My Meeting with FusionAnalytics

Fans of Barry Ritholtz might enjoy this post. As most of you know, Mr. Ritholtz is the CEO and Director for Equity Research for FusionIQ, an independent quant research firm. He works with Kevin Lane and Michael Conte of FusionAnalytics Investment Partners, LLC. I happened to meet Mr. Lane and Mr. Conte yesterday morning.

Mr. Lane provided some details about his background. He started with MFS and then became Redwood's Chief Market Strategist. When margins on the trade execution side of the business diminished, Mr. Lane shifted gears into market research. Mr. Lane appears to focus part of his research on answering the following three questions:

1. What are the underlying fundamentals?
2. Are we in the right sector?
3. What is the overall market environment?

Mr. Lane is a quant--someone who relies on numerical ("quantative") techniques to time the market and to determine market risk. I asked his thoughts on LTCM, the most famous quant-based blow-up in Wall Street history (read the book, When Genius Failed, for more on this topic). This is where Mr. Lane differentiated his product from other quant-based tools. Many quants believe so religiously in their system, even when the data in front of them tells them a trade isn't working out, they ignore it. In contrast, Mr. Lane mentioned human error and being able to recognize when you've made a mistake. Though he didn't come out and say it, he implied that LTCM fell prey to hubris. Mr. Lane also said that when his own bets on Tempur Pedic International Inc. (TPX) and La-Z-Boy Inc. (LZB) went awry, he exited those positions. His decision to take the loss sooner rather than later saved his investors from more downside movement. Overall, I found Mr. Lane to be upfront and professional. He clearly had passion for his work, and his eyes lit up when he began talking about his investment strategies.

I then spoke with Mr. Conte. If Mr. Lane is the gravitas of the operation, then Mr. Conte is the suave go-getter, the East Coast stud who brings energy and drive to every meeting. Mr. Conte talked about the FusionAnalytics program and how it sought to minimize investment risk. He used the term, "tilt," instead of portfolio "re-balancing," saying it was important to allocate assets in the right direction rather than just haphazardly. Actually, he said it more colorfully--he said that rebalancing doesn't make sense, because you could be rebalancing into toxic assets, except he used a scatalogical term for "toxic assets," which made me laugh.

Mr. Conte also talked about conflicts of interest and how many brokers and advisors had no incentive to protect their clients' money. For example, let's say you recommend a stock to your clients. A few months later, the technical indicators show that the stock is poised for a dive. In most firms, there's no incentive to go back to your clients and tell them you were wrong a few months ago and they should sell. That's because many Wall Street firms don't prioritize protecting their clients' money--their models are based on getting as much money as you can and giving your clients bullish tips. Mr. Conte said FusionAnalytics avoided this conflict of interest by charging a percentage of assets under management, allowing them to focus on results.

As I've written several times before, it's important for investors to see investment advisors and corporate executives in person to gauge their credibility. Human intuition, honed for thousands of years, may not always be correct, but it can sometimes save investors a lot of grief. One reason Madoff might have secluded himself from his investors and created an exclusive (read: isolated) existence is probably because he knew his lies would produce tell-tale signals. Mr. Conte and Mr. Lane both came across as credible, decent men. I wouldn't be surprised to see them doing very well in the future. In a world where a Madoff can exist, it's nice to know that a Mike Conte and a Kevin Lane can also thrive.

One final note: during my chat with Mr. Conte, we experienced a 4.3 earthquake. This was Mr. Conte's first earthquake, and I got to share it with him. It's always good to see how investment advisors operate under pressure. Mr. Conte's face got a little red when he realized what was happening, but he kept his composure. Mr. Conte, welcome to California.

FYI: here is an article re: Mr. Lane's timely calls:

http://www.businessweek.com/magazine/content/02_50/b3812104.htm

"Beat" Poet

Whenever I feel despondent, I've tried to get out of my funk by exercising or playing video games. Lately, however, one simple quote attributed to Lawrence Ferlinghetti has brought me quick happiness:

"Mankind is too stupid and greedy to save himself."

There's something in the statement's inevitability that brings an immediate lightness to the moment. More on Ferlinghetti after the jump:

http://www.redroom.com/authornewsitem/lawrence-ferlinghetti

Legal Pot Sales in California

According to The Atlantic, April 2009, p. 23 (Joshua Green):

Given California's well-publicized budget crunch, it's worth noting that legal pot sales generate $100 million in state tax revenue a year.

That's a lot of dope.

Governor Mark Sanford

It's Sunday, so let's visit Gov. Mark Sanford, who's been getting a bad rap in the mainstream press:

[T]he Bible says, “Let your light so shine before men that they may see your good works and give glory to your Father that’s in heaven.“ Hopefully, by the way in which you act. The way in which you make decisions.

Here's another quote from the interview, regarding the stages of democracy and civilization:

Sir Alex Francis Taylor studied history for all of his life. When he came to the end of his life, the quote attributed to him was that a democracy can not exist as a permanent form of government. It can only exist until voters discover that they can vote for them selves largess of the public treasury with a result that democracy always fails under loose fiscal policy and is generally followed by dictatorship. The average age of the world’s great civilizations has been 200 years for a nation to progress to a sequence from bondage to spiritual faith, spiritual faith to great courage, great courage to liberty, liberty to abundance, abundance to selfishness, selfishness to complacency, complacency to apathy, apathy to dependence. And from dependence back again into bond age. And so what I’m saying is some of what’s going on here is probably a reflection of where we are as a people.

More here.

California Economy

I almost missed this Washington Post article about Southern California's economy. Mr. Pearlstein sounds like a member of California's Tipping Point Club.

How Did My X-Mas Shopping Go?

On December 18, 2008, I posted my personal X-Mas shopping list for stocks. Although I intended to hold the stocks for at least a year, I made some changes, taking some losses to raise cash and to buy Berkshire Hathaway (BRK.B). Let's review:

12/18/08

CSCO = 16.66
EWZ = 35.95
INTC = 14.26
KO = 45.18
MXIM = 12.00
WFC = 29.65

S&P 500 = 885.28
DJIA = 8,604.99
Nasdaq = 1,552.37

3/26/09

CSCO = 17.31 (+3.9%)
EWZ = 40.85 (+1.3%)
INTC = 15.82 (+10.9%)
KO = 44.85 (-0.7%)
MXIM = 14.11 (+17.58%)
WFC = 15.95 (-46.2%)

S&P 500 = 832.86 (negative 5.9%)
DJIA = 7924.56
Nasdaq = 1587.00

Overall, the return on the above portfolio is a negative 2.2% (not including dividends). This return beats the S&P 500, but my victory is admittedly Pyrrhic. If I had avoided Wells Fargo, I would be doing quite well. In fact, I bought Wells Fargo stock all the way down to 9 dollars and recently sold at around 14 dollars, taking a loss. I just sold Intel and Maxim, too, but plan on buying them back at lower prices. The recent run-up seems too much, too soon. Even so, my major holdings, all in mutual funds, are untouched and mostly in stocks.

I am worried about the T. Rowe Price Latin America mutual fund (PRLAX) and iShares MSCI Brazil Index (EWZ). Despite its name, the T. Rowe Price Latin America fund holds Brazilian stocks. I am concerned because Brazilian government projections seem overly optimistic; demand for commodities continues to be soft; and political rivals appear all-too-willing to undermine President Luiz Silva's authority.

Right now, the above list is not representative of my major holdings. I continue to trade actively in my retirement accounts.

The information on this site is provided for discussion purposes only. Under no circumstances do any statements here represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence. To summarize, I do not provide investment advice, nor do I make any claims or promises that any information here will lead to a profit, loss, or any other result.

Update on 3/27/09: an astute seekingalpha.com reader points out that my math above is incorrect (and in my favor):

"You need to check your math. On EWZ, a price move from $35.95 to $40.85 is 13.63%, not 1.3%."

That, my friends, is why I'm a lawyer. I leave the math to the professionals and the expert witnesses.

Joseph Cardinal Ratzinger on Economics and Morality

My Catholic readers are going to love this link:
  http://www.acton.org/publications/occasionalpapers/publicat_occasionalpapers_ratzinger.php

Pope Benedict XVI is too traditionally conservative for my tastes, a comment a real Catholic ought to consider a compliment. Regardless of his political beliefs, the Pope's 1986(!) essay makes some very good points. Take this paragraph, for example:

The great successes of this [free market] theory concealed its limitations for a long time. But now in a changed situation, its tacit philosophical presuppositions and thus its problems become clearer. Although this position admits the freedom of individual businessmen, and to that extent can be called liberal, it is in fact deterministic in its core. It presupposes that the free play of market forces can operate in one direction only, given the constitution of man and the world, namely, toward the self-regulation of supply and demand, and toward economic efficiency and progress.

What the Pope is saying seems all too prescient, given the recent collapse of the banking sector. The Pope continues to make some common sense points when he quotes Peter Koslowski: “The economy is governed not only by economic laws, but is also determined by men.” In other words, the free market may be a relatively good path, but men have flaws, and their decisions impact the free market. It sounds so simple when the Pope says it, you almost want to resurrect Milton Friedman for a debate.

The Pope's main point is that free market systems require self-restraint, and religion provides self-restraint. As a result, a free market system without religion probably won't be ethical and won't include self-restraint. Extrapolating from these points, the Pope is arguing that religion is required to inject ethics and discipline into the ethics-less enterprise of the free market.

Again, the Pope no doubt makes excellent points. Ethics can flow from religion, but he veers off-course when he argues that self-restraint and discipline are necessarily tied to religion. It is true that religion can produce self-restraint and discipline; however, self-restraint can be learned without religion. Given America's wise policy of separating church and state, we need to determine how to effectively teach all of our children self-restraint and other ethical behavior without using religion.

Law schools have attempted to teach ethics without religion, but almost every law school ethics course is a joke amongst students. This is because too much of the course relies on counter-intuitive case studies, such as defense lawyers who know where a body is buried but cannot reveal the location because of attorney-client privilege. Since lawyers have failed to create broadly applicable ethics courses, we need to go back to the time when ethics was a central part of education.

How do we do this? At first blush, it seems simple, because the subject matter already exists. Learned philosophers, which would certainly include religious philosophers, have written volumes on ethics. Sadly, most high school and college students lack the reading or analytical ability to study Immanuel Kant, Socrates, and Thomas More. Ultimately, the problem isn't available content, but the willingness to read and to spend time reading complicated texts. I hate to sound so stodgy, but television bears much of the blame. Given the way humans are designed--with traces of the hunter in all of us--visual stimulation is more powerful than the written word. As long as children are exposed to hours of television on a daily basis, their ability to read and to have the attention span to read profound works will evaporate. Even among the children I coach in basketball, I can see a discernible difference in attention span among the parents who restrict television time and the ones who do not.

But it's not just television that's the problem--the intellectual value of all visual media has declined precipitously. For example, I love old movies. I notice they are slower in pace, but I don't mind. More importantly, Hollywood designed the dialogue of older films for educated adults; consequently, movies challenged audiences and forced children and teenagers to evolve to a higher linguistic standard to keep up with mainstream culture. Just compare Who's Afraid of Virginia Woolf? and A Man for All Seasons with most of the films in today's theaters. Outside of David Mamet's films, intelligent dialogue is a rarity in most modern films.

How does a society stop the corrosion of intellectual discourse, which includes ethics, when major media channels are dumbing down dialogue everywhere? I don't know the answer, but I do know this: when we implement a culture that prizes reading and books above television, we will be on the right path. Reading great books used to be automatic for society's elites, the college-educated, and the upper class. Today, it's hard to imagine George Bush or Sarah Palin fully understanding Shakespeare or Erich Maria Remarque. Pope Benedict XVI is correct that the free market needs disciplined practitioners to prevent itself from turning excessive. It's too bad he sees only one (unlikely) path to get to the promised land of self-restraint.

© Matthew Mehdi Rafat (2009)