By Barry Randall
Like many teenage boys in the 1970s, I didn't have much in common with my father. I was pretty good at sports; he was legally blind in one eye and naturally clumsy. I loved airplanes and dreamed of learning to fly; he was claustrophobic and afraid to fly. I was into computers and math; he had washed out of engineering school and only found his footing in law school.
But we both loved the stock market. Although my father literally wrote the book on his particular field of legal expertise (municipal law in the state of Massachusetts), he was also a very savvy amateur investor. And I was fascinated by the stock tables in the morning paper (remember those?) and the Value Line packets that arrived every week.
Every Friday night, he'd conveniently forget whatever I'd done wrong that week and sit down with me at 8:30 p.m. to watch Wall Street Week with Louis Ruykeyser. (I'll bet you can hum the theme song even today.)
Since then, I've earned an MBA from a top-20 school (Texas) and been a professional analyst and PM for over 20 years. And a lot of what my dad taught me has been superseded by 'higher education' and my own experience or been made irrelevant by changes in technology. But some things Dad knew, believed and taught me are things I still use. Such as:
Management Matters: While my dad wasn't exactly a stock market gadfly on the level of Evelyn Davis, he wasn't afraid to pick up the phone and call a CEO and ask thoughtful questions. Even allegedly boring utilities have complex decisions to make.
And with all that cash flow coming in, it's tempting to do something foolish. Dad's determination to know management and judge them by their ability to execute on an operating plan is an underappreciated skill and one that I employ regularly.
Trading Costs: Dad began investing in the Stone Age, a.k.a. 1961. Back then, trading costs were onerous- often 1-2% of any position. But he never flinched because making the right decision at the right time overwhelms the effect of trading costs.
Today, online brokers trip over each other offering trading commissions that would have seemed like a fantasy to someone in the pre-Big Bang era (i.e., before 1975 in the U.S.). But my Dad's time horizon was measured in years and he was looking for (and sometimes finding) doubles and triples. The regular re-balancing I employ (see below) is less costly because of today's cheaper commissions.
But I would trade only slightly less often (perhaps twice per year?) if the costs were higher. Because even today, owning the 'right' company and not owning the 'wrong' one trumps the effects of commissions.
You can't win if you're not in the game: Dad learned this lesson playing poker in the Army. When you bet your entire stake on one hand and lose, you can't make it back playing poker. You're out.
When investing in the stock market, Dad never committed all his risk capital to one position, no matter how strongly he believed in it. Even his most successful investment ever, buying General Public Utilities stock in the wake of the Three Mile Island nuclear accident, involved risking about 20% of his investable capital. There might be only a few great investments out there. But there are always many good ones, and you can easily diversify among the latter.
I search a proprietary database of nearly 1200 companies to find the 50 that make up the Crabtree Technology model portfolio. I'm about equally comfortable with the ability of any one of those positions to generate alpha for the model. So there's no point in putting more eggs in one basket than in another.
Investing in tech stocks is dramatic enough. Baby doesn't need a new pair of shoes. She needs a roof over her head. That comes via diversification.
My dad will celebrate his 90th birthday on December 16. Happy Birthday, Dad, and thanks for everything. Especially those Friday nights on the couch watching Lou Ruykeyser.
On November 25, we completed the fourth quarter re-balancing of the Crabtree Technology model. We sold fourteen positions, bought fifteen new ones, trimmed five holdings and added to three existing
International (DATE), eHealth (EHTH), Himax Technologies (HIMX), M/A-Com Technology Solution Holdings (MTSI), MagnaChip (MX), Simcere Pharmaceutical (SCR), Silicon Graphics (SGI) and TE Connectivity (TEL).
Brand new 2% positions included Marvell Technology (MRVL), Brocade (BRCD), QLogic (QLGC), Finisar (FNSR), Silicon Motion (SIMO), Motorola Solutions (MSI), NTELOS Holdings (NTLS), China Telecom (CHA), TakeTwo Interactive (TTWO), XO Group (XOXO), KT Corp. (KT), Atlantic Tele-Network (ATNI), ShoreTel (SHOR), Geeknet (GKNT) and Aspen Technology (AZPN).
Trimmed back to 2% positions were CalAmp (CAMP), Euronet Worldwide (EEFT), Hexcel (HXL), Inteliquent (IQNT) and RigNet (RNET). Raised back to 2% positions were AudioCodes (AUDC), Catamaran (CTRX) and EnerNOC (ENOC).
Our mid-November quantitative model yielded 100 candidates, down from 122 when we ran the model in mid-August. This was in-line with expectations considering the recent market-wide price appreciation.
Our valuation parameter is excluding more candidates because the appreciation hasn't been accompanied, in general, by an increase in operational and share-gain performance. None of this is predictive of the market in general and shouldn't be interpreted as such.
Overall performance for the Crabtree Technology model in November was solid on an absolute basis but mixed on a relative one. The model rose 3.1% in the month, compared with a 3.9% gain for the Russell 2000 (RUT) benchmark and a 3.8% gain for the S&P 500 (SPX). Our internal benchmark, the Merrill Lynch Technology 100 (MLO) also rose 2.9% in October.
The most widely held technology ETF, the State Street Global Advisor's Technology Select SPDR (XLK) rose 3.1%.
We're glad to be done with trading for the year because trading volumes in December are traditionally low. But we'll spend the 'down time' as we usually do between re-balancing: analyzing the companies in the model and keeping worthy replacements 'on deck."
DISCLAIMER: The investments discussed are held in client accounts as of November 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry, among other factors. The Merrill Lynch 100 Technology Index (MLO) is an equal-dollar weighted index of 100 stocks designed to measure the performance of a cross section of large, actively traded technology stocks and ADRs. Investors cannot invest directly in an index. Indexes have no fees. Past performance is no guarantee of future results.
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