Rhino Games?
Cover Story, by Mark Robertson, Managing Partner September 1st, 2012
In the face of high-frequency trading, dark pools, derivatives that would make Frankenstein proud, and a gluttony of greed and irresponsibility (and ethics) perhaps it’s time for a little reverse aging and a return to the ways things used to be.
“I’m sorry, but this was never what was really intended.” — Mr. Buttonwood
Mr. Buttonwood is our incarnation of Ken Fisher’s Great Humiliator, or the stock market, in general. We’ve recently harkened for a version of Benjamin Button and the curious case in the movie of the same name. In the face of high-frequency trading, dark pools, derivatives that would make Frankenstein proud, and a gluttony of greed and irresponsibility (and ethics) perhaps it’s time for a little reverse aging and a return to the ways things used to be.
Our pet name of endearment for the institutional analysts and portfolio managers on Wall Street is rhino based on their estimated 30-40 yards field of vision. Groups of rhinos are called crashes (no, you can’t make this stuff up) and have been clocked by National Geographic with land speeds approaching 45 MPH. Our community of investors realizes that — first and foremost — “Stock prices fluctuate.” But we also admit that (1) there are days when we wish the rhinos wouldn’t boost the fluctuation quite so much and (2) there are some good rhinos who don’t get as many hugs as they should.
The Hunger Games is a 2008 young adult novel by American writer Suzanne Collins. It is written in the voice of 16-year-old Katniss Everdeen, who lives in the post-apocalyptic nation of Panem, where the countries of North America once existed. The Capitol, a highly advanced metropolis, exercises political control over the rest of the nation. The Hunger Games are an annual event in which one boy and one girl aged 12-18 from each of the twelve districts surrounding the Capitol are selected by lottery to compete in a televised battle to the death.
I’m not really all that surprised that the Nintendo Generation would combine forces with hackers and computer scientists to foment a morasse that is undeterred by things like Dodd-Frank.
Complete the following quiz. The average holding period for a stock on the New York Stock Exchange is now __________.
Take your time. I’m willing to wait longer for the answer than the answer.
That’s right. The answer was 18 seconds. The operative word there is “was” because that information is a few years old.
18 seconds ain’t easy. When you consider the reality that many people in the long-term investing community rightfully hold (for the Nintendo critters reading this … that’s a reference to prudent ownership and stewardship) for decades. Our family still has stocks purchased back in 1992 and laziness or ostrich emulation has nothing to do with it. Warren Buffett and Berkshire Hathaway own shares of Coca-Cola accumulated back in 1989. One of my investment clubs owned shares of AFLAC acquired back in the late 1960s. In any event, to get to 18 seconds on average, it takes a lot of frenzied rhino behavior to offset those holding periods measured in decades.
Buy. Hold. For as long as it makes sense to do so.
Instead we’re treated to a daily dose of frenetic algorithms in a quest for chasing a huge pile of transactions all aimed at extracting a penny or two in a shameless series of self-propagating and self-fulfilling prophecies. At least that’s the way the Rhino Games stack up on closer examination. What could possibly go wrong with a bunch of super-cooled computers hidden away in dark rooms and dark pools? There’s evidence that flash crashes happen virtually every day.
It’s enough to make an INVESTOR yearn for pricing in pieces of eight. (Again)
When Rhinos Stampede. During March 2000, Cisco Systems (CSCO) approached $80/share. On the pages of Better Investing magazine, we documented that CSCO not only had a ghastly negative PAR but that CSCO had the strongest “Strong Buy” signal on Wall Street. I can recall Value Line — the source of these low total return forecasts — ratcheting up projected average P/E ratios at the time because we were in an unprecedented period when lack of EPS (to justify rocketing stock prices) didn’t matter. Yeah, right. Despite the ratcheting, return forecasts were still stark. Some rhinos play nicer than others and Value Line ranks as a favorite and trusted resource. CSCO has been stuck in the mud for a decade or so. Rhinos have long memories. The price vs. forecast has actually been pretty reliable (forecast peaks = buying opportunities) over the last several years.
Pieces of Eight?
Talk about things that ought to make you go “Hmmmmm.”
I’d like to sit in on NYSE/Euronext morning meeting where the person in charge tenders that notion. Of course, he or she would do well to have a fresh, and actively deployed, resume before doing so.
All of the major league baseball and NFL teams have throwback days where they don uniforms of days long ago. What if the stock exchange were to hold a day or week of pricing in 1/8ths just to see what it felt like?
I have no doubt that Mr. Buttonwood would approve and that the high-frequency crowd would howl, well … in the highest frequency possible.
Speaking of morning meetings and Mr. Buttonwood, I’d like to have been a fly on the wall of a certain series of meetings at JPMorgan Chase that went something like this:
“Hey, fellow Nintendo enthusiasts. I have an idea!”
“Can we make a bunch of money?”
“Absolutely! What if I told you of a scheme where we could do a whole bunch of things like Enron did about ten years ago?”
“Well, first I’d wonder if you skipped your meds this morning …”
“No, seriously. We can do a bunch of Enron stuff. Nobody will notice, that is until they’re handing out Christmas bonuses. Jamie [Dimon] will love it.”
“We’re interested. Go on.”
“We’ll have a WHALE of a good time. What could possibly go wrong? I think I’ll call my buddies over at the LIBOR desk and see what they’re up to this morning.”
This just in. JPMorgan Chase offset a $4.4 billion ($0.69/share) trading loss in the June interim with reductions in loan loss reserves, securities gains and other items. The loss was the result of a trading strategy that went awry at its Chief Investment Office (conveniently located in London) charged with investing excess funds.
As it turns out, Jamie didn’t love it.
That said, his first estimates of the carnage were “on the order of a billion or so.” The question is whether he is willing to discover and discontinue all instances of this sort of thing. Mr. Buttonwood thinks Jamie should stick to banking.
Is Jamie willing to take away the Nintendo game controls?
Probably not. “C’mon, Buttonwood. We can’t make as much money if we have to return to boring old banking stuff. Have a heart.”
Curious case, indeed. Because we have a really hard time reconciling historical return-on-equity from banks in general at levels of 15-20% with the 6-8% levels that they’ve attained now. It seems to us that 15% was pretty rewarding for being boring.
“But that’s like playing Madden13 without using the fancy controller options! Pretty boring, old man.”
Long-term investing is not a zero sum game and the Nintendo rhinos would do well to understand that survival doesn’t depend on killing counterparties. Because no matter how hungry they are, it simply doesn’t.
In the song, Incomudro, by Kansas, the rock band chronicles that in some cases “growing old is merely going back to where you’re from.” Mr. Buttonwood can only smile and hope that BOTH presidential candidates have Brooksley Born on speed dial.
Mark Robertson
Mark Robertson is founder and managing partner of Manifest Investing, a source for research and portfolio management focusing on strategic long term investors.