. But, as fate would have it, clients often want to sell and buy at exactly the wrong times, so the banks often profited. That supposedly had to be stopped.

    This brings us to the worst market start of any calendar year in history – 2016. There are lots of excuses given for this selloff. The first was geopolitical tensions; that has gone out of the headlines and is no longer even being discussed. The second is China and its economic slowdown, but that has been going on for a few years now and even it is starting to grow weary.

    The third excuse has been oil. The most honest thing I have heard on the oil story came earlier this week from Morgan Stanley. Their oil analyst was on CNBC and came out and said flat out that the price of oil being set in the market has become completely dislocated from the actual, real world supply and demand for oil. It is all speculation. The oil price is not forecasting some economic doom, it simply reflects the whims of traders, more and more of whom are not even human beings.

    All these things may be contributing to a poor start to this year, but none of them equate to the worst start in history.  The truth is that volatility is much higher just because there is no one willing to step in and be on the other side of a trade on any given day. The computers, who are now ruling the daily trading, are either buying or selling. If they are buying, then whatever they are buying is going to be up huge; if they are selling, then whatever they are selling is going to be down huge. Every move is being greatly exaggerated because all the programs are the same and they are all doing the same thing.

    Over the last several months this market has really just been stuck in a giant trading range: it goes up, then down, then up…but it is really going nowhere. That is not unusual. What is unusual is the size of the ups and downs. The market is not functioning because no one has stepped in to be the bank. If no one is willing to buy when most are selling or sell when most are buying, then the daily price movements will continue to be exaggerated. This brings me back to my original question. Do you miss proprietary trading yet? I know I do.

    This is not the end of the world. The market has always been a voting machine in the short term but a weighing machine in the long term. I do not believe that these exaggerated movements will change that; they just make the ride that much bumpier.

    I would love to see real reform to fix the mess we created in an emotional knee-jerk reaction to the financial crisis. Maybe instead of simply reacting to each crisis du jour, we could rewrite the whole rulebook in a way that actually makes sense. Not likely, but we can dream can’t we?

    In the meantime, we focus on what is real and what we control. The ride has become rougher but the destination has not changed. This selloff will end and a new rally will begin. Three steps forward and two steps back.  We know what we own and why we own it, and those factors did not change with the change of the calendar. Patience will be rewarded.

    Warm Regards,
    Chuck Osborne, CFA
    Managing Director

    ~Miss Proprietary Trading Yet?

  • The December “Santa Rally” in the market came just in time for Christmas and then faded in the low volumes of the week between the holiday and the New Year. So far 2016 is looking like a dud. Saudi Arabia is not a big fan of Iran and North Korea is testing nuclear weapons. Those events don’t exactly coincide with positive New Year’s resolutions.

    For several years now I have questioned the reverence with which we regard the dawning of a New Year. After all, every day is a new day, isn’t it? Every day starts a new twelve-month period. If one is out of shape in March, he really shouldn’t wait until January 1 to make a resolution. Alas, in the case of the changing of the calendar the old axiom holds true – it is what it is.

    For better or worse people use January 1 as the time of the year to mark progress and start over. From an investment standpoint, the issue is that 12 months is too short of a time period to be meaningful. Investing is, by nature, a long-term endeavor. Language can be tricky here, because “long term” is in the eye of the beholder. To be clear, we define that term as one full market/economic cycle. A full cycle is one boom and one bust, a period of growth followed by a period of contraction. This is the natural course of things. We never grow forever nor do we shrink forever. There is a cycle which in total usually means growth – you know, three steps forward and two steps back. The problem is that most people constantly believe that what is happening now will just go on forever.

    This morning in Atlanta it felt like 24 degrees outside with the wind chill factor, while it was over 70 degrees and humid on Christmas day. Yesterday I spoke with a friend in the clothing business who is overrun with sweaters because no one buys sweaters as gifts when it is 70 degrees outside. I laughed and asked, “They didn’t think it would ever get cold?” Evidently not.

    Well, the weather is indeed going to change, count on it. The market environment will as well, and it really has nothing to do with what day it is on a calendar. If the New Year happens to be the time for reviewing your portfolio’s investment results, a prudent person would not look at the calendar year but instead would examine what has happened over the last five years, or since inception if the investment is newer.

    This doesn’t mean set it and forget it. As I have said many times, long-term investing is a mindset, not a time frame. New information could come out tomorrow that would change one’s long-term view dramatically. This information just has nothing to do with short-term price movements. The prudent investor diligently follows what is actually happening at the companies in which he has invested. Is their business growing? Is management doing a good job? Are their balance sheets in order? These are the things that matter in the end. It doesn’t always look that way.

    Geopolitical events can temporarily rock markets, but ultimately investment returns are a product of the price one paid for the future earnings of the companies in which she invested. Right now prices are good, especially when one looks beyond the top returners from last year that are selling at ridiculous prices. The vast majority of the time that means that over the next three to five years, returns will be good. What happens tomorrow we have no idea, but we aren’t investing for only one day or even one year.

    2015 was a frustrating year for prudent investors. (You can read more about that soon in the next issue of The Quarterly Report). 2016 is off to a rough start. It could get rougher, but as sure as it was not going to stay 70 degrees all winter long in Atlanta, Georgia, it won’t stay like this in the market. This too shall pass and 2016 could prove to be a better year. After all, it’s a New Year and tomorrow is a New Day.

    Warm Regards,
    Chuck Osborne, CFA
    Managing Director

    ~Happy New Year? Bah Humbug!

  • We live in a crazy world. Every time one sees the news he sees a world in turmoil. When we see the events in Paris and manhunts throughout Europe, the natural response is fear. For those of us fortunate enough to grow up in an era when world history was still taught, this is scary stuff.

    China: An emerging world power experiencing the first real economic slowdown in a long time, simultaneously trying to flex its muscles at its borders. The U.S. and Russia: Two world powers who don’t really like each other working in close proximity against a mutual enemy, simultaneously fighting over one’s invasion of a neighbor. Radicals wreaking havoc globally. Collectively this has all the elements of potential disaster.

    Facing this horrific news day after day can make one start to feel helpless. To add insult to injury, we have admittedly less important but nonetheless real issues in the financial markets. For more than a year now we have seen the underlying market deteriorate while the headline indices mask much of this because of a few large outliers. The ten S&P 500 stocks with the highest returns over the last year are currently selling for an average of $160 for every one dollar of earnings. One would assume such companies must be growing like crazy, but those same companies have earnings growth of negative 1.67 percent. If that sounds crazy to you, that is because it is.

    In the meantime, there is a company that we own in many client portfolios which is growing earnings at a rate of 35 percent, and its stock is selling for $2.33 for every dollar of earnings. This company, however, is in the oil industry; no one seems to care for the moment that the company is doing great, because its industry is out of favor.

    None of it makes sense. So what is one to do in a world that does not make sense? Fortunately for us it is the beginning of basketball season, which means we can lean on the wisdom of the late great John Wooden. Coach Wooden had many great sayings, but one of my favorites is, “Don’t let what you can’t do get in the way of what you can do.”

    We can’t make the market behave rationally, but we can control what we own, knowing that in the long run what we own will matter.

    We can’t control the world around us and make evil people disappear, but we can teach our children through our example to love our neighbors.

    We can’t make bad things go away, but we can draw inspiration from a band of Pilgrims who gave us the first Thanksgiving.

    There were 102 passengers on the Mayflower when it left England in September of 1620. After a 65-day journey across the North Atlantic and a harsh New England winter, only half survived to see the first harvest. Having lost half of their colleagues and endured hardships which we can barely imagine in our modern world, the Pilgrims could have done a number of things. What they chose to do was to give thanks to God.

    Even with all the bad things that happen in our world we still have much for which we are thankful. In keeping with our tradition, here is my list:

    1. I’m thankful for long-term investment opportunities provided by short-term traders.

    2. I’m thankful that the United States of America is a place where people are still free to disagree without threat of violence.

    3. I’m thankful for the opportunity to once again coach my son’s basketball team.

    4. I’m thankful that my Wake Forest Demon Deacons are finally headed in the right direction under second-year coach Danny Manning.

    5. I’m thankful for my family – immediate and extended.

    6. I’m thankful for a good friend lost this year and the time we had together.

    7. Of course, I’m always thankful for Mama’s pumpkin cheesecake and my loose-fitting pants that make enjoyment of said cheesecake possible.

    8. Finally, I am thankful for you, our clients and friends. Your trust in Iron Capital is our greatest asset and we value it every day of the year.

    Happy Thanksgiving!

    Chuck Osborne, CFA
    Managing Director

    ~What Can You Do?

  • “I will not lie, cheat or steal and I will discourage others from such actions.” That is the honor code at my alma mater Culver Military Academy. There are similar codes at other schools, and while the language varies slightly, the message is the same:  I not only will act with honor myself but also will insist that those around me do the same. These codes are usually enforced by student-run honor councils that have the ability to punish severely, including dismissal. One can be punished not only for lying, cheating or stealing, but also for not sufficiently discouraging such action, i.e. witnessing an honor violation and not reporting it.

    It is interesting that these codes almost always trace back to the military. The Latin word “integritas” is what Roman legionnaries would shout while being inspected. It means wholeness, completeness and entirety. The legionnaire was signaling to his commander that he was whole and ready for battle. It is from this word that we get “integrity.”

    I don’t know if they have an honor code at Volkswagen, but if they do, some heads are going to roll. For those who missed it, Volkswagen somehow rigged the software in some of their diesel vehicles to pass U.S. emissions inspections. How does this happen? I have no insider knowledge of this situation; in fact Iron Capital owned Volkswagen in some client portfolios until this came to light. I drive one of their products as do several friends and relatives. However, having spent my career working in and researching large corporations I can submit a very likely hypothesis: This revelation most likely came as a complete shock to senior management. That does not make them innocent, but the conspiracy theorists who are undoubtedly out there are as usual dead wrong. The CEO and board of directors likely did not meet in secret and decide to break the law because they were so greedy that they really want the stock price to completely collapse. What likely happened was some middle-level engineer was told, “Fix this,” and since he couldn’t figure out how to build an affordable vehicle that complies with EPA standards, he cheated. His bosses are likely more guilty of not being curious enough about how things actually get done. They all are likely guilty of caring more about pleasing the boss than living with integrity.

    Of course lost in this story will be any question of why U.S. emission standards for diesel engines are so much more restrictive than the restrictions in Europe? Could that have anything to do with the lack of diesels made by the U.S. auto industry? Why was this not discovered by EPA inspectors? We will likely never know. One of the great tragedies of the aftermath of the financial crisis is that there is no accountability given to regulators and policy makers. Greed was and is a convenient and believable villain, which has the benefit of also being factual – there are greedy people in the world – but it is not complete, and therefore lacks integritas.

    Just about every asset pricing bubble that has ever popped has taken place after a prolonged period of time with lower than normal interest rates. Yet rates sit at zero seven years after the crisis is over. I have not been critical of the Federal Reserve in the past, but last Thursday’s decision was a poor one. Of course the biggest benefactors of low interest rates are the world’s largest debtors – governments. Could it be that the Fed has the same lack of courage as the engineer at Volkswagen? Could it be that they are just too scared to tell the truth? Sorry, we cannot profitably make a diesel engine that meets EPA standards at the price point demanded for such small cars in America. Sorry, we cannot keep borrowing money for free. Integrity is tougher than it looks.

    Towards the end of the Roman Empire the tradition of pounding the chest and shouting integritas was replaced. They changed integritas to, “Hail Caesar!” Seemed like a small thing. That is the trouble with honor codes; it is the second part that gives them strength – using the power of peer pressure for good. It is much easier to just try and please one’s boss.

    Alas, we cannot control what goes on around us, we can only react. While integrity may seem like a quaint notion in our modern world, it is this love of truth – the whole truth – which drives prudent investment decisions: the desire to not be satisfied with surface answers, for investment opportunities exist precisely where actual truth differs from perceived truth. That is what we strive to find every day.

    Chuck Osborne, CFA
    Managing Director

    ~Integritas!