• 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
  • 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.


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  • Iron Capital Insights
  • March 9, 2020
  • Chuck Osborne

Fear

“[T]he only thing we have to fear is…fear itself.” – Franklin D. Roosevelt.
This quote is truer today than at any time I can recall in my career. The coronavirus itself will pale in comparison to the damage done by the fear of the coronavirus.


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

Coronavirus

Will the coronavirus change the market’s overall momentum? Anything is possible, but it is not very likely. In our opinion, trying to guess the long-term impact of such global events is a fool’s errand. Prudent investors know what they own and why they own it.

  • 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

  • [T]he only thing we have to fear is…fear itself. – Franklin D. Roosevelt.

    Most people are familiar with this famous quote. Many mistakenly believe that FDR was talking about War World II, but that is not the case. This quote came from his inaugural address in March 1933, and the fear he spoke of was economic fear – the fear that had crashed the stock market in 1929 and brought on the Great Depression.

    This quote is truer today than at any time I can recall in my career. The coronavirus itself will pale in comparison to the damage done by the fear of the coronavirus. The last time we dealt with a pandemic was 2009, with the novel H1NI virus, also known as the swine flu. How many people remember it? It did cause some issues; schools and camps closed for short periods here in the Atlanta area, as in many places around the U.S. and the rest of the world, but to be honest, I personally don’t really remember much about the ’09 outbreak. Do you? According to Wikipedia, H1N1 killed 575,400 people globally. Any death is a tragedy, but I note this for perspective. According to the Wall Street Journal, there are now approximately 110,000 cases of coronavirus globally. In South Korea, where there has been the most widespread testing thus far and therefore the best data, the mortality rate is 0.6 percent. Let’s put this another way: 99.4 percent of the people who get the coronavirus will have flu-like symptoms for a few days and then go back to work. Run for the hills!

    The difference between today and the far more serious pandemic of 11 years ago is that we now have multiple groups in our society that profit from fear. The “reporting” of the coronavirus has been far closer to screaming fire in a crowded theater than actual information. Case in point: the headline in this morning’s Wall Street Journal is, “Coronavirus Cases Outside China Tripled in Past Week.” If one actually reads the article, the cases have gone from 10,000 to 29,306. The world population outside of China is 6.3 billion people. I set my business calculator to go out three decimal points and all I get is zeros when attempting to calculate this percentage. I was going to say this is like going from 1 to 3 percent, but it isn’t even within three decimal points of 1 yet.

    I told our staff what I was going to write about this morning, and one of our analysts pointed out that he saw a headline in Globe magazine in the grocery store checkout aisle this weekend which said, “Coronavirus Will Destroy the World.” We expect that kind of sensationalism from tabloids, but The Wall Street Journal? The fact is, the media is loving this. They profit from fear. No one clicks on an article that says, “Number of Coronavirus Cases Outside of China Remains 0 Percent out to 3 Decimal Places.”

    The media is not the only segment of our society which profits from fear; short sellers make money when stocks go down. Selling a stock short means one sells shares of a company that he does not actually own; he “borrows” the shares and promises to eventually close his short position by buying the stock, but he hopes to sell high and then buy back at a lower price. Historically, speculators who did this had to wait for what we called an uptick. In other words, the last trade of the stock in question had to be positive, then he could sell it short. Then, he would have to wait for a positive move, and he could sell it short again. This is the way the market worked from 1938 until 2007, when the uptick rule was removed.

    Today short sellers can just sell away with nothing stopping them. They do it by computer, so they can sell more and more until markets open down 7 percent. During this latest crisis, at Iron Capital we have had no one call us panicked; we have had only a few calls from any client who was concerned. We have had more clients sending us money to take advantage of these prices. I point this out because at some point one has to ask, who is selling? Investors are not selling, so that leaves us with the short sellers. They are profiting from fear.

    All of this would be just a sad commentary on the state of our media and Wall Street if it did not have real impacts. However, people and organizations are canceling events all over the place. This may not seem like such a problem, but it is if you are in the hotel business or travel industry, for example. This impacts lives, and for more than just a few sick days. Economists and people like myself who think in terms of growth are often labeled as cold and calculating; nothing could be farther from the truth. Economic activity means jobs. It means food on tables and roofs over heads. If we allow those who profit from fear to create an actual economic crisis out of this bug, then people will lose wages. Some will go hungry, and others may even lose their homes – because of fear.

    The stock market will bounce back, and 99.4 percent of the people infected by this virus will bounce back, but the people who get laid off because of this fear will truly struggle. People who give up on investing for retirement because of the day-to-day craziness of computerized speculators will not be able to support themselves in retirement. Fear of the coronavirus will do and is doing far more harm than the virus itself. Is this now how we are supposed to act each and every flu season?

    We talk all the time about being prudent investors. We should all be prudent with our health, all of the time. Hiding from our fellow man because of a virus is not prudent. We have to fight the fear as well as the virus.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Fear

  • The market is down on coronavirus fears: that is the headline that welcomed us this morning. While the coronavirus news out of China is still improving, there are now more cases in Italy, South Korea, and Iran. This has the market dropping.

    The coronavirus is a human tragedy and our thoughts and prayers go out to anyone affected. Hopefully we learn the lesson and at the very least the practice of so-called wet markets is eliminated. Having said that, our role at Iron Capital is to navigate the crazy world of investing for our clients. We have to think about how the coronavirus impacts our client portfolios.

    Outbreaks like this are similar in impact to natural disasters: they have an impact on economic activity in the immediate term, but that impact is short-lived. Once the crisis is over, people return to their normal lives. Of course, nothing feels short-lived while it is happening, but when we look back at 2020 three years from now (and it may not take even that long), the coronavirus is most likely a small footnote. I say most likely because I am projecting the future, and the future, of course, is always uncertain. When the weatherman says there is a 10 percent chance of rain and it ends up raining, that does not mean that he was wrong; once out of every ten times, the 10 percent chance hits. This is how averages work.

    The odds of the coronavirus having a lasting meaningful impact on the markets is far less than 10 percent, but there is some minute chance that this time it is different. However, betting on such long odds is not the prudent thing to do. In fact, betting on these kinds of global news stories is never the prudent thing to do.

    Some perspective is always helpful while going through such events. As of this morning, the market by almost any measure was still positive for the year. The S&P would have to drop another three and a half percent to simply go back to where the year started, and that was after being up more than nine percent last quarter. Being up a little more than nine percent in five months is not exactly bad. In fact, coronavirus or not, the market was well overdue for a correction. Markets never go up in a straight line.

    Another way to look at the market is through moving averages; many market participants view the markets this way. Instead of paying attention to daily price movements, which can be very volatile, some look at the average price over the last fifty days or the last two hundred days. As of this morning, the current price was still higher than the fifty-day average, which is well above the two hundred-day average. That means the market’s momentum is still going up.

    Will the coronavirus change the market’s overall momentum? Anything is possible, but it is not very likely. In our opinion, trying to guess the long-term impact of such global events is a fool’s errand. Prudent investors know what they own and why they own it. They invest from the bottom-up, meaning they judge each investment on its own merit as opposed to speculating over global events. This is what we do at Iron Capital, and it is what we will continue to do.

    I have witnessed a lot of human tragedies during my career – hurricanes, earthquakes, tsunamis, outbreaks, and, of course, terrorist attacks. Each one was horrible and almost universally caused the market to drop; and every single time, those market drops created great buying opportunities.

    I’m reminded of the wisdom of the old stockbrokers who were around when I was young in my career: the stock market is the only store in the world where people want less of the product every time that product goes on sale. That is when prudent investors want to buy.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Coronavirus