- Martin Sosnoff
Only Tone-Deaf Players Buy Into Volatility
I was a feisty operator when poor. I had so little to give back. Some 60 years ago, the collar was yellowed on my seersucker jacket and I didn’t even own a pair of black shoes with laces.
I bought $5 stocks, thinking it was an easier path for them to go up, but it was the decade of hundred-dollar growth stocks like IBM, Xerox and Polaroid. The rich got richer, not me. Name analysts promised their clientele that stocks like Xerox would appreciate 2%, monthly, for years to come.
Things aren’t so different today. Forty-two analysts recommend trillion-dollar paper like Apple, Amazon, Alphabet and Microsoft. Normally, 2 out of 40 analysts are neutral but there’re no naysayers in the bunch. Consider, Warren Buffett carries Apple at over 40% of portfolio assets. (And he’s made a ton of money on it.)
To be sure, I’ve owned Microsoft for 5 years so my tax basis is too low to even consider banging it out. But, at heart, I’m still a junk peddler. At the bottom of the market, 2 years ago, I bought ragamuffins selling under 10 bucks. The list embraced Halliburton, Macy’s, Freeport-McMoRan, U.S. Steel, even Alcoa.
This paper has gone around the clock couple of times, still super-volatile. Alcoa can fluctuate 10% intraday. I’ve tried to protect myself selling call options on these goods, but unless your timing is perfect you’ll cover at a loss.
Finally, you end up hating the market for its gross volatility. The honcho who bought Netflix recently when it gapped down on a bad quarterly report has my respect. But, unless I thought I knew more about Netflix than anyone else could possibly know, I couldn’t summon up enough moxie for a gap down play like this one.
The problem is my memory is long and dated on the market’s mindless volatility. Besides, I maintain charts on volatility that go back 50 or so years. On specific sector volatility, like technology, the amplitude of fluctuation is rarely recalled or given much weight. Journalists don’t maintain requisite data history to hold deep-seated opinions.
For example, the near total destruction of internet infrastructure stocks in 2001 was inescapable on flimsy fundamentals. No market capitalization was left exceeding $1 billion. How many players struck out with Akamai, Inktomi and StorageNetworks? Analysts used 10-year discounted cash flow models to justify such picks. Exodus at its peak sported a market capitalization of $35 billion but then sloughed off to $797 million. It was no more than a string of computer server farms. Today, I disremember it.
Few of us care to recall growth stock trajectories in 2013 – ‘14. Mid-decade, money managers challenged valuation for even traditional “golden oldies” like Coca-Cola, Merck, Pfizer, Cisco Systems and Microsoft. They sold at either a small premium to the market or at a discount. Everyone (including me) was skeptical their franchises were intact or that R&D would be sufficiently productive. Lest we forget, Polaroid and Xerox mounted hefty R&D budgets but couldn’t renew themselves. Hewlett-Packard and Oracle then sold at 10 times earnings, not 40 times earnings.
Why so many bargains then? Well, gross profit margins for tech houses traced a downward slope. The market at yearend 2014 sold at 17 times earnings, not so different from where we are currently. Call it 20 times expected results in 2022.
Beneficiaries of exponential computer power and miniaturization are no longer black box assemblers like Hewlett-Packard and integrated circuit pioneers like Intel. Now, the field belongs to packagers of entertainment, information and telecommunications that leverage technology. The names are familiar: Netflix, Comcast, Alphabet, Apple, Twitter and Meta Platforms.
Back in the sixties, when growth stocks sold at 60 times earnings, Wall Street pointed to their scarcity value. Not enough of ‘em to go around. Pure bull market rationalization patter. Today, half a dozen growthies are capitalized at a trillion bucks or more - like Apple and Microsoft. Apple trades over 60 million shares, daily. You can buy or sell all you want, hardly changing the stock’s trajectory.
I’ve just posted a good day, a breakeven, with 20% of my assets in financials balanced by 20% in energy paper. Financials sloughed off 5% while the oils rose 5%. Banks acted like death warmed over along with American Express and Goldman Sachs gapping down.
Decades ago we’d say “If it were easy, they’d have girls doing it.” Now some girls are name money managers, but it ain’t any easier.