When I worked as a stockbroker, our firm had a custom where all of the brokers would take turns serving on Broker of the Day (BOD) duty. The vast majority of the calls coming into our offices were from established clients to their existing brokers, but on any given day we might get a few first-time inquiries from people who needed our services. Most of us welcomed the chance to serve our turn as the BOD, because it could mean picking up a new client. I mean, you just never knew when Warren Buffet might call needing to buy a million shares of IBM, or when Bill Gates might walk in the door to sell a gazillion shares of Microsoft.
My most memorable encounter as the BOD started when the receptionist buzzed my desk to tell me that there was a lady who needed some assistance in the outer lobby. I straightened my tie, put on my suit jacket, and entered the reception area to greet a woman who was neatly but not elegantly dressed, probably just shy of middle age. She was clutching something in her hand that I soon learned was a stock certificate, and she had that deer-in-the-headlights look of someone who has ventured into unfamiliar territory on a decidedly alien mission. She told me that she wanted to sell the 20 or so shares of Philip Morris indicated by the certificate, which had come her way as some inheritance, as I recall. I politely suggested to her that she place the shares in an account, and that we could discuss her long-term investment plans. I quickly learned that she would have none of that. To her those shares were like a stray dog that had taken up residence on her front porch, and she wanted to wash her hands of the inconvenience and collect any reward due her from the mongrel's owner. This was particularly frustrating for me, because Philip Morris was one of my favorite stocks at the time. I was trying to get my clients to buy it, not sell it. There wasn't anything to be gained from pressing my case, so we filled out the necessary paperwork and sold the shares, which took all of about ten minutes. I never saw her again.
The moral of this story is a variant of the "knowledge is power" bit of wisdom, namely that the lack of familiarity can lead to missed opportunities. To put it another way, you don't know what you don't know. It could have been that my ten-minute client desperately needed the cash, but I think she just didn't want any currency that she couldn't spend as the need arose. Keep it simple, give me something I can understand. As investors, we try to avoid the costly mistakes, but when we make them--as we inevitably do--the consequences are made manifest on our portfolio statements. Unfamiliarity works more like a dormant virus that manifests little in the way of symptoms, but nonetheless eats away at our potential for market-beating returns. Familiarity may breed contempt in relationships, but unfamiliarity is more likely to breed missed opportunities when it comes to investing. Here we will look at two ways that unfamiliarity can sabotage our returns and consider some ways we might inoculate ourselves from its virus.
First, we could come up with a list of familiar companies that would make Peter Lynch proud, a number of which would make worthwhile investments: everything from Pepsi and Coca Cola to Apple, McDonald's, Priceline, Whole Foods Market, etc. If we picked our stocks based on solid research, we'd likely do quite well. However, there are other companies that are not household names because they are not likely to come into contact with your household. These are the businesses that do business with other businesses, and they can be huge established companies or start-ups. For example, unless you are the next Jed Clampett and strike oil in your backyard (Well the first thing you know old Jed's a millionaire.....), you're not likely to be doing business with Schlumberger (SLB, $68), the big oil services firm. Such companies are not part of our everyday experience, so they escape joining the pantheon of the familiar. Consider as another example Verisk Analytics (VRSK, $47) which, until a few years ago, was owned by a group of the major insurance companies. VRSK collects and analyzes data to evaluate risk in the underwriting process, and they have expanded into the areas of healthcare, credit, and crime data analytics. We, as final consumers, are only indirectly affected by what is known as Big Data, but all of our transactions and online activities are generating massive amounts of information that companies need to analyze so as to more effectively market their goods and services. (We'll look at this trend in more detail in an upcoming post.) Other companies involved with data storage and analysis include EMC (EMC, $29), Teredata (TDC, $68), TIBCO Software (TIBX, $33), and Rackspace Hosting (RAX, $57). Such accumulations of data need to be protected, and this is potentially big business for Internet security firms such as Fortinet (FTNT, $28) and Sourcefire (FIRE, $49). Also in the technology sector, Qualcomm (QCOM, $67) makes the wireless technology in many smartphones and tablets. We may be very familiar with Apple (AAPL, $634) products, but not so well-versed when it comes to understanding what is inside those devices. Many drugs that made the big pharmaceutical companies household names are now coming off patent (the so-called "patent cliff"), but a company like Watson Pharmaceuticals (WPI, $67) that makes generic versions of those drugs may not be familiar even to those who are prescribed the treatments.
Now, you may be thinking that you can rely on your financial professional to know about such trends and companies and to bring that information to your attention as potential investment opportunities. That is no doubt true to some extent, but the second source of the familiarity challenge may be your broker's own lack of it in certain areas. No financial adviser or broker can be expected to follow every single publicly-traded company, and that is understandable. Brokerage firms and other research sources typically have a specific coverage universe, and their recommendations come from that universe. If your broker's firm does not follow a certain company, then he or she is not likely to recommend the stock. With fee-based money managers, stock selection may be limited by aspects of their investment style. They may "screen out" companies that are below a certain market capitalization, or trade above a specific price-to-earnings multiple, or that may not conform to the manager's stated parameters in a host of other ways. This is not necessarily bad, because such winnowing of the stock possibilities can be a way of ensuring discipline and focus, reasons why an investor would hire a professional money manager in the first place. But if your money manager has a strict value discipline, he or she will probably not be investing your resources in Priceline (PCLN, $757), a more aggressive growth stock.
So, how can we inoculate ourselves against the unfamiliarity virus and open ourselves up to a broader world of investment possibilities? First, I think it is important to cultivate a relentless curiosity that leads us to read consistently and broadly on a wide range of topics. (You may even end up with enough information piled on your desk to start your own blog, which is really how this one came into being.) Pay attention to changes and developments in the world around you, and acquire the habit of following the money, at least mentally, by asking yourself who stands to benefit from trends, changes in regulations, and demographics. Knowing that Pepsi has a strong and reliable source of earnings from its flagship beverage is one thing, but understanding how Monster Beverage (MNST, $63) is riding the wave of energy drinks is another. Reading and exploring information outside your typical field of interests can also make you a more engaging dinner party guest.
When it comes to your broker, don't be afraid to ask questions and offer your own investment ideas. Really good brokers welcome such input from their clients, because it adds to their own store of knowledge and understanding. Brokers have access to a multitude of information resources, and the best ones will make the extra effort to research an idea that is not available through their own firm's coverage. You are not likely to see such flexibility from fee-based money managers, who are not going to be so open to deviating from their methodology script. The solution here, if it is feasible, might be to spread your investment assets among two or three managers with different investment styles, so that you have more exposure to smaller companies and lesser-known firms with more promising growth opportunities. At the very least, make sure you understand just what you are getting in any relationship with a financial professional, so that you can take the steps to expand your horizons if needed.
I sometimes wonder whatever happened to my ten-minute client from so many years ago. I like to think of her as having overcome her deer-in-the-headlights response to stock investing, even if she did so without my help. Maybe she accrued a small fortune in the 1990s bull market, and maybe she is relaxing on a sunny beach somewhere reading The Hunger Games. But I doubt it.
Updates and News: Monitoring the Radar Screen
TJX (TJX, $40), the company behind TJ Maxx, raised their first quarter earnings-per-share view to $.51 to $.52 from a previous $.45 to $.47; the consensus is $.48. March same store sales (SSS) were up 10%, with total sales up 14%. The company also increased its dividend by 21%. Ross Stores (ROST, $60) also said that its SSS rose 10% in March, with total sales up 15%. An analyst on CNBC said she believes that these stores are taking market share from JC Penney, which reported disappointing sales results.
Verifone (PAY, $53) upgraded to buy at Goldman. The company is well-positioned to benefit from the multi-year upgrade cycle in emerging payment technologies. This is the shift from the magnetic strips on credit and debit cards to embedded chips. PAY makes the processing terminals.
Autozone (AZO, $384) upgraded to Conviction Buy at Goldman, price target $435.
Qualcomm (QCOM, $67) saw several price target increases: to $75 from $ 72 at Barclays and Deutsche Bank; to $78 from $65 at Morgan Stanley; and to $80 from $75 at Canaccord.
Monster Beverage (MNST, $63) price target raised to $70 from $67 at UBS.
Las Vegas Sands (LVS, $58) price target to $70 from $58 at Lazard. LVS opens its fourth casino in Macau next month.
Lululemon Athletica (LULU, $77) initiated with a buy as UBS, price target $91.
Life is short. Get busy.
Jim
Disclosure/Disclaimer: My family members and/or I own shares of VRSK, EMC, TDC, TIBX, RAX, FIRE, QCOM, AAPL, WPI, PCLN, MNST, TJX, ROST, PAY, AZO, LVS, and LULU. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as investment advice or the recommendation to buy or sell any security.
No comments:
Post a Comment