The secret to happiness is to lower your expectations....that is what you compare your experience with. If your expectations and standards are very high and you only allow yourself to be happy when things are exquisite, you'll never be happy and grateful. There will always be some flaw. But compare your experience with lower expectations, especially something not as good, and you'll find much in your experience of the world to love, cherish and enjoy, every single moment.
- Charlie Munger
Coming off of a few positive weeks in stock markets, it was probably too much to expect a third good week in a row, especially with investor sentiment so poor. On Friday, when the January jobs number came in at a soft 151k, the initial reaction was not too bad. As the day progressed, however, selling accelerated based on the idea that more interest rate hikes could be coming.
Thursday's poor guidance and earnings reports from NASDAQ heavyweight LinkedIn (N:LNKD) and security firm Tableau Software (N:DATA) might have been the bigger concern, and everything in the tech heavy index took it on the chin. The reaction by the markets is just brutal, and one only has to look at these two companies for a typical example. They each lost over 40% of their value yesterday, which is an astonishing number. The rational investor could make the argument LinkedIn never had any business being valued at 30 billion anyway, and even at 15 billion it still has a ways to go. Ditto for Tableau, now given a value of 3 billion, as well.
The thrashing of these entities highlights one of the biggest problems the market has had for a long time, which is the excessive valuations placed on tech firms when they go public, and the low number of shares outstanding. With institutions now controlling over 90% of the stock, if they get disappointed, look out below. No kidding, huh? There are plenty of public companies facing a similar predicament, or should I say, their shareholders do. Silicon Valley has long been delusional about valuing their companies, and public markets have a way of getting rid of the froth. It further illustrates the need to be very careful about where one allocates capital.
The ramifications of the commodity collapse and currency volatility continue to ripple through markets. Barron's does an excellent job of explaining the relationship between countries running deficits and how the governments and sovereign wealth funds of these countries (China, Saudi's, Norway) may be selling assets to help bolster capital outflows. With respect to black gold, down another 8% last week. Still, in an effort to provide a little bit of sunshine, the same edition of Barron's has this nice story on oil bouncing back (no extra charge). A lot of investing is patience and fortitude, and holding anything related to oil proves it.
On the earnings front, plenty of companies reported and like always, the results were specific to the individual company. The drug sector performed nicely, although many investors are concerned about political scrutiny for pricing. Yum! Brands Inc (N:YUM) and Dunkin Brands Group Inc (O:DNKN) showed unhealthy food remains tasty for investors, though their stock prices did not necessarily fatten up.
Yahoo (O:YHOO) remains unloved after taking billions in write downs from previous acquisitions. The story of Yahoo will ultimately play out as a negative value for a business which generates a billion bucks of cash cannot last indefinitely, though it seems like it already has. Finally, Mattel (O:MAT) reported a good number and the stock popped nicely, showing the market the long popular Barbie remains a great asset. One only needs to have a little girl to understand this generational truth.
Long ago, my brother introduced me to a quote about NASCAR, 'If you ain't cheatin, you ain't tryin.' The same could be said for politics, and last week in Iowa, it seems the campaign associates of Ted Cruz adopted the aggressive philosophy when reading about the clothing habits of Ben Carson. As Donald Trump lost the caucus, quite naturally he feels cheated. Don't you feel sorry for now victimized Mr. Trump? No mention of the hundreds of people who feel the same way about Mr. Trump when he took their real estate deposits or tuition down payments from the infamous Trump University. Oops, sorry to bring up the unfortunate incident.
As we head into tonight's debate and Tuesday's New Hampshire primary, all eyes will be on Mr. Rubio to see if he can withstand the heat from his fellow competitors. Like Mr. Munger advises, my expectations are low in the hope of a favorable outcome.
Thanks for reading the blog this week.
(Oops, one other thing, in my newsletter last week, there was an error in that I stated there were other places which looked better than the equity market if interest rates stayed the same and GDP remains at 2-2.5% annualized. What I meant to say was the equity market looks better than anywhere else if those conditions held. I am always a buyer of stocks, and will be for the rest of my days. Sorry about the potential confusion).
Disclaimer: Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.