Announcer: It’s time for Marc Lichtenfeld’s Oxford Club Radio, the hardest-hitting half hour about you and your money. And now here’s Marc Lichtenfeld.
Marc Lichtenfeld: Welcome to Marc Lichtenfeld’s Oxford Club Radio. I am Marc Lichtenfeld. Thanks for being with us. I have a great show for you today. Coming up in a little bit, we’ve got Lou Basenese, founder of Disruptive Tech Research and the editor of Agora Financial’s True Alpha. We’re going to be talking about top tech trends in 2017 and how you can make money from those trends, so that’s coming up in a little bit.
I’m also going to tell you about the worst trade I’ve ever made, so I will relive those glorious moments for your benefit and you can hopefully learn a lesson on what not to do and how not to trade a stock based on this horrific mistake I made many years ago. We’re also going to talk about a really interesting post that I saw that I think, if this person is correct, is really going to shift the psychology of America. I thought it was really fascinating and insightful and hit on something that a lot of people, myself included, have been sort of circling around but he articulated very well. So that’s all coming up in just a minute.
If you want to get in touch with me, go to www.OxfordClubRadio.com. Click on “Contact.” Shoot me an email. Do us a favor. Go to iTunes. Give us a positive review. Give us the five stars. That kind of thing really helps. You want to follow me on Twitter. Tweet at me @StocksNBoxing. I’ve been asking for suggestions for new money-themed songs for next year that we can put into the show. You know, we come back from the break and have various songs about money. A few of you have tweeted at me, but tweet at me some money-themed songs that you want to hear. Don’t tweet at me Money by Pink Floyd. I hate that song. It’s not going to happen. I’m telling you right now. I know it’s about money. It’s got the cash register ring. I’ve just always hated it. It’s not going to happen. So anything besides Money from Pink Floyd is up for consideration.
Alright, so I wanted to read a post that is making a lot of rounds around Wall Street and financial circles. This was a post that came out by Ray Dalio. He is the founder of Bridgewater, one of the largest hedge fund companies out there. And he posted this to LinkedIn. The title is “Reflections on the Trump Presidency One Month after the Election,” and he’s talking about a bunch of different aspects. But one thing that really caught my eye was the second paragraph of the post. He says, “Regarding economics, if you haven’t read Ayn Rand lately, I suggest that you do, as her books pretty well capture the mindset. This new administration hates weak, unproductive, socialist people and policies, and it admires strong, can-do profit makers. It wants to, and probably will, shift the environment from one that makes profit makers villains with limited power to one that makes them heroes with significant power.” And I thought that was really interesting. And then he goes on to talk a little bit about how we had that same shift in the 80s under President Reagan.
And I think what he’s getting at is really very much a cultural shift. If you remember, the 1970s was a decade of very poor economic performance. Of course, we had the recession and sky-high inflation under Jimmy Carter. And if you think about some of the movies and TV shows that were popular there. It was very much the workingman, the common person. Good Times was a popular show. Saturday Night Fever about a working-class kid in New York, in Brooklyn. There was a lot of that very blue-collar aesthetic to our culture. BJ and the Bear about a trucker. You know, trucking was really a popular theme, I guess, at one point. I remember I used to have a board game called Breaker 19 with the CBs. That was a whole thing. So it was really very much about the workingman.
Then you shift into the 1980s and what happened? We had Dallas and Dynasty and those John Hughes movies like Ferris Bueller, where you have these kids living in these mansions, and all these movies with kids, and John Cusack, and they all take place in these beautiful neighborhoods with gigantic houses. And it very much changed. I don’t want to say the 80s were about worshiping money. That might be a little too strong. But it was about getting ahead. Yuppies were big, and it was very much a cultural shift from this workingman to this money culture.
And I think what Ray Dalio is getting at is that’s going to happen again. In these past several years, we had the Great Recession and then the rise of Bernie Sanders, and the CEO was the villain, and profits were a villain at the expense of the working person. And I think what Ray Dalio is saying is that it’s going to shift to the point where it’s okay to make money. It’s okay to turn a profit. It’s okay to make investors money. And we’ll have to see how that works, because right now, the workingman is pretty pissed off. I mean, that’s why Donald Trump got elected. He’s expecting something good to happen, and it’s certainly possible that, if the economy gets stronger and if corporate profits are up, people will get jobs – better jobs and pay raises. So it is possible that a rising tide will lift all boats; that remains to be seen if that’s actually going to happen. But I think what Dalio is tapping into is people are ready for this shift of it’s okay to make money and people want to make money. So let’s take a look and see what happens on TV and in the movies, if we get this shift to wealth. And if we do, then I think that will reflect probably what’s happening in corporate America, and it’ll be interesting to keep an eye on. So I just wanted to point that out because I found it fascinating. And you can go to LinkedIn.com and do a search for Ray Dalio to read the whole column. It’s really quite good.
Alright. Our guest this week is Lou Basenese. He is the founder of Disruptive Tech Research and the editor of Agora Financial’s True Alpha, and he’s here today to talk about tech trends in 2017. Lou, Merry Christmas. I hope Santa was good to the Basenese family.
Lou Basenese: He’s always good, isn’t he? Come on. And especially when you get to be the guy that pays the bills, right?
Marc Lichtenfeld: Exactly. So speaking of paying the bills, how are we going to make money off of technology in 2017? What do you see as the big themes that are emerging?
Lou Basenese: Yes, I think it’s a great question. You know, as we come into the beginning of year, everyone starts wondering what’s going to be big next. Right now, making the headlines is 7-11 delivering Slurpees via drone. So if you never thought we were having progress in the world, Lord, we’ve found it. You don’t even have to leave your home; you can get a Slurpee dropped off at your front door. So, look, I think it’s a great headline. It’s a great news story, but I think it’s also a really important one, too. It drives home the fact that there’s a lot of hype in technology, and it’s easy to get caught up in. So I think before we talk about specific trends, we need to make that disclaimer: Don’t get carried away. There’s going to be a lot of news hype about drones and machine learning and chatbots and everything else you can think of in the next year. And you’ve got to make sure you’re looking for investments that are actually businesses – that are ramping up: getting ready to produce a lot of not just sales, but profits as well. Because that’s what’s going to make for the most fruitful investments.
Marc Lichtenfeld: So when you’re looking at a technology company, and assuming that it’s an emerging technology, is there a sweet spot you look for? Are you okay with a company that’s not making money yet? Or how about one that’s not even generating a ton of sales? Where do you stand on that?
Lou Basenese: Yeah, there’s two different places where you look to invest. There’s higher risk, and that’s looking for companies that are pre-revenue but right at that inflection point. You’ve got to have a company that has a technology that’s completely developed: It’s ready to go commercial. They’re just in the initial sales phase where they’re looking for early adopters. I would say they have to have patent protection. And then, more important than that, is there has to be some catalyst on the horizon. For instance, you know, you want to see that they’ve had active discussions with a pipeline of partners so that, at any given day, they could have a news announcement saying, “Hey, look, we have this great drone technology and we’re actually going to market with Amazon.” So, you know, those are more risky but there’s a lot more upside.
And then I’d say, after that – and I think this is more suitable for everyday investors – is finding companies that have sales, because that takes away the biggest risk. Does the technology work and does the market really think it’s valuable? Well, if the company’s getting sales and they’re increasing by a good clip, then that answers that key question. So looking for companies that still have under $350 million market caps and have sales that are ramping very aggressively – call it 35% or more a year, sometimes doubling year over year.
Marc Lichtenfeld: How about pitfalls? Are there certain things you look for or red flags that, when you see them, you say, “There’s no way I’m touching this company”?
Lou Basenese: [Laughter] Yeah. I think first and foremost is management. You’ve got to look at management’s track record in terms of emerging technologies. Are they really promotional? That’s always a red flag for me. Another more concrete thing is looking at their research and development spending. If they’re spending a lot of money on R&D, I want to see tangible results for that. So one of the things you can look for is actual patents: They’re putting money toward innovations and patent-protecting them. A red flag is when a company’s spending a boatload of money on R&D, but there’s no patents and no meaningful prototypes. That’s usually an indication that they’re just squandering shareholders’ money and not really getting very far with it.
Marc Lichtenfeld: Alright, so again, we’re going into 2017. You mentioned drones real briefly with 7-11. That’s something a lot of people are expecting. There’s been talk that Amazon is going to be doing a lot of deliveries with drones. People are also talking about robots doing all kinds of things. So is there one or two technologies you think will emerge and it’s what everybody will be talking about in 2017?
Lou Basenese: There’s two or three here. In 2016, there was tons of talk about driverless cars. Mobileye was a really big momentum play for people. I think that the hype has gotten ahead of itself there, and we need to focus more on what’s actually coming to market. I think that’s the connected car space. So the difference is simply that connected cars are just bringing the internet to all the components of the car to allow different functionality, whether that’s internet access or improved software updates that can happen over the air instead of going to the local dealer. So a company that we’re really bullish on in that space is Visteon (NYSE: VC). They basically make the dashboard displays that now have to figure out the best and most effective way to display all this new information. Samsung bought up one of their competitors recently, Harmon, for a multibillion dollar price. I think Visteon’s naturally a takeover target.
If we look outside of the driverless and connected car space, I think the internet of things has been talked about for years, but in 2017, you’re going to see a big distinction and that’s the industrial internet of things. So the consumer side has been overhyped, and it’s moving forward in fits and spasms. But the industrial internet of things – which is basically connecting manufacturing equipment and machines to the internet to optimize their performance and reduce downtime – is really taking off. We’re seeing companies like GE drive this. There are several companies in this space. There’s one microcap that we like. It’s a Canadian-based company called Memex. One of the things we look for, aside from sales, is a partnership with a major company: a major blue chip company. And Memex has a deal with Cisco, which provides the router and equipment to facilitate the connections. And then Memex has the software that allows the big companies like GE to analyze all the data that’s coming off the machine.
So connected cars, the industrial internet of things, and then robotics and automation. Amazon Go has plans for this grocery store, where you just walk in, grab what you want and go – no human interaction whatsoever. For things like that to become a reality, you need machine vision. So there’s an up-and-coming company called Cognex. It’s got a bigger market cap than some of the micro-cap names we talk about normally, but it’s got some mainstream mutual fund manager interest. They’re the hands-down leader in machine vision, so anything that needs to be verified or inspected and can’t be done with the human eye? These guys do it. They’ve been in business for decades doing it, so it’s not a new company that’s trying to prove itself. They’ve got great traction in a lot of end markets, and they’re now just starting to get mainstream attention for the products they sell.
Marc Lichtenfeld: Alright, we have about a minute left, so I definitely want to get to your thoughts on the market in general for 2017. Does the Trump rally continue? What are your thoughts for the broad market?
Lou Basenese: I think anyone that tries to make predictions related to politics and the market is just asking for trouble. I mean, there were so many people that were dead wrong about who’d win the election. The first year is always going to be figuring out what policies are going to come to pass, how much was just campaign bluster and what’s going to be political reality. So I think if Trump follows through on his pro-business initiatives, the markets are going to get a tailwind for certain in certain sectors. Redoing some of the healthcare laws will be a boon for insurers. I think technology is always going to be an up-and-coming space just because it pervades so many aspects of life right now. It’s not something that’s just limited to a small sector. But yeah, it’s to be determined with Trump. I think people are saying that on a personal level as well as an investment one.
Marc Lichtenfeld: We have to leave it there. We’re up against the clock. But thanks so much. Always great to have you with us. Happy New Year, and we’ll look forward to catching up with you in 2017.
Lou Basenese: Sounds good. Thanks again, Marc.
Marc Lichtenfeld: Alright, that’s Lou Basenese, founder of Disruptive Tech Research and the editor of True Alpha with Agora Financial.
So I promised you details on the worst trade I ever made. This was 1999, I believe, so right at the height of the dot-com boom. And keep in mind that I was working for a dot-com, and I was saying the emperor had no clothes. I really was. I was interviewing CEOs and asking them about revenue and cash flow, and they would look at me like I was crazy. This is an actual quote somebody said to me: “It’s a whole new paradigm; it’s all about eyeballs now.” So I knew the emperor had no clothes. That being said, I still got caught up in the hype and everybody making money off these ridiculous companies.
So there was a company that I was very familiar with called Quokka Sports. What they did is distribute online videos of extreme sports: things like rock climbing and surfing and kayaking – outdoor and extreme sports. Now keep in mind, this was at a time when nobody really had broadband. So video? You could watch it, but it wasn’t great. Now, it was before YouTube and before video was so ubiquitous, so video online was still a bit novel. But nobody had the bandwidth to really watch it that well.
Anyway, I knew the company very well, and then they signed a deal for the 2000 Olympics, where they were going to cover some of the sports that NBC wasn’t going to be covering – things like kayaking. So I bought 1,000 shares at $7. Now, at that time, that was a little bit more than I probably should have. It was too much for me at that point, but it was the height of the dot-com boom, I figured I knew how to trade and so it would work out. It would be fine. And as soon as the Olympics started – or shortly before the Olympics, when it started getting this press coverage about all the video they would be showing – the stock would take off.
Way before that happened, the stock took off. It took off almost immediately after I bought it. So it went from $7 to $9… $10… $15. And one day, I came home and said to my wife, “You know what? We made a bunch of money off this. I think I’m going to sell half of it and let the rest ride so we participate in the upside, but I’m going to take my risk off the table.” And my wife, who had never, ever been involved with our investing – she left it all up to me. Never voiced an opinion about any of this stuff – said, “I think we should just let it ride because, if it keeps going up, we could make some real money here. And you know, we’re saving for a house, and if this thing goes to $40, that’s a down payment.” And I said, “You’re right. But what if it doesn’t go to $40? What if it goes down?” But she was pretty insistent that we not sell the stock. I kept saying, “You know, I’d be able to sleep better at night if we sell half, take our risk capital off the table, and then we’re playing with the house’s money.” But she was insistent – to the point where she actually challenged my manhood.
Now, anybody who has met my wife knows that she’s very mellow. She’s a calm, rational person: the nicest, kindest person you’ll ever meet. So, for her to challenge my manhood about this? I mean, she was pretty opinionated. So of course, I had to meet that challenge and say, “Okay,” although I guess acquiescing to your wife isn’t quite living up to that challenge. But you get the point. I said, “Fine, we’ll let it ride.”
So that was pretty much the top. I think the day we talked about that was the top of the stock, and it came down a little bit. It went down to $12, then to $10. Alright. Big deal. I’m still up. If it gets back to $12, I’ll sell it. And then it went down to $9… $8… back to $7 at breakeven. I said, “If it gets back to $10, I’ll sell it.” Then it went down to $5. I said, “Alright, once it gets back to breakeven, I’ll sell it.” And you can imagine what happened next. It went to zero. It went under. The company does not exist. It was one of the early dot-coms to go under, and I rode it all the way down: never sold a share because, once it started falling, I froze – absolutely froze. Like I said, I kept saying, “Well, if it gets back to $7, I’ll sell it.” And then, once it was at $3, “If it gets back to $5, I’ll sell it.” And it just never did. It just kept falling.
So I lost seven grand, and I really could not afford to lose seven grand at that point. I mean, it didn’t make us homeless, but it was not a good thing. And my wife learned a lesson, basically to keep her nose out of this stuff unless she’s been studying it or knows the company or knows the investment. I mean, to this day, we do talk about our investments as far as asset allocation and long-term planning. She’s not sitting in the dark about that kind of stuff, but she doesn’t give me stock advice, as you can imagine.
So there was that part of it. And then there was the trading part for me, where I made two mistakes. If I’ve made a double, if I’ve made 100% on an investment, I’ll often take half of it off the table, especially with options, since they can be so volatile and that gain can vanish very quickly. So I will take half of it off the table very often with options and fairly frequently with stocks, too. And that way, I’m playing with the house’s money; there’s no risk to me. Now if I’m a long-term investor – if this is something I plan on holding for 10, 15 or 20 years. If it’s a dividend stock – that’s different. Then I’ll let it ride usually. But if this is a speculative play, yeah, I will take that off the table.
And then, also, I did not have a stop in place and I let my emotions get the best of me. So as the stock kept going down and down and down, I was basically bargaining with the trading gods. “Oh, just get me back to breakeven. Just get me back to $5, and I’ll take the small loss. Get me back to $3.” And it never happened, and I had no plan for getting out. So now, when I enter a position, I don’t enter a position unless I have an exit strategy. So whether it’s a stop, which is usually what it is, or whatever the strategy is, I know where I’m getting out. And I’m not going to let my emotions get the best of me, because they have before and it was disastrous. And that wasn’t the only time that my emotions got the best of me trading earlier in my investing career. It happens to everybody. It’s the tuition you pay for learning the stock market. It happens to everybody. I’ve never made a trader who that didn’t happen to. But learn from my mistakes. Have an exit plan when you get in, not when things start going bad. That’s not when you establish the exit strategy. You know where you’re getting out from the moment you get into the stock – usually with a stop. And if things do go really well, think about de-risking yourself a little bit. Put a little money in your pocket. It helps you sleep better at night and helps you hold on longer to some of those gains. So if a stock’s going up and up, and then all of a sudden it falls, if you only have half a position on it, you might be able to withstand some of that noise and let it go even higher.
So that’s my thoughts. I would love to hear your worst trade, so shoot me an email by going to www.OxfordClubRadio.com. Click on “Contact” or leave a comment under the episode. I would love to hear your worst trades. Give me all the juicy details. And if you want, we don’t have to read your name if you’re embarrassed. But I would love to share the knowledge, because your mistakes will help other people as well.
Alright, my thanks to Lou Basenese, Kevin Kocak, Curtis Daniels, Colleen Hill and all of you for listening. We’ll be back next week talking biotech with Brad Loncar. This is Oxford Club Radio. I’m Marc Lichtenfeld. See you next time.