Monthly Archives: December 2010

George Bailey vs. Mr. Potter – Who is the Better Investor?

It's A Wonderful Life

It's A Wonderful Life

One of our family’s favorite Christmas movies is Frank Capra’s 1946 classic, “It’s a Wonder Life.”  It’s a story about George Bailey (played by James Stewart), a compassionate, but despairingly frustrated businessman, who in the end learns how important his seemingly average life really has been.  The antagonist in the tale is one “Mr. Potter,” portrayed with a full measure of bile by Lionel Barrymore.  Throughout the movie, George Bailey’s best hopes and dreams always seem to be foiled by circumstances well beyond his control, and Mr. Potter is always lurking nearby to make the hard times seem even worse.

As I reflected on this movie, I realized that both Mr. Potter and George Bailey might have made quite successful investors.  Please indulge me for a moment while I flesh out this idea a bit.

Mr. Potter, as the wealthiest man in Bedford Falls, must have been an astute businessman.  As an investor, I see him as a true contrarian and opportunist.  During the bank crisis in the Great Depression, he was able to keep his cool and actually took over the town’s main bank.  He was a buyer when everyone else wanted to sell.  I suspect he would have been driven by the analytics of an investment.  The valuation metrics and profitability stats would have been more important to him than “the story.”  His focus would have been on the numbers and not the people involved in the stocks he would have bought.  His weaknesses as an investor would have been his pride and maybe his greed.  Overconfidence and the drive to make money for its own sake are common pitfalls for investors.

George Bailey, in his heart of hearts, may have been a bigger risk taker than Mr. Potter, but his circumstances would have forced him to be more conservative.  I see him as a classic long-term investor.  He was willing (maybe forced?) to forgo short-term wants for longer-term gains.  Some of his actions led to great success by others (his brother Harry and his friend Sam Wainwright, who made millions in plastics) – in this way, he almost operated like a venture capitalist.  When he made home loans to the people rejected by the bank (he was a sub-prime lender!), he realized the value of the people, not just the numbers.  I could see him being very interested in investments such as alternative energy, which require a long-time horizon, and which may never pan out as expected, but could help not only the investor but also the world at large.  His pitfalls as an investor would include liquidity risks – he always seemed to be short on cash and had to pass up some opportunities because of this.  He could have been the plastics millionaire had he been more interested in his own wealth.

In the movie, the audience is immediately shown the evil/good contrast between Mr. Potter and George Bailey.  Viewing them as investors erases this distinction to some degree.  It is not clear to me which of them would have had the better investment performance record.  Mr. Potter clearly had more money, but George Bailey may have beat him in total return and alpha generation.   Also, it’s nearly impossible to say which approach is better.  I see them both viable ways to invest.  In fact, there are many, many ways to invest and each has its strengths and weaknesses.

In my view, the real key is finding a style that works for you and sticking with it.

And also remember the immortal words of Clarence the angel from this movie, “No man is a failure who has friends.”  May you always have  an abundance of good friends.

‘Tis the Season for Predictin’

Sell Snow

One of the eternal customs of Wall Street is the year end prediction about the coming year.  At this very moment every Wall Street strategist and analyst is putting together the new forecasts and predictions for the New Year.  All will be well-researched, logical and compelling.  Many readers of these reports will undoubtedly find their views and opinions about the coming year colored by these persuasive essays.  And just as likely, most of them will turn out to be wrong.  This isn’t really a criticism of the Wall Street strategist (I used to be one); it’s just how things usually happen.  Most predictions are clustered around a mean, and the mean expectation (in other words, the thing predicted to be most likely), rarely happens.  C’est la vie…

This week I came across three separate news items which I think powerfully demonstrate the challenge of making accurate predictions.

1.)  Today in the Wall Street Journal is a story about Citibank (C).  The company just completed a $10.5 billion stock offering wherein the government sold the last of its holdings in the company.  As you may recall, Citibank was one of the banks the U.S. government “rescued” by becoming an equity shareholder.  Recall if you can the angst generated at the time this rescue occurred.  Many of the large banks were saddled with mountains of toxic assets, and at that time, many experts were predicting that either Citi would ultimately fail or that the government was simply throwing good money after bad.  Turns out, much to the chagrin of the pessimistic prognosticators, that the U.S. taxpayer will reap a $12 billion gain on their $45 billion investment – a two-year return of 26.7%.  I think this outcome could be viewed as a surprise versus the consensus prediction.

2.)  Our good friends at MFS Investment Management pointed out this week that the entire cost of the “Trouble Asset Relief Program” (TARP), the program that was put in place in late 2008 to help the U.S. banking industry and maybe save the entire world economy, was revised downward (again) to $25 billion.  At the time of its implementation, the smartest people looking at this plan estimated that it would cost $700 billion.  Again, another huge surprise that clearly befuddled the oracles.  For reference, $25 billion is roughly 3 weeks of interest service of the U.S. national debt…

3.)  Also from MFS, some interesting data about NCAA college football.  The Auburn Tigers ended the season ranked #1 and will play for the national championship.  Back in August, Auburn ranked only #23 in the coaches’ poll.  Surprise!  Conversely, the Texas Longhorns, who were ranked #4 at the beginning of the season, wound up losing 7 games this year and did not qualify for a postseason bowl game.  More surprises!

We live in a complicated world.  Yet we all crave the easy answer.  And many people will happily try to satisfy this need for the simple answer by offering their “expert” predictions.  This behavior is rampant in the investment world.  We all would love to know what’s going to happen next year.  We would all love to know which stocks will go up the most in 2011.  Actually, knowledge like this would be priceless.  Alas, it does not exist.  Thus, we are left with predictions. And you will be seeing a lot of them over the next few weeks.

Although I spend very little time making predictions, we will sometimes put together our own little internal guesses for the market, for fun.  Let me share mine with you.

Last December I “predicted” the following:

Prediction Actual (12/6/10) 12/31/09
S&P 500 1,235 1,223 1,115
U.S. Long Bond 4.58% 3.028% 3.84%
Gold ($/oz) 1,305 1,429 1,136
Oil ($/bbl) 95 91 80

This is about as accurate as I would expect (not very).  Luckily for me, I am no longer making a living by trying to predict where prices are going.  I can spend my time finding and measuring value in individual stocks.  I find this exercise much more rewarding (in every way) than making predictions.