The Education of a Value Investor Part III: The “Ugly”

The-Education-of-a-Value-investor

Everyone has a plan ’till they get punched in the mouth. –Mike Tyson

The author describes in Chapter 7: The Financial Crisis, Into the Void, his trauma. He learned not to be leveraged and to turn off the Bloomberg to avoid the daily carnage.  But I wonder why—if the experience was so searing—he didn’t reflect deeply on the causes for what had happened. Like after seeing the dead and wounded in your safari camp after an elephant stampede and then wondering if changing the color of your tents would stave off disaster.  Perhaps studying elephant migratory patterns would help. Value investors like Seth Klarman and Jim Grant were howling about rapidly burgeoning mortgage debt and centrally-planned interest rates.  Mr. Spier should dust off his Mises and Rothbard texts on the Austrian theory of the business cycle.

On page 80, he believes that people’s human excesses and moral compromises helped cause the financial crisis. Poppycock!  And even if true, then what lessons could be learned? People are always and everywhere greedy, kind, cruel, amoral, and just plain human. Forget the inner scorecards, Robert Cialdini, author of the book Influence, would be saying, “look at incentives.”  The U.S. banking system is inherently flawed.  Since 1840 the US has had 12 major banking crises, while Canada has had none—not even during the Great Depression. See Fragile by Design by Charles W. Calomiris and Stephen Haber. I don’t believe Canadians are less prone to humanness than Americans? Ever been to a hockey game?  The author makes an assertion without theory, evidence or fact. That’s ugly.

The author seems to lack curiosity as to what happened to him.  However, he did listen to Michael Burry’s warnings about the mortgage crisis, but he didn’t share what he thought happened. He bet that policymakers would use every available tool to avert disaster.  But why should the politburo at the Federal Reserve intervene to pile more debt upon debt? To what effects and consequences? What about the crisis of 1920? The Fed did nothing and the result was the fastest and strongest recovery in US history. View: http://youtu.be/czcUmnsprQI.

Now the US labors under high private debt, too-big-too-fail banks, absurd Dodd Frank bank regulations (10,000 pages and counting of rules), and a $4 trillion dollar Fed balance sheet.   Imagine if the Fed did the right thing and shut down.   The panic of 2008 was a global banking crisis. Wealth would have been unaffected, however titles to that wealth would change from the profligate to the prudent.  Now, in 2014, bubbles and moral hazards abound.

My questions are not only asked of Mr. Spier but also of Mohnish Pabrai and Bill Miller.  Mr. Miller once mentioned how cheap housing stocks were at 6 times earnings during 2006 http://www.bloomberg.com. Yet homebuilder company earnings were at 200-year peaks.  Mr. Miller may have lacked understanding of how much mal-investment occurred along with a host of other reasons (community reinvestment act that forced banks to lend to poor credit risks so they could be rechartered). Mr. Pabrai can clutch a check-list but that won’t help in a credit crisis if he owns a subprime lender.

Ironically, Mr. Spier mentions sub-prime auto dealer/lender, Carmax (KMX), as a risk.  Now with massive Fed intervention with QE, QE2, QE3, and QE Forever, why be a value investor? Move over Graham and Buffett, own the most leveraged, subprime lenders you can find like: KMX

But be sure to sell in time:

Conn

Balance sheets matter when bubbles pop. Right now–for now–bubbles abound.

May Mr. Spier enjoy his nirvana, but I can’t recommend this book for anybody who is forging their own way.  You are better off to read Buffett and Graham’s writings while thinking of your own strengths and weaknesses. Follow Mr. Spier’s example and keep a diary of your progress. It’s YOUR journey.

I won’t be doing other book reviews unless I am 100% behind recommending the book to you. I would like to next look at DEEP VALUE by Toby Carlisle. Ten thumbs up.

Tutorial on Gold and the Mining Business from the Denver Mining Show

Very good overviews of gold and mining

Updating the Bullish and Bearish Cases For Gold http://bit.ly/1B6LHte 

Gold Bullion and the Need for Systematic Insurance. http://bit.ly/ZLb0pc  An excellent review of market risk.

How Not to Blow it Next Time http://bit.ly/1tYZYYI 

The Education of a Value Investor: Part II, The “Bad”

 

The-Education-of-a-Value-investor

 

We do not see things as they are. We see them as we are.  – The Talmud

Part II: The “Bad”

To be fair, the author delivered exactly on his promise in the first paragraph of his book:

My goal in writing this book is to share some of what I’ve learned on my path as an investor. It is about the education of this investor, not any other investor. This story is not an investment how-to. It’s not a road map. Rather, it is she story of my journey and of what I’ve learned along the way. With my own flaws and foibles and idiosyncratic abilities—and despite my considerable blind spots.

I titled this part of the review, “Bad” because I was hoping for so much more from the author. Much of his description of his investment process is cursory and his analysis seemed a mile wide and a half-inch thick.  Examples will be discussed in part III.   He never promised that in his opening paragraph, but more experienced investors will then have little to learn from this book.

If you want to learn about the psychology of investing and trading then start with the classic, Reminiscences of a Stock Operator by Edwin Lefevre.  Tudor Jones calls it a textbook for speculation.

Another relatively unknown classic, Why You Win or Lose by Fred Kelly (1930) See a synopsis here:WHY_YOU_WIN_or_LOSE_Fred_Kelly (1)

Investing is something you do. Like sex, reading about another’s activities will only take you so far in understanding it. You must apply yourself, actually invest, and review your results.

Two excellent books on having an investment process and managing emotions:

Trader Vic-Methods of a Wall Street Master and Trader Vic II-Principles of Professional Speculation by Victor Sperandeo.

Back to a hardcore value investor. Read, There’s Always Something To Do, The Peter Cundill Investment Approach.   Cundill was a Canadian Graham and Dodder.

An interesting romp through the investing world, The Money Game by Adam Smith.

Simple But Not Easy by Richard Oldfield is another interesting overview by an old pro.

Then if you want to understand why you must fit investment to YOUR OWN approach, read about all the different ways there are to trade and invest by reading the Market Wizard books by Jack Schwager or Free Capital by Guy Thomas.

Of course, go to the original sources and read all the investment letters from Buffett, Munger, Klarman, Tweedy Browne. Type in their names in the csinvesting.org search box and see where the links lead you.

In Part III, the “Ugly” I take off the gloves and point out the author’s fuzzy thinking regarding the financial crisis.

The Education of a Value Investor: Part 1: The Good

The-Education-of-a-Value-investor

The Education of a Value Investor: The Good, the “Bad,” and the “Ugly.”

Editor: In full disclosure I received this book from the publicist, and I actually read the book.

The title of this review has the words bad and ugly in quotes because I will define those words in part II and III of this review.

Part I: The Good

Here is a story of a young hedge fund manager on a Hero’s Journey (Joseph Campbell) to become a more integrated human being—to become, as the author says, authentic. Though managing money is the author’s profession there isn’t much in the way of investing strategy or techniques.  The author writes with honesty and humility about his journey through life starting as a young investment banker.  The author provides an example for investors and non-investors alike by taking responsibility for his failures and setbacks, understanding his weaknesses and then designing workarounds to improve his investing and life.  A person must develop self-understanding and go where his or her strengths can benefit.

Perhaps Nassim Taleb, author of Fooled by Randomness describes the main investing lesson I took away from the book, “We are faulty and there is no need to bother trying to correct our flaws. We are so defective and so mismatched to our environment that we can just work around these flaws. I am convinced of that after spending almost all my adult and professional years in a fierce fight between my brain (not Fooled by Randomness) and my emotions (completely Fooled by Randomness) in which the only success I’ve had is going around my emotions rather than rationalizing them. Perhaps ridding ourselves of our humanity is not in the works; we need wily tricks, not some grandiose moralizing help. As an empiricist I despise the moralizers beyond anything on this planet: I wonder why they blindly believe in ineffectual methods. Delivering advice assumes that our cognitive apparatus rather than our emotional machinery exerts some meaningful control over our actions. We will see how modern behavioral science shows this to be completely untrue.

For example, the only way for a chocaholic like me to avoid temptation is not to stop loving chocolate but to be kept here in a padded cell: http://youtu.be/pjProtBm4Dc.

Along the way, Mr. Spier shares life lessons such as:

  • The real goal, perhaps, is not acceptance by others, but acceptance of oneself.
  • Avoid groupthink—get out of the New York hedge fund vortex.
  • Environment trumps intellect—move to Switzerland
  • Turn off Bloomberg and check prices infrequently on Nestle, Berkshire and other global franchises.
  • Write thank you notes.
  • Surround yourself with people better than yourself.
  • It helps to know thyself—and to adapt thy setting accordingly.
  • If you don’t know your inner reality, you are likely to be mugged by reality.
  • Become more aware, strip away your facades, and listen to the interior.
  • Take a sincere interest in people. Value people as an end in themselves, not as a means to our own ends.
  • Try Tony Robbins fire walk—put your mind to it and unleash the power. https://www.youtube.com/watch?v=a2c8PMmQxJs (disturbing content, so children should not watch).
  • Play bridge because it is a game based on insufficient information like investing.
  • Try for a state of quiet contentment.
  • Think about your own investment processes in a structured, systematic way.  For example, gather investment research in the right order. Hint: start with the 10-Ks.  Less biased.
  • And finally, the greatest lesson Buffett taught Mr. Spier: “ The more you give love away, the more you get.”

Certainly, the above are excellent lessons, but information is not knowledge and wisdom may not translate into action. How to go from here to there?  The author suggests the Nike commercial, “Just Do It!”  If only action were so easy. But remember the author battles his own flaws and vulnerabilities not the readers’. You may be better off reading Dante’s pilgrimage in the The Devine Comedy. Perhaps Plato’s Dialogues or Nicomachean Ethics by Aristotle. My favorite: Watch Groundhog Day over and over. See:  http://youtu.be/6VF5P7qLaEQ (I’m serious).

There are flashes of good writing: “In hindsight, I can see with clarity that the real value to the firm of my Oxford degree and my Harvard MBA was to adorn its (D.H. Blair, an investment bank bucket shop) deals and documents with my pristine credentials. I thereby provided a kind of Ivy League fig leaf.”

But there are spots of overwrought description: “This book is about my journey from that dark place toward the Nirvana where I now live.”   Nirvana?  A tad over the top.

This is Mr. Spier’s particular journey and a beginning investor or those who need inspiration may learn how honesty and self-knowledge helped transform a hedgie into a better human being. Mr. Spier continues on that journey. Part II and III will describe a few of this reviewer’s disappointments.

More on Mr. Spier here:

https://www.youtube.com/results?search_query=mr+guy+spier

Greg_Speicher-Ways-to-Improve-Your-Investment-Process

2009.7.31_Guy_Spier_interview

The Last Bear Commits Suicide

suicidal-bear

Buy What is on Sale! CEF Discounts

PITSelling today in the pits-gold and silver

CEF BIG

Above is a chart of CEF, Canadien Gold (60%) and Silver (40%) bullion closed-end fund trading at a 6.5% discount today. ON SALE!  I have no clue if tomorrow the price will be higher or lower.

http://www.cefconnect.com/Details/Summary.aspx?Ticker=CEF

Note the premiums as high as 10% and currently 6.5% discount.

4-Gold-sentiment-data

Learn more about interpretating sentiment indicators: www.acting-man.com

Long term sentiment

gold Sent 1

Silver Sent 1

HYGI Sent

A Great blog, Down the Rabbit Hole: http://biiwii.com/wordpress/2014/09/10/sentiment-shifting-gold-bugs/

Though, I like miners more, but now is a good time to pick up tangible money at a discount. Pay 94 cents and get a dollar of gold and silver today–I will take it.  SOLD!  Miners make money on the arbitrage between their input costs and output prices. You don’t need a rising nominal gold price; you need a rising REAL gold price.

gold.cci_-600x264 (2)

Gold commodities

Now is the time for me to post on Yamana (by this weekend, I pray) because it is at a price $7.33 that I have purchased in the past and it may be a reasonable choice for a BASKET of miners.

Also, you want to see analysts pile-on negatively AFTER price has fully dicounted the news. I am not being contrarian or cynical, it is just how markets work–they DISCOUNT.

Yamana Gold suffers rash of stock price target cuts • 12:58 PM

Carl Surran, SA News Editor
  • Yamana Gold (AUY -1.2%) is lower after Morgan Stanley, Credit Suisse and Raymond James cut their price targets on the stock to $10.70, $10.50, and $10, respectively.
  • In the case of Morgan Stanley, the lower target still implies upside of more than 40%; AUY has said the Pilar mine in Brazil has shown improvements with output increasing M/M, but the ramp up is tracking modestly below expectations, thus the firm’s tempered outlook.
  • An update on Canadian Malartic and meeting quarterly expectations are potential catalysts expected over the next 6-8 weeks.

Read comments

Read the link below and the link within it to gain more understanding on gold and miners.

http://www.acting-man.com/?p=32809 

Li Lu’s Lecture; Value Investing Videos

Go comics 1

JUN 24, 2010

Li Lu’s 2010 Lecture at Columbia

Many of you enjoyed my previous transcript of a talk Li Lu gave at Columbia University. Thanks to Joe Koster, you can now view a more recent lecture he gave to Bruce Greenwald’s value investing class in April of 2010. Seen here: http://www7.gsb.columbia.edu/video/v/node/1365?page=26 Based on Berkshire’s investment in BYD, the fact that Lu manages Charlie Munger’s money, and that even Buffett would give money to Lu if he ever retired (according to Greenwald) makes me think Li Lu is an investor worth watching.

With that in mind, I believe it is insightful to study whatever you can find about him and his approach. I think this lecture from 2010 is great. The recording has some audio issues making it difficult to hear and I thought that some of you might enjoy reading notes from the talk. This is not a true transcript, but an approximation of what was said. I think it comes pretty close, having listened to the lecture a few times. I think you will find it helpful and Lu’s talk rewarding.

Bruce Greenwald: Warren Buffett says that when he retires, there are three people he would like to manage his money. First is Seth Klarman of the Baupost Group, who you will hear from later in the course. Next is Greg Alexander of the Sequoia Fund. Third is Li Lu. He happens to manage all of Charlie Munger’s money. I have a small investment with him and in four years it is up 400%.

http://streetcapitalist.com/2010/06/24/li-lus-2010-lecture-at-columbia/

http://www.bengrahaminvesting.ca/Resources/videos.htm#2006_Guest_Speakers

Letters to a young analyst (Great blog for books): 

http://www.readingthemarkets.blogspot.com/2014/09/brakke-letters-to-young-analyst.html

Scottish Vote on Independence: https://www.youtube.com/watch?v=PD5Imb7vWSc

 

A Bear and a Value Investor Throw in the Towel

fairbanks-and-chaplin

Bull could run 5 more years, carry S&P 500 close to 3,000 only seemed interesting because the forecast sounded a bit extreme. We quickly scanned the headline, thinking that whoever was making this assertion surely hadn’t breathed a word about this when the SPX traded at just below 670 points in March of 2009. Such wildly bullish forecasts are strictly a function of SPX 2000 in our opinion, on a par with the “Dow 36,000” forecast, which gained some notoriety in the late 90s. One of the reasons behind the SPX 3000 forecast mentioned in the article did amuse us greatly though, namely the following:

They cite extensive deleveraging in the U.S. as well as the uneven global recovery among other reasons why “this could prove to be the longest U.S. expansion – ever.”

CHART-1-total-US-credit-market-debt-owed

and

CHART-4-NYSE-investor-credit-SPX-since-1980

http://www.acting-man.com/?p=32732#more-32732

An emerging market value investor’s plea:

“This Is A Circus Market Rigged By HFT And Other Algo Traders”

Andrew Cunagin, the founder of Rinehart Capital Partners LLC, a hedge fund backed by hedge-fund veteran Lee Ainslie and specialized in emerging-markets stock-picking, and who as the Wall Street Journal reported earlier, is closing. The closure is not news: what Cunagin blames the closure on, however, is.

From the WSJ:

“This is a circus market rigged by HFT and other algorithmic traders who prey on the rational behavior of warm-blooded investors,” Mr. Cunagin wrote, referring to the high-speed traders who have attracted wide attention this year for the alleged advantages they hold over more traditional investors.

Mr. Cunagin, 43, said in an interview from Cape Town, South Africa, where he was scouting potential future investments, that there was “clear evidence of penetration” by high-frequency traders in the stock markets of South Korea and Mexico, among other areas.

You can see the evidence of dark pool trading…you’ll see half the day’s trading volume occur in the last seconds of trading,” he said. “There’s just evidence that this is not a level playing field.”

In his late-August letter, Mr. Cunagin criticized the “dash for trash” among other traders, including exchange-traded funds, that “puts to shame even the most speculative excesses of the dot.com era.” He said those factors, along with the impact of high-frequency trading, contributed to his fund’s recent poor performance.

Rinehart launched in August 2007, just two months before many emerging markets hit their precrisis peaks. The fund lost 12% in 2008, outperforming most funds during a dramatic pullback for emerging markets world-wide, and made money in the subsequent three years. More recently, however, it struggled, posting losses of 7% in 2012, 15% in 2013 and 4% through midyear this year.

So is this just sour grapes as yet another trader “fought the Fed”, and lost due to two minor disadvantages: a limited balance sheet, and being forced to stay liquid longer than the central planners can stay irrational?

Perhaps, he does however, make a point: “The frustrating thing is that this is precisely the time when you shouldn’t be giving up,” Mr. Rinehart said in the interview. “Anyone who shorted the ‘dot coms’ in the 90s had bad performance, and those ended up being the trades of the decade.

The flipside is that everyone else who went long the dot coms felt richer and richer, if only on paper, and invest more and more cash into the clear bubble until they too lost everything in the end. But such is the poetic justice of the, rigged or otherwise, market: first it wipes out all the shorts, then it drags everyone on the long side, and then it goes bidless and wipes out the longs.

Rinse, repeat.

* * *

Some other excerpts from Cunagin’s letter, courtesy of the WSJ’s Money Beat blog:

The dislocation of returns from traditional vehicles of wealth creation and protection has created a violent rip tide of fund flows from conservative segments of the risk spectrum to the most speculative, giving rise to another, more dangerous bubble. With yields ZIRPed and alpha dead, beta and the ethereal pursuit of “market-” and theme-driven (social media, bio-tech, Chinese internet) returns have become the only game in town, with central banks as the arbiter. Post-2008 monetary policies have rewarded the beta investor who’s gone “all in” on market risk and themes, while punishing harshly the market-neutral, alpha investor who discounts allocations on the basis of value. New paradigms have emerged as a result, defined by binary outcomes of risk-on/risk-off, taper-on/taper-off, win big/lose big. With new innovations of beta-engineering—instruments such as E-minis, QQQ, dollar-yen carry trade—investors are pursuing en masse too little reward in exchange for too much risk. As one commentator put it recently, “the market has become a roulette table, with dimes on black and dynamite on red.”

Just as in previous boom-bust cycles, the seeds of destruction are sewn in the illusion of trend masquerading as truth, with momentum seeming to validate a widening gap between perception and economic reality. And just as in past cycles, the manager who doesn’t subscribe to the new rules, who goes against the grain of convention is viewed as out of touch or left behind.

If there’s an expression that’s come to capture the zeitgeist of the QE era, it is the notion of what is or is not “working” across the asset allocation spectrum. I’ve read reports from equity strategists advising clients to stick with growth themes since “value isn’t working.” Technical analysts assure us that, despite what you’ve been brought up to believe, a strategy of buying high (especially on dips) while selling low is what “works” in this market. I’ve heard from prominent allocators frustrated that “nothing seems to work in emerging markets.” And, most dishearteningly, I’ve heard from Rinehart investors who have rightly observed that, despite steady performance in the past, our strategy is “just not working now.”

The assumption, of course, is that if it’s not working then it’s wrong and if it is working, it’s right. That’s fair enough. As a service provider, we serve at the pleasure of clients, and no manager is ever owed an explanation for being hired or fired. But it’s worth asking, what is it that investors seek? That is, just what is working?

Since the beginning of our fund’s drawdown in early 2012, a Bloomberg index of the “Worst Balance Sheet” companies of the S&P500 has returned to-date over +30% on an annualized basis. An MSCI index of the “Most-Shorted” companies of the Russell 3000—a proxy for the visibility of bad valuations, bad managements, and bad fundamentals—has also returned over +30% annualized. These perversions are even more pronounced within EMs, exacerbated by record fund outflows in the first half of 2014, exceeding even those of the 2008 crisis. This dash for trash puts to shame even the speculative excesses of the dot.com era. This is a circus market rigged by HFT and other algorithmic traders who prey on the rational behavior of warm-blooded investors. They only serve to further undermine the integrity of public markets, which will ultimately bring about their rationalization. Nonetheless, it’s an internal dynamic to which we are uniquely levered, by design, as an alpha strategy. One thing is certain, managers whose strategies are working may be bright and well-informed with advanced metrics on which they make investment decisions, but a reasonable assessment of value is not among them. Do previous cycles not bear asking, what other measure is there?

Sequoia Transcript Sequoia 2014 Transcript

Update on Sept. 11, 2014: Another bear throws in the towel for not being BULISH enough

HAVE A HAPPY WEEKEND!

Dead Companies Walking; Financial Accounting Course

dead-companies-walking-new-cover

http://www.scottfearon.com/

The above is an interesting blog from an original thinker.

For a refresher: A free Wharton course on Financial Accounting (rave reviews)

https://www.coursera.org/course/accounting

 

Deep Value

 

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Interview-with-benzingas-deep-value-letter-author-tim-melvin-about-my-new-book-deep-value/

Another Value Investing Program (Marty Whitman)

Whitman

http://orangevaluefund.com/Welcome.html

Learn about “SAFE and “CHEAP.” 51LTsFHG74L._AA160_

Munger’s book recommendations

http://www.farnamstreetblog.com/2014/08/book-recommendations-from-billionaire-charlie-munger/