CNBCfix review: Gary Kaminsky aims to stick it to the big guys in Smarter Than the Street

          Posted: Friday, Nov. 19, 2010

It's not until CNBC pundit Gary Kaminsky is deep into Chapter 3 that he unleashes his most compelling argument for his investing book, Smarter Than the Street.

That argument is "Myth 9: Individual Investors Can't Beat the Pros."

In fact, Kaminsky notes how small investors have several undeniable advantages over money-management pros: Flexibility to buy and sell what they want, speed at acquiring and unwinding positions with imperceptible effect on share price, and having nobody in a firm's research wing to appease or answer to.

So it makes one wonder ... shouldn't the little guy usually win?

That is a question Kaminsky's book does not quite answer, though there are hints.

Presumably too many amateurs hang on to losers and unload winners. This point is made, but not hammered.

Another suggested reason is that amateurs tend to "average in" to losing positions; in other words, they buy more of their stocks that have fallen and not more of the ones that are rising.

Still another hint is that they "overdiversify" — that amateurs buy too many stocks for their portfolio, which dilutes the gains of a few blockbusters.

Maybe amateurs just don't pick enough winners. The goal of Smarter Than the Street is not avoiding strikeouts, but slugging home runs, triples, doubles, singles. This is a book unfazed by the catastrophe of 2008 or tech bubble of 2000-'02. It's about the joys and rewards of stock-picking, beating the pros and making money with your own hard work. Kaminsky notes in Chapter 11 that in the first 10 chapters, "we've focused on various ways of playing offense." And really, that's the way long investors should view the stock market; those wary of it as a tar pit of risk are better suited for other investments.

There's also another relentless goal of Kaminsky: To put the laziest of Wall Street money managers in their place, the type of people Kaminsky repeatedly refers to as the "closet indexers." These managers and their teams, in Kaminsky's view, are selling the public a highly compromised product. They base their credentials on relative performance, a concept Kaminsky loves to bash, rather than actual production of more money. They pitch securities recommended by the other wing of their firm. (In fairness, he will say on television and in the book that for every 8 or 9 money managers out of 10 who famously can't beat the indexes, there are 1 or 2 who can, and those are worth investing with if you know how to find them.)

Chapter 3 is devoted to the "myths," most of them related to the skills, incentives, reputation and marketing of institutional money managers. But these observations are repeated in almost every chapter. This helps explain why Kaminsky's strongest point, about individual investors able to beat the pros, is pushed so far back into the text. This book is just as much consumer ed as it is stock market glory. He wants small investors to know what they're really getting when they deal with a typical broker or fund. If you avoid their traps, you might not beat them, but at least you're not getting screwed.

Kaminsky opens with credentials and a premise. The credentials are a remarkably impressive reign managing money for his Neuberger Berman "Team K," which he writes "routinely outperformed the market ... and we achieved that in every kind of market, up, down, and sideways." The premise is far more debatable: that the next decade for stocks will be flat and range-bound and that he doesn't expect buy-and-hold to be a good strategy.

While there are plenty of indicators as well as a number of experts on Kaminsky's side, it should be noted it's in his interest to make this call. He disdains market indexing, which produced healthy returns in the 1980s and '90s requiring minimal effort and would presumably be a profitable, low-maintenance strategy for an upward-sloping market. He writes in the introduction, "I ... do something that no other investing book has attempted: I show individual investors, step by step, how to make money when markets go nowhere. No book in recent memory has attempted to do that."

Kaminsky in the introduction acknowledges that some will disagree with this flat-market thesis but says the latest research is on his side; "people of all ages are getting far more risk averse." He spends the first two chapters recapping the 2000s and offering evidence to support the flat-decade-ahead theory.

These first 2 chapters are filled with unimpeachable detail, straightforward analysis and statistics that strongly bolster Kaminsky's flat-market contention. At a minimum, they are an interesting summary of stock performance for 15-plus years.

But it feels like those chapters would be best left to the end, because Kaminsky's flat-market thesis is acceptable enough and not the most compelling element of the book, even though it is (based on the subtitle "Invest and Make Money in Any Market") the hook on which the book is based.

What readers will want to know is, How did Gary Kaminsky succeed? What did he do that so many other money managers don't?

Arriving at this answer requires some reading between the lines, and the likely conclusion is that Kaminsky simply outworked and outsmarted the Street.

Notably, the 3 stocks he praises the most from his "Team K" tenure, while well-known on Wall Street, are not household names in most of the U.S. They are Suncor Energy, American Tower and Expeditors International. Those companies all have $10 billion-plus market-caps now — after massive gains in the last 10-15 years (take a look at those charts under the "max" timeframe).

Yet despite that success, it's likely most people with a Schwab account couldn't tell you exactly what any of those companies do.

In the book, Kaminsky writes about visiting Suncor's headquarters in Fort McMurray, Canada, after owning the shares for a doubling from $30 to $60. This is a powerful, though sobering, example of the necessity of hard work for wannabe-successful investors who'd prefer to simply evaluate MCD and HD on their next visits or just heed a broker's advice. (Kaminsky also mentions being in Fort McMurray and running into an analyst from another firm who loved the stock but couldn't buy it because the market cap at that time was not high enough for the firm's criteria, which bolsters his point about the flexibility advantage that the small investor enjoys).

Most people, pro or amateur, who study financial statements will dwell on P/E ratio. The book doesn't downplay that statistic but rightfully implies it takes an analysis of more than that known-by-everyone data to be successful.

Kaminsky made a fabulous point on CNBC in autumn 2010 about research, specifically the controversial for-profit education sector, questioning if analysts had actually been taking courses at for-profit institutions to see how legitimate these companies are.

That's the type of research few retail investors are going to do, but it's very savvy, very obvious actually, and the type that made "Team K" highly successful.

Aside from wondering how he did it, critical readers will also want to know: Why isn't he still doing it? Kaminsky has actually landed an even better job since departing Neuberger Berman, proving to be very adept as a CNBC pundit/host who is increasingly in demand. In Chapter 2 he briefly describes his exit from Neuberger as the 2008 subprime mortgage meltdown hit, writing that he was never comfortable with Lehman Brothers' acquisition of Neuberger and implying 2008 represented an opportune time to make a break from the business: "I saw some of these events coming down the tracks like a freight train. Among concerns, I did not want my compensation to be paid in the form of restricted Lehman shares any longer. As a result, I negotiated a settlement with Neuberger Berman four months before Lehman ultimately declared bankruptcy and collapsed."

Critical reviewers will find virtually nothing objectionable about Kaminsky's advice. He doesn't recommend certain stocks or sectors in this book. He doesn't dabble in technical, chart- or volume-based trading (which are sometimes sold as gimmicks to the public but can be effective strategies if properly executed). He promotes a framework for constant research and an awareness of the important criteria that moves stocks. His thesis that markets will be range-bound for years could be wrong, but is not controversial. There are certainly no gimmicks or schemes here. Stocks experiencing positive changes should be bought. Identifying those changes is what's important. We're all just trying to hit a moving target, and Kaminsky adequately reminds readers there's always someone else on the other side of every trade.

The book helps readers find a place to start — one interesting suggestion is to look up the top names on business magazines' lists of "the best companies to work for," under the theory that many of those companies are growing their businesses organically and producing healthy free cash flow even though the criteria of the list is something different — but is more thorough at telling them what to do about companies they've already identified.

Kaminsky is a big proponent of identifying changes — he submits a list of "the 8 pillars" — that will affect a company's performance or multiple, for better or worse. A couple of them, such as changes in the capital structure or cultural changes, seem too subjective or vague, but many others are demonstrably important, including management, regulatory and currency changes.

The implication of this list is to be informed beyond the P/E ratio, to pay attention to company filings and personnel changes and regulatory developments. As is becoming a staple in many investment books, Kaminsky recommends a series of financial news Web sites to click to daily. There is a greater implication, pretty much saved until Chapter 9, that investors surely need to avoid the noise, the minutiae that people react to that has no sustainable impact on stocks. Much of that noise merely comes from other people evaluating the company in newsletters, on the Internet or on TV. Lesser-known stocks often spike briefly when discussed by experts on CNBC or other business channels. As Kaminsky likes to say on television, "You only know what they know." And it's fair to add, the whole world probably knows it too, so you've got zero advantage based on what this person said.

Written for readers who are presumably long-oriented, Kaminsky in a few passages explains the value of shorting. He offers an example from very early in his career, at J.R.O. Associates, when he was asked to evaluate an IPO presentation. He reluctantly told his bosses he "didn't understand what the company did" and was bummed that he couldn't recommend the shares, only to be upbraided by his boss that the firm is interested in short opportunities also and that his analysis didn't quite go far enough.

Shorting is one of the concepts where the book feels a little bit uncertain about the investing I.Q. of its audience. Early in Chapter 4 Kaminsky explains what "shorting" is. A "dividend" is defined in Chapter 7.

It's probably a fair assumption that readers who needed those definitions are not going to be ready to jump into 10-Ks to interpret examples of company change.

Somehow, these basic definitions do not feel condescending. Possibly because they are rare, and possibly because they are actually helpful. Amateurs, even highly talented ones, in any subject tend to have odd holes in their games. It's entirely possible that very smart, high-net-worth individuals who have done a great job investing their money might read Kaminsky's book and scoff at seeing a dividend defined, and yet not actually know the difference between a call and put option.

If anything, it could be argued that Kaminsky's book is not basic enough. Before buying stocks people should have a firm grasp as to what the stock market is, how Wharton (for example) teaches finance students to value stocks, and why the stock market is apparently a better option for building wealth than, say, the bond market.

Books about investing (or any subject) that get noticed tend to be ones with unique, attention-grabbing theories. Because his investing strategies are straightforward, conservative, long-term approaches to evaluating stocks, there is a risk with Kaminsky's book: That maybe it's such overwhelming common sense that there's not enough special about it.

That would be selling it short. Kaminsky peppers the strategies with spirited anecdotes. Written with Jeffrey Krames, the book is fast-moving and only occasionally gets bogged down with redundancies or unnecessary passages. This is a straightforward insider's explanation of the system with a sharp, entertaining critique (often negative) of his own industry. While Kaminsky also loads up on lists of myths and pillars of change and keys for doing due diligence, he probably doesn't go overtly far enough in celebrating something the book strongly implies: it's really a simple game. It takes time, effort, and a little ingenuity. But the information's out there. It surely didn't take a genius to discover AAPL in 2006, and those who did and merely hung on have made a small fortune by now. Think about it, work hard on it, but don't overthink it.

Kaminsky in most cases avoids blanket declarations. He says tax treatment and capital-gains holding periods should be a concern of your portfolio, but he readily says that tax consequences should not be a reason for buying or selling a stock. He does suggest the number of stocks that a small investor should ideally hold. (This page will not reveal that number but just note that it is smaller than many would think, and under 100.) Unfortunately, this leads to a logically dubious conclusion to Chapter 10 on the "fully invested" concept, essentially that having cash available gives investors flexibility for adding a great stock without having to sell (but if there is always cash available, then the real portfolio size is actually the account minus the cash).

The advice for what not to do tends to be more specific. Kaminsky says in Chapter 4 that " 'buy on dips' is one of the stupidest and most overused phrases on television." In Chapter 9, he says "averaging down is a loser's game," and in Chapter 10, he says buying stocks simply for the sake of being "fully invested" is one of the "dumbest" things investors can do.

A few things probably should've been axed by sharp editors. For example, Kaminsky is describing to readers in Chapter 4 how a stock trade never really ends; shares get sold and then sold again and endlessly passed along among investors with varying perceptions of value and risk. (This is another example of one of the book's elementary basics that is still an interesting description.) To explain this, he refers to his own early 2010 short of Lululemon, a high-beta stock that has essentially gone straight up (and a short that Kaminsky presumably covered long before the book came out) since February and likely isn't the best example of Kaminsky's market savvy.

In Chapter 6, there is a reference to the "liquidity crisis of 2008 and 2009," then a reference to "the years since then," while there's only been less than 1 as far as we know.

Smarter Than the Street is not a get-rich-quick guide. That may disappoint some. It's certainly one of the most realistic, critical and entertaining investment books on the market, and readers will be better off for that. There is a lot of intrinsic value here beyond its conservative P/E. You can get ahead, and you don't have to get screwed.

Smarter Than the Street, by Gary Kaminsky (with Jeffrey Krames) (2010)
Acknowledging: Jeffrey Krames, Susan Krakower, Navira Ali, Alex Bacu, Yana Berman, Tamara Calendar, Ralph De Feo, David Fecht, J.J. Gartland, Anthony Gerrits, Mary Ellen Herron, Randi Hyman, Gerry Kaminsky, Michael Kaminsky, Joe Lasser, Susan McKay, David Mizrachi, Jacqueline Rada, Avi Safei, Mindy Schwartzapfel, Kent Simons, David Wechsler, Richard Werman, Caroline Witte, Jason Ainsworth, Joe Amato, Brad Cetron, Meg Gattuso, Carolyn Golub, Charles Kantor, Ken Rende, Sevan Sakayan, Rick Szelc, George Walker, Randy Whitestone, Brian Gaffney, Jeff Lane, Bob Matza, Avi Mizrachi, Keith Wagner, Mark Hoffman, David Faber, Mary Duffy, Max Meyers, Andy Barsh, Maria Bartiromo, Josh Bieber, Nick Deogun, Jenny Dwork, Jason Farkas, Beth Goldman, Herb Greenberg, Dan Hoffman, Kate Kelly, Joe Kernen, Melissa Lee, Steve Liesman, John Melloy, Jeremy Pink, Matt Quayle, Carl Quintanilla, Becky Quick, Brian Steel, Joe Terranova, Samantha Wright, Brian Kelly, Shelly Bergman, Nils Brous, Mitch Brown, Liz Claman, Joe Cohen, Frank D'Ambrosio, Marge Demarrais, Donald Drapkin, Robert Feidelson, Jeff Greenfield, Marc Howard, Ron Insana, Rob Kapito, Steve Lipin, Nat Lipman, Paul Marsh, George Mattson, Jeff Moslow, Bob Olstein, John Oppenheimer, Scott Page, David Pelton, George Raffa, Mike Santoli, Russ Sarachek, Anthony Scaramucci, Ben Thompson, John Ziegler, Timmy Grazioso, Marni Pont, Seth Tobias

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