Imagine hiring a contractor to build you a house, and within a few years, it literally falls apart around you. Imagine, too, this individual did the same thing for several other people over several years, and their houses also fell apart around them. Then, imagine this incompetent homebuilder's name was plastered all over every news service in the free world as the worst homebuilder ever.
Would you ever hire this man to build you a house? It's a stupid question, isn't it? Of course, you'd never ask this guy to build you a house. He's obviously a terrible homebuilder.
Managing money is apparently very different than mundane jobs like homebuilding. For proof, ask John Meriwether – the hedge-fund manager responsible for one of the most famous blowups in history, Long-Term Capital Management (LTCM).
You'd think LTCM would have made it impossible for Meriwether to attract even another $1 of assets. But after losing investors billions in 1998, Meriwether was still able to raise money for a second fund, JWM Partners, soon thereafter. The JWM Partners fund failed three months ago after a crippling, 44% loss.
Surely, after two miserable failures, one of them perhaps the most notorious and spectacular money-management failure of all time... surely he'd never be able to raise money for a third fund. Would he!?...
Lay-deeeez and gentlemen, coming in 2010... Mr. John Meriwether's third hedge fund: JM Advisors Management. Proving he's learned nothing, Meriwether's new fund will employ the same highly leveraged arbitrage strategy as his first two funds. I can't imagine who is dumb enough to give this man a penny. He's pursuing a strategy that can't possibly work, and now the whole world knows it beyond a shadow of all doubt.
His name should be Mudd (though I realize that's probably a disservice to Dr. Samuel Mudd, who did a decent job on John Wilkes Booth's leg, as far as we know). Instead, it seems like John Meriwether's name is more like Jesus or Ghandi or Brittany Spears.
I don't care how smart Meriwether is or that he pioneered bond arbitrage at Solomon Brothers in the 1980s. As a money manager, he is worthless and stupid. His undoing always has the same cause: high leverage. At one point, LTCM was effectively levered 100 to 1. JM Advisors was much more conservative at a mere 10 to one. It's as though he is incapable of learning. No matter how great the mind, it's downright stupid to use a strategy in which a small drawdown – whether it's 1% or 10% – will destroy your equity base. Leverage goes both ways. Duh.
As for why investors would take yet another chance on the likes of Meriwether when his brilliant strategy is so obviously toxic... I think the answer lies in the allure and mystique of "talent." People worship "talent" the way they worship Jesus, Jon & Kate, and Barack Obama. The compliment I hear most often about money managers is not that so-and-so has loads of experience or that he's committed to a fundamentally sound process or great at avoiding big risks other people don't see. The compliment I hear most often is something like: "He's so brilliant," or "He's so talented," or usually just, "He's so smart."
The trouble is, investing isn't a puzzle best solved by smart people. It's a mystery best solved by people with the experience and skill to recognize risks that aren't worth any potential reward. The difference between a puzzle and a mystery was the subject of an article by Malcolm Gladwell, author of best-selling books like Outliers, Blink, and The Tipping Point. The article wound up as a chapter in Gladwell's new book, What the Dog Saw. There's an interesting book on the same subject called Talent Is Overrated, by Fortune's Geoff Colvin.
Porter delved into the distinctions, too, several years ago in The Digest.
Then, there are folks like Jimmy Cayne, the former CEO of the former investment bank, Bear Stearns, who is always good for a laugh... even if he's not good for anything else. While his firm was failing, rumor had it Wall Street's most Nero-like stooge was off somewhere playing bridge, golfing, and smoking pot. According to a new book by CNBC's Charlie Gasparino, Cayne also enjoyed some of the "harder" stuff...
[Phil] Cohen recalls one such incident of Cayne's free-living lifestyle: Cayne called him to his forty-eighth floor corner office with its great view of the East River in Lower Manhattan to discuss some firm business. After a couple minutes of small talk, Cohen says Cayne reached down into his desk and pulled out a blue Bromo Seltzer bottle. (Bromo Seltzer is a white powdery antacid.) "What do you think's in here?" Cayne said, according to Cohen's recollection. "Bromo Seltzer?" Cohen asked, slightly bewildered. "No, it's filled with cocaine," Cayne said with a smile. Cohen never checked to see if that was true, and Cayne in an interview says he has never done coke (he also called Cohen's account "patent bullsh*t").
In today's Growth Stock Wire, Jeff Clark predicts higher prices at the gas pump:
Last week's gasoline inventory report showed a surprising drop of 5.2 million barrels versus expectations for an increase of 1.6 million barrels. The price of unleaded gas jumped 10% higher on the news.
Yesterday, the gasoline report came in line with expectations for a 2.3 million barrel drawdown. The price of gas rose again...
The price of unleaded gasoline is approaching the upper end of a five-month trading range. If gas can break above resistance at about $2.10, the pattern suggests a move as high as $2.55.
While the upswing in gasoline prices will mean big profits for the refining industry, it will undoubtedly hurt the wallet of an already struggling economy. But don't worry, Doc Eifrig is on the case...
The good doctor has found another way to spend less without compromising your lifestyle..
Last month, I drove to Baltimore from Florida and saved about $12 on my fuel (roughly 6% of my costs) using the website www.gasbuddy.com. The site lets you find the lowest gas prices along your route.
Here's what I did. I clicked on "Trip Cost Calculator" (near the top in the middle) and put in the make and model of the car and even how much fuel was in my tank when I started out. The site calculates where to fill up to maximize your gas savings.
Be sure to try it this holiday season... You'll easily save yourself at least a few dollars. By the way, I also use it around town. My actual savings this year is more than $120.
If you're looking for more tips on saving money and living well, check out Doc's Retirement Millionaire. His latest issue will be out tomorrow evening. In it, he tells readers about the easiest exercise you'll ever do, how to rent your real estate out tax-free, and many other tips to improve your lifestyle. To access this issue – and learn how to save as much as 80% on almost everything you buy – click here.
New highs: iShares Hong Kong ETF (EWH), iShares High Yield Bond Fund (HYG), Visa (V), Kinder Morgan Energy Partners (KMP), Enterprise Partners (EPD), Altius Minerals (ALS.TO), WD-40 (WDFC), 3Sbio (SSRX), Jinshan (JIN.TO), Martin Midstream (MMLP), Nevsun Resources (NSU).
Find out about "croupier businesses" in the mailbag. Also, send us a note: feedback@stansberryresearch.com.
"After I was hired by a major oil company, I had an interview with my new boss. One advice he gave me: Never dip your pen in company ink. Two weeks later he died of a heart attack while climbing the stairs to his secretary's apartment during the noon hour." – Paid-up subscriber Lee
"Inflation/Deflation? For most people what counts is the cost of everyday items. So what if real estate prices are down. There's no impact unless you are a buyer or seller. Your property may be worth less but have your property taxes gone down? Fat chance. Sales tax just went from 7.125% to 7.5%. Electronics? How often does one buy a big screen tv. On the other hand many items in the grocery store are up 50%-100% in the last two years. Milk, butter, eggs, and bananas are ridiculously cheap but that doesn't make for balanced diet or offset the increase of other items. Utility bills are up. Gasoline prices change every day. They may be down but nowhere near the price before the big spike came. All in all, the government COLA basket may be down but when people are paying more for necessities, it sure feels like inflation.
"As a bar owner, dealing in non-essential/sin tax targets, my costs are constantly increasing. Much of which is the direct result of government rules, regulations and fingers in the pie. Downtown night life has been steadily declining for nearly 10 years. They are killing the goose that layed the golden egg." – Paid-up subscriber Anita Carlson
Ferris comment: That's what I've found. All my utility bills have gone up. If it weren't for Wal-Mart, my grocery bill would have gone way up, too. On my trip to New York earlier this week, I ate at McDonald's every day to save money.
The day after I paid almost $8 in Times Square for a Big Mac, fries, and a Coke, Bill Ackman of Pershing Square Capital Management, speaking at the Value Investing Congress, said he doesn't own gold because he'd rather own stocks like McDonald's and Automatic Data Processing (an Extreme Value pick), both of which are excellent ways to counteract the effects of inflation, due to pricing power and the ability to earn a yield from float.
Murray Stahl of Horizon Asset Management has been saying for years that many financial stocks are good inflation hedges. He calls these stocks "croupier businesses," because, like ADP and Visa, their earnings skim something off the top of the movement and/or have custody of hundreds of billions or even trillions of dollars. Inflation means more dollars in existence, ergo, the croupiers' earnings, as a group, will always keep pace with inflation. You can read more about his ideas on croupier businesses here.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
October 22, 2009