Liquid Lunch

Denis Broci, Claridges Bar-photo courtesy of http://www.thecocktaillovers.com

I love hotel bars. I love their dark glamour and the feeling of being public and private at the same time. Being an ‘indoorsy’ type who thinks spirited conversations are a contact sport, hotel bars are always a must-see on my travels. Also, there is booze. In the afternoons, some bars convert to ‘tea salons’ which also works for me. Basically, anything to be tucked inside a cozy room where the talk is in whispers and nice people bring you food and drink in return for your initials on a piece of paper.

It’s no secret that we guests, or punters as Gordon Ramsay likes to call us, pay an enormous premium to linger in these luxurious places. For many (“Yes, Please!”), it’s money well spent—a haute hospice for the soul. A place to recharge knowing that just outside the velvet-upholstered walls is a thrumming metropolis, and that we choose, for the moment, not to partake.

Liquidity, whether the 5-star hotel kind, or the Mr. Market kind comes with a cost premium. In the stock market, the ability for an investor to be able to enter and exit a position without too much muss-and-fuss is critically important. And there’s a price tag for that.

A recent study by Roger Ibbotson, formerly assistant professor of finance at the University of Chicago and now chief investment officer of a U.S.-based wealth management firm, shows a 7-percent return advantage for holding small-cap illiquid stocks vs. large-cap liquid stocks. Factoring in time-value calculations and compounding, an additional 7-percent annually amounts to huge incremental return over time. (Translated into English: Not paying the premium associated with large, actively-traded stocks gives you the potential for better long-term returns.)

In an investing world that gets crazier by the minute, buying quality companies in the small-to-mid-cap sector can give individual investors a slight edge over institutional investors. Large wealth management companies are constrained in many ways. Firstly, they often have to take very large positions in order to generate expected returns. Also, they need to ensure that they can go in and out of positions rapidly. Their clients are paying hefty management fees and  don’t want to see three quarters of losses on their statements.

Retail investors, or punters, do not have these types of limitations. Especially during the accumulation phase of our portfolios, we can wait for the market to recognize value. In fact, it’s advantageous to add to our holdings when stock valuations are depressed. Who doesn’t love to buy on sale?

One strategy is to identify good quality but illiquid public companies. (Hint: many of these are family controlled.) Sometimes they are taken private, so, no problem, you take the cash. Other times they land on the radar of the institutions. Again, no problem. Once this begins to happen, you can happily sell your shares to the Big Boys at a profit.

However, this strategy is not for every taste. If your time horizon is short, liquidity is your friend, so pay for it. If you like to trade frequently, skip this idea. Your eyes will glaze over while you wait for a buyer to emerge. If you like micro-caps, illiquidity can be tricky. The companies may not survive and you’ll be stuck with a worthless share certificate to stuff into drafty windows.

On the other hand, if your picker is good and you have time on your side, this is an excellent way to juice returns. And, when you do finally cash out, why not treat yourself to a week-end stay at Claridges? At the bar, ask for Denis. I hear he makes a mean Mojito Royale.

Add Dress

In her recent memoir The Woman I Wanted To Be, Diane Von Furstenberg recounts the time in 1978 when she was on a flight from New York to Cleveland for a personal appearance to promote her iconic wrap dress. The plane was packed with businessmen and, except for herself and the flight attendants, there were few women passengers. That very morning, January 28th, the Wall Street Journal ran a front-page feature on Von Furstenberg and her fashion empire. Her seat mate spent the first few minutes of the flight ogling her legs. Finally, in an attempt to get a conversation going he said, “What’s a pretty girl like you doing reading the Wall Street Journal?”

Her anecdote reminded me about the time in the mid-80s when I was at my neighborhood bookstore (remember those?). I had stacked The Economist and Vogue on the counter and the male cashier said, “Wow, I’ve never seen the same person buy these together!”

This was before there were a lot of role models showing that women could be investors, wealth managers, and yes, even tycoons. There was the usually unspoken belief that if a woman was interested in money she was either a gold digger or kinda butch. The dissonant idea that a woman could be equally interested in fashion and in investing was really out there.

It wasn’t that long ago that I encountered the same kind of sexist thinking—from women. I was working as the editor-in-chief of ELLE. When I was offered the job, after essentially doing it for the past six months anyway, I gladly accepted and began to negotiate my new salary, benefits and perks. You know how women are always being told that the reason we don’t earn as much as men is because we don’t negotiate? Yeah, well, in my experience that’s just another lame excuse for the sexism that’s baked into the corporate cake. I negotiated on every point. The only result was my boss implying it was unseemly for a woman to be aggressive about money.

There was also the belief that fashion was ‘a calling’ and to see it as a business, albeit a creative one, somehow brought your commitment to it into question. That shadow never fell on my various publishers or the sales and marketing teams or the CEO. No, just on the female “talent”.

That’s why women like Diane Von Furstenberg are so important. She leveraged a great name and juicy Rolodex into a multi-million dollar lifestyle brand. She followed her impulses and made some killer deals. (Like buying property in the Meatpacking District when it was still pretty dodgy for $5 million and selling it a few years later for $20 million.) And, best of all, she did it wearing a dress.

In the HBO series Boardwalk Empire, Margaret Thompson, wife of bootlegger Nucky, enters into a stock deal with Joe Kennedy (yes, gangster patriarch of that Kennedy clan). She tells him, “Here’s an experiment for you: Think about the things you want in life. And then picture yourself in a dress.”

It’s fitting then that Diane Von Furstenberg, named for the Roman Goddess of the moon and the hunt, would create a business empire whose motto is: Feel Like A Woman, Wear A Dress.

Golden Slumbers

Photo Courtesy of Hakon H

For years I stalked a gold YSL messenger bag. The first sighting was at the YSL boutique on 57th Street in New York. It was perched like a goldfinch on a shelf just out of my reach. The fabulosity of the gold glitter adorning an otherwise utilitarian city bag tickled my Marie Antointette/Madame Bovary genome. “Dare I”, I wondered?

I daren’t. Instead I opted for a perfectly respectable taupe shoulder bag in a kind of pebbled patent leather. Still, occasionally my mind drifted to the gold YSL that got away. I wondered how it was; where it was?

Occasionally it popped up on eBay, spit up like ambergris, on the waves of fashion. But ambergris, (for those readers not into perfumery, it is otherwise known as whale vomit), the ones that came up for auction were all ‘pre-loved’ as the resale lingo goes. In other words, the bags had been around town. And, friends, gold sparkle is not known for its durability.

In other news, gold, that investment stalwart, has fallen on hard times. Often viewed as a hedge against inflation, many investors liked to have at least a smidge in their portfolios—along with the rows of canned beans in their cellars. The rampant, multi-year bond buying program to the South stoked fears of rising inflation but that has not come to pass. If anything, interest rates are drifting lower raising fears of lowflation or deflation.

Still, in tumultuous times humans find emotional comfort in tangible things like gold, real estate, sable coats, and, as Dennis Gartman, a U.S. economist and editor of the widely followed The Gartman Letter,  put it thusly, [things] “that if dropped on your foot shall hurt.” He’s also long steel, railroads, aluminum and, yes, even gold.

Some investors are adamantly opposed to owning gold. Warren Buffett makes a compelling case for avoiding this asset class entirely. According to Buffett gold has two significant shortcomings: it’s of no use and it’s not procreative.

Yes, it looks pretty on a wrist or finger but if you purchase an ounce of gold in 2014, in 2020 you will still own exactly one ounce of gold. But, if instead you buy 100 shares of Apple this year, there is high probability that your 100 shares will have earned you substantial dividends, as well as an increase in market value during the ensuing six years. Apple is constantly growing and innovating; the gold bar is not. (By the way, this same reasoning applies to currency-based assets like T-bills etc.)

Over the years I’ve taken small nibbles in gold in both large caps and micro caps. Unlike Buffett, I am agnostic on gold. Sometimes I own it, sometimes I don’t. Currently my only position is in a small gold mining company operating out of Burkina Faso. It doubled recently and I sold off half and now I’m left with the “market’s money”—and just as well given circumstances there which are fully reflected in the today’s share price.

Still, there’s something alluring about tangible things that come out of the ground.

Lately I’ve been flirting with graphite—the unsexy carbon. It could have great commercial applications in batteries for electric cars. There’s also a buzz about aluminum as a replacement for steel in car manufacturing to decrease weight and meet government-mandated fuel efficiency targets.

Graphite? Aluminum? Yes, they very far from the glamourama of 57th Street. But fashion never sleeps and neither does Mr. Market. So, until the next gilded age, try a more somber palette.

Meh Day

Photo courtesy of Julian Fong

If you can’t find inspiration in Paris, you can’t find it anywhere. Having just returned from a two-week sojourn in France only confirmed that the general malaise of milquetoastness has also taken a perch in the City of Light.

As pretty and as skillfully art-directed as the shops and bistros are, it’s clear that there are no new ideas in the air—and sometimes even no merchandise. A stop at Marie Helene de Taillac’s jewelry boutique on Rue de Tournon was a harbinger of reduced expectations.

“Je suis desolé,” replied the handsome store manager when we asked to see a gold bangle. “Out of stock.” Instead, he disappeared to the back office and returned with a matchbook-sized slip of paper with a photocopied image of the bracelet. We looked at the paper. (“Yup, that’s a bangle”), but declined the espresso he offered.

Next stop, Place Vendome, home to Cartier, Boucheron, Van Cleef and Arpel, Buccellati, Chanel and every other major purveyor of sparkle in the Western hemisphere. This week the posh square is also temporary home to Paul McCarthy’s sculpture, a 24-metre Christmas tree, or massive green sex toy, as some have said, as part of the International Contemporary Art Fair.

But wait! Where is it? Apparently vandals cut the scaffolding causing the sculpture to collapse. Earlier the artist had been physically attacked on the street. Talk about deflation.

One morning over a breakfast of pain au chocolat and frothy café au lait, I read Vanessa Friedman’s column about the “new mediocre” inspired by a comment by Christine Lagarde. (Lagarde, managing director of the International Monetary Fund, had referred to the subpar growth of the global economy at a speech at Georgetown University.)

The ‘new mediocre’, argues Friedman, is everywhere, not only in the global economy. She’s right. From fashion (high-fashion sneakers? Really?) to investing (ETFs for everyone!), our appetite for innovation and excellence is flattening. Old ideas and fashion labels are recycled— and the popularity of ETFs suggests that few investors think they can beat the market.

You can literally see this flattening of optimism in a country’s yield curve. A steeper yield curve implies good credit growth which spurs economic growth. A flattening curve indicates expectations of slower economic growth and lower inflation in the future. (Yield curve 101: Yield curves naturally slope upwards because investors expect to receive a premium for making longer-term investments. The slope flattens when the “spread” or difference between short-term and long-term rates narrows.)

Despite dovish monetary policies like the massive bond buying program by the U.S. Federal government, economic growth remains muted at best. Europe appears to be on the cusp of deflation and will likely begin its own bond buying spree to attempt to juice its moribund economy.

So, in a world of diminished expectations and slower growth, where does one invest?

Like your mama said, it’s the company that you keep. No one ever went astray by holding shares in high-quality companies and high-grade bonds. So, say bye-bye to hedge funds, private equity, small caps, high-yield corporate bonds and real estate.

Oh, also take a pass on over-priced designer sneakers, start-ups with no earnings, and—especially—on giant inflatable sculptures. They’re bound to burst.