<![CDATA[Pennyfarthing Investment - The Derailleur]]>Sun, 25 Jul 2021 02:52:39 -0400Weebly<![CDATA[2020 Fourth Quarter Commentary]]>Thu, 18 Mar 2021 19:06:13 GMThttps://pennyfarthinginvestment.com/the-derailleur/2020-fourth-quarter-commentarySurely, you’ve heard of the video game retailer GameStop stock’s climb in price recently as a result of an online mob’s chitchat to buy.

If you haven’t heard about it, god bless you.  It’s an endless dog chasing its own tail, a rabbit hole on a blank page upon which any story could be told.

One bunch of speculators sought to manipulate another even as they themselves were unknowingly manipulated.

Does it make sense to you?  It doesn’t to me.

I’ll tell you my version of the story.  It’s a scam, one that combined the lure of striking it rich with a desire to punish greedy hedge funds.  It all works, until it doesn’t.
Speculators urged others to buy in order to achieve higher prices.  It’s anti-social behavior at its darkest, to entice naive buyers.

Ignore poverty, an economy transforming in favor of the wealthy, climate change or an ailing healthcare system, nothing to see over there.  For the past two weeks, the financial news focused on small-time speculators as they battled big, nasty hedge funds which had bet on a decline in the stock price.  GameStop stock soared +2,300% in one week.

In my old days at the U.S. SEC, we’d have investigated this as a scheme to defraud, a messy case to be sure.

Over its second week, GameSpot stock fell -87% amidst public discussion over how much money was made and lost.  Should have sold out when you had the chance.

We define who we aren’t as we unite over who we are.  Or do they get what they deserve?  It’s a little of both.

When values fade, empathy darkens.  And GameStop is not the world that I love.]]>
<![CDATA[2020 Third QUARTER COMMENTARY]]>Tue, 05 Jan 2021 19:07:50 GMThttps://pennyfarthinginvestment.com/the-derailleur/2020-third-quarter-commentary​Covid, economic conditions and the election have made analyzing investment prospects as challenging as ever.  Because the Federal Reserve proclaimed near-zero short-term interest rates until 2023, injecting trillions of financing into the investment markets, to keep them buoyant, the stock market went up.

Over the long term, returns on stocks over the past century annualize to around +7% per year.  However, there have been 10-year periods when overall real returns have been negative for stocks, and 20-year periods when returns were nearly zero.  Is the market nearer its +7% long-term average with regard to its future returns or will it test its -2% annual return boundary over the upcoming decade?  At current benchmark prices, the market appears expensive.  Given all that could happen, i.e. tax increases, economic recession and numerous possibilities we cannot yet imagine, low stock market returns ahead seem quite possible.

In many ways, our portfolios don’t look like the overall stock market as reflected by its broadest benchmarks.  Within the sub-benchmarks, large stocks have out-performed small stocks by 21% on the year.  Expensive growth stocks have out-performed cheaper value stocks by 32%.  These two characteristics have factored into our portfolio performance, for better or worse.

As Ray Dalio, the legendary investment manager behind Bridgewater Associates, says about both investing and for living a good life: 1) determine what it is you want, 2) determine what is true, and 3) focus your energy on making #1 happen in light of #2.

What we’ve been living within is an Age of Illusion.  It won’t last. ]]>
<![CDATA[2020 Second QUARTER COMMENTARY]]>Tue, 11 Aug 2020 16:34:09 GMThttps://pennyfarthinginvestment.com/the-derailleur/2020-second-quarter-commentaryBob Dylan, eleven years ago this month, in the rain, was picked up by police while wandering around Long Branch, NJ.  He was wearing a hooded raincoat, black sweatpants and rain boots. The officer, she didn't believe he was Bob Dylan.

He didn't carry ID.  He had stepped into the front yard of a house with a "For Sale" sign. The homeowners had called police, reported an "eccentric-looking old man" and followed him down the street.

Dylan explained to police he had been looking at the house for sale. Was he also looking for a nearby house where Bruce Springsteen lived in 1974-75? He did have a history of visiting the former homes of Neil Young and John Lennon.

After driving him to his tour buses parked at a nearby oceanfront resort, police verified Dylan's identity.

This story, black and white.  Dylan got a ride in the back of a police car.

Earlier this year, Ahmaud Arbery, also looking at a house, one under construction, was shot dead while the sun was shining, ambushed by three white men, one a former police officer.  Both Dylan and Arbery were in the wrong place at the wrong time, one subject of a quirky story; the other a tragedy.

Bob Dylan, poetically raw, real and beguiling, in his song “My Back Pages” sung about how hatred in the heart is not a pathway to love.  Though we might feel strife, though we might become angry, hate need not drive the behavior of our souls.

I’ll stop there.  It’s raining.
<![CDATA[2020 First QUARTER COMMENTARY]]>Tue, 11 Aug 2020 16:25:18 GMThttps://pennyfarthinginvestment.com/the-derailleur/2020-first-quarter-commentaryToday is a day that is filled with surprises,
Nobody knows what's gonna happen.
Anyone can be a fool and do things which are wrong
But fools find out, when it's too late, that they don't live so long
Oh, I'm no fool, no siree
I want to live to be 93
I play safe for you and me
'Cause I'm no fool

— songs written by Jimmie Dodd and sung by the Mouseketeers and Jiminy Cricket

The song “Anything Can Happen Day” conveys a feeling of the times, if you can forgive its perky joyousness.  Lest you think I’ve gone a bit loopy, my other favorite these days is the classic Disney song “I’m No Fool”.  Within these songs’ advisory warnings is contained my investment strategy’s intent: anything can happen, but I’m no fool.

Rates paid by U.S. government bonds are low, low, low, between 0 and 1%.  Stocks of healthcare, grocery staples and stay-at-home technology companies are high, high, high.

This is uncharted territory, a global health crisis, the economy plunging to depths similar to the Great Depression, at the speed of the 1987 stock market crash, from high prices rivalling the 2000 and 2007 bubbles.

We move across a spectrum of feelings that range from our worst nightmares to our happiest of dreams.  It’s bad and we know it, but the same could also be said of the good.

Collectively, we feel denial, shock and anger.  We have little common agreement, high uncertainty and stark group affiliation.

In a few words, it has been and will be chaos around what is out of our control.

Humanity’s best answers will be discovered, built up or gifted to us over time.

While we grieve, we also find time to be kind, grateful and compassionate.  Love and connectedness are not contained byviral outbreaks, economic transactions or political disputes.

We will move through this and, one day soon hopefully, out of it.

I plan on being steady, humble, careful and prudent.  Ourselves we can control.]]>
<![CDATA[2019 Fourth Quarter Commentary]]>Tue, 10 Mar 2020 15:55:11 GMThttps://pennyfarthinginvestment.com/the-derailleur/2019-fourth-quarter-commentaryStocks are by definition riskier than bonds and, at current prices especially, shouldn’t be substituted for bonds without recognizing the risks.

Hold on, some say, risk lessens for long-term investors, since any negative event in stock prices becomes distant memory when investing over a long duration.

Let’s me argue against that point.  First, stocks are by definition simply a share of ownership in an enterprise.  Unlike with bonds, equities are not a promise to pay or receive anything.  Over time, you might receive nothing for your stock, unless the company declares dividends or you decide to sell your stock to another investor.

Risk doesn’t necessarily average lower over time, just as the risk of crossing a busy divided highway by foot doesn’t lessen the more times you do it.  I’ve bicycled on short stretches of interstate, which is perfectly legal out west, and it’s not fun to travel in the same direction as such fast, heavy traffic, let alone cross in a perpendicular direction to it.

This winter, I’m cautious amidst the market traffic of gravity-defying prices in stocks.  Be balanced, now is not the time to take chances.]]>
<![CDATA[2019 Third Quarter Commentary]]>Tue, 10 Mar 2020 15:52:21 GMThttps://pennyfarthinginvestment.com/the-derailleur/2019-third-quarter-commentarySmall is beautiful.  This quarter, we highlight small companies we invest in.

When you buy small, you get focus and, as the owner, it’s important to know what you own.   I dare any Wall Street analyst to tell me exactly what a large multinational conglomerate does.  It’s vast.

A company is more than a balance sheet and profitability measures.  It’s important to understand both the bigger picture and the detailed implications.  With a smaller company, I can talk or meet with management.  While not every investment opportunity is a small one, smaller ones can be among our most rewarding.
<![CDATA[2019 Second Quarter Commentary]]>Sat, 24 Aug 2019 16:01:17 GMThttps://pennyfarthinginvestment.com/the-derailleur/2019-second-quarter-commentaryThe stock market has hit a high.  At the same time, corporate profits are stagnant.  When numerator is divided by denominator, what you get is a record high number showing stocks as expensive, rivaling the peaks recorded in 1929, 1972 and 2000.  The current recession in corporate earnings is expected through at least the end of the year, as evidenced by second quarter results.

Meanwhile, measures of manufacturing activity are contracting, purchases of cars and trucks are in decline and rail shipments are slipping across the U.S.  The ISM New Orders index is 50, a number that means zero growth in the industrial sector of the economy, down from 63 in 2018.   Auto sales are on a steady descent, down -3% this year (only Subaru is achieving sustainable growth).  Trucking is down -5%, rail transport fell even more, to a level last recorded in 2014, reversing five years of growth.  While 2018 was marked by strong economic growth, 2019 so far shows gravity is pulling the economy towards the ground.

The Trump Administration has pushed foreign trading partners to revise long-standing agreements, arrangements which have arguably benefitted consumers and corporations despite numerous loopholes sacrificing labor and environmental conditions (yet the Trump Administration hasn’t targeted improving these two areas of concern).  If you can make sense of Trump’s logic on trade, beyond his headline-grabbing tactics, then congratulations.  Trade dislocations mean price increases and production relocating to other countries, away from China.

The Federal Reserve, although its members were split, signaled future reductions in short-term interest rates at its last meeting.  They’d be supportive of economic growth to calm market worries – these monetary magicians hope to achieve the trick of “look away, nothing to see here”.  It’s been working, until it doesn’t.  Longer-term interest rates have declined to nearly record lows. 

Worries fuel the stock market.  The ability to push worries aside levitates stock prices.  Gathering worries are pressures that, once the container breaks, cause investment prices to cascade lower.

It takes time for lower interest rates to spur economic growth.  It might have the opposite effect.  Worries over the health of the economy might further suppress spending.  The Fed might not deliver dramatically lower interest rates.  I question whether the U.S. would ever join the club of countries with negative interest rates, ex. Germany, Japan, Switzerland, along with several other European countries.  The 10-year government bonds of even somewhat dodgy credit Italy are yielding the same as those of the U.S. (shorter 1-year Italian bonds are more notably paying investors an interest rate of 0%).  Remarkably, over $17 trillion of bonds currently trade at negative interest rates, an absurdity only logical when you stand reason on its head.  This means investors could expect to be repaid less than what they paid to buy their bonds.

I’m not throwing in the towel, just giving perspective on how we live in interesting times.  I’ve erred on the conservative side, meaning that we invest in stocks for growth, bonds for income and retain reserves to not only meet your upcoming cash withdrawal needs but also add a cushion of cash that’s ready to invest if and when prices decline to levels more in sync with opportunities.

Ready to invest across a range of possible future scenarios, I believe that’s a better way of investing for the long run.     
I should have been more kind. It is my fate. To find this out, but find it out too late. 
​– poet Clive James
<![CDATA[2019 First Quarter Commentary]]>Thu, 15 Aug 2019 18:40:35 GMThttps://pennyfarthinginvestment.com/the-derailleur/2019-first-quarter-commentaryEnron in the year 2000 was a fraud hidden in the plain sight of public disclosure.  The professional investment experts who recommended buying the stock couldn’t explain, or understand, how the company made its money.  In short answer, it didn’t make any money.  Enron made itself look like it was making billions, until it came crashing down.  Its CEO, Jeff Skilling, was later sentenced to 24 years in prison, later reduced, so that at age 65 he’s just been released.

Of note, Enron fooled the nascent socially responsible investing community.  Every environmentally managed mutual fund owned the stock.  Enron was the electric and gas utility that didn’t pollute: it traded only financial claims on energy.

Lehman Brothers was a similar sort of bad deal, on Wall Street. During the financial crisis of 2008. Lehman masqueraded as a bank worth saving.  It actually wasn’t a bank and so they didn’t save it.  Lehman became the poster child for, financially, making something out of nothing.  In the end, it was a nothing.  And yes, anyone paying careful attention could have seen it coming.

Over the past couple of years, Theranos, the medical testing startup once highly acclaimed, was also revealed a scam, with lawsuits in progress to prove it.  Promising a new diagnostic test based on a single drop of blood, in reality, the test Theranos claimed to have developed wasn’t accurate.  That didn’t stop some big corporate names from buying into the myth, as did its all-star board of directors, including the former CEO of Wells Fargo bank, former Secretaries of State and James Mattis, former Secretary of Defense.  It was Wall Street Journal’s reporter John Carreyrou who first broke the story, as was recently told in HBO’s documentary The Inventor.  In March 2018, the U.S. SEC filed fraud charges against Theranos and its now 35 year-old former CEO Elizabeth Holmes, who awaits trial and could face 20 years in prison.

Tesla, I expect, will meet a similar fate.  The company operates a business, in automobiles, solar installations and batteries, that we all hope might bring a brighter future for our world.  In reality, we can’t overlook Tesla’s many burdens despite its pioneering role in bringing electric cars to market in a big way.  Tesla’s funding needs are large, its competition strong and numerous managers have departed.

What Tesla has going for it are customers who are fanatically loyal and goals dramatically ambitious, aiming to overthrow the fossil fuel-based economy.  Its leader is Elon Musk, a modern-day P.T. Barnum who fakes it until he makes it, while the harsh reality is billions of dollars in losses, kept afloat by a free-spending investor base.  However, as I write on the cusp of Tesla’s two billion dollar stock offering, needed to keep the business going, operations aren’t going well and poor finances are finally catching up with it, in the form of vendors who demand payment in the courts and sales falling at a double-digit percentage rate.

The truth in these cases is that they became frauds hidden in plain sight.  At first, we might have an investment theory.  We might wish for it to be true, about how it will work.  And it might seem to be working for a time and we feel good to be associated with a good cause or what goes up – the perpetrators of frauds rely on investors’ perceived indicators of success to be proof of success.

When I was an auditor at the U.S. SEC, I helped uncover many frauds where everyone, victims included, were happy with the situation right until the very end, when something happened to derail the fantasy.  In our analysis, if we can’t find fundamental truth in what’s wished for, your wishes probably won’t turn out true after all.
<![CDATA[2018 Fourth Quarter Commentary]]>Wed, 27 Feb 2019 18:15:51 GMThttps://pennyfarthinginvestment.com/the-derailleur/2018-fourth-quarter-commentaryPassive funds invest broadly across the market, holding a portfolio of securities regardless of their prices — passive investing is much like going to the supermarket and buying everything in the store, as opposed to choosing your items carefully.

Active investing is a curated collection, an active choice to buy a stock, for example, and avoid another.

You do this in life all the time.  One doesn’t marry every person you meet.  While you might have a collection of partners, hopefully love also means you can be carefully prudent with whom to match and, at least at the time of the wedding, you feel you made a good choice, all things considered.

If you go to college, you don’t attend every available college.  You attend the one, two or the few you select.  You take care, perhaps do some research, and then act on your insights.

No different in investing, active investing is making positive choices to allocate wealth to a select few investments.  Via this wealth, perhaps your buying boosted the stock price or lowered an interest rate paid on debt, a company’s management puts your money to work.

It’s up to us to decide where to invest wealth —  whether or not we choose to decide, we make choices even by default.

Passive funds have been gathering an increasing share of investors yet their portfolios look so much the same.  To passive investors, value doesn’t matter, buy or sell.  They buy whatever the entire market has to offer.

We active investors make informed judgments based on value and price.  As the carpenter’s saying goes, we measure twice and cut once.
<![CDATA[2018 Second Quarter Commentary]]>Tue, 18 Sep 2018 15:51:11 GMThttps://pennyfarthinginvestment.com/the-derailleur/2018-second-quarter-commentaryTom Wolfe, the acclaimed journalist and novelist of the Wall Street tale The Bonfire of the Vanities, passed away several weeks ago.  If you’ve read Wolfe, he might prefer we use the present tense to write about his life.  He wrote in that form, as the reporter he was (is).

Modern finance works along similar lines as Wolfe’s description of modern art.  Those who advocate Modern Portfolio Theory say that the model is more important than the qualities of individual investments within a portfolio.  If a stock or group of stocks in the past has moved in price according to certain patterns of return and volatility (risk), then buy if favorable, regardless of the companies the stocks represent.  An intellectually consistent theory, I believe, just rather incomplete.

In one of Wolfe’s critical masterworks, The Painted Word, he tells how modern art begins with a Truth, a theory of the art.  Wolfe also calls it the Word — modern art avoids reproduction of real scenes.

Wolfe ridicules those who champion theory even as they minimize an artwork’s technical or realist qualities.  He writes that they believe as “like Plato’s cave dwellers watching the shadows, without knowing what had projected them.”

In modern art, Wolfe says, what the viewer sees, the reality of what is painted or sculpted, is thought unimportant.  It’s theory that tells you what you see!

Let’s not forget (as many financial advisors do) that in the real world a stock represents an ownership stake in a business.  Over the long term, the underlying prospects of the business are arguably what drives its stock price up or down.  In the historical record, we see how stocks moved as they did.

When a company’s return on investment falls below its financial costs, that’s bad.  If a company can’t pay the interest on its borrowings over an extended period, that’s even worse, i.e. Tesla automobiles.

As much as the Modern Portfolio Theory can tell you how a portfolio’s risk can be reduced through holding investments in combination, reducing the risk that any single investment would drag down the portfolio’s returns, it doesn’t tell you a whit about how to identify an undervalued investment.

So many investment managers value theory more than what you can see.  Don’t allow theory to overrule.

I believe that a composite picture of real world observations builds what we’re looking to create — a balanced portfolio where each individual investment stands on its own merits.


Tom Wolfe (1975).  The Painted Word.  New York: Farrar, Straus and Giroux.

Steven D. Bleiberg (2018 April).  “The Limits of Theory."  Epoch Investment Partners, Inc.  Retrieved http://www.eipny.com/white-papers/the-limits-of-theory/]]>