Advice For Grads (and Value Investors)

It’s Graduation season, and with it, my reveries veer off in the direction of “what would I say if, scraping the bottom of the proverbial barrel, some institute of purportedly higher learning were to ask me to address its latest crop of freshly minted degree holders”. I suppose I would look out over that sea of fresh faces (assuming they aren't all hunched over their phones LOL-ing with their hundreds of Friends) and wonder how much debt was taken on to fund the four to seven-plus year respite from reality that so many of them have just enjoyed. Or how much less knowledge, of important things like civics and history, is floating around in those stylishly (if only in some anti-stylistic alternative style) coifed heads than when they exited high school? I would stifle the prejudice, which has only strengthened since its acquisition around the time I exited the Marine Corps and returned to the university for an advanced degree, that college is wasted on about 85-90% of eighteen year olds. (The man children at the frat house did not compare favorably with the Marines I had had the privilege of leading.) And I would most certainly dispense with the usual bromides, and deliver the following advice: “Many of you have just earned (I use that word in its most capacious sense) the functional equivalent of those trophies you got for your mere participation in youth sports. You know, the ones that every kid on every team got, even if they didn’t show up for much more than the pizza party when the trophies got passed out. It will be just about as helpful as far as getting you a job. Someone told you, during those interruptions of your busy campus life when you had to ponder the choice of a major, to follow your heart; Do what you love. Unfortunately, they (as well as the rest of the chair warmers who are culpable for what has become of curricula in this establishment) did not see fit to encourage you to a fuller understanding of what is meant by “heart”, or “love” for that matter. So it probably hasn’t tumbled on you that “love” is not what you feel, the emotion being its mere accident, but a disposition of the will which favors, desires and seeks good for its object. I learned to love my work, a series of choice much like, I suppose, often gets made by those who have entered into an arranged marriage. But I digress. If you got a degree in something you think you will love doing (whatever that really means), you probably are holding on to a worthless piece of paper. You will see what I mean in the months ahead when you try to find a job. A few of you will luck into something, or have something familial already lined up (good luck with those in-laws), but most of you are going to be working at things you could have been doing four years ago, perhaps under the supervision of someone younger than you who went straight to work after high school. It will dawn on you that your degree is worthless, and you need to get another one (or go learn small engine repair, or shoe repair, or some other skill that is still needed but hardly anybody takes up.) And it is for that moment of truth that I leave my one bit of advice. When you do come back to these hallowed halls: “LEARN SOMETHING THAT IS HARD TO DO!” Something that took patience, persistence and at least occasional bouts of brute force effort to learn. And something for which a middling dose of intellectual capacity will not suffice (here, a brisk whiff of honest self-awareness might be helpful, and might ought lead to a decision to go and learn what we used to call a trade.)” This reverie appears in Musings not simply out of a desire to vent a bit of bile towards that badly corruption institution we call Education (which contra so many other entities which over our lifetimes have persistently delivered more value at lower cost, has cost us more and more as its product, to the degree it can be measured at all, became worth less and less). It shows up because it came to mind as I was working on investment ideas. Just as having learned to be able to “do something hard”, like most engineering, sets graduates apart from squishier degrees like Creative Writing. [Hey, I have creatively laid down millions of words, and would rather read something so masterfully crafted as to be deemed classic than watch almost anything on TV, but the world does not need thousands more creative writers (and the other 97% of graduating class bereft of the ability to string together three reasonably well-formed sentences capable of conveying “what they really mean”.) with nothing in particular to creatively write about!], one of the most important ways that companies worth investing in stand out is in being able to do something that is a real trick to do. In fact, I find myself questioning an assumption I have carried since the very beginning of my adventures in this craft about the fragility of an advantage based on a company’s proprietary knowledge. As a man of the Twentieth Century, it was certainly best to assume it more likely than not that the knowledge on which such “edges” are based will find its way to others and, barring relentless effort to enhance that knowledge, the “edge” will dissipate and even disappear. This became even more so as higher education (post WW2 version) spread beyond a few favored enclaves, and it is still largely true. But what I find myself rethinking is the prospect that some things have gotten so advanced that perhaps the “edge” that some companies have earned is less vulnerable than observing the last three decades of the 20th Century would lead one to expect. I find myself studying companies, some new to me and some I have known for a very long time, and asking, “How hard would it be to replicate what these guys know how to do?” Not just to make something in a lab, but to mass produce it in ways that bring the cost well within the value as perceived by the customer; to delight customers in ways and at the cadence at which one brings innovation and value; and do so in a way that scorches the earth for any prospective entrant save some billionaire with a subconscious desire to give it all back. I am finding any number of companies that have cornered the market (or nearly so, most companies sell into customer bases that prudently abhor the thought of any supplier being “the only game in town”. Indeed, if the valuation is right, sometimes the “clear alternative to the big dog on the block” is a better investment than said paragon.) in something vital to our very understanding of prosperity. Probably the most obvious example of this in my investment schema would be Intel (INTC). Being the motive force of Moore’s Law (which, BTW, is not a law in the sense that we have a law of gravity (defy it and you will be crushed) or a law against fishing out of season (someone will write you a citation to pay a fine or appear in court). No, Moore simply described what should happen if really smart, really capable people kept on collaborating.) No Saudi prince could spend enough money to replicate it. Ten thousand recent computer engineering grads from Bangalore or Beijing or anywhere else, wired up in series and parallel, could not starting today get in five years to where Intel was five years ago. INTC might not be the most compelling idea among my holdings. Indeed, it is more like a bond substitute (something badly needed in light of what the powers that be have done to bond yields), but it is the incredibly tough thing that only INTC knows how to do, over against the world’s ever increasing desire to imbibe in activities involving or facilitated by ever cheaper computing power, that gives me confidence that INTC is not likely to be a wasting asset over the time period I need to be concerned with (something that cannot be said about the preponderance of companies one might invest in.) Other great examples show up among aerospace suppliers I have followed for a very long time, like Precision Castparts (PCP) or Esterline (ESL), or for only the past several years, like Hexcel (HXL). I prefer owning suppliers, but I think that Boeing has shown that integrating millions of parts and systems, at the rate and cost they do, into flying means of transportation that are safer than the ride to the airport, is a real trick to manage, and that less than a handful of entities are likely to be able to do. Other good examples would be companies I have recently written about, like Hutchinson Technology (HTCH) or Graham Corp. (GHM). Indeed, my big bet on Seagate and Western Digital is at base premised on the extreme unlikelihood that anyone but them (and also-ran Toshiba) will deign to even attempt the tricky business of designing and manufacturing data storage by the Terabyte, at penny per Gigabyte. I suspect that what impelled me to write about this is that as I ponder how I might re-tool Market Musings and my research effort, I am settling in on some criteria for the kind of ideas I might traffic in. It will continue to be value oriented, but value has always been very much in the eye of the beholder. In my tired, old eyes, being able to do what’s a real trick to do, in a way that only the most deep pocketed and irrational of start-ups would attempt, constitutes a truly durable element of intrinsic value. (Here I part company with certain tangible-book dogmatists I have had the dubious pleasure of working with.) I hope to shed more light on this and other investment criteria in the week and months ahead.

Reboot

If you are reading this, you probably got here by way of my page at Seeking Alpha. A bit of explanation of what is before you, or a click or two away, is in order. This post will do that, and then conclude with a brief prognosis of Mr. Market’s current emotional state.

The first thing that you should notice is that a very long time has elapsed since the previous post. The answer to”Why’d you stop?” begins with “Why I started.” It was the prospect of imminent inadvertent retirement, which came pass in January 2009. Though retrospectively it was very much a blessing, at the time I felt impelled (putting it mildly) to get busy doing what I knew how to do. All this is explained somewhere in High Road Value Research. What caused me to walk away was not just the deep suspicion that hardly anyone is reading more than 140 characters at a time any more, and the rest of us are have a hard time remembering what we read more than a few hours ago. No, it was more about the way a rising tide and few astute picks had so improved my financial position. That and having lived through one more tough scrape brought me to a place where I lost the thing that seemed to have been my prime motivation for working as hard as I did all those years. When for the first time in your life you are not at least a little scared and hungry, it gets hard to show up and work. At least for a while.

So, content to just be a private investor (though there are presently two parties who pay me a fee each quarter, each for one of two different facets of what passes for “expertise”), I have disdained from scratching the journalistic itch. But when a “story that simply had to told” (the telling of which having been one of the best parts of my days as a sell-side analyst) about one of my investments presented itself, I wrote it up and submitted it to Seeking Alpha. This venue had not really occurred to me before, as my sense of it was colored by a quick look at it years ago, and that most of what I see on it I don’t consider worth reading. (To be fair, in 30+ years I have developed a rather narrowly defined approach which would preclude most of the content of any channel.) It turned out to be such a fun experience that I feel a renewed desire to show up and write. So I will be publishing ideas to Seeking Alpha, but will also try and post to Market Musings once or twice a month, probably make some changes to the High Road site, and see where it goes.

The next thing I would ask you to notice is that as of this post, I have left the High Road site untouched from almost fifteen months ago. This really only matters with respect to the Companies We Follow page. What you see there is like right out of a time capsule. A few of the Also of Interest stocks are no longer of interest. One of the Top Ten, Cymer, is no more, having just been acquired by ASML for $20 plus 1.16 shares. (I am keeping enough ASML to hold my attention to the very exciting prospects it has over the next several years.) WDC is a top ten holding (top five actually, as my HDD bet has grown to about 25% of my liquid net worth.) A few stocks came and went for me since then, like Timet (acquired by PCP), a few others would be there if I stuck with this format. But presenting “stocks we follow” in this format is not the bright idea I thought it was when I launched HRVR. (There was a certain logic to it that broke down in the face of evolving price and circumstance.) Finally, if updated today, the “cash & equivalents” would show about 16%, but this is distorted by my being about two-thirds of the way through a massive and protracted home renovation.

So I will be doing Market Musings, and writing about stocks and companies I know or get to know. I might tweak the HRVR site, or revamp it, or just not go there anymore. I do have a better schema in mind for presenting and categorizing ideas (working title: Two Buckets and a Can). Sometime in the weeks and months ahead, the wax museum display that is Companies We Follow, March 2012, will close down, and something might take its place.

In the mean time, count me one nervous Bull. By the reckoning of What Time is it?, we are certainly due for some kind of meaningful interlude of a temperament opposite what has been in play since mid November. (Think trough to peaks, like Aug 82 to Aug 87, Dec 87 to Aug 90 and March 03 to July 07.) But as I was saying a couple of years ago, March 2003 is looking more and more “once in a generation” as in July 1932 or December 1974 (or August 1982, if inflation is taken into account), and this matters. The momentum we are enjoying lately got some of its impetus from a tide of sentiment being very, very out in March 2009. In the 4 1/4 years since that low tide began its turn, we have had only one correction worthy the name. Nasty as it was, even Q3 11 turned out, from the vantage of two years later, to have been a fine opportunity to “buy the dips”.

“Buying the dips” has kept the Market on its skyward trajectory, as has that “clamor for yield” that I wrote so much about back then. Retirement plans made when CD rates were within hailing distance of 5% (not so long ago!) have had to come up with a new game plan, and that has meant buying stocks. (For me, it meant that some “bond substitute” stocks like IP, MRK, VZ & WMT produced unexpectedly good returns, so good that the calls I wrote proved to be not quite as “out of the money” as I would later wish, but that was a high class problem to have with “steady total return” bucket in my portfolio.) This clamor for yield will continue to cause investors at the margin to decide that they aren’t as risk averse as they thought they were (either that or dial down the lifestyle and tell the kids to start paying rent) and pile into what is shaping up to be the almost-only-game-in-town (bonds being grossly overvalued, commodities having proved as treacherous as they really are, and real estate offering mixed prospects). This won’t stop the Market from eventually having a correction, or even keep it from being a Q3 11 sort of affair, but it is definitely nourishing a Bull that by any other measure is due for a rest.

The one other factor that I think has cheered Mr. Market is on the political front. It matters that a chief executive with no demonstrable executive capacity, an Administration indelibly steeped in the Chicago Way, and the minions who do their bidding,that 2MM strong claque of unionized government workers, are in ways not apparent only a month or so ago very much on the defensive. Governments at their best struggle to avoid doing more harm than good to the enterprises which nourish and sustain them. This one has shown every inclination to favor its cronies and do damage to everyone else. That inclination has been stymied by the recent revelations that are no surprise to those of us who study history and human nature deeply and know that the lust for power is even more pervasive and corrupting than the lust for money. My sense is that the Market understands that ill-considered unaccountable intrusion by putatively omniscient government apparatchiks invariably does more harm than good, and that it has been celebrating what amounts to a turn in this particularly noxious tide.

I hope to keep finding things worth showing up and writing about. Summer will of course be punctuated by a few adventures out in the wild parts of this great big beautiful country we are blessed to live in, but there is enough percolating upstairs right now for me to show up and write from time to time. Stay tuned.