Category Archives: Humor & Entertainment

Risk Disclosure in Plain Language; Go LT Fundamental

Written in 1998 during the Internet Riot (from Cove Capital Blog)

Risks of Investing in IPS Millennium Fund
Plain Language Risk Disclosure (Funny)

First of all, stock prices are volatile. Well, duh. If you buy shares in a stock mutual fund, any stock mutual fund, your investment value will change every day. In a recession it will go down, day after day, week after week, month after month, until you are ready to tear your hair out, unless you’ve already gone bald from worry. It will insist on this even if Ghandi, Jefferson, John Lennon, Jesus and the Apostles, Einstein, Merlin and Golda Maier all manage the thing. Stock markets show remarkably little respect for people or their reputations. Furthermore, if the fund has really been successful, you might be buying someone else’s whopping gains when you invest, on which you may have to pay taxes for returns you didn’t earn. Just try and find somewhere you don’t, though. Dismal.

While the long-term bias in stock prices is upward, stocks enter a bear market with amazing regularity, about every 3 – 4 years. It goes with the territory. Expect it. Live with it. If you can’t do that, go bury your money in a jar or put it in the bank and don’t bother us about why your investment goes south sometimes or why water runs downhill. It’s physics, man.

Aside from the mandatory boilerplate terrorizing above, there are risks that are specific to the IPS Millennium Fund you should understand better. Since most people don’t read the Prospectus (this isn’t aimed at you, of course, just all those other investors), we thought we’d try a more innovative way to scare you.

We buy scary stuff. You know, Internet stocks, small companies. These things go up and down like Pogo Sticks on steroids. We aren’t a sector tech fund, we are a growth & income fund, but right now the Internet is where we think most of the value is. While we try to moderate the consequent volatility by buying electric utility companies, Real Estate Investment Trusts, banks and other widows-and-orphans stuff with big dividend yields, it doesn’t always work. Even if we buy a lot of them. Sometimes we get killed anyway when Internet and other tech stocks take a particularly big hit. The “we” is actually a euphemism for you, got it?

We also get killed if interest rates go up, because that affects high dividend companies badly. Since rising interest rates affect everything badly, we could get killed even worse if the Fed raises rates, or the economy in general experiences higher interest rates beyond the control of those in control, or gets out of control. Whatever.

Many of the companies we buy are growing really fast. Like, 50% – 100% per year sales growth. Many of them also don’t make any money, although they may be relatively large companies. That means they have silly valuations by traditional valuation techniques. We don’t know what that means any more than you do, because we have never seen anything like the Internet before. So we might overpay for these companies, thinking we are really smart and can get away with it because they are growing so fast. It doesn’t take a whole lot for these companies to drop 50% or more, because nobody else knows what they are worth either. Received Wisdom can turn on a dime in this business, and when that happens prices fall off a cliff.

Even if we were really smart and stole these companies, if their prices run way up we are still as vulnerable as if we were really dumb and paid that high a price for them to start with. If we sell them, you will get pretty irritated with us come tax time, so we try not to do any more of that than we have to. The pole of that strategy, though, is that if we are really successful, you will have a lot of downside risk in a recession or a bear market. Bummer.

Finally, if you haven’t already grabbed the phone and started yelling at your broker to sell our fund as fast as possible, you should understand the shifting sands of technology. It doesn’t take billions of dollars to start a high tech company, like it did U.S. Steel or Ford Motor. Anybody can do it, and everybody does. Many of our companies are small, even though they dominate their market niche. It’s much easier for a new technology to blow one of our companies out of the water than it was in the old days of canal, mining, railroad and steel companies.

Just so you know. Don’t come crying to us if we lose all your money, and you wind up a Dumpster Dude or a Basket Lady rooting for aluminum cans in your old age.

Please e-mail us if we haven’t scared you enough, and we’ll try something else.
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Passive investing bubble
 

 

 

 

 

 

 

 

Note: The Value Vault will be down for a few months for reorganization.   For new readers just use the search box or start at the beginning of the blog and go through the 1,200 posts.   By the end you can run Berkshire of Blackrock.

Update on Analyst Course, Part 1

What We do Not want to learn

We want to learn from professionals who are putting their money on the line: Michael Price, Seth Klarman, etc.

You ONLY need to learn two skills:

  1. How to value a company
  2. How to think about prices.

Unfortunately, the devil is in the details and within YOU.

How to value a company: So What’s it worth?

You must learn how businesses allocate capital.

How to think about prices


and

and

How Wall Street Works

Analyzing Management

If you actually studied the above videos, you would find much wisdom.
The good news about the course is that I have ALOT of material, the bad news is that I have ALOT of material to reformat and organize.

Part two will be your suggestions and comments. Thank you for those who have made the effort so far. So keep them coming.

A Great Learning Site

Fantastic sources of information here:  http://facpub.stjohns.edu/~moyr/videoonyoutube.htm

A good microcap investor to study: http://otcadventures.com/

If you enjoy learning about management (founders beat bureacrats every time) and business–especially one of the greatest franchises of all time–then this movie is for you:

Other Blogs/Websites to Read; The Meaning Crisis

http://wertartcapital.com
Argonaut Capital
Bargain Magazine
Bristlemouth
Bronte Capital
Clark Street Value
Damodaran
Farnam Street
Keep on track
Marathon Reviews
Swiss financial markets commentary
valueandopportunity
https://foragerfunds.com/bristlemouth/value-traps-media-sector-nzme/#comment-7353

I downloaded several excellent articlues on the Capital Cycle from Marathon Reviews.    Search for and find other good sources, then let others know at the Deep-Value discussion board–go to http://csinvesting.org/2015/01/14/deep-value-group-at-google/

READING:

11 THINGS WE’RE READING OR WATCHING THIS WEEK
  1. Savvy owners, savvy investors? – Larry Sarbit
  2. The great unbundlingBen Thompson
  3. Amazon is eating the retail worldBen Carlson
  4. Aurelius on business, investing, lifeRavi Nagarajan
  5. Pabrai’s market-beating approach – Preston Pysh
  6. Cassandra’s songJohn Hussman
  7. President Obama on booksMichiko Kakutani
  8. Restaurant industry bubbleKevin Alexander
  9. A chat with Daniel Kahneman – Morgan Housel
  10. Knowing your investment boundaries – John Huber
  11. Letters: AnabaticArquitos | Askeladden | BronteD&C | Greenlight | GreenWoodJDPLMMOakmark | Pershing | VltavaWedgewood

The Meaning Crisis for College Students

RISK/ Aftermath of Trump Election: Independence Revoked!

cleese2

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]

market-risk

What is Risk?    A Great Post on Risk

risky

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.

comey-and-the-trio-infernal

donald-and-hillary

trump-vs-clinton

4-spx-failed-breakout

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

 

Hedge Fund/Family Office Consulting Job

An example of my short corporate careerQUIZ: You are called in to interview for a six-figure consulting job for a family office.   The family wants to establish an investment policy and procedure for investing.   You are asked whether you would recommend investing in IPOs or other hedge funds.   You reply that before recommending any asset class you would first determine:__________________________?   Also, as a “value” (redundant) investor you would seek to buy from _______________ sellers. In case you need a hint, Ben Graham would have given you the answer in The Intelligent Investor.

One of the family members plops two annotated charts: 1 shows a reverse head and shoulders pattern on pork bellies and chart 2 shows blood spatter on the right of the chart.   Which one has more predictive value as to where the market is headed?

Please answer in a few words–two or three–but no more than a sentence. GOOD LUCK!

Search Process–No Hope: Dry Bulk Shipping

MES-to-Build-Bulk-Carrier-for-Malaysian-Owner

From 1975-2001: ROI for T-Bills was 6.6%, S&P 500 14.1% with a 15% std. dev., Bulk Shipping 7.2 with a 40% std. dev., and Tanker Shipping 4.9% with a 70.4% std. dev! (Source: Maritime Economics, 3rd Edition)

Who in their right mind would invest in the shipping business? Well, if you can buy low, then fortunes can be made.  Recently, the Baltic Dry Index (BDI) hit a thirty-year low of 291BDI Index and note the long-term chart below.  Always look at MANY years of past data. The boom of 2007/08 will probably not be seen again for many years.

bdi

See a deep contrarian investor discuss the dry bulk shippers (March 2016):Deep Value Inv./Operator Discusses Dry Bulk Mkt.

“Dry bulk is a screaming buy; one of the best entry points in the cycle in the last thirty years. But be prepared to sustain a prolonged period of poor freight market conditions and have plenty of cash reserves and low leverage. In other words, you have to have a longer-term perspective than most investors–three to five years at least.

Isaac sowed seeds into the land during a drought.  –Leon Patitasas

“That’s the funny thing about ships. They are actually more attractive to buy at 20xs EBITDA, or even negative cash flow, than they are at 4xs EBITDA,” Coco said.

“So you are telling me that investors should seek out money losing shipping deals?” she asked incredulously.

“Correct. And sell the ones that are making lots of money. Itis like that little Napoleon said….”Buy on the sound of cannons and sell on the soundsof trumpets.”    (Source: The Shipping Man by Matthew McCleery).

John Chew: Here is where I wonder if this post helps readers’ understanding of investing because is this investing or speculating?   Note as much as what Warren Buffett does NOT do. He doesn’t invest in mining or shipping stocks. He has already had poor results with the airline industry.   So why even mention an industry in massive distress with historically sub par returns and huge volatility? I would prefer businesses with great reinvestment opportunities or great capital allocators at the helm like Markel (MKL), but a horrific business going from a distress price to a bad price may give much better returns depending upon the price paid.  Also, the worst bear market in freight rates in the past 30 years for dry bulkers means unusual opportunity just as the worst bear market in gold miners in the past 100 years offered bargains galore.

Readers know that I ventured into the miners in mid-to-late 2013, subsequently suffering back-to-back declines of about 25% before seeing the portfolio rally about 100%. So I still do not have a great return (12% after three years), but I bought miners with a five-year-to-seven year outlook and I am only three years into the investment. With Junior miners you can expect to see a 50% decline before they rally five to 10 times (assuming you chose the ones that survive! –Rick Rule).  In a land of negative-to-low interest rates, I have to look further for bargains.

Readers can pipe in what they would like to learn in future posts–let me know.

Dec302015GoldStocksBears

Five years of declines in gold mining stocks and then…..

sc

Are you investing or speculating by dry-bulk shipping stocks?  These are stub stocks where the equity is a small fraction of the enterprise values due to the shrunken market cap and the large debt taken on to finance ship purchases. But if you buy a few well-managed and relatively well-financed shipping companies that can survive the trough of the cycle–two to four more years?– you can tolerate a few going to zero if the ones remaining multiply many-fold. Not for the weak-kneed. Scorpio Bulkers (SALT) has ALREADY diluted shareholders and has taken drastic action to survive. Note management buying shares at $3.00 Scorpio Bulkers Inc. Announces Financial Results for the First Quarter of 2016. An ugly past, but we invest for the future in terms of mean reversion. I have not yet invested in any shipping stocks!

Here is what I love about the shipping business.   10 ships and 11 cargoes, then a BOOM. 11 ships and 10 cargoes, then a BUST.  You are also on the SAME footing as the most experienced ship owners in the world. NO ONE knows when the cycle will turn.   This is like a poker game where the investor that has the ships when others have thrown in the towel takes a lot of the marbles.  The worse the freight rates and the outlook, the better IF you can carry the costs until the cycle turns, and it WILL turn due to the laws of supply and demand.

I view this as intelligent speculation.   I allocate five tranches of investment into five shipping companies.  Say $5 units each.  One unit goes to zero (ouch!), the next to $2 (Boo!), the next to $1 (Damn!), the next to $3 and the next to $50 (Homerun!) and it takes three years.  There is a 31% compouned return.  Though I have no idea if this is realistic because I must study the shipping industry thoroughly.  I am just formulating a possible strategy IF I find the right companies at the right prices.  But I am drawn to the shipping companies because some companies are trading below depressed net asset values. As Mr. Templeton suggests, look where the outlook is most dire.

The best source to learn about shipping is Maritime Economics. And a must read:

51VJQBA-hNL._SX310_BO1,204,203,200_

Meanwhile keep reading………………..

RISK Management Video – Be prepared for the unexpected.

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/