Thursday, January 8, 2009

MW vs. Syms: There are more things to heaven and earth

It’s funny how you can think yourself into a hole. It’s especially common in analysis, which is the breakdown of a whole into its component parts. I recently did this when I was playing the addictive stock market stimulation, TMF Caps, where thousands of players rate stocks that they predict will out- or under-perform the S&P 500. You’re then awarded points based on whether your favored stocks out-perform the S&P and your un-favored ones under-perform the S&P. The next few paragraphs delve into 2 picks I made on Caps with the dual purpose of talking about the companies and then portraying my analytic rut. Then we’ll pop out and look at the nature of the rut itself.

One of my first picks was in favor of The Men’s Wearhouse (MW). MW sells discounted formal men's clothing and rents out tuxedos from hundreds of stores across the country. Here were my thoughts at the time:

Shopping is predominantly a female experience. Men’s sections at department stores are a joke. They’re at best a third the size of women’s sections and they’re always overpriced. My hunch is most men only find themselves in these stores because they’re brought in by their female counterparts. Which is fine, because expensive department stores can sell plenty of $80 ties to absently wandering men who are waiting for their women. But if a young man suddenly needs a bunch of formalwear - say, a whole new job’s worth of clothing – then he’s not going to fumble around at an overpriced department store.

Across the range of brands, prices for men’s formalwear increase exponentially. It’s not like cars, where there are plenty of discount, standard, and luxury items. Rather, the distribution of prices is heavily skewed with large price-jumps as you get just a bit fancier. On the one hand, you might expect this for any luxury good: You won’t find many cheap gold watches, because gold is expensive by nature. But at the same time, for many men, formalwear is an occupational necessity rather than a luxury.

MW is the biggest national company offering discounted men’s clothing, and this niche has a promising future. Consider 2 inescapable trends: Our economy continually shifts away from physical labor, and the baby-boomers – who are the wealthiest and most skilled workers – are retiring. The shift away from physical labor means that more occupations require men to wear suits; while retiring baby-boomers means that the remaining population will be younger and less wealthy, which makes them more likely to seek clothing discounts.

Based on this argument, I went ahead and placed my vote of confidence for MW on Caps. A few weeks and about 10 stock picks later I came across Syms (SYMS) which appealed to me for the same reason: Cheap men’s clothing. Syms is a much smaller company (with 30-some stores), and I’d frequented a local one, where the customer service was stellar. Their stores are physically bigger than MW’s, kind of like a Burlington Coat Factory but with suits instead of coats. And the store by me constantly has many ethnic minorities (both shopping and working there), which is a good sign because America is becoming less white.

But it didn’t take long for me to realize that Syms is a dreadful stock option. The stores make hardly any money and management has remained mostly in-family, to the point of concern. More disturbing were rumors about the company’s desire to go private. They delisted from the market for 4 months due to extra costs from new burdensome accounting laws, and during that time they expressed the desire to go totally private, but shareholder pressure persuaded them to reenlist. Yet just a few months after their return to the NASDAQ, they started touting the value of their real estate, and shareholders suspected that this was a ploy from the management to raise the stock's value just enough to buy it back and go private for good. Again, shareholder pressure prevented this. In response Syms’ PE ratio jumped to over 100, and it's suspiciously remained at that level for months. So in sum you have an extremely overvalued retail company, which is underhandedly more in the real-estate sector, and which is run by family management who’ve had to keep the company public against their will…and all of this is during a recession. The situation was so ugly I was compelled to vote against them on Caps (e.g., that they would under-perform the S&P).

Over the next few weeks I researched different companies and watched my score fluctuate. MW rose a bit, making it look like a nice recession-proof stock, and Syms dipped a bit, convincing me they had it in for them. However the problem was that whenever MW rose, Syms seemed to rise as well, and whenever MW fell, Syms fell as well. So when they both rose, I made points on MW but lost points on Syms; and when they both fell, I made points on Syms, but lost on MW.

Then one morning it hit me like a ton of bricks. Seriously it was a classic doh-moment, you know like an a-ha moment but for a stupid mistake: Both stocks were fluctuating in relation to general market expectations for the discounted men's clothing sector. Or perhaps more generally for the discounted clothing sector. Or just the discount retail companies. Of course. When investors were bullish on clothing retail – or even just on the retail market as a whole – both stocks went up, and when they were bearish on retail, both went down. It was to my disadvantage that both MW and Syms - in spite their differences, which appeared magnified in my analysis - were indeed such similar companies.

I’m admittedly unsure about my reasons for liking MW and disliking Syms, but I’m fairly confident about why, in combination, this was a losing proposition. Maybe it would've been obvious for more seasoned investors, but of course: It’s not a zero-sum game!

MW and Syms, although competitors in one sense, are allies in the general fight for opulence. This harks back to one of the best reasons for capitalism: It’s not a question of who gets what slice of the pie, it’s a question of the growth of the whole pie. Clearly there were larger forces at work than these 2 companies.

Sometimes it’s so easy to get bogged down in details that you forget about these overarching forces. The myth that life is a zero-sum game is commonly seen in economics, especially in arguments to redistribute wealth and in equilibrium models, but it extends beyond economics as well.

One analogous situation, which bugs the hell out of me, is the practice of awarding grades relative to students' standings in relation to each other, such that a class’ grades are based on percentiles (i.e., with a certain number of students receiving, A’s, B’s, C’s, etc). This practice automatically assumes that there is a limited amount of knowledge to be delved out among a group of students, and one student's insight into a concept is another's failure to grasp it. It further frees the professor from any responsibility to teach the subject matter, because all he’s responsible for doing is rating students relative to each other. Theoretically, the whole class can come out of a semester without any new knowledge and everything would look fine and dandy. In this system learning of true knowledge is mistaken for competition between students.

A natural extension of this system could be seen in Enron’s old semi-annual performance-review committees, where they ranked all the employees and laid off the bottom 15%. After years of doing this, the long-term result wasn’t better business but nasty cut-throat employees who tried to make their peers look bad, and who ultimately were part of taking down the company.

Competition, likewise in the free-market, occurs not so much between similar companies as it does against general market forces. Each company is fighting for the most efficient use of its necessary resources. It's telling, for instance, that Ford, GM, and Chrysler all announced that they were in trouble at the same time. Clearly these companies were hit harder from general market forces than from each other or from foreign companies.

I see people make this mistake as well in my day-to-day personal life. Like that guy with a nasty type-A personality who's always vying to get ahead or look better than his peers while he proclaims that it’s a dog-eat-dog world. Or on the highway the person who swerves right by you only to soon be stuck in traffic 3 cars ahead.

Or did you ever undertake an endeavor where no matter how hard you tried to succeed you still failed? And it’s like you come out of such an experience, and you’re running the same tape over and over your mind, trying to break it apart into smaller pieces, when perhaps it was really something bigger, or something out of view completely.

It seems like these days it’s easy to get into that sort of analytic rut in all sorts of contexts. Invariably the human mind has always been between 2 relative extremes - it’s small in relation to some things, large in relation to others – but modern science is constantly allowing us to zoom further in and to gaze further out, while more and more the hidden enigma for some things in life falls not so much at the edge of either extreme but in the ever-widening gap between them.


Media (in order of appearance)

Photo: (1)Men's Wearhouse, 02/15/2008, by AnotherSunshine; (2) reflecting (upon) empty parking lot, 07/30/2007, by Lori Greig; (3) 曼哈頓最讚的折扣店, 02/25/2007, by Tommy Ian; (4) Hemming and Hawwing, 12/01/2007, by Andy I.; (5) Times Square, 06/14/2007, by barabeke; (6) Project365 - 250, 09/09/2007, by Mike Nielson; (7) N2008-06-19_06_cesta-do-prahy, 06/25/2008, by Ma a Ra.

Video: (1) Music video of the song "Do you Realize??" by The Flaming Lips from their 2002 album Yoshimi Battles the Pink Robots.

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