Jeff Hawkins always felt that understanding the human brain would be his life’s work. After graduating from Cornell in 1979, he built and sold two mobile computing companies, PalmPilot and Handspring, and funded his own brain research institute called Redwood Neurosciences. In his 2004 book, “On Intelligence,” Hawkins laid out his main thesis that “Prediction is not just one of the things your brain does. It is the primary function of the neocortex, and the foundation of intelligence.”
Even as you read this sentence, your brain is predicting the next word. If you have ever held lyrics in your hands and sung the wrong words, your brain has chosen the words it predicted over the lyrics before you. When you catch a ball, your brain has predicted the arc and impact of the ball before you clutch it. If you buy an investment that succeeds, you may have had some particular insight about that company. Conversely, if your investment fails, you probably missed some critical fact.
Economically, the idea that predictive ability is the crucial mark of intelligence makes sense. If you had perfect predictive abilities you would reap unending economic rewards. You would know how people would behave and when they would buy and sell. You would always buy low and sell high. In a short while, you would own the world.
I once had a very bright college friend who said almost exactly that. “Glenn, if my models are correct, I will own the whole market in seven years.” I invested in his fund and our little investment club put some money in, too. We received monthly reports for a while, but, as values dropped, the reports came more sporadically. He called and asked if we would like our money back. “No,” I said, “You’ll figure it out.” One day, he sent the remains of our diminished accounts. Life went on, and I didn’t hear from my friend until I opened Forbes magazine one day and read that he was managing $3.5 billion.
Few people have invested their way to riches, but Warren Buffett springs to mind. One of his famous axioms is: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” Yet this same man saw a “durable competitive advantage” in Dexter Shoes that cost his shareholders $3.5 billion. Buffet also bought World Book Encyclopedia and Kraft Heinz; the first is hardly a growth company and the second lost $5 billion this year. Still, Buffet’s long-term shareholders celebrate their good fortune every year at his annual meeting. The daughter of one early investor, a professor named David L. Dodd, gave the George School in Newtown, Pennsylvania, $128 million in 2007.
The good news for investors is that, unless you are selling short, you can only lose 100 percent of your investment. On the other hand, your upside can be many hundreds of percent and is theoretically unlimited. Peter Lynch, a famous fund manager, coined the term “ten bagger” in his book, “One Up on Wall Street,” for a sale that yields 10 times the investment. In this baseball analogy you hold onto the stock while it continues to round the bases. Lynch’s 29 percent annual returns — twice the S&P return during that time — were driven by his ten baggers, not by short-term trades.
In another baseball analogy, investing is an activity of losing: if you hit 30 percent of the time in baseball, you’re an excellent hitter. If your portfolio of 10 stocks has a few modest losses and winners, one or two wipe-outs, and one or two six- or ten-baggers, you are way ahead. You can lose most of the time and still beat the market percentages.
Most people hate to lose. As any financial advisor will tell you, clients only want to talk about their losers, so most advisors suggest funds or indexes. What can you say about a fund or index? There is only past performance, and you have been forewarned, “Past performance is not indicative of future results.” If a financial advisor recommends a stock it is usually a large company that everyone knows. Unfortunately, those companies are not likely to become ten-baggers that make a real difference to your life, so people who hate to lose tend to stay on second base.
It’s been a year since I started writing this column, which is about companies, not portfolio management, but here is how I manage my portfolio. I invest for two years or more. I keep companies that I continue to believe in, and I sell when a company stops growing, when something about the company has changed, or when I am clearly wrong.
I have a 16 percent loss in Immersion (IMMR) but am holding it because it has a simple strategy to license a core technology, and because sometimes a small group of intelligent people with a focused strategy can achieve outstanding results. It happened for Qualcomm and Universal Display — both tech licensing companies. We cannot know exactly what is happening within Immersion, but we will find out when it tanks or skyrockets one day — perhaps it will be acquired by a larger licensing company.
I bought Nordic Semiconductor (NDCVF) because it makes the chips for the Internet of Things. Its price fell as soon as I bought it on November 21, 2018, because of China fears and the general semiconductor market. Nothing had changed at the company as far as I could tell, so I held it. A year later, NDCVF is up 44 percent, and the Economist has featured the Internet of Things on its cover.
With Kirkland’s home stores, I was wrong. The numbers looked good, and I thought I had found a company that could counter the retail trend. As is often the case in disasters, KIRK went from bad to worse. Kirkland’s investor relations department no longer responds to inquiries. Sales are up slightly, cash is down, and the company is barely profitable. Worse, when I visited the Amazon warehouse in Robbinsville, I looked inside the steamroller that is crushing retail stores. Between Amazon and Wayfair, home stores are consigned to subsistence earnings — if they survive at all. KIRK dropped from $5.06 to $1.54, a 70 percent loss.
I recommended Universal Display (OLED) on January 23, 2019, at $94.96. Today it is $200.09, a 111 percent gain. I liked OLED so much that I also bought the January, 2021, $140 Call Options on February 6, which are up 218 percent. OLED went as high as $224. About that time, insiders cashed in, and the stock fell to $160. If you were skittish, you sold then, but OLED crushed earnings, and the stock jumped $25 in after-hours trading on October 30. I bought an LG OLED TV this year. The color is exquisite. OLED is a long-term play in screens and lighting.
I also bought a TREX deck this year. I wrote about the company TREX on February 6. The price that day was $71.62; TREX today is at $87.88, a 23 percent gain.
Public interest in marijuana was so fierce that I wrote two columns on the “industry” and concluded that, while marijuana is a good substitution for deathly opiates, it’s a bad business. I struggled to find one stock that might be the best of the worst: MedMen (MMNFF) has fallen 62 percent to $1.08. Businessweek recently noted “the rout on marijuana stocks.”
My UBER January, 2022, $25 Puts are up 17 percent in three weeks. A put option is a bet against the current value by giving the buyer the option of, one hopes, buying the stock at a lower price in the future. According to Marketwatch, Uber’s high-yield debt is “notches away from being designated ‘imminent’ default risk.” It looks like a car wreck to me.
Sometimes you have a peculiar insight about a company. A programmer once recommended that we push a number-crunching problem through the graphics processor instead of the CPU; a few years later, when NVDA began selling its graphics processors (GPUs) for pattern recognition, I recalled that suggestion. I bought at $21.71 in 2015 and it’s up 862 percent. Since I wrote about NVDA here on March 20, it’s up another 20 percent.
“It is better to remain silent at the risk of being thought a fool, than to talk and remove all doubt of it,” noted Maurice Switzer in 1906. Such is the risk of writing publicly about specific situations. Yet, as a group, we spend most of our time trying to fathom the entire economy, which we can hardly comprehend.
A fine restaurant in Princeton called Agricola inspired me to take down a book called “The Agricola and The Germania.” Its author, Tacitus, describes an ancient method of divining predictions that reminds me of today’s scrutinizing of the interviews of CNBC guests, the whisperings of Fed chairmen, and the tweets of presidents. “Although the familiar method of seeking information from the cries and the flight of birds is known to the Germans, they have also a special method of their own — to try to obtain omens and warnings from horses. These horses are kept at the public expense in the sacred woods and groves that I have mentioned; they are pure white and undefiled by any toil in the service of man.”
“The priest and the king, or the chief of the state, yoke them to a sacred chariot and walk beside them, taking note of their neighs and snorts.” Compare to Bloomberg Businessweek, October 30: “In a press conference after the Fed cut interest rates for the third time in 2019, [Fed Chairman Jerome Powell] repeatedly said that the stance of policy was now ‘appropriate’ to keep the economy growing moderately, the jobs market strong and inflation near the central bank’s 2 percent goal.”
Tacitus continues: “No kind of omen inspires greater trust, not only among the common people, but even among the nobles and priests, who think that they themselves are but servants of the gods, whereas the horses are privy to the gods’ counsels.” Two thousand years on, we are still hanging on neighs and snorts to predict our collective future.
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