Incorporating Right-Brain Thinking into your Investment Process

The following article is the first part of a series designed to help investors develop their own investment process and increase the efficiency of dealing with the daily deluge of investment ideas that are now available to investors, thanks to the internet. 

A long time ago when I was trying to learn how to draw and paint (note: unless childlike stick figures become immensely popular I failed, which is why I became a photographer), I read a book called Drawing on the Right Side of the Brain by Betty Edwards. The idea of the book was to help a person tap on the strengths of the right side of the brain and “deepen your artistic perception” when engaging in creative endeavors. Athletes and musicians often talk about “being in the zone” and from personal experience as an investment analyst, a drummer,  and a professional sports photographer, I can tell you that you can put your brain in either a “right brain” or “left brain” thinking mode. One of the first exercises in Edward’s book is to look at a picture and draw it.  More than likely it will look “ok” but the perspective and other things may not look just right. The author then tells the reader to turn the picture upside down and draw it again. You would be amazed at how much closer to the original the second drawing looks than the first attempt. Why is that? Edwards explains that since the brain doesn’t recognize the upside down drawing as an object, the brain switches to the right side and allows the artist to “see it”  more in the abstract and not a preconceived recognizable image, which makes it easier to “draw” the lines more accurately. Since successful analysts incorporate the ability to think in non-linear, non-analytic ways; being able to tap into those aspects of the right side of the brain is very important. This idea can be thought of as “inversion.”

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Classic Wall Street Analyst Behavior

This is all you need to know about Wall Street analysts and their ratings..

Bespoke Investment Group has a  great chart showing how few analysts followed Apple in 2000-2004. But as the stock price rose, so did the number of analysts following the company and the number of buy ratings..  Now that the stock has been a poor performer, analysts are changing their tune. Classic trend following and only concern for the somewhat visible near term.

http://seekingalpha.com/article/1508272-analysts-slowly-sour-on-apple?source=email_authors_alerts&ifp=0

 

 

How Safe Is Your Money Market?

For an asset class with almost $3 trillion in assets, you would think that investors would pay more attention to the holdings in their money market fund. We have found little information or analysis on the holdings of money market funds. While your money market mutual fund is certainly safer than it was in 2007-’08, if you think that recent proposals by the Securities and Exchange Commission (SEC) make your fund completely safe, you have not been paying attention.

Since 1999, I have advised friends and family to invest in “treasury-only” money market funds. After reading the following three documents, I find no reason to change that recommendation. While the SEC proposals are carefully crafted and do appear to solve some of the more troubling issues, they remain incomplete. First, let’s discuss the interesting points found in the reports and then consider the unresolved issues.

SEC Money Market Reform Proposed Rules

Response to Questions Posed by Commissioners Aguilar, Paredes and Gallagher

Financial Stability Oversight Council 2013 Annual Report

 

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Texas Pacific Land – The Ultimate Buy And Hold Stock

We continue to publish articles on Seeking Alpha to build awareness to our website. We have been fortunate that SA has recognized the quality of our work and has made this article part of their subscription service Seeking Alpha Pro. Unfortunately, the article will go behind their subscription wall in 30 days. But for now here is a summary of our article and a link to it.

Texas Pacific Land – The Ultimate Buy And Hold Stock

Warren Buffett has been quoted as saying his favorite holding period for owning a stock is “forever.” In this article we are going to analyze Texas Pacific Land (TPL), a company that an investor just might want to hold “forever.” In what could be called the “ultimate stock buyback program,” TPL is using multiple income streams to eventually repurchase all of its outstanding shares. Texas Pacific Land Trust is a passively managed liquidating trust that was established in 1888 as the result of the bankruptcy of Texas & Pacific Railway. It was granted over five million acres of land in Texas to build a railroad from Marshall, Texas to San Diego, CA. Ever since, the company has been slowly liquidating its land holdings and buying back the sub-shares of the Trust. For a more detailed summary of the history of TPL, readers can go here

The stock has increased 10 fold in the last 10 years and is not a typical type of investment we would discuss. But the uniqueness of the business model, the hidden value of the land on the books and the incremental benefit shareholders receive from higher oil and gas production and prices make it worth writing about. The company is currently buying back around 3-4% of its shares each year and under our base case scenario it appears as though the company can sustain a 2% buyback rate. As some point things will change and stocks will sell off. Many reasons will be given for the proximate cause and most will sound plausible and may actually be true. TPL stock may decline in value as well. Oil prices may plunge on China or European disaster fears or some other reason. But investors who stay focused on the long term strategy of TPL and view price declines as an opportunity, not a risk, should enjoy the benefits of buying low and holding “forever,” thus eventually being rewarded for their patience.

An example of the mentoring process

Gregg and I have always enjoyed helping promising and ambitious young analysts improve their analytic skills. Many have gone on to have successful careers in the industry. One promising young analyst is Shaun Currie. I helped hire Shaun at Manalapan Oracle and had the pleasure to work with him for several years.  He has been accepted to several very prestigious  MBA programs including MIT, Duke, Dartmouth and University of Chicago. Before beginning his schooling in the fall, Shaun is writing research articles for Seeking Alpha.

As part of our educational section of the website, I thought it would be of interest to other young analysts to see how some input from “experienced” investors such as ourselves can help improve the analytic process.  I have posted the first and second draft of his analysis of Finish Line (FINL). I think that there is a noticeable improvement in the thought process and the presentation.

FINL-Write-up-attempt-1

FINL-Write-up-attempt-2

Here is a link to the final version of his article that was posted on Seeking Alpha. I would like to point out that my first attempt to post an article on Seeking Alpha required at least four revisions and a couple of days of work before it was posted. Shaun’s FINL report was posted within just an hour or so of its submission. Congratulations to Shaun for the publication of his first research article. We look forward to working with him in the future and wish him good luck on his pursuit of his MBA.

Intriguing Ideas From The Las Vegas Value Investing Congress Part 1.

We attended the Value Investing Congress in Vegas last week, and instead of listing all the presentations and giving a brief summary, which can be found many places on the internet (herehere and here), we thought we would look at some of the ideas that warrant further analysis. Developing a strong process and sticking to it is much more important that the outcome of any particular investment idea. Over the long run, the correct process with produce the desired results. In this sense, investing is like playing Texas Hold’em. If you had a pair of Aces and raised pre-flop almost every time, you would made money in the long term (maybe not the “optimal” strategy for you hardcore players). But you would also have times where your hand would lose to a far inferior hand. That did not mean that your methodology was invalidated, just that other factors impacted the desired outcome.  Most of the ideas presented have some investment merit and were well thought out and presented. While Peter Lynch always said you should be able to present your investment case in three minutes or less, 25-35 minutes to present some of the ideas weren’t enough to cover all the factors involved in certain ideas — and that is as it should be. There was something for every kind of value investor. Finding ideas with markets and most stocks at or near all-time highs means it is not the easiest time to find lots of profitable value ideas.

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Book Review: The Most Important Thing By Howard Marks

Gregg and I attended the Value Investor Congress in Vegas last week. I downloaded a couple of books to read on the flights.  Let me just say that we highly recommend the book and is one of the best investment books I have read in years. The book is not a “how to analyze a company” book, nor does it have any “magic formulas”.  The main goal of the book is to show “how to think and how to deal with the psychological influences that interfere with investment thinking.” There are lots of investment books that talk about traits of successful investors and characteristics of stocks that perform well over time, but there are few books that deal will the other side of the investment equation, dealing with emotion in real time. This website is an attempt to do that by showing investors what we are thinking at the time we are building the portfolio. The book uses quotes from previous shareholder letters he wrote and expands on them. Other well-known investors such as Joel Greenblatt, Paul Johnson and Seth Klarman also make comments throughout the book.

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