• 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
  • 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.


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

Bear Market

Here we go again. The market has broken through the barrier and we are now officially in a bear market. Markets like this are always scary, but everyone should be reminded that we have a plan, and this too shall pass.

  • 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

  • Here we go again. The market has broken through the barrier and we are now officially in a bear market. Markets like this are always scary, but everyone should be reminded that we have a plan, and this too shall pass.

    All of our clients have heard me say this (probably more frequently than they like), but you are going to hear it one more time: Our number-one job at Iron Capital is to make sure our clients do not make The Big Mistake. The Big Mistake is selling out at the bottom of a bear market and then not getting back in because of fear. That is job number one. It is like the Hippocratic oath: first, do no harm. If we do nothing else, then we have helped our clients.

    We accomplish that goal by setting downside thresholds. We ask every client, over a one-year (12-month) period, how much downside can you take without making that big mistake? Those reference points are noted in every single client file. At times like this we are monitoring those risk levels and will be taking necessary measures to protect our clients the best we can. At this moment, no client has breached her threshold.

    That is step one. As I tell my basketball teams, winning begins on defense. So here is the bear market strategy. We first want to protect our clients as mentioned above, but even before the threshold is reached, it is our goal to protect as much as possible. No one is going to like their statement come the end of this quarter, but losing less is actually one of the keys to long-term investing success. The importance of this is simple math. If a portfolio is down 20 percent, then one needs a 25 percent return to get back to even. If that same portfolio is down 30 percent, then that same investor needs a 42 percent return to get back. No one, myself most of all, likes losing any money, but losing less in these downturns is very important.

    However, winning only begins on defense; a team must score if they want to win. When this downturn ends (and it will end), there is going to be a powder keg of stimulus lined up. To begin with, there will be great pent-up demand from consumers who have not been able to do all the things they wish to do. Oil prices have been slashed and this put more money in consumers’ pockets. Governments are also lining up to provide stimulus. The recovery should be rapid in the real economy, and the market always outpaces the real economy.

    We play defense now to have the ability to play offense soon. How we play offense will be impacted by the downturn. After the tech bubble burst, many areas of the market rebounded rapidly, but it took a decade for those big tech companies to get back to where they had been. How we go up is not usually a mirror reflection of how we came down. Some companies and industries may bounce back faster than others. Prudent investors take advantage of downturns to improve the quality of their portfolio, which helps in the rebound.

    Our biggest concern going forward will actually be the bond market, not the stock market. Bond prices and bond yields are inversely related. In other words, they act like a seesaw. When yields – the interest rate the bond pays – go down, bond prices go up. Bonds are more expensive today than at any time in our history. They will remain safe as long as we are in crisis mode, but once this is over, they are practically guaranteed to be losers. This will change asset allocations.

    These are the things we are working on as I write this. There are lots of things I don’t like about this crisis; I have written about some already. However, all we can do is focus on what is in our control. We can’t control what happens to us, the virus, or society’s response to the virus. We can’t control that computerized short sellers are now allowed to drive the market down over the course of a month as much as historically would have taken 18 months. We can’t control any of that, but we can control how we react. We will do everything in our power to react prudently.

    Warm regards,

    Chuck Osborne, CFA

    Managing Director

    ~Bear Market