Wednesday, February 22, 2006

You Can't Judge a Book......?

Yesterday, I came home to find an unexpected bulky package in my mailbox.

For the second time in as many weeks, I had received an unsolicited book. Not exactly a typical occurrence, as I am neither a publisher, nor a reviewer of books.

However, these two particular books gave me pause, as they are exceptions to the old saying to which the title of this piece refers. Sometimes, there is enough information on a book's dust jacket to prioritize one's reading list. In this case, one volume went straight to the bottom of my list. The other is my current read.

The losing title was some combination of words like "innovation," "entrepreneurship," and, maybe, "American values," or "American economy." I really cannot recall. The author is the named donor of an entire center of study at a second- or third-tier US university. Are we surprised to learn that the center in question is focused on entrepreneurship? The gist is that without innovation, our entrepreneurship won't continue to drive our economy. Or maybe it was, 'without entrepreneurship, our economy won't be innovative.' Or was it, 'without an economy, innovators can't be entrepreneurs?' Well, you get the general sense of it.

Thanks- I was really losing sleep over these burning questions.

What sealed this book's fate was a quick look inside the cover, to see if the sender had inscribed a message. He is a classmate from graduate school, from whom I had not heard in years. No inscription. But in accidentally turning a page further, there was a page of acknowledgements, including one to the sitting CEO of GM, Rick Waggoner. That did it.

Does anyone really think Waggoner has demonstrated knowing anything about "innovation," "entrepreneurship," or running anything well during his tenure at the now-prostrate auto maker? Merely mentioning the guy on that page made me question the judgement of the author and co-author. Plus, the book's stated topics don't seem all that insightful. I would hazard to guess that our economy has out-performed most of the world's other economic systems due to its inherent risk-taking, risk-rewarding nature. Innovation and entrepreneurship would seem to be key elements of our economy on the face of it.

The other unexpected book I received recently, however, is a gem. My business partner, Steve, bought it for me on Amazon. Entitled, "Mean Markets and Lizard Brains," by Terry Burnham of Harvard. It is a rare breath of fresh air on a business-related topic from a school that is not noted, anymore, for empirical research. Burnham is a member of the second generation of academics doing work in behavioral finance, and this book is well worth reading. The title was rather obtuse, but compared to the other book, at least it wasn't uninteresting on its face.

So, maybe sometimes you can judge some things on face value, at least to rank order their worth.

I'll be writing more on Burnham's excellent book soon, as it provides some empirical foundations for why my own equity strategy has performed so consistently well over the last fifteen years.

Monday, February 20, 2006

Animal Spirits

It seems that last week, the equity markets decided to revalue energy company stocks upwards, while softening on technology issues.

At times like these, I am reminded of Ben Graham's famous depictions of the equity markets as person who, on some days will sell the same thing cheaply that, on other days, it will hold much more dear. With no apparent relationship between the two.

The wild ride of energy stocks so far this year bears this out. They were up significantly in January, and, then, as if a switch had been thrown, plummeting in the first ten trading days of this month. How can the long term outlook for the sector, and its various components, have been affected so much in so little time, absent any serious exogenous influences?

The answer is, as Graham observed, and Keynes, before him, "animal spirits." They seem to move investors and traders to value things in unsupportable and unsustainable ways in the short term. Thus the reason I hold stocks for several quarters. In market conditions such as these, who can possibly know that a daily value is "correct?"

Rather than attempt to trade frequently, attempting to anticipate volatile short-term price moves, I prefer to invest and hold, taking advantage of superior management and longer-term trends.