Category Archives: Investor Psychology

Evolutionary Development of Contrarians; Letter to An Analyst

What does it mean to be a true contrarian? (www.truecontrarian.com) Steve explains the fundamentals of his investment philosophy and how to apply it to real-world situations. He details how human herding, group following, and projection of the recent past into the indefinite future enabled our ancestors to survive thousands of years ago, while weeding out those who were contrarians. This has caused contrarian behavior to be quite rare in modern times because it goes against our hard-wired emotions. Steve analyzes why the financial markets often act most irrationally during the first hour of each trading week. He also describes the reasons that financial analysts at major corporations are unable to invest in a contrarian fashion even if they know intellectually why they should be doing so.

Letters to an Analyst    http://researchpuzzle.com/

Value Traps; The Dollar Crisis; Depression of 1929

worse

I owe my early success as an investor not to brains or knowledge, because my mind was untrained and my ignorance was colossal, The game taught me the game, And didn’t spare the rod while teaching.  

Whenever I have lost money in the stock market I have always considered that I have learned something; that if I have lost money I have gained experience, so that the money really went for a tuition fee.  –Jessie Livermore

Mark Sellers and PRXI Value Trap

He put over 50% of his fund into MCF:

MCF

I added an update to yesterday’s micro-cap post. http://wp.me/p2OaYY-2tX.  The point is to try and understand prior investment successes or failures. Any lessons there?

An excellent book on the inflationary 1970s The-Dollar-Crisis by Percy Greaves

I just like the old photos to capture the spirit of the times: The-Stock-Market-Crash-of-1929

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I am still in shock over Brazil’s World Cup blow-out.

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A fat tail event?

Sentiment vs. Money Supply Growth; Find Cheap Options

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TMS-2-st-ann

Market Sentiment and Money Supply update: http://www.acting-man.com/?p=31559

James Grant’s Investment Approach (Video) June 12, 2014

Jim Grant: Buy Gold

Editor: Focus on how Mr. Grant approaches investing not necessarily the current object of his affections.

James Grant: “The Fed’s policy will inevitably fail because hyper-aggressive leveraged finance always seems to step in front of a bus.”

“Macro-economic forecasting is not a useful endeavor. It seems a better way is to consider the panoply of risks and then after having pondered them, look for mis-priced and cheap options on likely but uncertain outcomes.”

http://www.realclearmarkets.com/video/2014/06/12/jim_grant_buy_gold.html

[Note: Grant’s comments on gold begin at the 7:12 minute mark.]

“Gold is an example to me of an opportunity,” James Grant, editor of Grant’s Interest Rate Observer said in an interview this week. “[It] exhibits so many of the characteristics of a corpse, although it does occasionally toss and turn.”

“Gold stocks certainly look as if they were dead—but nobody even bothers to poke them with a stick.”

Gold is a cheap option on the failure of price control. Observe how the future is handicapped. We now have low levels of volatility and terrific embedded complacency. You will be paid well if the consensus makes a mistake. Invest in the monetary failure of an improvised monetary system run by tenured professors (Yellen).

Investing is when you want people to agree with you not now but in the future.

“Gold and gold mining shares are very, very cheap-and certainly widely detested options on the failure of this massive world-wide experiment, or the demonstration of the hopelessness of the technique of price control.”

HAVE A HAPPY FOURTH!

Compare and Contrast

MINERS-GOLD-RATIO-CHARTS-JUN-18

MINERS-INDEX-MONTHLY-LINEAR-CHART-JUN-18

TMS-2-long-term-dosh-slosh

The above represents my understanding of INFLATION, not prices rising. Prices may or not rise depending upon supply/demand for goods and currency. Usually, as the supply of currency increases much faster than the production of goods and services, then prices rise or the value of the currency declines.

World-stock-vs-GDP

inflation_jerryholbert

Thanks to www.acting-man.com and www.zerohedge.com

TA vs. FA for Investors; Longleaf; The Outsiders

James-Turk-speech-Zurich

James Turk, a Goldbug, giving a speech last month to a mostly empty auditorium in Zurich last month.

Technical analysis versus value in gold By Alasdair Macleod Posted 16 May 2014

At the outset I should declare an interest. In the 1980s I was a member of the UK’s Society of Technical Analysis and for a while I was the society’s examiner and lecturer on Elliott Wave Theory. My proudest moment as a technician was calling the 1987 crash the night before it happened and a new bull market two months later in early December. Before anyone assumes I have a gift for technical analysis, I hasten to add I have also made many wrong calls using it, so to be so spectacularly right on that occasion was almost certainly down to a large element of luck. I should also mention that the most successful investors I have observed over 40 years are those who recognize value and disdain charts altogether.

Technical analysts assume past prices are a valid basis for predicting what investors will pay tomorrow. The Warren Buffetts of this world act differently: they care not what others think and use their own judgment of value. This means that value investors often buy when the trend is down and sell when the trend is up, the opposite of technically-driven decisions. A bear market ends when value investors overcome the trend.

Technical analysts go with the crowd and give any trend an added spin. This explains the preoccupation with moving averages, bands, oscillators and momentum. Speculators, who used to be independent thinkers, now depend heavily on technical analysis. This is not to deny that many technicians make a reasonable living: the key is to know when the trend ends, and the difficulty in that decision perhaps explains why technical analysts are not on anyone’s rich list.

Value investors like Buffett rely on an assessment of the income that an investment can generate, and the opportunity-cost of owning it. This may explain his well-known views on gold which for all but a small coterie of central and bullion banks does not generate any income. So where does gold, a sterile asset in Buffett’s eyes stand in all this?

Value investors in gold who buy on falling prices are predominately Asian. For Asians the value in gold comes from the continual debasement of national currencies, a factor rarely considered by western investors who measure investment returns in their home currency with no allowance for changes in purchasing power.

The financial system discourages a more realistic approach, not even according physical gold an investment status. Using technical analysis with the false comfort of stop-losses leads to more profits for market-makers. Furthermore, gold’s replacement as money by unstable national currencies makes economic and investment calculation for anything other than the shortest of timescales unreliable or even impossible. But then this point goes over the heads of the trend-followers as well as the fundamental question of value.

Technical analysis is a tool for idle investors unwilling or unable to understand true value. It dominates price formation in western markets and distorts investor behaviour by exaggerating any natural bias towards trends. It is this band-wagon effect that is the root of trend-following’s success, but also its ultimate weakness. A better strategy is to make the effort to value gold properly and then act accordingly.

http://www.goldmoney.com/research/analysis/technical-analysis-versus-value-in-gold

Longleaf Partners Presentation

http://longleafpartners.com/   (click on video link on the right side)

A great book on good capital allocating CEOs, The Outsiders: http://www.amazon.com/The-Outsiders-Unconventional-Radically-Blueprint/

Reading for this weekend

Snails

Bubble Watch

GMO_QtlyLetter_1Q14_FullVersion

ABOOK-Mar-2014-Valuations-Stocks-to-GDP

Momentum Stocks Crushed

Momentum Crush

http://www.acting-man.com/?p=30382#more-30382

Buffett Notes

BN-CQ488_0503be_M_20140503154303

http://covestreetcapital.com/Blog/?p=1173    Icahn slams Buffett on his cowardice.

Warren-Buffett-Katharine-Graham-Letter on Pensions 1975

Warren-Buffett-Florida-Speech

Buffett1984Retail Stores and Clean Surplus

Berkshire_Hathaway_annual_meeting_notes_5-3-2014

20140424_CNBC_Transcript__Legendary_Investor_Warren_Buffett_Speaks_with_Becky_Quick

BRK_annual_letter-2014

Have_Researchers_Uncovered_Buffetts_Secret

20140224_Preview_of_Buffett’s_annual_letter__Learn_from_my_real_estate_investments

And in case of Buffett overdoseCrony Capitalist

Resource StocksRules of Thumb for Junior Mining Speculators and A Light at the End of the Tunnel

Michael Price’s Case Study on Hospira HSP) Valuation

Michael-Price

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

Video Lecture: http://youtu.be/Nph-sDz1EtA 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

SEARCH STRATEGY

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.

HSP

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.

VALUATION

See:HSP VL

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%
FXCM INC. CLASS A COMMON STOCK 3.87%
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)http://hurricanecapital.wordpress.com/

Understanding Bear Markets; Without Comment

Understanding Bear Markets:  http://www.nextbigtrade.com/2014/03/11/learning-from-the-devious-gold-bear/

Charts below from: http://www.alhambrapartners.com/2014/03/11/valuation-bonanza-march-2014/

ABOOK-Mar-2014-Valuations-FINRA-Margin-Debt

ABOOK-Mar-2014-Valuations-FINRA-Net-Worth

 ABOOK-Mar-2014-Valuations-FINRA-Net-Worth-Change

ABOOK-Mar-2014-Valuations-CAPE

ABOOK-Mar-2014-Inventory-to-Sales

 SP-500-vs-200-MA

 

Volatility-Index

 

Speculative Hedge Funds Piling In.

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Market-Sentiment

Socionomics and History; The Bubble in Social Media

SHARK

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. 

VIDEO: http://www.socionomics.net/hhe-part-1/#axzz2uM3BV7in

Bush-DecidesTimeCover

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 Markethttp://www.socionomics.net/1999/09/stocks-and-sex-a-socionomic-view-of-demographic-trends/#ixzz2uM4DB7aq

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: http://www.acting-man.com/?p=28860

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

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

jumper

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.

http://armstrongeconomics.com/2014/02/18/are-bankers-committing-suicide-for-a-connected-reason/

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. https://www.coursera.org/course/behavioralecon

POKER: To learn about investing in the 21st Century: The great poker movie, Rounders: http://www.tfmetalsreport.com/blog/5494/rounders

Munger on Investing: http://www.valueinvestingworld.com/

Any interest in analyzing a gold stock? http://youtu.be/NML5-dgp1u4

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.