Saturday, December 27, 2008

Clark Winter's The Either/Or Investor

I originally avoided Clark Winter's The Either/Or Investor because the title is uninspiring and brought back visions of Søren Kierkegaard. I am happy I reconsidered. Clark Winter isn't your ordinary Wall Street denizen. He dedicates his book to his "wife and family," which tells you right away he knows his priorities. You can almost imagine him zipping across the landscape in a Pontiac G8. He seems to admire GM and the car business--which is part of the problem, because he wrote his book before March 2008 and the auto industry's current woes. If you can ignore his sanguine predictions about car companies and auto usage (see page xxxiii, where he praises GM over Ford, and says, "Even rising fuel prices will probably not make much a difference, as American habits are extraordinarily ingrained." [p. 147]), the rest of his book is a joy to read. His comments on immigration are particularly timely, given America's increasing protectionist sentiments:

Despite the belief that immigrants don't contribute much to society besides low-level work, they are in fact instrumental in starting businesses that serve other immigrants. In the United States, individuals start more than 550,000 new businesses a month, according to the Ewing Marion Kauffman Foundation. Latin American immigrants start more business[es] than any other group, following by immigrants in general. [p. 33]

On the whole, immigration is good for investors. It brings new customers, new incentives to innovate, new markets, new competitors, and new capital into the market. The savings rates of immigrants are higher than those of the native born, which adds to capital formation. What immigrants, legal or otherwise, take out of the system in terms of municipal services, they probably make in sales taxes on the goods they purchase. Immigrants start new businesses--and therefore are a greater source of new employment--than their native-born counterparts. Additionally, these new companies add to the capital stock of the community in another way. They bring their talents, hopes, dreams, and skills to countries that are increasingly postindustrial and therefore less inclined to do the jobs that those at the bottom rungs of the economic ladder are willing to take on. All in all, there are few reasons to oppose immigration from an investment perspective, much less a cultural one. [p. 35]

Most investing books have insightful or funny anecdotes and facts, and Mr. Winter's book is no exception. He talks about teaching his son economics while driving to grandma's house [p. 54]; Singapore's rise [p. 66]; the economic concepts of alpha and beta [p. 106]; sentiment's role in the markets [p. 70]; and the role of "expensive beef" in Argentina's rise and fall [p. 73]:

Poverty doubled from 27 percent to 54 percent, and millions of Argentines had their life savings wiped out...During all that time, the diet never changed. If it had, Argentines would have brought down their government. [p. 70]

Mr. Winter's main point is that ordinary investors can invest better simply by paying attention. He calls this "thematic investing," or concentrating on a subject whose outcome might be reasonably predictable [p. 72]. Although he doesn't explicitly say it, he favors momentum trading, because buy-and-hold investors are subject to the vagaries of geopolitical events and other events beyond their control:

You could always be a buy-and-hold investor, but that isn't likely to work, either, as you could lose a lot of money in the process. Markets can and do go to sleep for years, as they wait for geopolitical events to sort themselves out. [p. 72]

Going back to Argentina, if an investor understood or learned how important beef was in Argentina's traditional diet, s/he may have been able to profit. For instance, Mr. Winter's "reality-based" investor could have done well by trading beef/cattle futures, or perhaps by stockpiling beef before the Argentine peso collapsed. However, Mr. Winter supplies his own counterargument when he describes Macao as a good investment opportunity:

If Macao is a good enough investment for Steve Wynn or Sheldon Adelson, two of the most successful investors in Las Vegas real estate, it may be a safe bet for individual investors as well. [p. 77]

Unfortunately, Steve Wynn's Wynn Resorts (WYNN) and Sheldon Adelson's Las Vegas Sands (LVS) have been two of the worst-performing stocks this year. Both invested heavily in Macao. What's the lesson? Even if you know which direction the wind is blowing, it doesn't necessarily mean a beneficial storm will occur at the spot you predict. (Somewhere, John Bogle, an ardent buy-and-hold advocate, is smiling.)

Despite these "oops" moments, I learned a lot from Either/Or. Mr. Winter can explain complex ideas without sounding as if he's speaking down to his readers. On page 94, he explains why companies go public, despite the higher scrutiny (they want liquidity and access to more sources of funding). On pages 95-96, he discusses derivatives (you can almost hear the foreboding music in the background as you read):

[T]he variety of futures contracts available has increased dramatically and the number of contracts has increased exponentially. There are now many more futures contracts in oil traded than actual barrels of oil to be delivered...While futures are supposed to create more orderly markets, sometimes they can add disorder in the marketplace.

I also learned some more interesting facts. For example, Brazil is an oligarchy: "In Brazil, for example, twenty thousand families control 80% of the wealth." [p. 123] Also, the bottom of an oil barrel contains the most valuable liquid:

[W]hen the oil is refined, the lightest components become gasoline and kerosene and jet fuel, which sell for a couple of dollars per gallon. The next heaviest component becomes heating oil, which also sells for a dollar or two a gallon. What is left at the bottom of the barrel is the heavy, tarlike residue that is turned into thousands of different organic chemicals and pharmaceutical compounds...[these can] sell for anywhere from a few dollars a gallon to thousands of dollars a pound.

I'll leave you with Mr. Winter's investing rules:

1. Don't lose money
2. Don't invest where the big investors invest
3. Find a waterfall and put your bucket under it
4. Open your mind

Mr. Winter is obviously a man with both feet planted firmly on the ground. If you're skeptical of buy-and-hold investing, or if you just want to learn more about a different investment style, you may enjoy his book.

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