Category Archives: Risk Management

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

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

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

Financial Assets vs Real Assets

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

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

Thoughts on Mauboussin

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

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

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

Shld Mouboussin

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

Housing Mouboussin

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

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

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

Here is a video of a Mauboussin class

Color me skeptical.

Gold in a Nutshell

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

How to Lose Money Consistently; A Contrarian Speaks

buy buy sell sell

First, I get my stock tips from experts.

Second, I wait until the recommended stock goes up after the broadcast tip to make sure the trend is your friend.  Who needs to understand accounting anyway or the present value of free cash flow.  I mean understanding the magnitude and sustainablility of free cash flow or how the business makes money is old news.  Compare expectations versus funamentals?  I go with price because price is all.

I don’t need to think probabilistically because there are sure things like following Jim Cramer’s recommendations.

I am often wrong but never in doubt.

What behavioral biases? I am right, always right.  I don’t need losers like you second guessing me.

Now why would I blindly follow Jim Cramer?  The most important part of investing is having someone to blame when you lose money.  I typically lose 9 out of ten times and my losses are triple my wins.   Consistency wins!

Please read: http://ericcinnamond.com/parachute-pants/   A fantastic blog of knowledge from an experienced investor.

This article hits home because I have also felt the pain of being a contrarian as anyone who types in “gold stocks” in the search box can see.

AG

I bought AG in mid-2014 at $8, then $4.50, then $3. Over two years, I was down over 45% based on my average price.  Clients screamed. One said that if my IQ was higher, he could call me stupid.   One client took out an insurance policy on me and told me that I might have an accident.   Now all is forgiven. Yes, I have sold some AG but still retain a position because conditions haven’t changed, but the price has begun to discount the good news. Risk is higher now than in 2015. Yet, there doesn’t seem to be a mania into these stocks–so far.  But mining stocks are burning matches where their assets deplete and deplete.  You have to jump off the train when people are clamouring for these companies.

Parachute Pants

Did your parents ever tell you not to worry about what other people think? I remember my mother telling me this when I was in eighth grade. I’m not sure if she was simply giving good advice or trying to talk me out of buying parachute pants. In the early 80’s parachute pants were a must have for the in crowd. I wanted to fit in, but my mom convinced me it wasn’t necessary to act and dress like everyone else. In hindsight, good call mom. Now if only she would have talked me into cutting off my glorious “Kentucky waterfall” mullet! The pressures of conforming and fitting in don’t go away after eighth grade – it sticks around many years thereafter. Investing is no different.

In the past I’ve discussed and written about the psychology of investing and the role of group-think. The pressure to conform in the investment management industry is tremendous, especially for relative return investors. As their name implies, these investors are measured relative to the crowd. One wrong step and they may look different. Looking different in the investment management business can be the kiss of death, even if it’s on the upside. If a manager outperforms too much, he or she must have done something too risky or too unconventional. For some relative return investors being different (tracking error) is considered a greater risk than losing money. Losing client capital is fine as long as it’s slightly less than your peers and benchmarks. From what I’ve gathered over the years, to raise a lot of assets under management (AUM) in the investment management industry, the key is looking a little better, but not too much better, and definitely not a whole lot worse.

How did we get here? Since my start in the industry, relative return investing has gradually taken share from common sense investing strategies such as absolute return investing. How well one plays the relative return game is a major factor in determining how capital is allocated to asset managers. I believe this is partially due to the growing role of the institutional consultant and their desire to put managers in a box (don’t misbehave or surprise us) and turn the subjective process of investing into an objective science. Institutional consultants allocate trillions of dollars and are hired by large clients, such as pension funds, to decide which managers to use for their plans. The consultants’ assets under management and their allocations are huge and have gotten larger over time, increasing the desire by asset managers to be selected. This has increased the influence consultants have on managers and how trillions of dollars are invested.

During my career I’ve presented hundreds of times to institutional consultants. While I have a very high stock selection batting average (winners vs. losers), my batting average as it relates to being hired by institutional consultants is probably the lowest in the industry. It isn’t that they don’t understand or like the strategy. In fact after my presentations I’ve had several consultants tell me they either owned the strategy personally or were considering it for purchase. Although they appreciated the process and discipline, they couldn’t hire me because I invested too differently and had too much flexibility and control (for example, no sector weight and cash constraints). In other words, they liked the strategy, but they were concerned that the portfolio’s unique positioning could cause large swings in relative performance and surprise their clients. In conclusion, in the relative return asset allocation world, conformity is preferred over different, as investing differently can carry too much business risk (risk to AUM).

Over the past 18 years the absolute return strategy I manage has generated attractive absolute returns with significantly less risk than the small cap market. Isn’t that what consultants say they want – higher returns with lower risks? Yes, this is what they want, but they want it without looking significantly different than their benchmark. This has never made sense to me. How can managers provide higher returns with less risk (alpha) by doing the same thing as everyone else? Maybe others can, but I cannot. For me, the only way to generate attractive absolute returns over a market cycle is to invest differently.

Investing differently and being a contrarian is easy in theory. When the herd is overpaying for popular stocks avoid them (technology 1999-2000). Conversely, when investors are aggressively selling undervalued stocks buy them (miners 2014-2015). It’s not that complicated, but in the investment management industry, common sense investment philosophies like buy low sell high have been losing share to investment philosophies and processes that increase the chances of getting hired. Instead of asking if an investment will provide adequate absolute returns, a relative return manager may ask, “What would the consultant think or want me to do?” I believe the desire to appease consultants and win their large allocations has been an underappreciated reason for the growth in closet indexing, conformity, and group-think.

In my opinion, the business risk associated with looking different has reduced the number of absolute return managers and contrarians. And some of the remaining contrarians don’t look so contrarian. For example, look at the four-star Fidelity Contra Fund. According to Fidelity this “contra” fund invests in securities of companies whose value FMR believes is not fully recognized by the public. Three of its top five holdings are Facebook, Amazon, and Google. I suggest the fund be renamed to the “What’s Working Fund”. With $105 billion in assets under management, one thing that is working is the sales department! Wow, that’s impressive. What would AUM be if the fund actually invested in a contrarian manner? My guess is it would be a lot lower, especially at this stage of the market cycle when owning the most popular stocks is very rewarding for performance and AUM.

I’m not just picking on Fidelity. The relative return gang is in this together. After the last cycle we learned most active funds underperformed on the downside. Given the valuations of some of the buy-side favorites currently, I suspect they’ll have difficulty protecting capital again this cycle once it undoubtedly concludes. This could be the nail in the coffin for active management. If the industry is unwilling to invest differently and they don’t protect capital on the downside, why not invest passively and pay a lower fee?

In my opinion, given the broadness of this cycle’s overvaluation, the most obvious and most difficult contrarian position today is not taking a position, or holding cash. In an environment with consistently rising stock prices and the business risk associated with holding cash, I don’t believe many managers are willing to be patient. That’s unfortunate because I’ve found the asset that is often the most difficult to own is often the right one to own. The most recent example of this is the precious metal miners.

After the precious metal miners crashed in 2013, I became interested in the sector and began building a position. Besides a couple positions I purchased during the crash of 2008-2009, I had never owned precious metal miners before. They were usually too expensive as they sold well above replacement value (how I value commodity companies). Miners are a good example of how quickly overvalued can turn into undervalued. In addition to selling at discounts to replacement cost, I focused on miners with better balance sheets to ensure they’d survive the trough of the cycle.

After the miners crashed in 2013, they eventually crashed again in 2014 and became even more attractively priced. I held firm and in some cases bought more in attempt to maintain the position sizes. After adding to the positions in 2014, they crashed again in 2015 and early 2016. I again bought to maintain position sizes. I’ve never seen a group of stocks so hated. Many were down 90% from their highs – similar to declines seen in stocks during the Great Depression. The media hated the miners with article after article bashing them and calling their end product “barbaric”. I haven’t seen many of those articles recently. The bear market in the miners ended in January. Today they’re the best performing sector in 2016, as many have doubled and tripled off their lows.

Owning the miners is a good example of how difficult it can be to be a contrarian. While clearly undervalued based on the replacement cost of their assets, there didn’t appear to be many value managers taking advantage of these opportunities. I thought, “Isn’t investing in the miners now the definition of value investing? Where did everyone go?” It was extremely lonely. Some investors argued they weren’t good businesses as they were capital intensive and never generated free cash flow. Obviously they’re volatile businesses, but after doing the analysis I discovered that good mines can generate considerable free cash flow over a cycle. Pan American Silver (PAAS) did just that during the cycle before the bust. As a result of past free cash flow generation, Pan American entered the mining recession with an outstanding balance sheet. New Gold (NGD) is another miner with a tremendous asset in its low-cost New Afton mine, which also generates considerable free cash flow. I also owned Alamos Gold (AGI). Alamos had a new billion dollar mine, Young Davidson, which was paid for free and clear net of cash and was expected to generate free cash flow. Alamos was an extraordinary value near its lows and was the strategy’s largest position in 2016.

Assuming a mining company had developed mines in production, generated cash, and had a strong balance sheet, I believed while the trough would be painful, these companies would survive and prosper once the cycle turned. They weren’t all bad businesses when viewed over a cycle, as all cyclical businesses should be viewed. Furthermore, many had very attractive assets that would take years if not decades to replicate. In the end, survive and thrive is exactly what happened for many of the miners this year. I sold several of the miners as they appreciated and eventually traded above my calculated valuations. The remainder were liquidated when capital was returned to clients.  It was a heck of a ride and was one of the most grueling and difficult positions I’ve ever taken. But it was worth it.

The reason I bring up the miners is not to boast, but to illustrate how difficult it is to buy and maintain a contrarian position in today’s relative return world. I believe it helps in understanding why so few practice contrarian investing, or for that matter, disciplined value and absolute return investing. During the two and a half years of pain (late 2013-early 2016), equity performance in the strategy I manage suffered. I initially incurred losses and was getting a lot of questions — I had to defend the position. Relative performance between 2012-2014 was poor (high cash levels also contributed to this). During this time, the strategy lost considerable assets under management. People were beginning to believe I lost my marbles. Whether or not I was going crazy is still up for debate, but one thing was certain, holding a large position in out-of-favor miners wasn’t encouraging flows into the strategy. While the miners were eventually good investments, in my opinion, they were not good for business.

As value investors we often talk about being fearful when others are greedy and greedy when others are fearful. However, in practice it’s extraordinarily difficult. In addition to the pain one must endure personally from investing differently, a portfolio manager also takes considerable career and business risk. Given how the investment and consultant industry picks and rewards managers, it can be easier and more profitable to label yourself as a contrarian or value investor, but avoid investing like a contrarian or value investor. Instead simply own stocks that are working and are large weights in benchmarks – the feel good stocks. I’ve always said I know exactly what stocks to buy to immediately improve near-term performance. Playing along is easy. Investing differently is not.

Investing to fit in with the crowd may feel good and it may be good for business in the near-term, but fads are cyclical and often end in embarrassment (google parachute pants and click on images). Participants in fads and manias often walk away asking “What was I thinking?”. But for now owning what’s working is working, so let the good times roll. I’ll stick with a more difficult position. Just like I did with the miners, until it pays off, I plan to stay committed to my new most painful contrarian position – 100% patience.   —

Boy does the above post ring true. 

HAVE A GREAT WEEKEND AND STAY COOL ON THE US EAST COAST.

Special Situation Quiz Question; An Overcrowded Trade

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 Rags make paper,
Paper makes money,
Money makes banks,
Banks make loans,
Loans make poverty,
Poverty makes rags.
-Anonymous

Interview at Special Situations Hedge Fund

You have been working so hard to have an interview with Buffo and Greensplat Special Situations Hedge Fund and now you are in their offices.   The interviewer sits down and then asks, “Can you please tell me what you think was the greatest special situations trade/investment of the past thirty years and what was the catalyst for the trade?”  Hint: This made huge multiples on the original capital.  Few recognized the opportunity until too late.

An overcrowded trade in the search for yield. http://truecontrarian-sjk.blogspot.com/

Tuesday, August 2, 2016

THE FIRST AND THIRD SHALL BE FIRST, WHILE THE SECOND SHALL BE LAST (August 1, 2016): There is a fascinating pattern to the trading during the first seven months of 2016. The strongest sectors by far have exclusively been silver and gold mining shares, in that order, followed primarily by other commodity producers and mining-related emerging-market equities. The second-biggest percentage winners have mostly been high-dividend, low-volatility assets including consumer staples, utilities, REITs, tobacco shares, telecommunications companies, and long-dated U.S. Treasuries. The third-best performers of 2016 have been mostly energy companies and a variety of emerging-market stocks and bonds.
This is puzzling is because the first and third groups are inflation-loving assets, whereas the second group performs well when deflation reigns. How can the financial markets be both inflationary and deflationary?
The deflation trade is nearly over, but it has remained in a bull market due to huge inflows from investors desperate for yield.
High-dividend and low-volatility assets including FXG and XLP (consumer staples), IYR and RWR (REITs), XLU, IDU, FXU, and VPU (utilities), along with TLT and ZROZ (long-dated U.S. Treasuries) have been among the second-best performers of 2016. They have also been among the top winners of the past five years. Many of those who have retired or who need to pay their monthly expenses have become overly dependent upon income-producing investments to generate yield. That’s fine as long as high-dividend assets are either bargains or reasonably priced, but it creates a dangerous situation when they are trading at all-time highs even compared with previous historic peaks. There have been all-time record inflows into high-dividend and low-volatility funds which have far outpaced their previous records. A person who has retired with a half million or a million dollars might perceive that he or she “needs income” in order to maintain a basic lifestyle, and most of these investors don’t realize that if everyone goes to their financial advisors and wants the same level of “safe” income then they are all going to end up owning the exact same assets. What would be reasonable for a tiny minority of investors has become an inevitable catastrophe since millions of others are acting similarly without realizing the consequences of collectively being in such an overcrowded trade.
The inflation trade has only been in a bull market since January 20, 2016, and has a long way to go to recover its losses since April 2011.
Unlike most high-dividend assets which had bottomed in the first quarter of 2009, most commodity producers and emerging markets had been in severe downtrends from April 2011 through January 20, 2016, and even after their subsequent strong rebounds remain far below their previous peaks. Earlier this year, many of these assets completed multi-decade nadirs, with some of them touching levels not seen since the 1970s. Therefore, they remain substantially below fair value. Silver and gold mining shares including GDXJ, SIL, GLDX, SILJ, and GDX have tripled on average in just over a half year, and have thereby outpaced nearly all energy producers which had initially rallied but have gone out of favor along with most emerging-market equities during the past several weeks. This has created the best bargains for those assets which are in the process of completing important higher lows including URA (uranium), GXG (Colombia), FCG (natural gas), and FENY, a more diversified and less volatile fund of energy producers.
The Daily Sentiment Index for crude oil, indicating the percentage of traders who are bullish toward any asset, plummeted to 10% at the close on Monday, August 1, 2016. This is an incredibly low level for anything which is in a primary bull market, as energy commodities have been since February 11, 2016. The shares of energy producers mostly approached or reached multi-decade bottoms on January 20, 2016. Whenever it is possible to buy at higher lows during a major uptrend, this is ideal because a sequence of several higher lows is often followed by an accelerated rally.
The high-dividend and low-volatility bull markets are very stale and incredibly popular, while few know about the uptrends for commodity producers or emerging markets.
Almost everyone knows that high-dividend shares have been the biggest winners of the past several years and are still eager to jump aboard the bandwagon, while few realize how overcrowded this bandwagon has become. Historically, the most wildly trendy and popular trades have always proven to be disappointing. Although it is rarely compared with the internet bubble of 1999-2000, the Nifty Fifty overvaluation of 1972-1973, or the blue-chip top of 1929, high-dividend and low-volatility names have become the bubble of the decade. The total assets in USMV, a frequently-touted low-volatility fund, have tripled in one year. Just as in 2000, almost no one who has invested in these securities realizes that they can lose half or more of their money. Almost no analysts, even those who know how overvalued these popular securities have become, can emotionally imagine them plummeting. They might know intellectually that it is possible, but they can’t really imagine it happening any more than anyone at the beginning of the century could envision the Nasdaq plunging by more than 75% within three years. Alas, a similar fate awaits those who are participating in high-dividend and low-volatility shares and funds.
Just because you’re in the water to get exercise doesn’t mean you can ignore the great white sharks.
When I point out the dangerous of owning high-dividend and low-volatility shares, I often hear the refrain that “I’m not in these due to their extreme popularity” or “I only own these to generate the income I need to pay my expenses.” The market won’t treat you differently just because your motivations are allegedly pure. You might be the nicest person on your block, you might generously donate to charities, and you might frequently help old ladies to cross busy streets. Even if you’re swimming in the water just to get your daily exercise, you’re not magically exempt from being eaten by hungry great white sharks that are lurking nearby. If any given trade has become desperately overcrowded, then no matter why you’re involved in it, you’re going to be as badly hurt as the ignorant buyer who is doing it to keep up with his poorly-informed friends. As Warren Buffett has stated, when we strip off the clothing and pretense, we’re all fully exposed underneath. When the U.S. housing bubble collapsed in 2006-2011, as it about to do again in 2016-2021, it won’t spare those who are nice to animals or who do good deeds. I will discuss real estate in more detail in the near future.

Seeking an Investment Manager! Lesson on Cost of Capital (VRX)

unfriending

I am bombarded with these types of emails everyday, but I notice the increasing sophistication in these “fishing” missives. I post it as is.

Hi Dear.
Good day to you and your family, i want to use this moment to communicate you privately, I apologize if the contents of this letter are contrary to your moral ethics, I am really happy sending you this letter to know some one like you in my life. Let start from here to know ourselves and see what the future will hold to each other. I am Eleev Belaid a Tunisian by nationality, 26 year old single female and never married before, a first year university student and studying medicine.

My Father, Mr M. C. Belaid worked with the Arabian Gulf Oil and Gas Company as top senior officer in Tripoli Libya and also was purchasing a large quantities of metric tons of raw organic Cotton. He was into exportation of cottons from Burkina Faso Agro-business product company before his sudden death as he was killed by the rebels (al-Qaeda terrorists) on 20th October 2011 during the civil war in Libya. They attacked our house one early morning killing my Mother and my Father. I was not a victim of death because i was not living with my parent but was at the school Dormitory when the incident took place, after i have confirmed the death of my parent, i traveled back to Tunisia (my country) where my Father had his Siblings and investments/properties, my wicked uncle who had been controlling my late Father’s investments/properties whom i met in person said that i have no right according to tradition and custom of the land to inherit my late Father’s investments because i am a female and my Mother didn’t have a male child for my Father since i am the only child for my parent. My attempt to go into argument with him he threaten to killed me which made me to ran away for my dear life.

Firstly, I don’t have another option than to let you know about this so that you can help me out, but before the war got out of hand in Libya, my late Father moved all his funds into one of the European Banks. The amount that was moved to European bank was a total of $5,800,000 Million USD. I had applied to bank for the release of the funds to me, so that I could start a new business, but the bank Directors told me that my late Father left a “Note”(WILL) in the form of conditions, that the bank Must Not release the funds to me until I have an experienced of investing the funds into a very good business venture, and the “Will” also stated that I should present an experienced business partner/manager before the bank, who would assist me in investing wisely.

This then brought me to the issue of searching for a reputable and trustworthy person who would be my investment manager over the transaction with the European Bank and who has vast experiences in profitable businesses, where to invest the funds into. I want you to tell me more about good investments in your country, so that I will move this fund into your account in your country so that I can relocate my investment plan to your country. Tell me more about your country. How good it will be to invest in your country. I will appreciate whatever result you may brief me. Do let me know your idea and knowledge regarding these or any other profitable investment you may suggest. After the whole deal and the fund is released, You will be rewarded with 30% of the total amount for your participation and also any future investment profit you are entitle of 10% as your benefit.

Please, am seeking your humble assistance to uptake and accept the below responsibilities:
1. To stand as my Foreign Partner over the transaction.
2. You are to provide any account for the transaction (either empty account or existing account.)
3. After the transaction process, you recommend a nice university where to complete my studies.

Honestly, my days are not good since i came over here in Ouagadougou, Burkina Faso in this prison called refugee camp. We are only allowed to go out on Mondays and Fridays of the weeks. It s just like one staying in the prison and i hope by God’s grace and with your future assistance i will come out here soon.

Reply soonest to proceed.
Yours Truly
Miss Eleev Belaid

What bonds are saying about Valeant http://seekingalpha.com/article/3994126-bond-market-saying-valeant

Summary

Valeant’s bonds are trading at non-distressed levels, and have done so throughout the past year while the stock has sold off ~90%.

The bonds are currently trading at the same level that they were before the March earnings report, while the stock has sold off by almost 70% since then.

The bond market does not believe the negative message that the stock market has been sending about Valeant.

The B3/B- rating of Valeant’s bonds implies a 27% chance of bankruptcy over 10 years. I show that the share price ~$23 is pricing in a 67% chance of bankruptcy.

This is done using a comparison with peers based on EV/revenue, which shows that Valeant’s shares should be trading at ~$70 in normal circumstances.

One way to determine the cost of capital would be the rate of interest needed for a banker to loan all the firm’s capital. See Chapter 8: Cost-of-Equity-Capital Credit Model in Security Valuation and Risk Analysis by Hackel

CASE STUDY Activist Action on Coke 2014 Proxy

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We are taking up from the last post http://csinvesting.org/2016/07/25/major-analyst-exam-reading-a-proxy-then-assessing-management-and-directors/

This case study teaches us about reading a proxy, management compensation, board governance, and the struggles of activism.

Mr. David Winters of wintergreen_fund_annual_report_2015_1231 has struggled since inception. From inception on 10/17/2005, Wintergreen has returned 68.73% vs. 113.22% for the S&P 500.   Another fund started in 12/30/2011 returned 15.95% vs. 77% for the S%P 500.   Nevertheless, he has done a service for the investment community by pointing out egregious compensation plans in Wintergreen-TheTerrible10-2-web.  Then note the passiveness of the big index funds in terms of protecting their own shareholders, 20150430-Wintergreen-Advisers-BigIndex.

Mr. Winters began his battle with Coke in 2014. KO_VL Jan 2015. Coke has a fine franchise with high returns on capital, but its cost structure (including management’s compensation) may be far too high considering the competitive pressures that incombents are facing.   Coke has had to make pricey acquisitions to diversify out of brown sugary fizz drinks. Also, all incumbents are facing new pressures like DollarShaveClub.com breaching of Gillette’s (P&G) moat–see below

Dollar Shave Club Hurting Gillette

Video:

Analysis of Dollar Shave Adshttps://www.youtube.com/watch?v=cW8S-QBKcq4


As a review: Mr. Winter’s on Wealth Track: https://youtu.be/x6I1B3MaTms

Ok, back to Coke’s Proxy and Wintergreen’s battle to have Coke’s Board rescind the 2014 incentive compensation plan.   See the progression of the battle along with the slide presentations: Wintergreen Faults Coca Cola Management (KEY DOCUMENT TO READ!)

Then view Wintergreen’s presentations along with the articles in the link above:

What do you make of Mr. Winter’s struggle?  How can you explain Mr. Buffett’s actions? I was DISAPPOINTED but not surprised.  What did you learn that would be of help to your investing–the key to anything you spend time on?   Note Mr. Winter’s designation of corporate buybacks as another shareholder expense.   I believe shareholder buybacks are a use of corporate resources (a shrinking of the equity capital) that may either be a waste or a good use of resources depending upon whether the purchase price of the shares is below intrinsic value. Mr. Winters stresses that buybacks simply use corporate funds to mop up shareholder dilution. Regardless, Mr. Winter points out the huge shifting of shareholder property to a management that hasn’t performed exceptionally well.  Coke’s Board had granted exceptional awards for middling performance–now that is a travesty.

When I think of Coke, a great franchise that is not currently super cheap, I think of other “stable” franchise stocks like Campbell Soup or Kellogg’s.  The market has bid these up so your future returns will be low.  Do not misunderstand me, these companies are massive, slow-growth franchises, but if you pay too much, then you may have lower future returns for many years.

CMP Soup

CMP Soup

38630396-An-Open-Letter-to-Warren-Buffett-Kellogg-Company

—-

Lie with statistics http://tsi-blog.com/2016/07/you-can-make-statistics-say-whatever-you-want/

HAVE A GREAT WEEKEND and KEEP DANCING

MAJOR ANALYST EXAM: Reading a Proxy then Assessing Management and Directors

KO IMGAGE

KO ten

You always read the proxies and the notes to the financials. Today you read Coke 2014 Proxy.   

What is your assessment of management and the Board of Directors? What do you notice? Please justify your reply.

If you are struggling, then here is a hint:

You react: https://youtu.be/_YQR36fQ_Xc?t=43s  Why?

Another hint: KO_VL Jan 2015 for context.

Take a few days if necessary.   This is a critical case study that should be taught at every business school!

Lesson: READ WITH A PURPOSE.   Why do you read a proxy?  Unless it is a merger proxy, you focus on who the management and Board of Directors are and how they are compensated.   Go to the heart of the matter, don’t read all 100 pages.


Update: Between Euphoria and Despair.

If you invest in cyclical companies, then you should listen to http://ir.scorpiobulkers.com/Events and SALT-Earnings-Presentation-Q2-2016-Supplemental-Information and SALT 2Q 2016 Q Report

Is Gold a Pet Rock; Hedge Fund Analyst Quiz

Gold is money

Is Gold a Pet Rock? http://www.fiendbear.com/Curmudgeon226.htm

Hedge Fund Analyst Quiz

Your boss drops the earnings announcement from Skyworks (SKWS) on your desk.   He asks if he should buy the dip?

big

You spend five minutes on the 8-K: SEC-SWKS-4127-16-57

What hits you like a frozen flounder across the face?  Red lights should be flashing and sirens blaring.   You tell your boss……………………….

Anyone NOT figuring this out needs to read: Earning Quality

or face this:

Socialism at work: http://www.bloomberg.com/features/2016-venezuela-diary/  A frantic search for food in Venezuela.   I am offering $5,000 to anyone who can explain how Socialism improves the lives of ALL citizens over the long-term? Can Socialism ever NOT collapse into death and despair?

HAVE A GOOD WEEKEND!

Pinpoint Bottom in Drybulk Shipping Stocks!

shipwreckThe result for investors in shipping stocks–sinking more than 50% in 2015 alone or 95%+ since 2011.

BDI_blog_120716

A correlation between the Baltic Dry Index for Shipping with the Goldman Commodity Index. So, here’s an idea: Rather than piling onto the bearish bandwagon, when the real price of an indispensable service or commodity drops to a multi-decade low it might make more sense to be bullish. Read more Shipping rates will never go to zero

tsx perspective

Shame on you if you thought I or anyone could predict the bottom of any shipping cycle.  That impossibility allows reward for the investor who can use time arbitrage. You can use a longer time-frame (three-to-five years) than 99.999999% of all investors.  You can listen to an excellent shipping conference here: Marine Money NY Conference.  The whole conference is worth listening to so you develop an understanding the industry.  See 910 Adam Kent – From the Weeds to the Trees and 855 Jeff Pribor Marine Money Presentation and 250 Panel – Untitled, Uncut and 910 Adam Kent – From the Weeds to the Trees and Falling Knife or Bargain 855 and Jeff Pribor Marine Money Presentation.

At that conference, analyst Andrew Horrocks said that institutional investors all say to him, “Yes, Andrew we have the same data as you–assets are at generational lows and supply looks to be diminishing, but call us in 2017 or ‘just before the cycle turns!’ See chart below of drybulk shippers.

shippers

Read his handout Andrew Horrocks on the shipping market and go to page six, then listen to Horrocks Talk to Investors. At minute 11 he points out the good news for drybulk shipping. Supply is waning. There is high scrapping rates, low crude prices, and ordering of new ships is practically nil.  Mr. Horrocks says to never underestimate the dimension of time in investing. Even though public institutional investors see the same data, they can’t afford a longer-term investment horizon than six-to-twelve months.  Therein lies our opportunity.

See more on time arbitrage: http://basehitinvesting.com/the-market-value-fluctuations-of-the-10-largest-companies/

The reason prices for drybulk ships are at 35-year lows is because of simultaneous over-supply met with falling demand from a weaker global economy. Prices adjusted rapidly. Smart ship owners who have been through several cycles are snapping up second-hand ships for cents on the dollar using cash and then expecting to wait three or more years for the cycle to turn.   But for investors in shipping companies, we face the dangers of high debt loads and future dilution. The shipping companies that survive will go up 5, 10 even 30 times or go to ZERO ($0.00). The opportunity/dilemma.

Mr. Bugbee, the president of Scorpio Bulkers (SALT) whose company has diluted shareholders several times to survive, points out that the key is to survive to the other side of the cycle. Go to minute  11 and 24 https://www.marinemoney.com/sites/marinemoney.com/files/325%20Panel%20-%20Dry%20Cargo%20Discussion.mp3 Massive Opportunity or Bankruptcy? Bugbee discusses the opportunities and dangers as Mr. Bugbee talks about survival in this cycle.

He says, ” I have NEVER seen a market that is so EXCITING in the long-term but that is so TERRIFYING in the short-term. Capital is HARD TO COME BY. there is no cash flow in the the market. We hope the market stays ugly for another eighteen months to allow for scrapping rates to clear up the supply, but we should be careful what you wish for. The KEY is to get your company to the OTHER SIDE of this cycle.   Meanwhile investures face DAILY or WEEKLY performance pressures.

And finally, always remember:


HAVE A GREAT WEEKEND!

P.S. Check out Fund Seeder

 

 

Time to Sell Some Miners, But Not Much

Junior Miners

There is no training, classroom or otherwise, that can prepare for trading the last third of a move, whether it’s the end of a bull market or the end of a bear market. Paul Tudor Jones

I am selling about 1/5 to 1/6 of my speculative miners like Minco Silver. It was trading back in Jan. 2016 at about 30 cents.

Minco one yr

This miner didn’t fit all my criteria like jurisdiction and top-flight management, but it had $1 per share in cash and short-term investments and $2.00 per share (basic shares outstanding) in book value with no debt.  I viewed the stock as a cheap call option.  My position was not a full position but diversified in these type of exploration/pre-development type of companies.

MSV_2015YE_FS  Minco Financials

Minco Presentation

This bull market is starting to smell like the 1970 rally!

Bear-market-comparison-Gold-768x685

So, I expect this bull market to last perhaps years or for miners to multiply several times over.  You make your money SITTING.  But when you start feeling smart or, worse, other people think you are smart (where were you in 2015 when my accounts were down 35% to 40%?), it is time to peel some positions off.   Sell into strength. Note the past history of the miners.

bgmi

I wanna go back to the 70’s.

An educational video on the Federal Reserve or why you should own some gold

Have a Great Weekend!

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

ego

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

Berkshire CS_wedgewood partners 1st quarter 2016 client letter

geico case study and presentation 2016

Incrementum-signal-768x439

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

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

Avoid Overconfidence

A lesson in trading

A lesson in valuation

It is never different this time

Happy Fourth of July Holiday.  

I will answer the option questions upon return.