Practical analysis for investment professionals
14 August 2015

Weekend Reads for Investors: The Case, the Conflagrations, the Conglomerate, and CEOs

Posted In: Weekend Reads

Alliteration abounds in this edition of “Weekend Reads for Investors: The Case, the Conflagrations, the Conglomerate, and CEOs.” I am honored to try and fill the shoes of my colleague David Larrabee, CFA, who has carved out a reputation for delivering stories worth catching up on over the weekend. Not only do I hope to curate the cogent story, but I also hope to provide critical contextualization, too.

Now let the preamble end — on to the stories.

The Case of the Missing Earnings Stories

Though it does not qualify as a story in and of itself, I find the utter lack of earnings news making headlines as the story of the last four years. Back in the day when I was a fund manager, earnings season was dominated by headlines touting the profit makes and misses of major businesses. But post-Great Recession, about the only thing making business news headlines is macro news. Here I am talking about central bank actions, sovereign debt bailouts, GDP numbers, major commodity price moves, and so forth. Excepting a handful of technology companies, such as Apple (AAPL) and Google (GOOG), and the bulge-bracket banks, no one seems to care about earnings any longer. I interpret this as a large anecdotal sign that capitalism has not quite recuperated from its bout of Great Recession plague.

Macro Conflagrations

  • So, of course, the big news of the last several weeks for investors is macro-oriented. In Greece, an €86 billion economic bailout deal appears likely. Does anyone out there believe this is the last time that Greece and its teetering economy will be in the news? Note to future creditors of the lovely Mediterranean country: It’s the capital base, stupid! Yes, the Greeks certainly are accountable for their current situation, but so are the lenders that over-lent to Greece. Another point for consideration: Since when does capitalism work without the signaling pain of losses? (The Financial Times)
  • The other big macro story is the conflagration confronting China. Its economy looks shaken, but not broken. One shaking force is the value of the yuan. Frankly, it is too high, making Chinese exports expensive. Not surprisingly then, China devalued the yuan by the most in two decades, ending its erstwhile peg to the US dollar. I think this story — skidding China — is critically important to watch. It is my opinion that the social contract in China between the people and their government is “a job for you, in exchange for a vote for us.” It is hard to have a one-party system if there is economic malaise. Put another way, the more extraordinary the actions taken by the central government, likely the more acute is its anxiety about social unrest and possible political upheaval. Final point, and in keeping with my point above, since when did capitalists become so afraid of losses? Aren’t profits the reward for smart risk taking? (South China Morning Post, Japan Times)

Return of the Conglomerate

  • As I said above, a handful of companies, like Google, tend to dominate the business headlines. For several years, many investors criticized Googzilla for a lack of strategic focus. In addressing these concerns, Google restructured itself, creating a holding company called Alphabet. The soup is to be headed by its founders, Larry Page and Sergey Brin, with the search engine business to be a single asset of the holding company. Hmmmm. There was a time when investors believed organizations with diverse investments in multiple businesses was a bad thing. During 1990–2010, the surest way to bump up a sagging stock price was to execute a spinoff. Here, Google appears to be molding itself into that forgotten business archetype, the conglomerate. To me this just looks like legerdemain, a nod to the form desired by shareholders, but the substance is likely to be the same. (The Financial Times)

How Much Is a CEO Worth?

  • Few investor issues spark intense debate like CEO pay. Rarer still is the opinion piece that can walk down the middle of both pay arguments — pay them what they earn versus don’t enrich the rich — adroitly. A recent New York Times piece, however, passes through the compensation gauntlet unscathed. I am not sure where I stand on this issue either. Yes, CEOs who create large value deserve to be compensated, and yes, there is a market for talent. All of that I get, understand, and mostly subscribe to. The great businesses of the 20th century, however, were also large, very complex, and multinational, and many of those companies are still in operation today. But the execs at these firms were compensated much less than their contemporaries. For me, the irritation in my gut is: If these execs are creating such amazing long-term value, hence earning just rewards, then why do they stick around for such short tenures? (The New York Times)

And Now for Something Completely Different . . .

My colleague Lauren Foster, let’s face it, is the monarch of Enterprising Investor’s Weekend Reads series. One feature she routinely includes (that I believe should be emulated) is her “And Now for Something Completely Different” segment.

  • Two stories really caught my attention over the last several weeks. First, Japan Times reports the development of a magic marker whose ink contains silver. As silver is a conductor this allows you to draw circuits onto paper. Just place a battery with its connectors onto what you have drawn, then connect it up to an LED to create light. What I love about this invention is that I do my best work the old-fashioned way. Namely, when I take out pen and paper and begin drawing pictures or sketching out ideas and outlines, I find the connection between my mind and the tactile sensation of writing to liberate my creativity. (Japan Times)
  • Next up, those of you who have followed my content efforts at CFA Institute know that I am a critic of unbridled worship at technology’s altar. TechCrunch carried an interesting commentary that is a familiar old investment theme: garbage in, garbage out. Here the story makes the case that the biases of the programmers of algorithms and of artificial intelligence (AI) engines end up being reflected in and amplified by these machines. I consider this to be a cautionary tale: know thyself, know thy methods, and know thy investments! (TechCrunch)

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Jason Voss, CFA

Jason Voss, CFA, tirelessly focuses on improving the ability of investors to better serve end clients. He is the author of the Foreword Reviews Business Book of the Year Finalist, The Intuitive Investor and the CEO of Active Investment Management (AIM) Consulting. Voss also sub-contracts for the well known firm, Focus Consulting Group. Previously, he was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund to noteworthy returns. Voss holds a BA in economics and an MBA in finance and accounting from the University of Colorado.

Ethics Statement

My statement of ethics is very simple, really: I treat others as I would like to be treated. In my opinion, all systems of ethics distill to this simple statement. If you believe I have deviated from this standard, I would love to hear from you: [email protected]

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