Is Buffett Over-Hyped?

Are you sure you know all this to become a day trader?

The selling and buying of a financial asset within the same day or several times during the same day is called day trading. It can be a lucrative game to seek advantage of small price movements, provided you play it correctly. For rookies, day trading can be a dangerous game, especially when you don’t abide by a well planned strategy.

It is vital to follow day trading strategies when you’re planning to monetize on small and frequent price movements. You require in-depth technical analysis to create an effective and consistent strategy. You also have to utilise charts, patterns and indicators to foretell the future price movements. If you’re thinking of choosing a broker, make sure he suits your day trading style. You should look for things like:

  • Remarkable speed of trade execution
  • Capability of trading directly from graphs
  • Price action data
  • Stop losses and take profit orders
  • Automation of trade

Day Trading Strategies

  • Keep aside funds

Determine how much capital you can risk on each trade. Most day traders risk less than 1-2% of their account per trade. For example, if you have $40,000 in your trading account and you’re eager to risk 0.5% of the capital on each trade, then the maximum loss per trade is $200. So you have to set apart extra funds that you can trade with.

  • Invest time

Day trading demands lot of your time; this is why it is called day trading. You may have to invest most of the day into trading. If you have limited time, don’t opt for day trading. Here the trader has to track markets and spot all opportunities that can come up during the trading hours. The key is to move quickly.

  • Begin small

Since you’re a beginner, concentrate on maximum 1-2 stocks during a single session. You will find it easier to track and look for opportunities when there are few stocks. Of late, it has become common to trade fractional shares and hence you can invest in smaller dollar amount on which you wish to invest. This means that if Apple shares trade at $250 and you just wish to buy $50, there are many brokers who’ll allow you to buy one-fifth of a share.

  • Don’t go for penny stocks

Being a novice, you might be looking for low prices and deals but you should strictly avoid penny stocks. The reason behind avoiding them is that they’re mostly illiquid and so the likelihood of hitting a jackpot is rare. Stocks trading under $5 a share become de-listed from the stock exchanges and they only become tradable OTC (over the counter). Unless you find a real opportunity or you’ve done enough research, stay away from these.

  • Curb losses with limit orders

Decide the type of orders you will use to enter trades and exit them. Will you utilize market orders or limit orders? If you place a market order, it can be executed at the best price at that time as there’s no guarantee of price. With the help of limit orders you can trade with better precision where you set your price for buying and selling. The more experienced traders might deploy such strategies and hedge positions as well.

A day trading strategy doesn’t have to win all the time in order to be profitable. Ensure that the risk on each trade is limited to a definite part of the account. The stock market can test your nerves at times. You shouldn’t let your emotions govern your logic.

Understand Semantics to improve your thinking

Suspend your certainty.

Constellation Software

Excellent Shareholder Letters

The above letters can teach you how a business owner should communicate

with his or her fellow owners. A lesson in understanding a business.

Thomas Kaplan, an Investor in Novagold

Mr. Kaplan is the perfect investor to study to improve your investing in deeply cyclical resource investments and to understand gold. As Mr. Kaplan explains in an interview (2017): “Gold is not someone’s liability…. Economically, we are in unchartered waters.”

His philosophy is to start with a macro theme (A long-term bull market in gold) and then locate the best asset (Novagold) to leverage that theme. He considers gold the best risk reward of any asset class. Setting aside that gold is the best asset to own during financial crises, gold will be facing a severe supply crunch since no new large deposits over 5 million ounces are being discovered much less developed. Development from discovery to production requires over 20 years.

In addition, more and more foreign jurisdictions like the Philippines or Papua New Guinea are becoming too risky to mine. Mr. Kaplan estimates the equilibrium price to incentivize new discoveries is probably $3,000 to $5,000 per ounce. I think that is too low of a price.

The patience and conviction to be successful in this type of investing are extraordinarily high. Most professional investors cannot even pretend to be as patient. Mr. Kaplan became involved in Novagold during the crisis of 2009–imagine the fear and financial stress swirling amongst investors then.

Recognizing the obvious: Intrinsic value rising well before price

From 2009 to 2019 the intrinsic value was rising as Novagold became de-risked.  The decade ticked by as Novagold obtained all the required permits, it strengthened relationships with native communities, it spun off non-core assets like Galore (copper) to Trilogy, Novagold treasury increased its cash balance to $250 million with an annual cash burn of less than $10 million, and NG’s relationship with Barrick strengthened. Few cared or paid attention. Meanwhile, many jurisdictions have become even higher risk like the Philippines, Papua New Guinea, etc.

Price goes sideways while intrinsic value rises quietly.   These are the best situations to hold onto.  You just need VAST patience and to pay attention. Value accretion was occurring away from the financial statements. You would see expenses each quarter, but you would need to be aware of the permits won and the relationships strengthened. No algorithm or computer screening model will do that for you. But NG just traded as part of an index until decoupling in mid-2019.  Everything related to Novagold was increasing except the share price until one day……. Meanwhile, Mr. Kaplan held fast because of his knowledge and conviction.

NG trades with the indexes, GDX and GDXJ, then decouples upward as price catches up with intrinsic value.

As a word of caution, this post is not a recommendation to buy Novagold even though I have been a shareholder since 2015. You should understand that Mr. Kaplan has been an investor for over 11 years through declines of 85% in NG’s share price. As an investor you might check on the statements and claims made in the annual reports listed below. If Novagold’s grade is considered outstanding, then look at the annual reports of five major miners and verify/check whether that fact checks out. Take nothing on faith so you can learn conviction.

How would you be willing to hold a investment without a huge payoff for over a decade while waiting for the market to turn to your analysis?

If you study those letters and annual reports, you will have a course in patient investing in a deeply cyclical industry and in understanding gold.

  • UPDATE 5/1/2020: 2008 Annual Report marks the entry of Electrum during the Great Financial Crisis.
  • 2012 Annual Report began the time when management change had begun in earnest with CEO Greg Lang arriving from Barrick Gold as well as divesting of assets to focus on Donlin Gold. Those actions made the company into a perpetual option on the value of gold.
  • The Tortoise and The Hare Chairman’s Letter of 2015 explains why Thomas Kaplan was (and remains) bullish towards gold.
  • Please note how consistent Mr. Kaplan’s and Novagold’s message has been over the past twelve years. The Donlin project attributes remain consistent even while the resource base increases.

Remember that Novagold (NG) as a perpetual option is highly leveraged to the price of gold and to sentiment so expect prices swings of 25% to 50% or more. Such is the requirement to being a long-term investor. My secret is not to look at the share price but once a quarter.

Short attacks are ultimately noise. Eventually, value will out.

Wall Street Never Changes

Case Study on Capital Cycle: Tidewater

Below is a case study of the capital cycle using Tidewater as an example. This page will be updated over time. This is not an investment recommendation but an ongoing case study.

Capital Cycle Case Study: http://csinvesting.org/wp-content/uploads/2020/04/JAC-Case-Study-Capital-Cycle-and-Tidewater-1.pdf

Since Tidewater has been in business since 1955, its service is needed, but this is–at best–no more than an average business with no long-term competitive advantage. Currently, there is a trade-off between a decline in intrinsic value as time progresses without economic charter rates versus Tidewater’s competitive advantage over financially distressed competitors.

Update: 4/17/20

Tidewater filed to protect its $300 million in NOLs and $388 million in foreign tax credits. As an investor, you know that the NOLs can be worth more than $0 to worth a whole lot.

Meanwhile, Hornbeck (HOSS), a competitor filed for bankruptcy.

Update: 4/21/2020 US Crude oil near-term futures trade at a negative price for the first time in history. Natural gas is rising in price as shut-in oil wells reduce natural gas supply. What we are witnessing is a massive destruction of capital and productive capacity thanks to covid-19 and negative global interest rates. The future might require far higher oil prices. Near-term one would expect more pressure on TDW’s price because of the fear in hydrocarbon markets.

Update: 4/22/2020 TDW does not seem to be declining with oil prices–a divergence that may be signaling some change–perhaps investors are looking out at the supply destruction in oil.

http://siemoffshore.com/Default.aspx?ID=9

4/25/20: Siem Management in their 2019 Shareholder letter move from hopeful to despair. (A good sign for Tidewater). These are dark days for the OSV industry and what you typically hear about in the depths of a downcycle.

The Siem Offshore is exposed to a number of risks. One of the most important risk factors is the demand for its services. The OSV market is now in its 7th year of depressed conditions and it has taken longer to recover than earlier expected. It is highly uncertain as to when charter rates will offer sufficient earnings for full debt servicing. The Company has been able to reduce its debt substantially over the last five years. Principal payment of debt instalments in 2019 was USD99 million (2018: 195 million). The significant debt reduction has been possible due to good cooperation between the Company and its financing banks, significant shareholder support, good ship operations and disposal of non-strategic and older assets. However, the significant excess capacity in the worldwide offshore service vessel fleet has increased the competition amongst owners for any vessel requirements, thereby depressing charter rates. The imbalance of supply and demand for offshore vessels is expected to remain for some years and will continue to put pressure on the charter rates and our cash flows. Five vessels were in lay-up at year-end 2019.

4/22/2020 OUTLOOK from Siem Offshore’s Annual Report. Despair!

The collapse in the oil price and the effect of the COVID-19 on the world’s economies have created a very different operating environment for our fleet. Field developments offshore are being cancelled or postponed by our clients and there will be much less work offshore during the coming several years. The demand for our services will therefore reduce rather than increase. At the end of last year, we looked forward to a gradual recovery in offshore activities and the nearing of balance in supply and demand in the OSV sector. That hope is now gone and we brace ourselves for a downturn probably worse than we have experienced during the past few years.

The actions required to achieve the best possible outcome when
confronted with the market difficulties include consolidations between and among debt-burdened owners, such as practically all OSV owners in Norway. This is the time when owners should work together to embrace the opportunities to survive until the end of a long, dark tunnel of slow activity in the market for all of our vessels. Only by working together can the right scheduling and layup of vessels be achieved. The cost saving would be an added benefit. Most of our lending banks are lenders to several if not all of the competing OSV owners and are in the position to influence this required development. Disappointedly, the banks do not appear willing or prepared to assume this vital role.

The financial problems are currently solved independently within each company giving the owners more time to compete fiercely with each other, all to the benefit of the clients. Owners are seen to take higher risks as the clients take advantage of the desperate situations to shift operating risks from the clients to the OSV owners. The latter accepts the risks because they have nothing more to lose. Ironically, it is the banks who are exposed to the contractual downside in this new reality. This has created an artificial, unhealthy and unsustainable competitive situation in our industry.

May 17, 2020 Update. Tidewater currently trades at $4.13 or about 24% below its scrap liquidation value if we take Hornbeck’s bankruptcy filing as a guide.

Tidewater had 157 vessels operating at the end of the year. It took 4 of its active fleet to sell. So let’s take 150 vessels times $2 million per vessel (See last page on Hornbeck Bankruptcy filing below) for 300 million sales/scrap value then minus $85 million net debt for $215 liquidation value divided by 42 million shares or $5.11 per share. At $4.13, TDW trades 24% below this value.

I realize that the next twelve to eighteen months will be extremely difficult for TDW as it races to scrap excess vessels and conserve cash, but I don’t think it is a certainty that TDW will have to restructure it debt or declare bankruptcy again, but the market is pricing for extreme events ALREADY. The issue is whether to add on weakness.

The biggest risk is if financiers continue to throw good money after bad in this OSV industry. We shall see.

Update on June 3, 2020. Robotti Letter to Tidewater Board on Poison Pill https://advisors.robotti.com/blog-items/carpe-diem-read-robottis-letter-to-the-tdw-board-re-consolidation/

Capt. Sully has Lessons for Investors

These two videos give investors an overview of how important preparation is for success under extreme pressure.

Relative Values

Most investors are not aware of the improvements that miners in general have made. 1. Managements have lowered costs. 2. They have been careful on capex and acquisitions. 3. oil prices,a big input cost, have lagged the rise in gold. 4. And finally, free cash flows are increasing.
Video

Learning from other Industries