|“Chaos is an azure line that surrounds all the world.”|
From the Sefer Yetsirah|
While reading the Sefer Yetsirah by the light emanating from a painting of Lucas Cranach I was approached by an angel whose wings were covered with blinking eyes. As it hovered above the table where I laid down my book, the angel offered me an envelope. Carefully opening the letter I discovered inside a single sheet of fine papyrus embossed in the lower right-hand corner with a single symbol. Not immediately identifiable, the curious figure reminded me of the Monad of alchemist John Dee, as it had been described by the polymath Athanasius Kircher. The angel hovered above me, the eyes on its wings moving in every direction until I realized the papyrus sheet was an invitation.
I hastily gathered up some bread, beer and the philosopher’s stone placing them in a small package. After donning a hat decorated with five flowers, I followed the angel as it flew out of my library. As the angel finally identified itself as Semyaza I felt an indistinct unease, like that, encountered as one begins a long journey.
Moving into the darkness of night Semyaza led me through a series of gates guarded by: An ancient Oriental man wearing a sky-colored robe; a sphinx made of mercury; the sacred painter of the profane, Father Giotto; and ultimately we passed a virgin named “The Magdalene” who was carefully extinguishing devotional candles resting on a small alter covered with a red cloth.
Semyaza bade me farewell, leaving me before the entrance to a great courtyard. Here a group of angels, whose faces were dirty with soot, bound me tightly with rope and left me alone in the darkness, awaiting dawn. The morning light revealed a gallery on the west side of the courtyard. It slowly filled with 999 sacred falcons, all bred in the gardens of the Temple of Behkdet in Egypt. A priest wearing a gold mask shaped like an ibis declared loudly that the falcons had deemed me to be not entirely unworthy. As such, I would be allowed to witness the terrible spectacle of a Chymische Hockziet. With this proclamation, the priest turned to leave as the sky filled suddenly with shrieking birds flying in every direction and I was reminded of the eyes on Semyaza’s wings. Then the ropes that had held me fell away and again I was alone.
The angels with dirty faces returned and I was given a handsome pewter goblet filled with a powerful smelling, blood-like liquor and told to drink. Closing my eyes as I slowly sipped from the goblet, a feeling of heat spread throughout my body. A vision of a royal sepulcher in all its sublime glory appeared before me. I was led to a magnificent library like that of Borges imagination and felt bliss.
Upon leaving the library I found myself in a small, enclosed garden. Spying a large three-tiered fountain, I first drank and then bathed. Refreshed, I went down a dark, spiraling stairway furnished with rare tapestries and beautiful paintings, though I was saddened to realize none were by Nicholas Poussin. The stairs ended at a great hall whose walls and high ceilings appeared to be made of flames. In the center of this awful place rested the skull of Adom Kadmon with a serpent crawling in and out of the eye sockets. The name Lilith had been painted on the snake’s back in silver.
A door at the far end of the flaming hall opened to the shore of a raging ocean. A single ship being tossed about on the waves awaited me. Boarding the boat I found no one else there. My only recollection from the voyage was passing an island around which nine muses slept fitfully as they floated upon a green foam that remained undisturbed by the rough seas. Arriving at a place very cold and seemingly without color, I was carried off by four wingless angels, each with an aleph painted in gold on its forehead. They laid me on a blue cushion in the middle of a vast stone floor that had no walls. Sitting there in the numbing cold I gazed at the endless ocean until midnight, when I fell into a troubled sleep.
It must have been very early the next morning when priests, dressed as gods from Ancient Egypt, woke me up and led me across the vast pavement. Arriving at an undecorated stone building, I was asked for my small package of offerings as well as the five flowers still decorating my hat. In return, I was given Occam’s Razor, which I carried tentatively into the building. We entered a room, identified in small letters carved above the door as the Nuptial Hall, where I took a seat among mostly empty pews.
A battered wooden alter rested against the east wall and in front of it stood Enoch, whose hat was now decorated with my five flowers. He stared intently at the opposite wall and I turned to see his bride to be, the sweet Shekinah, making her way slowly toward the altar. The room was growing increasingly hot and I realized the sun was now shining brightly through long, thin windows and casting alternating stripes of light and shadow across the room. A priest who reminded me of the Pharaoh Akhenaten rose from the front pew and turning around with his back to the bride and bridegroom began speaking in a sonorous voice of love. As he spoke, cherubs descended carrying a massive crown, made of many precious stones, that was held above the heads of Enoch and his sweet Shekinah.
Suddenly a great cacophony erupted as the angels with dirty faces flew into the room carrying the blue cushion I had slept upon the previous evening. Then just as quickly, the room became completely silent as Semyaza entered with the pewter cup I had brought here the day before. Handing it first to Enoch, and then his sweet Shekinah, the couple took turns partaking of the evil red liquid before smashing the goblet against the stone wall. Semyaza picked up the broken pieces of the pewter cup and placed them on the blue cushion. When his sweet Shekinah kissed Enoch gently on the stomach I sensed the ceremony was over. As if leading a royal procession, Enoch and his bride left the Nuptial Hall at the head of the few attendees.
Only Semyaza and I were left in a now deserted room. The angel pointed at the floor beside the wooden altar where I noticed a large, beautiful painting by Max Beckmann of a woman lovingly embracing a mandolin as she lay asleep. Semyaza asked that I lay down on the painting where I proceeded to again fall into a troubled sleep. As the sweet Shekinah and her groom sailed away aboard the ship that had brought me to this place I dreamed of my long passed youth and wept softly.
Trumpets sounded as these visions faded from my memory and all that was dark became light.
|The analogy of keeping credit risk low coupled with the value of dividends as a potential income stream suggest it is possible to move the odds, as much as possible, in your favor with some thoughtful analysis…. or put another way, you want to create a steady income by only using financially solid stocks.|
When loaning money for a home or automobile purchase lenders rely heavily on a person’s credit score (also known as a FICO score). The idea being, that certain behaviors and traditional spending patterns can determine risk levels – the higher the score, the lower the risk of default. Traditionally scores were based on things like your history of timely (or not) payments on other debts; the length of your credit history and how much you currently owe; other types of credit you have (or had) including charge cards, loans, mortgages, and banking history.
Recently, in an effort to improve predictions of creditworthiness, some new information is being collected and aggregated. Gathered mostly from digital sources, it’s worth considering how you might stack-up against these new data points: uses both names in contact information forms; consistent travel patterns; limited contact with few entities; uses Uber; and, no regular contact with people who have bad credit. Now you really know why they want you to keep that location finder activated on your mobile device and check-in at Facebook regularly.
The reason I bring this up is due to shifts in the investing landscape which makes some traditional metrics used to measure value not so effective and suggests we might need to reconsider what criteria to use in scoring our investment prospects. Traditionally there have been three go-to metrics to make a quick, back of the napkin assessment of a potential equity investment. In other words, what’s the fastest way to determine the creditworthiness of a business you are thinking of owning part of? This, in turn, allows you to focus on learning more about only stocks that fit your investment profile.
A prime example is the price-to-book (P/B) ratio. Essentially the P/B value of a company is a measure of debt to assets – which when divided by the number of shares gives a ratio that might be a reasonable measure of financial soundness. An example of how this works is to look at a million-dollar piece of real estate owned by an individual.
When what looks good is bad.
If you own (hold the title) on a property valued at a million bucks, there are a couple of scenarios that can make this good or bad. If you hold a clear title (no mortgage or commercial loans) then you have an asset that reflects positively on your total net worth. On the other hand, if the property was financed by a loan of $1,00,000 and due to the vagaries of the real estate market it is now worth less than a million, you are at-risk – the property is a liability. This same concept was for a long time a significant marker for making investment decisions. The value of the tools a company uses to make its products can ensure the ability to survive hard times. If a factory and the land it sits on, are mostly paid for, this can make for an attractively low P/B. A business that owns a fleet of company vehicles has a liability, not an asset. The vehicles are depreciating items needing to be insured, maintained and ultimately replaced. The fleet can only be sold for less than the acquisition price and incurs an ongoing expense. Your loan to this company (through the purchase of stock) carries greater risk and would have a high P/B.
With outsourcing, a now standard practice, a company like Amazon (AMZN), that absolutely requires delivery vehicles, can operate just fine without actually owning any trucks. Uber (UBER) is now the biggest taxi service in the world, and they don’t own vehicles. The drivers who use Uber’s software to operate as individual contractors are the ones responsible for purchasing and bare all associated expenses. So, with hard-to-value assets like intellectual property being the driver of value, P/B might not provide much insight into a company’s cash value. And when a company gets in financial difficulties or goes bankrupt, fixed assets can often be the only way investors can recoup even a fraction of their investment. For our discussion, let’s compare AMZN and Apple (AAPL). P/B for AMZN is over 18, for AAPL 8 and generally speaking a good ratio is less than 4. This could imply that your investment in AMZN has a greater credit risk than AAPL, even though AAPL carries a P/S double the average.
Another classic metric is the price-to-earnings (P/E) ratio. Assuming that a company is profitable – that it makes more money than it spends – the P/E is a reasonable way to calculate how much owning part of that profit stream will cost. A low P/E implies that the cost to buy some of a business’s profits is reasonable and that at some point in the foreseeable future you will have paid off the cost of your investment and the profits can become income. This might be best understood by thinking about dividends. If you buy a share of stock for $20 and get an annual dividend of $1 (5%) at some point you will get back what you paid for the share (which is then an asset, like a loan-free piece of real estate) and the dividend becomes income (like receiving rent from that loan-free piece of real estate).
But when a company isn’t profitable either there is no P/E or the gap between what the company is spending versus what it is earning becomes untenable. The P/E for amazon is north of 70, where the average long-term ratio for the market as a whole is around 18. This implies that it could take up to 4x longer for your investment in AMZN to become profitable than one in AAPL whose P/E is 16. One excuse investors use to justify stocks with a nosebleed P/E is that they have “momentum.” The assumption is the company is growing so fast that eventually, they will make more money than they spend. One culprit of the dot-com crash at the start of the new millennium was this kind reasoning.
In a similar vein, the price-to-sales (P/S) ratio can help identify stocks whose price offer compelling value. Using a formula that includes the total value of a company (the market capitalization) and the number of shares outstanding divided by 12-months of sales or revenue the P/S is like the P/E since it is intended to quantify the value of individual shares. The biggest limitation of the P/S is it doesn’t take into account if a company is profitable, or will ever be profitable. Using our example one more time, both AMZN and AAPL have a P/S of 3.5, which is considered high, but not unreasonable.
Now a quick summary. AMZN has rarely been profitable and continues to spend more than it makes. According to our traditional metrics, its P/B suggests it is a risky investment; the P/E suggests the stock is expensive and doesn’t offer much value; but, the P/S implies the stock is not grossly overvalued. AAPL has long been profitable by making things like phones and computers for both business and retail use. The P/B reflects less credit risk than AMZN, but more than average. The P/E says this is a good time if you want to buy some stock, while P/S urges caution around equity purchases. All of which points to a merely average credit score for AMZN and a slightly better one for AAPL which also gets points for paying a dividend (making for a quicker payback on that initial purchase of stock). One last point here, now that Microsoft (MSFT) had got its groove back it scores between AMZN and AAPL using our criteria here.
What does all this mean to you?
The most widely held exchange-traded funds are SPY and VOO, both indexed to the S&P 500. Passive investors and their retirement accounts (401Ks and IRAs) should be anchored with a large position in one of these index funds. The primary reason being that in any given year most of the stock market gains will come from just a handful of stocks. By owning a fund composed of the 500 biggest and usually best companies in America you get to take advantage of the fact that stocks go up more often than they go down. Investors get the benefit of upside in the winningest equities and at the same time hedging the performance of struggling stocks while still earning a modest dividend.
Hopefully, you have accounts intended for both short-term needs and long-term goals. These should be structured to meet your investment objectives and would likely vary in composition. Specifically, outsized risk should play no part in a retirement account, especially as you get older and the opportunity to rebuild after a significant loss becomes more daunting. The analogy of keeping credit risk low coupled with the value of dividends as a potential income stream suggest it is possible to move the odds, as much as possible, in your favor with some thoughtful analysis.
As it currently stands, of all 500 companies in the S&P index funds, MSFT, AMZN, and APPL make up a full 10% of total shares. The benchmark index is structured so that stocks with the largest market capitalization have a heavier weighting. The alternative for an S&P index is an index fund that is equal-weighted – meaning regardless of company size, all components in the fund have an equal percentage of shares. An example is the Invesco S&P 500® Equal Weight ETF (RSP) where the total shares of each company are around .23%. So, the MSFT-AMZN-AAPL triad makes up less than 1% of this index. I own two of these funds in a ratio of 65% VOO to 35% RSP and regard the combo as a single holding.
Personally, I still find the idea of weighting as criteria for fund composition a bit uncomfortable, which explains why S&P index funds are only 25% of the equity holdings in my retirement accounts. If you subscribe at Morningstar, one of their more valuable tools is a program that aggregates all the holdings in a portfolio and compares them to the S&P index. By comparison, my IRA is composed of 14 individual investments, not all of which are index funds, with several holdings having been in the account for a couple of decades. The idea is to increase the dividend stream without using riskier equities. Or put another way, I want to create a steady income by only using financially solid stocks. According to Morningstar analysis, my IRA has both a lower P/E and P/B ratio and almost twice the yield of the S&P 500 index. In an account intended for the long-term, I aim to keep my portfolio credit score high.
|For the interested, or discerning, listener “Tenor Conclave” offers a chance to really hear the distinct sounds of John Coltrane, Zoot Sims, Hank Mobley, and Al Cohn.|
The output of the Rolling Stones rolled off my radar a couple of decades ago. Hearing some newer music recently it was not difficult to recognize the sound, even if it has evolved somewhat since I last tuned in (around the release of Steel Wheels in 1989). So why does it surprise people that the sound of John Coltrane is just as identifiable to a fan? For someone even mildly familiar with the music of the Rolling Stones and Beatles it is hard to believe the difference wouldn’t be immediately obvious. Ditto for Coltrane and Hank Mobley despite their playing the same instrument.
Reading the liner notes from a 1956 release from the Prestige All-Stars we find this to be a tired conversation. Ira Gitler opens his note with the following comment; ‘Last year a writer on jazz posed a question to me. It was, “How do you dig both Sonny Rollins and Zoot Sims?” and I answered, “Because I dig both Bird and Pres” (i.e., Charlie Parker and Lester Young).
The album referenced here is “Tenor Conclave” featuring John Coltrane, Zoot Sims, Hank Mobley and Al Cohn on tenor saxophones, Red Garland on piano, Paul Chambers on bass and Art Taylor on the drums. While Gitler focuses mostly on contrasting the two “schools” of sax represented – that of the hard bop (Parker) and the modernists (Young) – this still seems too broad of a distinction. Yet Gitler is correct when describes this album as not a “cutting session”, something that could have easily occurred, where players push each other to show-off. As he correctly states, “Each of the four showed admiration for the other three…”
For the interested, or discerning, listener “Tenor Conclave” offers a chance to really hear the distinct sounds of each tenor. The title cut, an original composition by Mobley, is a swinging affair, where personalities and sounds are distinct. Followed by the standard, Just You, Just Me, at the opening we hear the ensemble, then a bridge with only Mobley and Sims. After another 8-bars of the ensemble, in sequence, we hear the solos of Mobley, Sims, Coltrane, and Cohn. The second Mobley composition, Bob’s Boys, plays to the strengths of Sims and Cohn. In the last of four songs on the album, How Deep is the Ocean, we hear an achingly lyrical rendition of another jazz standard. Hard to believe even a novice couldn’t hear the difference between Coltrane and Cohn here, despite the lighter touch.
Of particular note is the fact this recording pre-dates the Blue Note albums for which Coltrane and Mobley are so well known. Here Gitler’s two schools are further subdivided to provide additional commentary about each player. For Coltrane, there are already hints of the “sheets of sound” to come. The Coltrane sound has also been described as very muscular, which sounds about right. In contrast, Mobley’s most successful album to my ears is “Soul Station” with “Workout” a very close second. Gitler uses the term “sinewy” to describe Mobley’s playing.
The players usually associated with the East Coast, Cohn and Sims, find a reflection of their work with jazzmen like Gerry Mulligan, Bob Brookmeyer, and Shelly Manne. Theirs is a more swinging sound influenced by the classic big bands of Woody Herman and Count Basie. In the most complimentary sense, Sims is more smooth than muscular with Cohn more fluid than sinewy. The contrast between bop and modernist is not as obvious here as is the stylistic preferences of each player. While this distinction between schools becomes more pronounced over time, here we listen to an ensemble working hard to achieve harmony and a blending of personalities through this music. It is not clear to me that the Prestige All-Stars would have sounded so cohesive if they had first recorded together in 1966.