There are so many investing strategies out there it is hard to know which one is best for you. In today’s session, we will discuss some of the major investing strategies such as value investing, trend following, and momentum investing. All investing strategies have pros and cons to them and it is important to understand how these investing strategies work. Investing can be complicated enough, it is probably best to find a style that suits you and your personality so you can be successful.
- A breakdown of trend following and momentum investing
- Why buy dividends and why we aren’t missing out on non-dividend paying stocks
- How valuations make a difference
- The ins and outs of shorting a stock
- The best use for value investing strategies
Welcome to session 15. Today we are going to be talking to Allan, who is from upstate New York and he has only been investing for a couple of weeks but he asks us some great questions. I can’t believe the quality of the questions being asked by the listeners of this show. It gives me hope that we are providing some value to everyone out there. In today’s session we will learn:
How does value investing compare to the other investing strategies, what are the pros and cons of each?
Andrew: Yeah, that’s a great question. I don’t know if I mentioned this or not before, but when I got started in the world of investing. I had been exposed to a certain type of value investing, Peter Lynch was the first book I read, and it is more of a general value investing, and he doesn’t get into the nitty gritty of it. Just the basic of the vibe of selling high and buy low general advice you would get from a lot of books. Peter Lynch has some approaches that take it a step further.
But that was the kind of the general thing that I got into it. I got into the Intelligent Investor written by Benjamin Graham, and that was what exposed me to value investing. Even though firstly I feel like a strategy should make sense intuitively, either the logic is there or it isn’t’. I apply that to a lot of different things. I feel like if you are an intuitive, intelligent person you can base your experiences, you can kind of use some of the out of the box thinking, and make a little bit of a thought experiment and what is being presented to you is legitimate.
I felt value investing right away was for me, but I also am the type of person that wants to collect data on whatever options are available, see if I am going to label myself as a value investor what are my competitors doing so I can understand where I can get an edge. And on top of that maybe pull things that other guys are successful with and implement that into my strategy.
One of those big things that both Dave and I love to preach is the trailing stop, and it’s not something that is talked about a lot of value investing, and it’s a technique we borrow from technical analysis, more specifically trend following.
Trend following is a strategy that is based on instead of company financials it looks at a companies stock price. And it’s movement of the stock price and from there develops a system to try to maximize a profit gain on that stock price as it rises as there’s optimism and as the bulls are cheering up the stock as may be a craze happens and everybody just jumps in. What can happen with a strategy like that is naturally they can get in a lot of positions where a company is doing well. And that’s why the stock price is going up and that’s why a strategy like a trend following can attribute a lot of success to the same reasons like a strategy like value investing is attributing its success, which is really down the business fundamentals. The only difference is the trend followers are focused on the fundamentals, so there is a bit of a disconnect there.
Of course, I could talk about trend following all day long, it’s a great alternative, but from a basic principle and foundation, the big difference is because they look at stocks as more of numbers on the screen. There are long-term trend followers, and a lot of the successful do use that. If you are interested in trend following and technical analysis at all, I talked about how I read a book called “Market Wizards” where they interviewed a big group of successful traders. Guys out on the floor, guys that can live easy going lives because they were able to turn small amounts of capital into big ones, similar to the way that value investors have done.
I think a lot of the value investors I think you will see them more concentrated as fund managers, more like Warren Buffett. Of course, you can go either way, and you see fund managers using technicals, it’s all integrated there.
Even thought a lot of successful trend followers had used long term, from a very basic level they are not looking for a stock or a company to ride out for a decade or longer. There going to attach a trailing stop right until it hits the top and then sell before any significant loss. And again we have talked about in the past, I like to balance the buy and hold with the trailing stop, and there are certain positions I would prefer to hold forever, hold through a bear market.
There are other positions I would prefer just to attach a trailing stop. A trend follower is going to lean, or if not exclusively be an investor who is attaching a trailing stop at all times and any bear market hits they will probably be liquidating all of their positions. As a function of their strategy and because they focus so much on the stock price there not looking at things like how the expense is the company. Is this company going to be doing well in ten years? Even if it may be considered long term from a descriptive level, it’s not long term as a value investor would be or even a dividend investor whose looking at a growing dividend over decades and just looking to compound in that way.
Might be a subtle difference for someone who’s not an expert on either strategy. But it’s a big difference, and I could talk about some other intricate differences al day long. But that’s a fundamental one that makes me say it’s not to say that trend following wouldn’t work. I would prefer to have a large portion of my portfolio that I don’t have to touch that is going to give me very high yields on cost and that are in businesses are confident that will not only continue for the next 10, 20, 30, 40 years.
Maybe even my grandchildren will someday be having that business in their world, and it will still grow and still continue to pay out dividends, and that’s the kind of stocks that I am looking to buy. In contrast to the trend following approach and of course, I think we should go over a couple of other strategies that are out there. Dave, you have one on the top of your mind that you would want to talk about?
Dave: There are a couple that spring to mind that I would talk about. One that I could talk a little bit about the other one I honestly don’t know that much about. The one that I am thinking about is momentum investing, I’ve heard the guys on the “The Investors Podcast” Preston and Stig talk about this a little bit in the past. Momentum investing is a system of buying stocks or other securities that have high returns over the last three to twelve months and selling those that have had poor returns over the same period.
So, they look at a group of stocks that they are going to buy and over a three to twelve month period any that are going up they are going to buy. Any that are doing poorly they’re going to sell, and that’s a little bit like trend following, but I think with momentum investing they do a little more fundamental analysis, they will look at the prices of the stock, they will look at the value of the companies as well. Whereas with what Andrew was talking about with trend following it is all about the number on the screen. If it goes up your following and if goes down your getting out.
So, momentum investing is a little bit of science to its as well. But it’s going to be similar to value investing a little bit, and there are certain aspects to it that could be beneficial to it as well. I think the reason why I became a value investor was a lot along the same lines as Andrew. It just seemed to fit for me, it just seemed to make sense for my personality, and I’m a conservative guy by nature so to be dealing with a lot of volatility when I’m buying stocks, it is already a nerve-wracking endeavor enough as it is.
So for me, I’m looking for something that is going to be a little safer. We talked a lot about the margin of safety in the past, and Andrew and I are big fans of the safety part of that phrase. I think that’s why value investing appeals to me and me; I’m also a numbers guy, I like looking at numbers and analyzing things and figuring out why it’s worth what is and intrinsic value is a big thing for me. And I guess along those lines there is a myriad of different kinds of investing styles.
Even in the value investing world there are dividends, and there are dividend growth investors, and there are growth investors. There are so many different ways, and I think that the most important thing about all this is finding a style that works for you. Andrew and I are big advocates of value investing; we see the benefits of it. And we see the effects it can have on your portfolio. And it’s a great way to make money for your future. It’s a patient strategy and something that requires long term view, and it’s not something that you are going to buy in and out of very quickly, but it is something that you can use to make a lot of money over a period.
There are other strategies of course, and I think the great ones look at a strategy and then they will adapt it. I am not comparing myself to Warren Buffett by any stretch of the imagination. But one of the things that I admire about him is that he was very much grounded in Benjamin Graham and the Intelligent Investor and Security Analysis and those books formed his basis. He’s learned to adapt through the years by his association with Charlie Munger. And he’s changed his approach as he’s gone along.
And Andrew adapting some of the things that he learned from trend following and has been a benefit to him and me and others. And I think those are great things as well.
I know that I have gotten a little off track on the momentum investing, but I don’t honestly know a whole lot about it. Value investing is my thing, and that’s really what I focus on. I really, honestly haven’t paid as much attention to other ones because they don’t seem to fit my personality. I guess that is my thought on the momentum investing; I don’t know if there were any others that you wanted to talk thru?
Andrew: So it was love at first sight?
Dave: Pretty much.
Andrew: So you are a committed man. So another resource I would recommend if people want to look at what else is out there. We have discussed this book in the past. A Random Walk Down Wall Street by Burton Malkiel. Obviously, Dave and I don’t agree with the conclusion of it, but it does present a good picture what other investors mindset is and what kind things they try to do to beat the market.
We talked about trend following, momentum. I have seen people who have been successful with momentum and value. It is kind of like a niche thing, I believe it can be successful but again depends on how much you believe in momentum. What Malkiel, the author of the Walk Down Wall Street presented was his idea that prices are completely random to the point where a stock has gained in one day there is just a 50/50 chance it will gain or lose the next day.
There is no correlation, so with that argument, he argues there is no reason why momentum strategy would outperform. That is not something that we can just cover in a couple of minutes if the whole random prices thing is interesting to you I would recommend the episode we did on the efficient market hypothesis. Some of the other strategies that Malkiel talked about that investors have used in the past, things like the dogs of the Dow, which is a strategy where investors will look dow jones and pick the stocks with the highest dividend yields. I believe it was something that was done once a year; I can’t remember exactly.
Obviously, I wasn’t a proponent of it. I just understood the basic concept of it, if they are holding that forever or rebalancing every year. It’s had some success initially; it was the early 90s when they first really started gaining momentum in the sense that people started to follow that kind of a strategy.
A big problem with it is obviously your constricting yourself to the Dow, and the Dow is selected by its exclusive club that nobody talks about, and nobody knows what the criteria are for that. When you constrict yourself to such a small group of stocks, even if you select the best group of them, it doesn’t mean it is the best reflection of them. And in addition to that, I don’t know if they are holding those stocks forever or if they’re rebalancing like I said. Usually, when you look at back tests of people trying to prove the validity of a strategy or not, they tend to look at the short-term and look at as if you had rebalanced portfolios and things of that nature.
While the dogs of the Dow were popular, I’m sure it had higher returns, but if you keep selling like that, year after year, you’re not going to outperform a strategy like very long-term hold value investing, it is just not going to happen. I think that is a couple of reasons why that might not be the most optimal strategy.
Another strategy which isn’t so much a strategy as a mindset, and it’s referred to as the greater fool theory. You see this a lot in growth investors, guys who will talk about the Netflix, Facebook, Amazon of the world. They don’t want to see earnings growth; they just want to see revenue growth, sales growth. They see high sales growth, and they will pay anything for however expensive the stock is regardless of how much money it is making.
It works for a lot of them for a while because as a stock gets popular, and as the bull market continues, there are other people who want to join in on the party, and they empty their pockets, and it continues to escalate until the stock crashes. That’s the problem with growth stocks is they will crash at such a higher percentage than the value stock will when there is a bear market that it cripples investors and any sorts of spectacular gains they saw are instantly negated. Even reduced at such a higher level than someone who was more prudent, someone who was more careful, someone who after how much they were spending on a stock. The whole thing with the greater fool is I can buy a stock, and it’s fine. I’ll be able to sell it later because there is going to be a greater fool whose going to buy it at an even more high price, continues, continues, and the funny thing is nobody can afford time market. And there is always a big group of investors who pay very high prices on stocks that are left “holding the bag.” And they are the ones that bore the big majority of losses that you see when the market crashes, and it is tragic and for a stock to crash at that high of an extent.
And don’t take my word for it, look back at 2008-09. Look back at 2001-02, look at the stocks that not only took over the headlines but evaporated billions and billions of dollars of worth over a very short period. Look at those, and you will start to see a trend, and that trend is that these were all stocks that were growing, if not earnings wise, they were growing maybe, if not in sales at least in price. And people were buying them very high valuations.
When you have a stock that falls to such a great extent the definition of that is that a big, big majority of almost all investors are going to lose almost everything. The more investors that are losing, the harder it is crashing and so compare that to a stock that might have been trading at a lower PE, maybe the lower price to book. Yeah, maybe it dropped 25%, 35% but if you look at the numbers and if you can understand the math behind a loss. Losing 25% compared to losing 80% or 90%, that’s the difference between keeping your returns close to the market and then being able to beat it later on. And having the types of returns that would make a banker who invests in CDs, and they would just laugh at you because your not even making inflation or things of that nature. While you may be able to get away with going the route of trend following, maybe you can get away with momentum.
You can switch to an index type of thing, which we talked about in an earlier episode. We covered that extensively with the efficient market hypothesis. You can do growth, you can do any of those things but what you can’t do is become a greater fool, or you can’t jump into a strategy if you don’t know too much about. And you can’t jump into a strategy where you don’t understand what the end game and what your greatest risk is. If you don’t’ understand what the greatest risk is, if your not making plans to actively avoid being exposed to that risk, then you are going to be the first person hit in the ass when things go south.
And you’re going to be caught unawares; you don’t go camping without having all your materials and supplies, having different game plans and having a knife in case a bear comes to get you and having a map just in case you get lost. There are all these types of mental preparations for the worst, and then people will jump into the stock market with their life savings and not even have a clue about what could go wrong. That’s the most important thing, and I think it is a great question to expand our knowledge really and how everything is out there.
I think that beginners should dip their feet into all these little things and get exposed. But at the end of the day, the purpose of this is to gain the experience to understand when you have a good strategy like value investing that you can commit to it and see if over the long-term. And understand how to use its strength and weaknesses to give the best result.
Is Value Investing a good strategy for short-term to medium-term investments? Like for example for holding a position for maybe two months to a year and a half? I noticed that Andrew has examples on his eLetter of selling some stocks within a year time frame, is that typical?
Andrew: Define typical right, it depends on the market, and every single stock is going to be different. I am fortunate in that when I started the eLetter ever since then we have had a bull market and things have been going great. Juxtapose this on another period where maybe we hit a bear market n the next ten years and the different strategies and same mindset, and you could see 3, 4, five losses in a years time.
The important aspect of that is limiting the losses and maximizing our gains. That’s a big reason why smarter investors, wise investors, prudent investors do not look at the short and medium term as a good holding period. Personally, I don’t like to brag about the positions where I have gained at lot like you said in a short amount of time because it is not a reliable thing.
It’s something that we obviously take the profits, and we are happy about it, but let’s have a long-term mindset and understand it’s nice to get these little bonuses along the way. But the real wealth is going to come from those positions, and like I said are the buy and hold, dividend fortresses. The ones that we are keeping for decades and just letting it naturally compound and let the dividend naturally compound to grow the business naturally, to grow our dividends and grow our share of that investment naturally. It can be a good strategy, just as anything could be a good strategy.
I think overall I hesitate to say that if you; re looking to make as much money as you can make in six months and I don’t think that value investing would be best for that. I think that hooking yourself to one of those growth stocks where you’re trying to play the greater fool and just praying you’re not the one holding the bag. I think that is better for the short-term though it’s obviously much more of a gamble.
There are other value investors out there who agree with me. Whitney Tilson has a book called the “The Art of Value Investing.” where they have interviewed a whole lot of managers, and they don’t look at the success and failure of their investments until 3 to 5 years maybe it was seven years. I guess everybody’s definition of long-term investing is going to be different.
I struggle with trying to say that to answer this question could draw somebody away towards to the bigger picture. You don’t want to be too short term focused because you obviously get the short-term capital gains that are assessed with that let’s say you are an eLetter position like mine, where I have the Roth IRA, that is buying this position which means the Roth IRA doesn’t get capital gains on taxes. There are still other disadvantages to that, for one, you could buy a stock like GameStop, and we will see how that works out.
When you compare that to a stock like Corning, where if you would have bought when Dave was looking to buy and then waited let’s say six months, and you see that the stocks haven’t moved in all that time. You might be thinking that was a bad investment, but you fast-forward 3 to 4 years and all of sudden the stock has more than doubled. Ther is just no way the time, just even think about the whole concept of 6 to 8 months, a business cycle, the way the financials work and the way they report quarterly earnings. And the way that the sales, and economy work? Six months to nine months is nothing; it’s not even a full retail cycle if you’re talking about stores who are trying to sell clothes, brands, electronics it’s just not.
Be cautious as a beginner of getting caught up with how can I make money quick, because just as you have scam artists out there who tell you can flip homes. It’s the same type of people who are telling you that you can double your money in a couple of months by buying these investments. It’s something to be wary of, and there’s no proof that value investing will be better than something else in the short term. The studies have really shown that it’s over the longer terms that value investing has outperformed.
In previous episodes, you mentioned that you pretty much only buy dividend-paying stocks. What would you say that you’re missing out on other stocks that otherwise have great numbers, great PE, good price to sales, and they have a good outlook? Would you say you are missing out on stocks like that and would it prevent you from buying a stock that otherwise looks good? Or is it just one metric that you consider?
Andrew: I am missing out. But I don’t think that is a bad thing, again we talk about margin of safety and how we like the safety. It’s maybe a little bit of lower risk, you’re getting a dividend no matter what the stock does, and I just like the idea of getting paid regardless. Again your always going to get the downside as you mentioned you ar going to miss out on some high flyers. Let me present it like this in the simplest way that I can.
You have two strategies; there are always going to be winners and losers for either. So let’s compare the winners and losers for non-dividends and dividends. The winners for non-dividends might go higher but the losers for non-dividends you losing and not getting anything out of it. Now, for buying only dividends the winners you might not get as high, but the losers even throughout the losing, if you are continuing to hold you’re continuing to gather shares.
If you remember the biggest premise of a buy and hold investor is holding on through that roller-coaster, you only get hurt if you jump out. Assuming you don’t buy stocks that have gone bankrupt, you can hold a stock and assume you bought it at a reasonable price to say that one day it will be at a higher price. Then you’re in a position where you are maximizing that time where a stock can rebind, essentially recover from the nasty period.
What is nice about dividend paying stocks is during those nasty periods is not time wasted. It’s time getting paid that dividend and collecting that dividend. And it is also a good indication when a business is struggling. Because the business and businesses that pay dividends, once they start to make that a part of who they are.
Management is pressured to keep that dividend going because suddenly a lot of investment community or a lot of the people investing in their business and buying shares are going to be dividend-focused people. And they are not going to be part of the great fool crowd; it is a different group of people. And there is a lot of pressure to keep that dividend going over time. And if management has to pull the cord and that we can’t pay a dividend this year, then that means something is seriously wrong, and it’s a red flag to be like, cut my loses, can’t win them all. I am out. But for the stocks that are good for the long-term and will eventually return to what they are really should be priced on.
Or just to continue to grow on a nice long term trend. We are going to collect dividends all along the way, and we are going to reinvest those dividends, and we are going to have a higher ownership percentage of these stocks. And over the very-long-term, it’s going compound fantastically. You might miss out buying the next Apple, or Amazon but your missing out by not buying a lottery ticket right now aren’t we all?
It is just picking which risk you want to take and playing the probability method nad the chances are better when you have the right strategy. You also have to have the right mindset; you have to be able to hang on nad have conviction, power through tough times. But understanding that is why I can buy the only dividend paying stocks and why I can be lucky because I haven’t seen it yet as far as my dividend fortresses have gone.
To be able to look at a lose for my dividend fortresses and now that this isn’t a two-month game. These are 10 to 15 years games, and you have to be able to withstand that everything it entails.
You also need to be ok with losses as long as no big red flags within the company are popping up. That is a really big reason why, and I know its very anti-value investing in a sense. And it is looked down in the investment community as a whole. And that is why I have it as a whole, and that’s why I have so much belief in it, is because of these type of things.
Dave: I think to add on to that. You have to think about the mindset of what you’re doing when your investing. I am investing for retirement, and I want to have income while I am in retirement. And dividend paying stocks are going to be paying you income during that period. And if you are buying a company that does not pay a dividend. The only way to make any money is to sell that company. And that starts to get into the scary part where what if the market was down during that period. Now maybe you have a shorter time to recoup that money like Andrew was talking about with the time horizon, you’re not generating any income from that company. But let’s say your 75 years old now, and you want to turn around and sell Facebook, Netflix, and any other company that may be. And maybe it is not paying a dividend at that point.
If they are not paying a dividend and now the stock goes through a 2009 to 09 crash while you are in retirement. You are screwed now because the only way you are going to recoup that income is to sell the stock, and if is down 24.78%, you’re out of luck. If you’re a company that is paying income, then you are still getting some income from that company. And it’s still be growing shares of that company and increasing your wealth and helping you through that period.
To me, that is where the dividends are the plus side of the equation for me. Yes, there may be not as high flyers or not exciting. Typically, dividend companies are boring, but you know what, that is what value investing is all about is finding great companies that are going to pay you income over the life of the investment. And frankly, the best companies to invest in most of the time are boring companies. Tesla is not boring, but it is also not the best investment, and Tesla and Amazon are my two little whipping boys, but for investors, I may upset millennials by talking negatively about these companies.
But when I look at their earnings reports and their financials I just wonder to myself why are people investing in this company because it’s not going to pay them anything. The only way they are going to recoup this money is by selling it. I read the other day that Tesla is now the largest market cap in the auto industry in the US, and I was flabbergasted by that, it doesn’t make sense to me. Getting back on focus here, that is where to me dividends are going be of benefit; they are going to pay me income when I am in retirement. Whereas a company that does not pay me a dividend I don’t have that option.
What do you look for in a stock and you are looking at its trendline?
Dave: I never look at the trend line.
Dave: I don’t, I mean I will check on occasion glance at it for giggles, to see about something. But as far as my analysis of the company, it has no bearing on it what so ever. For me, it’s all about what the numbers are telling me about the company. To me, the trend line is based on the price of the company and Andrew, and I have talked about the past, value investors are looking for intrinsic value. So we are looking for a value that we think the company is worth, not what the stock market is saying the price is worth. So, if Wall Street says a company is priced at $50 that doesn’t always mean that it is worth that. Let’s put this in an analogy when you buy a car, and you walk onto that lot you have a pretty good idea of what that car is worth, most of the time, and when you go to negotiate with the car dealership about what they think that price. That is why people car shop, is because you can go to different dealerships and look for different cars, and each dealership is going to have different prices on each of their vehicles around town.
And because different dealerships are going to have prices put on that car because they think they can get more for it than what it is worth. And when you go to buy it, you think it is worth $20,000, but the dealership across the street is selling them for $28,000. But the guy, next door to you, is selling his for $22,000, well your going to buy it from the guy who was selling it at $20,000 because that is what you felt it was worth.
And it’s the same analogy applies to stocks when you go to buy a company I don’t care about the price is what I think it’s worth. IF I think it’s worth $35 but Wall Street is selling it for $50 then I am out, I’m not buying it, and it’s too expensive for me I want it less than what I think it’s worth. If I can buy it for $25, I will wait until I can see it at that, or I will move on to something that I would think would be a better fit at that time. I may put it on a watchlist and keep an eye on it because I think it’s a great company and I think it’s overpriced but at some point, it may come down.
The thing with the price in the stock market is it’s really based; there are so many other factors that drive where that $50 is coming from a doesn’t always have to do with what it is worth. To me when I am looking at a trend line that falls more into the trend following and momentum following that we were talking about earlier. As a value investor when I am looking at a company that I am interested in buying I’m more interested in finding what I think the intrinsic value is and finding out what I think it is worth and basing that on what Wall Street is selling it for.
Andrew: And I just full of agreement as well. If I see a trend line and its positive its kind of like a cherry on top, and it makes me feel better about buying, but it’s not something that I am going to put any heavy weight towards. I do lean a little bit in that I don’t agree with Malkiel that momentum is completely bogus
I think there is something to momentum just from the emotional and human side of the market that people can excite about things just as they can get very fearful of things. I do think there is a factor, but I see a stock that has a really bad trend line, and I can understand that it is due to some unfounded fears and it is not because of some negative earnings or really bad long term growth. Little hiccups not big flaws in the business model then I’m going to ignore a negative trend line, and in the same way, a positive trend line is nice, but it’s not something that’s going to make me go towards a buy instead of just keeping it on the watch list.
Is it worth looking into that more advanced buying and selling options on TradeKing?
Andrew: I’d like to say no. There’s a way to do a trailing stop you can enter into the broker, and you could do a stop limit order. I don’t like that because you’re putting all the power on the broker and they can execute a trade, and it could be unfavorable to you, and you have no recourse.
I am talking in an extreme case like a flash crash where we’ve seen a stock drop substantially in one day and then came back up there was some algorithm glitch or something like that. If you’re using a trailing stop for the long term, that would have triggered your trailing stop. I like only to trigger trailing stops at the closing price because exactly of things like a flash crash, which I think the trend of having this type of technology and these types of glitches happening could be more often, I don’t think it is going to go the other way and disappear.
Number one it could trigger where you didn’t necessarily want it too. Number two of course whenever you buy a stock it’s not going to be exactly at the price you want the way that Wall Street works and the way that the trading floor works is there are people buying and selling, there are large units moving back and forth. What you pay compared to what the price is currently compared to what the price closes at, it’s all very complicated. If you are doing a limit or stop you don’t have much control over really quick short term swings and I think that could be not necessarily problematic but not ideal so I just use buy and sell.
Dave: And I am right there with him, I’m old school, and I buy and sell. The trailing stops I do manually, and I do those with a spreadsheet, and I do those with alerts from Yahoo finance that tells me when a stock is getting to that limit that I set, and that’s how I do it. I have some many other things that I need to worry about in my investing that some of the advanced buying and selling options that are too high of math for me.
Do you have any concerns about TradeKing being bought by Ally Bank and what might happen to the platform?
Dave: I don’t. As somebody who works in the banking industry which is a common deal in my application, a common thing that is going on right now, All the banks are aligning with brokerage houses because investing becomes such a huge, I mean the market is over 20,000, ten years ago it was 10,000. And what a lot of the banks are doing is they realize that the interest rates are so low, the money is in the investment part of the bank.
The bank that I work for they bought a very large bank solely for the reason that they had a huge investment portfolio and they were able to mold that into our bank, and they were able to use that to increase their revenue. If you look at that in the last five years or so there have been a lot of mergers like this, Bank of America has merged with Merril Lynch, Bremer with TD Ameritrade and Ameriprise has merged with some as well.
The merger of TradeKing and Ally is Ally’s way of trying to gather an investment arm to their bank and make them a “legitimate” bank. This is another way for them to generate revenue, from my experience with the bank that I work for they only changes that were made in the investment part of it were for the better. The technology was much better, and the customer service improved. There were just a lot of advantages to it; my anticipation is that it will be the same with Ally.
Wondering what your thoughts on shorting stocks are?
Andrew: You’re opening a can of worms. One of these episodes Dave and I will cover this extensively, but for now, I will just answer in the simplest way. It sounds like a great idea, the problem the market is such a fluid nad when you are buying and investing that time is one your side when your shooting time is on your side if the company pays dividends your going to have to pay those dividends out. It sounds nice because we see the market and we think we are the smart guys here will just fix it. There are things like short squeezes and margin calls these types of things that really, really can knock opt-out and just try to avoid that risk. It goes out to you might miss out on some great deals, but it’s not worth a headache.
Dave: I will echo what Andrew was saying too. To me, shooting is a scary, scary thing and I just avoid it at all costs. You mentioned the Big Short, and I loved the movie, and I thought it was a great movie. But if you noticed during the times when Michael Bury is going to those other banks to try to raise capital to do the shorts the banks. You remember the looks he was getting from these people; they thought he was a joke, they thought he was crazy. They were also so greedy; you saw the greed in them because one of the things that a lot of people don’t know about shorting is you have to pay interest on that money that you are borrowing to short that stock.
And that is what he was talking about throughout the movie about how much it cost him every month; it was just staggering he was paying to these banks, and that is why they were willing to do it was because they were greedy.
There were just so many aspects of the greed that the movie displayed in the banking industry and some of them are still going on and people aren’t talking about them. To me that is where shorting is such a risky play because if the stock goes up, you are screwed. If you go down, you may win, but if it goes up you are in a world of hurt.
One of the more famous shorts recently is Bill Ackman’s short of Herbalife, and there are all kinds of wars going on about that, they even made a documentary recently that just came out. They talk extensively about that one particular short, and it hasn’t come to fruition yet, but he’s paying a lot of money to the bank that is covering him for that. That’s scary stuff, and I think that for somebody’s who’s been doing it for two weeks I think might be something that you might want to hold off on just a little bit.
That will do it for today’s session. As always thank you very much for taking the time to read this today. If you are enjoying the podcast, please take a moment and give us a review on iTunes so we can help more people.