Bye-Bye Birkin

 

Some years ago at a hotel press luncheon, a distinguished silver-haired gentleman from Hermes boasted to the assembled fashion journalists, “At Hermes we are highly selective about the skins we use for our leather goods. We can even identify which particular calf supplied the hide by its unique markings.”

Given the Hermes’ reputation for quality control and that ole-time, artisanal approach to manufacturing, it’s more than a little surprising to see that their public response to accusations of animal torture at the farms that supply “exotic” skins for the famed Birkin bags—costing upwards of $220,000— is a Gallic shrug.

The style was created for British actress and singer Jane Birkin in 1984 after a serendipitous meeting with Hermes chief executive Jean-Louis Dumas during a flight from Paris to London. However, recently, after seeing brutal footage of the cruel slaughtering practices, Birkin has requested that her name be removed from the bags. Hermes says they have no business connection with the reptile farm, despite years of swirling rumours long before the actual videos turned up.

It’s been a bad week for animal killers. Take Walter Palmer, a dentist from Minnesota, who paid $55,000 to maim and murder Cecil, a protected lion in Zimbabwe. (Palmer has a criminal record of illegal hunting.) The discovery of Cecil’s skinned and decapitated body has sparked a global outrage. A whiz with a bow and arrow, the good dentist seems to have momentarily misplaced his courage.  Zimbabwean police have issued an arrest warrant for illegal poaching and now Walter’s closed his practice, River Bluff Dental in Bloomington, folks, and is on the run. Long may he be.

Hermes, on the hand, can’t hide. They have an obligation to address these allegations promptly and in an honest and forthright manner. One of the implied benefits of making purchases from a respected European manufacturer who charges full freight and then some, is the assumption of responsible and humane behavior toward employees and community, as well as animals and the environment. (The discussion about whether any animal should be made into a handbag, wallet, carpet or umbrella stand in the first place, is an important question but beyond the scope of this piece.)

Just like I disbelieve Walter, who, when he realized the wrath of the world was against him, whimpered that, had he known Cecil was so beloved, he never would have killed him. Rubbish. He knew exactly what he was doing and to whom when he lured Cecil away from the protected area by dragging an animal carcass off the back of a truck as bait.

Ditto for Hermes. Knowing the firm as I do and the inordinate pride they take in controlling every facet of the manufacturing process, I cannot believe they didn’t know about the appalling mistreatment of animals at the Texas farm. After all there are long waiting lists for these bags and most people who buy them don’t give a toss how the skins are obtained, they just want the status symbol on their arms. Despite the artsy la-di-dah of their marketing, Hermes, like every other manufacturer, is in business to make money. They have no great interest in stopping the flow of exotic skins—unless it becomes bad for business.

As painful as it is to become aware of animal suffering, casting the perpetrators out of the shadows is the first step to stopping the misery.

As for me, I’ve just saved myself $220,000.

Blue Period

Courtesy of Mertim Gokalp

With tax-loss selling behind us, it’s time to contemplate 2015 and what the markets may have in store. Pundits predict a generally robust year, albeit with increased volatility. Despite the blather about the market being rational, it’s as zany and fickle as the people who trade in it. How else to explain seasonal effects like the “Santa Claus Rally”, “January Effect”, and the fact that years ending in a “5” give positive stock markets? (The number 5 was certainly lucky for Coco Chanel who named her first perfume Chanel No. 5. Its financial success has made the brand the juggernaut it is today.)

Despite attempts to explain these effects as expressions of rational behavior, I think it’s best not to overwork the dough, so to speak. Is the January Effect, when stock indices get a bump, the result of investors buying back stocks after December’s tax-loss selling?  I say, when Nature gives you a boon, just say ‘thank you’ and shuffle off before She changes her mind.

Pablo Picasso said, “If I don’t have red, I use blue.” This is great investment advice.

The latter half of the year saw a lot red. When the price of West Texas Intermediate dropped through the floor, the share valuations of many senior, mid-, and junior-oil and gas companies went along for the ride. Of course, some are now in oversold territory and may attract investor interest next year. Others, particularly those with overly-leveraged balance sheets, high production costs, and unhedged contracts, will find the capital markets unobliging, forcing them to slash dividends, put themselves up for sale, or simply close shop. Until sentiment towards this sector changes, best to put down the red brush and pick up the blue.

In 2015, it’ll be blue skies over the country the world loves to hate, America. Lower fuel costs will be a boon for consumers— and Americans do love to spend their way to happiness. Hence small-and mid-cap companies that sell within the domestic economy like Coach, Nordstoms, Home Depot, and TJX Cos., as well as those who typically spend a significant chunk on transportation, like Fed Ex and Amazon, for example, are sure to see fatter margins in 2015 and beyond.

Another ‘blue’ area is luxury products. According to a recent special report in The Economist, shares of public luxury companies have outperformed those of other companies since 2005. Hermes, LVMH, Prada, Burberry, Swatch, Kering, Richemont, and Diageo are doing smashing business. Avid consumers in Asia are more than compensating for lower demand in Europe and North America. But don’t cry for Europe. Its luxury industry sold $726 billion of covetable mercy in 2013 and has 70% of global sales. So, while its citizens have cooled it on luxury spending, the continent is still running the show and reaping the rewards through employment, exports, and increased GDP.

Bernard Arnault, the sharp-eyed LVMH honcho was once asked by the late Steve Jobs for his advice on retailing. “I’m not sure we’re in the same business,” replied Arnault. I don’t know that we will still use Apple products in 25 years, but I am sure we will still be drinking Dom Perígnon.”

So, let’s raise a glass of Dom to next year’s most promising sectors: U.S.consumer goods companies, U.S. financial institutions (the regional ones too), small-and mid-cap U.S. domestic companies, and U.S. pharma and technology companies. Russia is a dud but India is looking interesting, and if monetary policy loosens up in Japan, that region may be worth a gander. Higher interest rates in the U.S. and, by extension, Canada, will put a damper on the allure of high-dividend paying stocks. But don’t be blue because steady growth in the U.S. economy will more than off-set this. And, for those going long, you could do worse than investing in luxury goods. No red ink in sight.

Here’s to good health and good fortune to all in the year that ends in “5”.

Hermessence

Courtesy of Hermes

Long gone are the days of sumptuary laws. Fine gems, furs, gold and rich fabrics were verboten to the hoi polloi and wearing them meant risking punishment or sometimes, death. Today, the biggest risk to indulging in a bit of luxury shopping is carrying a balance on your credit card. Not ideal but some distance from summary execution.

But in a world where luxury is available to nearly all, how do we define it? And what’s with all the qualifiers? Today we hear terms like “affordable luxury”, “aspirational luxury” and “absolute luxury”…My favorite definition of luxury comes, not surprisingly, from Hermes: “That which can be repaired.” 

Many years ago a friend bought his mother a classic black Birkin in a vintage shop in Paris. The bag was authentic but missing the lock and key. The salesman assured them that if they took the bag to the Hermes boutique on Rue Faubourg, they could replace the missing accessories.

But at the boutique they were informed, “Before we can sell you the lock, we must send the bag to our spa. The leather is dry and stressed. You will be contacted in a few months when the bag has fully recovered.” (Readers will be pleased to know that several months and several hundred Euros later the bag made a full recovery.)

Lately the markets have been more than a little stressed themselves. During the volatility of the past few weeks, broad swaths have been hit, chief among them oil and gas exploration companies and related industries such as pipelines, heavy machinery, and even some financials.

A good question would be: Which of these companies can, like the Hermes bag, be repaired?

Whenever sentiment turns against a sector, perfectly decent, even great, companies suffer collateral damage. While the price of oil is not going up anytime soon, rest assured that it will go up again. Companies with solid balance sheets, manageable levels of debt, astute management who are savvy capital allocators, and who attract patient institutional investors, will do just fine. Their stock valuations will be repaired.

Junior exploration companies, or highly-leveraged small-and mid-caps are less likely to fare well. Some will get acquired by larger firms who will cherry-pick the best. The remainder will twist in the wind burning cash, slashing dividends and capex, and praying for a recovery in the oil price before their stock certificates end up as landfill.

While business strategies at high-luxury companies do not naturally translate to firms in other industries, (for example luxury companies are not too concerned about the cost of production; goods will be priced to ensure high profit margins), a few general rules still do apply. Among them, of course, is Warren Buffett’s adage to invest in companies with a wide economic moat.

Companies like Hermes benefit from an indelible aura of luxury, including their famous after-service. This gives them, in Buffett parlance, a wide economic moat. When they stumble, as all companies do at some point, they recover.

Oil stocks are experiencing a rapid vertical compression. But they’re not all lemons and many will make a full recovery. Here’s what to do: Find a charming café and order a citron pressé. Sip it slowly while browsing the financial pages. You’re bound to uncover a few oil patch gems. Or, you could always just buy an Hermes bag because their prices only go up.

Eat Cake

photo courtesy of tarakanova07

Remember how we used to eat muffins for breakfast? We scarfed them between gulps of grande coffee and felt terribly virtuous. It was the breakfast of champions, not guilt-inducing cake. (“Dude, it’s cake.”) Muffins have all the sugar, fat and calories of cake without any of the pleasure of eating a real, honest-to-goodness cake.

Often we act in ways that are not altogether rational and are ultimately counter-productive. This can end up costing us more than we think. (See the latest research on sugar substitutes and their link to obesity and illness.)

Years ago I was on a business trip in Paris and a colleague and I went window-shopping. By pure chance we happened upon the Hermes boutique on Rue Faubourg St. Honoré. We climbed the stairs and entered handbag heaven. Our eyes popped over the vast array of styles and colors. We sighed over the sky-high prices. Some day, we vowed, in the far, far distant future, we would give ourselves permission to buy just one.

As we left the store, my colleague turned to me and said, “You know, we’ve probably spent way more money on crap we no longer like or use. If we had just bought the thing we really wanted, it would’ve been a lot cheaper.”

Lately, I’ve been cleaning out my closets and her comment has hit home. Piles of clothing and accessories that I no longer wear have found second lives. Sometimes at the neighborhood charity shop—sometimes straight into Lady Gaga’s closet. (She swept into town in late summer and bought some of my Issey Miyake dresses and Yves Saint Laurent evening clutches from an upscale resale boutique here. God bless her fashion lovin’ heart.)

During my pruning season, I learned an uncomfortable lesson: It’s designer label or bust. All those charming dresses in mint condition by homegrown designers? Resale poison. Or, in investment terms, zero liquidity. Bupkis.

As investors, we’re often tempted by what we think of as bargains. Is a 10-cent stock cheap and a $100 stock expensive?

The answer is, it depends. The micro-cap likely has no earnings, a lot of debt, low liquidity, and a spotty cash flow. On the other hand, the $100 stock may have robust earnings, be growing rapidly, be in a favored sector, pay regular and growing dividends, have great cash flow, no debt, high liquidity, and lots of cash on its books. Now which one is expensive?

Owning a large cap stock is like owning a top designer label:

• There’s good liquidity. If you need to raise cash or simply want to take some profits, somebody will be on the other side of the trade. There’s always a buyer for a Chanel handbag. Not so for a Lida Baday coat.
• It will be relatively easy to assess its intrinsic value. Even a novice can quickly access information about the company’s key metrics like dividend yield, cash flow, and earnings estimates. Likewise, everyone knows the market value of an Hermes Kelly.
• Top large cap stocks, like top brands, retain or grow in value over time. A Van Cleef and Arpels necklace will never be on sale; a mid-tier name like David Yurman will.
• A top company is covered by many analysts so it’s easy to keep up with news and material changes that could affect the value of the stock. Ditto for designer labels. They have lots of fans, not to mention powerful ad campaigns, to talk them up and keep prices plumped. Louis Vuitton is not running those ads for charity. (And, by the way, doesn’t Michelle Williams look darling in the fall campaign?)

The world would be a boring place if we only wore big brands and bought big caps. But when it comes to your wardrobe—and stock market investing—strategic asset allocation rules the day. Why not buy some high yield large caps and then spring for a nice Chanel something with the divvies? Have your cake and eat it too.

Candyland

Photo courtesy of Jason Meredith

The dress was pink chiffon. Cotton candy pink. It was strapless, with a fitted bodice, nipped in tight at the waist, and the skirt a big cloud of translucent chiffon. I simply had to have it and price was no object. That evening, I tried it on again in my bedroom. Under the overhead lights, I noticed that the pink was faded and yellowed in certain spots. Looking at myself in the full-length mirror I had to admit that the huge volume of chiffon made me look even shorter than I was. Suddenly I realized I had neither the shoes, handbag or jewelry to match the dress. It also occurred to me, I would never, ever in this lifetime be invited to a cotillion, which is the only kind of event at which a 16-year old girl could wear this froth. Plus, even if I were invited to one, I had no boyfriend to take me. Shit.

What I didn’t know then and sort of know now is, before you go chasing after the ‘wow’ pieces, build a solid wardrobe of boring but hardworking staples like the little black dress. Things that will actually benefit you in the here and now, not in some fashion fantasy life.

Same goes for investing. Many so-called investors chase after the latest thing that some pundit is touting in the press, instead of concentrating their efforts on building a set of core holdings and then, if the urge continues, venturing beyond for some badaboom action.

Since most of us, including the pros, are terrible stock pickers, studies show that owning a basket of well-diversified equities, either directly or through ETFs, mutual or pooled funds is, over the long term, the best strategy.

Staying fully invested, even through downturns, has proven to be successful too. A recent study by  Bernstein Global Research looked at 1,000, 12-month periods from 1926 until 2013. Those investors who put all their eggs in the market at one time averaged returns of 12.2 percent, whereas those who bought in gradually made 8.1 percent. The worst performers were those who stayed in cash on the sidelines. They netted 4.1 percent.

If I were building a core fashion wardrobe it would look like this: Marlowe cashmere v-neck sweaters in white, oatmeal, black; Gucci or Chanel wool gardardine slacks in black, grey; Chanel little black dress; Akris white shirts; Repetto loafers, Prada sport shoes; Max Mara camel hair coat; Hermes Evelyne or Jypsiere bag; Cartier Tank Francaise watch; Cartier Love bracelet; Tiffany diamond ear studs; Tiffany Elsa Peretti Diamonds-by-the Yard pendant. Done!

If I were building a core investment portfolio it would look like this: Pipelines (Transcanada, InterPipeline); Consumer (P&G, Unilever); Financials (Scotia, TD, RBC); Industrials (Deere, Fluor, Dupont); Technology (Microsoft, Apple, Intel); Pharmaceuticals (Pfizer, J&J, Merck)…you get the idea.

Yes, they are boring but they spit out regular dividends, raise their dividends annually, and give upside potential on their common shares. Short of private placements or insider trading that’s the best deal in town given the amount of risk assumed.

Just like I leave room in my closet for a few sizzlers, I carve out a small percentage of my portfolio for excitement. So far my choices have always done well in the long-term but with lots of volatility in the short term.

It’s wise to remember the words of investor George Soros: “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”

I never wore the pink chiffon dress. The next day, overcome with buyer’s remorse, I went back to the vintage shop to return it. The manager put up a good fight but, in the end, she took it back. Feeling immense relief, I put the money back in my wallet and soon found some other stupid thing to buy.