Dave Canal's blog

Frank Thoughts: The Book of Misery

With deference to Stephen King and his horror novel Misery,” it seemed the only appropriate name for my scrapbook.  The “book” started 10 years ago when a famous hedge fund manager massively underperformed the S&P 500.  Then it happened again with a well-known mutual fund manager.  I sensed there was more to come.  Over two, three, five years, the list grew rapidly.  As time went by, active underperformance became a “gift” to passive investment firms.  One that kept on giving.

Frank Thoughts: The Next Retail Wave

When I was quite young, my father and I would go into Boston on Saturday afternoons to see my grandmother.  She lived in a brownstone in the south-end across from the Greek Cathedral.  As we settled in, she would give me a dollar and ask me to “go down to ‘Sam’s” and get a pound of hamburger for dinner.  Sam was the butcher at the end of the street.  Every time I walked in the store an overhead bell on the door would ring and I would become instantly mesmerized by all the sawdust on the floor and the smell of meat.

Frank Thoughts: The Internal Structure

Most of us think of the stock market as a monolithic entity.  I don’t.  I believe it has an internal structure of three categories each based on the size and history of the companies.   Or sometimes, it’s just the nature of the business.   Each segment has its own investment advocates.  

Frank Thoughts: The Law of Large Numbers

For all the presumed sophistication of Wall Street investment banking firms, I have yet to see a mention of a simple financial law.  The law states the faster a company grows, the harder it is to maintain the same percentage of growth.  We now have dozens of “unicorn” companies (billion dollar valuations) ready to go public.   Many are 10 billion or more in size. Some have been in existence for 10 years or more and most (80%) have not made money.   They’re following the Amazon model.    “Build it and they will come.” Gaining market share is not the same as gaining profitability.

Frank Thoughts: The Father of Technology

You might think I’m referring to Bill Gates, but the story goes back much further in time.  The father of 20th century technology, undoubtedly, was General Georges Doriot.   He was born in France in 1899.   Twenty-one years later, he came to the United States as a young immigrant to attend the Harvard Business School.   Four years later, he was the Assistant Dean of the school.  Yes, he was that bright. 

Frank Thoughts: The Hummingbird Project

If you created a computer system that could send signals close to the speed of light, would it make you a successful investor?   You might respond, “What does the speed of light have to do with investing?  That’s astrophysics.”  You would be correct; it has nothing to do with investing.   So why have astrophysicists made most of the money in the investment business for the past 10 years?  It’s not because of their investment acumen.  They’re using knowledge few others have … to legally steal money because of a tenuous legal distinction. 

Frank Thoughts: The Nifty 500

In a speech before the House of Commons, Winston Churchill paraphrased a phrase first said by Harvard professor George Santayana.   Churchill’s statement that, “Those who fail to learn from history are condemned to repeat it” became instantly famous because of its undeniable truth.  This is especially so in the investment business given its historical cyclical boom and bust periods.  Nonetheless people still like to think, “This time is different.”

Frank Thoughts: The Unwinding

The recent pullback in the stock market has caused much angst in the media.  The strength of the economy is questioned daily.  It’s reminiscent of the investment chatter after the October “crash” of 1987.   The “coming recession” that never happened.   In my opinion, both periods were impacted more by the structure of the market rather than the economy.   In 1987 it was the buildup, and subsequent unwinding, of portfolio insurance.   In 2018 it’s been the buildup of passive investing and the start of its unwinding.  Both were intended to reduce risk.   Neither did.

Frank Thoughts: The False Narrative

For the past decade, the overwhelming and universally accepted narrative in the investment world has been, “no one can beat the market due to the 1% management fee.”  Nothing could be further from the truth.  The real cause of active management underperformance has been the high, and historically unusual, degree of stock market correlation.  It has been unprecedented. 

Frank Thoughts: The Risk and Reward in Technology Investing

When I was young, I thought a business would last forever.  After all, J.C. Penny still exists and it’s a 114 years old.  But I was to learn, in 1973, why the saying, “Technology is a business that eats its young” was so true.  My understanding began with the initial public offering of Prime Computer.  It had a great business, but one that was to last for just 26 years.  That lifespan was very different than J.C. Penny’s.


It isn’t as important to buy as cheap as possible as it is to buy at the right time.

– Jesse Livermore