“The Tao of Steve” was about the pursuit of amour utilizing the unique style of the three Steve’s: Steve McQueen (movie star in “Bullit”), Steve McGarret (“Hawaii Five 0” ), and Steve Austin (“Six Million Dollar Man”). Companies want you to love their business model and buy their stock, so there is no difference.
The first tenet of “be cool” is to eliminate your desire. If you are overly aggressive, you will chase away your romantic interest. If you are too aggressive in buying a stock you will make the same mistakes. This is where due diligence comes in. Research why the company wants your money. As an example, FriendFinder Networks went public so that most of the proceeds could be used to pay down the debt, much of which was owed to insiders. If FriendFinders, as a business, was worth your money wouldn’t the insiders have wanted their debt to be converted to equity? After all, they are asking you to buy into the company so why are they selling if it is such a great deal. Will you money go to finance costly acquisitions when most end up losing money? Take away the successful takeovers by Warren Buffett and Southwest Airlines, and most of the corporate world is terrible at buying other companies. Businesses that are doing poorly will sometimes buy another company to try to fool investors that conditions are much better. There is nothing “cool” about a company wanting your money based on these desires.
Also be wary of stocks that try to attract investors by following a fad. Many floundering stocks in the late 1990s attached .com after their name hoping to entice investors into thinking they were an Internet play. The same has happened with many hedge funds and private equity groups. The Great Recession put many out of business and more will follow. When something works on Wall Street, it is pumped until a bubble is created, which always bursts. As Warren Buffett counseled, “First come the innovators, then come the imitators, then come the idiots.”
“Be excellent” means to be successful. For an investor, this means going beyond the ordinary due diligence. Compare the numbers of the company with competitors in their industry: do they match? Do other companies spend much, much more on marketing but only earn as much: this was a compelling factor for Glaucus Research on deciding to short Universal Travel Group. Competitors such as Orbitz had much higher marketing expenses.
If the company is posting record financials, look at booking a flight from the closest airport on a Monday morning when business travel is the heaviest: if plenty of seats are available, things might not be as they appear. Double check with business cars in the area to see if they are booked. Compare the cash with the sales. Gulf Resources cash on hand dwindled as sales increased, on virtually a one to one basis. Something will make them stand out if they are trying to hide: for Bin Laden’s family and followers, burning their trash at the compound rather than setting it out for collection was evidence to the CIA to help confirm his locale. It was not the only piece of evidence, but enough of it soon creates the foundation needed.
Another part of “be excellent” is to question everything. If a company owns a great deal of real estate and has not marked it down, this raises many issues. David Einhorn of Greenlight Capital, who successfully shorted Lehman Brothers and Allied Capital, is shorting St Joe Paper for this reason. China has a real estate bubble: all the major rating agencies have issued downgrades as a result. Be excellent and check the balance sheets of Chinese companies in the real estate sector and see if their holdings are still carried at cost rather than market.
Also question the equity and debt postures. What exchange is it listed on, how did it go public, who is the accountant, and who are the law firms are needed questions to ask. If the stock has a wide margin between the bid and ask, that demonstrates an inefficiency in the market. When any asset, a stock or a house or a painting, is priced well there should not be a gap between what the seller wants and what the buyer is willing to pay. That is what makes a market. If there is local bank debt, that can be a good sign as their due diligence can be thorough. However, if the loan is from a bank where company executives sit on the board that could be troublesome as the lender might engage in “sweetheart” deals. If this is discovered, there could be two stocks to “be gone.”
After “be cool” and “be excellent,” comes “be gone.” This is the most difficult steps as many sociopaths can be quite charming: that is how a con man lures his mark. You have to be willing to move away from what you once had an attraction. If you have already invested, it is very, very difficult to admit you have made a mistake: witness John Paulson and the hundreds of millions his company lost by hanging onto Sino Forest. According to John Armitage, founder of Avenue Capital Group, “We’ve gotten hurt relying on the numbers and relying on meetings with the company and getting to a certain comfort level and then finding out there is fraud. How do you come up with a system to catch fraud? Its hard. The guys committing fraud are good at lying and hiding. In the past, we thought such behavior was an aberration. Its not.”
Be cool, be excellent, and be gone: it worked in the movie.
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