Conceptual Investing Fills My Car’s Back Seat

Never underestimate how wrong group think can be. Linear extrapolation, what economists do can be horrendously off base. Then, there’s group think. Right after World War II’s end, everyone believed a horrendous recession lay in store for the U.S.A. The post World War II recession that never surfaced was pure group think. Nobody even tried to deal with stored up demand for housing and automobiles. 

I’ve learned to paint with a broad brush. If IBM’s quarterly earnings come in up 16% instead of forecasted 17%, IBM ain’t no disaster of missed numbers but of foolish expectations. Don’t get me wrong. anticipating change at the margin is what denotes first class money management. But, the change needs to be meaningful. 

Before I set a price-earnings ratio for the market, I deal with Treasury notes. I like to see long Treasuries yielding at least 4.5%. But the real yield after a 4% inflation forecast is miniscule. My solution is not to go out to more than 10-year maturities and use some high yielding BB rated corporates with maturity under 10 years.

You could have a dream about what to buy and sell, but lemme give a “for instance” about conceptual investing rather than pure numbers work which is what analysts do pretty unsuccessfully. 

Take airlines, for example. Nobody ever projected airline earnings accurately, because of so many variables, not the least is the business cycle, price of oil fuel and consumer spending strength. I want to own airlines because their earnings power is tied to the economic cycle and peace abroad which we may finally gel in the Mideast. 

I don’t care if an airline is selling near book value or below because in a lean economic setting airlines do run through serious money and need transfusions. Better buy a utility with a 5 to 6% dividend yield or even 10-year Treasuries now yielding 4.7%. Maybe some Coca-Cola and Costco can help your sleep, too. 

These days, penalty for being wrong on growth stock quarterly earnings can be 20% overnight. 

My fling is in the more wobbly American Airlines and in the more stable United Airlines. These days, you can lose much more money in Ford or GM than an airline.  

When I renew my goods, best acting belongs to banks, brokerage house operators and Master Limited Partnerships (MLP’s) like Enterprise Products Partners and Energy Transfer. Don’t omit Citigroup and Goldman Sachs. I’m keeping fingers crossed on American Airlines, a 10% position, along with Goldman Sachs at 9%. 

This is live by the sword, die by the sword structure. I expect to better Buffett’s Apple Computer. Remember,  Buffett owns gobs of banks which also have been known to gasp for air in hard times when their stupidity shines through. 

Tracking this market, NASDAQ 100 over some decades, shows the penalty for being wrong on orientation and your picks. It’s easy to slide into disaster by bottom of a cycle. In 2000-2003, NASDAQ plummeted from 5,000 to below 

1,000. Recovery took a decade, but never reached its 2000 peak. When a player, the market always seem more drastic than subsequent recoveries that you read about. 

When Chuck Wilson, GM’s headman in 1953, got tapped by President Eisenhower for the Secretary of Defense post, he said at his hearing before the Armed Services Committee, “I thought what was good for the country was also good for General Motors and vice versa.” Some in the press foreshortened this sentence to read “What’s good for General Motors is good for this country.” The abridged version ignited an uproar in liberal quarters. 

It’s taken only 70 years and a government bailout to make this quip right as gold. In 2011, GM was cut in half, from around $40 to under $20. The cyclical forces in the country crushed earnings power for nearly everyone. 

Before the technology breakout in semiconductors, early sixties, GM management was considered royalty. They wore tightly tailored shark-skin suits, snug around the hips and with oversized lapels. White shirts were prescribed with silk rep ties. And yet, it wasn’t too difficult to get to see them and talk about their business. George Romney and his compact car crowd was their enemy, but GM managed through all such flack. 

Romney, at American Motors,  was so outstanding a manager that for a stretch he got marked as Presidential timber. In the end, the business cycle engulfs us all. 

But, lemme fess up. The Street didn’t make me so rich. Collecting Contemporary art as it unfolded in the fifties and sixties was my leveraged play. The lesson is, be early in what you discover and then bet-a-bunch.