Category Archives: History

Cargo Cults


Feynman_Cargo_Cult_Science_

The first principle is that you must not fool yourself–and you are the easiest person to fool.


A Real Cargo Cult

An example of cargo cult analysis would be expecting to predict future market returns from P/E Ratios or believing you can pick money managers who can overcome a 2% and 20% hurdle vs. a low-cost index fund. See pages 21-24:Berkshire Hathaway AR 2016. Why Buffett is winning his $1 million dollar bet against fund of funds manager, Ted Seides.

A READER WRITES:

The cargo cult mindset — mindlessly aping something without understanding *how* it works — is rampant. E.g. young people who “go to college” and end up unemployed or making minimum wage. They’re not much different than the islanders who made fake airplanes and control towers based on simple observations.

“So I wish to you—I have no more time, so I have just one wish for you—the good luck to be somewhere where you are free to maintain the kind of integrity I have described, and where you do not feel forced by a need to maintain your position in the organization, or financial support, or so on, to lose your integrity. May you have that freedom.”

If we look at the active management world, we see many (most?) asset managers don’t have such freedom. It’s for that reason that Jeremy Grantham believes career risk is what dominates investing. Better to be wrong collectively and focus on relative returns, right?

Fast-forwarding some years, we see Feynman having such freedom during the investigation of the cause of the Space Shuttle Challenger disaster; he was an effective investigator precisely because he wasn’t beholden to NASA and was motivated by the pursuit of truth. His “Appendix F” in the Rogers Commission Report is another must-read: https://science.ksc.nasa.gov/shuttle/missions/51-l/docs/rogers-commission/Appendix-F.txt

Feynman eschewed the “standard” investigative approach and instead wandered around and talked to engineers and technicians, to the consternation of Rogers and others. (Didn’t W.E. Buffett and/or one of his associates do something similar after the Salad Oil Swindle hit AMEX in the ’60s? He saw that actual AMEX customers didn’t much care, so decided to go ahead with his investment.)

In Appendix F, Feynman uses basic engineering concepts and “numbersense” to expose NASA’s defective management culture. The disparity between the engineers’ estimate of flight risk and NASA management’s is astounding. The lesson here is that you oftentimes don’t need very much to sense-check, or falsify your hypothesis — the whole being generally right instead of precisely wrong concept. Going back to the Salad Oil Swindle, the whole thing would’ve never happened if anyone involved decided to reconcile the deposit receipts (known) to the USDA report on national salad oil production (known) to see how the receipts were inflated to the point of absurdity. Looking back at various case studies of failed investments, how often were the warning signs staring us right in the face if only we thought to look?

Since this is an investing website, we might modify Feynman’s closing sentence to something like, “For a successful investment, economic reality must take precedence over public relations, for you cannot fool everyone forever.”

A Strategy for Resource Stocks; Investing Course

A Strategy for investing in highly volatile, cyclical stocks

Once again, gold, silver and their mining stocks are selling off for whatever reason: risk-on as money floods into the stock market, rising nominal yields, 95% certainty of a (meaningless) 0.25% interest rate hike, momentum–take your excuse. The main point is to know your companies (valuation) and wait for sales like you do at the grocery store.   This week we are having a sale on some miners.

As Sprott’s Rick Rule often says, “If you are not a contrarian in the resource sector, you are a victim.  The above video is provided to show a particular investing strategy when your quality miners are selling off to prices where you estimate a margin of safety.  However, it doesn’t mean you predict THE exact bottom.  If your holding period is three-to-five years, you can occasionally pick up cheaper merchandise. Use prices to your advantage, not disadvantage.  I also wouldn’t be surprised to see the miners sell-off further because of their highly volatile nature–huge operational and asset-based leverage–when gold or silver goes up or down, both the price of their product goes up or down and the value of their reserves.  Never expect exact timing–a fool’s game.  Also, miners are impacted by the cost of their inputs, so a rising gold/oil ratio is a positive, for example.

What about the gold price in my assumptions?   I am assuming gold is money (“All else is credit”–JP Morgan) and thus I can benchmark it against world currencies. Gold has been THE strongest money relative to all other currencies for the past 20 years, 30 years, 40 years, 50 years, 100 years.  Gold is THE only money and store of value that can’t be created out of electronic bits like FIAT MONEY.  The stability of available supple is what makes gold the premier money. Of course, due to LEGAL TENDER LAWS, gold is not a currency in the U.S., except that may be changing in some states like Arizona: http://planetfreewill.com/2017/03/09/Ron-paul-testifies-support-arizona-bill-treat-gold-silver-money-remove-capital-gains-taxes/.

In fact, gold (originally silver) is the only Constitutional money allowed–http://www.heritage.org/constitution/#!/articles/1/essays/42/coinage-clause

You can get a historical overview of gold’s‘ price history below. Notice a trend?


http://www.macrotrends.net/1440/hui-to-gold-ratio Now view the miners in perspective.

P.S. Let me know if anyone wants to see a NPV case study on a miner.

Designing an analyst course

My goal is to organize a comprehensive analyst course using the best investors’ teachings and lectures. For example, Buffett, Munger, Graham, Fisher, Tweedy Browne, Walter Schloss, Klarman, and many others etc.  Why not use original sources of the best practitioners?  This is the course I wish I had twenty years ago.  It will be Buffett and Munger teaching not me.

The course would cover search, valuation, portfolio management, and you (how to improve decision-making).   There would be different modules continuing articles, case studies, videos from Columbia Business School and others. We would go from DEEP VALUE to FRANCHISE INVESTING.   Valuing assets to assessing franchises. Understanding reversion to the mean and slow reversion to the mean.  You need to understand that when a moat is breached-watch out! Note Nokia in cell phones.

I would have to make it a private web-site because of copy-right.   This would be more of like a private study place, library, and discussion area for learning.   There could be a in-person value class in some convenient location depending upon interest once folks have had a chance to go through the modules.

For example, putting ebitda into perspective might be a mini-module on a sub-set of cash-flow: http://csinvesting.org/placing-ev-and-ebitda-into-perspective-case-studies/   Now, if you scroll down to the last link, you can see that it was taken down.   With a private web-site, you would see this: http://csinvesting.org/wp-content/uploads/2012/09/placing-ebitda-into-perspective.pdf

Let me know your thoughts because this would be a huge project to complete.  What focus do YOU want?   How would YOU design and make the course.

Have a great weekend!

Fidel Castro and a Glimpse of Cuba

 

castro-skulls

Must Read: https://mises.org/blog/fidel-castro-hero-or-cold-blooded-murderer

FREE SPEECHfree-speech-in-cubaFREE HEALTH CARE

free-heathcare

FREE EDUCATION

free-education

THE RIGHT TO PROTEST

the-right-to-protest

a-glimpse-of-cuba   Let the Cubans tell you their stories.

Cuba in socialist context: http://www.321gold.com/editorials/thomas/thomas120916.html

 

Case Study of a 100 Bagger: Middleby

m-aurelius

midd-chart

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

 

Mining for Gold; Secular vs. Cyclical

saupload_taking_gold_out_of_a_sluice_box

I’m addicted to placebos. I’d quit but then it doesn’t matter–S. Wright

Secular vs. Cyclical and more

 

A Money Problem

1964-money-problem2

We Don’t Have a Wage Problem; We Have a Money Problem

FYI: GAAP Acccounting gatech_finlab_lifo_42216

I’LL BE BACK; Meanwhile Keep Learning

Bull_market_03.24.2016_normal

John Chew asked me to post while he goes through his stem cell transplant.  He says, “I’ll be back.” He thanks the many readers for their kind words of encouragement. 

His hospital roommate. John may opt for a radical new therapy.

Unfortunately, John challenged the status quo so he may have to be hospitalized longer.  Sign up to Farnam Street Blog

Novagold Annual Report 2015 This annual report’s shareholder letter including the links provides an excellent example of how several investors view the capital cycle for an asset.  History does provides a guide.

http://latticework.com/featured/ Worth a look

Sign up: http://investorvantage.com/ to receive reading links like:

10 THINGS WE’RE READING & WATCHING:
    1.   Overcoming Their Fears 
    3.   3 Critical Things An Investor Needs – Capital Exploits
    5.   Unique Behind The Scenes Look Into Buffett’s Process – Vintage Value (must read)
    6.   Andy Groove And The Iphone SE – Ben Thompson
    7.   How Maritime Insurance Built Ancient Rome – Priceonomics
    9.   How Buffett And Munger Differ In The Way They Think – Outlook Business
    10. Podcasts: Conversation with Bethany McLean A fantastic interview for aspiring analysts. Her book on Fannie and Freddie seems like a must read!
Ackman: PSH-Annual-Report-12.31.151 See the section on Valeant.
A short summary of the tug of war over Valeant. Setting aside the noise about fraud, greed, and accounting issues, The Valeant Casino, this is a company that financed fast asset growth with cheap debt (at the time) while taking advantage of the flawed quasi-socialized medical system in the US.   Valuation depends on a normalization of true long-term cash flows–VRX_Update_StillOverpriced_2016-03-15 and EV_EBITDA_Misses_the_Point (View video on valuation and ROIC below for more context). The beneficiary of medical care does not DIRECTLY pay ALL of the costs. Who would be willing to accept a $1,000 tube of anti-fungal cream for their itchy feet if a third-party didn’t pay? See Dying with dignity.
Seconal

Meanwhile……be wise not smart and stay-thirsty-my-friends-3

GO SEE THE BIG SHORT!

So you’re Michael Burry who gets his hair cut at Supercuts and doesn’t wear shoes and you know more than Alan Greenspan?

Michael Burry: Yes.

I Saw the Crisis Coming (Michael Burry vs. Alan Greenspan)

A Review:

A lesson on the MBS crisis

Peter Schiff howling about the coming housing bust: https://youtu.be/Z0YTY5TWtmU

and see the results: aerial-photos

Lake Las Vegas/Macdonald Ranch 05.2012

The movie provides a case study in belief in authority and incentive-based bias.   See how many more biases you can pick out: https://en.wikipedia.org/wiki/List_of_cognitive_biases

The movie can’t cover all the reasons behind the housing/debt crisis, but you will get a sense of what great investors have to go through when they take a massively contrarian position.  Note that Michael Burry started becoming worried about housing in 2003. Why?   He asked himself the simple question: How come real estate prices are RISING or NOT going down in Silicon Valley during the biggest tech bust in history during 2001/2002?

More on Burry

BURRY_2000 Annual Letter

BURRY_Scion_2006_4Q_RMBS_CDS_Primer_and_FAQ

BURRY_Scion1Q2001

BURRY_Scion2Q2001

Burry_Writeups

BURRY_The_Crisis_By_Alan_Greenspan-3-9-10

Mike Burry Lettersw

BURRY_Scion3Q2001

I remember being in the president’s office at Merrill Lynch in 1999 to see about selling www.art.com and the president pointed out through the glass partition to his trading floor and said see my risk team?   They are the best in the business! 

Update: http://thefelderreport.com/2016/01/15/the-big-short-is-only-half-the-story/

Capitulation IV; Analysts Like to Herd; Agony and Euphoria

Miner Sentiment

Bloomberg hating on gold. “Looks like a short”, “Nothing uglier”, “Not even an asset”…AFTER miners drop 90%.

What's uglier than gold

“The Direxion Daily Gold Miners Bear 3X Shares, or DUST, is up a whopping 99 percent in July.” via @

Grant on gold July 22 2015 Zweig   The same analyst who suggested buying miners within 1% of the all-time top in Sept. 17, 2011 now says gold is a “doorstop” in July 17, 2015.  NOW, he tells me!  Journalists chase price and sentiment.

Zweig

Goldman sees gold to $1,000 (July 2015) and Goldman sees gold at 1840 by end 2012  Note a pattern?

gold_10_year_o_b_usd

Media piles on late in trend:

Perhaps today the absurdity has reached the apex of its crescendo with this utterly ridiculous “letter to gold bug” published by Marketwatch:   It’s time to surrender and let the yellow metal fall to its bear market low

Better analysis: Gold Warns Again and Heavy wears the crown

yen and gold

Amazon Beats

AMZN

amzn 1 yr

How analysts react after Amazon reports–follow the herd recommendations regardless of price. Analysis?

http://www.bloomberg.com/news/articles/2015-07-24/wall-street-cranks-up-its-outlook-for-amazon-after-it-delivers-monster-earnings-report

The headlines reported that AMZN’s sales were up 20% year over year for Q2 and that net income had swung from a loss of $123mm to a profit of $92 million yr/yr for Q2.  While those numbers are what they are, sales growth from Q1 to Q2 was a mere 2.9% – pretty much in-line with the rate of inflation.

The media propagandists attributed AMZN’s highly “surprising” quarter to big gains in its AWS business segment, which is its cloud-computing business.  However, if we drill down into the numbers made available in its 8-K, we find that the AWS segment represents just 7.7% of AMZN’s revenue stream vs. 6.6% of revenues in Q1.   Sure seems like a lot of manic hype over well less than 10% of AMZN’s business model.

As it turns out, AMZN’s AWS business model, like everything else it does, is seeded in low quality sources of revenue that will ultimately prove to be unsustainable.  Why?  See this comment sent to me by someone who read my Amazon research report and who used to specialize in high tech accounting for Silicon Valley start-ups:

I audited many of the high fliers that crashed and burned, took companies public & was at the printers the day the bubble really burst which ultimately tabled that IPO…Amazon Web Services is growing by leaps and bounds and a significant amount of those $’s are coming from venture backed start-ups. Almost the entire Silicon Valley and other startups outside the Valley use AWS. Venture backed startups have exploded just as AWS revenues have exploded…That segment of their business will get walloped which right now seems to be a main source of their operating income.  

Read more: Dot con

Notice the difference between mining stocks and Amazon–Deja-Vu of the late 1999’s/2000.  Remember the music Sugar Ray

amzn fomo

bezos_laughing

Money for Nothing (Inside the Federal Reserve)

Producer discusses the above movie–a good discussion about the U.S. Dollar https://youtu.be/6Ad9jtn2kOc

How do you like the Fed’s ability to stabilize the dollar (stable money) and the economy?
Dow_Gold_050615

http://www.forbes.com/sites/markhendrickson/2013/12/20/100-years-later-the-federal-reserve-has-failed-at-everything-its-tried/

Worth the time to study the above.  Pop Quiz: What Exactly Backs the dollar?

Hint: 1. 8,000 tonnes of gold (hopefully!) and…………?