Q&A With Martin Sosnoff, Author Of Master Class For Investors by Gene Taft – Republished with permission.
Question: You’ve written two previous books, starting with Humble on Wall Street forty years ago. Why did you decide to write MASTER CLASS FOR INVESTORS almost thirty years after your last book, the classic Silent Investor, Silent Loser?
A: I wanted to deal with the theme of perception vs. misperception and its consequences for investors, states and countries. This is a variation on George Soros’ concept of reflexivity, how the consensus is always wrong and then re-congeals into an updated consensus, trying to correct its misconceptions, belatedly, only to be wrong, again, six to twelve months ahead.
Q: Did you have a particular audience in mind when you wrote the new book?
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A: Yes. Everyone who has at least $10,000 in financial assets and wants to learn more about how financial markets function, what they react to such as 9/11, the Cuban Missile Crisis et al. that turns them dysfunctional.
Q: Why should an investor/money manager listen to the advice you provide in MASTER CLASS FOR INVESTORS?
A: They shouldn’t take this as gospel but process how much news calls for reaction and how much is just pure noise and headline nonsense or Wall Street hysteria.
Q: If someone reads your book, listens to your advice and follows the strategies you lay out, what can they expect to achieve as an investor?
A: They’ll never tap out, but live to fight another day.
Q: What is the worst investment you’ve ever made?
A: Worst investment was Caesar’s World where I went for control in a hostile takeover while the market dropped 19% on Black Monday, 1987.
Q: What stock/company are you most proud of identifying as a good investment that others may have missed?
A: I was early in the development of cellular technology and made ten times on my capital. My cost on Gilead Sciences is $25, now trading at $105 a share just two years later. Analysts used too conservative valuation yardsticks.
Q: Do you have a few rules of thumb for making smart investments?
A: Know the management, feel comfortable with its capital structure and position in its industry. Management has to work for shareholders and not over compensate themselves.
Q: The old stock market adage is to buy low and sell high, but it’s not that simple, is it? How do you decide when a stock is low enough to buy and how long do you hold onto it as it goes up before it’s high enough to sell?
A: Warren Buffett can hold a stock for fifty years, but I’m closer to five years because history shows that the growth trajectory for over 90% of the S&P 500’s stocks peak in five years. I’ve bought stocks at one buck, like airlines, but only if I thought they had a better than 50% chance of staying afloat. Any property that sells much more than one times its growth rate is a suspect of overvaluation.
Q: When it comes to successful investing/money management, do you think it’s best to make decisions leading with your head (brain) or your heart (gut instinct)?
A: You can’t run a portfolio with more than a couple of gut plays. For me today it’s Freeport-McMoRan and Micron Technology. Alibaba is a gut play, too, based on its extended valuation, but revenues grow at 45%.
Q: What would you consider a well-balanced portfolio?
A: Today, mainly large capitalization properties, over $50billion, with overweights in reflation sensitive sectors like banks, internet properties, multinational industrials and materials properties – oil, copper and chemicals. Bonds are a no, no. Interest rates are too low, almost confiscatory for the inherent risks in Treasuries and high yield paper.
Q: Were the “old times” on Wall Street better because they were simpler or have the advances in technology and information gathering/availability made things better?
A: Good question! The old times were better because Wall Street was underdeveloped in terms of security analysis coverage and aggressive money management. Warren Buffett was one of the few operators doing basic research in the late fifties and early sixties – where American Express and Geico came from. Today, he has no edge as a stock picker and it shows up in mediocre performance numbers.
Q: What are some of the biggest changes you’ve seen on The Street in your fifty plus years of experience and have the changes been more positive or negative?
A: There were only a handful of hedge funds in the sixties so wealth formation was minimal. A few gunslingers in the mutual fund sector like Jerry Tsai operated, but most fund managers were closet indexers. Security analysis really didn’t blossom, but became more statistically based. In the tech bubble of 2000-2001 valuation yardsticks turned psychedelic and analysts took direction from their mergers and acquisitions teams and investment bankers.
Q: Although we seem to have successfully weathered the latest market crash, do you think the worlds of banking and investing need more or less regulation and why?
A: Regulation should be indirect rather than 300 pages of dos and don’ts. Indirect regulation must prescribe debt/equity ratios for financial intermediaries like banks and insurance companies, limit off balance sheet investments and promote full disclosure of same, particularly derivatives positions.
Q: Have we learned anything from recent down cycles—07/08 banking collapse, the internet/tech bubble of 2000 and/or Black Monday in 1987?
A: Each of these three events had very different dynamics. The ’08 banking collapse turned on overlending in mortgages against minimal equity coverage. Black Monday was more a valuation correction. The market sold at over 20 times earnings in a high interest rate environment. Finally, excesses in LBO lending worried the FRB and the establishment. There was very little liquidity and borrowing costs were very high – over 8%. The tech bubble was induced by decadent security analysts who used flim flam metrics to induce investors.
Q: What is you take on the ongoing battle between corporate management and shareholders in the fight to divvy up profits?
A: The investor constituency is still short changed by many managements whose take home package is excessive in terms of options, salaries and stock grants. In the tech sector the abuses are outrageous, while the staid big cap properties like ExxonMobil divide free cash flow pretty evenly in terms of dividends, stock buybacks and management compensation. This has happened only in the past five years or less. The shareholder constituency is waking up and winning many battles.
Q: What do you think about the Occupy Wall Street movement?
A: It was a joke because they had no stated ideology, a platform for change or even understood how Wall Street worked. They didn’t tap the free knowledge base of government statistics to build their case of corporate largesse and inequality for the guys in workboots.
Q: How would you compare yourself to other well-known money managers like George Soros and Warren Buffett with regard to career trajectory and investing and money management philosophy?
A: In investing you gotta know what kind of player you are. Soros takes much more risk in currency speculation than I do. I don’t play futures markets extensively but I did bet against the euro. Additionally, I’m not an international investor although I do own Alibaba and some foreign oil properties. I’m closer to Buffett as a security analyst looking for undervalued properties. In my book I do compare my portfolio with Buffett’s ten largest holdings.
Q: The name Michael Milken tends to evoke negative connotations, but you speak very highly of Milken in your book. What do you see/know that others may not?
A: Michael was a great security analyst and investment banker – not what headline writers dubbed him “The Junk Bond King.” Milken knew how to stand alone and buy properties that looked moribund but weren’t. Also, a great trader in the high yield sector. His foundation work in cancer research, education and economic publications is exemplary, meaningful and has made a big impact.
Q: Besides yourself, who is the smartest modern money manager, you’ve ever encountered?
A: I admire Carl Icahn for his fearlessness in standing alone, particularly his Apple play. As an investment banker, Buffett’s record in the financial crisis was fabulously successful with minimal risk taking. I read everyone’s 13F portfolio filings, but nobody jumps off the page. I tend to be reclusive, not gregarious but used Larry Tisch as a role model in how to conduct myself in my Street dealings over the decades. Tough but fair.
Q: What do you think your legacy as a money manager will be?
A: I hope my book stimulates other money managers to open up to the public and write about their winners and losers and how they perceive the financial world. Buffett burnishes his image too much, but at least he’s readable. Great Wall Street memoires date back to Jesse Livermore who told us how operators functioned in the twenties. I don’t read memoires of politicians and Federal Reserve Board chairmen. They’re self-serving and boring, ghost written, mainly.
Q: Some say investing is a young man’s game. What would you say to those people?
A: Look at Warren Buffett at eighty-four. Carl Icahn in his late seventies. Larry Tisch worked into his eighties. You do need to be an omnivorous reader of financial data, both macro and micro, but disciplined with a sense of valuation. It can take decades to develop your investment philosophy, but implementation is everything.
Q: What do you want readers to take away from MASTER CLASS FOR INVESTORS?
A: My theme is the interplay between perception and misperception. How easy it can be to trap yourself in bad investments. A sense of risk has to pervade everything you do – the risk/gain ratio for being right or wrong. The consensus on every major issue is always wrong. If you can’t think independently, buy an index fund. Never fall in love with a concept or stock or rationalize its trajectory.
Master Class For Investors by Martin Sosnoff