Category Archives: Investor Psychology

Taking Diet Advice from Fat People; What would you buy?

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Is taking investment advice from Michael Mouboussin Interview similar to taking health and fitness advice from the gentleman above? More here: http://www.michaelmauboussin.com/

Question: Your broker offers you a 10-year bond with a coupon yield (annual interest payment / face value) of 3.0%, and a current yield (annual interest payment / current price) of 2.3%. Assume zero probability of default. Comparing this opportunity with the 1.5% yield-to-maturity available on 10-year Treasury bonds, would you prefer the bond “yielding” 2.3%?   What is your return?

Financial Assets vs Real Assets

What is your return?  The readers who commented below are more accurate in their analysis, but let’s pretend to keep things simple:

If you chose the 2.3% bond anyway, you’ve joined the company of countless other investors who are making effectively the same mistake as they reach for yield across every financial asset. In order for a 10-year 3% coupon bond to provide a 2.3% current yield, one must pay $130 today in return for the following set of future cash flows: $3 a year for 10 years, plus $100 at the end. Paying $130 today in return for $130 in future cash flows, buyers of that bond will inadvertently discover that they’ve locked in a total return of zero. Of course, their real return incorporating inflation is negative.  Who likes that deal?  Yet many “professionals” are choosing that for their clients.  Better to burn your money in a barrel. (Source: http://www.hussmanfunds.com).

Thoughts on Mauboussin

Well, it is hard to take advice from a fatman. However, if we were perfectly rational then it wouldn’t matter if the provider of the advice/info/knowledge was fat or fit. What matters is the content.  I believe you should hear or read what Mr. Mauboussin has to say and critically think if the information is useful to you. You can have all the wisdom in the world, but unless you act on it, of what use is it?

My suspicion is that Mr. Mauboussin does not thrive on the acting part. Common sense is lathered with a patina of sophisticated jargon to make him or his organization seem smart.   How does one take “contrarian” advice who works for a mega-organization like Credit Suisse.

I sat in the back of his security analysis class at Columbia GBS in 2006 as he spoke about the incredible capital allocation skills of Eddie Lampbert.  However, almost no mention was made of the true asset value of Sears.   Sure Mr. Lampert is a master investor, but HOW much of a premium do you pay?   I shook my head in dismay.   The Columbia students gobbled it up in awe.

Shld Mouboussin

Mr. Mauboussin was riding shotgun with Mr. Miller when their fund bought housing stock at the 100,000-year peak in housing stocks. See Pulte below.

Housing Mouboussin

Mr. Maouboussin said in the linked interview (audio) above that only with hindsight bias could someone have foreseen the housing collapse.   I guess he didn’t receive the letters Michael Burry was sending to Alan Greenspan warning of the impending disaster due to massive mal-investment caused by manipulated credit (Thanks Federal Reserve!).

Burry saw it coming:  http://www.nytimes.com/2010/04/04/opinion/04burry.html?_r=0

Greenspan’s replyhttp://www.businessinsider.com/greenspan-on-michael-burry-scion-capital-2010-4

Here is a video of a Mauboussin class

Color me skeptical.

Gold in a Nutshell

A million paper dollars held since 1913, when the Federal Reserve Bank was created, would be worth $20,000 today, down 98 percent. A million dollars of gold in 1913 would now be worth $62 million. Aligned with irreversible time, gold is the monetary element that holds value rather than dissipates it.  (Source: How We Got Here Money: How the Destruction of the Dollar Threatens the Global Economy–and What We Can Do about It, 2014)

Do Investors Overreact?

DremanLufkin2000 Do Investors Overreact

Institutions Increase Sentiment

PERSPECTIVE

Aug 5 2016 Gold bull analog

Aug 5 2016 HUI Bull analog Aug 2016

Aug 5 2016 Jr Gold bull analogs

I made my money sitting tight–got that? Jesse Livermore

MGI Debt and not much deleveragingFullreportFebruary2015 (2) A Must Read.

Have a Great Weekend.

Op. Leverage; Geico and Berkshire Case Study; In Gold We Trust; Overconfidence

ego

Mauboussin on Operating Leverage is a review on margins and operating leverage.  I recommend reading pages 19 to 21 in addition to my prior post: ROIC and more

Berkshire CS_wedgewood partners 1st quarter 2016 client letter

geico case study and presentation 2016

Incrementum-signal-768x439

Do not focus on forecasts but learn from history and economics about gold: In_Gold_we_Trust_2016-Extended_Version

In_Gold_we_Trust_2015-Extended_Version (Referenced in 2016 Ed. Why miners struggled to gain investor respect.)

Avoid Overconfidence

A lesson in trading

A lesson in valuation

It is never different this time

Happy Fourth of July Holiday.  

I will answer the option questions upon return.

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…..

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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.

Time for Review: Behavioral Portfolio Managment

book cover

Video on Behavioral Portfolio Management

Emotional crowds dominate market volatility (nothing new here). Emotions trump arbitrage.  If you learn anything from this post may it be that you concentrate on your best ideas and do not overdiversify beyond ten or twelve stocks.  Also, understand randomness. Teams hurt performance. Avoid closet- indexers.

See slide 6 for a summary: 10495_Howard Presentation Slides

Behavioral Portfolio Management A research paper

T Howard CFA Behav PM   Short article

And here is a secret not to be shared with others: If you are going to have a behavioral edge, then don’t do what the mass of investors are doing–invest with a at least a five-year time horizon so you can give mean regression to work if you buy non-franchise companies (assets like cyclcial mining, manufacturing, etc.) or allow your franchise companies time to compound because of a slow mean reversion.

nyse-ftse-stock-holding-period

global-stock-holding-periods

But holding stock five years or more is SCARY because of the VOLATILITY.  Not so:

cotd-returns

The enemy

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

Price vs. Value–a Disagreement

Clearly people can have violently different views on price vs. value.

More on the Capital Cycle

FMQ for blog

We last left off here: follow-the-capital-cycle-as-a-contrarian

Gold and the capital cycle_2 Edward Chancellor discusses the fall-off in supply in precious metals which bodes well for FUTURE profits for miners.

The future turn in oil prices: http://www.resilience.org/stories/2016-01-12/arthur-berman-why-the-price-of-oil-must-rise

Over or mal-investment in the commodity cycle: Commodity Crash due to Monetary Supernova_Stockman

Buy disappointment and sell popularity  Don’t do this reflexively but place into context.

Peabody from hero to zero_case_resolution_fictconsulting

FCX_AR_2014 Note the increase in the rapid increase in assets before the stock price collapse. Note the research on how rapid asset growth usually precedes declines in future profitability  Robin Greenwood Investment and Ship Prices and asset_growth

Follow the Capital Cycle as a Contrarian

Stanley

Ed Chancellor on the capital cycle…

From his introduction to Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15, which was released in hardcover today (Dec. 2015):
Typically, capital is attracted into high-return businesses and leaves when returns fall below the cost of capital. This process is not static, but cyclical – there is constant flux. The inflow of capital leads to new investment, which over time increases capacity in the sector and eventually pushes down returns. Conversely, when returns are low, capital exits and capacity is reduced; over time, then, profitability recovers. From the perspective of the wider economy, this cycle resembles Schumpeter’s process of “creative destruction” – as the function of the bust, which follows the boom, is to clear away the misallocation of capital that has occurred during the upswing.

The key to the “capital cycle” approach – the term Marathon uses to describe its investment analysis – is to understand how changes in the amount of capital employed within an industry are likely to impact upon future returns. Or put another way, capital cycle analysis looks at how the competitive position of a company is affected by changes in the industry’s supply side. In his book, Competitive Advantage, Professor Michael Porter of the Harvard Business School writes that the “essence of formulating competitive strategy is relating a company to its environment.” Porter famously described the “five forces” which impact on a firm’s competitive advantage: the bargaining power of suppliers and of buyers, the threat of substitution, the degree of rivalry among existing firms and the threat of new entrants. Capital cycle analysis is really about how competitive advantage changes over time, viewed from an investor’s perspective.

  1. Follow the capital cycle as a contrarian (well worth STUDYING!)
  2. Gold miners in the capital cycle (part 2)

http://www.marathon.co.uk/global-investment-review.aspx (Read several articles on the capital cycle in investing).

Watch for errors  (Interview of the gentleman pictured above)

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/