“Many see pictures without knowing what to look at.” - Bernard Berenson, The Italian Painters of the Renaissance.
Maybe, this piece should be headed “How Not To Die Broke.” Making serious money in financial markets is the hardest thing to do consistently. Few of us escape the “Great Humbler.”
Consider: The S&P 500 Index got halved during the financial meltdown of 2008 – ‘09. It took NASDAQ 15 years to regain its 2000 bubble peak. Don’t ask me to go back to the Volcker induced crunch of 1982. Even worse. The market touched down at book value with 5-year Treasuries yielding 15%. Yes, 15%! It made Black Monday in ‘87 look like just a chart squiggle.
Financial data at the margin unfolds daily. Some 95% of what you see online or in the financial press is just noise which you disregard as garbage. Your macro point of view must diverge from the consensus. Later on, the consensus does fall into line. Over 6 months, if the facts don’t confirm your thesis, fold your hand. Don’t rationalize yourself into the poorhouse. But, close reading of quarterly reports and 10Ks is a must to gauge the dynamics of unfolding growth.
The reason for corporate due diligence is to muster your courage to build on or unwind positions without inhibition. I did this years ago with Citigroup, Bank of America, Sirius XM Holdings, Gilead Sciences, Boeing and Las Vegas Sands. Conversely, I couldn’t buy into the technology rout back in 2000 - ‘01 because there were serious valuation issues and inventory gluts while capital spending had dried up in the country.
Historical memory is useful as an evaluation tool in appraising the entire market, but not for specific stocks. I had to terminate a bright fiftyish tech analyst because his image of IBM, Texas Instruments and Motorola was formed a decade earlier. Later, he missed Apple and preferred Yahoo over Google. I’ve grabbed corporate files a foot thick and dumped them in the trash basket as impediments to perception.
Unlike many operators of my generation, I’ve eschewed short selling because it screws up my head, making me anxious. I’ve bought calls and written puts but only to quiet me down and re-concentrate on maximizing bull market plays. Anyone left who hasn’t studied Buffett’s style should at least read one of his annual reports.
Over 40 years ago, Secretariat won the Belmont Stakes, going away by 31 lengths. Big Red’s record of 2:24 for 12 furlongs still stands. Alas, the stock market contains no big capitalization properties in Secretariat’s class. Apple started it’s run from low thirties so we’re talking near 30 times on your money. Alphabet remains a contender to Apple but 2014 was a negative year.
Mike Milken and his crowd came close to Secretariat’s bold moves. But, they did it with OPM (other people’s money) raised for the honchos using 10 to 1 leverage on takeovers. Mike lugged around 2 lawyers briefcases filled with “deal” papers that were actionable.
Facebook and Alibaba may contain hearts as big as Secretariat’s, but they first went to the moon backed by V.C.s (venture capitalists). During Secretariat’s reign, 1973, the market faltered badly, a wet track, one horrendous recession induced by real estate overspeculation.
Early sixties, great fortunes were made by tech honchos and later some conglomerateurs, more a 1980s phenomenon. In the sixties, few investors even knew how a hedge fund operated. A pool of $20 million tabbed you as a big operator. Microsoft first went public in the early eighties. Today, there are dozens of $20 billion money pools, some concentrated in Apple, Micron Technology, even General Motors.
My patience and perseverance are found elsewhere, but frustrations and mistakes of commission and omission are enormous, namely selling artworks prematurely. I’m talking about the contemporary art market scene where my involvement dates back to early fifties when abstract expressionism was taking off in the Big Apple.
Namely, Jackson Pollock, Mark Rothko, Willem de Kooning, Clyfford Still, Jasper Johns, Roy Liechtenstein and others were young and prolific along with Franz Kline, Alberto Giacometti and guys on the Côte d’Azur, the great colorist Marc Chagall was entrenched, happily.
My excuse was I liked Rothko et al but in 1954 couldn’t come up with even $1,200 for a canvas at his initial ‘54 show at Betty Parsons Gallery in New York. Just back from the Korean War, penniless and unemployed. My M.O. was buying canvases from friends, artist without galleries. The going rate was $300 and you paid off your purchase $25, monthly.
There ain’t space to enumerate all my stupidities in the art market which embraced Warhol, Richter, Jeff Koons and Christopher Wool’s later paintings. Like stocks, I sold paintings when they began to bore me. This is a no-no, because there’s always another generation coming along getting its feet wet in terms of perception and taste. Such honchos dangle in the grip of advisors and auction house executives. Art for them is a commodity like pork bellies and gold. They’re told to put 10% of wealth in art and mainly comply.
In the art world there are juicy back stories. Now, for mine. Jean-Michel Basquiat’s best work was painted in 1982. An ‘82 piece recently went off at auction for $100 million. Back in ‘82 I was introduced to Basquiat’s work by Mary Boone whose gallery was housed next door to Annina Nosei’s space where she had confined Jean-Michel in her basement. He was painting fast and furiously, knocking off a piece in a couple of hours and then moving on.
“You should buy a couple,” Mary said to me. “They’re $2,500 apiece.”
“Mary, don’t screw up my head with what’s one step above graffiti,” I said. “Find me more work from the German Neo-Expressionists. Keep showing me Kiefer, Baselitz and Immendorf.”
I could have bought half a dozen Basquiats in 1982 for $15,000, now worth half a billion. No 10Qs to read or conferences to attend. Just put ‘em in the warehouse or on your walls for 50 years.
Collectors I know buy 20 or 30 pieces by one artist, warehouse them for decades and then feed them out into the auction market. If you refer to a compound interest table you’ll find these are better returns than Buffett logged over 50 years of intensive investing.
Even contemporary art indices based on auction prices don’t do justice to the tremendous moves within subcategories. We’re talking more like V.C. rates of return. Steve Cohen and Steve Wynn are blue chip buyers in the art market, but more intensive speculators in securities. Subliminally, they must know they’re overmatched in art but not on the Big Board. Same goes for Leon Black.
To make even hundreds of millions in financial markets you can’t afford any big down years. Don’t ever own a property that can’t come back big. Polaroid and Eastman Kodak come to mind, maybe Xerox and IBM today. Dead paper.
The way money is managed by big institutions for passive investors is a sham. They’ll put you in 10 to 20 investment categories covering everything from gold to emerging market debt. There is no underlying theme therein, except saving the money manager from extreme underperformance and criticism.
Short of entrepreneurial genius, options leverage and raking off 20% of the profits running $10 billion hedge funds or a private equity construct, these individual players must put together a long string of felicitous investment results. Commodity plays, gold and currencies seem too treacherous.
Subscribe to a chart service, not a stock market technician’s music sheets, but quarterly economic charts that date back 50 years. The objective is to understand historical norms, how the country and major corporations function and what turns them dysfunctional.
Keeping up with macro numbers earns you the right to call inflection points and take a contrarian point of view. Thoughtful individual investors may not have great information retrieval capacity but do make calls on tsunami events like the Cuban missile crisis, Black Monday, the Lehman Brothers bankruptcy and the 2008 – ‘09 financial meltdown. You do all this by relating panic lows to historic valuation yardsticks.
When the market touches down at book value and yields over 5%, push your chips into the pot. You’re on firm ground, historically speaking. Today, the market sells at 2 times book value, yields under 2% with the price-earnings ratio at 17 on projected 12-month forward earnings, not at 10 times market lows. The question now is how long can the good times last? Maybe next week I’ll deal with financial cycles.
Comparing real rates of return for mainly emotional plays like art with financial assets since 1900, art comes between stamps and violins, but is outdistanced by equities nearing 150%. Since 2000, both art and equities traced W-like formations, not topped until late 2014. Art’s 3% hundred-year rate of return compares with 7% for equities.
Putting serious money in art is betting against history. Where will Jeff Koons, Basquiat and Warhol sell 50 years from now? My guess is lower than today’s prices. If you’re early, smart and don’t rely on making money in art you’ll probably come out a big winner.
I’ve learned all this by making my own mistakes. If I somehow had bought a Mark Rothko piece even late fifties and assuming current auction prices of say $40 million, annualized compound rate of return for 50 years approximates 25%. Now you know how Buffett made his gelt.
For the Sosnoffs there was an invisible crossover point where the art collection exceeded financial assets. Never dreamed of this happening but time works on peculiar ironies. Conceptually, I didn’t give enough weight to how newly made billionaires would throw money into art as objects of value.
If lightning strikes for you, assume nobody believes you short of an audit. In 1964, I phoned my dad in Key West and excitedly blurted out I was a millionaire. Pop dismissed this utterance out of hand. His Russian peasant’s mentality couldn’t accommodate such largesse embracing his family.
Transactions in art annually, tot up to no more than a few hours trading on the Big Board. For Bernard Berenson, owning a 34,000-volume library at Villa I Tatti outside of Florence, a good rough test of value was whether you felt reconnected with life upon looking at a painting. The research came later.
The final irony is new money foolishly marked up my collection. I lucked out.
Sosnoff and his managed accounts own: Citigroup, Bank of America, Las Vegas Sands, Alphabet and General Motors.
msosnoff@gmail.com
