Video Game Markets
Stock markets are dominated and whipsawed by mega-computers, lightning-fast trading and huge value swings. Small and mid-size businesses offered byoffer the opportunity to achieve full disclosure, growth and prosperity…without “gaming.” Video Game Markets An announcement in October 2010 traced the May 2010 “flash crash.”
WASHINGTON—A trading firm’s use of a computer sell order triggered the May 6  market plunge, which sent the Dow Jones industrial average tumbling nearly 1,000 points in less than a half-hour…
A report by the Securities and Exchange Commission and the Commodity Futures Trading Commission determined that the so-called “flash crash” occurred when the trading firm executed a computerized selling program in an already stressed market. (DANIEL WAGNER, 2010)
Although not named in the report, the trade has been traced to my backyard, the firm Waddell & Reed in Overland Park, Kansas, a trade for $4.1 billion which, even in these markets, is a lot of money! The report goes on to say that others followed suit (“sheep in a pen” has often been used to describe this behavior) and the market collapsed.
Solutions were offered (delayed trading, etc) but we all know that the stock market is dominated by the large firms and the solutions are likely to be unsuccessful…or, like so many government solutions, make matters worse.
OPINION: Investing in these markets has more in common with a video game or a slot machine bet than in REAL VALUE INVESTING. Benjamin Graham would have a stroke Graham’s books Security Analysis (with David L. Dodd) and The Intelligent Investor influenced so many of us, notably Warren Buffet since their publication in the 1930’s. It proposed the concept of “value investing” which has been, apparently, set aside as old-fashioned or irrelevant by our current crop of stock market gurus.
Problem: Value investing is probably not relevant to the public markets and the gurus are right. Fact: Value investing is what wedo every day—help business owners pass along that total business value to buyers at a price that reflects the “value” transferred.Take a look at the history of Warren Buffet’s portfolios and you will see that Berkshire Hathaway has practiced these value investing tenets and prospered. As individuals, we do not have the opportunity to participate in this type of investing in the public markets except through mutual funds or by trying to time the market or trade like the “big boys” through day trading. Remember, the reason that David and Goliath is a memorable story is because it is out of the ordinary, unusual.
Benjamin Graham would be pleased. We now have the opportunity to practice value investing and to apply our own character, talents and energy when we, and that process has become easier and easier with the advent of the internet advertising sites, such as BizQuest and its sister sites.
When Graham started to teach these concepts at Columbia in the 1930’s, the stock markets had grown from a few traders meeting at the Wall in lower Manhattan to exchange ownership shares in businesses to a market that took advantage of the newest technology that allowed nearly instant communication with every part of the country through the ticker tape. In the 1920’s, that technology was exploited and the “back room” functions, such as accounting rules, did not keep up and there was a mighty crash.
Panics were then, and have since then, been a part of investing in the stock market. Controversial legislation was pushed through by the Roosevelt administration, and the true historian should become familiar with the Glass-Steagall Act of 1932, the Banking Act of 1932 and the Securities and Exchange Act of 1934 that guided this country’s banking and financial communities (in part, by keeping them separate!!) until essentially gutted by the “Modernization Act” of 1999 led through Congress by Phil Gramm (whose name has an ironic similarity to our hero, Benjamin) and signed into law by President Clinton (one a Republican, the other a Democrat which ought to give us pause in an election year). In keeping with the current political practice of Total Denial, Gramm and Clinton continue to claim that it was a successful bill, despite its direct causal connection to the current real estate meltdown.
MOST IMPORTANT UNINTENDED CONSEQUENCE: Accounting firms had always been required to avoid conflicts of interest—they could not be “independent” auditors when they were collecting consulting fees in another department. Investigate Arthur Anderson and Enron for details. Why? The following unabashed sales pitch for assumes “competent” . Some states require some sort of license, usually a real estate agent license, which is sort of like requiring a dentist to have a chiropractic license—sounds good, but has little connection to the work being performed.
Many states, including my state and neighboring ones, do not require consultants to have any kind of license and that includes. How then do you find the good ones? Go back to the basic research Graham and Dodd recommended. Ask for resumes, check references and above all, check up on the broker by contacting parties on both sides of completed deals.
Back to the question, why:
· I often remind my clients that, while I am not any smarter than the next guy, I do this several times a year and am more experienced and practiced than most.
· The broker should, at the very least, be able to explain and adequately support the concept of “free cash flow,” “total owner benefit” or “cash available for debt service” that are different names for the same idea, and the application of that concept to the business you are examining.
· Independence. The traditional auditor is independent, theis not. More often than not, the broker is dealing with both sides of the transaction, but he can only “represent” one side and that is usually the seller. Whoever pays the broker is entitled to representation. I often tell my clients that I represent the seller, but I must “work with” the buyer or a transaction will never occur. Frankly, this is difficult to explain but pretty easy to employ if the broker is not too dazzled by dollars and seeks to find the best, fair deal.
· You are the boss. This is the most important feature of any transaction and will provide the best information and outcome. The broker should be able to come up with the important “value investing” facts so that you can make your decision, and enable your obtaining other information directly from the sellers.
In the end, you will invest in a value proposition that gives you the opportunity to employ your capital, skills and knowledge in a manner unavailable to us in the current capital markets. This opportunity has served millions of Americans by providing a handsome living and accumulation of wealth. No “Get Rich Quick”The fundamental idea of the stock market is to invest, not to make a quick buck. Current public stock market conditions pit the small investor against those with resources and influence that undermine these traditional goals.
Owning a business is not a formula for a quick fortune, but is a time-honored method of accumulating wealth while doing something you can love. And, the phrase “Only in America” heartily applies to this opportunity, unique in the history of the world, for a person imbued with drive, energy and talent to succeed on a scale only imagined by citizens of other countries and other times.
Equity Funds – Why do the high-income athletes, the wealthy families and those who have sold businesses pool their money and employ professionals to manage “equity funds?” They realized some time ago that even though they had large funds, they could not invest according to their objectives in a market dominated by emotion abetted by technology. Just too risky!Equity funds have become prime buyers of small to mid-market companies. They often specialize in a type of business, such as manufacturing, or a vertical operation.
Rental/Leasing is a good example. This is a terrific business but not palatable for public companies because it does not provide good quarterly earnings in the early and growth stages. Earnings tend to be tax-sheltered and accumulated over longer periods, ideal for privately held firms that want to accumulate “value” and wealth. Heavy Equipment rental/leasing has characteristics of manufacturing, finance and sales. See another article that discusses these companies in more detail.
Put it all together – Where should you put your money, stock market or a business that you control? The former is easier, the latter is a lot more work. Instead of paying 20 times “earnings,” you pay three or four times net owner benefit, a much different deal. Would you like to follow the lead of the investment greats, Graham, Dodd, Buffet and pursue Value Investing or put your money into the Video Game.
Select a good broker, one who will help you work through the financial facts (sometimes not accurately presented on the books) and the business prospects. The ultimate goal is to find a business that is reasonably priced for your budget and fits your talents. There are going to be many, many challenges, but at least you won’t have to worry about waking up to a 50% drop in the value of your investment caused by “market forces.”