The Big Short - Michael Lewis

The Big Short was definitely a book worth reading if you believe in the efficient market hypothesis.  It is a very similar type story to Liar's Poker and you can tell that Michael Lewis continues writing in the same way.  There are many different themes that come up and some are very similar to those in the 80's within Liar's Poker.
Themes

• Greed - Within this book we see many different occasions where well educated, rich employees are willing to jump into an investment they really don't understand.  Once again we saw many people wanting to join the crowd and many that believed these crazy BS investments would lead to great wealth.  What they didn't put together was the knowledge needed to double check the loans.  Michael Lewis does a great job of showing us the people that correctly predicted the collapse of the industry, at the same time he shows us some of the people that were suckered into selling the CDO's that pushed the problem on to other parts of the industry, such as the big banks.  There was a lot of money lost, and many people didn't think it was possible for the housing market to tank due to recent history.  We start thinking about how history impacts what is to happen next, but with new inventions of securities it is almost impossible to compare.  The one thing we have to do is become very cautious and hesitant with our investments and make sure that we are double checking each and every loophole where there could be a problem.
• Knowledge - It is crazy to think that some of the people that flooded the big banks with debt due to their stupidity were also graduates of great schools such as Harvard or Wharton.  The more and more I learn about the business, the more and more I believe that if you get wrapped up into specific investments it can easily lead you to your downfall.  I think it is very important for us to not get attached to specific investments because they will at some point let us down.  My uncle once told me, "Never fall in love with a stock...they never love you back".  This is definitely the case, and when we look for our investments in the future it should never be a personal battle to keep a stock.  We as people tend to grow attached to the specific stock picks we come up with.  If you continue that attachment you lead yourself to be biased.  Don't let this happen.  
• Market is not all knowing - In the mid to late 2000's, we started to see people jumping on MBS's, CDS's, and CDO's.  The crazy reality was that the market had not allowed for these different securities to be priced efficiently.  The main reason for this was the fact that many of the sellers and buyers didn't have a clue what they were buying and didn't understand the mortgage industry that backed these securities.  This was obviously not a little problem and the more you think about the fact that some of these securities were issued with a AAA rating the more you see where the trap was set.  The assumption of Housing Prices going up at a steady 8% rate was incredibly optimistic and obviously overly incorrect.  Because of these insane ratings many people who believed in the rating system were set up to fail.  The Market is not all knowing and we can not believe in the AAA/no risk type of investment.   
• Always think ahead - Something that really struck me within this book was the potential profits that many of the people who foresaw the problem were able to obtain.  While it is important to have an opinion on the specific industry and specific stock I think it is also incredibly important to have a macroeconomic view of the world as we see it.  In this case, was it realistic for us to assume that the housing market was going to continue to rise?  Was it realistic to give out loans to people with little money?  If one was to think logically, they could have come to the conclusion that housing prices most likely were not going to continue on such a dramatic run up and that the market would eventually stable out.  This was probably not a hard realization to come to, but what the people we read about in the book did that was so different than others was that they acted on it and tried to find a way to use it to their advantage.
• Instincts - As I recognized in the last theme, it is important to recognize a trend and make your move. Throughout the book we see many different professionals who question their thinking because they think no one else is seeing it the same way.  It is important to recognize the problem and to be able to have the self confidence to push your realization forward and make it into an investment.  There are not many books that more accurately show the reluctance of the characters to believe in news that ostracized by the public.  They continued to think "Are we crazy?  This can't be!" but at the end of the day they were brave enough to act on it.  
• Betting - Another interesting topic that continued to come up while I was reading was the topic of risks and odds and betting.  They were trying to bet on different classes failing by looking at the odds of default.  They tried to lower their risks by picking the trenches of mortgages that were most likely to default.  They played the odds and hoped that their bet would pay off.  They were betting on different defaults that they were getting odds of 100/1 when they really should have been 10/1.  Obviously this is not a normal type of investing and is more of a hedge fund type approach, but it is absolutely crazy that you could find disparities like this within the market.  

Overall, The Big Short is a book that is really worth reading to gain a better understanding of what has led us to a recession.  It has many great insights into the thinking behind the people that made millions/billions and the people that were setting our country up for a dramatic problem that impacted all Americans.  Great read and Michael Lewis is a great writer and fun to read!

Stock Market 2/2/12

The stock market seems to be getting very top heavy.  January has been a good month for the market, and it seems like the volatility has dramatically slowed from the fall.  I have read many different articles about the Santa Claus rally and the January effect and each one has a little validity to them (might be a reasonable topic for my next blog).  It seems as if investors are gaining confidence in the market and the European situation is being overlooked.  It seems that Europe is still doomed to fail and I doubt Greece will be able to pay off their debts.  I am amazed that we have had the rally that we have over the last month because it seems as if nothing has really gotten much better.  Yes the bonds have been sold but the real time to watch is when those bonds get paid off.  Just like the US government, they have gotten into debt and continue to push back the date of reality.  I have seen dramatic price changes in the different stocks I own and have jumped out when each stock has gotten to a price at which I would not buy.  I am not an expert by any means but watching Daimler go from less than $40 to over $59 in less than a month and a half is nutty.  I invested at $42 and bailed out at $57.8 earning over a 36% return in less than 2 months.  Stinks that I have to pay taxes on short term gains but I guess its just part of it!  I am looking for value but at the moment, and for the past month, I have not really seen much value that I like.  I have invested in 8 companies since I started my job in August and I have found plenty of different values.  I invested in MRO, SDRL, DDAIF.PK, RF, CSX, TAP, VOD, and FLY.  I still hold positions in SDRL, CSX, TAP, VOD, and FLY.  I will explain why I liked each one of these in the future.  But for now I can not seem to find much value.  Blue Chips have been bought up and we can see that the European companies are starting to make a little comeback.  I am going to wait for a big down day before pulling the trigger on my next investment but I have a few in mind.  I have made money on all of my investments thus far and have seemed to find value in many different industries including Energy, Automobile, Banks, Railroads, Beverages, Communications, and Aircraft Leasing.  I hope to find similar value investments in the future.

Richard Foxcroft

Liar's Poker : Michael Lewis

Liar's Poker was a great book, yet it justifies my perspective that the financial business is pure madness.  Michael Lewis does a great job of showing us how crazy Soloman Brothers really got and even though it was run by some very smart people, it was still able to burst up into flames.  There are a couple of main themes that I saw as prevalent throughout the book

1. GREED
• Throughout the book we come to meet different individuals who continue to want to be the best.  They will do anything they can to manipulate others to better themselves.  For example the bond salesman that tricks Michael into selling the AT&T bonds.  He does not care about anyone besides himself.  The German investor ends up getting hammered because of the greediness of the salesman.  
• It is baffling to me that these companies put themselves in front of everyone else and lack the respect and companionship to their customers.  In my opinion it is very important to put the customer first and if the incentives are not aligned with the customer the business will ultimately fail (like Soloman Brothers).
2. Class warfare
• This is another important theme that plays out consistently throughout the book.  We constantly see others taking credit for work that is not theirs.  An example of this was when Michael and Alexander created a new security betting on the rise of the German Bond market.  A man that Michael called the Opportunist jumped in and claimed the whole idea as his own and only put his name on the memo.  This is a classic example of higher ups using their power to undermine the younger, smarter individuals.
• I understand that this is just part of the business but it makes me question the persons character when they steal an idea and claim it as there own.  I am a firm believer in karma.  I think it is important to give credit when credit is due and it was definitely due in the case of Michael and Alexander.  
• We consistently see the 'peons' at places like Soloman Brothers not being appreciated as well as being work horses for their higher ups.  One of my good friends that works for Goldman Sachs sits in his office all night waiting for his superior to send an email that could be sent if the woman took 3 minutes to read it over and push send.  Tell me if you think that is efficient
3. Personal Time
• This theme does not seem to come up in the book very much.  That is because the individuals who work for these firms do not tend to get much time for themselves and tend to be in the office day in and day out.  The young professionals tend to get no free time and their work is their life.  But, it doesn't seem very different for the execs either.  
• "Bosses attached beepers to their favorite analysts, making it possible to call them in at all hours.  A few of the very best analysts, months into their new jobs, lost their will to live normal lives.  They gave themselves entirely over to their employers and worked around the clock.  They rarely slept and often looked ill; the better they became at the jobs, the nearer they appeared to death"
4. One sides advantage is another sides disadvantage
• One of the biggest themes of the book was the fact that people did what was best for themselves and did not care whatsoever about the people that were on the other end of the trades.  Michael fights a battle over whether or not he should screw over his customers to better his companies.  The way I see it, business is business but customers should be friends and you don't screw over someone who has put their faith in you.  There are many cases when they tried to get rid of bonds and they relied on there relationships with the customers to get the deal done.  This is very deceiving and is not a responsible way to run a business.  You really screw over a customer and that customer would be crazy to come back.  Maybe it happens, but if it were me I would avoid doing business with that firm till the day I die.  
5. Ego
• Another theme I want to talk about is ego.  Like class warfare this theme continued to prevail within the big Wall Street firms.  There are many different instances where this happened throughout the book but none bigger than the separation of groups within Soloman Brothers and the break up of all of its best parts.  Lewie Ranieri for example created a huge market for mortgages, yet many of the other egotistical higher ups were jealous.  There was a huge problem within Soloman Brothers to control the egos of their executives and when someone felt as if they were getting screwed they bailed out.  Many times they were getting screwed and Soloman Brothers ended up paying for it.
6. Business is Business with large firms
• It was crazy to me how the firing and job jumping occurred.  When people were getting fired, the company didn't seem to care who they were or how the loss of their job played into the employees lifestyle.  I understand that things need to be made efficient, but firing a mass amount of people and making them clear out there stuff while snatching their swipe card doesn't seem very respectful to me.  Efficiency is needed but so is closure and respect.  Yes they got packages but losing a high paying job and treating them like dirt is just not right.  Either way that's how the world works and I can not change it. 

All in all, Liar's Poker is a book worth reading.  It has many lessons about the investment world and a day in the life of a Wall Street employee that are very valuable.  

Richard Foxcroft

Netflix

At the beginning of the year, Netflix was at less than $72. Now Netflix is over $124. If I would have invested I would be up 72% in less than a month. Unfortunately I was a little late and I work for a PWM group that specializes on retirement investing. Netflix isn't the best investment for older people interested in income. Everyone knows what Netflix does and the market share that they have accumulated in the past 15 years.

The Movie Rental Business:
Everyone remembers back in the day when people would drive to blockbuster or other small rental stores to rent the 3 month old "new releases". Well that era is over and Redbox and Netflix have come into play. My grandfather owns multiple movie stores in Lexington, Kentucky and the diminishing sales of these locations shows a huge change in the movie rental business. The business dramatically changed with the competition of these quick and easy boxes that are almost like soda machines. Netflix changed the industry forever with the creation of online rental streaming and sending rentals through the mail.

The Netflix Story:
It is hard for any specific company to catch up with new inventions in technology.
"Netflix initiated an initial public offering (IPO) on May 29, 2002, selling 5,500,000 shares of common stock at the price of US $15.00 per share. On June 14, 2002, the company sold an additional 825,000 shares of common stock at the same price. After incurring substantial losses during its first few years, Netflix posted its first profit during fiscal year 2003, earning US $6.5 million profit on revenues of US $272 million."
While many of us had never heard of Netflix back then, they were preparing to change an industry that had been dominated by Blockbuster. There is no question that Netflix changed the market and was expected to continue its domination

A New York Times article from September 2002, said that, at the time, Netflix mailed about 190,000 discs per day to its 670,000 monthly subscribers. The company's published subscriber count increased from one million in the fourth quarter of 2002 to around 5.6 million at the end of the third quarter of 2006, to 14 million in March 2010
As of 2004, nearly two-thirds of U.S. homes had a DVD player.

The Last Years Debacle
On September 18, 2011, Netflix announced its intentions to rebrand and structure its DVD home media rental service as an independent subsidiary company called Qwikster, totally separating DVD rentals and streaming. Andy Rendich, a 12-year veteran of Netflix, would have been the CEO of Qwikster. The new service would carry video games whereas Netflix did not. Then, in October 2011, Netflix announced that it would retain its DVD service under the name Netflix and would not, in fact, create Qwikster for that purpose.
On October 24, 2011, Netflix announced it lost 800,000 US subscribers in the third quarter of 2011 and more subscriber losses were expected in the fourth quarter of 2011. Despite the losses, earnings for Netflix jumped 63 percent for the third quarter of 2011.
On January 26, 2012, Netflix said it added 610,000 subscribers in the US by the end of the fourth quarter of 2011. The company announced it had 24.4 million US subscribers for this time period.

NETFLIX AS AN INVESTMENT
From what I have gathered from the technology sector, it is very hard to determine the accurate price for companies like Netflix. Good examples of this are Ebay, Apple, Amazon, Mastercard, etc. It is hard to value a company that could be devastated by an invention that is greater than their products. Look at Blockbuster! But if we look at Netflix in a financial light, here are there statistics.
Price: 124.09
Market Cap: 6.85 Billion
P/E : 29.03
Profit Margin: 7.23%
Operating Margin: 12.02%
Return on Equity: 49.36%
Revenue: 3.2 Billion
Total Cash: 797.81 Million
Total Debt: 400 Million
Book Value Per Share: 11.70
Operating Cash Flow: 317.71 M

By the numbers Netflix looks appealing. They have a firm market share, they have a high ROE, and could pay off their debt with the cash that they have outstanding. The key to the Netflix investment is now somewhat speculative. Are Netflix customers going to quit using their products because of the major mistake by management. I tend to believe that management made a temporary mistake that everyone will forget about within a year. They still dominate an industry that has started to put up major barriers to entry. Yes you could put up a movie store in your town and try to get people to rent but why would they drive to your store when they can have them delivered to them via mail or internet. Yes, there are other companies that could jump into the market and try to build their own "Netflix" but they are few and far between. Amazon, Dish Network (they bought Blockbuster), and Google are some of the big names...and there are not many small names involved. Who else would have the money to sign a contract to obtain rights to the CW's streaming rights for 1 BILLION dollars with a B. Gossip girl must be really popular. Either way Netflix really flopped with their idea of a split and they lost many customers because of it, but in the end it seems as if the barriers to entry might be a little to high for other companies to really capitalize on there mistake. Netflix has a 52 week range of 62.37 to 304.79. The downside was hit by management's mistake but it has come back and could still go up

ME
I MISSED MY CHANCE. A lesson that I have learned while being in the business is that when you feel as if you found something and you bring it up to someone and they don't pay any attention...don't listen to what they have to say about that investment because they haven't taken the time to see what you see. I brought this investment up to a coworker when Netflix was less than 72 and he blurted out, "O, well I would rather buy Apple". Since then Netflix has been up 72% and Apple has been up 10.5%. Netflix has had some good fortune but Apple just finished an unbelievable record quarter with over $46 Billion in revenue and $13 Billion in net profit. Jump on your instincts because if you don't you will miss it, just make sure you're not missing something!

PS. I will use Wikipedia and Yahoo from time to time...I dont have all the time in the world!

First Blog

This is my first blog...I am now using this to way out the investments I see, and to determine what looks appealing in the different industries in the stock market.  I am not what you would call an experienced investor but I enjoy throwing ideas to paper (or blog) and allowing myself to understand the logic behind different investment decisions.  The material on this site might be worthless to you or might be useful, either way I will try to make it entertaining for myself and allow myself a way to judge the market.  My predictions might not always be accurate but when I see value in something I will try and evaluate why others tend to be so down on it.  I will also post information I see as important and copy articles that I deem necessary.  This is a great way to help me understand why the market does what it does and if you have any commentary that you think is helpful feel free to email me or comment.

PS. These articles will not always be grammatically correct and I don't intend for them to be.  I will be putting my writing to blog quickly and do not intend to reread all of my thoughts.  Whether anyone reads this or not it will allow me to have a personal reflection on the market!

Richard Foxcroft