Where to Search

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Case Study of a 100 Bagger: Middleby

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https://microcapclub.com/2016/05/middleby-corporation-midd-case-study-intelligent-fanatic-led-100-bagger/

How many lessons can you pull out of this case study?

Also, a must read on finding fanatics: https://microcapclub.com/2016/01/how-to-find-intelligent-fanatic-ceos-early/

More studies: https://www.youtube.com/watch?v=KoOEE8GI-Ko

SEARCH STRATEGY: Look off the beaten path (Joel Greenblatt)

https://youtu.be/sYJaF86zY0E

 

India’s Economic Suicide; Quantitative vs. Qualitative Research

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Indian Prime Minister Nahendra Modi has declared 500 and 1,000 rupee notes illegal for exchange. Since these are worth a mere $7.26 and $14.53, he has de facto ended paper currency for use in all major transactions.

Half the population do not have bank accounts, and consumer trade has come to a screeching halt. That is because the highest permitted denomination fetches only about one US dollar, and exchanging the larger notes requires long waits and government identification, which a quarter of Indians do not possess.

Beyond the self-inflicted economic crisis, Jayant Bhandari says India is becoming a police state. She is on a fast track to banana-republic status, before fragmentation into smaller political units.

The gold market in India is in chaos, as people rid themselves of the domestic fiat currency: the price per ounce has skyrocketed to above $2,000, and tax authorities are blocking the retailers. This means the black market is set to boom, as smugglers adapt to the new opportunity, but import demand from India has dropped momentarily, since the formal markets are under the gun.

Hear the podcast: http://goldnewsletter.com/podcast/jayant-bhandari-indias-economic-suicide/

See articles: http://www.acting-man.com/?p=47966

Another dent in confidence of fiat currencies. What are YOUR thoughts. Lessons?  I will pay $1 million dollars to ANYONE who can tell me how central planning helps people increase wealth over time vs. free exchange.

The balance between quantitative and qualitative research

“There’s so much you can tell in a 10-minute tour of a plant.

I can tell you right away whether we’re making money, if we have quality or delivery issues (so customer issues) and if there’s a morale problem. It’s easy to tell.

But you can’t tell until you go there.”

– Linda Hasenfratz, CEO Linamar Corporation, in conversation with The Women of Burgundy, September 21, 2016

One of the familiar tensions underlying the quality-value investment discipline is the balance between quantitative and qualitative research. Many investors intuitively understand the importance of assessing the quantitative aspects of a business. We analyze the numbers to understand what level of return the business is generating for its shareholders, what level of debt sits on the balance sheet, and whether the cash flows into the business are stable and recurring, for example.

While a quantitative assessment is vital to an investment decision, it is not complete without a qualitative framework to guide its meaning. For instance, it is not just the level of debt on the balance sheet that matters, but whether those debt levels are appropriate for the business. It’s not just a historical record of stable cash flows that gives us confidence, but rather an understanding of the economic moat that protects those cash flows from future competition.

It is with this background that I find Linda Hasenfratz’s quote truly compelling. As CEO of Linamar, she is responsible for running a global manufacturing business that spans 13 countries around the world. She may be able to look at the financial metrics to assess how her business is doing, but for Hasenfratz it is clear that a true, holistic understanding of the business comes from walking the halls of manufacturing plants and speaking face-to-face with her management teams around the world.

Her words were a welcome reminder about the importance of being there, on the ground, to gain a complete qualitative understanding of the operations. As I listened, I felt as if a member of our Investment Team had been dropped into her seat. Take, for instance, the excerpt below from the June 2016 issue of The View from Burgundy, “Boots on the Ground,” which brings us along on a site tour of a Chinese flavour and fragrance company’s R&D facility:

“Normally lab environments are tightly controlled, but in this case, rooms labelled ‘temperature controlled’ had open windows, letting in both the hot summer air and a fair share of local insects. What’s more, the facility was curiously devoid of employees, and the few research staff we did encounter were surly and unapproachable. It seemed odd to us that a company could have its main R&D facility in such a state of inactivity and disrepair, while reporting seemingly world-leading profitability in a highly competitive research-driven industry.

Our negative impression from the site tour provided useful information that would have been difficult, if not impossible, to acquire had we not done the on-the-ground work. It prevented us from making an investment in what had appeared on paper to be an attractive business, provided one didn’t scrutinize its operations – an example of why relying on company-produced financial statements alone is not sufficient when conducting due diligence.”

In other words, the science of investing is never complete without the art.

 

When No One Wants ‘Em–Search Strategy

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HUI represents unhedged miners. In January 2016, the HUI dipped to $99.13 then rose 2.84 xs to $286 when the $BPGDM, Bullish Percentage Index, was less than 15%. Then in mid-July the bullish percentage was 100%! Prices dipped, but then made a marginal new high.  Sentiment is not an EXACT timing device. Now, the index is near 7% bullish after a 37% decline and four months.  Talk about swings in sentiment. Buy high and sell low.  Interest rates are rising, gold is falling, the dollar rising, so who would be in the stupid 7%?

Update: Nov. 27th, 2016

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As of Nov. 27th, not every data point shows a turn in the gold market, but bearishness quite high. https://monetary-metals.com/good-news-and-bad-news-report-27-november-2016/

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gold-stocks-bullish-sentiment-nov-16th-2016   Assuming you have found cheap, well-capitalized miners, developers and/or explorers, there is a time to buy and a time to sell.  I think this is a time to be greedy when others are fearful. Also, if this was a sell-off after a long bull market (not a six month rally) where large amounts of capital investment entered mining, then bullishness might be less warranted.  ey-m-a-exchange-performance-comparison Place information into context.  A good read: commodity-resource-stocks An investment only a mother could love.

hui-to-djiaHUI in relation to the Dow Jones.  Be careful, though, the starting and ending periods are deceptive. The point is that miners have been scorned despite or even because the recent rally/sell-off.

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Positive Signs: Juniors holding better than Senior Producers

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As deep value contrarians, we aren’t able to have absolute certainty, but we can put probability on our side along with the laws of supply and demand.  If you don’t feel ill when buying your resource stocks, then don’t do it. Forcing yourself through the fear (assuming you have done your homework) to ACT, is the key.

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Investors fleeing the miners over the past few weeks

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Update Nov. 30th 2016

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If we are in a bull market, then a healthy position, but more to go if we are in a bear market. But base metals continue to show strength.

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Recent headlines imply near total bearishness:

Battered Gold Looks at Risk of Further Thumping

  • ABN Amro, OCBC see bullion dropping to $1,100 by end of 2017
  • Higher interest rates, stronger dollar seen pressuring gold
Photographer: Akos Stiller/Bloomberg

The worst is yet to come. At least that’s the opinion of the top two gold forecasters who say bullion will suffer further losses in 2017 as interest rates climb and the dollar strengthens.

Oversea-Chinese Banking Corp. and ABN Amro Group NV see gold sliding to $1,100 an ounce by the end of next year as the Federal Reserve tightens monetary policy, real Treasury yields increase and the U.S. currency rises. Prices were at $1,185.77 Wednesday. The banks were ranked first and second as forecasters in the third quarter, according to data compiled by Bloomberg.

After briefly soaring to $1,337.38 as it became clear that Donald Trump was about to pull off a shock victory in the U.S. presidential election, gold slumped to a nine-month low of $1,171.18 last week on speculation that his pledges to increase spending and revitalize the economy would boost interest rates and augment the attraction of other investments such as stocks and bonds.

“From an investor point of view there is little reason to hold gold,” said Georgette Boele, a currency and commodity strategist at ABN Amro. “Rising inflation expectations are more than countered by the rise in U.S. Treasury yields and expectations about upcoming rate hikes by the Fed. As long as real yields rise and there are no major inflation fears, prices will go lower.”

Global bond yields have climbed to 1.58 percent from a record low 1.07 percent in July, according to the Bloomberg Barclays Global Aggregate Index. The odds of the Federal Reserve hiking in December are 100 percent, up from 69 percent a month ago, before the election, and a gauge of the dollar against its major peers surged to the highest level since at least 2005 last week.

Gold is set for its worst month in more than three years, with investors dumping bullion at the fastest pace since 2013. Assets in bullion-backed exchange-traded funds have shrunk 5.3 percent in November, the biggest monthly drop since June of that year. Billionaire Stan Druckenmiller sold all his gold on election night. “All the reasons I owned it for the last couple of years seem to be ending,” he said in a CNBC interview shortly after the vote.

In the month through Monday, investors pulled $4.4 billion from exchange-traded funds backed by precious metals, the biggest redemption among all asset classes offered in such funds globally that are tracked by Bloomberg. Money is moving out of gold and other precious metals as U.S. equities rally to a record and traders boost bets on further rate increases.

Boele from ABN Amro sees the negative environment for gold continuing into next year, with a recovery for prices expected in 2018. The bank cut its prediction for the end of 2017 from $1,150. Before the U.S. election, Boele was already bearish, lowering her outlook in October.

Barnabas Gan, an economist at OCBC in Singapore, was predicting $1,100 by the end of next year before the U.S. election. He kept to that view in a note on Monday and cut his call for the end of this year to $1,200 from $1,300. He’s factoring in three rates hikes — one in December and two in 2017 — which will drag bullion down to his target by the end of next year.

“Political uncertainties continue to persist,” Gan said. “Note the upcoming Italian referendum as well as next year’s French election. Contrast this with the relative certainty over U.S. economic growth under President-elect Trump’s proposed fiscal plans which gives rise to reflationary and higher U.S. rates expectations into 2017.”

Risk Appetite

While Gan and Boele already saw lower prices for next year before the U.S. election, a Trump win was interpreted as bullish in a Bloomberg survey of more than 20 traders and analysts published before the vote. A victory for the Republican was seen pushing Comex gold futures to $1,395 within a week. Instead, the reverse happened.

Not everyone is bearish going into 2017. Bullion may average $1,300 next year, says Robin Bhar, head of metals research at Societe Generale SA in London, the third-best gold forecaster in the data compiled by Bloomberg.

“All in all, gold prices are at the mercy of risk appetite. Buying on dips is likely to provide support given a view that gold is a good portfolio diversifier, hedge, insurance policy,” Bhar said in an e-mail last week. At the same time, he acknowledged the downside risks because changes in fiscal policy could push real interest rates higher, offsetting haven demand.

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Thinking about Prices

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http://energyandgold.com/2016/11/14/moriarty-there-is-more-opportunity-today-than-there-has-ever-been-in-history/

 

Moriarty: There is More Opportunity Today Than There Has Ever Been in History

by Ceo Technician |  posted in: Bob MoriartyGoldGold Stocks |  0

Given the surprising US election outcome and the tumultuous market environment we wanted to connect with 321gold founder & editor Bob Moriarty for his latest thoughts on geopolitics and of course, markets. Bob obliged and this is an interview that you definitely don’t want to miss!

CEO Technician: Does the election result have any impact on gold and markets?

Bob Moriarty: I’m not sure it has any impact. Everyone wants to connect news with price movement and it just doesn’t work that way. We’ve been taught since we were two years old “the stock market went up today for reason xyz,” the financial news media needs news but the market goes up and down for many reasons and there is not a direct correlation between news and price movement.

I think Donald Trump is a fool but he’s not nearly as big of a criminal as Hillary Clinton. For whatever reason Trump’s surprise win sent precious metals tumbling and I see this as the real opportunity to load up and get aboard the train before it leaves the station.  I will be buying silver on Monday.

CEO Technician: Russia is getting even more serious in Syria by moving their sole aircraft carrier to the region in order to assist in bombing “terrorist” groups. With Turkey moving land forces inside Syria and the usual cast of characters remaining very much involved in the power struggle inside the country and in Iraq next door, the situation doesn’t look like it could be much more dangerous. What’s next in Syria?

Bob Moriarty: Hillary Clinton got us involved in Syria. Syria is a completely different situation from Iraq although the two are often confused. Israel came out with a proposal in 1996 called “The Clean Break From The Peace Process,” it’s on Google. In this proposal Israel says it needs to destroy Syria and that’s exactly what they’re doing. It’s a plan that’s been in place for 20 years. The US is in Syria because of Israel but if you step back for a minute and ask yourself “what interest does the US have in Syria and why do we care who runs Syria?” the answer would be “we have no interest in Syria.” We are destroying the Middle East and the 65 million or so refugees from the Middle East are going to destroy Europe and the EU.

CEO Technician: The refugee situation in Europe is out of hand and Europe faces a terror threat from within its own borders of an unprecedented scale.

Bob Moriarty: If you’re in a village in Syria and someone comes in and bombs the shit out of you, then you do 1 of 3 things: You die, you leave, or you fight back. If there’s another option please let me know. When you leave you’re angry. Syria is a 7-dimensional chess match and there’s no good guys. The refugees are angry, by creating refugees we are creating terrorists. The key to solving the terrorist threat is to stop creating refugees.

A lot of people act like this refugee crisis isn’t going to come to the United States, of course it’s going to come to the United States. We need to stop bombing countries and creating refugees.

CEO Technician: I was at the New Orleans Investment Conference a couple of weeks ago and there were a couple of themes that stood out to me and I’m interested to hear your thoughts. Big discoveries are becoming extremely rare and the biggest investment profits come from big discoveries. Another theme of the conference is the idea that yields have bottomed and we are now in a rising rate environment.

Bob Moriarty: That’s correct. The last big discovery I can think of is Fruta Del Norte down in Ecuador and that was about 10 million ounce (20-30 million ounces over the long term). There are some big deposits of lower grade but those require several billion dollars to move into production.

Here’s what used to happen, the majors had big exploration teams and did a lot work themselves while partnering with high quality juniors. Suddenly 200-300 juniors skyrocketed to 1,500-2,000 juniors due to the evolution of the internet and the rapid access to information. It is more important than ever to distinguish high quality well run juniors from the rest of the crowd. I believe this is the best time ever to be a junior mining investor but you must do your research and pick the companies with top tier management teams. There is more opportunity today than there has ever been in history.

Yields have bottomed but you must remember that the Fed follows the market, not the other way around. Interest rates are increasing but with the entire world awash in debt and an extremely unstable financial system it will be an increase in interest rates that blows the whole thing up.

CEO Technician: What do you think about gold in a rising interest rate environment? I posted a chart last week on CEO.CA showing that over the last 40+ years gold has more often than not been positively correlated to interest rates. It’s only been in the very recent history (since the Global Financial Crisis) that we have witnessed a negative correlation between rates and gold.

Bob Moriarty: I’ll tell you something that few have the guts to say. Gold is expensive relative to other commodities (such as oil, pigs, platinum, etc.) because gold is the #1 real asset. The real interest rate environment is what matters to gold, if inflation is 4% and interest rates are 3% that’s a very positive environment for gold. Gold can do well in a rising rate environment but it’s the real rate of interest that matters.

CEO Technician: Any thoughts on lithium, cobalt, and renewable energy revolution?

Bob Moriarty: The key to lithium is how soon they can get it into production. Lithium is actually a very common element but we are having a revolution in energy storage. By 2025 solar power will be comparable in cost to coal and that’s going to create an absolute revolution, fortunes will be made between now and then. Cobalt is much less covered than lithium, if you can find real cobalt companies with legitimate projects I think you will do very well. There are way too many lithium companies and many of them will go away.

CEO Technician: We’ve seen the sharpest move lower in precious metals and mining shares in more than 3 years since Trump won last Tuesday night. Where are we at and is it time to buy?

Bob Moriarty: Trump didn’t win the election, Clinton lost it. There is a difference. If Clinton had read Nobody Knows Anything, she would have known to not trust the “Experts” and “Gurus” and the other fools. Trump has never worn a uniform or held a public office. He will either be the best president in US history or the worst. Flip a quarter and find out. This is the bottom and the buying opportunity in gold and gold shares, right now. I am buying silver this morning (Monday 11/14).

There is a time to buy, a time to sell and a time to do nothing. Now buying miners.   Note the extreme swings in sentiment

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Lookin’ cheap: http://ericcinnamond.com/look-away-im-hideous/

RISK/ Aftermath of Trump Election: Independence Revoked!

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A LETTER TO THE US FROM JOHN CLEESE

To the citizens of the United States of America, in light of your failure to elect a competent President of the USA and thus to govern yourselves, we hereby give notice of the revocation of your independence, effective today.

Her Sovereign Majesty Queen Elizabeth II resumes monarchical duties over all states, commonwealths and other territories. Except Utah, which she does not fancy.

Your new prime minister (The Right Honourable Theresa May, MP for the 97.8% of you who have, until now, been unaware there’s a world outside your borders) will appoint a minister for America. Congress and the Senate are disbanded. A questionnaire circulated next year will determine whether any of you noticed.

To aid your transition to a British Crown Dependency, the following rules are introduced with immediate effect:

1. Look up “revocation” in the Oxford English Dictionary. Check “aluminium” in the pronunciation guide. You will be amazed at just how wrongly you pronounce it. The letter ‘U’ will be reinstated in words such as ‘favour’ and ‘neighbour’. Likewise you will learn to spell ‘doughnut’ without skipping half the letters. Generally, you should raise your vocabulary to acceptable levels. Look up “vocabulary.” Using the same twenty seven words interspersed with filler noises such as “like” and “you know” is an unacceptable and inefficient form of communication. Look up “interspersed.” There will be no more ‘bleeps’ in the Jerry Springer show. If you’re not old enough to cope with bad language then you should not have chat shows.

2. There is no such thing as “US English.” We’ll let Microsoft know on your behalf. The Microsoft spell-checker will be adjusted to take account of the reinstated letter ‘u’.

3. You should learn to distinguish English and Australian accents. It really isn’t that hard. English accents are not limited to cockney, upper-class twit or Mancunian (Daphne in Frasier). Scottish dramas such as ‘Taggart’ will no longer be broadcast with subtitles.You must learn that there is no such place as Devonshire in England. The name of the county is “Devon.” If you persist in calling it Devonshire, all American States will become “shires” e.g. Texasshire Floridashire, Louisianashire.

4. You should relearn your original national anthem, “God Save The Queen”, but only after fully carrying out task 1.

5. You should stop playing American “football.” There’s only one kind of football. What you call American “football” is not a very good game. The 2.1% of you aware there is a world outside your borders may have noticed no one else plays “American” football. You should instead play proper football. Initially, it would be best if you played with the girls. Those of you brave enough will, in time, be allowed to play rugby (which is similar to American “football”, but does not involve stopping for a rest every two seconds or wearing full kevlar body armour like nancies) You should stop playing baseball. It’s not reasonable to host event called the ‘World Series’ for a game which is not played outside of America. Instead of baseball, you will be allowed to play a girls’ game called “rounders,” which is baseball without fancy team stripe, oversized gloves, collector cards or hotdogs.

6. You will no longer be allowed to own or carry guns, or anything more dangerous in public than a vegetable peeler. Because you are not sensible enough to handle potentially dangerous items, you need a permit to carry a vegetable peeler.

7. July 4th is no longer a public holiday. November 2nd will be a new national holiday. It will be called “Indecisive Day.”

8. All American cars are hereby banned. They are crap and it is for your own good. When we show you German cars, you will understand what we mean. All road intersections will be replaced with roundabouts, and you will start driving on the left. At the same time, you will go metric without the benefit of conversion tables. Roundabouts and metrication will help you understand the British sense of humour.

9. Learn to make real chips. Those things you call French fries are not real chips. Fries aren’t French, they’re Belgian though 97.8% of you (including the guy who discovered fries while in Europe) are not aware of a country called Belgium. Potato chips are properly called “crisps.” Real chips are thick cut and fried in animal fat. The traditional accompaniment to chips is beer which should be served warm and flat.

10. The cold tasteless stuff you call beer is actually lager. Only proper British Bitter will be referred to as “beer.” Substances once known as “American Beer” will henceforth be referred to as “Near-Frozen Gnat’s Urine,” except for the product of the American Budweiser company which will be called “Weak Near-Frozen Gnat’s Urine.” This will allow true Budweiser (as manufactured for the last 1000 years in Pilsen, Czech Republic) to be sold without risk of confusion.

11. The UK will harmonise petrol prices (or “Gasoline,” as you will be permitted to keep calling it) for those of the former USA, adopting UK petrol prices (roughly $6/US gallon, get used to it).

12. Learn to resolve personal issues without guns, lawyers or therapists. That you need many lawyers and therapists shows you’re not adult enough to be independent. If you’re not adult enough to sort things out without suing someone or speaking to a therapist, you’re not grown up enough to handle a gun.

13. Please tell us who killed JFK. It’s been driving us crazy.

14. Tax collectors from Her Majesty’s Government will be with you shortly to ensure the acquisition of all revenues due (backdated to 1776).

Thank you for your co-operation.

* John Cleese [Basil Fawlty, Fawlty Towers, Sir Lancelot of Camelot (Monty Python & The Quest for the Holy Grail), Torquay, Devon, England]

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What is Risk?    A Great Post on Risk

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Readers’ Questions

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When you have questions–first try to solve the problem for yourself–build a good investing/accounting/finance library. Then join and reach out to the Deep-Value Group at http://csinvesting.org/2015/01/14/deep-value-group-at-google/
There you will find many serious investors who are nice enough to answer an intelligent question.  Many are far more knowledgeable than this wretched scribe.
Ok, your questions………..
Estimated Reproduction Cost is Above your EPV
My question pertains to circumstances in which your estimated reproduction cost of assets is above your EPV. If this circumstance arises not because of managerial incompetence or malfeasance, but rather because the industry as a whole has significantly overinvested and faces excess capacity, does this change what you use as your estimate of intrinsic value?
No.  You have to normalize your earnings power value, EPV, (See Graham’s discussion in Securities Analysis, 2nd Ed.) using a long-enough period like ten years to average mid-cycle (if highly cyclical company) earnings and eliminate the highest and lowest values.  Reproduction value will have to decline to EPV or, mostly likely, EPV has to rise to reproduction value as capital leaves the industry. 
Do a search on CSinvesting (use search box at top right corner of this blog) and look up Maritime Economics.   Then Capital Returns.  Right now Shipping companies are not able to cover their voyage costs, but new builds trade above scrap.  The market estimates that eventually rates have to normalize and ship owners cover their costs.  
QUESTION
 
Am I wrong to think that although this industry is viable, you should use your calculated EPV as the more conservative estimate of intrinsic value rather than current reproduction cost of assets because presumably some of the capacity that will subsequently come offline will be that of the firm you are valuing? Accordingly, the firms in this industry will return to earning the cost of their invested capital but this will be achieved through some combination of increased prices as capacity comes offline and a reduction in individual capital bases.
The only circumstance I can think of in which this situation warrants using the current reproduction cost of assets would be if all the capacity that exited the market was the capacity that belonged to firms other than the one you are valuing.
Greenwald from Value Investing, pages 93-94:
In Chapter 3, we defined  the EPV of a firm as earnings after certain adjustments time 1/R where R is your current cost of capital. The adjustments mentioned:
  1. Undoing accounting misrepresentations, such as frequent one-time charges that are supposedly unconnected to normal operations. The adjustment consists of finding the average ratio that these charges bear to reported earnings before adjustments, annually, and reducing the current year’s reported earnings before adjustment proportionally.
  2. Resolving discrepancies between depreciation and amortiztion, as reported by the accountants, and the actual amount of reinvesatment the company needs to make in order to restore a firm’s assets at the end of the year to their level at the start of the year. The adjustment adds or subtracts this difference.
  3. Taking into account the business cycle and other transient effects. The adjustment reduces earnings reported at the peak of the cycle and raises them if the firm is currently in a cyclical trough (know your company and industry to do this effectively!)
  4. Applying other modicifations as are resonable, depending on the specific situation.

The goal is find distributable cash flow (owner’s earnings) Buffett used EBITDA minus maintenance capex for pre-tax owner’s earnings where maintenance capex kept the business competitive at the current level of operations.  If a competitor in your motel business puts in HD TV, then you might lose customers to your competitor unless you join the “arms race.”

Reproduction value is a signpost.  If the reproduction of a mine today is above the required capital returns, then you know that capital will have to be leaving the industry.   Who will build and/or operate a new mine.   Know your industry.   Mines can take over a year to shut-down or restart.   Finding an economical deposit and building a mine may take over 25 years.  You have to have industry knowledge to make a reasonable assessment.   Make sure you give youerself a big margin of safety.   

Take bulk shipping companies, you can see that new orders are slim and scrapping is taking place, so supply will be lessening. The question is how long before supply/demand equals. The pendulum swings. 
Follow up Questions
I have an additional question. This one is regarding Greenwald’s discussion of expected growth rate. He says that your expected return on a growth stock is the (current earnings yield*payout ratio)+(current earnings yield * retention ratio *ROE/r) + organic growth. I really appreciate how intuitive it is and how it forces you to focus on the core issues that generate returns on growth stocks. Moreover, I understand that the formula is not intended to spit out an exact figure of prospective returns, but rather to guide the investor towards a yes no decision about whether or not the stock can be reasonably classified as a bargain.
But one issue I have remains–it seems to me that to a certain extent the organic growth and reinvestment growth are comingled, at least to the extent that Greenwald suggests estimating organic growth by looking at the growth of the market that the business is in. I suppose I’m just worried about any embedded circularity/double counting in disaggregating the growth figure into two figures that may have some overlap with one another. Thank you.
Answer: I don’t know if I fully understand your question. You need to separate maintenance capex from growth capex. So the change in sales over the change in fixed assets shows you total capex, so then you need to subtract maintenance capex to see the remainder, growth capex.  You either find maint. capex in the 10-K or call the CFO/Inv. Relations.
Another Reader
Can you help help me to make the estimates on current earnings, I know Bruce said to do five years average, but he also said add back one time charge, and any cyclicality. Conversely, Joel Greenblatt mention he add back pension liabilities, is he talking about adding back maintenance cap ex  ? This is the only issue I have been having for the last year.. I would appreciate your help.
If you are figuring Enterprise value, then you need to add back liabilities to the market cap, including operating leases, unfunded pension funds, long-term debt, etc. Then deduct non-operating cash –depending upon the business, usually 2% to 3% of sales.
You want to figure out what distributable earnings the company can give you, the owner.    Depreciation and Amortization is an accounting principle while maintanance capex is a TRUE cost to stay in business. 
You drive a cab so your fares minus expenses, including maintenance of running your cab and REPLACING it.
IF you can’t figure out a company, then pass on it.
Good luck,

I am Voting for Anthony Weiner

It is inaccurate to say that I hate everything. I am strongly in favor of common sense, common honesty, and common decency. This makes me forever ineligible for public office. H. L. Mencken

The above film documentary is an amazing study of addiction and narcissism. The film will give you insight into the two politicians running for office. May our Constitution and institutions protect us.

A Congressional Limerick
                                 
            There once was a congressman named Weiner, 
        who had a perverted demeanor.  
        He was forced from the hill, for acting like Bill.
        Now Congress is one Weiner leaner.
                                   And The Moral Is: 
                You tweet your meat, you lose your seat.

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Back to the Future; NCAV Strategy

The Financial Report

By Janet Tavakoli

The Great Gold Conspiracy of 1869

William Worthington Fowler’s Twenty Years of Inside Life in Wall Street or Reflections of the Personal Experience of a Speculator is a joy to read.  (I second that opinion).

Twenty Years of Inside Life in Wall StreetFowler’s ripping yarn covers the New York traded markets from 1860-1880, a period that spanned the Civil War, the post war bubble, worthless paper money, the Black Friday Gold Panic of 1869, the Great Panic of 1873, and the consequent first and worst seven year Great Depression. Fowler witnessed how U.S. government paper money replaced specie leading to bubbles, panics, and crashes. It is time to revisit Fowler’s classic. Our current crisis is much more similar to the crash of 1873 and the first Great Depression than the 1929 crash and Depression. History repeats itself, especially in finance.

Conspiracies “R” U.S.

Fowler met the most influential financiers of the day including Jay Gould, James “Diamond Jim” Fisk, Jr., Cornelius Vanderbilt, Jacob Little, Daniel Drew, Leonard Jerome, Addison Jerome, David Groesbeck, and Henry Keep. Their fortunes rose and fell on margin, carry, and derivatives including puts, calls, and futures. They risked everything speculating in equities and a wide range of commodities including gold, silver, cotton, and more. Fowler’s tale entertains as he exposes the great corners, trading rings, conspiracies, bear twists, manipulations, and frauds.

Main stream media sometimes suggests that conspiracies are only for anonymous people who lurk on the internet, or people who send you poorly written emails from yahoo accounts. But conspiracies are as American as apple pie. One of my favorite conspiracies is The Great Gold Conspiracy of 1869. Fowler provides details of the New York financiers who cooked that one up.

“Here, sitting at their ease, surrounded by luxury, in a magnificent apartment, with shrewd lawyers at their elbow, two confederates plotted The Great Gold Conspiracy of 1869, and coolly organized the ruin of thousands.”

“From April, 1865, to September, 1869, a period of more than four years, the movements of gold had been brought about by artificial means, in conjunction with commercial causes, or rather pretexts. The price of Government Bonds abroad, wars or rumors of wars in Europe, disturbances of trade, the shipments of the precious metal in payment of our imports, sales of gold by our government; these and a thousand other strings were harped upon by the gold gamblers to produce those singular upward and downward oscillations in the price, which enriched the members of the Gold Board, while they disturbed the peace of commerce and beggared a host of infatuated outside dealers.”

“Wall Street, like history, repeats itself. Every summer, since 1865, there had been a rise in gold. In March, 1869, gold fell to 131. The astute intellect of Jay Gould now foresaw another opportunity to push up the price of gold, and having purchased $7,000,000 of it, by playing on the strings of the Cuban insurrection, the Alabama difficulties, the prospect of a war between France and Prussia, etc., terrified the bears and rushed up the price to 145. Emboldened by the success of this move, he formed a new and daring scheme.”

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Michael Lewis: Pointless Skeptics (Derivatives, 2007), Management Fee

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In 2007, Michael Lewis laughed off concerns about derivatives and excessive leverage

I enjoyed Michael Lewis’ recent Daily Show interview about his new book, The Big Short. Lewis summarized the crisis nicely and mocked the ignorance of most of the banking world, saying they hid the risk so well they fooled even themselves.

But Lewis faltered when he said almost no one saw the financial crisis coming. Lewis said “A very small handful of investors, I mean, ten to twelve, made a giant bet against [subprime mortgages]” and virtually everyone else on Wall Street was “dumb money”:

“They [financial institutions] figured out there’s an awful lot of money to be made lending money to people who shouldn’t be lent money. And when you do that, you create lots of risk. And the only way you get that risk out [of your firm] and get other people to take it is to disguise it. So they got really good at disguising the risk, and they got so good they disguised it from themselves, they fooled themselves.

Lewis apparently fooled himself too because, in January 2007, Bloomberg reporter Michael Lewis wrote an entire article — titled “Davos Is for Wimps, Ninnies, Pointless Skeptics” — complaining about all the foolish worry at Davos over excessive risk-taking and derivatives contracts:

It’s become almost obligatory for the world’s most important economic people, at the beginning of each year, to travel joylessly to the base of a Swiss ski slope and worry…. Davos is where people with no talent for risk-taking gather to imagine what actual risk-takers might do. Davos Man needs to sit in judgment; Davos Man needs to brood. So great is this need that he will brood about virtually anything, no matter how little he knows about it.

Ah, Michael? How much did you know about derivatives or bank leverage ratios in 2007? You sat in judgment of many of the world’s top financial experts and mocked them for their ignorance when, it turns out, they were right and you were wrong. Look at the insiders whose worry you mocked:

“The system is becoming very complex. The risk of some crisis happening is rising,” says Nouriel Roubini, chairman of Roubini Global Economics. “The world isn’t pricing risk appropriately,” says Steven Rattner, co-founder of Quadrangle Group. “Excessive borrowing and risk-taking,” intones Juergen Stark, chief economist for the European Central Bank.

“The last time we talked,” says William Rhodes, senior vice chairman of Citicorp Inc. (in case you didn’t hear him the first time), “I mentioned we’re going to get some adjustments some time in the future. So this is a time to be prudent.”

..So why do these people waste so much of their breath and, presumably, thought, with their elaborate expressions of concern? Even if these global financial elites knew something useful that you and I don’t — that, say, 50 hedge funds were about to go under and drag with them half the world’s biggest banks along with a third of the Third World — they would be unlikely to do anything about it.

Lewis especially mocked Davos’ concerns about explosive growth in (completely unregulated) derivative contracts:

Derivatives seem to be this year’s case in point. Davos had hardly been up and groaning about the dangers of being alive before Bloomberg News reported what appears to be the general Davosian view: “The surging demand for derivatives is making financial markets more vulnerable to any slowdown in the global economy.”

The piece came with supporting quotes from European Central Bank President Jean-Claude Trichet, Bank of China Vice President Zhu Min and the deputy chief of India’s planning commission, Montek Singh Ahluwalia — but not a worrisome fact in sight. None of them seemed to understand that when you create a derivative you don’t add to the sum total of risk in the financial world; you merely create a means for redistributing that risk. They have no evidence that financial risk is being redistributed in ways we should all worry about. They’re just — worried.

But the most striking thing about the growing derivatives markets is the stability that has come with them.

Now, I realize we all make mistakes. Most of us occasionally make really, really big mistakes. Perhaps we even publicly ridicule everyone else for making a serious mistake when, in fact, they’re right and we’re wrong.

But, if we make a huge mistake, laugh at others for being wiser and more prudent, and later write about how stupid “everyone” was for making the mistake we made, that’s intellectually dishonest. Lewis complained very publicly that the world’s financial experts were idiots for worrying about leverage and derivatives… then he turned around several years later and pretended only a handful of brilliant investors saw the crisis coming while everyone else was blind to the dangers. Which Michael Lewis should we believe?

Lewis should express humility and contrition for so falsely slamming those concerned about leverage and derivatives. His opinion matters, especially when he is writing for Bloomberg. And he should stop pretending that only a handful of people saw the crisis coming because he himself told us otherwise just a few years ago.

Posted by James on Thursday, March 18, 2010

The Greats Struggle

Who can tell me why? q316-longleaf-partners-funds-shareholder-letter and fundcommentary-q3-2016-final   What should your management fee be to solve their underperformance problems?