You could call him "The old man of the markets."®
Picking up from last week’s post, succeeding generations of money managers missed McChesney Martin’s and later Paul Volcker’s draconian FRB tightening exercises when inflation ran between 7% and 8% and 5-year agency notes sold at a 15% yield in 1982.Earlier:
Macro events, early sixties and seventies, make today’s noise level in the market look like a kindergartener at play after naptime. Early seventies markets had to absorb the Saudi king’s anger at the U.S. for supporting Israel. King Faisal hiked oil from $3 to $12 a barrel overnight. New York suffered through a horrendous real estate recession with everything for sale on Park Avenue.
The world faced Armageddon during the Cuban missile crisis in 1962. At the New York Stock Exchange, its electro-mechanical ticker ran 6 hours late. I folded my buy slips for Polaroid and Xerox into the pneumatic tube going to the order room. Then I walked home over the Brooklyn Bridge, not so sure I had done the right thing.
In the early sixties, Warren Buffett revved up with great pics like American Express and Geico when they saw the wolf at the door. I bought a block of Geico for 2 bucks and kicked it out a year later at $8. Buffett married Geico for life. My deep basic is there was little competition then for good ideas and concepts that lasted for years in their exploitation phase. By comparison, this mid-July, a team of analysts at Goldman Sachs raised their price target on Netflix to $140 from $111 based on 85 times upwardly revised projection for enterprise value to EBITDA.
This is the stuff Internet bubbles were made of. (Full disclosure, I missed Netflix on the way up.) It’s still a double past 12 months’ trajectory, but 25% off its August high. By comparison, General Motors sells around 3 times enterprise value and yields 4%. Nobody cares.
Wall Street houses in the sixties carried maybe a dozen senior analysts following oil, metals, automobiles, chemicals, electric utilities, consumer durables and nondurables like RCA and Procter & Gamble. Computers were in their formative stage. In media the hottest stocks were paperback book publishers. Vending machines and bowling pin setters were considered prime growth sectors.
A handful of hedge funds operated then, starting with A. W. Jones. Few Wall Streeters knew anything about hedge funds. I wrote a piece for the Financial Analysts Journal, explaining how they worked. A $20 million fund was considered a major player.
Tools for analysts during the sixties and early seventies embraced slide rules, adding machines and semi-logarithmic paper for plotting out earnings growth constructs. Every house carried a stock technician (an oxymoron) whose pronouncements punctuated a day’s trading and were taken seriously, carried on teletype machines to outlying brokerage offices.
I miss these formative, simplistic years because there was limited competition for good ideas. Today, not even Warren Buffett can uncover big concepts to exploit early on. Last year or so he’s added to a mammoth position in Wells Fargo, bought and sold ExxonMobil and built a big holding in an oil refiner, Phillips 66.
Buffett’s prowess now focuses on cash deals like Burlington Northern Santa Fe and Precision Castparts. They’ve built out Berkshire Hathaway’s footprint as a major conglomerate of above average properties closely mimicking the industrial heartland and GDP.
There’s very little value added from security analysts today because mountains of data are instantly retrievable online. Managements talk and talk and talk. This applies to big capitalization properties, anything over $10 billion in market value. The age of discovery still exists in small capitalizations, but money managers with portfolios ranging up to $50 billion must deal with the top 100 stocks in the S&P 500 Index.
There it gets dicey....MORE