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Inside the brain of an investing genius – Peter Lynch
Asset Management
<p>Those readers who have frequented my Investing Caffeine site are familiar with the numerous profiles on professional investors of both current and prior periods (See Profiles). Many of the individuals described have a tremendous track record of success, while others have a tremendous ability of making outrageous forecasts. I have covered both. Regardless, much can be learned from the successes and failures by mirroring the behavior of the greats – like modeling your golf swing after Tiger Woods (O.K., since Tiger is out of favor right now, let’s say Phil Mickelson). My investment swing borrows techniques and tips from many great investors, but Peter Lynch (ex-Fidelity fund manager), probably more than any icon, has had the most influence on my investing philosophy and career as any investor. His breadth of knowledge and versatility across styles has allowed him to compile a record that few, if any, could match – outside perhaps the great Warren Buffett.</p> <p>Consider that Lynch’s Magellan fund averaged +29% per year from 1977 – 1990 (almost doubling the return of the S&amp;P 500 index for that period). In 1977, the obscure Magellan Fund started with about $20 million, and by his retirement the fund grew to approximately $14 billion (700x’s larger). Cynics believed that Magellan was too big to adequately perform at $1, $2, $3, $5 and then $10 billion, but Lynch ultimately silenced the critics. Despite the fund’s gargantuan size, over the final five years of Lynch’s tenure, Magellan  outperformed 99.5% of all other funds, according to Barron’s. How did Magellan investors fare in the period under Lynch’s watch? A $10,000 investment initiated when he took the helm would have grown to roughly $280,000 (+2,700%) by the day he retired. Not too shabby.</p> <p>Background </p> <p>Lynch graduated from Boston College in 1965 and earned a Master of Business Administration from the Wharton School of the University of Pennsylvania in 1968.  Like the previously mentioned Warren Buffett, Peter Lynch shared his knowledge with the investing masses through his writings, including his two seminal books One Up on Wall Street and Beating the Street. Subsequently, Lynch authored Learn to Earn, a book targeted at younger, novice investors. Regardless, the ideas and lessons from his writings, including contributing author to Worth magazine, are still transferrable to investors across a broad spectrum of skill levels, even today.</p> <p>The Lessons of Lynch</p> <p>Although Lynch has left me with enough financially rich content to write a full-blown textbook, I will limit the meat of this article to lessons and quotations coming directly from the horse’s mouth. Here is a selective list of gems Lynch has shared with investors over the years:</p> <p>Buy within Your Comfort Zone: Lynch simply urges investors to “Buy what you know.” In similar fashion to Warren Buffett, who stuck to investing in stocks within his “circle of competence,” Lynch focused on investments he understood or on industries he felt he had an edge over others. Perhaps if investors would have heeded this advice, the leveraged, toxic derivative debacle occurring over previous years could have been avoided.</p> <p>Do Your Homework</p>
UK Pimco execs, CEO got 30% pay cut in 2014
Asset Management
<p>Pimco's U.K. directors had their pay slashed by 30% in 2014 in the wake of Bill Gross' departure last fall, reports the Financial Times.</p> <p>Pimco has been bleeding assets since before Gross left for Janus Capital last September. Its London unit had a 11% decrease in assets under management last year, falling to £120.8 billion, after the flagship Total Return bond fund failed to produce strong returns and the firm lost both its CEO and founder within a year.</p> <p>In 2014, Pimco's nine U.K. directors were paid £36.5 million, compared to £48.6 million total in 2013. The highest paid director saw his pay cut 57% from £22 million to £15.7 million. Pimco's U.K. directors include William Benz, managing director in London, and Douglas Hodge, CEO since Mohamed El-Erian's sudden resignation in early 2014.<br /> Photo: Images Money<br /> &nbsp;</p>
Earnings surprises…are you kidding me?
Asset Management
In the game called the quarterly earnings season, positive surprises have become so commonplace among US large-cap stocks that they’ve nearly lost all meaning. We wonder why investors keep playing along. The media are an integral part of the entertainment, cheering or booing companies from the sidelines as if earnings season were a sporting event. This incessant focus further feeds
Video: High Frequency Trading hurts the little guys
Hedge Funds
<p>"Creating an advantage for to an institutional user or a particular type of trader that disadvantages the retail investor is bad for the country, bad for the markets, and bad for the business," says Dick Grasso, former NYSE chairman and CEO. "The structure of the market today for major securities has been terribly hurt," Grasso says on Wall Street Week. The complex markets have become less transparent, hurting the average retail investor.</p> <p>&nbsp;</p>
Video: The most important factor that can tell you whether a startup will succeed or fail
Venture Capital
<p>Bill Gross has launched tons of startups. Some have done brilliantly. But not all. In this video, Gross analyzes what is most important in determining success. The answer that the founder of Idealab comes up with may surprise you. The answer really surprised Gross.</p> <p>From TED.</p>
Venture capitalists are keeping a list of unicorns most likely to die. What would be on your list?
Venture Capital
<p>There's been a lot of chatter about the burgeoning number of unicorns out there. In fact, unicorns are giving way to what Re/Code calls "decacorns" --startups valued at more than $10 billion.</p> <p>Well, now venture capitalists are creating lists out there predicting the death of many of these unicorns, Fortune is reporting. Who is on the list? Mum's the word. CB Insights has a list of dying startups -- but it will cost you $6,895 to access it. A bargain basement price for a list that could save you millions.</p> <p>Is a bubble about to burst? VC par excellence Marc Andreessen declared last year that many startups will "vaporize."</p> <p>Some might argue there was never a bubble -- just a pretty good illusion of one. Those billion-dollar valuations? They may have been real for only a handful of investors who were promised that they would be first in line when a company went public or got sold: If the benighted unicorn sold for less than $1 billion, the VC would still get paid as if it had sold for $1 billion.</p> <p>Now that's what I call magic.</p> <p>According to a survey of 37 deals by Silicon Valley law firm Fenwick and West, if the company does even better than expected? You guessed it. The benighted investors get a larger share of the profit.</p> <p>Fortune keeps a list of unicorns. You can find it here. Any on it that you think deserve to be on the deathwatch?<br /> Photo: yosuke muroya<br /> &nbsp;</p> <p>&nbsp;</p>
A bull on China
Asset Management
<p>While high-profile hedge fund managers such as Ray Dalio go full-on negative on the region, Nikko Asset Management Asia’s Peter Sartori says that China, as well as Asia’s emerging markets, will continue to beat its first world peers.</p> <p>According to the Straits Times, Sartori argues that there’s still a compelling case for a “long-term bull market” in the region, despite all its recent routs and regulatory missteps:<br /> “The pace of initiatives appears to be increasing in China, particularly in the state-owned enterprises and financial services space…While naysayers argue that the attempted shift from an investment-led economy to a consumption-led economy will result in a major dislocation in financial markets, we believe that the government has enough tools and capital at its disposal to make the transition successfully.”<br /> He also adds that the nation’s highly-scrutinized GDP doesn’t really mean anything to the equity market, saying:<br /> “Does GDP matter from the stock market point of view? No. There's no strong correlation between economic growth and stock market returns. In fact, it's the opposite. When Japan and Korea's economies were growing, their stock markets' returns were lacklustre. When growth slowed in those countries, their markets went through a long and sustained bull market. That's what's under way now in China.”<br /> While he does have a point, low growth in the new and open China seems to be uncharted territory for most, and the fact that Beijing’s been behaving like a riddle wrapped in a mystery within an enigma doesn’t help his argument either.</p> <p>That said, Sartori’s also betting on India in the medium term, asserting that all the nation’s recent troubles “provide scope for looser fiscal and monetary policies.”</p> <p>India bulls are sure to love that.<br /> Photo: groucho</p>
Why China is like the movie Predator
Hedge Funds
<p>Investors are no doubt full of quirky analogies they can employ to describe their experiences of China, but perhaps the best comes from Russel Clark, the CIO of hedge fund Horseman Capital, who recently compared China to the 1987 sci-fi action movie Predator.</p> <p>ZeroHedge reports that Clark offered up this gem in his firm's monthly letter after the $2.5 billion fund was up a staggering 9.4% for August following China’s market rout. </p> <p>Clark recalls how the film features a special ops team ordered on a mission to a South American jungle, that are slowly hunted down by an alien creature. </p> <p>They try to trap the creature, but it defies anything they have seen before: it can turn itself invisible, has infrared vision, and uses a shoulder mounted laser rifle. Nearly all of them succumb to the Predator.  </p> <p>The explanation is long and can be read here. In short, for bears, the Chinese government is like the Predator: continually using special abilities that were previously unknown. Bearish investors meanwhile have been picked off relentlessly and effortlessly by the government and the central banks. </p> <p>But things have unraveled since. The stock market began to sell off and pressure  built on the currency, prompting the Chinese to devalue the renminbi. This had the unwanted effect of stoking fear in the investing public, increasing  both capital outflows and pressure on the exchange. Clark concluded his analogy:<br /> “In my experience, in the mind of the international investment community, small devaluations tend to encourage even more capital outflow, which in turns leads to even large devaluations. Or to borrow, a line from Predator, 'If it bleeds, we can kill it'.’’<br /> One wonders what other movie analogies work to describe the Chinese economy. <br /> Photo: Malte Sörensen</p>
David Tepper is “not as bullish” on the short term
Hedge Funds
<p>David Tepper, arguably one of the most successful (and volatile) hedge fund managers currently in action, recently told CNBC that he’s “not as bullish” as he could be – a terrible sign for the markets since he thinks being a bear is the work of Satan.</p> <p>In an interview with CNBC’s “Squawk Box,” the always-optimistic Tepper said that he has “problems with earnings growth [and] problems with multiples,” alluding to the high expectations currently embedded in the market, and added that you should “really make sure that you have some cash” if you invest in it because he sees a 10% to 20% correction on the horizon.</p> <p>As for Appaloosa, it’s on defense mode right now: “we have some longs and shorts and we're hedged in, but we don't have a huge equity book right now.”</p> <p>He also has issues with China, saying that they “just keep making policy mistake, after policy mistake, after policy mistake over there,” adding that while he knows there’s a learning curve in becoming a market-based economy, doing it in real time is “kind of bad when they're a $10 trillion or $11 trillion economy and they influence more than a third of the world's economy.”</p> <p>He’s bullish on the long term though, stating further that if the market fell 20% or more, he’d be a buyer.<br /> Photo: Sam valadi</p>
S&P cuts Brazil to junk: what it means
Asset Management
<p> S&amp;P cut Brazil's sovereign credit rating to BB+.<br /> The Bovespa index fell about 0.6 percent on Thursday. The real tumbled more than 1.75 percent.<br /> Although a downgrade was expected, the timing of the demotion was unexpected.</p> <p>Standard &amp; Poor's has downgraded Brazil’s sovereign credit rating to BB+. While the move came as no surprise, the timing did catch many analysts and investors off guard, as the demotion was expected for later this year.</p> <p>In addition, the firm maintained the outlook on the rating at negative. This also surprised most analysts.</p> <p>Read more at Benzinga, here.<br /> Photo: Sam valadi</p>