Gerry and Doug look at 4 relationships that are key to succeeding financially and using it wisely. You relationship with God, with yourself, with your spouse, and with your network of friends.
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Episode 82: A Rally, Really?
The Fed "kinda sorta" gives the market permission go up, a surprising defense of whole life insurance and a primer on derivatives.
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Episode 81: Suffering-You've Got To Embrace It
There is no reward with risk, which is basically another word for suffering. Plus, the Latte Effect and what do do with cash.
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Episode 80: Hold On
More confirmation of a market inflection point, compound growth, get an estate plan and this a complex person who had both some good and not good ideas.
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Episode 79: No, Really, This Time It's For Real
Could the market have actually found a bottom? Plus, short selling (and why Gerry hates it), company sponsored retirement plans and our Free Enterprise Saint (or Sinner) of the week.
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Episode 78: 30 Minutes Or Less
Have interest rates peaked? Plus, Gerry's favorite savings plan, mutual funds basics and a little bit Domino's founder, Tom Mongahan.
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Episode 77: What Is Truth?
Gerry discussed the role of truth in investing and, at the end, gets back to basics as he breaks down what stock is.
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Episode 76: Growth Misconduct
What is a business worth? Gerry is seeing an amount of increasing cases where the whole is less than the sum of its balance sheet.
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Episode 75: Passive Aggressive
ETFs started out as a way to facilitate passive investing, but they have gotten more and more specialized over the years. By definition, there has been a bit of a style drift.
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Episode 74: Dividends Aren't What They Used To Be
If dividends are so great, why doesn't Amazon declare them? Gerry and Doug talk about the (relatively) recent de-emphasis of inflation.
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Episode 73: Israel and Market Depth
First, Doug and Gerry address the obvious big issue of the day. Then go into the issue of a few big companies, their outsized effect on the indices and the prospects for that to continue into the future.
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Episode 72: Hot Take-Scandal Sells!
Doug's recent reading selection leads him to the profound (which is obvious to most people) conclusion that not all books are edifying.
But, Ship of Dreams is one of the good ones.
[Sorry for the poor audio this episode. Our levels where off and we are adjusting to our new studio].
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Episode 71: Public Vs. Private
Gerry discusses the features and bugs of investing in private companies versus public companies.
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Episode 70: Forfeiting The Dating Game
Gerry and Doug talk about an article in The Free Press about men leaving the dating pool and what this could mean for all of us.
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Episode 69: From The Headlines
Gerry and Doug peruse the headlines...which basically just turns into a discussion about the UAW strike and a mild rant about rich power being obsessed with (allegedly) elite colleges.
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Episode 68:
Some things never change. Some do. Successful investing requires us to recognize the difference between the two.
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Episode 67: Planning To Fail
Doug complains about his checking account balance needing constant monitoring, which Gerry uses to springboard into a conversation about George Gilder's concept of time as it relates to inflation.
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Episode 66: Faith
Gerry pulls rank and asks the questions this week, getting to the reasons for why we do what we do.
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Episode 65: We Aren't The Only Ones
It's episode 65! That means this show is old enough to apply for Medicare.
Gerry and Doug talk about another analyst who shares their belief that the Fed is beating a dead horse when it comes to inflation.
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Episode 64: You'll Know It When You See It
Bad management is sometimes hard to define, but obviously, it can kill a company and ruin an otherwise good product. Gerry opines on some management red flags.
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Episode 63: Football, Music and Fraud
After talking about country music and college football, Gerry tries to keep his blood pressure down as he breaks down the Madoff series on Netflix.
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Episode 62: Short Selling-The Worst Thing Since...
Gerry minces no words when it comes to his opinion of short selling and discusses the short squeeze on one of our companies. Like in all short squeezes, what goes around comes around.
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Episode 61: Bowling for Dollars
Gerry and Doug talking about business efficiency, paradigm shifts and bowling with two hands.
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Episode 60: Threading the Needle
Bad news is bad news. Good news is bad news. Medium news is good news.
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Episode 59: Aging Gracelessly
What do aging baby booners have in common with poor investing? Listen and find out as Gerry makes the connection. (Actually, given the average person's investing habits, it's not that much of a leap.)
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Episode 58: Overrated/Underrated
Gerry talks about the potential market size and the company's place in that market impacts how much he thinks a company is worth.
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Episode 57: SPAC Attacke
Gerry talks about Special Purpose Acquisition Companies, unintended consequences of things like decimalization and liquidity.
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Episode 56: Are You Experienced?
Gerry proposes a new name for the podcast. Gerry uses the example of Carvana (full disclosure: we own it) as a window into his thinking when it comes to evaluating a company.
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Episode 55: Backdoor Pilots
(With apologies for Doug's audio)
Doug leads with a TV ratings statistics that points to the atomization of mass culture and Gerry shoehorns in his (justified) disdain for ESG.
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Episode 54: Information vs. Wisdom
Gerry dissects the headlines on a major website as an illustration of why the news is broken and our focus on the immediate hasn't served us well at all.
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Episode 53: Is The Stock Market More Volatile Than It Used To Be?
In a word, "yes". Gerry opines on why stocks are saying "normal" movements in some stocks that would have raised some eyebrows back in the old days.
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Episode 52: You Can't Do That While Social Distancing
Mark Zuckerberg's choice of hobby during the pandemic shows us once again that, whatever the rules are, the rich are going to get by.
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Episode 51: Chevron and Coinbase
Gerry and Doug parlay years of watching LA Law and Ally McBeal into a discussion on an upcoming SCOTUS case and bitcoin happenings.
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Episode 50: Cash Forever!
Gerry and Doug talk about the regulatory state, crypto, sitting in cash for decades and bank panics during the Gilded Age.
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Episode 49: If The Government Helps, It Will Cost You
Why are healthcare, college and housing so expensive? You get one guess.
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Episode 48: Another Reason To Hate Light Beer
Is "go woke, go broke" true and how does what is "good" fit into free enterprise? Gerry and Doug talk about Bud Light.
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Investment Climate April 2023: The Fed, Banks and Business
In the first quarter of 2023, markets continued the wildly volatile ride that they have been on for some time now, ending the quarter up mid to high single digits across most major indices. Our portfolios for both Core Growth and Income Strategies ended the quarter similarly. But, as suggested, the path to that end was anything but sanguine given that six weeks into the quarter, portfolios were up over 20%, only to give back most of those gains by mid-March, and then to gain back most of the overall quarterly gain in the last few days of the quarter. Simply crazy! But it is the hand we have been dealt in this era.
Once again, it was fear of the Fed’s fight against the economy (oops! sorry, inflation) that sent stocks back down mid-quarter, and the hint of a possible end to this battle which rallied stocks back in the last days of the quarter.
We highlight the Fed’s fight against the economy simply to emphasize that officials at the Fed believe that economic growth, in the form of employment, causes inflation, instead of the simple truth that it is the spending by government and ensuing money creation from the Fed that is the ingredient for inflation. It’s simply “too much money chasing too few goods” that causes this monetary phenomenon called inflation, not that too many people are employed! But we have said this so many times over the years that we are weary. And we are certainly not alone. Far smarter people than us, like Milton Friedman, have said the same thing, to no avail. But we are compelled to continue to point that out. Who are we -- or who is Milton Friedman -- to contradict the institution that has presided over a more than 90% drop in the purchasing power of the dollar since its inception in 1913!
Reminder, the Fed’s dual mandate is “full employment” (whatever that is) AND a “stable currency”. How’s that working out? But we digress.
Earnings expectations and guidance from companies have certainly come down. Overall market earnings are expected to decline in the first quarter in the overall market. Given the headwinds created by the Fed, this is not surprising. And yet, as we have pointed out in previous commentary, podcasts and blogposts, we continue to be amazed and impressed at the way our portfolio company management teams are handling this environment, where so much seems stacked against them. Over time we have every confidence that they will reach their objectives and visions for their companies.
But the focus these days is so short-term oriented, it is often impossible to see past the nonsense of the Fed, bad policy and a void in leadership everywhere to get to the real objective of finding successful businesses. We intend to stay focused on that objective, regardless of what the day-trading world (which is most of the investment world today) thinks is important.
No interest rate cycle, market cycle, economic cycle, nor political cycle will deter us from that focus.
Lastly, as for the bank failures. Our view is that of the three bank failures, two (Silvergate and Signature) were deliberate attempts on the part of regulators to destroy the “on and off ramps” of fiat currency (the Dollar) to/from crypto currency, as a means to ultimately destroy the crypto ecosystem.
In the case of Silvergate (which we owned until this reality became clear a few weeks before the failure), we do not believe the bank did anything wrong. Between the short-sellers and an aggressive regulatory regime, it was impossible for them to stave off the “run”.
As for Signature, it is less clear, but we suspect something similar happened.
As it relates to Silicon Valley Bank (SVB), this one is very interesting, and we think may have a silver lining.
Besides being caught in the “borrow short and lend long” conundrum that banks often grapple with when rates are rising aggressively and their bond portfolios are dropping in value, we think there is more at work here. SVB was “ground zero” for the venture capital heavyweights who benefitted greatly from the “free money”, zero percent interest rate regime that the Fed engineered in the wake of the 2008-2009 financial crisis. We wrote extensively about the dangers of such a policy for the almost 15 years it had existed.
We believe that environment resulted in an unprecedented amount of malinvestment in the Silicon Valley ecosystem which allowed easy money to fuel money-losing projects for too long, and starved capital from real, core technology that was just too complicated for many of the 21st Century VCs to understand or take the time to learn. It drove an unsustainable “binge” of excess in Silicon Valley that was exemplified in the way SVB was run. The unwinding of this, and maybe the zero percent interest rate strategy, may have positive implications for the allocation of capital going forward.
Regardless, as we always end up saying, well-run businesses will find a way through to the other side of this mess that has been self-inflicted. While painful to witness, in many ways, these failures will pave the way to better policies and circumstances. There is no alternative. Stay tuned to our podcasts, blogs, and this commentary, all found at www.taylorfrigon.com, for more as we manage through this era in investing.
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Episode 47: Valuation Is In The Eye Of The...Valuationer?
Gerry explains the art of valuing companies.
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Gerry on "Money Life with Chuck Jaffe" Again!
Episode 46: Short Attention Span Theater
Gerry bemoans short term-ism in the markets and reiterates the need to focus on the business. Doug confesses a modicum of perma-bear sympathies.
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Episode 45: Is Hyperinflation Coming?
As bad as inflation has been, Gerry and Doug are skeptical about claims that it will devolve into the dreaded hyperinflation. Still, they like crypto.
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Episode 44: Gerry Can't Drive 55
Instead of being mad at the Fed this week, Gerry is mad at traffic. Once's he's done with that, he and Doug talk about the advantages of venture capital, the good old days (and how they weren't always so good) and whatever else comes to mind.
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Getting back to real investing, March 2023 edition
ABOVE: An actual bank run, in Germany in 1931 -- not a scene from a movie!
image: Wikimedia Commons (link).
In the wake of the failure of Silicon Valley Bank last week (and Signature Bank of NY over the weekend, both of which followed closely on the failure of Silvergate Bank earlier in the week), plenty of news outlets are describing the cause as "an old-fashioned bank run," often adding a reference to the famous bank-run scene from It's a Wonderful Life (1946).
In one sense, that comparison isn't inaccurate, but there are some very important differences too -- differences that investors living in 2023 should take time to understand.
As Bloomberg author Matt Levine explains in a very well-written article here, Silicon Valley Bank "could probably have muddled through and been profitable if people had just kept their money in the bank: Its maturities were laddered, its deposit rates weren't going up that much, it did have a positive net interest margin even this quarter, it did have various ways to make money, and if people had just kept their money in, the bonds would have matured and been replaced by higher-earning bonds and SVB would have been fine."
He explains that the bank also would probably have survived if it had been allowed to borrow from the Fed against its assets at the face-value of those assets -- but that if the Fed insisted on marking those assets down (due to the rising interest rates resulting from the Fed's extremely rapid and steep tightening over the past twelve months) following "mark-to-market" accounting, then such markdowns would make SVB insolvent in the face of rapid withdrawals, which is exactly what happened.
If you are not a banker and don't necessarily understand the mechanics of the above description, check out Matt Levine's article. But we would point out that the possibility of insolvency due to a bank run is well understood and not a new danger -- and the banking system has had safeguards in place for almost a hundred years in order to prevent people from losing all confidence in the system and pulling their money from every bank when they see banks start collapsing the way we have seen three banks collapse over the past several days.
So what is new and what is important to understand about the current situation?
What is different from the bank runs of the Wonderful Life era is the fact that we are now in an era that enables the constant moving of money using mobile devices -- a phenomenon that was not present until the rise of the smartphone, which has transformed society so thoroughly that even fairly recent movies made before the advent of the mobile era look like they are set in a completely different world from the one we live in today (and in many ways, they are).
In fact, the most-recent financial crisis of 2008-2009 (which was caused by a different set of banking mistakes than the ones we are seeing take down the banks this week) was itself a crisis that took place prior to the current era of mobile money movement: the very first iPhone did not even appear until the year 2007, and it took a few years before smartphones became ubiquitous the way they are now.
This important transformation of society since the appearance of the smartphone cannot be emphasized enough -- and it should be noted that the Fed has not raised rates as much and in such a short period of time as it has recently, at least not in most people's memory.
The mobile era makes it very easy for depositors to pull their money out of a bank in a heartbeat (they don't have to crowd into a physical building or line up around the corner, the way they did in Its a Wonderful Life or in the actual bank run shown in the photo above).
On the other side of the balance sheet, the bank holds assets which counterbalance the deposit accounts that the bank owes to its depositors. The bank may be forced to sell or borrow against these assets in the event depositors start demanding their deposits back en masse. In the modern era of high-frequency trading of bonds and other securities in which banks typically invest, and since those bank assets are "marked-to-market", this can result in a bank becoming insolvent very quickly.
In the current case, these bank's bond portfolios were hit hard given the rapid rise in interest rates engineered by the Fed in the wake of rampant inflation, which was itself brought on by profligate government spending (some $10 trillion in two years!). A year ago, at the beginning of March 2022, the effective Fed funds rate was only 0.8%. Today, the effective Fed funds rate is 4.57%.
All of this is connected! We now live in an era of mobile money, in which investors have been encouraged to make second-by-second valuation decisions and second-by-second trading decisions -- and in which bank assets can be marked-to-market on a second-by-second basis.
This mentality can lead to bank panics like the one that took down Silicon Valley Bank. If depositors get spooked, they can pull their deposits almost instantaneously, and if the system that is supposed to enable banks to borrow against assets now insists on marking those assets down to their immediate market values (instead of valuing them as if they will be held-to-maturity), then collapse becomes almost inevitable.
Another important difference from the famous scene in Its a Wonderful Life: in that movie, the townspeople who were panicking and starting the run on the bank were portrayed as simple, honest, hardworking men and women. They were not sophisticated investors: they were just ordinary people who needed to pay a doctor bill or buy food to make it through the week.
But the depositors who frequented Silicon Valley Bank included some of the wealthiest venture capitalists and institutional investors in the world, as well as the young companies they funded. The same can be said for the trading firms who made up the majority of the depositors at Silvergate Bank, as well as those who frequented Signature Bank of New York.
As professional investors ourselves, we have never bought into the "fast money," nanosecond-by-nanosecond, "flash trading" schemes favored by these supposedly sophisticated institutional investors. The collapse of Silicon Valley Bank shows that when it comes to a bank run, the venture capitalists and self-styled "tech investors" of Sand Hill Road act a lot like the panicking townspeople of Its a Wonderful Life, except that in the age of mobile devices and instant money movement, they can pull their deposits out a lot quicker!
In fact, this whole sorry spectacle highlights what we have been preaching for decades: that investors need to get back to real investing. The smartphone-era, second-by-second money movement, and the idea that investors should be pursuing real-time changes in "valuation," is only the latest and most-destructive phase of the decades-long arc of so-called "modern portfolio theory". It is our view that this theoretical analysis, which de-emphasizes the importance of fundamental analysis of an investment and replaces it with an almost cult-like worship of the ability of "the market" to accurately value everything instantaneously, has hijacked the investment world and convinced too many investors that investing all comes down to algorithms.
To us, "getting back to real investing", means evaluating businesses (or bonds or any other securities) based on their fundamentals, and investing in them for their long-term prospects, through the ups and downs of the panic-of-the-moment. It is the opposite of the kind of short-term focus that has characterized most fast-money institutional managers, and which has spread to just about anyone with a smartphone (just imagine if the crowd in Wonderful Life had all had smartphones and trading accounts!).
Sadly, even the most (supposedly) sophisticated investors, including Silicon Valley venture firms, have been caught up in two decades of malinvestment built on short-termism and the demise of what we call real investing. Perhaps the events of this week will lead to a re-evaluation of these very serious problems and a change for the better. At least, we certainly hope that they will.
* Disclosure: At the time of publication, the principals of Taylor Frigon Capital owned shares of ClearPoint Neuro (CLPT).
Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.
Episode 43: SVB Blows Up
The guys rehash what everyone is hashing: Silicon Valley Bank. Then, Doug hijacks the show and lets loose on Covid policies.
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Episode 42: Fit To Spit
Does the Fed have as much control over inflation as we think? Also, Gerry and Doug finally realize that it is hard to complain about over-focusing on the Fed without over-focusing on the Fed.
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Episode 41: Where'd Everyone Go?
Is the recent rise in automation a blatant attempt to crowd out humans...or does the declining birth rate indicate that we aren't holding up our end of the bargain?
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Episode 40: Hit On The Business, Miss On The Stock?
Gerry explains what "Long Only" means to the uninitiated and Doug ask Gerry if he ever got the business right but go the stock wrong.
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Episode 39: Episode 39: Taking On Economists (And Pilots)
Gerry and Doug discussion predictions, the Phillips Curve, economists, etc. as they both try not to cough.
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Episode 38: Bouncing Around
Gerry and Doug talk about books, lessons learned, changes not made and basically just try to avoid talking about the currently rising market (as of this recording).
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Episode 37: Eighth Time's A Charm?
Don't look now, but the stock market is up. Will the rally stick this time?
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Episode 36: Never Sell...Until It's Time To Sell
Gerry tells you when to hold 'em and when to fold 'em.
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Investment Climate January 2023: Rip Van Winkle Revisited
The troubled year 2022 has come to a close, and with it has ended our worst year ever (by far) of investment returns on our portfolio companies. That worst year of performance follows immediately on the heels of 2021, which, until Nov 2021 was our best two-year period of investment returns in our Core Growth Strategy. Conversely, our Income Strategy performed quite well, but we will focus here on Core Growth. Such wild and violent swings in market values give rise to some analysis and reflection on the state of the underlying businesses themselves, as well as on the state of the markets, which set the prices of our investments.
Over the years, we have in our blog posts referred to the well-known story of Rip Van Winkle, published by the famous early American author Washington Irving. A somewhat unreliable fellow tells a tale about falling asleep in the Catskill Mountains of upstate New York for twenty years (nonstop), and returns to his sleepy little village to find that it is now a bustling town, full of people he does not recognize and who do not recognize him. And what is more, there has been a revolution in his absence, where the former colonies of the British Empire are now an independent democratic republic!
We first wrote about Rip Van Winkle in September of 2009, asking what a similar sleeper who had slept for one full year (nonstop) since September of 2008 might observe about the markets, had he or she not been awake through the tremendous crash and subsequent return of market prices in the interim -- and we revisited this theme in 2010 and again in 2013.
Now, having experienced both the most violent upward movement of prices (in 2020-2021) and the most violent downdraft in prices (in 2022) of our portfolio companies that we have ever experienced in over 35 years of professional investing, we ask the question: “What if Rip Van Winkle had fallen asleep at the end of 2019 – completely unsuspecting of the oncoming Covid panic and lockdown – and then stayed asleep all the way until the end of 2022?”
In asking this question, we want to imagine that this sleeper awakens to look at the actual business performance of the companies in the Taylor Frigon Core Growth Strategy during the period encompassing the end of 2019 through the end of 2022. While it may come as a tremendous shock to most readers, our analysis found that during the period that our modern-day Rip Van Winkle took his most-recent nap, every single one of our portfolio companies grew their annual revenues – and in most cases they did not just grow those revenues by an insignificant amount but instead grew them at a very respectable rate!
In other words, even though the growth companies are going through one of the most brutal bear markets that we have ever seen in all our years of managing investments, the companies in which we are investing are growing their businesses – and in most cases are doing so at strong rates of growth – despite the fact that many of them have seen vicious reductions in their stock prices over the same Rip Van Winkle period (although not all have seen net declines in stock price: some of our companies are trading higher than they were at the end of 2019, despite the current bear market).
To cite a few examples, we might point to Twilio, a provider of customer engagement solutions consisting of communications and data analysis tools for business customers, which had revenues of $1.1 billion over the four quarters ending December 2019, and which had $3.7 billion in revenues over the four quarters ending September 2022 (we used the four quarters ending in September because most companies have yet reported their official numbers for the quarter which just ended on December 31, 2022). So, Twilio revenues are now 223% higher than they were when Rip Van Winkle went to sleep at the end of 2019 – and yet Twilio’s stock price has declined by fully 50% over a similar period.
Other examples of portfolio companies who have grown their revenues at a very respectable rate include two companies which sell devices used for aesthetics and cosmetic surgery: Apyx (makers of the Renuvion line of devices) and Inmode (makers of the BodyTite line and other lines of products). During the period of Rip Van Winkle’s 2019 to 2022 nap, these two companies have grown their one-year revenues from $28 million to $49 million (in the case of Apyx) and from $156 million to $431 million (in the case of Inmode).
As a final example, Vapotherm (makers of the HVT line of high-velocity respiratory devices and other products for respiratory therapy and support) has seen their revenues increase from $48 million for 2019 to $70 million for the four quarters ending September 2022. In the interim, their revenues shot even higher, driven by hospital purchases during Covid in 2022 – but even after that extraordinary year ended and purchases decreased, the company’s revenues are much higher in 2022 than they were at the end of 2019 before the pandemic had been declared (and before it had even hit the news). Had Rip Van Winkle fallen asleep in 2019 and awakened at the end of 2022, he would observe that Vapotherm has done a good job of almost doubling its annual revenues – and yet the stock price and market capitalization of the company declined by over 70% during the same interval.
We would readily agree with the argument that the “recovery-induced mania” of 2021, during which stock prices rose rapidly across the board during the first three quarters of the year and during which our portfolio stocks rose even more rapidly, was probably overdone. But we would also argue that stock prices and valuation multiples almost certainly should not have been crushed to the degree that they have been crushed in 2022, either.
The main cause of the pounding that growth company stock prices experienced during 2022 was external to the businesses themselves: the Federal Reserve initiated the most rapid (in many decades) raising of interest rates during 2022 in order to come to grips with inflation, and by all appearances the Fed is not done yet. We are on record having warned about the danger of inflation caused by easy money – and during 2022 we certainly saw the inflationary results of tremendously easy money, which led to the Fed’s tightening campaign.
But the whole point of imagining Rip Van Winkle taking naps over various periods is to advise long-term investors to avoid fixating on the quarter-to-quarter or even year-to-year fluctuations that will always be part of the market’s landscape. We recognize that these violent swings – and especially the violent swings we have experienced in recent years – are very painful, and we certainly do not deny that or belittle it. However, we are convinced that the right way to invest is to focus on the businesses – and we continue to be impressed with the progress that our portfolio companies have shown over the years. We anticipate that business success will, in the long term, lead to investment success.
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