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

    John Maynard Keynes

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Iron Capital Insights

Our insights, reflections and musings on the most timely topics relevant to managing your investments.
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  • Iron Capital Insights
  • July 30, 2020
  • Chuck Osborne

The Gap Widens

For the last decade growth stocks have outperformed value stocks, large-company stocks have outperformed small-company stocks, and domestic-company stocks have outperformed international-company stocks. This is not sustainable and it will end; the questions are, how and when will it end?


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  • Iron Capital Insights
  • June 26, 2020
  • Chuck Osborne

Making Sense of the Markets

Statues are falling, parts of cities are being taken over, and COVID-19 is reminding us that it is still around. So, are we headed for another large selloff? Not so fast.


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  • Iron Capital Insights
  • June 12, 2020
  • Chuck Osborne

Too Far Too Fast?

The market has come back considerably from the COVID-19-induced fall, and it has many people scratching their heads. The real world doesn’t look so great: we have witnessed civil unrest, record unemployment claims, and a pandemic, and the S&P 500 somehow broke into positive territory for the year. Is it too far too fast?


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  • Iron Capital Insights
  • April 24, 2020
  • Chuck Osborne

Texas Tea Revisited

Oil is not an investment. A barrel of oil is just a barrel of oil. If one were to bury it in his backyard and dig it up many years later, it is still just a barrel of oil. This past Monday, the oil dug up backyards sold for ~negative $40; they had to pay for someone to take it away.


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  • Iron Capital Insights
  • March 25, 2020
  • Chuck Osborne

Uncertainty

The market hates uncertainty. I hate that phrase. News flash: the future is unknowable and therefore always uncertain. There is never more or less uncertainty; there is always 100 percent uncertainty. The reason past crises appear more certain than this one is because they are in the past. Hindsight is 20/20, foresight is nowhere close.

  • For the last decade growth stocks have outperformed value stocks, large-company stocks have outperformed small-company stocks, and domestic-company stocks have outperformed international-company stocks. This is not sustainable and it will end; the questions are, how and when will it end?

    First, some background. As a reminder, growth and value are terms thrown around by people in the investing world to describe the two great philosophies of investing. The growth school suggests that an investor should favor companies that are growing their business more rapidly than the general economy. The value school suggests that all companies have intrinsic value that can be estimated, and if the stock is selling for less than that amount, it is a good investment. We often use the example of shoppers: Growth investors want the latest and greatest fashion and are willing to pay in order to get it, while value investors want bargains.

    In reality, all great investors, like good shoppers, are a bit of both. One may lean more towards value or more towards growth, but no one wants to overpay or buy the stock of a company that cannot grow its business.

    One will often hear the terms growth stock or value stock, but these are simply descriptions of the typical stocks favored by growth and value investors, respectively. Trust me, no board of directors has ever met and said, “This company should be priced as a value stock.”

    Large versus small is clearer, although keep in mind this is all relative. These are all publicly traded companies, so none of them are that small. Likewise, international versus domestic is clear, but it is important to remember we are talking about where a company is headquartered and not where it does business. Most large companies today are global in their business efforts, but everyone has a home somewhere.

    This tilt towards U.S.-based growth companies, most of which are technology companies, began in the aftermath of the financial crisis. The decade of the aughts was led by small value stocks and international stocks. It seems so long ago now, but this was the so-called lost decade where the S&P 500 went nowhere. While the media obsessed over “stocks” going nowhere, small company stocks and the stocks of companies headquartered overseas did very well. Then the crisis hit.

    During the crisis, panic ruled and all stocks were thrown out like babies with bathwater. Then we had the knee-jerk rebound, and once that was over a new bull market took hold. However, when the global economy should have been rebounding dramatically, we instead went on a horrible detour of economic stupidity. Governments seemingly did everything in their power to keep us in the “new normal;” that was artificially low economic growth. During a period of low economic growth, investors will generally favor the stocks of companies that can grow faster than the economy.

    The financial crisis started in the U.S. and thus we were the first to emerge out of the crisis. This, and our advantage in technology, gave us a head start on the rest of the world. The combination of these two factors led to the outperformance of U.S.-based technology (growth) stocks. This is how usual market cycles go. These cycles usually last five years, and this is the unusual part: We have been in this cycle for a decade.

    Let me put some numbers to it. As of June 30, 2020, the Russell 1000 Growth index, which represents large U.S.-based growth stocks, is up 17.2 percent annualized. The Russell 2000 Value index, representing small value stocks, is up 7.8 percent. Companies headquartered in emerging markets, represented by the MSCI Emerging Markets index, saw their stocks go nowhere at 0.8 percent annualized. Developed international markets as represented by the MSCI EAFE index were up only 6.2 percent.

    Not only has this been going on for a decade, but it has gotten worse lately. The last 12 months ending June 30 saw the Russell 1000 Growth go up 23.2 percent while the Russell 2000 Value is down 17.4 percent. This is the largest gap since the Tech bubble. That ended and this will too.

    This leads us to our questions, how and when? No one knows when, but with things this extreme it would seemingly have to be soon. How is more interesting. The tech bubble burst with a long bear market. However, history doesn’t always repeat itself exactly. These companies are a lot more mature than they were 20 years ago. They may not collapse so much as go nowhere. As I write this, their CEOs are testifying to legislators who can agree on little other than the dislike of large tech.

    There is really a lost decade in stocks not included in the U.S. large-growth bucket. I believe we will see a long period of reverting to the mean, and these companies will once again get to lead the way. Markets can go up being led by companies other than U.S. tech firms; it is about time for that to happen. Diversification has not really helped investors over the last decade, which leads me to believe it will be more important than ever over the next decade.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~The Gap Widens

  • Statues are falling, parts of cities are being taken over, and COVID-19 is reminding us that it is still around. So, are we headed for another large selloff? Not so fast.

    It has become a cliché to say the market rally is dislocated from reality, and that valuations are higher than they have ever been. Well, there are certainly instances where this may be true. Some stocks are quite expensive right now, and some businesses are greatly hurt by our current environment. However, to suggest that is a universal position is simply not factual.

    AT&T is a business that, if anything, may be helped by the new normal. It is no longer the phone company; AT&T is the internet and cellular company. As people continue to work remotely, the need for AT&T fiber and unlimited cellular data continues to grow. In the meantime, the stock sells at nine times earnings and pays just under 7 percent dividend yield. (This example, as always, is for educational purposes only and not a recommendation to buy. Iron Capital does own AT&T in client portfolios where it is deemed appropriate.)

    Another company whose stock we own where appropriate is Cummins, the diesel engine manufacturer; their stock is selling for 12 times earnings. Yet another is Wells Fargo, which is cheaper today than it was in the financial crisis. We also have invested client money in PayPal, whose stock is crazy expensive, but the company is benefiting from this environment and growing rapidly.

    I must emphasize these examples are for illustration purposes. The point is not to go load up on these particular companies, but to understand that all stocks are not in the same situation. Airlines are in long-term trouble; internet providers are not. Brick-and-mortar retailers are in trouble; electronic payment systems are not. Technology companies may be expensive; banks are not.

    Referring to “the market” is always an over-generalization, but this is especially true right now. Nothing sells like bad news, so that is what the media dishes up all day, every day. That news has to exist; they don’t just make it up (not entirely anyway). There are industries and individuals that are hurting right now.

    There is, however, another side to that coin. I recently had a conversation with a gentleman who is in the boat finance business. I naturally assumed things must be tough for him with the state of the world. He informed me that his business is up more than 400 percent from last year. Summer vacations are canceled as are summer camps, so what are people going to do? Evidently, they are buying boats.

    We have a newly organized garage. Our son (primarily with some help from his little sister and guidance from Dad) has built us some new shelves and a pegboard wall. These home projects are all the rage in the COVID world. Some friends of ours needed some stone for a home project; the stone company apologized, but the stone they needed was on backorder. Under normal times they can deliver same-day, but they can’t keep inventory in stock now that everyone has time for that project they have been putting off.

    The point is:  this environment has both winners and losers. The local restaurant may just be getting by on takeout orders and/or socially distant half-filled dining rooms, but the home improvement folks are slammed with business. Summer camps are shuttered, but boat dealers are overwhelmed.

    One size does not fit all. I know you’re tired of hearing it, but this is why prudent investing is done from the bottom-up. That is what we do, and times like this illustrate why.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Making Sense of the Markets

  • The market has come back considerably from the COVID-19-induced fall, and it has many people scratching their heads. The real world doesn’t look so great: COVID-19 is still here, and although it does appear that we have flattened the curve on a national basis, some areas are seeing upticks. Even in best case scenarios we are far from fully open. We have witnessed civil unrest, record unemployment claims, and a pandemic, and the S&P 500 somehow broke into positive territory for the year.

    Is it too far too fast? Yes and no. The current state of the market reminds me of the problem with my industry. For too long the investment world has moved away from helping investors invest in companies and towards selling products. More and more of those products had become index-oriented. That works great in a bull market, like the one we had from March of 2009 until March 2020; that is an environment where everyone is doing well, so all ships rise on the rising tide. That environment is tough for professional investors, at least when compared to the index, because there is little differentiation and many areas get inflated prices, which professionals don’t like paying.

    However, when the going starts to get a little rougher, the importance of prudent investing is revealed. Prudent investing is always done from the bottom-up, analyzing each individual investment on its long-term merits. This is always important in our opinion, but never more so than today. There are winners and losers in our current environment, and a prudent investor will wish to avoid those losers.

    Airlines are a great example. As the market rally took hold and optimism started to return, many investors instinctively look to the places that were hurt the worst. Airline stocks are among that group and they have come screaming back. Does that make sense? No, and my free advice to any day trader who has been buying airline stocks would be to take your profits while you can. That is fool’s gold. It may take years for the airlines’ business to get back to where it was before the pandemic. How many travelers are willing to sit in a tube where social distance is impossible? How many businesses are going to keep their travel budget cuts and encourage more use of Zoom-style virtual meetings on an ongoing basis? These questions are unanswerable.

    Might the airlines do better than expected and actually justify the optimism? It is possible, but prudent investing is not about having a crystal ball into the future. Prudent investing is about understanding probabilities. The risk-return payoff for airlines is no longer there. Seeing these stocks drop more than 10 percent in one day should surprise no one.

    However, the same argument cannot be made about banks. We all need the bank, and even at the height of the crisis we were all banking. Take Wells Fargo. (As with all specific examples, this is for educational purposes and not a recommendation to buy a stock.) Wells Fargo is cheaper today on a price-to-book value basis than it ever was in the height of the financial crisis. We have plenty of other types of crises going on right now, but we do not have a financial crisis. During the financial crisis regulators allowed multiple financial institutions to go under and/or be taken over at rock-bottom prices. Wells Fargo took over Wachovia. It was not until Fed Chair Ben Bernanke finally said that they would not let another bank fail that the crisis finally ended and the stock market went on a 12-year bull run. Learning from that time, current Fed Chair Jerome Powell stated early on that the gloves are off and they were not going to let a single bank fail.

    Bank stocks have been rallying up until this little blip, but did they go too far? No, not even close. Again, there is no crystal ball. These stocks could do poorly in the short run, but the valuations here are crazy low if anything, and that puts the long-term probability of success on the positive side. The risk-reward here looks much better.

    The market is by definition fluid, and these relationships could change at any instant, but the lesson here is that underneath the surface it is not one size fits all. Some stocks have certainly come back too far too fast and stepping back is warranted, while others have yet to get the love they deserve, and any step back should be seen as an opportunity. Now is not the time for market generalizations; it is the time for prudent investing.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Too Far Too Fast?

  • It is hard to believe that 2008 was 12 years ago. Of course we remember it now for the financial crisis, but another highlight of 2008 was oil peaking at more than $160 per barrel. (Goldman Sachs said it was going to $240, and I repeat that every time any of our analysts quote a Goldman Sachs recommendation. But I digress…)

    We featured the oil story in our second quarter 2008 “Quarterly Report” newsletter, Texas Tea. (It was also a highlight for me because I was able to reference “The Beverly Hillbillies.”) We later followed that up with more insight on investing in commodities like oil. I made the point, several times, that oil is not an investment. No commodity is investment-worthy. Benjamin Graham defined an investment as follows: “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.” This safety of principal and adequate return are driven by the fact that investments have some intrinsic value. That value can be estimated by analysis of ongoing cash flows. Oil has no intrinsic value. Oil companies may have intrinsic value, as might an oil well, but oil itself does not.

    One point I made repeatedly was that a barrel of oil is just a barrel of oil. If one were to bury it in his backyard and dig it up many years later, it is still just a barrel of oil. An oil company can grow or shrink, but either way it is dynamic. Stock in an oil company will not be the same years from now as many factors will influence that company’s success or lack thereof. Oil is just oil. When one eventually digs that barrel back up, he is just hoping it will sell for more than what he paid.

    I believe our clients understood what I was saying; at least we stopped getting questions about adding oil to portfolios. Many market participants did not, as they loaded up on oil exchange-traded funds (ETFs). This past Monday, the oil they dug up from their backyard sold for roughly negative $40; in other words, they had to pay for someone to take it away. In the past twelve years, oil has dropped from an all-time high of more than $160 per barrel to Monday’s catastrophe. Oil is not an investment.

    That did not stop Wall Street from creating a product that allowed investors to part with their money. This story is not just about oil, but also about the misuse of investment vehicles. Investors usually do not take delivery of actual oil; they purchase futures contracts. Futures allow commodity producers to lock in a future price. The best example is farmers: When farmers plant their fields in the spring they don’t know the price they will get in the fall. To protect themselves from prices falling they can enter into a contract to sell their produce at an agreed-upon price. If prices fall, they are protected; if they rise they may lose out, but it was good insurance. Likewise, oil well operators can do the same thing.

    The existence of these contracts of course attracts the Wall Street gamblers. Speculators can buy these contracts as well, and hope that prices rise. Eventually, though, one has to deliver the commodity. Since speculators can’t actually do that, they are forced to sell the contracts before they come due. On Monday that was a big problem as no one wanted the actual oil and was therefore willing to pay for the contracts.

    This spooked the rest of the market, but it shouldn’t have. This does not affect any company not in the oil business, except to the extent that oil is an input cost, and in that case it is a plus. The reaction made no sense, but so much in our world makes little sense today. The stock market recovery is still underway. The market always moves before the real world so hopefully the real recovery will begin soon. In the meantime, oil is still not an investment.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Texas Tea Revisited

  • The market hates uncertainty. I hate that phrase.

    We could just about make up for all the market loss in this downturn if we had a dime for every time some pundit has uttered the word, “uncertainty.” I have heard people say this crisis is different because fighting this virus is so uncertain. I have heard pundits claim that markets can take good news or bad news, but they can’t handle uncertainty. (Markets are not big fans of bad news, either.)

    Here is a news flash: the future is unknowable and therefore always uncertain. There is never more or less uncertainty; there is always 100 percent uncertainty. The reason past crises appear more certain than this one is because they are in the past. Hindsight is 20/20, foresight is nowhere close.

    Prudent investors don’t try to predict the future; they pay attention to what is happening now and think in probabilities. Right now, the market appears to be in a bottoming process. The volatility remains high with big up and down days – Friday and Monday were down, Tuesday was up.

    When we have the down days it feels like we are going to be going down forever, and when we explode up it is easy to say, “this is it, time to go all in.” This is when it is time to stop projecting and just pay attention to what is actually happening. We are going nowhere, which is what happens when the market is forming a bottom.

    We also have to think in probabilities. There is not one possible future; there are several possible futures. Right this moment, we can see three probable futures:

    1) We could take off as we did in March of 2009, and Tuesday could be the beginning of the new bull market. This is possible, but is it likely? We are far from the peak as far as the actual virus is concerned, and as of this writing, Congress has still not committed to the stimulus package.

    2) We could go down further. It is possible that this crisis is not even halfway done as far as the market is concerned. Is it likely? There is a lot of stimulus coming. The Fed has pulled out all of the stops and many healthy people are already getting anxious to get back out there and get things moving. Some experts are even suggesting that the cure may be worse than the disease and we should take a more surgical approach to battling this virus.

    3) We could bounce around before finally heading back up. It is possible we are forming a bottom, which takes a little time. Is this likely? It seems so to us. The highest probability in our view is that we get good news one day and bad news the next for at least some period of time. We bounce around with a lot of volatility but not really going anywhere before the real rebound takes hold.

    Prudent investing is risk-averse, so we position our portfolios in a way that protects us in the last two scenarios without putting us out of reach if the first scenario pans out. This I can promise:  No matter what happens, there will be pundits claiming to have predicted it, and many will say it is all clear ahead because our future is certain…you know, just like they were saying 30 days ago.

    We’ll know better.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Uncertainty