Blogger Q&A: Stone Street Advisors

1st September 2011

What inspired you to first start blogging?

Noticing the impending doom in late 2006/early 2007, sitting on a desk all day watching stupidity continue and thinking it was only a matter of time before crap hit the fan. Also, my job in early 2008 required much less from me than the job in 2006, so I had the time and desire to do alot more with myself. Starting to write and analyze things in public really got me through a few years in a job I absolutely hated.


What's your most controversial blog post?

I can't say any single one, but I can say a general category, anytime I dig into the fundamentals (sec filings, diligence, etc) of a hot momentum stock 9/10 times (if not more) the results indicate the momentum guys are insane and have no idea what they're getting themselves into. Whenever you throw water on a flame like that, these momo and naive people long & strong the stocks take it personally, and start flinging accusations left and right. "they make the best xyz product & best buy loves it, the more iPads Apple sells the more $$$$$$$$$$$$ they'll make" blah blah. When I started writing about CCME from day 1 and onward, that continued to be a disaster in terms of guys long the stock attacking me. This was the 1st post (see the comments): Fuzzy logic or those who fail to learn from history

I think we all know how that one worked out, hey, at least I tried to warn people!


What's the elephant in the room?

Investing wise? tons of dumb (and perhaps even more scary) "smart" money getting WAY long hot trends. Got China? How about Social Media? We're not just talking IB analysts issuing rosy estimates by juicing the cash flows, they're using insanely low discount rates and pulling out every trick in the book to keep valuations high. This cannot last. I have no idea when it'll end, but when it does, its going to be ugly. We're not in a bubble, let me say that clearly, but there are a few areas that are getting close. Co's that MAY have a 70x 2013 P/e that are currently hemorrhaging money (and cash), uh, yea. Trading in ‘em is so volatilie, but results are going to take a while to pan out. Should these firms be worth 10, 20, 30%+ more/less in a few days or weeks time? I doubt it.


If you could travel back in time and change something in the financial world that would benefit investors, what would it be?

I would make sure NRSRO regulations never came into being and the Ratings Agencies with it. If you can't figure out how much a security is worth (or pay someone else to do it) then don't buy it. If you buy it & use a proxy (ratings) to rationalize it, you deserve to get wiped out. Unfortunately, ratings are so prevalent in the system removing them is going to be virtually impossible, too much $ behind the status quo.

More realistically, I'd grossly reform the retail business. There's no reason preferreds should be sold with undisclosed markups in 2011 instead of traded just like equities w/commissions. Same thing for fixed income. Brokers shouldn't be able to take markups/downs w/out clearly disclosing them to clients, and don't even get me started on the fee-based business. The retail business is important, but its such a gross business especially at the big firms (excepting chop shops).


What's the most exciting thing happening in your field that people don't know about?

You should have your answer to that by the end of the year. Beyond that, I can't say any more at this time…


Name a financial or economic villain and say why.

I think its very hard to point at any one person here. Besides obvious targets like Madoff, financial "villains" are usually large groups of people in the same market doing the same thing whilst missing some extremely relevant information, e.g most of the crowd in the CDO business before crap hit the fan. Even the guys like Jimmy Cayne, Dick Fuld I don't think are really villains so much as they just really sucked at their jobs. Angelo Mozillo, well, guys like him may be a bit of a different story. I'm going to stick with what I previously said though, I think the Ratings Agencies, Moodys, S&P and Fitch largely (although I interviewed with a smaller one, and after a few rounds did not leave confident that they were any better) really screwed the pootch. Of course, eventually this gets back to Congress, but that's a longer rant…


Name a financial or economic hero and say why.

Legitimate short sellers. I'm not talking about BS pump & dump shops, but the guys who do the research and take on the Wall Street bull apparatus, which takes a massive degree of patience, cajones, and realistically, sedatives and/or alcohol. The market is so painfully long-biased that even firms that for a lack of a better word suck get funded, and sometimes they're in a hot industry or supposedly riding a secular trend, getting swept up with everything else. Throwing yourself out there and saying "hey, does a company that's losing money really and may forever continue to do so deserve a $5bn valuatiion?" is freaking hard, and you take ALOT of heat for it from everyone, and that sucks, alot. Eventually, though, if you've really done your homework and absent some miracle for the company in question, you're proven right, and all you can say is "hey, I told you so," while you watch so many people get wiped out. I do NOT support bogus short seller "reports," but if you find material concerns with an especially hot company, its all you can do to try to get everyone else to see it before it blows up. The guys who are really digging deep into companies while the market laughs at them while stocks go higher are unsung heros. Yea, they want to see stocks go down, but seldom is it for lack of good reason.


What's your media diet?

On any given day, 80-98% of the things I read (that I havent already started or had on the list) I get from my twitter feed. I read a fair amount of SEC filings, academic papers, and other painfully long documents so I have to shut down twitter when I want to get real work done, but in terms of staying up to date, instead of the painfully disparate message boards and paid-services, once you follow the right people, twitter and stocktwits are indispensable. Implicit in that is that you have to be smart/patient enough to follow the right people. If you can't do that, well, not sure I can be of any help to you.


Is there such a thing as the wisdom of crowds?

I believe either H.L. Menken or PT Barnum said it best, "no man has ever gone broke underestimating the intelligence of the American people." I'm a natural contrarian, so I tend to miss the upside of hot momentum stocks, but I actually was up around 18% in my PA in 2008 shorting retail and consumer discretionary while the S&P (and pretty much everyone else) got walloped. Ultimately, trends go longer and higher than fundamentals suggest, and they usually fall from grace faster and farther than they should. Humans make some stupid moves, myself included, but alot of stupid people can do some pretty fantastically stupid things together.


Blogging is just a passing phase. Discuss.

When major fund managers, top academics, and even the government maintains blogs, I don't think the medium is going anywhere. I've written more times than i care to remember about how the name blog is really kind of stupid, since for professionals, its not a web log (as tumblr might be for common folk), but one of the key ways of communicating with the world in a convenient (for all parties) way. "blogging" helps the author work on his/her ideas, and hopefully think them out to the point where once published, readers will appreciate. Twitter is a big extension of this, I think, except it tends to be more immediate, at least in terms of reactions.

Can you imagine going back to a world where the only information that anyone got was from the MSM? Those days sucked! While we still rely and cooperate (usually) with the financial media, alot of the time its easier for those of us who know to just say it ourselves (often this requires the use of pseudonyms) without it being filtered by the media. Especially in Finance, I think Main Street has more and better information available to them now than at any time before, and its getting even better all the time. 20+ years ago if you wanted to know what stocks to buy you read the WSJ or FT, listened to your brokers' BS, talked to your friends, and well, not much more. Now if you want to get into a stock you can read all sorts of financial "blogs" written by professionals, check out the Stocktwits streams, I mean, how can you beat that?

And one last thing: if you don't like that some people write under pseudonyms, that means you're not smart and/or confident enough to figure out who's worth reading and who isn't. I follow hundreds of pseodonymous types, and over time, with a little work, its not very hard to figure out who knows what they're talking about and who's shilling/talking out of their ass.


Stone Street Advisors

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