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Jack of All Trades, Master of None
Posted by: The Science of Hitting (IP Logged)
Date: September 12, 2013 10:26AM

Tesla Motors (TSLA) is a bubble and is worth pennies in comparison to its current market valuation.

Tesla Motors will change the world; those that have already been burned shorting the stock have only begun to feel the pain that they will incur if they don’t cover now.

Those two statements are about as opposite from one another as you can get – and if you went and read any articles about Tesla on SeekingAlpha (not too many are published here on GuruFocus, which says a lot about the different crowds on the two sites), you could find a seemingly endless number of people in the comment section that are 100% certain that one of those two statements is undeniably true.

For those ready to tune out, don’t worry – this article isn’t about Tesla. I have nothing to add to the conversation: I can’t begin to understand the company’s technology, let alone estimate its sustainability (the company’s disclosure on patents in its 10-K doesn’t do me any good). What I’m more interested in discussing are the people who “know” how this will all play out. Now, I must admit, I’ve made one key assumption: I believe that most of the people discussing Tesla don’t have the first clue what they’re talking about, either from a financial (even rough, “back of the envelope” calculations) or technological perspective (quite important in determining the success – and sustainability – of Tesla’s business model); if you stop for a quick read of the aforementioned comments, I’m sure that you’ll agree.

The unfounded conviction of a seemingly large number of market participants despite any background knowledge or research (with TSLA being a prime example) is a truly astounding phenomenon. Unsurprisingly, the great investors of our time take a different approach, following the wise words of Thomas Watson Sr. – “I'm smart in spots, and I stay around those spots.”

In a Forbes interview in 1987, Phil Fisher said the following when asked about what kind of companies he liked: “My own interests essentially are in manufacturing companies that in one way or another can expand their markets by taking advantage of the discoveries of natural science. In other fields, such as retailing and finance, there are excellent opportunities, but I feel this is one where I am more qualified. I think a weakness of many people's approach to investment is that they try to be jacks of all trades and masters of none.

This is astounding when we consider that Mr. Fisher made these statements at the age of 80, with more than half a century of investment experience. Even then, Phil Fisher still saw no reason to stray beyond his core competency (his success with investments in Motorola and Texas Instruments (TXN) over many years prove that was a wise decision).

Speaking of Mr. Fisher, another of his quotes is appropriate here. This is from the list that I wrote about the other day (here): “There are a relatively small number of truly outstanding companies. Their shares frequently can’t be bought at attractive prices. Therefore, when favorable prices exist, full advantage should be taken of the situation. Funds should be concentrated in the most desirable opportunities… For individuals, any holding of over twenty different stocks is a sign of financial incompetence.”

These concepts are related, if not one in the same: Many people attempt to become a jack of all trades, and as a result become a master of none. It’s much the same for the investor that owns a little bit of everything, and when all is said and done “owns” nothing; they’ve done a lot of buying and selling to end up in a spot that is essentially identical to what they could’ve achieved with no work and at a lower cost (trading, taxes, etc) via an index fund. In fact, studies have shown that, if anything, they’re bound to end up on the wrong side of the divide in comparison to the major indices due to poorly timed decision-making (buy high, sell low).

The solution is clear: concentration and conviction, with that conviction supported by analysis and facts; Berkshire Hathaway (BRK.B) was built upon those two pillars, and Warren Buffett’s most notable investments all fit the bill - from American Express (40% of portfolio after the salad oil scandal) to Coca-Cola (the investment was equal in size to approximately three years of operating earnings for Berkshire in the late 1980’s) to Burlington Northern (the purchase price is equal to ~10% of Berkshire’s current market cap). Charlie & Warren went big when they acted, and it’s paid off; even today, Berkshire isn’t the index fund that many paint it out to be: at the company’s current market capitalization of $265 billion, five names – American Express, Coca-Cola, Wells Fargo, IBM, and Burlington Northern (assuming a similar multiple to UNP, CSX, etc) – account for nearly 50% of Berkshire’s underlying value.

The point is that it’s okay to say “I don’t know” – but on the few occasions where you do know, act accordingly.

Very few people can make an informed decision about Tesla – on the buy side or the sell side (there’s a reason why smart people like Jim Chanos don’t short stocks based upon valuation alone). Figuring out the important questions that you should be asking – let alone answering them – is easier said than done; failure to address critical questions can leave you with a false sense of confidence, and lead to a permanent impairment of capital.

A great example is competitive threats: whether or not General Motors (GM), Ford (F), and others will stymie TSLA is simply unclear at this point in time - yet it’s a critically important piece of the puzzle; considering that GM spent more than $7 billion on R&D in FY2012, or more than 26X what TSLA spent in the same year, this cannot be glossed over as immaterial (Ford spent roughly twenty times more than TSLA).

There are people out there that could gather and distill the core arguments and facts involved and put together a logical estimate of what the coming years will bring; I’d bet that the vast majority of people with a current interest in Tesla (long or short) couldn’t – or have not – done so.

I’m of the mindset that intelligent investing requires intense self-reflection; action that is rooted in behavioral biases must be sought out and eliminated swiftly. Many people jump from one stock to another, racking up confidence from the winners and finding scapegoats for the losers; they’re flipping coins, and it has no place when we’re talking about something like saving for retirement. Even worse, many can’t recognize that what they call investing is really gambling.

The best course of action is to move on when you’re at a competitive disadvantage; recognizing that reality is an arduous task. Missing a few winners that are near the edge of your circle of competence is a small price to pay to avoid the true disasters - like buying a tech stock at the turn of the century only to see it crater 80% or 90% in a few months’ time (as an example, Pets.com went from IPO to liquidation in less than nine months).

Don’t get caught up in the game, even if it’s just a small piece of your portfolio; this stuff is like poison – with some luck, you’ll start to believe that you actually know what you’re doing. It’s a dangerous road that can result in disaster. Let the media and the bloggers worry about the “hot stocks” of the day; there are plenty of other companies out there - almost all of which are under less focus than Tesla, Facebook (FB), and Apple (AAPL). Find the spots where you can truly excel, and stick to those spots; if you’re the guy who can honestly say that you’ve done the research and will long/short Tesla, more power to you (I think you should require a minimum commitment of time and money if you make that call, but I’ll save that discussion for another day).

When you find yourself with a screaming opportunity that’s based upon thorough analysis, don’t move gingerly - act boldly. Otherwise, stay away; leave the gambling for Vegas.



Guru Discussed: Jim Chanos: Current Portfolio, Stock Picks
Stocks Discussed: TSLA, TXN, KO, AXP, WFC, IBM, BRK.B, BRK.A, GM, F, FB, AAPL,
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Re Jack of All Trades Master of None
Posted by: AlbertaSunwapta (IP Logged)
Date: September 12, 2013 01:37PM

Great discussion. Fisher's books were among the first investment books I ever read. I guess I should re-read them as now I note that he said: "For individuals" which implies other investment entity don't apply. How did he explain that implicit differentiation? Multiple managers, investment committees, sectoral bets, indexing...?

For instance, on several occasions hasn't Buffett via Berkshire Hathaway held significantly more than the 20 stock litmus test for competence Fisher speaks of? In fact, how many holdings does Buffett, via his own hand, have right now?

"Funds should be concentrated in the most desirable opportunities…For individuals, any holding of over twenty different stocks is a sign of financial incompetence.” - Fisher



Guru Discussed: Jim Chanos: Current Portfolio, Stock Picks
Stocks Discussed: TSLA, TXN, KO, AXP, WFC, IBM, BRK.B, BRK.A, GM, F, FB, AAPL,
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Re Jack of All Trades Master of None
Posted by: gurufocus (IP Logged)
Date: September 12, 2013 03:48PM

Excellent read! Thanks!



Guru Discussed: Jim Chanos: Current Portfolio, Stock Picks
Stocks Discussed: TSLA, TXN, KO, AXP, WFC, IBM, BRK.B, BRK.A, GM, F, FB, AAPL,
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Re Jack of All Trades Master of None
Posted by: The Science of Hitting (IP Logged)
Date: September 12, 2013 05:07PM

Alberta,

Here's the quote in full from Mr. Fisher:

"There are a relatively small number of truly outstanding companies. Their shares frequently can't be bought at attractive prices. Therefore, when favorable prices exist, full advantage should be taken of the situation. Funds should be concentrated in the most desirable opportunities. For those involved in venture capital and quite small companies, say with annual sales of under $25 million, more diversification may be necessary. For larger companies, proper diversification requires investing in a variety of industries with different economic characteristics. For individuals (in possible contrast to institutions and certain types of funds), any holding of over twenty different stocks is a sign of financial incompetence. Ten or twelve is usually a better number. Sometimes the costs of the capital gains tax may justify taking several years to complete a move towards concentration. As an individual's holdings climb toward as many as twenty stocks, it nearly always is desirable to switch from the least attractive of these stocks to more of the attractive. It should be remembered that ERISA stands for Emasculated Results: Insufficient Sophisticated Action."

That probably goes a long way to answering your questions. In terms of Berkshire, about 70% of their equity holdings were across just five names as of 2012.

Thanks for the comment!

Guru,

Thanks for the kind words!




Guru Discussed: Jim Chanos: Current Portfolio, Stock Picks
Stocks Discussed: TSLA, TXN, KO, AXP, WFC, IBM, BRK.B, BRK.A, GM, F, FB, AAPL,
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Re Jack of All Trades Master of None
Posted by: Cornelius Chan (IP Logged)
Date: September 12, 2013 07:46PM

Very insightful investor you are Science. You are absolutely right in your observation of how the crowd behaves in the stock market, with the example of Tesla to highlight it.

There are many types of people participating in the stock market. I have the view that just as life in general produces a lot of people who never distinguish themselves or bother trying, so in the stock market there are millions who participate but few who succeed consistently.

As an old saying goes, "If you don’t want to learn, why waste your hard-earned money in the stock market?"

Another good one, "You don’t get rich quick gambling in the stock market. You only attain new levels of relative poverty."

I have checked out Seeking Alpha before and found that there is a lot of hot air going on there. I prefer the company of value investors. At least there is a focus, which is so very important to the fine art of investing. As they say, "birds of a feather flock together."



Guru Discussed: Jim Chanos: Current Portfolio, Stock Picks
Stocks Discussed: TSLA, TXN, KO, AXP, WFC, IBM, BRK.B, BRK.A, GM, F, FB, AAPL,
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Re Jack of All Trades Master of None
Posted by: sapporosteve (IP Logged)
Date: September 13, 2013 02:16AM

Ben Graham held well over 20 or 30 stocks. Walter Schloss does as well. It would be a brave person to call them financially incompetent. In the end (1974) Graham said basically to buy a lot of cheap stocks based on 2 or 3 simple criteria and then hold them for 2 years or 50% profit. The magic formula's success is predicated on simple formulas not a deep knowledge of individual companies.

While concentration and conviction works for Buffett and Munger, the question is for how many others does it work? It can - a study shows that if you followed Buffett into each of his purchases when it was made public, you would have made 15% annually. But how many followed through?

Quant strategies have been shown to outperform humans - but many think that quant strategies are a floor that they personally can improve on - however, as James Montier states, they are actually the ceiling and most human intervention reduces their success. These strategies rarely focus on deep knowledge and conviction, but simply use other strategies to outperform the market.

I suppose you could self reflect adequately and come to the conclusion that concentration and conviction are the domain of only a few like Buffett and Munger. But then what are the odds that you think you are can be among that type of company. That is the conclusion I came to.

I am not saying that Buffett type concentration and conviction does not, or can not work - of course it can but there are many ways to make long term money in the market. For most people it would be easier to simply adopt the Magic Formula, or perhaps the Dogs of the Dow rather than try to become a member of a very elite group that is able to select the few great companies.

Science - I know you wrote much about JCP and believed it to be a long term turn-around, but I have been wondering whether you still hold the stock.

regards
Steve






Guru Discussed: Jim Chanos: Current Portfolio, Stock Picks
Stocks Discussed: TSLA, TXN, KO, AXP, WFC, IBM, BRK.B, BRK.A, GM, F, FB, AAPL,
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Re Jack of All Trades Master of None
Posted by: The Science of Hitting (IP Logged)
Date: September 13, 2013 07:06AM

CWR,

Well thank you - that's very kind of you. Agree with all that you've said, and I hope to be part of the flock for a long time. Thanks for the comment!

SapporoSteve,

There are certainly examples to the contrary, and from great investors; I wouldn't get caught up in the exact number put forward by Mr. Fisher, and instead think about what he said as it pertains to even a very good individual investor (who is still no Graham, Schloss, etc). I think your point is valid, and I'd note that what Buffett/Munger do seems a lot like what Fisher did in his time (or at least how he described it; I don't have intimate details on his exact transactions); his book essentially never addresses the point of selling a stock that has reached fair value, because he felt so deeply that one should not depart from a truly great business with long term growth prospects. That certainly sounds more like Buffett than Graham (of course Graham's single best investment by a wide margin was in a situation quite like that - GEICO).

I don't think it's about right or wrong, and as you note, many people can have success approaching the problem different ways. One thing that certainly doesn't work is spreading your bets as a hedge against analysis; that is what I really looked to address in this article.

And on JCP I have not sold a single share; at the same time, I haven't bought any either, and will not be doing so (with all but 100% certainty). I made a commitment to be a business owner when I bought the shares and am seeing it through; I'm hoping painful lessons are more likely to be remembered....

Thanks for the thoughtful comment! Anybody who quotes Montier is a friend of mine :)




Guru Discussed: Jim Chanos: Current Portfolio, Stock Picks
Stocks Discussed: TSLA, TXN, KO, AXP, WFC, IBM, BRK.B, BRK.A, GM, F, FB, AAPL,
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Re Jack of All Trades Master of None
Posted by: batbeer2 (IP Logged)
Date: September 13, 2013 07:45AM

>> I made a commitment to be a business owner when I bought the shares and am seeing it through

I don't know about JCP but I think you will have satisfactory results with that approach. In any case you'd deserve them which is probably the best way to get them.

Off topic.... it just struck me that SPLS may be what's killing Dell. They are both trying to push tablets and other computer devices/peripherals to businesses/offices through their websites. SPLS seems to be growing that part of the business while Dell is transforming itself into a services/solutions provider precisely because the retail side is not as hot as it used to be.

Maybe Dell lacks the distribution footprint SPLS does have. Also, Dell used to assemble stuff themselves and they did a very good job. With the tablets and other modern/non PC devices, distribution of the finished product may be more important than the ability to assemble custom machines cheaply.

Like you, I've been giving the OMX/ODP/SPLS competitive dynamic some thought. I hadn't given much thought to the SPLS/DELL dynamic though. It struck me yesterday while I was reading up on the latest Dell news.

Just some thoughts. Thanks for another article worth reading.




Guru Discussed: Jim Chanos: Current Portfolio, Stock Picks
Stocks Discussed: TSLA, TXN, KO, AXP, WFC, IBM, BRK.B, BRK.A, GM, F, FB, AAPL,
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Re Jack of All Trades Master of None
Posted by: The Science of Hitting (IP Logged)
Date: September 15, 2013 02:20PM

Batbeer2,

That's my thinking - it will force me to partner with great businesses; if I don't get too crazy on the prices I pay, I expect the result to be quite satisfactory (I've been happy with my results in the few years I've been doing this, of course the markets have been friendly as well). I'll build cash when I can't find anything - as I have done this year, without a single trade to date - and then hopefully have the gumption to move in a big way when I get the chance to.

In regards to Staples/Dell, that's an interesting idea. I'm not sure if you heard it, but Mr. Sargent noted at the GS Retail Conference this week that roughly 3% of the company's sales come from PC's ("and declining virtually every quarter"), from 9% at it's peak (I believe he was referring to the peak when he said "at one point").

On $24 billion in sales, that's about $720 million in PC sales per year; across a total store base of ~2100 locations, that's $343,000 in computer sales per year, or somewhere around two PC's per day per location (assuming a price point of $400-500 on average). Obviously that assumes that none of these PC's are sold through contract or on the website, which isn't the case; not much that is useful from that, I just think those numbers are interesting...

Thanks for the comment!




Guru Discussed: Jim Chanos: Current Portfolio, Stock Picks
Stocks Discussed: TSLA, TXN, KO, AXP, WFC, IBM, BRK.B, BRK.A, GM, F, FB, AAPL,
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Re Jack of All Trades Master of None
Posted by: batbeer2 (IP Logged)
Date: September 15, 2013 02:38PM

>> I'll build cash when I can't find anything

Have you had a thorough look at Tesco plc?

Take what you know about Costco and Staples and through that lens, look at what Tesco has been doing since 2002.... FWIW, I think they are in the same league.




Guru Discussed: Jim Chanos: Current Portfolio, Stock Picks
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