Category Archives: Investor Psychology

Michael Price’s Case Study on Hospira HSP) Valuation


I wait for large discounts; I look for the growth guys selling to the value guys.”

Video Lecture: on November 9, 2013 in London.

Thanks to London Value Investor Conference, 22nd May, Featuring Mason Hawkins and Don Yacktman,  April 7, 2014 by Tobias Carlisle


Wait for bad news; wait for things (news/events) that can drastically affect the company. Be prepared to act on it. At MFP, we spend all our time determining intrinsic values (“IVs”). Try to lead them. Determine IV beforehand, so you can act quickly when events push prices below IV. The Sell-Side talks about this last quarter. How the hell helpful is that?  I don’t think one or two quarter’s matters or even a year’s worth of earnings reports. Understand what MIGHT HAPPEN not what DID HAPPEN.

Get prepared and wait for these opportunities like HSP,  today (Nov. 8, 2013) at $32. It will be worth $45 in a year.


Management has said they have fixed problems at the plant, the balance sheet is clean. Management will buy-back stock. The company has $2.00 per share in earnings now and in a year it will have $3 per share. A fifteen multiple (conservative given the business and competing investments) gives you $45.



Hospira (HSP) is a manufacturer of generic drugs, a pharmaceutical company. The Federal Drug Administration (FDA) regulates their plants for certain standards of cleanliness and to ensure the bio equivalency of their drugs.

So HSP was earning $3 EPS and was an absolute growth stock that never disappointed Wall Street up until 2010. Earnings were growing at a nice rate.

Then one day, the FDA shuts down one of HSP’s larger plants. The stock opens at $28, down $17 points from $45. So what happens when a company has 200 million outstanding shares and the stock declines 17 points—HSP loses $3.5 billion of market cap. I do not believe it will cost $3.5 billion to fix the plant to FDA’s standards. HSP has 17 plants and the FDA closed only ½ of one plant.

The stock market puts $3.5 billion discount on the bad news from Hospira. The market is OVER-discounting or over extrapolating the bad news (perhaps to ALL of Hospira’s business).

THAT situation—a good company hit with a temporary/fixable problem to go on sale—is what value guys wait for.

HSP was consistently growing, earning $3 EPS and trading at 15 times earnings. It was owned by all the growth guys. So what happens when a stock goes from $45 to $28 or 17 points? The growth guys are selling to the value guys and the value guys, at $28 per share, are saying that the company will be hit now for $1 per share (earning $2.00 per share temporarily) but will be back to $3.00 per share after the company fixes the plant, buys back stock, etc.

It will take two years to get back to earning $3 per share and cost the company about $500 million or a $1 billion to fix the large plant. Meanwhile, the company will earn 50 cents or a $1 less than it would with the plant operating normally ($2.00 to $2.50 per share), but the intrinsic value of the company is about $45 with a 15 multiple on normalized earnings of $3.00 per share that the company should earn once they get religion and run their plants a bit better.

Then the growth guys will come back into the stock and then the value guys sell to the growth guys.

You look for the most down stocks; down 25% to 35%. I look for the growth guys looking to sell the value guys.  Ask yourself if the discount is great enough. WAIT FOR BAD NEWS.

Michael F. Price 13F

% of Portfolio as of 12/31/13
Hess Corporation 7.48%
Intel Corporation 6.2%
Alleghany Corp. 3.85%
Boston Scientific Corporation 3.1%

See a more detailed Case Study: Case Study Hospira by Price London 2013

and a prior lecture: M PRICE Columbia Lecture Notes_2009 and G&D Spring 2011

A student should listen carefully to the above lecture and try to also value Hess, another company mentioned in his London speech.

Value AMEX during the Salad Oil Scandal (A Great Blog)

Understanding Bear Markets; Without Comment

Understanding Bear Markets:

Charts below from:










Speculative Hedge Funds Piling In.



Socionomics and History; The Bubble in Social Media


The History of the Markets through the lens of socionomics

So does social mood CAUSE events or vice-versa? I found the video below interesting but socionomics seems too general for useful application. 



Note the date on the above Time cover–August 21, 1999. America was at its height of exuberance. The NASDAQ peaked in March of 2000 seven months later. 

Social Mood and the Stock Market and Presidential Elections

Sex and the Stock Market

Talk about social mood? How about a bubble in social media? Do they ring a bell at the top? (Remember the AOL/Time Warner merger).

Facebook’s $19 billion takeover of WhatsApp (largely financed by issuing more of FB’s inflated stock, hence the price tag is in a way actually an illusion) has predictably produced a very wide range of reactions. Jeff Macke at Yahoo’s Daily Ticker was describing it as a ‘brilliant deal‘, heaping scorn on critics who in his opinion just don’t understand the value of a business employing metrics other than the money it actually makes (or stands to make in the future even under very generous assumptions, since a major attraction of the service is that it is actually free for one year, and thereafter costs a pittance). “They’ll eventually figure out how to make money from it”, according to Macke. Perhaps; Facebook’s shareholders were no doubt relieved to hear it.

On the other end of the spectrum of reactions,  Peter Schiff is criticizing it as just another outgrowth of the latest Fed-induced credit and asset bubble, noting that such pricey takeovers are typically only seen when oodles of money from thin air have flooded the system.

A great post:

Don’t forget to improve your investing by STUDYING the whole movie–ROUNDERS.  

Banker “Suicides”; Economic Myths; Food Crises; Gold Stock Analysis?


The string of suicides among the leading bank employees is indicative of the change in trend. The major Wall Street banks including Bank of America, Goldman Sachs, JP Morgan, Credit Suisse, subsequently told junior bankers to take more time off since the death at Bank of America last August of a 21-year-old Bank of America intern who died after reportedly working consecutive all-nighters at the bank’s London office.

An excellent course on behavioral economics. I took this course and highly recommend but it is a time commitment of $six to eight hours per week. Improve the YOU.

POKER: To learn about investing in the 21st Century: The great poker movie, Rounders:

Munger on Investing:

Any interest in analyzing a gold stock?

Economic Myths

Myth #8: The Fed provides a net benefit to the US economy

It never ceases to amaze us that people who understand that it would make no sense to have central planners setting the price of eggs believe that it is a good idea to have central planners setting the price of credit.

Myth #2: The Fed’s QE boosts bank reserves, but doesn’t boost the money supply.

It’s a fact that for every dollar of assets purchased by the Fed as part of its QE, one dollar is added to bank reserves at the Fed and one dollar is added to demand deposits within the economy (the demand deposits of the securities dealers that sell the assets to the Fed).

Myth #12: Inflation is not a problem unless the CPI is rising quickly

The conventional wisdom that “inflation” is not a major concern unless the CPI is rising quickly is not only wrong, it is also dangerous. It is wrong because monetary inflation affects different prices in different ways at different times, but the resultant price distortions always end up causing economic problems. It is dangerous because it leads people to believe that there are no serious adverse consequences of central-bank money printing during periods when the prices included in the CPI are not among the prices that are being driven skyward by money printing.

Read more:Economics_Myths_on_Fed_Reserves_Saville

An Expert on Bear Stearns:

 Why the rioting? fig1_crises

Social unrest may reflect a variety of factors such as poverty, unemployment, and social injustice. Despite the many possible contributing factors, the timing of violent protests in North Africa and the Middle East in 2011 as well as earlier riots in 2008 coincides with large peaks in global food prices. We identify a specific food price threshold above which protests become likely. These observations suggest that protests may reflect not only long-standing political failings of governments, but also the sudden desperate straits of vulnerable populations. If food prices remain high, there is likely to be persistent and increasing global social disruption. Underlying the food price peaks we also find an ongoing trend of increasing prices. We extrapolate these trends and identify a crossing point to the domain of high impacts, even without price peaks, in 2012-2013. This implies that avoiding global food crises and associated social unrest requires rapid and concerted action.

Tweet Map (clickable)

Clickable food prices tweet map

Press Release: Scientists show link between food pricing and global riots

A new Cambridge study issues stern warning for policy makers

(CAMBRIDGE, MA) — A new study shows that the timing of outbreaks of violence rocking North Africa and the Middle East is linked to global food prices.

Today’s headlines explode with stories of failed political systems, harsh regimes, and denial of rights underlying riots and warfare. The authors, however, point to rising food prices as a key factor too–not only in assessing the aftermath but in predicting future times of unrest.

The study, titled “The Food Crises and Political Instability in North Africa and the Middle East,” is by Marco Lagi, Karla Bertrand and Yaneer-Bar-Yam of the New England Complex Systems Institute.

Using detailed charts showing data from the FAO Food Price Index and the timing of the riots, the authors were able to demonstrate how food prices have a direct link to the tipping points of unrest and upheaval.

The authors also criticize the deregulation of commodities markets in the US as contributing to the rise in food prices.

The authors issued a stern warning that if food prices remain high, disturbances will continue. Averting further crises this year and next requires quick and concerted action by policy makers, they added.

“Our predictions are conditional on the circumstances, and thus allow for policy interventions to change them. Whether policy makers will act depends on the various pressures that are applied to them, including both the public and special interests,” said Prof. Bar-Yam.

The History of Trading in the Pits; Much More

Trading Pits

The successful investor is a master of paradox. He expects the unexpected, distrusts the experts and loves what the majority hates. He believes that, in markets as in heaven, the first shall be last and the last shall be first.

There’s fool’s gold–pyrite–and then there’s fools’ gold owned by idiots who will trade it for worthless dollars.

History of the trading pits: Great blog!

What is money? What is money_ TTMYGH_17_Feb_2014

Assessing Long-Term Account Performance

Hard wired for bubbles (Dan Ariely)

Thinking properly about “cash sitting on the sidelines.” Or how to think properly.

Rick Rule on Gold Miners and Gold (Of course, when you ask a barber if you need a haircut…..But, he has a lot of experience in these markets.  Survival is proof enough of competence in the miners!


Rick Rule: We’ve said on your interviews, ‘You’ve suffered through the pain, why not hang around for the gain?’  I think we’re in the beginning of the gain session.  Your readers and listeners, at least those who are new to the sector, need to understand that we are in a rising channel, but we are in a rising channel that is going to have higher highs and higher lows….

It’s going to be volatile.  You are going to see 15% declines, and you are going to see 20% gains for seemingly no reason.  The important thing to note is that I certainly believe the precious metals sector and the precious metals shares have bottomed and they are moving up.

We’re tempted to say that the bottom was reached and the recovery in the junior shares began in July of last year.  Certainly, November, December, and January have seen pretty good rises — 40% share price escalations have not been uncommon.

It is not uncommon for well-constructed portfolios in a precious metals market recovery to experience five-fold or ten-fold gains.  So for those people who went through the downturn and are now beginning to experience the upturn, firstly, congratulations.  And second, keep your seatbelt on.  It’s going to be very volatile but I think we are higher, probably substantially higher from here.” 


Eric King:  “William Kaye, the outspoken hedge fund manager from Hong Kong, was telling King World News that demand (for gold) out of China is just ‘insatiable.’  Your thoughts on the physical demand we’ve seen around the globe — it’s been quite stunning.”

Rule:  “He would know better than I with regard to Hong Kong demand, but certainly we’ve seen very strong physical demand from around the world.  A lot of the physical demand has taken place right here in the United States.

What’s interesting about his (Kaye’s) statement is the dichotomy between the private physical markets and the long-term markets.  I can’t help going back to an announcement about 12 months ago, when the Germans wanted to repatriate their 1,500 tons of gold, and they were told by the US government that it would take seven years (to get back only 300 tons of gold) that was theirs.

At the same time, over 30 days, in the physical market, Chinese retail buyers bought and took delivery of 1,120 tons of gold.  One of the things that this points out is the very, very odd dichotomy between central bank and multilateral institutional holdings of gold, and the paper gold market on one side, and the honesty of the physical market on the other side.  

My suspicion is that the physical market is prevailing and will continue to prevail over the paper market.  And the subtext of this is that the documented large (gold) short positions that exist in the paper market may get their long awaited religious experience as they are unable to deliver against futures obligations.”


Seth Klarman on investing vs speculating:

Mark Twain said that there are two times in a man’s life when he should not speculate: when he can’t afford it and when he can. Because this is so, understanding the difference between investment and speculation is the first step in achieving investment success.

To investors stocks represent fractional ownership of underlying businesses and bonds are loans to those businesses. Investors make buy and sell decisions on the basis of the current prices of securities compared with the perceived values of those securities. They transact when they think they know something that others don’t know, don’t care about, or prefer to ignore. They buy securities that appear to offer attractive return for the risk incurred and sell when the return no longer justifies the risk.

Investors believe that over the long run security prices tend to reflect fundamental developments involving the underlying businesses. Investors in a stock thus expect to profit in at least one of three possible ways: from free cash flow generated by the underlying business, which eventually will be reflected in a higher share price or distributed as dividends; from an increase in the multiple that investors are willing to pay for the underlying business as reflected in a higher share price; or by a narrowing of the gap between share price and underlying business value.

Speculators, by contrast, buy and sell securities based on whether they believe those securities will next rise or fall in price. Their judgment regarding future price movements is based, not on fundamentals, but on a prediction of the behavior of others. They regard securities as pieces of paper to be swapped back and forth and are generally ignorant of or indifferent to investment fundamentals. They buy securities because they “act” well and sell when they don’t. Indeed, even if it were certain that the world would end tomorrow, it is likely that some speculators would continue to trade securities based on what they thought the market would do today.

Speculators are obsessed with predicting – guessing – the direction of stock prices. Every morning on cable television, every afternoon on the stock market report, every weekend in Barron’s, every week in dozens of market newsletters, and whenever businesspeople get together, there is rampant conjecture on where the market is heading. Many speculators attempt to predict the market direction by using technical analysis – past stock price fluctuations – as a guide. Technical analysis is based on the presumption that past share price meanderings, rather than underlying business value, hold the key to future stock prices. In reality, no one knows what the market will do; trying to predict it is a waste of time, and investing based upon that prediction is a speculative undertaking.

Market participants do not wear badges that identify them as investors or speculators. It is sometimes difficult to tell the two apart without studying their behavior at length. Examining what they own is not a giveaway, for any security can be owned by investors, speculators, or both. Indeed, many “investment professionals” actually perform as speculators much of the time because of the way they define their mission, pursuing short-term trading profits from predictions of market fluctuations rather than long-term investment profits based on business fundamentals. As we shall see, investors have a reasonable chance of achieving long-term investment success; speculators, by contrast, are likely to lose money over time.

More on TA. Does It Work?


Readers’ Replies to prior post on Technical Analysis (“TA”) found here:

#1 Here is one rich technician. Paul Tudor Jones. Nuff said. Lowery research has been in business a long time doing TA. Tom Demark. Look him up.

#2 Personally I think people should use Fundamentals for investing in anything for the Long Term. Technical Analysis has a purpose but usually only for the immediate future. That’s why most Day Traders use Technical Analysis.

For instance, if you watch the Moving Averages and say that the 200-day Moving Average (200MA) falls below a 50-day moving average (50MA), this is known as a death cross and 9 times out of 10 that I have seen that kind of action, the price on that chart will start to go down.

Technical Analysis is mostly used for short-term movement in a stock, commodity, currency, etc., etc. It is virtually impossible to base a long-term investment on Technical Analysis.

My response: Thanks, but those opinions don’t improve our knowledge about whether TA is a usable tool.  Take #1, Paul Tudor Jones is a big, successful hedgie who uses TA–enough said.  Let’s substitute TA for dresses in drag and flips coins. The meaning would be the same.  I don’t want to pick on anyone, I read the same in many articles on Tudor Jones. I bet you Tudor Jones couldn’t even tell you EXACTLY how he uses charts.  He probably blends many factors into his “sixth-sense” based on thousands of hours of intensive interaction with the markets.See page one: 04_Jul_-_Tudor_Inv_Corp where Tudor loves the dollar and then the next day he is short the dollar. Did a chart give him a signal? If so, what is the STATISTICAL EVIDENCE?

The point is, there is and can never be any statistical evidence since charts just reflect PAST human choices of buying and selling. Future human action can’t be mathematically proscribed.

Paul Tudor Jones II Interview

Also, technical analysis has both passionate critics and ardent adherents. For example, an October 2009 study by New Zealand’s Massey University found that of more than 5,000 strategies that employ technical analysis, none produced returns in the 49 countries where researchers tested the strategies beyond what you’d expect by chance. However, scores of traders, including billionaire Paul Tudor Jones, say the discipline helped them amass great fortunes. So I tried to keep an open mind. (If Paul Tudor Jones is a billionaire, then TA must work! Flawed logic!) Read more at

#2 If you have evidence that 9 out of 10 times the “Death Cross” moves prices enough for you to take advantage of them–then great for you. But again, if this “signal” did work, why wouldn’t the market DISCOUNT it in the future especially if you could precisely define what a Death Cross is?

There are some money managers who use TA in creative ways for the long-term but I call them market mystics. 

Capital Mkt Update 2008 Montgomery and Capital Mkt Update 2009 Montgomery

What I AM saying is to use TA if it works for you however you define “works for you” be it in confidence, money management and setting risk parameters, finding opportunities, etc. but don’t fool yourself. THERE IS NO SCIENTIFIC EVIDENCE THAT TA HAS ANY EFFICACY.

I will make a $1,000 bet. Show me any statistical proof or long-term (fifiteen years or more) of market beating returns solely using TA. Ask these guys:  I guess SELLING TA is more profitable than USING it. I smell a legal high-pressure selling scam:

Why the strange picture at the top of this post?   This NY Times’ article by Gary Taubes shows how difficult it is to obtain scientific proof for even life threatening health issues.

NEARLY six weeks into the 2014 diet season, it’s a good bet that many of us who made New Year’s resolutions to lose weight have already peaked. If clinical trials are any indication, we’ve lost much of the weight we can expect to lose. In a year or two we’ll be back within half a dozen pounds of where we are today.
The question is why. Is this a failure of willpower or of technique? Was our chosen dietary intervention — whether from the latest best-selling diet book or merely a concerted attempt to eat less and exercise more — doomed to failure? Considering that obesity and its related diseases — most notably,Type 2 diabetes — now cost the health care system more than $1 billion per day, it’s not hyperbolic to suggest that the health of the nation may depend on which is the correct answer.
Since the 1960s, nutrition science has been dominated by two conflicting observations. One is that we know how to eat healthy and maintain a healthy weight. The other is that the rapidly increasing rates of obesity and diabetes suggest that something about the conventional thinking is simply wrong.
In 1960, fewer than 13 percent of Americans were obese, and diabetes had been diagnosed in 1 percent. Today, the percentage of obese Americans has almost tripled; the percentage of Americans with diabetes has increased seven-fold.
Meanwhile, the research literature on obesity has also ballooned. In 1960, fewer than 1,100 articles were published on obesity or diabetes in the indexed medical literature. Last year it was more than 44,000. In total, over 600,000 articles have been published purporting to convey some meaningful information on these conditions.
It would be nice to think that this deluge of research has brought clarity to the issue. The trend data argue otherwise. If we understand these disorders so well, why have we failed so miserably to prevent them? The conventional explanation is that this is the manifestation of an unfortunate reality: Type 2 diabetes is caused or exacerbated by obesity, and obesity is a complex, intractable disorder. The more we learn, the more we need to know.
Here’s another possibility: The 600,000 articles — along with several tens of thousands of diet books — are the noise generated by a dysfunctional research establishment. Because the nutrition research community has failed to establish reliable, unambiguous knowledge about the environmental triggers of obesity and diabetes, it has opened the door to a diversity of opinions on the subject, of hypotheses about cause, cure and prevention, many of which cannot be refuted by the existing evidence. Everyone has a theory. The evidence doesn’t exist to say unequivocally who’s wrong.
The situation is understandable; it’s a learning experience in the limits of science. The protocol of science is the process of hypothesis and test. This three-word phrase, though, does not do it justice. The philosopher Karl Popper did when he described “the method of science as the method of bold conjectures and ingenious and severe attempts to refute them.”
In nutrition, the hypotheses are speculations about what foods or dietary patterns help or hinder our pursuit of a long and healthy life. The ingenious and severe attempts to refute the hypotheses are the experimental tests — the clinical trials and, to be specific, randomized controlled trials. Because the hypotheses are ultimately about what happens to us over decades, meaningful trials are prohibitively expensive and exceedingly difficult. It means convincing thousands of people to change what they eat for years to decades. Eventually enough heart attacks, cancers and deaths have to happen among the subjects so it can be established whether the dietary intervention was beneficial or detrimental.
And before any of this can even be attempted, someone’s got to pay for it. Since no pharmaceutical company stands to benefit, prospective sources are limited, particularly when we insist the answers are already known. Without such trials, though, we’re only guessing whether we know the truth.
Back in the 1960s, when researchers first took seriously the idea thatdietary fat caused heart disease, they acknowledged that such trials were necessary and studied the feasibility for years. Eventually the leadership at the National Institutes of Health concluded that the trials would be too expensive — perhaps a billion dollars — and might get the wrong answer anyway. They might botch the study and never know it. They certainly couldn’t afford to do two such studies, even though replication is a core principle of the scientific method. Since then, advice to restrict fat or avoid saturated fat has been based on suppositions about what would have happened had such trials been done, not on the studies themselves.
Nutritionists have adjusted to this reality by accepting a lower standard of evidence on what they’ll believe to be true. They do experiments with laboratory animals, for instance, following them for the better part of the animal’s lifetime — a year or two in rodents, say — and assume or at least hope that the results apply to humans. And maybe they do, but we can’t know for sure without doing the human experiments.
They do experiments on humans — the species of interest — for days or weeks or even a year or two and then assume that the results apply to decades. And maybe they do, but we can’t know for sure. That’s a hypothesis, and it must be tested.
And they do what are called observational studies, observing populations for decades, documenting what people eat and what illnesses beset them, and then assume that the associations they observe between diet and disease are indeed causal — that if people who eat copious vegetables, for instance, live longer than those who don’t, it’s the vegetables that cause the effect of a longer life. And maybe they do, but there’s no way to know without experimental trials to test that hypothesis.
The associations that emerge from these studies used to be known as “hypothesis-generating data,” based on the fact that an association tells us only that two things changed together in time, not that one caused the other. So associations generate hypotheses of causality that then have to be tested. But this hypothesis-generating caveat has been dropped over the years as researchers studying nutrition have decided that this is the best they can do.
One lesson of science, though, is that if the best you can do isn’t good enough to establish reliable knowledge, first acknowledge it — relentless honesty about what can and cannot be extrapolated from data is another core principle of science — and then do more, or do something else. As it is, we have a field of sort-of-science in which hypotheses are treated as facts because they’re too hard or expensive to test, and there are so many hypotheses that what journalists like to call “leading authorities” disagree with one another daily.

It’s an unacceptable situation. Obesity and diabetes are epidemic, and yet the only relevant fact on which relatively unambiguous data exist to support a consensus is that most of us are surely eating too much of something. (My vote is sugars and refined grains; we all have our biases.) Making meaningful inroads against obesity and diabetes on a population level requires that we know how to treat and prevent it on an individual level. We’re going to have to stop believing we know the answer, and challenge ourselves to come up with trials that do a better job of testing our beliefs.

Before I, for one, make another dietary resolution, I’d like to know that what I believe I know about a healthy diet is really so. Is that too much to ask?
Gary Taubes is a health and science journalist and co-founder of the Nutrition Science Initiative.

Does Technical Analysis Help?


Note the Head & Shoulder Pattern Above and the negative divergence.

A Reader Asks: I was wondering, you seem to use a little bit of technical analysis in your work, like in the annual letter you recently sent out.  I’m a buy-at-a-cheap-price purist at this point, and I don’t pay much attention to price/volume movement.  However, maybe I should.  I’d love to persuaded as to why learning about technical analysis is worth the effort.  That is, of course, if you think it is.

Would you mind briefly explaining the basics of it, or maybe just making a brief book or article recommendation for it in one of your posts?  I’d really like to hear about your experience with it.

My Reply:  Warren Buffett explained, “I realized that technical analysis (“TA”) didn’t work when I turned the chart upside down and didn’t get a different answer.”After eight years of trying, he concluded that it was the wrong way to invest. Then he focused on the teachings of Ben Graham, which stressed business fundamentals, finding a strategy that both made sense and, more importantly, worked.  See more:

I don’t believe technical analysis has any predictive value or if it does, the rules are so fuzzy that nailing Jello to the wall would be easier than determining the efficacy of TA.  All a chart tells you is the price and volume history of a company’s stock.  What has happened in the PAST.  The chart may provide confirmation of your theory of who is on the OTHER SIDE OF THE TRADE from you if COMBINED with strong company specific fundamental knowledge plus industry knowledge.  Knowing if there are smart people or “dumb/emotional” investors on your side of the trade may be helpful ON THE MARGIN.

Why are there no rich technicians?

And if someone did actually HAVE A SECRET why would they reveal themselves?  Those that know, don’t say and those who don’t know  have the floor to themselves, like CNBC. Most technicians wiffle, waffle and sound like this: .  Nothing factual or evidence-based here.  ”Well I think this or if that does this then this does that!  Gimme a break!  Be warned! If you listen more than four minutes of the podcast, your brain will turn to slush.

Trade the trader:   Actually, seems more in line with my thinking, “Who is on the other side of the trade from you?”

I use charts to describe price history and my hypothesis about buyers and sellers. Let’s take a recent example where I sold out of the money puts ($18) and bot ($15 puts) for a bullish put spread on NEM. I am certainly not recommending NEM because there are “better” companies in terms of returns out there in the mining sector like Agnico (AEM), Royal Gold (RGLD), Detour, Kirkland, etc. but the sizing and diversity of your portfolio is critical. These companies are BURNING MATCHES!  You gotta sell when the birds chirp. See NEM NEM_VL


Note the 75% decline–one of the worst for the major gold producers and back to twelve-year lows.  Horrific! A lot of carnage, but there has been a change in management, a focus on slimming down and improving operations.  NEM made the fateful mistake of growing for growth’s sake five years ago.


Nem is a major component of GDX. Note the recent large (5%) under-performance. NEM announced earnings on the 31st and the stock lost about 10% of its value in one day. Volume traded at almost four (4x) times normal. Who sold; who bought?   Track here:

If you note the large percentage of portfolio holders, you are seeing deep value investors move in (Van de Berg of or Century Management, Inc.) while closet indexers are probably selling after news that should not have been unexpected for anyone following this company.

nem hourly

So on the 31st of Jan. on the 10.5% decline, I sold a put spread for a net credit. I am laying out X to make about 2X but I can lose 2.5X if NEM goes below $15 after six months. This is a speculation, not an “investment.”

The point is that the huge volume of 4xs normal AFTER a 70% drop over the past two years to a price at or below its hard asset value (assuming gold doesn’t go below $900/$1,000 over the next twelve months) tells me that “WEAK” hands are giving up to more committed, longer-term holders (deep value).  If gold goes below $1,200, you will see mine shut-ins.  Fundamentally, the news seems absurdly overdiscounted–a showdown with the Indonesian government over a new smelting law

While the company does have hefty debt–a problem, no doubt, if gold declines another 20%–but the debt’s repayment schedule is not front-end loaded. There is time on NEM’s side. That said, this is a lumbering giant with limited upside compared to other companies in the mining sector (IMHO).

I structured this as a defined risk with little capital tied up. It is more of a cheap asset coupled with taking advantage of the market’s emotional over-reaction. I also had the benefit of HIGH volatility that day. When volatility spikes it seems as if traders think NEM will go down 5% to 10% a day. Actually, after a 10% drop, the market figures an equal probability of the price of NEM to go up or down, but I don’t think each day is independent of the prior day. Market’s DO DISCOUNT–overly in this case.

So, that is how I use charts. Charts and sudden price movement alert me to potential opportunity like an over-reaction to news versus intrinsic value. But price and volume alone won’t predict where the price will then go. I need to combine the chart with my basic understanding of the company’s value along with WHO IS ON MY SIDE? and WHO IS ON the OTHER SIDE FROM ME?

I don’t have a guarantee, but I do think the huge volume of selling on the 31st was not well-reasoned based on what the facts are.

If you leave with anything, leave with this: WHO IS ON THE OTHER SIDE OF THE TRADE?  As Seth Klarman says, “I want to be on the other side from uneconomic selling like deletions from the S&P.”

Hope that helps………..

MBA from a Rapper; Don’t Lose; Greenbackd; Wolf of Wall Street


An MBA from rapper, Eminen (Altucher) An excellent psychological study of persuasion. See video.

I haven’t been posting any valuation case studies because of being so busy buying precious metals stocks (gold and silver miners). Hopefully, the time will come to just sit tight.  Let me know if there are any articles or blogs that help you become better investors so I can link to them. (a favorite blog) See: Trying Too Hard

The Wolf of Wall Street

Has anyone seen this movie? Lessons? Easy money

Wolf of WS

Fast womenEasy women

FBI Take-downFBI takedown

Jordan Belfort, the Wolf of Wall Street

The video below of the real “Wolf” shows me an egotistical sociopath

There were many lessons in the movies: Boiler Room, Trading Places, and Margin Call. 

I haven’t seen The Wolf of Wall Street, so I wonder if there are any lessons to be gleaned from the movie or is it just a parody of debauchery?

Making the Wrong Move at the Right Time – Cincinnati Kid

The dealer is incredulous. “You’re raising tens on a lousy three flush?” she says to Robinson. Robinson never should have made that bet since he had only the slim makings of a straight flush and he was staring at McQueen’s pair of tens. You don’t often beat two pair, and certainly not a full house.

Lesson for an investor?

Hint: The market is no place for “making the wrong move at the right time.” Stick to your plan. Don’t personalize losses or success–especially success.

Templeton’s 16 Rules; Go Where the Outlook is MOST Miserable; Young Investors

TempletonSir John Templeton Quotes

“Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria.

  • The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
  • “An investor who has all the answers doesn’t even understand the questions.”
  • “Diversify. In stocks and bonds, as in much else, there is safety in numbers.”
  • “…success is a process of continually seeking answers to new questions.”
  • “People are always asking me where is the outlook good, but that’s the wrong question…. The right question is: Where is the outlook the most miserable?”
  • “Focus on value because most investors focus on outlooks and trends.”
  • “Sell when you find a much better bargain to replace what you are selling.”

Sixteen Rules: Sixteen Rules for Investment Success_Templeton

Where is the outlook the most miserable?jan2edgoldstbears

Gold and silver stocks (as well as gold/silver) certainly fit John M. Templeton’s criteria of a hated asset class. The current 2011 to 2014 bear is near the average in duration and price decline. The worst decline in gold stock history was the 1980 bear market with a 72% decline. So, one sign post is the past. (Gold index used: Barrons’ Gold Mining Index or BGMI)

But charts like the the gold index only tell you the past.BIG HUI


As you would expect, sentiment follows price. Note the huge decline in Rydex precious metals assets compared to all other financial asset sectors of the market–5%. Even the 2008/09 crisis period had triple the percentage. Of course, public opinion is at near all-time lows.



As price quietly stops declining (for now?)


Another sign of bearish Western investor sentiment was the draining of gold from ETFs. Also, there were discounts of up to 8% to 10% in closed end funds such as CEF and GTU that hold gold and silver bullion–an asset with no credit liability! The gold mostly went to Asia.  Physical demand is high at these prices. I simply view gold as money that can’t be debased in a world of fiat currency wars.  That doesn’t mean the price of gold in US dollars can’t go lower in the near term–three to eighteen months. GLD history chart 010214


Rising demand for physical gold but declining price, video:

All of the above, is one part of a search strategy–look for the biggest price declines with the highest negative (or lowest positive) sentiment. Study the past hundred or so years of the industry (Google: Mark J. Lundeen and gold shares). If you are going to buy precious metals equities or gold/silver 5% to 20% as part of a portfolio, I suggest a high-quality mutual fund like Tocqueville Gold fund (TGLDX) or an ETF like GDX, GDXJ. You are nicked 1% or more in annual fees with a mutual fund but you get the diversification. GDX and GDXJ include companies that may be financially over leveraged or of poorer quality, but you have a lower cost and wide diversification. If gold and silver rise significantly, then highly leveraged–operationally and financially–leveraged companies will vastly outperform higher quality large cap miners like Agnico-Eagle (AEM) for example. I prefer a basket of 15 or so hand-picked gold and silver miners with 1. management with skin in the game, 2. decent balance sheets, and 3. well-defined projects with low cash and capex costs (no explorers unless a prospect generator). My goal is to hold through the beginning of the NEXT bear market–perhaps two-to-five years away?

Finding a hated asset class and then finding financially strong companies is relatively easy with some diligence. The HARD PART is holding on through the wild gyrations of price and sentiment. Stomach and character over brains.

Teaching the Young About Investing

John Del Vecchio and Tom Jacobs, the authors of What’s Behind the Numbers?,
are giving a presentation at the New York Society of Analysts. Attendees will learn:
How companies hide poor earnings quality
Repeatable methods for uncovering what companies don’t tell you about their numbers
Reliable formulas for determining when a stock will get hit
Whether you’re a number cruncher or just curious, you’ll greatly benefit from this seminar, given by two people who combine investment chops with crowd-pleasing stories. So what are you waiting for?

Date: January 13, 2014
Time: 6:30 – 8 pm
Place: NYSSA Conference Center
1540 Broadway, Suite 1010
(entrance on 45th Street)
New York, NY 10036
Price: Nonmember $55
($10 surcharge for walk-ins)

Advance registration is encouraged in order to avoid the additional charge for walk-ins. Also, space is limited by the size of the room.

You may not be able to keep your resolutions about losing weight or going to the gym, but with a successful portfolio, no one will really care. So start the new year right by attending the above seminar.

Thank you for your interest in What’s Behind the Numbers?. Please feel free to share this with your networks!