Tag Archives: investing

The Fox And The Hedgehog

“The fox knows many things while the hedgehog knows one big thing.” Click to enlarge Photo: Jeremy P. Gray The Greek poet Archilocus noticed this almost 3,000 years ago. We often see two different types of people. Some people go everywhere and study everything – pursuing contradictory ideas. They’re eclectic, diffused, and omnivorous. On the other side are souls who pursue a singular, unitary vision, an all-embracing organizing principle that gives the world coherence. We see this all around us. In literature, Dante was a hedgehog: he wanted to give the world a great poem about heaven and hell. Shakespeare, on the other hand, was a fox. He wrote plays about everything and everybody. In history, George Washington was a hedgehog – with the simple idea of American greatness – while Thomas Jefferson was a fox. And in modern life, outstanding business leaders are hedgehogs: think of Steve Jobs with his focus on design and functionality. And superior investors are often foxes: Warren Buffett, Peter Lynch, John Templeton. Both approaches are necessary. In business, a company needs a singular vision to cut through the clutter and make the main thing the main thing. It’s too easy to get distracted by the crisis of the day and never spend time or energy on what’s crucial. Hedgehogs get things done and keep their teams focused. But with investing, foxes rule. A portfolio needs to be diversified, limiting its exposure to any single area – reducing risk – while spreading its assets among an array of industries that generate new products and ideas – improving return. Investors need to be fox-like and flexible. And they have to be interested in everything, from genomic sequencing to quantum computing to chain-store sales to bitcoins and block chains. Investors should leave no stone unturned when searching for value. Foxes and hedgehogs each have an important role to play. A lot of times, they end up married to each other. Which one are you?

How To Bake A Highly Deficient Cake

What happens when you leave out a key ingredient in the recipe for baking a cake? We won’t keep you in suspense. What you get is a highly deficient cake, but how it is highly deficient can tell you quite a lot about what the omitted ingredient contributes to a competently executed cake! At Bristol Science Centre, Nerys and David illustrate what we can learn by baking four different cakes – one batch with all the ingredients the basic recipe calls for, then other batches where either the margarine, eggs or baking powder has been excluded from the recipe. The following video illustrates how the resulting cakes baked with a single missing ingredient differ from a proper cake baked with all the ingredients. The same principle applies to data analysis. For instance, if a set of economic data omits the contributions of one particular sector of the economy, and that sector turns out to contribute a large share to the performance of the overall economy, the analysis produced using such data that excludes the omitted sector’s contribution will be highly deficient, because the data itself is not adequately representative of the economy being analyzed. Much like what happens when you bake a cake without one ingredient and compare it with a cake baked with all of them, the deficiency becomes very evident when you compare the results of the deficient analysis with the results of analysis performed with data that does not omit the missing sector’s contributions. If a professional baker omitted an ingredient in a cake recipe, then their competence would certainly be at issue. If they weren’t aware that the ingredient was missing, it might all be chalked up to simple ignorance on their part – the kind of mistake that many of us all make from time to time, that we acknowledge, learn from and do not repeat. But if they were aware of the deficiency and then went on to claim that the results of their deficient recipe were just the same as a properly baked cake, then their integrity would certainly also be at issue. We wonder how many people would continue to buy the “cakes” of such a highly deficient professional baker!

Best And Worst Q1’16: Small Cap Growth ETFs, Mutual Funds And Key Holdings

The Small Cap Growth style ranks last out of the twelve fund styles as detailed in our Q1’16 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Small Cap Growth style ranked eleventh. It gets our Dangerous rating, which is based on aggregation of ratings of 12 ETFs and 451 mutual funds in the Small Cap Growth style. See a recap of our Q4’15 Style Ratings here. Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Small Cap Growth style ETFs and mutual funds are created the same. The number of holdings varies widely (from 28 to 1873). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Small Cap Growth style should buy one of the Attractive-or-better rated mutual funds from Figure 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 Click to enlarge * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The AlphaMark Actively Managed Small Cap ETF (NASDAQ: SMCP ) and the First Trust Small Cap Growth AlphaDEX Fund (NYSEARCA: FYC ) are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 Click to enlarge * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Smith Group Small Cap Focused Growth Fund (MUTF: SGSNX ) (MUTF: SGSVX ) and the World Funds Trust: Toreador Explorer Fund (MUTF: TMRZX ) (MUTF: TMRLX ) are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums. The SPDR S&P 600 Small Cap Growth ETF (NYSEARCA: SLYG ) is the top-rated Small Cap Growth ETF and the PNC Small Cap Fund (MUTF: PPCIX ) is the top-rated Small Cap Growth mutual fund. SLYG earns a Neutral rating and PPCIX earns an Attractive rating. The iShares Russell 2000 Growth ETF (NYSEARCA: IWO ) is the worst-rated Small Cap Growth ETF and the PACE Small/Medium Co Growth Equity Investments (MUTF: PQUAX ) is the worst-rated Small Cap Growth mutual fund. IWO earns a Neutral rating and PQUAX earns a Very Dangerous rating. Credit Acceptance Corp (NASDAQ: CACC ) is one of our favorite stocks held by PPCIX and earns a Very Attractive rating. Over the past decade, Credit Acceptance Corp has grown its after-tax profit ( NOPAT ) by 19% compounded annually. Over this same time, Credit Acceptance has improved its return on invested capital ( ROIC ) from 11% to a top quintile 26%. Despite the improvement in business fundamentals, CACC remains undervalued. At its current price of $210/share, CACC has a price-to-economic book value ( PEBV ) ratio of 0.8. This ratio means that the market expects Credit Acceptance Corp’s NOPAT to permanently decline by 20%. If CACC can grow NOPAT by just 9% compounded annually for the next decade , the stock is worth $437/share today – a 108% upside. Beacon Roofing Supply (NASDAQ: BECN ) is one of our least favorite stocks held by PQUAX and earns a Very Dangerous rating. Over the past decade, Beacon’s economic earnings have declined from $8 million to -$11 million and have been negative for each of the past three years. Beacon’s ROIC has fallen from 12% in 2005 to a bottom quintile 4% over the last twelve months. Given the business struggles at Beacon, its stock price looks significantly overvalued. To justify its current price of $38/share, BECN must grow NOPAT by 15% compounded annually for the next 16 years . Those expectations look awfully high compared to the company’s recent declines in profits. Figures 3 and 4 show the rating landscape of all Small Cap Growth ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst Funds Click to enlarge Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Funds Click to enlarge Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.