Small Cap Stocks

L. Randall Wray from the Levy Institute, just wrote a great follow up on his previous healthcare article. You can find it here. I also highly encourage you to read his Levy Economics Institute paper on Health Insurance. It’s available here.

Basically, Wray reiterates what I’ve stated many times in the past: Paying for healthcare via insurance is completely absurd. In Wray’s words:

“Healthcare is not insurable. There is a fundamental conflict between provision of healthcare and insurance.”

This is because by virtue of the fact that we are human and are born into this world, we will all require healthcare. We will all get sick at some point or another. Some may suffer more than others, unfortunately, but we all need healthcare of one form or another. This is not some uncertain and improbable risk, which insurance is designed for. This is a certain and 100% probable risk. You can’t use insurance for that. And if you do, it’s bound to be ridiculously expensive and entirely ineffective.

What is needed, I imagine, is a new approach to paying for healthcare that eliminates most private and profit-seeking enterprises (at least as currently constituted). Incredibly, if the government would have taken the $3 trillion+ it printed to bail out Wall Street and pay Wall Street bonuses, and instead funneled that money into healthcare, we’d basically be off private health insurance already.

But, instead of creating the means for a healthier society which ultimately increases economic productivity, we’ve printed money to uphold imaginary and worthless securities that have no social benefits whatsoever. Explain to me again why democratic capitalism is the best economic system?

Want to call attention to another great post from L. Randall Wray on the new Health Care Insurance legislation that seems bound to further increase healthcare costs and impoverish the average American, without actually addressing the significant problems with our healthcare system. Skyrocketing healthcare costs is undoubtedly a main factor holding back US growth, as an ever increasing part of the income of US workers, goes to pay the “health insurance mafia”. But, at least the real mafia offers protection…

Anyway, here’s the link: http://neweconomicperspectives.blogspot.com/2010/03/this-is-not-way-to-do-healthcare-reform.html

A couple of interesting quotes:

“the proposed legislation is not “reform” and it will not reduce US health care costs…This legislation has nothing to do with improving health services for the currently underserved—it is all about increasing the insurance sector’s share of the economy.”

As someone who owns a small business and finds it impossible to locate affordable health insurance, I couldn’t agree more with this assertion. Current legislation will all but kill many small businesses whose premiums will skyrocket with no concomitant benefits.

“As we show in our paper, the US’s high health care costs (at 17% of GDP, double or triple the per capita costs in other similarly wealthy nations) …”

I actually never knew how high health costs had risen as percentage of GDP. The numbers are truly staggering and will not slow down any time soon.

“As many commentators have argued (especially those who advocate single-payer) part of the difference is due to the costs of operating a complex payment system that relies on private insurers—resulting in paperwork and overhead costs, plus high profits and executive compensation for insurance executives. This adds about 25% to our health care system costs. “

Unbelievable how outrageous compensation at healthcare insurance companies is not a prime focus of legislation, especially since the government will now be forking over boatloads of money insurance companies for doing absolutely nothing.

And my favorite quote, given my belief that health care insurance is not actually insurance at all, but simply a financing scheme with nearly zero benefits:

“Hence, extension of healthcare insurance represents yet another unwelcome intrusion of finance into every part of our economy and our lives. In other words, the “reforms” envisioned would simply complete the financialization of healthcare that is already sucking money and resources into the same black hole that swallowed residential real estate.”

As this earnings season wraps up, one important lesson I’ve been reminded of is that it is sheer folly to analyze earnings reports and attempt to predict the Market’s reaction to the numbers.

As always, the stock prices of companies whose earnings I thought were dismal this quarter, have moved up significantly since their reports. At the same time, the stock prices of those companies whose earnings I thought were excellent have gone nowhere and in some cases have dropped dramatically. Needless to say, I sold the stocks of the companies with the “bad” earnings reports and bought the companies with the “good” earnings reports. Luckily, for a handful of investments, like INAP, I didn’t even bother to carefully read the earnings reports or listen to the conference calls, and lo and behold the stocks have appreciated nicely.

So why does analysis fail to work in the stock market? This is a difficult question, but I suspect that some form of the “fallacy of composition” is the main culprit. Basically, the Market is made up of many individuals, so that what maybe rational for one person, is not necessarily rational for the Market as a whole. In general, I believe that individuals are rational when acting alone, but as a group, rational individuals must eventually act irrationally. There really is no way to prevent this. The outcome is simply that the Market is everywhere and always irrational.

So what to do? This of course is a tougher question.

However, I now think that a good method of moving away from individual rationality into the irrational mind of a group is to always challenge your initial reactions. So, if your first reaction is to sell, try to figure out if there are good reasons to buy. Are things that bad? And if you’re first reaction is to buy, try to figure out if there are good reasons to sell. Are things that good? This type of inverted thinking should help one move out of an individual perspective and into the Market’s “group” thinking.

It’s also vital to understand the emotional mechanics underlying your investment decision. Is it based on some sort of panic or fear? Is the decision about an individual investment being based on the performance of your entire portfolio?

Overall, since you are always fighting group irrationality when investing in the Market it should be clear that pretty much whatever you decide to do will be wrong, especially if you approach investments from a rational perspective.

The one rule that seems to have worked for me over the years, and would have worked incredibly well last year, is that if the balance sheet is strong and the business has potential in the next 3 to 5 years, you should never sell at a loss. The way to make money in the stock market is to Buy Losers and Sell Winners. It never ceases to amaze me how quickly things can turn for no apparent reason.