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May 2013 Blogs
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Back in my youth-tennis-tournament-playing days I had a tendency to try to do too much because of what I was lacking both on and off the court: size. I was the small kid, the kid who you looked at across the net and knew didn’t stand a chance. That is, until the warm up began. I hit the ball a lot harder than someone my size should have and I was amazingly fast on my feet. It was very rare for an opponent to hit a successful dropshot against me.

But I was uncomfortable in my skin. I didn’t like being the small kid, and I overcompensated by trying to hit even harder than I was capable of. I went for winners when it was inappropriate, I went for too much on my first serve which resulted in a large number of double faults, and I was impatient and angry.

“Play within yourself” was the suggestion I heard from my father and from just about every coach with whom I came into contact as a junior. I didn’t like that advice. It felt like giving up to me. Like succumbing to the reality that I was just not going to beat the bigger, stronger kids. And I wasn’t ready to give up yet. So I pressed on for years, hitting too hard and playing low percentage tennis — winning tournaments here and there but losing a lot of matches I could have won. If I had only listened….

I believe this concept applies perfectly to the investment profession (and my trajectory in it), as well. These days I read a lot, and one of the most pervasive themes I find is people (reporters, journalists, commentators, and even investors themselves) speaking persuasively about topics outside their respective areas of expertise. And I see individual investors and advisers trying to do too much with their investments.

If you are not an expert on something — technology stock valuations; currency fluctuation and its effect on mega-cap stocks; interest rate movements/spreads and their impact on long-term bonds or dividend-paying stocks — why pretend you are? Or even worse, why put capital at risk in a strategy built around a non-core competency? Is that prudent?

Let’s look at Tesla Motors (TSLA) — the stock has more than doubled in the past three months, moving from about 40 to 90.

The combination of the company showing their first profitable quarter and the Tesla Model S earning Consumer Reports’ highest rating ever has folks excited. I’m excited. I want one. I love the whole story, I think Elon Musk is a genius and a visionary, and I believe in the company’s long-term prospects. But do I want to buy the stock here? The company had been losing money every single quarter until this most recent one. Is this a changing of the tide? Maybe. On Tuesday the company announced they were raising money by selling additional shares — the market interpreted this as “Tesla needs money!!!” and the stock took its first major hit in months. Yesterday Musk committed to buying half of the new shares himself. The stock rocketed higher in the after-market and higher still this morning.

So how does one value a company like that? The truth is: I don’t know. Part of playing within myself is admitting that.

Will Tesla’s shares be higher in a year than they are today? Quite possibly. Could the stock get cut in half, or worse, if Musk cannot deliver on one of his lofty promises? Quite possibly.

Speculation is interesting, fun, and potentially lucrative. I even think it has a place in most investors’ portfolios. It’s just not my specialty. So I don’t advise clients to buy stocks like TSLA. Will I talk a client out of buying it for himself as a speculative play? Depends on the client….

Warren Buffett, who has been fairly successful at investing, is famous for staying away from companies/stocks/industries he doesn’t understand. It’s how he avoided the tech bubble’s burst. Did he forego the upside of technology shares and the rest of the market in 1999? Sure. Were his clients/shareholders upset with him for a few months? Maybe (see the left side of the graph below). But something tells me they were pretty forgiving in 2001-02.

By the time I got to college I had finally accepted my limitations on the tennis court — my backhand stunk. My serve had become a true weapon and I had learned to follow both first and second serves to the net. More often than not, because of my serve’s strength, I had an easy volley to deal with and finished points quickly. Because I held serve so easily, a great deal of pressure was put on my opponents to hold their serve. I was playing within myself and I was winning a lot more matches.

Sticking with what you know can be challenging, especially when it seems like other people are being more handsomely rewarded for risks they are taking. My approach is to stick with what I know (tactical asset allocation, macroeconomic trend analysis, and the mathematics behind risk management), but to always be reading, learning, and adding to my list of competencies.

“Play within yourself” may have been some of the best advice I’ve ever gotten….

Adam B. Scott
Argyle Capital Partners, LLC

www.argylecapitalpartners.com
10100 Santa Monica Blvd, #300
Los Angeles, CA 90067
(310) 772-2201 – Main

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