Dan Sweet

How not to invest.

I am not good at trading. I try to be honest with myself, admit that, and avoid trading. However, in our Jim Cramer/Fast Money era it seems like you are leaving money on the table if you don’t have at least a couple positions on at all times.

Here is a summary of my trades of the last 4 years or so.

Trade #1 (Winner) – Buy Gold via CEF with gold at $600 back in 2008ish? Sell at $1000+ and rebuy at $900. Just sold again at $1500+ last week. 2.5x

Trade #2 (Winner) – Close all positions with market at roughly 11,000 in fall 2008 when I see on C-SPAN that Congress isn’t going to pass first TARP bill. I look like a hero as market falls to 6,000ish. Avoid getting cut in half.

No Trade #2.5 (Loser) – I never rebuy. Buffett say its time to buy, I see 4,000 around the corner and take a pass. Market now at 12,000+ and all of a sudden Trade #2 doesn’t look so great. Miss an easy double.

Trade #3 (Loser) – Try to make money shorting commercial real estate over a long period of time using a short term structured ETF. Very bad idea, lose lots of money. I suck at trading. I’m reminded yet again to not even play if you aren’t going to put the work in. Lose 75% of position.

Trade #4 (Winner) – Buy SLV at $13.89. Sell last week at $45ish. 3x

Net – I’m basically completely flat over those 4 years. Basically on par with the market.

I’m completely in cash now but want to get back in and “set it and forget it.”

Current shopping list looks like this:
Buy AAPL
Buy GOOG
Buy CEF (Canadian gold trust)

This passes the Warren Buffett test where hypothetically the market closes tomorrow for 10 years. I’d feel just fine owning these three. Keep it simple.

Ridiculous Revenue Growth

A friend at Apple brought this video to my attention.  Mary Meeker covers 10 questions for Internet company CEOs.  Watch the whole thing.  We are in very interesting times.  I found the 2.5 minutes starting at 14:25 the most fascinating.  Apple grew $12B in revenue to $20B between fall 2009 and fall 2010.  Wow!  Thats about all I can say.

Business is Solved

This concept is one of the major themes of the recent book The Lords of Strategy.  I listened to the Audible version which features a very wonkish sounding narrator.  The book is all kinds of academic/intellectual blah blah blah, but I definitely learned a lot from it.  Another of the book’s main points is that the roots of the top consulting firms are firmly planted in the academic and intellectual worlds.  Maybe this explains the choice of narrator?

Anyways, I wanted to jot down a couple of the main themes while they are still fresh in my mind.  Here they are:

1 – Greater Taylorism (that guy with the stopwatch) which led to
2 – The Fiercening of Capitalism
3 – BCG Matrix – the consultant’s Million Dollar Slide
4 – Bain – Thinking AND Executing? – profits at a discount
4 – Michael Porter – apparently not a hit with the tenured crowd
5 – The  Birth of Private Equity
6 – Where Are We Going? – good comments on “the shareholder”

See this link for a long interview with the author that covers most of the main points I’ve called out above.

Pieces of trivia/insights I found fascinating:

Bain was founded by a bunch of defecting BCGers. Bain’s big differentiator was that they wanted to do long engagements with a client and actually wanted to stick around to see the results of their strategies implemented successfully.  I liked the author’s description of the Bain sales pitch as tomorrow’s profits at a discount.  The evolution of Bain came a couple decades later when senior partners realized they’d never become “seriously rich” (only 3-4 million in personal wealth) staying in consulting.  So they started Bain Capital and created private equity.  Mitt Romney was co-founder (somehow I had missed this).  When the BCG Matrix reveals the pieces of a company’s portfolio that aren’t going anywhere (the Dogs), Bain can help you sell them off. In many cases, they’ll even buy the business from you.  Then throw a bunch of consultants at it, cut the costs to the bone, figure out the competitive landscape, re-invent the Dog of a company, flip it, and profit.

Being an outsider is powerful. In the best cases, consultants come in with a fresh set of eyes and lots of spare capacity.  No day job taking up 90-110% of their time.  No internal politics to navigate.  No 2-5 layers of middle management and multiple functions to navigate/get aligned.  Just a focus on analytics, costs, competitive benchmarking, market share, and a motivated senior leader to share the analysis with.  I got a taste of some of the elements of this experience when I interned at P&G.  Now that I have a full time job, it is a little more complicated.  That said, I like my family, so I’ll have to settle for this book as my window into the consulting world.

All in all, an interesting read.  A lot of useful background to help you understand key influences in the history of corporate strategy over the last 50-60 years.  Good refresher on key strategery frameworks.  Some interesting commentary on how capitalism has evolved / is evolving.  I’m guessing the print version is pretty dry, but thats why I did the audiobook.  A couple long drives, a grocery run or two, mow the lawn, a little work in the garage, and all of a sudden you come out a little more knowledgeable with a few more useful mental models.  I like it.
[end Audible infomercial now]

Warren Buffett on derivatives (11 of 12)

This is the eleventh in a series of twelve posts. The introduction to the series is here. By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

How do you feel about derivatives?

Derivatives create big positions people don’t understand.

Classic case is detailed in the Brady Report from October 19, 1987.  130/30 is the new hot thing.  Portfolio insurance was the thing then.  “Dynamic Hedging”  Basically the lower it goes the more you should sell.  Institutions had to sell at certain levels and everyone knew it.  Less than 2% of the market was on this kind of auto-pilot program-yet crashed the whole market.  Derivatives have created huge amounts of capital that are forced to move automatically.

They offer opportunity to me but a lot of people can get hurt.

A greater portion of the market is poised on a hair trigger to respond to given messages.

Federal Reserve margin requirements are 50% for you and me.  So many ways around that. “total return swap” for example.  Long Term Capital Management had a $6 billion position with no capital put up.  Whatever happens in the market is exacerbated by derivatives.

Banker’s Trust screwing P&G—like 8 variables those companies didn’t understand.

We will make a lot on derivatives but I will know every position.

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Warren Buffett’s thoughts on the Fed in October 2007 (9 of 12)

This is the ninth in a series of twelve posts. The introduction to the series is here. By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

Is the Fed doing a good job?

They can’t solve everything.

Dropping the rates a lot is less of an option with the dollar situation—$2B/day flowing out.  Bernanke’s hands are somewhat tied.  Brazilians have been supporting the dollar recently as their currency has become worthless.

Perceptions lag reality.

Gold and oil are up a lot but much of that is just our perspective and the result of the weak dollar.

Current account deficit is unsustainable.  Bernanke just said it. Greenspan said it in 2003.

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