The Problem with Being Active

This site was originally spinofftracker.blogspot.com. Spinoffs are still a great place to dig. Though I'm sure one of the rules of a successful blog is focus, this site meanders from the rare company analysis to random musings on markets and human nature. The principle reason is fear of activity. In most situations in life, the scorecard is based on how busy we look, not on how productive we are.

Society supports and rewards activity. Only in times past it was harder to fake. If you lived in the Great Rift Valley, it was impossible to pretend to hunt. Today we have IM and meetings to mask our slacking.

In the online financial world, sites that give advice, particularly stock advice, bore the reader with mundane lists and yesterday's news. They try to hard to be active. The Motley Fool is an example of a site with an occasional standout story or opinion piece. The rest is mediocre. (Important note: I did interview unsuccessfully--by some measures--with The Fool.) Their analysts try too hard to create the next big headline: "Why you need to buy these 5 stocks today", "3 mistakes Buffett made." Those headlines are not real. But most articles are overly hedged, obvious, or too promotional.

Hyperactivity is a great argument against subscribing to a stock newsletter. I'd guess that most newsletters are marketed to individuals not institutions. Institutions have research departments and sophisticated TPS reports.

A person, we'll call him Bill, is 45 years old and enjoys a modest income. Bill occasionally listens and cares about what Ben Bernanke says. He peruses the business section of the paper. He knows what LIBOR means, that the S&P is a market-weighted index, and that nobody really understands credit default swap exposure. He's ahead of the pack.

Most stock newsletters publish monthly picks of 1-2 stocks. You can imagine if Bill subscribes to just one letter, over the course of five years--the minimum time frame to establish a solid track record--that he'll have seen 60-120 recommendations. And surely he's not puting all his extra cash in one newsletter's picks. He'll pay 200-300 dollars per year for the letter and he'll cherry pick stocks he's familiar with. His performance will be very different from the letter's reported numbers.

Far superior to the newsletter model is money management. The idea of being a mere observer and learner and reaping the huge paydays is probably diverting many geniuses from cancer research and mentoring. That's not to say funds don't justify their "work" in some way. Nerds create algorithms, and fancy charts with Greek letters attempt to validate the lucrative 2 and 20 (2% of assets and 20% of returns) fees.

The ideal model is simpler. It would be a team of one or two. An ambitious unpaid intern could be of use in filtering and going through boring SEC filings. Office space would have to be free at the start, run out of an apartment or house. There'd be no company car, perks, or "strategic lunches." Portfolio turnover would be minimal, leverage nil, and picks rare (maybe 3-5 stocks in most years) but uncommonly good. 1.5% of hedge funds (loosely regulated investment firms) manage less than $100M. The fund would be small, have a one-time 100 basis point fee, and a performance fee of 20%, but only after profits of 5%. Size would be an advantage as the investment universe would be tilted toward $10-500M companies (too small for the big boys). The majority of the founder's net worth will be married to the fund.

Productivity, as measured by long-term returns, is the key. Bull shit activity is the curse of the modern corporation. A lot of big dumb problems can be avoided if we continually learn and work intelligently. Who cares if someone wears a nicer tie and walks faster than you.

Disclosure: see statement at bottom of screen.
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