Category Archives: Risk Management

Anniversary Day for the April Gold Massacre

04-14-2014_GOFO_cleaned (1)

The paradox in investing hinges on the tension between having both the strength of one’s convictions and the intellectual flexibility necessary to admit, relatively quickly, when one is wrong.–Unknown

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process.  It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.  Alan Greenspan (1966)

There are two ways to conquer and enslave a country. One is by the sword. The other is by debt. –John Adams, 1735-1826

When you consider the rate at which public debt is increasing, along with the fact that so many countries around the world instituted their own versions of quantitative easing (i.e. printing money) while increasing debt levels, these conditions are unprecedented. We have found NO HISTORICAL example of so many major countries simultaneously engaged in quantitative easing. Just ten years ago we would not have thought such an economic environment even possible. –Arnold Van Den Berg, Feb. 21, 2014

Gold Massacre

Today’s price decline in gold is probably a gift for the long-term buyer. A year ago on tax day the gold market had a large sell-off with rising demand from China.  big gld

Today, gold gets sold off $35 in the New York open, because demand from China is falling due to weakening money supply, credit stress and ?? What else can we make up?  China is relentlessly accumulating gold.

small GLD

However, 2014 is far different in market structure than 2013. 900 tons have already been removed from gold ETFs and demand to hold gold is greater than cash based on negative GOFO rates–see chart at the top and read here:

Take a look at the negative rates here:  An article discussing gold’s anniversary day:

The cause of today’s sell-off is not manipulation, contrary to the howls from goldbugs, but traders getting ahead of possible collateral issues tied to swap agreements:  So, gold prices could continue to be pressured–welcome to markets. Which force will be greater?


Has anyone has attempted a valuation of Detour Mines (DRGDF) mentioned in this post: I won’t post my valuation until the $500,000 prize is awarded.

My quarterly report (The Horror!) :Gold and Miners_April First Qtr Report

A reader wished to share a report on investing in materials:  Fortnightly_Thoughts_-_14_04_14_-_Materials

Understanding Bear Markets; Without Comment

Understanding Bear Markets:

Charts below from:










Speculative Hedge Funds Piling In.



Book Club for The Intelligent Investor; Can a Company Have Too Much Debt? Free Courses


Book Club for Value Investors (Discussion)

Graham & Doddsville – Issue 20 – Winter 2014

Can a Firm Have Too Much Debt


Is There Too Much Corporate Debt_Bernankie 1988

The above papers were written during the LBO craze of the late 1980s which, in turn, was driven by the all-time low in asset values of the early 1980s.

Liquidation and Debt Capacity   Worth a read!

Free Course with Yale’s Schiller on Financial Markets and Risk:

Argument Clinic

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.

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………..

David and Goliath: Underdogs, Misfits, And the Art of Battling Giants

Perhaps it is one secret of their (Bankers’) power that, having studied the fluctuations of prices, they know that history is inflationary, and that money is the last thing a wise man will hoard.–Will Durant in Lessons of History

Investment Strategy


Client Report Jan 29 2014

gold vs spy  Gold is money, not an investment.

Value Investing Videos (Manual of Ideas)

Pabrai lectures in India:

Reader’s Questions

How much of your decision to not own stocks of businesses outside of the mining sector is based on a top-down or macro decision.  The reason that I as is because you mention that you owned COH in the past and that seems like a cheap stock at the moment.  I could understand that you might not want to own it because of it struggles in the US and possible brand erosion, but that seems more like a quality issue than a valuation issue.  Or is it a fear of a hurting consumer?

My reply: Actually, it is a bottom-up decision.  I have pawed through my 250 stocks that I target in Value-line but see little margin of safety. Yes, I owned COH many months ago but sold near $58 as I had about a $60 to $65 valuation on it.  I am very skeptical that the high end of their profit margins can be sustained because of their clientele and QE. But the undervaluations in miners gave me a better uses for my capital.  So bottom up on both sides push/pull. 

But I am certainly not suggesting anyone follow exactly what I am doing. I still own some non-miners like ESGR but I wouldn’t add to them. 
Question: Also, I’m still trying to understand the margin decline argument. I haven’t done enough homework on it myself to ask intelligent questions, but intuitively I don’t understand why a specific geography (in this case the US) couldn’t have more than average of the types of companies that generate higher margins.  The geographic lines on a map seem arbitrary to me.

My reply: Well, set aside geography, because the same principles apply to any country. The most mean reverting metric of companies in general would be profit margins.  Think about the inevitable law of competition and lack of barriers to entry.  But understanding this subject will make you a better investor and save you heaps of pain!  If an analyst projects an increase in multiples on top of today’s profit margins, then I suggest a mercy kill for that analyst and his boss/clients. We are in the death zone–a climber’s term for high altitude conditions. 

Cutting back on growth capex and returning excess capital to shareholders if there are no adequate opportunities to generate excess returns is the right thing to do, but how sustainable is it for large companies like IBM or CSCO? Also, buying stock today may not be below intrinsic value for every company that is doing it.