Grounded

Celine Fur Shoes

While visiting Paris recently, I was sipping café au lait and munching on lightly toasted Poilâne bread with butter and apricot jam at my favorite breakfast spot on Rue Cherche-Midi when I came across this breaking news: Cannes Red-Carpet Ban on Women Wearing Flat Shoes.

Well, there goes my chance to gate-crash the Croisette. Flat shoes are the tops for me. What started out as “troubled” feet, gradually, with time, jogging, and far too much footwear-inflicted abuse, morphed into end-stage arthritis. A good day means walking the dog—or the winding, cobblestone streets of Paris—without wincing with each step. A bad day, (scratch that, a very bad day), would be being forced to walk in high heels—or, in other words, not walking at all.

It so happened that my career in fashion magazine publishing coincided with a vexing trend in women’s footwear. Designs veered into the realm of S&M with spiked-metal studs and thigh-high, stiletto boots. Nicknamed “limo” or “taxi” shoes, the only way to get around was to hobble into a waiting car. A limited few rose to the occasion, the rest were fashion roadkill. Let’s just say that with my flat, lace-ups, I stood out in a fashion crowd.

But there’s always an upside. My limitation means that I can walk into any shoe store and immediately eliminate 90% of the offerings, so decision-making is faster. In a city like Paris, with great shoe boutiques on practically every corner, this means more time to visit museums and to eat and drink.

On the 8-hour flight home I read The Einstein of Money, a terrific book on Benjamin Graham, the father of value investing. Graham’s rules for disciplined investing have inspired millions, including legends like Warren Buffett and Charles Brandes, and other “superinvestors”.

Graham developed screening methods to assess the intrinsic value of a company based on such metrics as size, earnings growth, dividend records, and ratios of price-to-assets, and price-to-earnings. This allowed him to know whether a company was a bargain or overpriced. Unlike others who base investment decisions on predictions of price movements, Graham peered into the income and balance sheet statements to discern value (not price).

Starting out as a bond salesman, at which he failed miserably, Graham eventually became a financial analyst. In 1916 he strongly recommended to his boss Alfred Newburger that the firm make a substantial investment in a company called Computer-Tabulating-Recording, Corp. that was selling at $45-per-share but whose intrinsic value Graham had estimated at closer to $130. His boss told him, “Ben…I would not touch it with a 10-foot pole.” In 1926 that firm changed its name to IBM.

Graham’s strict investment guidelines meant that he missed many hot stocks and gains through momentum investing. Yet, I admire his ability to eliminate thousands of potential investments into a select few that were highly likely to be “sure bets”, particularly if one was patient enough to let the market eventually weigh a company’s true value.

Today, like a woman shoe shopping in Paris, an active investor has an infinite number of decisions to make. Even product categories like ETFs and mutual funds that should, in theory, simplify investment selection, have exploded in recent years. When I began investing 25 years ago, ETFs didn’t exist and mutual funds were very costly so I began to cobble together a portfolio of individual equities. The process is stimulating and rewarding but can be very time-consuming, and quite harrowing when you add global, and emerging market equities into the mix. Lately I’ve been wondering if there aren’t better uses of my time—like learning French or writing a book?

Though I’m not ready to pull the trigger on my individual holdings, after reading The Einstein of Money, I know what Graham would do. Simplify the selection process.

Oh, and if you have troubled feet and happen to be in Paris and want to simplify your shopping, here are some brands to try: Accessoire Diffusion, Fausto Santini, Gelati, and Prada Sport. Then, with all the time you’ve saved, treat yourself to a glass of Chablis at Café de Flore and watch the pretty people.

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.

The Umbrella Shop

Illustration courtesy of Tom Simpson

In Paris, on the charming Viaduc des Arts, there are many “one-thing shops”. There’s a perfumery, a framer, and an umbrella shop. Parasolerie Heurtault sells one thing only: umbrellas. Mind you, they are verra, verra nice umbrellas. The proprietor, one Monsieur Michel Heurtault, makes hand-stitched brollies in waterproof silk taffeta with handles made of ebony, Bakelite lacquered wood, and, gasp, antique ivory.

It’s a risk to commit to just one thing. A prolonged drought, a public distain for theatrical presentations of My Fair Lady or Mary Poppins, or some other cause of falling umbrella demand, and, poof! the business collapses.

When it comes to investing, the mantra is diversify, diversify, diversify. To risk-proof a portfolio, pundits recommend owning 4-6 asset classes and over 30 different equities. Today that’s easy enough to achieve with mutual funds and ETFs that mirror the markets.

But sometimes in the rush to diversify, something gets lost: Outsize profits.

While no rational person would ever suggest putting all your money in a fledging graphite stock trading for pennies over-the-counter, making big bets is one way top investors make big paydays.

Whales like Warren Buffett buy entire companies. Not exactly a committment-phobe, he. Further down the food chain, other investors find success by selecting asset classes they believe will do well and tilting their portfolios toward them. Again, this take a certain amount of chutzpah.

Spreading the love around, as an S&P 500 mutual fund does, divvies up the risk but it will never beat the market. And, factoring in management fees, it will always underperform the market.

Size does matter. Sizing investments is probably one of the hardest parts of being an investor. And nowhere is this more nerve-wracking than buying highly speculative stocks. Because most of these are fledging companies with no profits, they’re brittle little birds that could vanish in a blink under a strong breeze.

On the other hand, if they hit, they hit big. The rule-of-thumb is, assuming you have the appetite for them at all, to put no more than 5% of your total portfolio into high-risk stocks. Depending on the dollars this represents, you may be able to buy several of them. Ten-thousand shares might sound like a lot but if the stock is selling for 17 cents, you’re gonna want to back up the truck to get a meaningful position and the potential for a healthy return.

Once that stock starts to move, consider paring back your investment. Double-baggers do happen. (Your graphite darling might go from 17-cents to 34-cents.) But how likely is it to go from 34-cents to $3.40? Not very. If you’re still in love, keep some but play with the market’s money. Take out your original investment and find another undiscovered gem to buy, or send a kid to camp.

Sometimes betting on one-thing is a not-stupid investment. And, if you’re lucky, it can provide you with a nice, big umbrella for that rainy day.