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  Vacations and better returns

BENJ GALLANDER and BEN STADELMANN

Friday, August 30, 2013

It is somewhat counterintuitive to think that “escaping” from the market can lead to better portfolio results, but this is something that Benj has found makes tremendous sense, much in the same way that vacationing from a job can enhance performance upon the return to work.

Years ago, he would be on the phone in August — as he often is throughout the year — placing calls to CEOs and CFOs, combing the grist for nuggets of information. Alas, a much higher than normal percentage of these top execs were away from the office, many on holiday. Benj took this as a sign that he too would profit from breaking away from his desk.

Ultimately what happened were a couple of key events. While doing something completely different than researching enterprises, like hiking or throwing a baseball or swimming, thoughts pertinent to the market would pop into his head. At other times, while in distant lands, he would observe things that would convince him that certain investments that did not appear to make sense from a North American perspective, were logical in a global context.

This month Benj meandered for an Ontario tour, or at least a small piece of the vast province. It took him camping to Owen Sound, where he went to the delightful SummerFolk Music Festival. From there he scooted through Tobermore to spend four nights on Manitoulin Island. The beautiful vistas and beaches along with the splendiferous stars that one does not see in Toronto offer glimpses into worlds far away. Add in a fire pit, where much ruminating can be done while enjoying those tasty marshmallow morsels. That was capped off with the moonscapes of Sudbury accompanied by Science North and Dynamic Earth, where a hint into the economics of mining can be attained.

While on this voyage, Benj continued to read newspapers and catch up on old magazines. A few ideas came out of this. One was how ironic it is that Carl Icahn can have such a big impact on Apple. It seems bizarre that a man so focused on money can potentially direct the outfit that was the creative brainchild of Steve Jobs. The two men's visions seem so far apart.

Two months ago we wrote this about Apple: “Another major mistake was the bond issue to do a share buyback and proffer dividends. Taking on debt for those two purposes always seems silly to us, even if interest rates are at or near historically low levels.” Carl, who has been immensely successful, disagrees. He believes the company should borrow $150 billion to fund a further share buyback, stating, “If Apple does this now and earnings increase at only 10 percent, the stock even keeping the same multiple currently should trade at $700 a share.” Upping earnings by this amount is not so simple. In addition, buying back shares at $500 or so, about where they trade now, when the book value is $135, seems rather stupid from this end. Often enough we have seen corporations overvalue their shares, purchasing them at expensive levels, which hurts shareholders.

When he meets with Apple's CEO Tim Cook in September, Icahn might be pushing for the company to purchase Nuance Communications, the manufacturer of the voice feature on Apple's iPhone. Icahn owns 16 percent of the company.

While heading back to nature, it becomes obvious how little one can live with. This magnifies the “KISS” principle, Keep It Simple Stupid, one that Benj likes to include in his investment bag of tricks while attempting to benefit from the obvious. He has stated for a long time that with interest rates at or near record low levels, they can only go one way: up. That is currently happening but for some bizarre reason, many prognosticators are surprised at both the direction and strength of the move. One area to be avoided as rates climb are bond funds, as usually in this situation, they go down. Anyone who owns one might be wise to think about pulling out. Also people who have taken on debt thinking that rates would stay low far into the future, might consider paying it down if possible, while those considering a real estate purchase might find more offerings at better prices in the future as distress situations appear on the market.

Lastly, quantitative easing kept popping into Benj's brain. While the future of QE is regularly in the forefront of market gyrations these days, as the campfire was burning, Benj confirmed his view that this is largely a non-issue, although it will continue to have a powerful psychological effect. Eventually, QE will end and when it does, it should be a clear indicator that things are better with the U.S. economy, which bodes well for the global system. Benj thinks the Fed should have turned off this spigot months ago, as the stock market as a predictive indicator has already suggested that better days are here.

So where will it be? A cottage? Other parts of Canada? The U.S.? Caribbean? Europe? Wherever it is, consider escaping and focus less on investing. At the same time, deeper thoughts could easily appear, leading to better returns.


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