The Intelligent Investor

The book my colleagues bought me a month ago is one of those which trigger the perennial question “who am I”? It may seem at least weird that a book about managing your personal finances can make you ponder upon a part of your identity, but this particular one definitely does it.

So who am I as a market participant? On the market there are two major groups of participants: investors and speculators. Usually market commentators call everyone who trades in securities an investor, which is a palpable insult to all true investors. Those two terms must not be used interchangeably, as their meanings are worlds apart. In short, an investor is someone who seeks out profitable companies, analyses their financial statements, the way they are run, industries in which they operate, estimates their fundamental values and puts his money into companies he picks out for a long period of time. Hence, an investor feels and acts like a co-owner of a company. A speculator in turn seeks quick profit, doesn’t care much about fundamentals of companies he buys and sells, falls back on various sets of rules that, as he believes, will enable him to reap profits. His only goal is to earn as much as possible in a possibly short period of time. Money never sleeps…

So who am I? Both. Impossible? I bought some stocks a few months ago and still hold them, but I also trade in stocks on a daily basis. I have to plead for some time now I have been faring better as an investor than as a speculator. Whenever buying companies for a long time I sought out those markedly undervalued and settled on middle-term investments in them. The strategy proved right and bore robust fruits. Most of my profits actually come from proper investments. How about speculation then? Here I have to confess I made an error almost everyone makes just before starting to run through money on a stock exchange. My over-confidence led me astray. I thought nothing bad would happen to me and eventually I sank around 1,000 PLN in risky, volatile stocks. It was still wiser than lending it to the ex-classmate, but has taught me a lesson of humility, a very precious one.

Speculation means risk – the odds to reap a quick profit are lower than to cover a position with a loss. Why is it more probable to incur a loss even if we assume stock prices follow a random walk? The answer lies in transaction costs. At my brokerage firm fee for a transaction is 0.39% of its amount. Hence, to let me break even, a price of a security has to go up by over 0.78%, if I buy a stock for 100.00 PLN and sell it for 100.50 PLN I lose. I even dread to tot up how much I have spent this year on brokerage fees. The sum is unfolded when the tax report (necessary to fill in the tax return on which traders report their capital gains on security trading) from my brokerage firm is delivered to me.

I think my colleagues had discerned all perils and traps of speculation and gave me that book to dissuade me from trading strategies which sooner or later would do me out of money.

Has reading the book changed my investment “mindset”? It was a kind of eye-opener, but I remain critical about some theses set there.

Firstly, I began to look at myself as at a co-owner of companies I invest in (or even just trade in). Those are not just securities which I buy to sell later at a higher price. I own a minuscule part of a company so I should have a stake in it.

Secondly, it changed my perception of investment horizon. As a young person I still find it hard to imagine that I could freeze money for thirty years in stocks. Alright, it might not be the best choice to buy stocks and sell them after a few days, but my plans have never reached beyond five years…

I remain wary of long-term investments. OK, I may stay on the market (provided my portfolio is made up mostly of blue-chips) during the whole bull market, but I feel it is wiser to sell stocks when the next bear market is imminent. It is not a stupid strategy, because everyone buys then and pays over the odds for stocks. Benjamin Graham has a recipe for bear and bull markets – you should always buy stocks for the same amount of money every month. If market prices are high, you buy fewer stocks, if they are low, you buy more and in the long run you will rake in profits. Surely an ideal recipe would be to buy in the dead of bear market, but who can grasp the moment when it cannot be worse?

I see two major drawbacks of the book. It was first released in 1949, then had several updates with the last one dated 1970. The Polish edition (unfortunately they would have to spend more and take some extra effort to get the paperback in English) includes commentaries made in 2003, after the burst of dot-com bubble which triggered the worst (until then) bear market in post-war history of NYSE. But… it has not been updated in the ongoing financial crisis in which the bear market wiped out profits from the whole previous bull market. From mid-2007 to March 2009 the peak-to-trough decline of S&P 500 was 57%. On Warsaw Stock Exchange indices fell by 67%. Was there any investor not put to a very tough test? The bear market of 2007 – 2009 was unprecedented in its scale, some economists predict an even more severe meltdown around 2015. In the light of the recent events, the book seems a bit outdated, even despite the fact its author rode out the Great Depression and came burnt and bruised, but stronger out of it.

The second downside is that it is relevant to developed American capital market. Warsaw Stock Exchange is not yet twenty years old, Poland remains and will remain for some time an emerging market, it is not possible to find companies listed on WSE that meet all investment criteria set out by Mr Graham. Polish stock market is totally different from the American one, so it ought to be handled in a different way, although many principles outlined in the book will always apply.

The book condemns speculation, but doesn’t get with the times. Today speculation is far is easier. When everyone has access to online brokerage accounts and transaction fees are much lower (in Graham’s times they stood at 4%, today they are below 0.5%), cost-effectiveness of such actions is higher, but it is hard to determine whether the risk has also gone down.

Finally, the author advises the readers to keep away from short-selling. This makes another difference between investors and speculators. Only the latter indulge in and profit from “betting against the stocks”, but I do not denounce it. Short selling after all only improves market efficiency because it allows market participants to bring the market value of a security down towards its fundamental value. Of course going short entails a far greater risk than taking only long positions, but hang on. The risk is what stock market is also about!

Who couldn’t care less...

Apologies for not posting last weekend. The profound reason for that negligence was coming down with some undiagnosed illness. It came to me as a surprise. The last time I had been ill in March 2001 and from then on I managed to forget how to feels to have fever or sore throat. Luckily, I’ve almost recuperated (still suffering from some irksome irritation in the throat), so it’s time to catch up…

Prior to coming down with no one knows what, I finally saw the (in)famous public debt meter installed in the very hub of Warsaw. I took the photo to the right on 13 October, so the outstanding debt of the Polish state has risen within ten days by probably some few hundred million PLN. “It’s not the matter how much you owe, the point is how much you earn”, some economist argue. Indeed if you earn one million PLN a year and have to repay a loan of 100,000 PLN you are better off than an unemployed couple with five children who can’t make ends meet and have 1,000 PLN to repay. When it comes to a state an indicator of relative indebtness is debt-to-GDP ratio. In Poland it runs at around 54%. Is it a lot? Japan’s debt has almost reached 200% of its GDP, the country’s economy is stagnating, but nothing heralds an imminent collapse of Japanese public finances. Greek debt-to-GDP ration exceeds 110% and in May 2010 Greece faced serious problems rolling over it. At the same time the same ratio in Italy was five percentage points higher, but financial markets perceived default of Greece as much more probable than Italy’s. In United States public debt accounts for around 80% of its gross domestic product and US bonds are still rated AAA. German public debt has reached record-high levels, but yields on German bonds are the lowest in the history (what makes borrowing very cheap for German taxpayers). Is there any logic in it?

So is 54% a lot? Much depends not only on how much revenues the state collects, but also on how much it spends structure the spending. In Poland rigid government expenses determine the growth of public debt.

Is 54% a reason to worry? Thousands of people pass the display with the meter by every day and they don’t care. Who’s going to pay it off? They? Their children? The state? If the state then who? Who is the state? The prime minister Tusk? The finance minister Rostowski? Do they realise majority of them are Polish state’s creditors? Most of them obligatorily put aside money in pension funds, which are obliged to hold at least 60% of their portfolio in Polish gilts. Some of them put their savings into bond funds (which hold mostly government bonds), some buy government bonds directly. Have they ever thought Polish state could one day go default? Do they realise interest they earn is nothing else but taxes paid by their relatives, friends, neighbours and by… themselves?

Does the government care about the meter? They say in comparison to other, wealthier states, our relative indebtness is negligible and there is no reason to worry. If the European Commission gives consent for not counting government bonds bought by pension funds into public debt, our debt-to-GDP ratio will plunge by around ten percentage points. I dread to see the complacency of minister Rostowski’s face when this creative-accounting decision is passed.

Does the opposition care about the meter? No, they have other stuff to gripe about. Besides, the thoughtless economic policy PiS-led government pursued when they were in power only exacerbated out debt problem. When the economy was thriving, instead of amassing a budget surplus, not only did they fail to reduce the public debt, but they cut revenues and raised spending. Thanks to that pro-cyclical move we are where we are and we wasted the chance to carry through some unpopular reforms when their negative effects could have been mitigated. Minister Rostowski was right to say someone from PiS should apologise to Poles for what their misconduct.

And ordinary people don’t care even if they see the “debt per capita”. Every Pole, including infants, disabled, pupils, senile old men owes 19,267 PLN. Whom do they owe? Partly themselves (individual bondholders), partly banks and investment funds from Poland and abroad. What if there was an initiative to crack down on the problem, chip in and pay it all off? I would join it. I would fork out 19,267 PLN of my savings if it could only help solve the problem. But let’s face it, the idea is completely unfeasible. Many Poles don’t even have so much money put aside, the stats include millions of people who don’t earn any money because they can’t. Most people wouldn’t agree to chip in and pay off our debts. Debts can’t be paid right away because bond holders wouldn’t agree to be paid off before bonds mature. Money would have to be collected and invested somehow, the whole process of paying off would last decades. And finally this one-off move wouldn’t solve structural problems, the debt spiral would just start over, after a few years with no incentives to cut spending the problem would relapse.

I wonder how financial markets would react to the decision of Polish government not to refinance its debt. In practice it wouldn’t be a decision not to issue new bonds, but the bonds would be issued on terms set by the government. It would be them who would beg us for issuing bonds, not us begging them to finance our debt. Interesting!

This burning issue could be addressed by some academics from my school, but I don’t believe it will ever happen. Students are believed to be have in innate tendency to bunk off, but from what I’ve noticed that affliction is rubbing off on lecturers. The fact that students are lazy is commonly known, but the fact scholars are lazy and don’t even bother to pretend they aren’t becomes embarrassing. I observe how laziness and ignorance are becoming a virtue. This is how the Polish higher education system is going downhill. Students want to put as little effort as possible and lecturers simply play along with them, because they find it convenient. Soon no classes will be held, students won’t have to attend them, lecturers will be paid anyway, in the exam period easy exams on which everyone cheats will be held. Happy students will get their diplomas, a bunch of wankers will get paid and thus will also be happy, nobody will get tired and that’s the point!

Within last two weeks I found out that:
1. If a lecture starts ten minutes later, it is a sufficient reason to finish it ten minutes earlier and have a fifteen minutes long break. Ninety minutes shrink to sixty five. And everyone is happy.
2. The blue chip index of Paris Stock Exchange is CACK 40. And Mr Lecturer thought it very clever of him to hit students with such an English-language joke.
3. And last but not least during the workshop I found out I even can’t lie so I don’t deserve to be called a student. („pan oszukiwać nie umie, co z pana za student?”)

I’ve felt like a sucker many times in life, given that I’m generally straightforward this feeling will be haunting me, but this time it wasn’t just an insult to me (I couldn’t be even assertive enough to respond to it without striking back), but it bore testimony to what set of values is instilled in students. Appalling. And, to make it worse, no one will stand up to it!

Alright, the school is bringing me down, but I’ve got just three months left there. And what after I graduate? I should look out for a job…

It’s not an easy task, some people have more luck than others. For instance, this year’s graduate, daughter of current finance minister, aged 23, was fixed up with a cushy job in Polish Foreign Ministry. According to the Ministry’s spokesman, previous translators did their job poorly and minister Sikorski was dissatisfied with them (here I do believe it, after seeing korpus dyplomatyczny translated as “diplomatic corpse” and dziękujemy za gościnność as “we thank for your hostility” I know anything’s possible) and decided to fire them and take on his fellow minister’s daughter. Since then, all minister’s speeches and official writings have been edited by Ms Rostowska who ensures they are all written in impeccable English.

Ms Rostowska is not well-known public figure, so journalist paid by hostile media had to go an extra mile to find any photo of her. The only one they procured was her profile picture from facebook (right) which proves her impeccable credentials, high qualifications and fondness for modern art. This photo disappeared from all main news sites after Ms Rostowska filed several request to remove it and now it can be found on some niche sites only. For no apparent reason the news item also has been removed from most main sites, but what has once been put into Internet will remain there forever and info about Ms Rostowska career circulates around the Net.

I screwed it all up and can’t boast about no prior experience as Mr Rostowska (if she hadn’t worked during her studies, what they hell do they do in England?), but if it happens that I have to look for a job next year, I’ll have to set a new photo as a profile picture on facebook. In the foreground: me, wielding a bottle of plonk, in the background, a board saying “I feel like shagging a young piece of arse” (mam ochotę przelecieć jakąś młodą dupę). Will it boost my chances on labour market? If a recruiter from the company I worked for this summer had found my blog (I try to keep it rather anonymous, but I didn’t do so at the beginning), would it make a problem to find my profile on facebook?

Yes, I admit, I am nasty and malicious, but that’s the way of coping with absurdities.

Next week I’ll post a book review – will be nicer!

Far in the background

I promised not to write about politics, didn’t I? But surely that pledge concerned only current issues, including the most topical – tomorrow’s pilgrimage to Smolensk. Besides, another blogger did his bit in Polish (and happened to insult tens of mourners), but his view doesn’t overlap mine at all. Yesterday “Wyborcza” revealed some journalists’ phone billings had been collected by secret services when PiS had been in power. The article and comments (those about wiretapping, which had not been mentioned) referring to it reminded me of two years when Poland was ruled by PiS, but lives went on, days passed by, all of us had our ups and downs. I can’t deny 2006 was remembered by Poles as a good one, the only question is who should take credit for it.

In the autumn of 2005 I couldn’t vote in any of three elections held in September and October, as a result of which Prawo i Sprawiedliwość caught hold of power in Poland and Lech Kaczyński was elected president. At that time I was more worried about how I would perform on matura and decided to put in for an admission to SGH. Politics was a hot topic in our talks during the last year of my high-school education, but we didn’t deplore about the aftermath of low turnout in the past elections, but gibed at midget-president, moherowe berety, and remotely-controlled prime minister.

On 7 January 2006 I had a studniówka. Around the last dance of one of deputies of Samoobrona was detained just two hundred metres from our ballroom on charges of drink-driving. Politics passed by.

In late January 2006 I began cramming up for matura, soon three wise men saved the country from instability, signing the pact was filmed by the only righteous TV station.

On 5 May 2006 I took my matura in English. I returned home in the late afternoon to find out about a new ruling coalition set up with a guy who hadn’t pass any matura exam and with a national-catholic chap who had been appointed minister of education. Imagine how happy I was to have finished school just a week before Mr Giertych took charge of ministry of education.

On 14 July 2006 I got in to SGH. Jarosław Kaczyński was sworn in as a prime minister on the same day. The former was more meaningful – after all I’m still a student of SGH and Kaczyński had to step down as a prime minister after over a year.

26 September 2006 was the second day of my studies and the day the tape scandal came to the light. Four days earlier the guy without a high-school degree had been ousted from the government just to be reappointed a deputy prime minister three weeks later.

On 11 January 2007 I was bracing myself for the first exam period, on the same day a graduate of one American business school took over as a governor of Polish central bank.

In July 2007 my cousin tied the knot. Around that time another scandal broke out and triggered an avalanche that led to an ultimate collapse of so-called Czwarta RP.

In August 2007 I got my first (and lousy) job. In the same month the ruling coalition eventually fell apart, soon the parliament disbanded itself and ahead-of-schedule election was called.

The election was held on 21 October 2007. The weather was the same as today – after a morning frost the glorious sunshine heated the air up. It seemed beautiful weather gave off the heartfelt joy of Poles who couldn’t miss the opportunity to put the rule of PiS to the end. And then Donald took over as prime minister and hopes for big reforms were dashed, but the life, with all its ups and downs went on…

Why have I drawn this peculiar timeline of Czwarta RP? It occurred to me why so many people don’t take trouble to go the polls. Their lives, choices, daily routines, earnings, don’t depend on what’s going on in big politics. Personal happiness doesn’t hang on the ruling coalition, health has no connection with who the president or prime minister is, generally the links between ordinary life and the world of politics are rather invisible. Why should we care then? Our interest should be focused on what really affects our private lives and politicians hardly ever have any influence on it. Years when PiS was in power could be extraordinarily good for me, years when Platforma has been ruling could be extraordinarily bad for me, yet it’s not a reason to associate personal ups and down with politics. But when it comes to economy some less-educated Poles discern when PiS was in power the economy was booming, after PO took over, the pace of GDP growth slowed down, unemployment rate picked up and stock prices declined. If so, does it mean economic policies pursued by PiS were better than those run by PO? How many people think so?

Internship’s over, back as a student

Actually there was no other solution. I knew there was no vacancy at my Department, so it didn’t matter they wanted to take me on, but they couldn’t. I knew I had to go back to school to take all remaining courses, pass all due exams, write my MA thesis and finish off my studies. I fully realised combining studying and working would be a task I might not be up to. I knew the day of parting with my colleagues would be dejecting, even the weather let me down – gloom and chill have been overwhelming for the past few days and just exacerbated my mood. Right – Thursday, on my way to work, Heaven only knows if for the last time. Will I return there? If so, when?

I bought some sweets for my colleagues (right) to brighten up the gloomy day. I spent it toing and froing between my office and main Warsaw head office located around a mile away from Złote Tarasy (try going there by car, the odometer shows you’ve covered eight kilometres and the journey lasts longer than on foot), trying to obtain all confirmations for my clearance slip (obiegówka) and predictably I haven’t managed to bring it off. Therefore before I return it to the HR Department I still have an entry card to my office and I’ll surely have to visit my colleagues here and there, the time for last farewells is still ahead!

My colleagues probably appreciated my efforts and commitment because they chipped in and bought me a book (right), “The Intelligent Investor” by Benjamin Graham. My supervisor even almost leant over backwards to come by a signature of the acting CEO of my bank under the dedication note. Maybe reading the book will finally convince me to shift from short-term, profit-chasing speculations towards long-term, well-thought-out investments. For sure I should give it a review on PES in a while.

On Monday I have my first classes at school. During three months of long vacation I wrote two subchapters of my MA thesis. Now, despite general, overwhelming numbness I’ll have to get round to writing in earnest, no leniency for myself. Plus yesterday I found out all one of my courses I have to get credit in has disappeared without a trace. Another stumbling block in my education process and another nuisance involving legwork and catching through the red tape. Back to school means also back to greyness, but next year when I graduate something will be over forever, the period, which lots of people call “the most beautiful in man’s life” will be over and so what then? Everything indicates I’ll dive smoothly into the corporate world. Hey, I begin to understand why some of my peers decide to take second studies only to feel younger? Do they do that to have those two diplomas and better chances on the labour market or is it a desperate attempt to extend the carefree years, put back the moment they become adult? I understand but I still steer clear of taking their path.

It has become an unquestionable fact – I have been going through a serious crisis. First symptoms were noticeable back in August, now it appears to be full-blown. Actually I don’t even try to conceal it, but everyone shrugs it off or stares at me with disbelief. Actually from the way I behave (that sense of humour, that self-confidence, etc.) no one can infer I’m afflicted with anything that resembles a crisis. Believe it or not, I’m at the crossroads – either I’ll pick up the pieces and get my act together or I’ll have to rename the blog into “PES without my neighbour’s rottweiler” or something like this. And I don’t know if anyone remembers, but in February 2009 when I became a blogger, I set a rule “nothing personal” for myself. When did I break it for the first time? Has anyone noticed the “unquestionable fact” from the first sentence of this paragraph is called into question by virtually everyone, except me? Next time instead of “you sound more like Pinolona every day”, I’ll find “you sound more like Kaczynski every day” in my comment box.

Observant followers of the Polish-English blogosphere have probably noticed we’ve been in decline for some time now. I suspended my blog in the late-spring exam period, from the beginning of July I set myself a rigid “one post per weekend” rule and I abided by it. In the academic year I’ll be keeping it up. My apologies, I’m too short of time and too busy to take care of my child more frequently. The same problem has affected other blogs – Travels without my spaniel is rarely updated, Scatts is bloody busy, but accepted a “sluggish blogger award”, Polandian has lost its charm – Jamie was moving and didn’t have access to Internet, Scatts and I were too busy to have time and energy to write. Will someone take the place of us?

Sink or swim! Time to get my act together!