There is some debate as to whether this is a double-dip or a triple-dip recession; that mini-recession in 2012 was questionable.  But there is no escaping the broader point here.  France has a serious growth problem, and so does most of the rest of Europe.

As a block, the Eurozone’s economy has been shrinking for six consecutive quarters, and the unemployment rate has crept up to 12.1%.  Ever the country to outdo its neighbors, Italy has seen its economy shrink for seven quarters in a row.  Even the German economy—the engine that is supposed to be driving the rest of the continent—is showing weakness, growing at a pitiful 0.1%.

Years of policy paralysis and a broken banking system have taken their toll. The European economy has official ground to a halt.

The upside?   Well, to start, French President Francois Hollande has promised an “offensive” to bring “more growth and less austerity.”

Wow, that’s brilliant.  Why didn’t anyone think of that before?  Clearly, all Europe needs to get out of its on-again / off-again, five-year recession was for the President of France to go on an offensive. (Please feel free to insert the joke of your choice about French military prowess in the last two world wars, Vietnam and Algeria here.)

Ok, now the real upside.  Mr. Hollande’s impotent pronouncements about “offensives” aside, serious pressure is mounting on France to reform its labor markets and relax some of the bureaucracy that makes doing business in France so miserably difficult.  Being a man of the left, Hollande has a better chance of actually ramming the reforms through in the sense that only an American foreign policy right-winger like Richard Nixon could normalize relations with Red China.  The French state is so resistant to change, that if it is going to happen it has to led by “one of their own.”

Is Hollande up to the task?  We’ll see. But he is at least starting to say the right things, such as indicating that French workers would have to work longer in order to qualify for their pensions.   Let’s hope he’s serious. The world economy needs a strong Europe, and Europe needs a strong France.

The broader issue of Europe’s banking system being broken also has some promising developments.  In the “bad news is good news” world of central bank policy, the European Central Bank responded to the bad economic numbers by promising to keep its loose monetary policy in place for “quite a long time.”

As John Maynard Keynes pointed out decades ago, stimulative monetary policy in the absence of real aggregate demand is akin to “pushing on a string.”  That is basically where we are today.  Credit is being made available, but it’s not making its way into the real economy or having much of an effect.

Part of this is due to lack of demand, but certainly not all.  Small and medium-sized companies in Spain and Italy—the companies most needed to hire new employees and get the economy moving again—are being starved of capital because the funds that the ECB are making available are not flowing through the local banking systems and into their treasuries.

Desperate times call for desperate measures, and that is exactly what ECB President Mario Draghi has promised to deliver. Draghi has publically suggested lowering the deposit rate than the ECB pays on bank deposits to below zero, meaning that the ECB would effectively be taxing Europe’s banks for not lending.

Will it spur the banks to lend to one another…and to the corporate borrowers that need the funds the most? We shall see.  But the ECB’s willingness to go to extreme means to shock the system out of stasis is a major positive.

And finally, we come to Germany.  Germany’s low growth rate is disturbing, but all of the news on that front isn’t bad.  The low overall growth was affected by low levels of investments and masked a strong performance by German consumers, who have been criticized throughout the crisis for being too frugal.

The situation in Europe looks bad, but I continue to believe that things are moving in the right direction there, even if it is slowly and in fits and starts.  And in the meantime, I continue to be bullish on European equities.  European equities tend to have better exposure to emerging markets than their American counterparts and particularly to the emerging markets I find most promising, such as Africa.

European equities are also attractively priced at the moment.  The iShares MSCI France ETF ($EWQ) trades for just 12 times earnings and is dominated by some real gems, including fashion powerhouse LVMH Moet Hennessey Louis Vuitton ($LVMUY), food products company Danone ($DANOY) and international oil major Total ($TOT), among others.

If you believe, as I do, that Europe will muddle through this crisis intact, then keeping an allocation to European shares makes sense at current prices.  I expect most major European indices to outperform their first-world rivals in North American and Japan over the next five years.

Sizemore Capital is long EWQ and LVMUY.

SUBSCRIBE to Sizemore Insights via e-mail today.

On the surface, this makes all the sense in the world.  Unlike fixed income investments, dividend-paying stocks tend to enjoy rising payouts over time (or at least they do if you choose them well).

There‘s just one problem with this.  Defensive, dividend-paying sectors are, as a group, expensive relative to the broader market.  Investors are paying a premium for slow growth…which is not exactly a recipe for long-term investment success.

As an example, consider the utilities sector.  The Utilities Select Sector SPDR ($XLU), a popular ETF proxy for the sector, trades for 16 times earnings and yields just 3.7%.

Utilities have had good multi-year runs.  In the 2003-2007 bull market, utilities were actually one of the best-performing sectors.  But it’s hard to get excited about them at current prices.

Surprisingly, some of the best dividend deals on offer are in the tech sector.  Microsoft ($MSFT), Intel ($INTC) and Cisco Systems ($CSCO) yield 2.8%, 3.7% and 3.2%, respectively, and all trade at very modest valuations.  All have also been aggressively raising their dividend in recent years. Cisco has nearly tripled its dividend in the past year and a half, and Microsoft and Intel have raised their dividends by 15% and 7%, respectively, in the past year.  Not bad for boring “old” technology companies.

If you are building an income portfolio, you have a choice.  You can load on slow-growth utilities.  Or, you can build a portfolio of solid technology companies with dividends not too much lower that offer far great potential for growth in the dividend stream over time.  The choice should be obvious.

Action to take: Buy “Big Tech” for dividend growth.  Use a stop loss appropriate for your risk tolerance; I recommend something in the ballpark of a 20% trailing stop.

This article first appeared on TraderPlanet.

SUBSCRIBE to Sizemore Insights via e-mail today.

But what about those legendary masters of the universe—the global macro hedge fund managers who, if their reputations are to be believed, hold the fates of companies and even entire countries in the palms of their hands?

At last week’s Ira Sohn Investment Conference, we got to hear the latest investment themes from some of the biggest names in the business, including Bill Ackman, Jim Chanos, Stanley Druckenmiller, and David Einhorn, among others.

Some of these “smart money” guys haven’t been looking too smart of late.  Ackman has taken enormous losses in JC Penney (NYSE:JCP); at one point, his losses on the investment were over $500 million.  He also appears to be on the wrong side of a very large short position in Herbalife (NYSE:HLF).

This year Ackman is recommending Procter & Gamble (NYSE:PG), even though it is sitting near 52-week highs and is trading at a substantial premium to the broader market…after a long run in which consumer staples have outperformed.  Ackman is agitating for management change.  We’ll see how Ackman’s recommendation plays out, but I wouldn’t expect market-beating returns here.

Most of the speakers focused their comments on individual stocks, but there were some “big picture” themes worth noting as well.  Kyle Bass of Hayman Capital reiterated his bearish call on Japan, saying that “the beginning of the end has begun.”  I agree with Bass’ view on Japan and recently called it “the short opportunity of a lifetime” here on the Trading Deck.  I can’t say I agree with Bass in his bullish defense of gold, however.

Stanley Druckenmiller, a legendary investor and a former top trader under George Soros, had perhaps the most interesting macro perspective.  Druckenmiller argued that the commodity supercycle—the massive decade-long bull market enjoyed by most commodities—is over.  The primary culprit?  A slowdown in commodity demand from China.

I would take Druckenmiller seriously here.  This is a man who enjoyed a 30-year run without losing money and who is one of the best managers alive today.  Druckenmiller sees the slowdown in China—coming at a time when commodity production is being ramped up globally—resulting in a supply glut and sharply lower prices.  This is good news for companies with large raw materials costs and for countries that import large volumes of commodities, but it is very bad news for Brazil, South Africa and Australia, among other resource-rich countries.

Still, you might want to take the words of all of these masters of the universe with a grain of salt the size of their egos.  88% of hedge fund managers underperformed the S&P 500 last year.

Disclosures: Sizemore Capital has no positions in any security mentioned.   This article first appeared on MarketWatch.

SUBSCRIBE to Sizemore Insights via e-mail today.

SUBSCRIBE to Sizemore Insights via e-mail today.

But if ol’ tobacky stocks are unattractive at current prices, what about wacky tobacky stocks?

With marijuana slowly becoming legalized in the United States (at least on a state-by-state basis), manufacturers and vendors of cannabis are evolving from enterprises of dubious legality into mainstream and regulated purveyors of vice.

So, if Big Tobacco has been a profitable investment despite its social stigma, might Big Weed get a haircut and get to work for investors?

Maybe, but I wouldn’t count on it.

To start with, there is no “Big Weed.”  All of the players are small companies with names that few investors have ever heard of.  Tobacco and marijuana are also vastly different industries with vastly different competitive dynamics.  Yes, both could be lumped into the category of “sin stocks,” but not all sin stocks are created equal.  This requires a little explaining.

I recently wrote that Coca-Cola and Pepsi were the “New Big Tobacco.” By this I meant that sugary drinks were evolving into a stigmatized industry that is regulated in the interests of public health in the same way that cigarettes are.  But I also noted that the stocks of companies operating under that kind of scrutiny can still be wildly profitable to own under the right set of conditions:

1. There should be substantial barriers to entry for new competitors (what Warren Buffett likes to call “moats.”)
2. The company should be financially healthy (strong balance sheet, manageable debt, etc.)
3. Management should be committed to rewarding shareholders with rising cash dividends and, to a lesser extent, share repurchases.
4. The stock must be cheap.

Big Tobacco names like Altria (NYSE:MO), Philip Morris International (NYSE:PM), and Reynolds American (NYSE:RAI) easily pass the first three criteria. They just happen to bomb the fourth.

So, how do marijuana stocks look in comparison?

The first point is in a state of limbo.  There were arguably barriers to entry under the old medical marijuana regime due to the legal hoops that growers and vendors had to jump through.  But none of the existing players were big enough to crush new competition, and none had any real name recognition.

Virtually every human being alive today is familiar with Altria’s Marlboro brand or Anheuser-Busch InBev’s  (NYSE:BUD) Bud Light, regardless of whether they smoke tobacco or drink alcohol.  But how many have heard of Medical Marijuana Inc (Pink sheets: MJNA), one of the largest suppliers of medical marijuana? Or Cannabis Science (Pink sheets: CBIS), one of its biggest competitors? Or for that matter, how many have heard of Growlife (Pink sheets: PHOT), a leading seller of hydroponic equipment?

I’m betting the answer is not too many.  At this stage in the game, there is no real brand recognition to speak of.

What about the other criteria?  Are these companies at least financially sound, and do they reward shareholders via dividends and share buybacks?

Not exactly.  All three companies are high-risk penny stocks, and none pay a dividend.  Of the three, Medical Marijuana, Inc., the “blue chip” of the group, has the healthiest balance sheet, but you’re talking about a company that generated only $5 million in revenue last quarter.

And price?  Medical Marijuana, Inc. trades for 14 times book value and 24 times sales.  To pay those prices for any stock…well, let’s just say you’d have to be heavily under the influence of the company’s products.

At time of writing, Medical Marijuana, Inc., Cannabis Science, and Growlife trade for $0.17, $0.05 and $0.04 per share, respectively.  But a young analyst I interviewed on the matter told me he had a price target of $4.20 on all three.

I think there was a joke in there somewhere at my expense.

Bottom line: while marijuana stocks may indeed be vice investments, they have none of the qualities that have helped tobacco generate such fantastic returns over the past 50 years.  Treat them as a risky speculation and nothing more.

Sizemore Capital has no positions in any stock mentioned. This article first appeared on InvestorPlace. 

SUBSCRIBE to Sizemore Insights via e-mail today.

Alas, we’ve been here before, and it didn’t end well.  So, is it time to worry?

My answer is “no,” or at least “not yet.”  The conditions are simply not in place for a major bear market.

Morgan Stanley chief investment strategist David Darst, whose book The Art of Asset Allocation I keep next to my desk, recently listed his “bear market checklist” of things to look for.  And by his estimation—as well as mine—none are showing signs of warning:

1. Is the Fed tightening monetary policy?  No, they are actively debating more stimulus.
2. Are stock price valuations stretched?  Hardly; they are slightly below long-term averages.
3. Is investor euphoria present? Not that I can see; most investors I meet are underinvested in equities and overly heavy in cash.
4. Are bond spreads widening?  No, and some risky bond sectors have yields at or near all-time lows.
5. Is there a recession looming? This is more complex; in the U.S., the answer is “probably not.”  In Europe, the answer is “probably,” though both the U.S. and Europe have been in what I call a long “slow motion” recession since 2008.
6. Are cyclical sectors retreating?  Actually, they have lagged all year and are just now showing signs of life.

Of course, Darst’s list is very U.S.-centric and doesn’t take into account developments in Japan, China or Europe.  Japan concerns me—a lot—and I expect it to suffer a 2008-caliber blowup within the next few years.  But for now, Japan actually appears to be showing signs of life for the first time in a very long time.  China is slowing, but it is also undergoing a transformation into a more consumer-driven economy; the jury is still out as to what this means for the global economy.

And Europe?  For the best gauge of what’s happening in Europe, check out Spanish bond yields.  Since the beginning of the year, the 10-year yield has slipped from over 5% to just barely over 4%, and the downtrend remains firmly in place.  Bond investors are clearly warming to the country that is viewed most at risk of “blowing up” the Eurozone.

The Spanish private sector is still is deep recession, and small and medium sized businesses are being starved of the capital they need by a zombie domestic banking sector.  These are problems that are not going away tomorrow.  But judging by the reaction of the bond market, they are problems that are known and under control.

My advice?  Stay invested.  If you’re nervous, rebalance your portfolio and take some small profits.  But maintain an aggressive portfolio, and if you’re adventurous add some European exposure.  My favorite ways to play Europe today are via the iShares MSCI Spain (NYSE:EWP) and iShares MSCI France (NYSE:EWQ) ETFs.  I hold both in my Tactical ETF portfolio.

Plan on holding for the remainder of 2013, or until something significantly changes in the checklist above. I would recommend something along the lines of a 15-20% trailing stop.

The article first appeared on TraderPlanet.

SUBSCRIBE to Sizemore Insights via e-mail today.

Warren Buffett calls Howard Marks’ The Most Important Thing “that rarity, a useful book.”  And as a researcher with a library of a couple hundred books myself, I couldn’t agree more.

For those unfamiliar with Howard Marks, he is the Chairman and cofounder of Oaktree Capital Management, an investment firm with $77 billion under management.  The Most Important Thing Illuminated, published in 2013, is an update to Marks’ original, published in 2011, though in Illuminated Marks has help.  Greenblatt, managing partner of Gotham Capital and author of The Little Book That Beats the Market, offers his own commentary throughout the pages, as do Christopher Davis, portfolio manager of the Davis Large Cap Value fund, and Seth Klarman, president of The Baupost Group and a well-respected value investor.  Marks keeps good company.

I had high expectations when I picked up The Most Important Thing Illuminated, and I wasn’t disappointed.  This isn’t yet another “how to invest” book or a tired rehashing of received investment “wisdom” that looks more like something found in a fortune cookie and which rarely seems to hold up in practice.

Instead, Marks gives us the insightful thoughts of a man who struggles with his own investing decisions on a daily basis.  There are no shortcuts, formulas, or easy tricks.  But there is a wealth of experience and thoughtful contemplation from a real “in the trenches” investor who has been doing this a long time.

Marks starts the book with a chapter on “second-level thinking,” and I consider this one of the most valuable lessons in the entire book.  Having a good understanding of this chapter alone will put you head and shoulders above most of your peers.

Mechanical trading rules work really well…right up until the point that they don’t.  And why don’t they work consistently over time?  As Marks explains,

The reasons are simple.  No rule always works.  The environment isn’t controllable, and circumstances rarely repeat exactly.  Psychology plays a major role in markets, and because it’s highly variable, cause-and-effect relationships aren’t reliable. An investment approach may work for a while, but eventually the actions it calls for will change the environment, meaning a new approach is needed.  And if others emulate an approach, that will blunt its effectiveness.

Investing, like economics, is more art than science.  And that means it can get a little messy.

“Messy” is not a technical term, but it is accurate and descriptive hear.  Markets are driven by people and by ever-changing real-world events.  Trying to cram this into a mechanical trading model or a black box is a recipe for disaster.  And frankly, it’s mentally lazy and reflects an unwillingness (or inability!) to grasp complexity.

This brings me to Marks’ points about second-level thinking.  What exactly is “second-level thinking.”  Perhaps it is best explained by example:

• “First-level thinking says, ‘It’s a good company let’s buy the stock.’  Second-level thinking says, ‘It’s a good company, but everyone thinks it’s a great company, and it’s not.  So the stock’s overrated and overpriced; let’s sell.’”
• “First-level thinking says, “The outlook calls for low growth and rising inflation. Let’s dump our stocks.’ Second level thinking says, ‘The outlook stinks, but everyone else is selling in panic.  Buy!’”
• “First-level thinking says, ‘I think the company’s earnings will fall; sell.’ Second-level thinking says, ‘I think the company’s earnings will fall less than people expect, and the pleasant surprise will lift the stock; buy.’”

Call it contrarian thinking, applied game theory, or just being clever, but this is the mindset that is required to be a successful investor over time.  It’s also a skill that few investors have or have the mental discipline to use.

It’s not easy going against the grain and taking views that are contrary to the consensus.  But then, no one ever said that investing should be easy.

Market Technicals and Psychology

As a value investor, Marks is not a fan of technical analysis (i.e. charting) but he does stress the importance of understanding what he calls “market technicals,” or non-fundamental factors that affect the supply and demand for a security.  Failing to understand these can lure an investor who looks at value alone.

What are some examples?  Marks lists two specifically: the forced selling that takes place when a market crash trips margin calls, which forces leveraged investors to sell at any price, and the cash inflows that go to mutual funds that are usually invested irrespective of price.  To these I would add short squeezes, secondary stock price offerings that dilute shareholders, and buyout offers.

These technical factors are often closely related to market psychology.  And as Marks writes, “The discipline that is most important Is not accounting or economics, but psychology…

Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity.  At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge.

Need an example?  Think of Apple’s performance over the past few years.  Apple was the “must own” stock of the 2010s.  Everyone owned it—individual investors, mutual fund managers, hedge fund managers…you name the investor, and chances are good that Apple made up a good-sized chunk of their portfolio.

There were cases of focused hedge funds having 20-30% of their portfolio in Apple.  Even now, after Apple’s massive slide, the stock accounts for nearly 15% of the Technology Select SPDR (NYSE:$XLK), one of the most popular ETFs for investing in the tech sector.  Apple’s position in the ETF is bigger than Google’s and IBM’s combined.

It’s not a figure of speech to say that there was no one left to buy Apple.  No matter how great a company is, there is a limit to how high a percentage of investors’ portfolios it could comprise.

And we all know what followed.  Apple’s share price fell by over 40%, and may or may not be finished falling.

A pure value investor wouldn’t have seen the risk in Apple.  Based on popular metrics such as price/earnings or price/sales, Apple wasn’t particularly expensive.  It actually looked pretty cheap compared to the broader market.

But if you had taken market technical and investor psychology into account, you would have known to be wary.  You almost certainly wouldn’t have timed the top perfectly, but you would have known that caution was warranted.

Unfortunately, as Marks acknowledges, “psychology is elusive…and the psychological factors that weigh on other investors’ minds and influence their actions will weigh on yours as well.”

There are no shortcuts here.  You have to remain as dispassionate as possible and, where possible, try to apply second-level thinking.

Thoughts on Risk

Risk is one of the most difficult concepts in investing because it is impossible to quantity.  Yes, we have measures such as standard deviation, variance, or beta, but these measure volatility.  Volatility and risk are not at all the same thing.

A better definition of risk is the possibility of loss.  But even this is hard to define or quantify in any meaningful way.  And at the time when a stock appears the most risky—such as after a recent volatile drop—it may actually be relatively less risky, as the selloff shook out the less committed investors.  And on the flip side, it is when a stock looks least risky—think Apple this time last year—when it is in fact most at risk.

And it gets more complicated than that.  You can’t gauge the riskiness—or the quality—of a trade based on what happened.  You have to base it on what could have happened.

In other words, you can take a phenomenally bad gamble with negative expected returns and still come out ahead.  But that doesn’t mean it was a good decision.  Let me state it bluntly: A good outcome does not mean that the decision that led to it was a good one.

If you don’t understand what I’m talking about, you should probably stop reading.  And you should definitely stop investing.

Winning the lottery is a fantastic outcome.  But the expected value on any given lottery ticket is negative because the possibility of a payoff is infinitesimally small. Most people would agree that winning the lottery is good luck.  But, being overconfident in their own abilities, they fail to see the role of luck in good investment returns based on bad trading.

Marks, in thinking very similar to that of Black Swan guru Nassim Taleb, does a good job of explaining this:

A few years ago, while considering the difficulty of measuring risk prospectively, I realized that because of its latent, nonquantitative and subjective nature, the risk of an investment—defined as the likelihood of loss—can’t be measured in retrospect any more than it can a priori.

Let’s say you make an investment that works out as expected. Does that mean it wasn’t risky?… Perhaps it exposed you to great potential uncertainties that didn’t materialize….

Need a model?  Think of the weatherman.  He says there is a 70 percent chance of rain tomorrow.  It rains; was he right or wrong?

It’s easy to get overly academic here and veer off into directions that are not particularly practical.  Perhaps it can be summed up with the old Wall Street adage to “Never confuse brains with a bull market.”

More broadly, we should always remember that risk is a complicated concept and that we can’t get complacent in our investment process.  When you have capital at risk, you need to be vigilant.

Does this mean we should avoid risk?  Not at all.  As Marks puts it, “risk avoidance is likely to lead to return avoidance.”  Assuming risk is part of the investment game.  It is just a matter of keeping risk under control and making sure that the returns we realistically expect are worth the risk we are taking.

On Cycles

While Marks eschews charting and most forms of technical analysis, he does have respect for market cycles.  In fact, he offers two rules for investing with a mind to cycles:

• Rule number one: Most things will prove to be cyclical
• Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.

Marks’ interest in cycles ties back to his belief in the importance of market psychology:

Objective factors do play a large part in cycles, of course—factors such as quantitative relationships, world events, environmental changes, technological developments and corporate decisions. But it’s the application of psychology to such things that causes investors to overreact or underreact and thus determines the amplitude of the cyclical fluctuations…

Cycles are self-correcting, and their reversal is not necessarily dependent on exogenous events.  They reverse (rather than going on forever) because trends create the reasons for their own reversal.  Thus, I like to say success carries within itself the seeds of failure, and failure the seeds of success.

Well said.  Marks’ views are consistent with those of Hyman Minsky, who believed that stability inevitably leads to instability (and vice versa) because stability encourages risky behavior and instability prompts more sober behavior.

Within the markets, a long period of stability and growth leads investors to assign higher and higher earnings multiples to stocks—think of the 1980s and 1990s.  But during long periods of economic malaise and market turmoil, investors assign lower and lower earnings multiples.  This cycle is probably the one permanent fixture throughout the history of the capital markets.

Marks offers so specific trading strategy to trade cycle fluctuations; his intent is simply to offer a word of advice to not ignore them.

In this book review, I have barely scratched the surface of The Most Important Thing.  This book is chocked full of very accessible, very down-to-earth investment advice, and the praise heaped on it by Buffett, Klarman and the rest is well deserved.  This is a book that I recommend you keep on your desk and thumb through on those days where the market isn’t making sense and you need a little grounding.

Compliments on a book well written.

SUBSCRIBE to Sizemore Insights via e-mail today.

After a storm of criticism from frustrated long-time Windows users, Microsoft announced that it would be making significant changes to its Windows 8 operating system.  The details have not been released yet, but it’s assumed that they will include bringing back the “Start” button that has been a fixture in the lower-left corner since 1995 and giving desktop users the ability to bypass the tiled start screen on system startup.

Is this a failure for Microsoft?  In some critical ways, yes.  In a classic case of arrogance, Microsoft assumed that, after some initial grumbling, consumers would embrace the Windows 8 style because, frankly, they weren’t given a choice.

Few companies can get away with something like that.  Arch-rival Apple (Nasdaq:$AAPL) can, or at least could under the Steve Jobs regime.  But Apple was a quirky exception in that its fans had an almost cult-like devotion to Jobs and would have likely drunk cyanide-laced Kool-Aid if he asked them to.  Jobs could have gotten away with something as jolting as Windows 8.  His replacement at Apple, Tim Cook, couldn’t get away it, and neither could Microsoft CEO Steve Ballmer.

A second flaw was failing to realize how conservative most Windows users are, particularly business users.  Window 8’s colorful tiled start screen is attractive and I have grown to like it.  But it is not appropriate for a stodgy business crowd that values efficiency and functionality.   I’m 35, and learning how to use Windows 8 was frustrating to me.  I can only imagine how much more frustrating it must be for a user in their 50s or 60s.

But here’s the thing.  It doesn’t matter.

This is why I love Microsoft.  They can have a fundamental screw-up like Windows 8 and still keep plugging along.

Steve Ballmer called the launching of Windows 8 a “bet the company” moment, but nothing could be further from the truth.   Microsoft’s “moats,” or competitive advantages, are so strong that it can survive and thrive even after making a major miscalculation like this.

My first experience with Windows 8 wasn’t particularly good, yet I subsequently bought two more PCs running the operating system.  Between home and office, I own three Windows 8 machines and may own a fourth before the end of the year.

Why?  Because I’m locked in.  I run my office—and my life—on Windows machines, and dealing with the frustration of Windows 8 is still less bad than trying to learn how to use a Mac or than paying the Mac premium.  And never mind all of the software and services I run that require a Windows machine.

And before we throw Windows 8 under the bus, there is actually quite a bit to like about the system.  It’s fantastic that Microsoft has an operating system that can run on both traditional PCs and laptops and on touch-screen devices like tablets and hybrids.   Having a common look and feel across devices is part of building the Microsoft brand for the next generation, and the tiled start screen actually works quite well on a touch screen.

After getting over the initial headache of learning something new, I actually like Windows 8 now.  I have all of my Windows 8 devices registered to the same Microsoft account and I save virtually all of my files on Microsoft’s SkyDrive cloud storage service.  Using this setup, I no longer have to lug a laptop around or use something clunky like a remote desktop client.  I can log into my Microsoft account from anywhere in the world and have instant access to my office.  For someone who travels as extensively as I do, that’s not a bad arrangement at all.

But there are still times when I would kill for a return to the Start button…

I’ve argued for months that “tech is the new tobacco.”   And by this I mean that big technology giants—Microsoft chief among them—are currently priced for no growth and are evolving into dividend-focused cash cows.

If none of Microsoft’s growth initiative amount to much—if the new Xbox fails to impress, if Windows tablets never gain much market share, in the Windows Phone remains an also-ran, etc.—then Microsoft is still attractive as a cheap dividend payer with a massive hoard of cash and stable, if gently declining, businesses in operating systems, servers, and office productivity software.

And if Microsoft’s work pays off and any of these new initiatives wind up being a success, then Microsoft quickly becomes the buy of the decade.

Disclosures: Sizemore Capital is long MSFT.

SUBSCRIBE to Sizemore Insights via e-mail today.

Not bad, considering the line of work they are in.  Given that the global economy has been tepid at best lately and that unemployment remains stubbornly high, you might not expect companies that depend on consumers opening their wallets to perform well.

But by focuses narrowly on the consumer angle, you miss the proverbial forest for the trees. MasterCard and Visa—along with American Express (NYSE: $AXP) and, to a lesser extent, Discover (NYSE:$DFS)—are some of the prime beneficiaries of two of the most powerful macro trends of the past 20 years:

1. The   transition to a global cashless society
2. The rise of the emerging market consumer

The first point should be obvious.  Even in the United States, where credit and debit cards are ubiquitous, roughly 40% of all transactions are conducted with cash or paper checks.  Not all transactions will ever be captured with credit and debit cards, of course, but with internet commerce growing relative to “bricks and mortar,” you can bet that the percentage will grow.

Demographics also play a role here.  Older consumers who might never have embraced plastic are a shrinking segment of the population, whereas anyone under the age of 50 grew up with credit cards and anyone under 30 learned how to swipe a credit card before they could walk.

I exaggerate…but not all that much.

Card usage is also working its way down the economic ladder.  Consumers without access to traditional credit or banking services are embracing prepaid cards branded with the Visa and MasterCard logos, and both companies are experimenting with ways to let consumers pay at retail cash registers using their mobile phones. Even American Express, which has traditionally focused on a more patrician business clientele, has partnered with Wal-Mart (NYSE:$WMT) in promoting its Bluebird prepaid cards (see “Is Amex Going Slumming?”).

This is a long way of saying that even if overall consumer spending growth is tepid, growth in electronic payments has plenty of room to grow.

The second point is the one I find the most promising, however.  Credit and debit card usage is soaring in virtually all major emerging markets as incomes rise and consumers join the ranks of the global middle class.  Rising incomes and growing financial sophistication can only mean a higher percentage of transactions move from cash to plastic. Both Visa and MasterCard stand to benefit from this trend, though Visa has the better presence globally.  Visa expects to get more than half of its revenues from overseas by 2015, and the overwhelming amount of this will come from emerging markets.

So what’s the downside?

As I see it, there are two.  The first is competition from other mobile payment solutions such as eBay’s (Nasdaq:$EBAY) Paypal and Square.

It gets a little muddy here, however.  Paypal is a payment mechanism in of itself, but it is also a facilitator for payment with a traditional credit card. Up until this point, the mobile revolution has been nothing but beneficial for the traditional credit card companies. The card readers for Square and Paypal Here turn any Apple (Nasdaq:$AAPL) iPhone or Google (Nasdaq:$GOOG) Android device into a mobile point-of-sale terminal.  Even an ice cream man or hot dog street vendor can take payment by card now.

But this is also a fast-changing area, and there is a possibility that Visa and MasterCard can see themselves getting pushed out as unnecessary middlemen.  On my recent visit to Home Depot (NYSE:$HD), the cash registers gave me the option to pay with Paypal. Today, this is a novelty.  But in five years, will it be the norm?

Maybe, maybe not.  But given the rate of change in this space, I am reluctant to pay too high a premium for the stocks in this sector.  The growth is impressive and the profit margins are so high as to be absurd.  But as with any investment, you don’t want to overpay.

And this brings me to the second downside.  Both MasterCard and Visa sport valuations that are reminiscent of the 1990s tech bubble.  Visa trades for an absurd 50 times trailing earnings and 21 times expected 2014 earnings.  MasterCard, at 25 times trailing earnings and 18 times forward earnings, almost looks reasonable by comparison.  Almost.

As much as I like both companies, I’m not comfortable paying these prices.  For now, I’d recommend you pass on Visa and MasterCard.

In the card sphere, American Express would appear to be the best bargain.  Unlike Visa and MasterCard, Amex actually accepts credit risk, but I am ok with that.  In an improving economy, that is not such a bad thing. Amex trades for 13 times expected earnings and pays a 1.2% dividend.

Disclosures: Sizemore Capital is long WMT.

SUBSCRIBE to Sizemore Insights via e-mail today.