Thriving on the Backs of Our Shell-Bound Colleagues

This is a modified version of a post from the March 2001 issue of Better Investing magazine.  As our Groundhog celebration continues — and even as it winds down — we’re reminded of a heritage of long-term investing success, steeped in patience, discipline and yes, rituals.

Punxsutawney, PA. (Population: 6,782)– February 2, 2001

On this day, a small town just northeast of Pittsburgh finds its way to the hearts and minds of people worldwide. The principal inhabitant of Gobbler’s Knob, Punxsutawney Phil, plays host to the likes of presidents, news anchors and talk show hosts. In the chilly morning breeze, thousands gather to see whether Phil will observe his shadow — immediately following his stretching exercises, breakfast and morning coffee. For the record, he’s seen his shadow some 90 percent of the time over the last 100 years or so. I doubt that there’s much correlation between his shadow and wintry durations — but the masses gather anyhow.

Saturday Morning

Rituals occupy an important place in our lives. One of the endearing features of monthly investment club meetings is that they encourage a discipline of regularity. Invest regularly. Monthly meetings reinforce. They make it difficult to ignore the prodding that we should regularly contemplate and explore our investment efforts.

When I first started investing, one of my rituals was to make the sojourn to my local bookstore every Saturday morning. The itinerary included a stop for a cup of coffee and a saunter next door for that weekend’s edition of Barron’s. Like all newbies, I watched CNBC and checked my stock prices far too frequently.

Too frequently? How much is “enough?”

On the Backs of Roaring Tortoises

It’s a good question. In fact, it’s a great question. It was presented to me by a reporter from Forbes not so long ago. It stirred the memory of a question to Ed Finn, publisher and editor of Barron’s, delivered from the floor of Congress 1999, after Mr. Finn had concluded his keynote remarks. (Those memories were recently rekindled while listening to Mr. Finn’s keynote remarks at last week’s MoneyShow in Orlando)

“How do we reconcile the apparent reality that investment clubs achieve strong performance levels despite the fact that most of them only meet for an hour every month or so?” Mr. Finn suggested that the investment professionals might want to think about that — and consider becoming a little less active in their execution of transactions.

The Forbes reporter’s question tiptoed up to the question again. “Once you develop a solid comprehension of the modern investment club approach to investing, and your portfolio is in place, how much time would you say you dedicate to the management of your personal assets?”

I thought about it. There’s an element of “hobby” and certainly entertainment to the things that we do as investors. Clearly, some of us spend more time than others exploring and learning. But this question had a deeper nature to it. How much was essential? I thought about it some more and said, “8-10 hours per year.” That may stagger some of you. But I’m convinced that my impressions are correct in this regard. My thoughts drift to conversations with national event attendees. These discussions are a distinct privilege. “You’ve done well, very well — for decades — what’s it take?”

With a twinkle and a smile, several answer the question with stories of cruises and their best days on the golf course. With a wink, others confide that much like Punxsutawney Phil, they drag out their portfolio once a year to see whether the sun is still shining. With regard to my personal holdings, it’s no exaggeration whatsoever. Following a recent investment conference presentation, I was discussing a mutual holding with an attendee and was pleasantly surprised to learn of a large increase in price that had occurred in the last month or so.

Eight, maybe 10 hours per year? It’s more than possible. For many, it’s an absolute reality. Many practitioners spend a couple hours every quarter — checking in on how the management of the companies that they own are performing. Are they pursuing opportunity? Are they doing so profitably? Is the sun shining? How’s their shadow?

Our obsession with tortoises in this issue has a basis in a time-honored heritage. Listen for the roar. Invest regularly, in leadership enterprises, at good prices. Don’t hurry, but don’t wait, either.

Join us at Manifest Investing and Expecting Alpha as we build resources that make sense for your Saturday morning sojourns. We hope our community resources will become a favorite destination for your 8-10 hours per year and beyond.  At Manifest Investing, we’re committed to remaining focused on what really matters: the growth, profitability and valuation characteristics of your holdings and potential holdings — and any threats or opportunities to both.  We’ll do our best to sound the bell of opportunity or the clarion of a threat.  And we know that our collective community will be vigilant and do its best to watch for shadows.

You can’t have a shadow without some sunshine.

Gerri Willis of Fox Business News asked about the Beardstown Ladies during an interview this week.  Yes, they’re still in existence and prospering. They’ve added new partners. The media still mangles the facts about that mistake.  The mistake was largely Disney’s — a federal judge agrees with me.  The Ladies committed a human error.  Their performance was better than is perpetually broadcasted.  You can ask Price-Waterhouse about that.  But more importantly, they continue to grow, explore and reach out to remove mystery and fear from investing — enabling a new generation to discover successful long-term investing.  We shared some details in this message from Thanksgiving 2010 …

Thanksgiving is a time for reflection, gratitude and hope and in this case, a rekindling of a very special spirit nestled in the cornfields of Illinois …

Of Heroes and Harvests …

It was a beautiful autumn day in the heartland. I attended a couple of investment club meetings … the first in Mt. Carroll, Illinois — near my home town — and the second in the heart of Illinois in place called Beardstown.

I admired the scenery as the combines and heavy equipment toiled to bring in a robust harvest this year and the highway miles rolled by. I have many friends who are farmers. They work hard. It’s nice to see rewards harvested and smiles even if that farm equipment backed up traffic while migrating from one field to the next. The day included reminders of time-honored traditions and legacies while harboring a surprise or two.

The Beardstown Ladies have been using options for their club portfolio. They’ve been doing it for a while now.

I’ll let that one sink in.

The Beardstown Ladies have been an inspiration to a generation of investors. I count them among my friends and heroes.

Did you know that they have a room in a museum dedicated to their investment club?

Still ruminating on that options thing? We’ll come back to that.

It’s true. During my visit to Beardstown, I discovered that the city was once the epicenter of Illinois, larger than Chicago. Beardstown is strategically located on the Illinois river and was a center of commerce back in the 1800s. Abraham Lincoln launched his presidential campaign in Beardstown.

The traditional town square in the center of town hosted one of the Lincoln-Douglas debates.

And down the hall from the Beardstown Ladies room in the museum … is the court room where Lincoln practiced law. It’s the scene of one of the most famous legal arguments. The case is known as the almanac trial. Lincoln was defending the son of some good samaritans from his youth. (They had literally taken young Abe in when he was essentially homeless.) Their son was on trial for murder and Lincoln (think Perry Mason) tripped up the key witness by pointing out that the “full moon used under testimony” was no where to be found in a Farmer’s Almanac.

Yes, the Beardstown Ladies are using options. But that’s not the best surprise.

The club is getting larger and attracting some younger people to participate.

The Ladies meet in the basement of the town hall shown — a former Carnegie Library, typical of those sprinkled throughout the Midwest.

You Can Do This. We’ll Show You How

The words still resonate. I had discovered long-term investing back in the mid-1990s … formed a family and friends investment club, but frankly it probably was hanging in the balance.

And then I attended a luncheon featuring the Beardstown Ladies, Betty Sinnock and Doris Edwards. You can do this. We’ll show you how.

It’s a theme we hope to live and extend at Manifest Investing.

The first of Carnegie’s public libraries displays the motto, “Let there be light” at the entrance.

His first library in the United States was built in 1889 in Braddock, Pennsylvania, home to one of the Carnegie Steel Company’s mills. Initially, Carnegie limited his support to a small number of towns in which he had an interest. From the 1890s on, his foundation funded a dramatic increase in number of libraries. This coincided with the rise of women’s clubs in the post-Civil War period, which were most responsible for organizing efforts to establish libraries, including long-term fundraising and lobbying within their communities to support operations and collections.

The genesis of the Beardstown Ladies was the Business and Professional Women’s association.

A few miles to the north in Mt. Carroll, I had the opportunity to spend some time in the shadow of yet another Carnegie Library … on another Midwestern town square. The Nest Egg investors sport a portfolio that I’d not only be proud to own, I basically do. Their collection of community favorites and promising companies mirrors our most widely-followed stocks.

That’s not a surprise.

The surprise is they’re expanding and welcoming new ladies to the club. On this day, they welcomed our family (including my Mom and Dad) to their gathering. The leadership of ladies like Mary Ann Hutchison and Wilma Colehour is making a difference. Interest is growing with a younger generation and we’re hopeful that these seeds germinate and continue to thrive.

We look forward to watching future harvests and celebrating nurtured nest eggs.

This is just one more nest egg that can point to the Beardstown Phenomenon as a powerful influence and inspiration.

Back to Beardstown

I’m still working on our nest egg. But the Beardstown Ladies have made a significant difference for me and my family as we’ve sent two children to college and launched a business. As we bow our heads on Thanksgiving, I will be thinking of many blessings. I want all of the Ladies to know that they’re pretty high on the list and I told them that as we gathered.

We talked about a few stocks. I watched them thoroughly discuss (and sell) a very long-term holding.

They asked me for some thoughts and I shared the significance and relevance that we’ve discovered with the Value Line low total return forecast.

And then … one of the ladies whispered, “What do you think of options being used by investment clubs?”

I slumped into my chair extruding a “fake sigh.” Most of them seemed to be either “giggling” or looking at their shoes. 🙂

“You mean to tell me the Beardstown Ladies are using options for the club?”

“Yep. We’ve been doing it for a while.”

“Really?”

“Homer, our broker in Peoria, has been teaching and helping us with it. What do you think?”

“One, I think you’re in good hands. Two, I think it’s a great idea. The foundation of investment clubs is learning-by-doing. Explore. Discover. Fail. Succeed. Together. Some of my other heroes have been urging me to better understand conservative options strategies like covered calls and protective puts for the last few years. I’m learning right along with you.”

We’ll launch a new demonstration in January — taking our [BareNaked Million] — and deploying options strategies in full view. We’ll call it [Covered Million] and hope to demonstrate some incremental success using some of the conservative options strategies we’ve become more aware of.

Exploring. Learning. Discovering together. I’m sometimes asked if I believe investment clubs are “dead.” These two clubs provide strong evidence to the contrary and we don’t need an almanac to check sunrise or sunset to see it. Youthful exuberance inspiring the next harvest … it combines with the knowledge that every harvest sunset is also a harvest sunrise. It’s just a matter of perspective.

Happy Thanksgiving, everybody.

Maintaining Our Time-Honored Long-Term Perspective

I feel no shame, I’m proud of where I came from
I was born and raised in the boondocks

One thing I know, No matter where I go
I keep my heart and soul, In the boondocks …

It’s where I learned about [investin]’
Its where I learned about love
Its where I learned about working hard,
And having a little [edge] was just enough
It’s where I learned about Jesus
And knowin’ where I stand
You can take it or leave it
This is me. This is who I am.
Give me a tin roof, a front porch, and a gravel road
And that’s home to me, feels like home to me.

With certain apologies to the country band, Little Big Town, the last few weeks have presented an old-fashioned whumping of vast abuse to well-intended investors worldwide.

Part of Warren Buffett’s charm is that he hails from Omaha, Nebraska. In his words, it’s an advantage to be a thousand miles or so from lower Manhattan … in the boondocks so to speak. I believe it’s also been an advantage for legions of long-term investors that heed the wisdom and philosophies of George Nicholson and the modern investment club movement: EXPORTED FROM DETROIT.  What we do is Better Investing … yes, in the boondocks, with our focus on fundamentals, quality, excellence of management, building return forecast expectations and an effort to channel misguided emotion into the energy of opportunities.

Some Perspective: Halloween 2007

Lest we all forget, this agony actually started nearly one year ago. As Dan Hess observed, we’re now treated to 4-day and 4-hour bull and bear markets — marked by 20% swings in the major averages. The massive gains of Monday have already been eroded.

What’s going on?

We could do a full-hour version of Stephen Colbert’s Wag-of-My-Finger lambasting the guilty, but we’d run out of fingers before we ran out of hooligans.

Yes, the slowing economy, the housing bubble, irresponsible mortgage transactions (both ends), that oh-so-normal market paranoia and panic. But the core — at least to me — revolves around two main themes: (1) Greed and heinous liberties taken by “innovative” rhinos, and (2) the human condition that makes understanding cycles so challenging.

Volatility … It’s Hard to Call You a Friend, But We Must, We Must …

Make no mistake. This ain’t easy. It hurts to see balances in retirement accounts sag. Our Tin Cup model portfolio has gone from $450,000 to $620,000 and back to $481,700 in less than four days.

Very few stocks are immune from the symptoms. Equilibrium has been wrecked by the “innovative rhinos.” We’re seeing the effects of a MASSIVE breach of confidence and trust and it will take a while to restore equilibrium, independent of whatever flavor of recession we endure.

We hope you’ve enjoyed the contributions of Hugh McManus with respect to the banking challenges and opportunities whether he’s writing from the boondocks of Switzerland or California or any number of boondocks in between. Hugh and I have spent a fair bit of time trying to understand this “event” and we’ll probably take a closer look at Charles Morris’ Trillion-Dollar Meltdown in days ahead.

My take is that the credit default swaps (CDS) are literally a form of lottery ticket. The problem is that infinitesimal odds were in place … and redemption was never supposed to be an issue. We should know better. If the idiots responsible haven’t noticed that we’re having 100-year floods every 3-5 years now, they need some remedial math.

I still don’t understand how the “leverage thing” works when it comes to these lottery tickets, but I’m still working on it. It’s little different than if I wandered my neighborhood urging my neighbors to tear up their insurance policies. “I’ll cover your house for $100/month — no problem!” After knocking on (20) doors and collecting $2000/month in “premiums”, life is good. My favorite “innovative rhino” and I are going Maserati shopping together. Why worry? Not a single house has burned down in our neighborhood since we moved in over 10 years ago. No worries.

The disruption is massive and it hurts.

Our daughter is a teaching intern at a local high school. She came home with stories of how the educators are “bailing” on their 403(b) plans. Virtually every teacher has converted their holdings to “guaranteed income.”

But hope lives in the boondocks.

I’ve also received calls from several friends and family seeking investment opportunities. Our heritage keeps hope alive.

If fundamentals stay intact — and we’re stepping up our monitoring/updates of EPS results and forecasts, etc. — we see opportunity in the very shadows of a panic:

VLMAP (Value Line Median Appreciation Projection) has rarely ascended so rapidly. It’s now in places that beckon for the reverse gear on our investing trucks. But only if the long-term trends stay intact at levels to support the elevated return forecasts … we’ll be watching closely.

One More Time Around The Block in the Boondocks

History repeats. It simply does. And every time we go through things like this, we promise to learn from it and “do better next time.”

Next time is here.

At the risk of sounding like one of our presidential candidates, “My friends, we’ve been here before.”

As the accompanying chart shows, projected returns have soared to rarely-seen levels on a number of occasions in the past. If you’re a member of an investment club or individual investor who persisted in investing regularly, seeking the best companies at the best return expectations you know exactly where this is headed.

This 40-year profile of weekly VLMAP levels (the median projected annual price appreciation for the Value Line 1700 stocks) provides some interesting milestones:

1. 1974 Oil Embargo. Disruptions in oil supply, prices and waiting lines. Some of the best selections in the history of the Better Investing monthly Stock to Study were made during the mid-1970s.

2. Culmination of a really nasty recession. The start of the Reagan Expansion and approximate 20-year bull market — with speed bumps, of course.

3. Days of malaise. Better days were ahead. There are always better days ahead.

4. Desert Storm. Recessionary speed bump — advent to 10 of the best years investors have ever experienced.

We’re virtually certain to see this weekend’s VLMAP “lap” the field and move into either the #3 or #4 best investing time in the last 40 years. Note that the 2008 VLMAP peak is virtually even with the most promising days of late 1987.

… It’s All About a “Little” Edge

When Peter Lynch assumed the reins of Fidelity Magellan, his performance target was to beat the market by 2-3 percentage points. It doesn’t seem like much until you try it.

Here in the boondocks, we believe it’s prudent to aim for a five percentage point advantage relative to the overall market. Not everyone achieves the 5% advantage and George Nicholson “confessed” that he had no idea how aggressive this objective was at the time.

Solomon Select

The results of investing $100 into the Solomon Select featured stock each month since the inception of MANIFEST is shown in the accompanying figure:

The relative return for this tracking portfolio is a little more than 5 percentage points — versus matching investments in a total stock market index. The monthly selections have outperformed the total stock market benchmark with an accuracy rating of 59.1%. (The last time we checked, a typical accuracy rating for the CAPS stock picking experiment was on the order of 40%.)

Think of the voyage as a ship riding the cresting and bottoming waves. Our objective is to stay “above water” no matter how perfect the storm gets. (No George Clooney jokes, please.) Steadily maintaining this margin is one of the keys to successful long-term investing.

As Hugh shared earlier today, the measure of success isn’t necessarily the performance results versus any given benchmark — because achieving an 8% long-term return is vastly superior to stuffing Andy Rooney’s mattress .

A Clamor For Context

The average EPS growth rate for year-over-year results since 1970 has been 10%.

Problem is … average doesn’t happen very often. The annual results were 10% in 1979 and 1996.

Stock prices fluctuate. Return forecasts fluctuate. I hope nobody is surprised that EPS forecasts and results fluctuate. Historically, they fluctuate quite a bit. As the following figure shows, the range is pretty wide (-50% to +60%) and our EPS critter is pretty restless:

Truth is … the fluctuations have actually subsided in recent years.

The periods of recession according to the annointed economists who declare such things have been shaded. Note the EPS growth dips that generally accompany these recessionary periods.

Now take a look at our recent history and the projections for the next few years. There will be some differences due to sample and (I’m guessing) a large-company bias on the longer term Value Line results. How do the swings compare for recent years?

Right. Pretty steady, huh? This is the kind of stuff that snuffs memories and leads turnip-truck rhinos to declare that cycles have been repealed.

Those Cycles … They Can Beguile

I think one of the largest influences on the events of today is the reality that we have so little experience in dealing with economic/business cycles over the last 20 years. Look no further than the historical frequency of the gray highlighting (recessions) shown on that year-over-year EPS chart.

We used to get a whole lot more practice at these “things” called recessions.

Now, hands are a-wringing and the whining is saturated with adjectives that include things like Armageddon, holocaust and doomsday. Make no mistake, I certainly know that the pain is real but context, perceptions and perspectives have been assaulted. My family and I live at one of the epicenters … or should I say Ground Zero? … to pour on the emphasis? Many of our friends, family and neighbors work for either Chrysler, Ford or General Motors.

We started this conversation with blame distributed among (1) greedy rhinos and their opaque playground, and (2) the challenge of cycle recognition. Turns out the two are related …

In an interesting display of “leadership” that can only be framed as “Be Afraid, Be Very Afraid” , an automotive executive shared the following:

The times for the auto industry are not just unimaginable, but “truly unimaginable,” he wrote. And also “challenging,” he added three sentences later.

The current economic period is not just difficult, but “the most difficult any of us can remember.”

Truly unimaginable? Really? Somehow defense attorney Demi Moore in A Few Good Men comes to mind.

Demi: “I object!”

Judge: Over-ruled!

Demi: “Then I STRENUOUSLY object!!!”

The problem is … he’s wrong. (Or simply afflicted with short or very selective memory)

Check out the long-term track record for the sale of domestic light-duty vehicles over the last thirty years or so:

Breaking it down into year-over-year comparisons provides a better/closer look at the situation replete with a number of cycles and historical challenges:

By the way, those 2009 forecasts are deemed worst-case scenarios according to think tanks and economists in their research.

And 2008 probably isn’t even in the Top Ten Worst … yet.

The point is that we’ve clearly been here before. Granted, the specific aspects of the challenge are different but from the larger perspective, cycles have been cycles and will continue to be cycles for the forseeable and unforseeable future.

There are cases where our analysis would be well-served to include much more than 10 years of retrospective. It’s something we’ll be taking a much closer look at because we believe that cycles will be cycles … and they deliver beguiling challenges.