Category Archives: Investor Psychology

Markets Go Up and Down; Shorting Stocks

I am on my knees buying gold/silver/uranium miners with both hand this prior week (ouch!).  Since the chart of the futures positions (COTS) is now more extreme–money managers are probably short now like back at end 2015/beginning 2016.  I use the blog as a diary/bulletin board on occasion. I hate miners as a business but love the values.   Note the vast underperformance of hard (read: miners) vs. financial assets (SPY).   Not a recommendation, just a “diary” post.

  1. The Economics of Gold Mining_Myrmikan_Research_2017_03_14
  2. Gold mining equities Myth and Reality by Paulson
  3. Why Gold Mining is a Tough Business_Pollitt
  4. In-Gold-we-Trust-2018-Extended-version-english

Common sense from a grizzled veteran

Bob Moriarty                                       Archives                                            Jul 3, 2018

Entire article:  http://www.321gold.com/editorials/moriarty/moriarty070318.html

Buying resource stocks has nearly nothing to do with the commodity. And near zero to do with management or country risk or interest rates or the dollar or what the DOW is doing.  Those who are always wrong about markets spend a lot of time mumbling about all those things and they are just wasting ink.

Unbeknownst to GATA or the other PermaBulls who believe some munchkin at the Federal Reserve pulls the levers all of the time, markets go up and markets go down. They all do and they do it constantly. So if someone is telling you silver is the rarest mineral known to mankind and it should go up everyday of the week, forever, he’s lying to you in order to get you to pay for a subscription to his service. In short he’s like a bible thumping preacher or politician, he wants your support, and he specializes in telling you the lies you want to hear.

During the bull phase of the metals markets even the biggest piece of crap stocks go up. During the eventual bear phase of the metals markets even the best run with the most desired commodity in the safest jurisdiction goes down.

So investors in junior resource stocks need to keep two things in mind. You have to trade markets and take a profit when you can or the only alternative is to take a loss. I have had hundreds of investors tell me their biggest mistake was not taking a profit when they could. And given that something like 95% of investors in junior lottery tickets lose money, sell when you can, not when you have to.

You need to align yourself with the phase of the market you are in and let the wind be on your back. We had major lows in 2001 in gold and silver, again in 2008 and late in 2015. Don’t try to second-guess the market. If you were a buyer of anything from 2001 until 2008 you had a wonderful opportunity to profit. If you bought in 2009 or 2016, it was like shooting fish in a barrel. If you didn’t sell in March of 2008 or September of 2011, you got creamed regardless of the merits of the project or company. The phase of the market will either put money in your pocket or extract it regardless of what anyone says about a company.

Kase Learning Channel (9 Videos on Shorting Stocks)  https://www.youtube.com/channel/UC7igQqc_-k3LWCeUGnpE7Cg

Value Investing Seminar; Hating Finance; Doing Research

Value Investing Seminar in Cyprus

I know nothing about this but to let you know: https://cyprusvalueinvestor.com/

Hating Finance

Why Everyone Hates Finance and What to Do about It
By Paul McCaffrey

Finance can be a noble profession, yet too many people don’t see it that way.
Mihir A. Desai, the Mizuho Financial Group Professor of Finance at Harvard Business School and professor of law at Harvard Law School, explained why finance has a trust problem and offered a simple strategy to address it at the 71st CFA Institute Annual Conference.

“Finance is being demonized, and it’s being demonized because people don’t understand it,” he said. “If we want to stop demonization, we have to make it accessible . . . And it turns out stories and the humanities are a really powerful way to do that.”

Though he says much of the criticism of finance is unfair, Desai, the author of The Wisdom of Finance: Discovering Humanity in the World of Risk and Return, acknowledged that some of the industry’s reputational wounds are self inflicted.
“Why do we have more than our share of Martin Shkrelis?” he asked. Largely because of attribution error. What sets finance apart from most other disciplines is that performance feedback is clear and constant. And that can breed arrogance.

“If you’re an investor,” Desai explained, “you get feedback all the time about how you’re doing every day. And it’s super precise and inflated by leverage. What happens in those settings? Human beings do what human beings do everywhere. Every good outcome is because of me. Every bad outcome is because of the world.”

As that process continues through the years and the outcomes are mostly good, people come to believe in their skill, that they earned and deserve their returns.
But in finance and investing, skill is difficult to assess and practically impossible to prove.

“The greatest lesson in finance, of course, is it’s very hard to tell the difference between luck and skill,” Desai said. “It’s better to operate as if it’s luck.” He also pointed to the emphasis on value extraction over value creation in recent decades as another culprit behind finance’s lackluster standing among the public.

These criticisms aside, Desai believes that finance does much more good than harm and that finance professionals need to highlight the benefits that it creates.

Rehabilitating Finance

“If we re-aim the practice of finance and the underlying ideas that are incredibly noble, we can make finance into something aspirational, which is what it should be,” he explained. That requires thinking about the big ideas, the first principles of finance, and explaining them to people in ways that resonate.

“And frankly equations and graphs don’t work for many people,” he said. “It turns out there’s a whole section of the population that just doesn’t get that.”
That’s where literature and the humanities come into play.

Inspired by the structure of The Wisdom of Finance, Desai broke finance down into seven concepts during his presentation, what he calls “the biggest ideas in finance,” which are

  1. risk and insurance;
  2. risk management —
  3. options/diversification;
  4. value creation and valuation;
  5. corporate governance;
  6. mergers;
  7. leverage/bankruptcy.

As Desai explains it, when reduced to its essence, finance comes down to insurance. “Insurance is underneath all of finance in a remarkable way,” he said. “Once we think about risk and insurance, we have to think about risk management. That’s going to be about options and diversification. Instead of doing it with fancy calculus, we’re going to do it with stories.”

Risk and The Maltese Falcon
To explain risk, Desai recommends the Dashiell Hammett novel, The Maltese Falcon, which was made into a motion picture starring Humphrey Bogart as the hard-bitten San Francisco private detective Sam Spade. In the novel, Spade recounts a story about a man named Flitcraft, who disappears one day, leaving a wife, family, and career behind. Some years later, the wife receives word from an acquaintance that Flitcraft has been spotted in Spokane, Washington. She calls Spade to investigate.

Spade learns after traveling to Spokane, that the man is Flitcraft, as it turns out, only he’s changed his name to Charles Pierce. Spade confronts him and Flitcraft admits his ruse and explains why he abandoned his family.

“‘I was walking along, and a huge iron beam fell right next to me, and a piece of sidewalk jumped up and hit me in the face,’” Desai said, quoting Flitcraft’s words. “‘And at that moment, I realized that life was totally random. And I’d been living my life as if the universe was well ordered so my life had to be well ordered. But, in fact, the universe is random. So I’m going to change my life at random.”

So Flitcraft left to build an entirely new identity. “But then,” Desai continued, “Sam says, ‘The best part of the story is, when I found him in Spokane, he had recreated the same life he had . . . He had the same kind of wife and house and job and kids and everything was exactly the same.’” The names Flitcraft and Charles Pierce were not chosen by chance. Allen J. Flitcraft was a leading actuary and author of a life insurance manual. Charles Sanders Peirce was a philosopher dubbed the “father of pragmatism.”

What Hammett and Spade were getting at was that what looked chaotic and haphazard was not entirely unpredictable. There was an underlying order to it.
“The fundamental thing in life is randomness,” Desai explained. “And what do finance and insurance understand? They understand that we can navigate it by looking for patterns. Things that look totally random are not. . . That’s what the foundation of finance is: Seemingly random outcomes actually behave along patterns.”

Pride, Prejudice, and Risk Management

So how does Desai explain the concept of risk management?
“We could talk about options and diversification with modern portfolio theory and stochastic calculus,” he said. “Or we could use Jane Austen.”
It turns out her 19th-century English romantic novel Pride and Prejudice, describing the courtship rituals of the day and how the heroine, Elizabeth Bennet, and other young women respond to their various suitors, has a lot to teach on the subject.

“So what’s the risk management problem?” Desai said. “Potential suitors come by and you don’t know which one to take. And there’s always a problem. Some of them are rich, some are drunk, some of them are nice, some of them are ugly.”
Indeed, the novel features one of the worst marriage proposals ever. A Mr. Collins asks Bennet for her hand rather bluntly: “You’re not that pretty. You’re not that rich. Here’s an offer. I suggest you take it,” Desai recalled. “And of course, what’s he doing? He’s playing off her risk aversion.”

Bennet rejects the offer, but soon after, Collins shifts his attention to her friend Charlotte, to whom he makes a similarly mercenary proposal, one that that she excitedly accepts.

“The neat part about that story is the risk management problem is solved with options and diversification,” Desai said. “These characters give voice to what we think of as modern financial institutions.” “Finance needs some humanization.”

Desai’s message was simple: The best way to reclaim finance’s reputation is to demystify it and to do it through literature and the humanities, through storytelling.

“If it becomes all about spreadsheets and screens, then we detach ourselves from humanity,” he said. “We should think about the human consequences of what we do. And these stories are a wonderful way to get reattached to what the moral content of our ideas are.”

https://blogs.cfainstitute.org/investor/2018/05/22/why-everyone-hates-finance-and-what-to-do-about-it/

Doing Research

https://youtu.be/c34vmUxXZ1A

Condemned to Repeat the Mistakes of the Past

Here We Go Again……..

Financial bubbles are not accidents but rather inevitable outcomes of our asset-backed banking system. To illustrate: imagine a homeowner who owns a $1 million house free and clear. He goes to a bank and borrows $800,000 against the house. This credit money springs into existence as an accounting entry of a private bank—it is the creation of credit out of nothing. The borrower goes out into the market with these newly created funds and starts purchasing other assets: stocks, perhaps, or a weekend house. The new money drives prices higher, including those of the assets that form the collateral of the banking system. Since its collateral value has increased, the banking system is happy to increase its loans to borrowers, which pushes prices yet higher, and so on in a positive feedback loop. Price signals then prompt over-development, which
eventually lowers rents, which causes borrowers to default, the fractional reserve
process goes into reverse, and the banking system collapses.

Irving Fisher, whom Milton Freidman anointed “the greatest economist the
United States has ever produced,” described it thus:

In boom times, the expansion of circulating medium accelerates the
pace by raising prices, and creating speculative profits. Thus, with new
money raising prices and rising prices conjuring up new money, the
inflation proceeds in an upward spiral till a collapse occurs, after which
the contraction of our supply of money and credit, with falling prices
and losses in place of profits, produces a downward spiral generating
bankruptcy, unemployment, and all the other evils of depression.

CREDIT INSANITY

Performance_Update_2018_04 (1)

Bitcoin: the World’s Largest Pump and Dump in History. Who Knew?

The clues and facts add up. Let’s sit and think for a minute:

In what rational universe could someone simply issue electronic scrip — or just announce that they intend to — and create, out of the blue, billions of dollars of value?

Bitcoin tangent

Did you guys notice something really interesting? The financial guys that really love bitcoin are some of the guys that either blew up or closed funds due to poor performance. The two most prominent fund manager bitcoin boosters are like that. It almost feels like they are so happy to have found their Hail Mary pass. And the most prominent guys that have good performance and didn’t blow up tend to be the guys that don’t like bitcoin and think it’s stupid, a bubble or whatever.

Think about that for a second. Oh, and that former hedge fund guy, after bitcoin plunged put his new bitcoin hedge fund on hold (buying high and selling low?). Now wonder he didn’t do well with his hedge fund; if you’re going to be making decisions based on short term volatility like that, you are bound to get whipsawed and lose money.

This is interesting because we can never really understand and know everything. But it is useful to know who you can listen to and who you should ignore. Sometimes, this saves a lot of time! From http://brooklyninvestor.blogspot.com/

Monday, April 30, 2018
Warren Buffett: Bitcoin is Gambling Not Investing

In an exclusive interview with Yahoo Finance in Omaha, Neb., leading up to Berkshire Hathaway’s annual shareholder meeting, which will be held om May 5, Buffett laid out his latest thinking on cryptocurrency investing. He nailed it.

“There’s two kinds of items that people buy
and think they’re investing,” he says. “One really is investing and the other isn’t.” Bitcoin, he says, isn’t.

“If you buy something like a farm, an apartment house, or an interest in a business… You can do that on a private basis… And it’s a perfectly satisfactory investment. You look at the investment itself to deliver the return to you. Now, if you buy something like bitcoin or some cryptocurrency, you don’t really have anything that has produced anything. You’re just hoping the next guy pays more.”

When you buy cryptocurrency, Buffett continues, “You aren’t investing when you do that. You’re speculating. There’s nothing wrong with it. If you wanna gamble somebody else will come along and pay more money tomorrow, that’s one kind of game. That is not investing.”

Buffett’s point is that the assets he lists such as a farm, an apartment house, etc., generate income. Bitcoin does not.

I would add there is another type of asset people hold and that is money. As Ludwig von Mises taught us, money is the most liquid good and people hold because of this liquidity. They know they can instantly exchange it, at a fairly stable price, nearly anywhere for goods and services.

This is where Bitcoin and other cryptocurrencies fail in the money category. They are from an instrument at present that can be exchanged for any good or service and they are far from stable in price. Many people who have purchased Bitcoin over the last 6 months have lost as much as 50% of their purchasing power. That is not a stable asset, not even when compared to the U.S. dollar which is run by the Federal Reserve in crony reckless fashion.

Moreover, the idea of a world where a cryptocurrency is the world’s medium of exchange is a frightening notion. It is quite simply a remarkable way for government to track all transactions and prohibit transactions in specific books and other goods that it doesn’t want individuals to buy.

The idea that the government can’t track Bitcoin is a delusion view held by Bitcoin fanboys.

The Intercept recently reported:
Classified documents provided by whistleblower Edward Snowden show that the National Security Agency indeed worked urgently to target bitcoin users around the world — and wielded at least one mysterious source of information to “help track down senders and receivers of Bitcoins,” according to a top-secret passage in an internal NSA report dating to March 2013. The data source appears to have leveraged the NSA’s ability to harvest and analyze raw, global internet traffic while also exploiting an unnamed software program that purported to offer anonymity to users, according to other documents.
Although the agency was interested in surveilling some competing cryptocurrencies, “Bitcoin is #1 priority,” a March 15, 2013 internal NSA report stated.
-Robert Wenzel

What is money Bastiat?  If you understand money, then the Bitcoin Scam becomes obvious.

Bitcoin is the greatest scam in history
It’s a colossal pump-and-dump scheme, the likes of which the world has never seen.

By Bill Harris Apr 24, 2018

Okay, I’ll say it: Bitcoin is a scam.

In my opinion, it’s a colossal pump-and-dump scheme, the likes of which the world has never seen. In a pump-and-dump game, promoters “pump” up the price of a security creating a speculative frenzy, then “dump” some of their holdings at artificially high prices. And some cryptocurrencies are pure frauds. Ernst & Young estimates that 10 percent of the money raised for initial coin offerings has been stolen.

The losers are ill-informed buyers caught up in the spiral of greed. The result is a massive transfer of wealth from ordinary families to internet promoters. And “massive” is a massive understatement — 1,500 different cryptocurrencies now register over $300 billion of “value.”

It helps to understand that a bitcoin has no value at all.

Promoters claim cryptocurrency is valuable as

(1) a means of payment

Bitcoins are accepted almost nowhere, and some cryptocurrencies nowhere at all. Even where accepted, a currency whose value can swing 10 percent or more in a single day is useless as a means of payment.

2. Store of Value.

Extreme price volatility also makes bitcoin undesirable as a store of value. And the storehouses — the cryptocurrency trading exchanges — are far less reliable and trustworthy than ordinary banks and brokers.

3. Thing in Itself.

A bitcoin has no intrinsic value. It only has value if people think other people will buy it for a higher price — the Greater Fool theory.

Some cryptocurrencies, like Sweatcoin, which is redeemable for workout gear, are the equivalent of online coupons or frequent flier points — a purpose better served by simple promo codes than complex encryption. Indeed, for the vast majority of uses, bitcoin has no role. Dollars, pounds, euros, yen and renminbi are better means of payment, stores of value and things in themselves.

Cryptocurrency is best-suited for one use: Criminal activity. Because transactions can be anonymous — law enforcement cannot easily trace who buys and sells — its use is dominated by illegal endeavors. Most heavy users of bitcoin are criminals, such as Silk Road and WannaCry ransomware. Too many bitcoin exchanges have experienced spectacular heists, such as NiceHash and Coincheck, or outright fraud, such as Mt. Gox and Bitfunder. Way too many Initial Coin Offerings are scams — 418 of the 902 ICOs in 2017 have already failed.

Hackers are getting into the act. It’s estimated that 90 percent of all remote hacking is now focused on bitcoin theft by commandeering other people’s computers to mine coins.

Even ordinary buyers are flouting the law. Tax law requires that every sale of cryptocurrency be recorded as a capital gain or loss and, of course, most bitcoin sellers fail to do so. The IRS recently ordered one major exchange to produce records of every significant transaction.

And yet, a prominent Silicon Valley promoter of bitcoin proclaims that “Bitcoin is going to transform society … Bitcoin’s been very resilient. It stayed alive during a very difficult time when there was the Silk Road mess, when Mt. Gox stole all that Bitcoin …” He argues the criminal activity shows that bitcoin is strong. I’d say it shows that bitcoin is used for criminal activity.
In what rational universe could someone simply issue electronic scrip — or just announce that they intend to — and create, out of the blue, billions of dollars of value?

Bitcoin transactions are sometimes promoted as instant and nearly free, but they’re often relatively slow and expensive. It takes about an hour for a bitcoin transaction to be confirmed, and the bitcoin system is limited to five transactions per second. MasterCard can process 38,000 per second. Transferring $100 from one person to another costs about $6 using a cryptocurrency exchange, and well less than $1 using an electronic check.
Bitcoin is absurdly wasteful of natural resources. Because it is so compute-intensive, it takes as much electricity to create a single bitcoin — a process called “mining” — as it does to power an average American household for two years. If bitcoin were used for a large portion of the world’s commerce (which won’t happen), it would consume a very large portion of the world’s electricity, diverting scarce power from useful purposes.

In what rational universe could someone simply issue electronic scrip — or just announce that they intend to — and create, out of the blue, billions of dollars of value? It makes no sense.

All of this would be a comic sideshow if innocent people weren’t at risk. But ordinary people are investing some of their life savings in cryptocurrency. One stock brokerage is encouraging its customers to purchase bitcoin for their retirement accounts!

It’s the job of the SEC and other regulators to protect ordinary investors from misleading and fraudulent schemes. It’s time we gave them the legislative authority to do their job.

William H. Harris Jr. is the founder of Personal Capital Corporation, a digital wealth management firm that provides personal financial software and investment services, where he sits on the board of directors.

Read full article here: https://www.recode.net/2018/4/24/17275202/bitcoin-scam-cryptocurrency-mining-pump-dump-fraud-ico-value

COUNTER-ARGUMENT:  https://www.forbes.com/sites/ktorpey/2018/04/24/founding-paypal-ceo-bill-harris-says-bitcoin-is-a-scam-heres-why-hes-wrong/2/#2d9379a166b9

Where have we seen this type of behavior before?

UPDATE: Friday April 27th 2018

Read: http://thecharlieton.com/whitney-tilson-why-the-hell-didnt-i-listen-to-charlie-munger/

Lesson be humble about what you attempt.

Below is an email from Whitney Tilson from Kase Learning announcing his:

Program Guide-Kase Learning Short Selling Conference-May 3,__ 2018

Attached is the program guide, which includes an agenda for the day and bios of all of the speakers. Registration and continental breakfast begin at 7:15am, the first speaker is at 8:15am, there are morning, lunch and afternoon breaks, and the last speaker ends at 4:15pm, followed by a networking cocktail reception until 7:00pm. The NYAC is on the corner of Central Park South and Seventh Avenue, and it has a dress code – no jeans, shorts, sneakers or t-shirts.

This full-day event is the first of its kind dedicated solely to short selling and will feature 22 of the world’s top practitioners who will share their wisdom, lessons learned, and best, actionable short ideas. I’ve seen many of the speakers’ presentations and they’re awesome! Companies that will be pitched include Tesla, Disney, Kraft-Heinz and Stericycle, plus internet ad fraud and gold.

The idea for the conference is rooted in the fact that this long bull market has inflicted absolute carnage on short sellers, and even seasoned veterans are throwing in the towel. This capitulation, however, combined with the increasing level of overvaluation, complacency, hype and even fraud in our markets, spells opportunity for courageous investors, so there is no better time for this conference.

Reporters from all of the major media outlets will be there, and CNBC is covering it as well. I was on their Halftime Report yesterday discussing the conference: www.cnbc.com/video/2018/04/26/kases-whitney-tilson-talks-the-art-and-pain-of-short-selling.html. I also just published the fourth, final (and my favorite) article in a series I’ve written entitled Lessons from 15 Years of Short Selling: https://seekingalpha.com/article/4166837-lessons-15-years-short-selling-veterans-advice

I’d be grateful if you’d help spread the word about the conference among your friends and colleagues, and wanted to pass along a special offer: when they register at http://bit.ly/Shortconf, they can use my friends and family discount code, FF20, to save 20% ($600) off the current rate.

I look forward to seeing you next week!

Sincerely yours,

Whitney Tilson
Founder & CEO
Kase Learning, LLC
5 W. 86th St., #5E
New York, NY 10024
(646) 258-0687
WTilson@KaseLearning.com

Acq. Multiple, Yog Berra and Financial Satire, and Hedge Fund Quiz

While at all times Wall Street analysts try to justify the valuations, here is a fun quote (via Bloomberg) from 2002 looking back from Scott McNeely, the CEO of Sun Microsystems, one of the darlings of the 2000 tech bubble:

“At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes.

What were you thinking?”

An educational, savagely satirical view of our current market conditions and lessons on valuation.   I read about 40 investment letters a quarter and this is about the best I have read in five years. Hilarious! Mark McKinney – Its Like Deja Vu All Over Again – Final and his prior letter: I Dont Get It – Mark McKinney – Final 8292017 New

An excellent interview by Tobias Carlisle.   CHEAPNESS not quality wins!  Yes, I was somewhat shocked.   Why?

http://www.valuewalk.com/2018/01/tobias-carlisle-talks-acquirers-multiple-valuetalks/

ACKMAN INTERVIEW

Ackman’s embattled Pershing Square hedge fund laid off 18 percent of its staff on Friday — a total of 10 pink slips that brought head count down to 46.

Investors have suffered in Pershing Square (PSHZF) vs. S&P 500:

He wants to hire an analyst who can THINK INDEPENDENTLY.  You walk into his office and he asks you, “Can you think independently as an analyst?”

How do you reply.   Be careful…………think for awhile before you reply.  What proof can you give?

If you are struggling to answer, then  https://www.newyorker.com/magazine/2015/11/23/conversion-via-twitter-westboro-baptist-church-megan-phelps-roper

will provide clues.


What determines the price of gold:

How the price of gold is determined Monetary Metals 2018

Multiple Delusions: Paper Wealth, A Booming Economy, and Bitcoin

Let us not, in the pride of our superior knowledge, turn with contempt from the follies of our predecessors. The study of the errors into which great minds have fallen in the pursuit of truth can never be uninstructive.”
– Charles Mackay

Extraordinary Popular Delusions and the Madness of Crowds

A good read on investor psychology by John Hussman: https://www.hussmanfunds.com/comment/mmc171218/

Be careful not to blindly label every steep chart a bubble; it leads to sloppy thinking.

Just remember what the current stock market feels like with its low volatility and steady rises because this is what a bear market FEELS like (Video link):

https://youtu.be/X-bogN0V8RM?t=1m56s

Why Ackman struggles:https://www.institutionalinvestor.com/article/b15ywsstynx8fm/whats-eating-bill-ackman     Hint: he overpays.

Intrinsic Value–Objective or Subjectively Determined? Bitcoin

A Discussion about Whether Austrian Economists and Value Investors Agree on How Intrinsic Value is Determined.

CSInvesting: Understand that Intrinsic Value is SUBJECTIVELY determined while prices are set by the marginal buyer and seller.  All an investor does is compare price to value.

Essentially, value investing focuses on the comparison of a good’s intrinsic value and its market price and recommends investing in it as long as the asset’s value exceeds its price given a margin of safety.

The first article says in summary: value investing and Austrian economics are nevertheless incompatible, particularly given that value investing’s definition of value contradicts the Austrian value concept.

End-the-Myth-On-Value-Investing’s-Incompatibility-with-Austrian-Economics-by-Olbrich-et-al   I would skim this article.

An Austrian economist who is also a value investor, Chris Leithner rebuts the above statement: “Value investors’ conception and assessment of value are congruent with the Austrian School’s.”

“A value investor” measures value by one of two methods:

  1. First, he/she values a company according to the external prices of its assets. He/she observes, for example, that X Ltd owns quantity Y of land, and that such land has a market price of $Z per hectacre.
  2. Second, the value investor makes plausible (based, perhaps, upon past experience and/or domain specific expertise) assumptions about a company’s future cash flows and, using some rate, discounts them to the present.  He might do these calculations in his head or on a spreadsheet.

The Hinge between the theory of Value and the Practice of Value Investing.

John Burr Williams in his The Theory of Investment Value, 1938 wrote, “With bonds, as with stocks, prices are determined by marginal opinion…..Concerning the right and proper interest rate (discount rate), however, opinions can easily differ, and differ widely….Hence those who believe in a low rate will consent to pay high prices for bonds…while those who believe in a high rate will insist on low prices…Thus investors will be bullish or bearish on bonds according to whether they believe low or high interest rates to be suitable under prevailing economic conditions.   As a result, the actual price of bonds….will thus be only an expression of opinion, not a statement of fact.  Today’s opinion will make today’s rate; tomorrow’ opinion, tomorrow’s rate; tomorrow’s opinion, tomorrow’s rate; and seldom if ever will any rate be exactly right as proved by the event.

How then does Warren Buffett define and measure value? In his 1994 Letter to Shareholders he writes:

We (Charlie Munger and I) define intrinsic value as the discounted value of the cash that can be taken out of a business during its remaining life.  Anyone’s calculation intrinsic value necessarily comes up with a highly subjective figure that will change both as estimates of future cash flows are revised and as interest rates move.  Despite its fuzziness, however, intrinsic value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.

Graham, by the way, would agree with the definition of intrinsic value but he would doubt whether investors could usefully apply it. (Ben Graham, 1939)  “The rub,” writes James Grant in the 6th Edition of Security Analysis (2009), page 18, “was that, in order to apply Williams’s method, one needed to make some very large assumptions about the future course of interest rates, the growth of profit, and the terminal value of the shares when growth stops.”

The entire article by Chris Leithner is an important read: Value Investing and Austrian Economics Leithner

BITCOIN

Certainty is not certaintude–Oliver Wendell Holmes

  1. Bitcoin Certitude is not certainty
  2. Bitcoin Adoption and Usage
  3. The Promise and Peril of Bitcoin

The video below–though choppy in the first few minutes–is worth hearing about the psychology of market bubbles.   The interviewer of Bob Moriarty is ignorant of basic economics (Can prices EVER go below the cost pf producing a useful/needed product? Yes or No), but you can follow the discussion.  Note the pushback of the interviewer who is also an owner of bitcoins to Moriarty’s questions.  The psychology is fascinating–the will to believe and suspend judgment.

Other Comments

Bitcoin is up more than 2,000 percent in the last year and now trades above $17,000. Bitcoin futures trading launched this week on the Cboe exchange, gaining more than 19 percent Monday in the first full day of trading.
There are now 1,358 cryptocurrencies in existence, according to CoinMarketCap. Other digital currencies such as ethereum are better designed for programmable “smart contracts” and have quicker transaction times versus bitcoin.

Bitcoin’s scalability is another issue. There is technical limitation on how many transactions that can be processed at the same time. Partly as a result, widespread use of the cryptotcurrency for payments has not occurred yet.
So cryptocurrency investors must honestly ask themselves, is bitcoin really changing the word through blockchain technology innovation or is it mainly speculative asset? It’s the latter.

Kynikos Associates short-seller Jim Chanos, lauded for his prescient negative calls on Enron and Tyco, compared bitcoin to previous fads.

Bitcoin “is a speculative mania. It’s Beanie Babies,” he said at a Schechter event in Detroit, Michigan Wednesday, referring to the toy fad craze during the 1990s.
DoubleLine Capital CEO Jeffrey Gundlach criticized the lack of analytical rigor in the recent “nice round number” $1,000,000 price targets for the bitcoin, which is reminiscent of previous speculative blow-offs.

“I have no interest in this type of maniacal type of trading market,” he said on CNBC Wednesday.

Hedge fund manager Seth Klarman, the value investing giant who often draws comparisons to Warren Buffett, wrote in his classic “Margin of Safety” book an illuminating parable warning against speculation:

“There is the old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, ‘You don’t understand. These are not eating sardines, they are trading sardines.’

Like sardine traders, many financial-market participants are attracted to speculation, never bothering to taste the sardines they are trading. … trading in and of itself can be exciting and, as long as the market is rising, lucrative. But essentially it is speculating, not investing. You may find a buyer at a higher price—a greater fool—or you may not, in which case you yourself are the greater fool.”

 

The ART of Contrary Thinking

When everyone thinks alike, everyone is likely to be wrong.

If you wish to keep from guessing wrong, learn to think contrarily.  –Humphrey Neill

CSInvesting: Humphrey Neill wasn’t advising to blindly go against the “crowd” but to think things through rationally.   For example, investors might be excited by the new invention of the air conditioner, but the second-order effects were more powerful like increase in demand for real estate in Southern cities in the USA.

The BOOK: NEILL(H_B_)-The_Art_of_Contrary_Thinking_(1985)

Critique of the book 2016-07-29_BR_ML

Contrary thinking in action….

Has Apple Stock Peaked?
December 3, 2012|by Timothy Lutts

Has Apple (AAPL) Stock Peaked?
In the Footsteps of Coca-Cola
The Next Apple?

Everybody knows Apple.
With more than 85 million iPhones sold, $156 billion in annual revenues and a market capitalization that recently hit $660 billion, Apple is the second most respected brand on the planet. Number one is Coca-Cola.

But what does that mean for investors?

It means there’s a chance that investor perception of the company is so high that all the big investors already own as much Apple as they can carry. It means there’s more potential selling pressure on Apple’s stock than buying pressure. And that means there’s a good chance the stock has topped!

Now, some investors, looking at numbers alone, will disagree.

They’ll point out that the company is still growing fast, that the third quarter saw revenues grow 27%, and earnings grow 23%, and that analysts are expecting 12% growth in 2013 and 18% in 2014. Then they’ll point to the stock’s forward PE ratio of 12 and say, “Apple is cheap!”

But using numbers alone is a mistake in evaluating growth stocks, particularly exceptional growth stocks like Apple.

For example, we at Cabot did very well recommending Amazon.com way back when the company (selling only books) was still unprofitable, and most bean-counters wouldn’t touch it with a 10-foot pole. We jumped on little Crocs (plastic shoes!) and rode it to the moon. And we did very well with ridiculously “expensive” First Solar, in part because we sold early, while its business was still booming, but its stock was on the skids. We could have justified owning none of those stocks if all we looked at were numbers.

Bottom line: to make money in exceptional growth stocks, you can’t just look at numbers; you’ve also got to look at momentum and sentiment.

But before I get deeper into Apple’s case, I want you to study this long-term chart of Coca-Cola (KO–see above) (the number one brand in the world today), spanning the years from 1965 to the end of 1985.  See at the top of this article.Note the earnings line, with each dot marking a quarterly earnings figure. It’s a steady uptrend, with the exception of a sharp dip in late 1974 and a stumble in 1981-1982. Then look at the dividend line; Coke’s dividends were increased every year, like clockwork. Finally, observe the price line, noting that Coke’s price peaked in late 1972 and didn’t exceed that level until late 1985, 13 years later.

The explanation for those “lost 13 years” lies not in the numbers; it lies in crowd psychology, and specifically, in the investing environment of the times. Coca-Cola was one of the Nifty Fifty, popularly regarded as one-decision stocks that you would simply buy and hold forever. (Others in this august group included Digital Equipment, Eastman Kodak, J.C. Penney and Simplicity Pattern).
Well, for investors who truly had the patience and guts to hold Coke through those lost 13 years, it worked out okay. But most investors don’t work with that kind of time horizon. Most investors can’t hold five years without seeing a profit—and they shouldn’t have to!

The truth is, the extreme popularity of those stocks (call it reverence, even), was a sign of their potential to top. But it was very hard for investors to see it then!
So, getting back to Apple, I’ve already mentioned the stock’s high regard among the general public; it’s the number two brand in the world. Among institutional investors, it’s regarded as royalty, providing both a dividend and spectacular growth. In fact, if you manage institutional money, owning AAPL has become almost a requirement in recent years, and the result of all that buying power is that even after the recent correction, AAPL is still up 45% for the year!
But when everyone who might buy a stock has bought it, what happens?
The same thing that happened to Coca-Cola in 1972.

It stops going up, and to some extent—every stock is different—it goes down.
Now, I have no doubt that Apple (the company) will continue to grow revenues and earnings for years to come. I’ve been an Apple user since 1987, when I bought a Macintosh SE for Cabot (to join our IBM Displaywriter—Google that!). Today I use a MacBook Pro, an iPad and an iPhone on a daily basis, and I expect to be an Apple user to the day I die, benefiting from the company’s legendary ability to make complicated technological interactions simple.

Nevertheless, I’m bearish on Apple (AAPL) stock today and here’s why.
There’s a dirty word to describe what happens when a company’s growth slows, and when the perception of the company’s future becomes just slightly tarnished. As that word spreads, and as those perceptions spread, the stock slowly collapses, as the supply of stock (potential sellers) overwhelms demand (potential buyers).


The Dirty Word
The word is deceleration, which is a fancy phrase for slowing down. And Apple is decelerating! That third quarter earnings growth of 23% followed second quarter earnings growth of 20%. Those were the slowest quarters since mid-2009! And looking forward, the projected 12% growth in 2013 is even slower, though 18% for 2014 provides hope.

Now, 12% growth is nothing to sneeze at; many companies would kill for 12% growth. And 18% is excellent! But it’s quite a comedown from the nine consecutive quarters from 2010 into 2012 where Apple’s earnings grew more than 50%! It’s deceleration.

And that brings us to the stock’s performance, which is where the rubber meets the road. Because more important than numbers, more important than sentiment, is the stock’s actual performance. So here’s Apple’s chart, since the 2009 bottom.

As on Coke’s chart, you see the earnings line, trending higher, but rounding somewhat recently; that’s the deceleration of earnings. There’s no dividend line on this chart; Apple’s dividend history is short but healthy. But there is another line on this chart and that’s the RP line. RP stands for Relative Performance; it depicts the performance of the stock relative to the broad market.

Note that over the past four years, whenever AAPL corrected, its RP line basically flattened out (ignoring the tiny weekly movements). But in this year’s correction, AAPL’s RP line turned down, and for eight weeks, AAPL performed worse than the overall market.

Now, this underperformance alone is not the kiss of death. Many stocks can pull out of similar corrections and move out to new highs.

But look back at Coke’s chart. If you look at the RP line, you’ll see the same pattern! From 1964 through 1973, KO was pretty healthy, beating the broad market overall, and holding its own in corrections. But after 1973, as sentiment turned, and the selling pressures slowly overwhelmed buying pressures, KO’s RP turned clearly negative, beginning a pattern that lasted many years longer than most investors could stomach.

And that’s very likely where AAPL is today.
So when you put it all together…
• The extremely high market cap
• The extremely positive public opinion
•The extremely high level of institutional ownership
• The deceleration of earnings growth
• The weakening relative performance line
…it looks ominous.

Now, big, well-respected stocks don’t collapse overnight. To the contrary; when a high-quality stock like Apple pulls back, you’ll hear a new chorus of “It’s a great value down here” and “Buy the dips.” But as time goes by, and the stock fails to return to its old highs, those choruses fade, and the stock falls slowly out of the limelight—just like Coca-Cola did in the 1970s.

Stepping back to look at the big picture, it’s worth remembering that investing is not a science. Uncertainty is a given.

But to be a successful investor, you need to put the odds in your favor, and today, the odds are not good for investors in Apple.  See more  http://www.timothylutts.com/

ALAS, NEVER CEASE TO DO YOUR OWN THINKING.

You might have sold out of a uniquely profitable company as AAPL went on to triple over the next five years!~

 

Whining about Chipotle

This makes an interesting psychological study.  Who holds the stock and how they react.   ($CMG last at $278, down 14.5%)  Many conversations below show no interest in discussing the valuation of CMG, but just the price (and if the price is declining, the pitiful management).

Also, note the focus on P/E ratio for valuation.   What about the flaws in using P/Es as a valuation metric?   No discussion about the business, cash flows or discount rate.

CMG will probably trade north of 6 million shares today or about 20% of the 28.5 million outstanding shares.  Where are the long-term shareholders?  One in five investors will sell based on one quarterly report.

If you have done your homework on valuation, then unreflective sellers who are throwing in the towel may mean an attractive price over the next few weeks.

I don’t know much about Chipotle, but management should be able to right the ship OVER TIME–the next 24 months–not next quarter. I don’t own any CMG currently.

Time to pile on (rats falling from the ceiling!):   https://www.bloomberg.com/news/articles/2017-10-25/ackman-s-lost-a-lot-of-queso-on-his-stake-in-chipotle

An interesting article on the struggle within the turnaround efforts.

“Every chain restaurant, he says, goes through this rite of passage. For every success like Starbucks, there are former high-flyers like Baja Fresh and Boston Market that no longer have cultural currency and are slowly fading.
Moran (Chipotle founder) remains confident that Chipotle will not end up an afterthought dotting the strip malls of America, but he preaches patience. “Will we climb out of it and get back to our former greatness? I absolutely believe we will,” he told me in June. “But will that take a year or two or three or four? I don’t know. The full recovery from this is going to take a long time.” https://www.fastcompany.com/3064068/chipotle-eats-itself

  • AlabamaHobo

    Why does a burrito company trades for 70 PE.

    Lots of room all the way down to 15 PE. 

    DowPete

    DowPete    yesterday
    Ackman has been unusually quiet about his position in Shipotle. For someone who is forever whining, the silence is golden. Glad he’s underwater in $CMG.

    Mad

    Mad

    13 hours ago

    200$ may not be that impossible tomorrow or later.

    CowboyFan

    CowboyFan

    13 hours ago

    Overvalued stock , for a burrito company.
  • CowboyFan

    CowboyFan

    14 hours ago

    What a POS! Seriously , this is a $40 stock
  • BB
    BB

    16 hours ago

    Why does almost every retail restaurant or fast food chain trade at 15-25xs earnings and Chipotle get to trade at >60xs? Its still way overpriced, should be $100/share or less. Concept is easily duplicatable and has been many times now. Theres plenty of fast food burrito places out there now..

    Tenley

    Tenley

    10 hours ago

    I want a refund on my burrito. It taste weird…
  •  DaveR
    DaveR

    20 hours ago

    Even a lemonade stand could beat the latest benchmark for CMG earnings. If they miss this bunny forget about it.
  • Jh

    Jh

    14 hours ago

    Fair market value $50
  • joe

    joe

    16 hours ago

    Hundreds of high school students chow down at these restaurants every day. Me too
  • liberal

    liberal

    1 hour ago

    I’m loving this fall, hope it goes on through the day and we see 270s today. Make some mulla on those put options from yesterday
  • CT

    CT

    4 hours ago

    The battle line is drawn at $295 ps. Buyers must buy at this previously held level – otherwise, it is abandoned and a new lower strength level is found. But holding this level will be difficult as it represents a triple bottom.

    My bet is that the shares go lower. Once the dam at $295 is broken, the selling will accelerate and we may end up the day at -20%.

  • Jerome R

    Jerome R

    23 hours ago

    20% short interest on a 25 mill float, see you at $400 after ER
  • Jerome R
    Jerome R

    23 hours ago

    20% short interest on a 25 mill float, see you at $400 after ER
  • S.P.
    S.P.

    17 hours ago

    Owning this stock is like having CMG’s molten cheese poured on
  • george

    george

    20 hours ago

    Bloodbath coming after hours. The bombs start decimating your portfolio at 4:30 PM. Get your shovel out to dig your own grave. Just jump in, we’ll kick some dirt on top of you.
  • Mocula

    Mocula

    13 hours ago

    What was the total compensation for the CEO this year? The small amount of money I lost on this stock, means nothing to the officers. As long as they car drive a fancy car or pay a lot for a douchebag haircut, they will just continue to make excuses and take as much as they can.
  • Robert
    Robert

    15 hours ago

    Jerome, Hope you didn’t get killed too bad. This stock is a pig. Over priced. Should see $250 in a week. Cannot beat same stores off a week quarter to comp. McDonald’s had stores close in Houston and Florida. Face it. Bad food, overpriced, competition. The shorts won’t cover until $275.00.
  • WIZARD1973

    WIZARD1973

    16 hours ago

    I can’t believe they think remodeling the restaurants and raising prices are going to bring people back. I hope they have a better plan than that!’
    • Bay Area

      8 hours ago

      This burrito seller is still trading at insanely high PE. Fools find 300 cheap because they are comparing with the peak of 2015. That was a pure scam by Kramer type people. Giving the mess and slumped earnings, risky low margin business, very specific narrow menu, this stock should be trading at no more than PE =10
    • Ahh Haa

      Ahh Haa

      19 hours ago

      About to be Bill Ackholed.
    • Andre

      Andre

      12 hours ago

      I’m hoping this dips sub $290ish for a quick trade. The most brutal selloff periods are in the first hour of trading. Don’t fall in love with a position whether long or short. Volatility in any stock makes it great to spot a trend and make a great trade.
    • kevin

      kevin

      39 minutes ago

      Spoiled foods. Empty stores. Flopping queso. Run and sell!!!

Bulls Rampage

Increasing debt for equity swap

Sentiment bullish and prices high relative to the past.