the-base-rate-view-by-mauboussin I wonder if readers will find this useful. We last discussed base rates here: http://csinvesting.org/2016/09/29/hedge-fundfamily-office-consulting-job/
the-base-rate-view-by-mauboussin I wonder if readers will find this useful. We last discussed base rates here: http://csinvesting.org/2016/09/29/hedge-fundfamily-office-consulting-job/
I approach natural resource investing through the prism of history and cycles. and tend to look for where the supply/demand fundamentals are improving marketedly, yet where, as John Templeton put it, Maximum Pessimism is the prevailing sentiment. –Tom Kaplan (Novagold Annual Report 2014)
i-did-nothing-mark-mckinney-final (A cyclical investor)
Prominent metals investor Thomas Kaplan raised $200 million, more than expected, from investors eager to join him in making acquisitions in an industry starved for cash.
Kaplan’s Electrum Group LLC raised the money in Electrum Special Acquisition Corp, according to a prospectus filed with the U.S. Securities and Exchange Commission on Tuesday.
Electrum had expected to raise $150 million, it said in the prospectus. The “blank check company” expects to use the money to buy a company or assets with a focus on gold and other precious metals.
Details about the money raised were revealed on Thursday.
Kaplan, an Oxford-educated historian turned metals expert with a long track record of success, is betting that he and his team can spot an unloved company to buy and help it flourish again as demand in the sector improves.
“We are building up a war chest, given what we think is a unique buying opportunity in the metals and mining industry,” said Electrum Chief Executive Officer Eric Vincent. He would not describe what the target might be.
Kaplan previously made big bets on NovaGold Resources Inc and Gabriel Resources, earning money as the price of gold climbed some years ago but suffering when it later dropped.
In 2007, Kaplan sold Leor Exploration & Production LLC, owner of natural-gas wells in Texas, for about $2.6 billion.
Last year Electrum started Electrum Strategic Opportunities, a private equity fund whose clients include the Municipal Employees’ Retirement System of Michigan.
(Additional reporting by Josephine Mason in New York; Editing by Lisa Von Ahn)
The Santangel’s Investor Forum invites eligible students to apply for a free ticket to attend the 2016 Forum, to be held in New York City on November 3, 2016.
The Leonard Family has endowed a table at the upcoming conference to enable a select number of talented students to attend the annual invitation-only event.
The contest was very beneficial for last year’s winners, including one who met his current employer through the event. We were excited recently to receive the following feedback about this 2015 Forum Winner:
“[He] started working here a couple months ago and he’s been terrific so far, and I just wanted to give you a big thanks for the connection. He has a bright future.”
All enrolled undergraduate and graduate students are eligible. Interested candidates should apply by emailing their resume and a current investment idea write-up to Steven Friedman (firstname.lastname@example.org). The idea can be for any type of security or asset class, but the write-up must be limited to 300 words. Preference will be given to unique and original ideas. Please submit ideas by October 15, 2016.
Please feel free to pass this along to anyone who may have an interest.
Pitching an investment idea is the life-blood of Wall Street analysts —whether at money management firms and investment banks or with CEOs to potential investors. Those who do it well win, and win big. Sonkin and Johnson teach professional analysts, sophisticated private investors and ambitious young analysts how to uncover the perfect investment and pitch it to critical decision makers, to advance their careers and increase their wealth.
No other book like this one exists. There are plenty of books that focus on investment strategy, company analysis and critical thinking. Yet, there is no book that combines investment analysis with persuasion and sales – in Wall Street vernacular—pitching. In our increasingly competitive world, being able to pitch your idea is becoming as critical as being able to find and analyze great investment opportunities. It is imperative to get clients or superiors to take action on your ideas. The teaching of this skill is sorely lacking on Wall Street. Pitching the Perfect Investment will present a two-step process: 1) finding the perfect investment; and 2) crafting the perfect pitch. The book will show that to be successful the reader will require two very different skill sets: the first is investment analysis and decision making; and, the second is persuasion and sales.
Pitching the Perfect Investment presents world-class insights into search strategy, data collection and research, securities analysis, risk assessment and management, combined with the use of critical thinking, to uncover the perfect opportunity for professional analysts, sophisticated private investors and ambitious young analysts as well as mergers and acquisition specialists advising clients, financial consultants and corporate financial analysis teams. Pitching draws from the disciplines of psychology, argumentation and informal logic. It instructs the investor analysts of all types how to craft this perfect investment into the perfect pitch. Pitching an investment is an essential skill to securing and then excelling at your job on Wall Street.
This is an essential skill for the ambitious young investment analyst looking to begin a career on Wall Street as well as the seasoned veteran discussing an idea on CNBC, and every investor in-between.
Aspiring analysts should be aware of this book, but I am not recommending since I have not read it. Common-sense writing helps. Clearly state your thesis then provide supporting facts and risks. Done. But if you can’t state your case to a child in less than a paragraph, then go back to your desk.
For example, Navigator Holdsings (NVGS) has a dominant position in handy-size petrochemical transportation and it trades at 55% of net asset value, its balance sheet and flexible fleet allows it to be profitable despite a perfect storm in the LPG shipping market. One of the most famous value investors, Wilbur Ross bought into NVGS at an average price of $8.73 over three years ago for a 50% stake. NVGS is now 20% below that price. The current lows in freight rates due to A, B, C are unsustainable due to 1, 2, 3, therefore normalized rates will mean much higher values. Timing is, of course, uncertain, but there are considerations for building more US ethylene plants for export. NVGS has the dominant position for transporting that product which requires special handling (super low temperatures and pressure). Price is about 50% below asset value and earnings power value.
Probably too long-winded, but you get the point.
Beware the echo chamber http://graphics.wsj.com/blue-feed-red-feed/ A serious concern for your research. Scary.
More on psychology for contrarians.
|Latest NewsJune 10, 2016 – We’re pleased to announce a new website launching in the coming week. Please let us know any questions or comments about the transition.
June 08, 2016 – Check out our latest 1-hour free webinar “Trading on Sentiment Strategies to Profit from Media Analytics in Global Equities.”
Recent PressMay 14, 2016 – How To Time The Stock Market Using Media Sentiment — Ky Trang Ho Forbes
|The World&39;s Greatest Stock Picker
Manny introduced himself to me as “the world’s greatest stock picker.” He explained that one key to his success was that he only needed two hours of sleep a night. He pored over details in every significant financial publication and in those quiet morning hours when all others slept, he let information percolate. By the morning he had brilliant new insights into the industries and companies that were poised to outperform over the following months. Some of the world’s top fund managers subscribed to his research, he told me.
I asked if his clients knew he was housed in prison, in solitary confinement. He explained that of course they didn’t, and he asked that I kindly keep his secret. He distributed his stock research through his secretary, who kept his office open.
In the intervening days I checked out Manny’s story. Much was true – he was in fact publishing highly-regarded financial research to large AUM clients from prison.
On the surface his research analysis sounded brilliant – the creative ramblings of an out-of-the-box Wall Street-obsessed thinker. But as we talked in depth it became clear that his thought process was laced with irrational and circumstantial connections. He was often confusing wishful thinking with objective analysis. He was hypomanic, with grandiose claims and excessively optimistic projections.
As a psychiatrist I’ve worked with many people with grandiose delusions. In each case the client has fixed beliefs that are contrary to reality – beliefs that guide much of their waking actions – beliefs that are entirely untrue. Delusions aren’t limited to manic prisoners, in fact we spend most of our days navigating the world based on assumptions, many of which are entirely unfounded. Because the financial markets are imbued with uncertainty, assumptions are more dangerous in that environment. Regardless of the fragility in our collective understanding of markets, there are enormous payoffs for those who can discern reality more accurately.
In fact, academic research on trading models finds that most are delusional. “Most of the empirical research in finance, whether published in academic journals or put into production as an active trading strategy by an investment manager, is likely false.” ~ Campbell Harvey and Yan Liu, “Evaluating Trading Strategies,” 2014
This quote is particularly relevant to us at MarketPsych because we are restarting our trading business. We’re currently trading a unique media-based machine learning strategy and re-registering as an investment adviser. It has been a long road to find a strategy worth deploying capital into, and based on our prior experience, trading delusions can easily become enshrined in predictive models.
Today’s newsletter examines the nature of false beliefs among investors, how beliefs shift (with an Amazon case study), honest investment strategy development, and examines what, if anything, we can do to find the truth about what moves markets.
|When Delusions Crack – Brick and Mortar Retailers
(The following was written by our own Tate Hayes and a longer version will appear in Investopedia this weekend.)
Nordstrom’s and Macy’s have both seen a 50% drop in stock price over the last year on the back of deceasing revenues. Wal-Mart and Best Buy shares have taken just under a 10% hit over the last 12 months. In contrast, Amazon’s stock price is up almost 70% in the last year and 135% in the past two years.
Investors’ beliefs about the retail sector have changed dramatically in the past 2 years. In examining media optimism data since July 2014, a clear decline is evident. Over the last 24 months, investors became more optimistic about Amazon, but increasingly pessimistic about a number of the top brick-and-mortar retailers (Wal-Mart, Nordstrom, Macy’s, and Best Buy are charted below). The media sentiment of these individual companies are compiled in the Thomas Reuters MarketPsych Indices (TRMI). The TRMI Optimism index represents the frequency of positive, future-tense references about a company verses those that are negative in millions of articles daily from thousands of news and social media sources. The 200 day-averages of media optimism about each retailer are plotted in the chart below.
What is remarkable is both how long the delusion of bricks-and-mortar retailer safety stayed afloat, and also how quickly it is unraveling as optimism about the individual retailers plummets. First optimism about Amazon rose, and then, on cue, optimism about bricks-and-mortar retailers declined.
Our new book, Trading on Sentiment: The Power of Minds Over Markets (Wiley, 2016), explains in detail how media sentiment is quantified and used to time markets and select investments.
|How We Know What Isn&39;t So
Throughout the twentieth century, a variety of stock market leading indicators achieved notoriety. The Super Bowl indicator was oft-cited in media. It was so-called because the U.S. stock market was said to rise in years that an NFL team won the American football Super Bowl. This indicator was 90 percent accurate in predicting the annual stock market direction from 1967 to 1997. However, the Super Bowl indicator is a random coincidence, the result of overfitting to a limited data set. Such spurious correlations are often repeated in the media and by the statistically illiterate.
As we are seeing in the U.S. election cycle, in politics there is an advantage to sincere assertions of half-truths and lies. But in scientific disciplines like healthcare and (aspirationally) finance, objective truth is the bedrock of all subsequent activity. In 2005, Dr. John Ioannidis wrote an academic article that has become the most widely read paper on PLoS One (Public Library of Science) and the first to surpass one million views. The paper contains a proof that the majority of published medical research results are false positives (i.e., untrue).(1) Dr. Ioannidis’s statistical insights have been extended to finance by Marcos Lopez Del Prado, Campbell Harvey, Yan Liu, and others.(2,3,4,5).
If a test result is considered true at a 95 percent confidence interval (two sigma), then that confidence interval must be expanded as additional tests are performed on the dataset to achieve a simile level of confidence that the result is not a random coincidence. Yet with massive data sets available, statistical overfitting is inevitable.
It is tempting to believe in strategies that do not meet solid statistical thresholds because (1) it is difficult to find novel and outperforming investment strategies, and (2) the thrill of thinking one might have found such a strategy is more compelling than the repeated frustration of intellectual honesty. The incentive to find a good result often leads to short-cuts in testing hygiene and spurious correlations.
Essential to identifying useful predictive relationships in data is to adopt techniques to achieve statistical confidence in positive findings. Also important is to understand the probable rationale – the underlying assumptions – for the findings. Amidst so much hype, how can we know what is real?
|Our Own Trading
While trading MarketPsych’s hedge fund, we adopted numerous datamining hygiene techniques, including: rigorous data exploration of the training set only; using multiple out of sample sets and k-fold cross-validation; utilizing universal concepts and language in our ontologies; visual inspection of output; and using a human filter to exclude strategies that are not empirically supported or based on “common sense.” We are confident in the validity of our statistical hygiene and testing techniques because of these efforts to debias.
However, without real-time performance and common-sense explanations, it is difficult to establish the robustness of quantitative investing strategies. To address these concerns, we have (1) an independently audited track record from our hedge fund, (2) live forward tested strategies launched online in 2013, and (3) empirical support for the validity of our strategies from psychological research. Each of those factors increases confidence, but nonetheless, modeling is very difficult to get right. Our equity curve is below.
As markets recovered from the financial crisis, our fear-based trading strategy was no longer suited to the positive momentum of prices. Yet we did not successfully pivot on the strategy, and we shut down the fund.
We have a new strategy being traded currently, and it is adaptive – as media delusions shift, it compensates. This strategy appears less vulnerable to regime changes, but it’s not open for outside investors yet.
Among traders the most common techniques for establishing the statistical validity of a finding include data division into training/test/out-of-sample sets and k-fold cross-validation. When data is divided into sets, typically 60% of the data is used for feature selection (identifying the best indicators), while 20% is used for testing to verify that the findings in the training set hold true in data that was “blinded”. Then once the model has been tweaked and risk management set on the training and testing sets, the model is run on the out-of-sample set to verify that it still holds true.
K-fold cross-validation is another technique for verifying the predictive value of a trading system. After studying the performance of indicators on an external training set (maybe 30% of the study data), and selecting the best, then the testing set (60%) and training set (90% of alll data) are utilized for cross-validation. If k = 10%, then the data set is divided into deciles. The overall model is learned on 90% of the data and tested on 10%. The 90% and 10% data sets are randomized each pass and dozens of passes are performed. The range of performance on each 10% set gives an approximation of the model’s stability. If the model is declared useful, then a final 10% study is performed on the final out-of-sample set to verify the model’s value.
In all cases of developing trading models, it also helps to watch real-time trading on paper first and then to forward-test with a small amount of real money before going live.
|Housekeeping and Closing
I met Manny well before the financial crisis while I was working part-time in a prison (to fund the launch of MarketPsych). His optimistic research tone reflected the mood of the times. Many of the popular Wall Street delusions are simply beliefs that fit the current social mood.
Eventually I asked Manny, “Do your clients know you’re manic?” He replied “Of course not!” He was trying to milk his manic energy for all he could by producing as much research as possible to pay for his legal bills. I haven’t kept track of Manny, so I don’t know if he saw the financial crisis coming or how his life turned out. Nonetheless I wish him well.
We love to chat with our readers about their experience with psychology in the markets. Please send us feedback on what you’d like to hear more about in this area.
Learn more about improving your investment returns with insights from sentiment analysis of the herd in our new book, “Trading on Sentiment: The Power of Minds Over Markets.”
If you represent an institution, please contact us if you’d like to see into the mind of the market using our Thomson Reuters MarketPsych Indices to monitor real-time market psychology and macroeconomic trends for 30 currencies, 50 commodities, 130 countries, 50 equity sectors and indexes, and 8,000 global equities extracted in real-time from millions of social and news media articles daily.
Keep It Real,
1. J. P. Ioannidis, “Why Most Published Research Findings Are False,” PLoS Medicine 2, e124 (2005), pp. 694–701.
more here: https://www.marketpsychinsights.com/blog/
See the lows put in Jan. 11th in both the HUI Goldbugs index and Freeport McM (FCX). Only six days after the publishing of this article.
Five years ago, the FTSE 350 Mining index reached a post-financial crisis peak at just over 28,000. It currently sits at 7,134, down 75% at an 11-year low, and share prices remain vulnerable.Global commodities markets remain massively oversupplied and Chinese demand is waning, but there will come a point at which mining shares are a ‘buy’ again. (You always want to buy commodities and/or commodity stocks at the point of MAXIMUM PESSIMISM or when supply is greatest and demand lowest!).
Investec Securities has built a “Mining Clock”, which brilliantly illustrates the mining cycle, including when to buy and when to sell. It’s a real “cut-out-and-keep” for every investor.
“Please see the updated Mining Clock below where we indicate that it appears still too early to be buying the mining sector. This is despite five straight years of underperformance from mining equities globally, in every sector, save Australian listed gold equities which outperformed the ASX in 2014 and 2015.” (Where is the article that told you WHEN, exactly, to buy?). Rearview investing doesn’t work.
The above article proves once again that no one can time a sector–except when (like in this article) there is no hope for a rebound.
Last time I sold a few of my miners back in July
And now over the next few days and weeks, a time to rebuy at the margin. But if you are in a bull market Sentry__Com_BullishGold_MacLean___E then sitting tight is what you must do. At most, I think we are in six to seven on the mining clock. So far, the public is not yet participating except perhaps in the last month.
WHAT do YOU think?
HAVE A GOOD WEEKEND!
P.S.: http://donmillereducation.com/journal/ Work on yourself!
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?
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.
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.
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
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)
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.
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.
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.
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.
I am bombarded with these types of emails everyday, but I notice the increasing sophistication in these “fishing” missives. I post it as is.
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.
Miss Eleev Belaid
What bonds are saying about Valeant http://seekingalpha.com/article/3994126-bond-market-saying-valeant
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
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
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.
Lie with statistics http://tsi-blog.com/2016/07/you-can-make-statistics-say-whatever-you-want/
HAVE A GREAT WEEKEND and KEEP DANCING
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