Vampires and wolves (Part II)

Continued from Part I ..

Mark Hanna: "Revolutions, you follow?" 

Jordan Belfort: "Revolutions."

Mark Hanna: "Keep the client on the Ferris wheel, and it goes, the park is open 24/7, 365, every decade, every go**amn century. That’s it. Name of the game." 

-- ending of a scene in the movie The Wolf of Wall Street where Matthew McConaughey (playing Mark Hanna) explains to Leonardo DiCaprio (playing Jordan Belfort) how the brokerage business works.

Enter dream customer.

I would imagine this is the dream scenario what comes to milking a client in investment services business:

• investments are inside insurance or other 'wrapper' with a yearly fee and there is significant penalty in changing from one financial services provider to another (e.g. being exposed to taxes)
• inside the 'wrapper', client is instructed to invest into funds-of-funds (many layers of cost)
• to top off the dream cake, client is instructed often to change allocation (because it is both "free of cost" and tax free)

I have been there as a client long time ago so I know exactly how this works.

A smooth-talking person in an expensive suite invites you to a meeting to discuss about investing. The setting will be impressive and everything will be free of charge. You may wonder how these guys are paid. You may even ask it directly (I did). Because they are good salesmen they will have an answer for pretty much anything you will ask. One by one they will eliminate any reason you may have for not investing via their shop.

Naturally they are not going to voluntarily expose all the ways they or their business partners are going to take money from your pocket (extract fees from your investment). Just the surface of it (the obvious commissions and fees).

If you read everything about their products and dig deeper into the funds you will slowly understand all the ways you are getting milked. Because of course you are. How else they will pay for their rent in the most expensive part of your city or get paid ridiculous amounts of money in the top tiers of their management pyramid.

Like you have a fund, which invests in other funds (I wonder how many layers there can be..).
And like you are not charged "anything" if you change from one fund to another, but then you note that there is a significant spread (difference between the bid and the ask price) in all of their funds.



Garlic, anyone?

Avoiding vampire squads is easy.

It starts by avoiding complex hard-to-understand financial constructs and companies who are just men/women-in-the-middle.

You can minimize your costs by handling the investments by yourself and invest directly in stocks and passive low-cost (yet high quality) index ETFs.

Do not be lured into frequent buy/sell flip-flop. I am a customer who mostly buys and rarely sells.

Also, please check my old article 'avoid costs' on why even 1-2 percent periodical holding cost/fee makes a big difference over the years.

THE END

Vampires and wolves (Part I)

"In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the Marketplace."  

-- Warren Buffett in 1987 letter to shareholders of Berkshire Hathaway Inc.

Buy! Sell! Short! Boom! Crash! Panic!

The constant barrage of market news and opinions has got much worse than anyone could have imagined back in 1980s. One can get easily lost without clear principles on which articles are worth reading and who to believe.

Fugazzi

I personally dismiss articles that are not based on real fundamentals. These include articles where author tries to time market or uses extensively technical analysis.

I suppose every investor will at some point get lost in moving averages, trend lines, support levels, resistance levels, MACD, RSI and so on. To me it happened quite early on. People want to believe they can predict the future via past/present and that they are smarter than the others. And everyone will try to time the market.

There are a lot of people who benefit from frequently changing mood of "Mr. Market" and keeping up the illusion that this would be predictable. In fact, the ones who benefit have also clear incentive to feed Mr. Market with either fear or greed - whatever it takes to create fuzz.

The stories can be based on company fundamentals, market fundamentals, market timing, pure technical analysis or unicorns and fairy dust. They really don't seem to care.

In the modern attention economy market commentators, blogs and news media get paid by clicks they get. So they want to create a lot of stories and market them via luring click-bait titles. However, sharing advertisement revenue via various mechanisms pales in comparison to profit that 'masters of the universe' have been extracting as long as there has been a stock market.

Enter vampires

"Name of the game, move the money from your clients pocket into your pocket."
-- Matthew McConaughey (playing Mark Hanna) in the movie 'The Wolf of Wall Street'

There are two main ways to milk a client in investment services business.

Somebody always benefits from trading (buying and selling) no matter what is told to the customer.

Secondly, some financial assets (e.g. mutual funds) expose clients to periodical holding and other costs (some of which may be well hidden especially in the case of mutual funds wrapped inside an insurance envelope).

The providers of financial services seek to maximize both.
Neither is in the interest of the individual investor.


To be continued (in part II) with e.g example of dream customer (for vampires)..

Helsinki Top 10 Over Billion Euro Companies

There are currently 36 companies listed in NASDAQ OMX Helsinki that exceed market cap of 1 billion euros. I ran my personalized screen to get top 10 list out of those companies.

I use a service provided by Valuatum.com via Pörssisäätiö to screen stocks listed in NASDAQ OMX Helsinki. I was not able to rank the following companies due to missing data: Nordea, Ericsson, SSAB and DNA.


Top 10


1 Orion

• Score 2,6
• Market cap 3,55 billion €

2 Citycon

• Score 2,5
• Market cap 1,68 billion €

3 YIT

• Score 2,2
• Market cap 1,26 billion €

4 Nokian Renkaat

• Score 2,2
• Market cap 4,6 billion €

5 Outokumpu

• Score 2,0
• Market cap 2,14 billion €

6 Sampo

• Score 2,0
• Market cap 24,94 billion €

7 Fortum

• Score 1,9
• Market cap 16,71 billion €

8 Elisa

• Score 1,8
• Market cap 6,15 billion €

9 Finnair

• Score 1,7
• Market cap 1,46 billion €

10 Sanoma

• Score 1,7
• Market cap 1,47 billion €

Average Score of all 101 companies in the research database: 1,5
Median Score: 1,4


Parameters used in screen (weight):
-------------------------------------------
 P/B estimate current year (13%)
 P/E estimate current year; next year (8%; 10%)
 Dividend yield estimate current year; next year (8%, 8%)
 ROA estimate current year (10%)
 ROI estimated 3 year average ending current year (8%)
 ROE estimated 3 year average ending next year (8%)
 Turnover estimated increase in 3 years ending next year (8%)
 Net Profit estimated increase in 3 years ending next year (8%)
 Gross Margin estimate current year (8%)
 Profit Margin estimate current year (8%)

The used parameters emphasize attractive valuation (31%), profitability in broad sense (26% weight), growth (16%) and dividend yield (16%).

The screen relies on estimates about future. Those combined with volatility of stock prices means that you should not try to chase screens like these (I don't). Ultimately any investment decision should be based on much more than just looking at the current numbers and estimates of future numbers.

Disclosure:

Author is long Citycon and Fortum.

PC is back?

Several stocks linked to personal computers (PC) have gained significantly in last 30 days or so:

Micron up whopping 47%
Western Digital up 28%
Intel up 18%

A bit more modest gains for Nvidia (up 7%) and AMD (up 3%).


What's going on here?

In my opinion atleast three tailwinds.

1) Market has revised pricing for Micron, Western Digital and Intel - rightly so.

As I wrote in December Micron, Western Digital and Intel seemed really inexpensive compared to peers and overall market. Especially so when considering how well these companies are positioned in their respective markets and with respect to growing demand for what they each produce.

2) Even though these companies contribute to much wider market, the "death of PC" narrative since iPhone and iPad came out has caused these companies to be priced at discount compared to the more "trendy" technology stocks.

3) Semiconductor sector overall continues to be red hot

The PHLX Semiconductor SOX ETF, which houses 30 chips stocks, has surpassed its record highs of March 2000 and is up nearly 16 percent in 2018. I recommend reading the linked article and watching the embedded video (contains Micron vs. NVIDIA commentary).

--

To drill a bit deeper to the "PC is back" theme, I would like to quote Jim Cramer from his recent "The personal computer is back" commentary:

 "The action off a return to growth of the PC, the steady burgeoning data center and the gaming business is now too great to ignore. This group is back and it's way too cheap. It's time to buy the breakout, as I believe the numbers are too low and the valuations are just plain out of whack with the rest of the stock market."

PC gaming has been somewhat shadowed by raise of mobile gaming and steady march of the consoles. Now it's raising back to focus thanks to e-sports and hit titles.

I am consuming games over all the mentioned platforms, but I have always liked PC gaming the best. It's the customizability of hardware and software, faster time-to-market of new games and cost of games when compared to console titles.


Disclosure: Author owns shares in Micron, Western Digital and Intel.

Allocations for 2018

At the start of the year 2018 our portfolio was allocated on high level in pretty much same way is it was last year:

Stocks 98,7%
Gold 1,3%
Cash 0,1%

No bonds. We simply substitute bonds with quality dividend payers in our portfolio.


Geographical Allocation (stocks):

Europe 59,4%
North America 30,1%
Emerging markets 10,5%

Actually, place of incorporation is pretty meaningless for most corporations we have invested in. Most operate and sell globally.


Sector Allocation (stocks) - in order of weight in portfolio:

Technology (Other)
Financial
Technology (Semiconductor)
Healthcare
Clean Energy
Basic Materials & related services
Industrial Goods


Top 5 positions - in order of weight in portfolio:

Siili Solutions (Finland)
Berkshire Hathaway (USA)
Fortum (Finland)
Citycon (Finland)
UPM (Finland)


19,4% of all stock positions are done via ETFs out of which 7,7% are allocated to broad emerging market ETFs. Rest are sector-specific ETFs.