Giving Away Money; Interesting Blogs Organized; Avoid Small Caps

I’m for human lib, the liberation of all people, not just black people or female people or gay people. –Richard Pryor


Not all here are of interest to me but you decide:

Bronte Capital with a post on avoiding small caps:


Trying to give away money

Why don’t you think people won’t take a $1,100 in market value 0ne-ounce gold coin for $50 or for free?

10 responses to “Giving Away Money; Interesting Blogs Organized; Avoid Small Caps

  1. “Why don’t you think people won’t take a $1,100 in market value 0ne-ounce gold coin for $50 or for free?”

    people are using a heuristic (i.e. mental shortcut) which isn’t crazy.

    based on experience, people know that 999,999 out of 1,000,000 when someone comes up to you on the street and offers you jewelry/watches/valuables/etc it’s fake. People are using a mental shortcut and concluding it’s a scam. You can’t do a detailed examination of every scam offer on the street to determine if its genuine … otherwise you’d waste a good chuck of your life trying to validate fake rolexes.

    Now in this case it wasn’t a scam but that doesn’t make them stupid or ignorant. I’m sure a bunch of those people could have ball-parked the value of an ounce of gold..

  2. probably and even more powerful and more fundamental heuristic is that people don’t sell items worth $1,000 for $50.

  3. They think it is a scam. If someone offered me something for far less than it is worth, only two scenarios come to mind: 1) the item is genuine, and the person is irrationally motivated or selling for uneconomic reasons or, 2) the item is fake and I am being scammed. Unless one is VERY confident in the quality of the item, scenario 2) seems more likely. The same situation applies to undervalued securities – one really needs to investigate thoroughly to ensure that there are not critical defects. Only then can one be confident that they are buying truly undervalued investments and not junk.

    Now, why wouldn’t someone take it for free? I don’t know.

    • Dear Olmsted thanks for your witty, incisive and cogent commentary. Well done.

      Regarding the gold coin–I would bite it, feel the weight and then ask to take it to a coin dealer for assessment. For free, I would take it.

      Most people on the street have no idea what a one ounce gold coin would be–that is how far we have come in believing in fiat money. Trust the Fed.

  4. Regarding the small cap article- Some serious logical gaps… “There are stupid people with suits and a lot of money, therefore don’t invest in small caps”. This is just so unbased.. If there are stupid people with a lot of money and you think they invest it badly, you should be glad!

    having a lot of dumb people with money in stocks means they can make mistakes both ways- they can buy stupidly and they can sell what they have now stupidly (unless I’m stupidly assuming, as the writer does, that all PE managers don’t have money invested now and will start investing the moment he finishes his article). Both stupid buy and stupid sells create oppurtunities, especially If you’re a HEDGE fund manager!! short something you idiot!

    He should spend more time improving his logic, or even better- studying companies, and less time criticizing other people’s suits.

  5. My pleasure 🙂

    By the way, John, are there supposed to be new lessons in model thinking? I’ve watched and loved all the ones currently available, but that’s only several hours worth. Do you know if there’ll be more?

  6. Arden, I don’t know for sure how valid or not Mr. Hempton’s assertion that there are tons of PE guys looking at small caps are. However, if there are a lot, this can cause tons of mispricing upwards when times are good and liquidity is flowing/cheap, and tons of mispricing downwards if things to poorly and firms start failing due to overleverage. If they take a company private, I would imagine there is not much you can do in terms of shorting via equities.

    Anecdotally, a company I follow has a business strategy to look at companies or assets <$500M to add on. One risk they have explicitly called out is that PE guys have started looking in the same area over the past few years, and competition for assets can drive prices up to a point where the returns are poor (for the company). Those same prices may be okay if you have access to tons of cheap debt and the company doesn’t fail.

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