Wednesday, December 30, 2015

Music - A Different Investing Analogy

In my research and investing I stress three things: people, structure and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap. This post is mostly about people and the beautiful music we make.

There is a host of famous investors that compare investing to American baseball.  Both have lots of statistics, and involve strategy, skill and patience.  One good write-up by world famous financial author Michael Lewis can be found here.

While baseball is fine, the analogy that resonates with me most is music. Especially the process of looking for and discovering new bands and music before others, or raw old rare-gems that others did not see value in.

I also love to introduce friends to new bands and genres.  I picture myself as being cool and hip by knowing obscure Japanese hip-hop bands and forgotten jazz greats that others don’t.  There’s not any money in all this, but the music itself is enjoyable and it gives me something to talk about besides small cap Jamaican stocks which not many of my Asia-based friend can relate to.

R.I.P. Don Cornelius
Process.  Finding good investments and new music is a process.  Although I’ve never written it down, when I was younger I had a procedure for sampling and finding new bands.  I read Rolling Stone and other magazines, hung out at independent record stores, watched Soul Train and American Bandstand, and sat through many live performances.   I’d stay up late to tape full albums that were played midnight to six on the radio, talked to other geeky music lovers and trade albums and CDs.  Anything to try new stuff at a cheap price.  If nobody had what I wanted, I’d bite the bullet and spend money on an album or CD that I just had to have. 

It wasn’t work, but looking back it took time away from other worthwhile pursuits.  Like watching baseball.

My investment process is more formalized than my music exploration ever was.  It involves searching globally for undervalued companies, thinking of new financial ratios to backtest, and making deep-dives into corporate structure and controlling shareholders.  This involves lots of reading, travel and talking.  Instead of listening to a lot of different bands, I now sift through lots of corporate data and reports to find the few that make sense to spend more time on and eventually invest.  
F Street's Minor Threat
(Washington, DC, USA)

It doesn’t feel like work, but it takes time away from other ways to earn a living.

Technology.  Music changes with technology. What would jazz be without the saxophone (invented in 1840)?  Could rock exist without electric guitar (1931)? How many modern genres owe their life to computers, synthesizers and other electronic instruments? Musicians are typically at the forefront of utilizing new technology.

Investing and finance are the same.  Investors quickly adopt new technologies.  Before Internet trading and ‘robo-advisors’, there were carrier pigeons, the telephone, ticker tape, and the non-stop rise of computing power.
When Digital Was Analog

Technology is a double-edged sword.  It underpins much of my favorite music styles such as house and hip-hop, as well as ground breaking and multi-genre pioneers such as Kraftwerk.  But it’s also what drives techno, which I detest. 

Technology allows me to invest in Eastern European and Jamaican stock markets from my Hong Kong base.  Something that was virtually impossible 20 years ago.  But it’s also what drives high-frequency trading which is basically front-running.  Something that is certainly immoral and should be illegal.

Importance of luck.  Luck is a big factor.  Just like I can’t predict which stocks will increase, I really don’t know why one band will do well commercially and another doesn’t. 

Many undervalued stocks stay inexpensive before others see value and bid up prices. It can happen quickly or may not happen for a long time.

Overlooked Value
This is similar to ground breaking albums.  The Velvet Underground and Nico only sold 30,000 copies after its 1967 release.  But in 2003 Rolling Stone called it the ‘most prophetic rock album ever made’.  A six CD box set based on that one album alone was released.  Whoever had the foresight to buy the album’s rights must have made a bundle.

I could likely fill many pages with bands and singers that did not make it as big commercially as I originally expected.  Troublefunk, Chuck Brown, the Knack, Wreckless Eric, Altered Images, the (English) Beat, Biz Markie, the Feelies, Love Tractor, Kool DJ Red Alert, are but a small sample of bands that I thought were as good as or even better than those that became much more popular.

Open-mind and independent thought.  Most of my best investments have been from original ideas.  I’ve made money from others’ recommendations, but the majority of my multi-baggers have been due to my own research and analysis.  

This is similar to most of my favorite music.  I’ve been fortunate to have friends who like music as much or more than myself.  Many of their recommendations have been fantastic. But most of my favorite stuff has come from just keeping an open mind and ears. 

HK's Best
Khalil Fong / 方大同
I first heard my favorite Hong Kong singer when I was wandering through Causeway Bay one late rainy evening and Khalil Fong’s (方大同) video was playing at the record store. My introduction to the Indian subcontinent’s great and varied musical traditions came from a jet-lagged meander into a record store in Delhi’s Connaught Circle.  I discovered my favorite Taiwanese band, Soft Lipa (蛋堡) from the try-before-you-buy listening station at Eslite bookstore. Listening stations at Tower Records in Tokyo and Osaka yielded many great finds including one of my all-time favorites, Small Circle of Friends.

Age and experience help.  Being older means knowing what you like and what you don't.  I now rarely spend much time and expense on music and shows that I don’t like.  I still enjoy trying new stuff but am more discerning.  I love Taylor Swift’s latest single - “Shake If Off” is as catchy as they come – but also know that it’s not for me.  It's catchy but without some sort of edge I doubt I’ll be listening to it in a year or so. 
Early Small Circle of Friends

This is true of investing.  I know what style works for my temperament and holding pattern.  I've a process that I’m comfortable with and I know what has a good chance of working.  There is lots of room for improvement, but I’m adding very few new diamonds to my decision tree these days.

Personal/Lonely.  Music and investing are also very personal.  We all like different sounds at different times.  A great investment for a long-term investor can be a money loser to the short-term speculator. 

Both can be lonely.  In most of my better investments, I rarely know of any peers that have also invested in the same companies.  Many times I’m going against the advice from others. This can be lonely.  But mostly it’s been profitable. As I wrote in a previous post, it’s good to look where others don’t (see here).

It’s only in rare circumstances that I’ve gone with others on company visits. Three weeks in a very foreign Eastern Europe and Moscow was a great learning experience, but it made me homesick for family, friends and Asian and Chinese food.


Bragging Rights – Putting It All Together

I got lucky seeing REM as the opening act in a small 200 person punk/new wave club when I was 15 or 16. They were incredible and the next day I rushed out to buy their first single, “Radio Free Europe/Sitting Still”, which was put out on the wonderfully named “Hip-Tone” label. In the next few years REM’s popularity grew very fast.  Record contracts, concerts in larger and larger venues and making the cover of magazines.  It was a like a ‘hundred-bagger’ and I still brag about it. 
REM's Murky First

Like a value investor that sells too soon, my interest moved to other bands and types of music after REM’s second or third LP.  They got way more popular and stayed popular for a long time. I still listen to their songs and still brag about seeing them so early when they were raw, hungry, and passionate.  It was a personal and somewhat lonely experience as friends and parents questioned why I became so enamored with an unknown band from down south.  Looking back it was all worth it as many blissful moments were spent listening and dancing to their music, and tracking the band’s progress.

Investments are similar.  I’ve seen many bad shows and bought albums and CDs that I’ve barely played.  I’m happy with most of what I’ve seen and bought, and the few brilliant performances make all the time spent on the poor ones worthwhile.  This is similar to stocks. In the last few years I’ve made some bad investments, but also some good ones.

2016 Recommendation 

It’s been a while since I’ve seen a live rock/punk/funk performance and I’ve never been to a rave.  Jazz is my musical drug of choice these days.  Instead of searching for new music, most of my time and energy is now spent looking for good companies that have been overlooked, beaten down or for one reason or another trade at a price lower than what it should be.

Last Year's Logo
Which brings this blog to its first ever recommendation.  Perhaps the best value for money is the annual Jakarta Jazz Festival.  A 3-day pass costs about USD 60 and gives one access over 100 performances.  Shows are concurrent and one can’t take it all in, but seeing 20-30 shows over 3 days will likely be more than enough for even the most passionate music aficionado. The Indonesian Rupiah has been weak compared to the USD, HKD, CNY, the Euro and other currencies so now is an even better year to give it a try (reviews of past festivals can be found here and here).  Website of the Jakarta Jazz Festival is here.


Encore

Baseball analogies seem to be the most popular, but there are others.  Ken Fisher, who runs one of America’s largest financial advisers, compares investing to hunting wild lions in America – it takes patience, effort and thinking two steps ahead to bag a wild lion (see here).  Howard Marks, a famous American investor, compares it to playing tennis (see here).  Others compare it to running a marathon and even buying avocados (see here and here)   

These are all valid comparisons and there are certainly many more.  

With a song in my heart, tapping feat and a few more dance moves left in my shoes, I’ll stick to my music analogy.  See you in Jakarta.


Investment Strategy
Music Comparison
Value
Great musicians overlooked for some reason.  Comeback acts.  Bill Laswell, Lonnie Smith, Jimmy Cliff, Mike Stern, Christian McBride, Kelly Rowland, Maxwell, M-People, George Clinton/Parliament/-Funkadelic, etc,
Deep Value / Small Caps
Live local music.  Many cities have numerous free/low-priced and high-quality live performance by local musicians, singers and bands.  Check local papers.  Experiment.  In Hong Kong try Full Cup Cafe, Orange Peel, Hidden Agenda, and the Wanch.   Washington DCs 9:30 club is now in a bigger building
Momentum
Up-and-coming artists and genres.  Check the music magazines.  See a show. Surf the web
Large Cap Growth
Trendy ‘stars’.  They may be good, but it could just be the hype and group think that makes you like them.  Taylor Swift, Justin Beiber, the Weekend
Large Cap Value
Headliners that seem to get better with age.  Herbie Hancock, U2, Faye Wang (王菲), Tonny Bennet, Kreaftwerk, Mariah Carey, Allman Brothers
International
K- and J-Pop; Brit pop, rock etc, Swedish Pop, Eurotrash, German / Danish / Europe EDM, Cantopop, Indonesian pop
Emerging and Frontier Markets
Huge variation.  Dangdut, Gamelan, Reggae, Bossa Nova, Soca, Qawwali, Tabla, West African, etc.
Technology – Good
House (Happy, Deep, etc.), Drum and Bass, Kraftwerk, Cabaret Voltaire, Switched on Bach
Technology – Bad
Techno






7 comments:

  1. thanks Mike, definitely speaking my language :)

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  2. Very interesting analogy. I am sure (and hope) many readers will add names to each category you created and come up with a few new categories. How about Special Situations?

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  4. You forgot Radiohead under “Deep Value.” As far as “Technology Bad” goes - add Bassnectar, STS9 or any horrible EDM band…

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  5. One of the best things I've ever read - spot on! I saw REM in the summer of 84 and I didn’t really get them. Then the 2nd album came out in the fall and I got into the jangle. But it was your cassette of the mini EP and Murmur that will always remind me of CUHK. “Sitting Still” is still one of my favorite tunes, and I’m still trying to figure out what it means.

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  6. great post.. I'd add G-Love and Special Sauce to the undervalued list. those guys are still together and still putting out great music

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  7. Thanks Michael for this article, I really like it. As a financier, a musician and of course a music aficionado, I can really relate to it.

    Regarding The Weeknd, I remember when he was still a Deep Value/Small Cap back in 2009-2010, and I was also bragging about how I saw value in him before every one when he became more famous around 2012, thanks to Drake and his OVO group.

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