Category Archives: Risk Management

Case Study on Managing A Company

View the Town Hall Meeting At Barrick Gold

https://www.barrick.com/news/news-details/2018/town-hall-with-john-thornton/default.aspx

Q218-Town-Hall-Presentation

Q218-Town-Hall-Transcript

A very interesting presentation of how Barrick is planning its future.

Gold in $US to be at $0.00 in 2020; TREASURE CHEST!; Breaking Biases

On April 11, 2018, the price of gold in US Dollars was $1,370.  This morning on July 19th, the price was $1,2110.90 for a decline of $159 in 99 days.  If current trends continue, then in 712 days or less than two years, the Gold price in USD terms will be about $0.00.  The trend is your friend!

The Single Greatest Mistake Investors Make

By Jesse Felder  (Sign up:https://thefelderreport.com/blog/)

January 22, 2015

The single greatest mistake investors make is to extrapolate recent history out into the future. They take the financial returns of the past 5 days or 5 years or even 50 years and assume the next few days or years will look just the same without any consideration for the historical context or conditions that provided for those returns.

They forget that, while ‘history may rhyme, it doesn’t repeat itself’ (Twain). Or that, “the only thing that is constant is change” (Heraclitus). These two famous quotes apply to the financial markets as much as anything.

Ignoring these truths and instead simply extrapolating is why investors are suckered into pouring money into the stock market only after a run of great performance. They believe that the recent gains are about to repeat to their great benefit when they should be thinking about what conditions allowed for those gains to take place and analyzing whether they are still relevant or not.
This is also why they are suckered into selling only after a painful decline as they did at the lows made during the financial crisis. They believe that they are about to suffer another 50% decline on top of the one they just endured when they should really be reminding themselves that change is the only guarantee in life.

I believe this is one of the biggest problems with so-called “passive” investing. It is built upon the faulty premise that it is ‘impossible to forecast’ the future returns of any asset class over any period of time so we should just own all of them all the time. My response to this is that while ‘ignorance may be bliss’ it’s not a valid investment strategy.

In his 1992 letter to Berkshire Hathaway shareholders, Warren Buffett wrote:
We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children. However, it is clear that stocks cannot forever overperform their underlying businesses, as they have so dramatically done for some time, and that fact makes us quite confident of our forecast that the rewards from investing in stocks over the next decade will be significantly smaller than they were in the last.
Much can be learned from this short passage. First, short-term stock market forecasts are, indeed, nearly worthless – essentially a guessing game. Second, long-term forecasts, on the other hand, can be made with ‘confidence.’ “How?” you ask.

It’s actually very simple. Rather than fixate on recent history and extrapolate it into the future you must abandon this natural tendency. And as I said earlier you also need to analyze the conditions that allowed for those returns to see whether they are still relevant to today’s market.

In Buffett’s example he’s referring to the wonderful returns equity investors experienced from 1982-1992. During that span investors roughly quadrupled their money. Over the coming decade they merely doubled their money so Buffett was right that the decade beginning in 1993 would fall far short of the return of the prior decade even if they were still very good.
sc-22

But Buffett made another prescient forecast in November 1999 when he wrote:
Today, staring fixedly back at the road they just traveled, most investors have rosy expectations. A Paine Webber and Gallup Organization survey released in July shows that the least experienced investors–those who have invested for less than five years–expect annual returns over the next ten years of 22.6%. Even those who have invested for more than 20 years are expecting 12.9%. Now, I’d like to argue that we can’t come even remotely close to that 12.9%… you need to remember that future returns are always affected by current valuations and give some thought to what you’re getting for your money in the stock market right now.

You probably already know that stock market returns from 1999 to 2009 were not very kind to investors.

And Buffett tells us how he was so confident that this would be the case. He examined the conditions that allowed for returns to be so wonderful from 1982-1999 but were no longer present in 1999: wonderful valuations. Stocks were so cheap in 1982 that the coming decade was virtually guaranteed to be better than the decade that preceded it. (1972-1982 was another decade that was not fun for investors.) Then in 1999 valuations were so expensive that there was almost no possibility of decent returns going forward.

So let’s take a look at Buffett’s favorite valuation yardstick which he refers to on both of those prior writings. It tracks the total value of the stock market in relation to Gross National Product.

From the chart, it’s plain to see that valuations were extremely attractive back in the early 1980’s. This is why stocks performed so well over the next 20 years. However, I find it absolutely fascinating that stock market valuations today are essentially equivalent to valuations in November 1999 when he wrote that latter passage. Yeah, go back and read that last line again. It’s a doozy and it’s absolutely fact.

This is also why the past 5 years or even the past 50 years are totally irrelevant to equity investors in today’s market. There is almost zero possibility today of achieving a return anywhere close to what those historical returns represent. So shun forecasts if you want. Plead ignorance if it makes you feel blissful. But at today’s valuations you should at least be aware of the fact that it’s exceedingly dangerous to fall into the trap of extrapolating without analyzing.

What The Buy-And-Hold Cult Doesn’t Want You To Know

By Jesse Felder   July 19, 2018

https://thefelderreport.com/2018/07/19/what-the-buy-and-hold-cult-doesnt-want-you-to-know/

Buy-and-hold, and all of its related strategies like BTFD, garnered a cult following a long time ago and it’s only gotten even more popular in recent years. (There may be no better evidence of this than the StockTwits merch store – which I love, btw). And after one of the longest and strongest equity bull markets in history this should not come as any surprise. Investors are always influenced by recency bias and prone to extrapolation.

What is surprising, however, is that, despite that fact that it’s long-term (20-year) performance still crushes that of the broad stock market, gold has become so maligned among investors of all stripes, including gold bugs themselves. Yes, the past few years have favored equities over precious metals and I guess that’s where the recency bias kicks in again. But the truth is it has paid far better to be gold bug over the past two decades than to be an equity bull.

The point being to understand your time preference and time reference!

Update:

fred hickey @htsfhickey 20/July 2018 5 PM

Here’s Managed Money(mostly hedge funds) COT details: 134.2K short, 11% higher than highest level (gold’s bottom) seen in 2015, so likely a record.. Net short -26.5k contracts-essentially equal to Dec. 2015 gold bottom. For comparison, at gold’s mid-2016 top they were net 270K long ago

The setup: Gold bugs totally demoralized. Gold sentiment(DSI)down to just 7% with extreme dollar bullishness(92% DSI). Trump beginning to talk $ down (will continue). FY ’19 $1T+ budget deficit. Gold seasonal demand (starts now). Managed Money (hedge funds) net short& have to cover.

It’s likely these are record level shorts. That means there are more shorts than at the bottom in late-2015 – before gold exploded 30% & miners +160% in 6 months and more shorts than at late-2008 bottom before gold soared over 75% in 1 year. Perfect setup-assuming gold’s bottomed.

Whoa Nelly! Just as I suspected it was short traders driving gold down. Thru Tuesday (likely even worse now), a slight increase in longs& another massive 27.7K jump in large spec. futures shorts. In past 5 weeks +121% jump in short contracts to 161K -highest level in at least 11yrs.

BUT, ALWAYS STUDY THE OTHER SIDE–GOLD TO KEEP FALLING.

https://seekingalpha.com/article/4188651-downside-case-gold-david-brady-cfa-19-07-2018

TREASURE CHEST!

Goto: http://www.austinvaluecapital.com/resources.html

 Value Investing In Action

Value Investing Seminar; Hating Finance; Doing Research

Value Investing Seminar in Cyprus

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

Hating Finance

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

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

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

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

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

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

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

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

Rehabilitating Finance

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

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

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

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

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

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

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

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

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

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

Pride, Prejudice, and Risk Management

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

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

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

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

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

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

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

Doing Research

https://youtu.be/c34vmUxXZ1A

The Art of Contrary Thinking

The above video is a decent book review of the book, The Art of Contrary Thinking found in this link: http://csinvesting.org/2017/12/01/the-art-of-contrary-thinking/

and http://csinvesting.org/2015/12/16/contrarian-investing-part-ii/

You are neither right nor wrong because people agree or disagree with you but because you have your facts and reasoning correct.

Emotionally, going against the crowd will subject you to ridicule.

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

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

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

Bitcoin tangent

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Bill Harris Apr 24, 2018

Okay, I’ll say it: Bitcoin is a scam.

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

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

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

Promoters claim cryptocurrency is valuable as

(1) a means of payment

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

2. Store of Value.

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

3. Thing in Itself.

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

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

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

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

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

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

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

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

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

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

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

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

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

Where have we seen this type of behavior before?

UPDATE: Friday April 27th 2018

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

Lesson be humble about what you attempt.

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

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

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

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

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

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

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

I look forward to seeing you next week!

Sincerely yours,

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

Arbitrage! Primero Mining and First Majestic

Mark Twain once said: “A gold mine is a hole in the ground with a liar standing on top of it.”  I think mining is more like a rusty, leaky bucket that you need to pour capital so as to keep the bucket filled.

A better description: mining is a capital intensive business that must be constantly replenishing its depleting reserves which are hard to find much less extract economically.

However, if you buy Primero Mining (PPPMF) say this morning 9:40 AM at 18 cents you will receive 0.03325 shares of First Majestic Silver (AG) that you short at $6.00, for example.   For each share of Primero bought at 18 cents allows you to own ($0.18/.03325) a proportional share of First Majestic at $5.41.  The difference between your short sale of First Majestic at $6 and 5.41 is ($6 – 5.41)/5.41 is about 10.9%.

Or the short sale of $6 of First Majestic converts at 0.0335 into a share price of Primero Mining of ($6 x 0.03325) or $0.1995.   The difference between the 18 cents that you paid for Primero and 19.95 cents received upon the closing of the transaction is (1.95 cents/ 18 cents) or 10.8%. The deal should close within the next twenty days.   The annual return if the deal closes in the next 10 to 20 days is over 100%.  March 13th is Primero’s shareholder meeting to approve the deal.

I believe there is a 98% chance of the deal going through thanks to all three parties benefiting. Wheaton precious metals’ (WPM) stream was restructured so there is now an economic mine and opportunity for WPM to receive cash flow. Primero shareholders are no longer faced with bankruptcy, and First Majestic has the money and the expertise to handle underground mining to expand their reserves and cash flows.  https://www.gurufocus.com/forum/read.php?10,622803,622803,report=1

Also, the proxy advisor has given the go ahead for the MARCH 13th meeting.  http://www.primeromining.com/English/investors/news/press-release-details/2018/Leading-Independent-Proxy-Advisory-Firms-Recommend-Primero-Shareholders-Vote-in-Favour-of-Proposed-Arrangement/default.aspx

If the deal would fall through, then let’s imagine your 18 cents is now worth $0 (PPPMF probably drops to 5 cents, but let’s be cruel) and AG spikes up 50 cents. On the deal announcement, AG fell 30 cents. Every dollar in PPPMF goes to $0 and every short dollar in AG loses about 10%.  A 2% chance of the deal not closing causes a loss of $1.10 for every dollar invested–which means an expected loss of 2.2 cents vs. making about 10 cents to 11 cents on each dollar invested in the arbitrage.  I have an expected value of about 8 to 9 cents on each dollar invested in this arbitrage within the next month.  Not bad considering my alternatives today.

See below 

Mexico-focused company First Majestic Silver has signed a definitive arrangement agreement to acquire all of the issued and outstanding common shares of Primero Mining for $320m.

Under the agreement, every Primero shareholder will receive 0.03325 First Majestic common shares in exchange for one Primero common unit.

Primero owns the San Dimas silver-gold mine in the Mexican state of Durango.
Primero has identified more than 120 epithermal veins with exploration potentiality throughout its production history.

In parallel with the deal, First Majestic has entered separate agreements with Wheaton Precious Metals International (WPM) to terminate the existing silver streaming interest at the San Dimas mine.

You can use Google Alerts to send to your email notices of buyouts, mergers, etc. Then do your homework.  These tiny, obscure deals are out there.

This is NOT a recommendation for you to do this arbitrage, but follow the logic or the lack thereof.   

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

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

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

What were you thinking?”

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

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

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

ACKMAN INTERVIEW

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

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

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

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

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

will provide clues.


What determines the price of gold:

How the price of gold is determined Monetary Metals 2018

Bulls Rampage

Increasing debt for equity swap

Sentiment bullish and prices high relative to the past.

Charts: Every Picture Tells a Story Don’t It? –Rolling Stones

Above is a chart of the Barrons Gold Mining Index, the oldest mining index available.

Above are chart analogs of past bear markets in gold-mining stocks. Rather than using charts to PREDICT the next “Head and Shoulders Bottom” or the next ROUNDING BOTTOM (How about I show you MY bottom?) what can charts tell you about this PARTICULAR industry?   How is that information useful? Or is it?

Note the hedged comments of the publisher of the above charts. https://www.bullionvault.com/gold-news/gold-bear-010420161

Charts have never shown (based on my research) to have any statistical predictive value because of the subjective nature of interpretation–there are always two sides to a chart. Buffett stopped charting when he could flip the chart over and get the same answer.   Note this article https://seekingalpha.com/article/82372-adventures-in-technical-analysis-jim-cramer-edition

Now onto the bull market analogs.

Bull Market Analogs Article

Notice the difference with these charts of housing and banks.

What might account for the difference in the chart patterns?  What do the charts tell you about the mining industry?  IF–god forbid–you did wish to invest in precious metals miners, how might you adapt your strategy?  What explains (mostly) the shape of the above charts?  It is perfectly rational to avoid the industry but what do the charts tell you about the structure of the industry? Whip out your competitive analysis books or http://mskousen.com/economics-books/the-structure-of-production/ and post your thoughts.

 

Hedge Fund Analyst FINAL EXAM QUESTIONS

Investing might be considered decision-making under uncertainty. Therefore the following exam.

You must answer BOTH questions correctly to be hired.  You are now in the final pool of candidates to work for a big hedgie fund. Now comes

Question 1:

Imagine playing the following game,  At a casino table is a brass urn containing 100 balls, 50 red and 50 black.  You’re asked to choose a color.  Your choice is recorded but not revealed to anyone, after which the casino attendant draws a ball randomly out of the urn. If the color you chose is the same as the color of the ball, you win $10,000.  If it isn’t, you win nothing-$0.00.

You are only allowed to play once–which color would you prefer, and what is the maximum bid you would pay to play? Why?

Question 2:

Now imagine playing the same game, but with a second urn containing 100 balls in UNKNOWN proportions.  There might be 100 black balls and no red balls, or 100 red balls and no black balls or ANY proportion in between those two extremes.  Suppose we play the exact same game as game 1, but using this urn containing balls of unknown colors.

What is your bid to play this game IF you decide to play?   How does the “risk” in this game (#2) compare to game (#1)?

Take no more than a minute.   So are you hired?!

Answer posted this weekend.

ANSWER (9/10/2017)

A Reader provides a clearer distinction in Question2:

Your second problem is ill-specified for your desired effect . You write that all combinations of red/black balls within the 100 ball population ARE possible; you don’t say they are equally probable. You need to assume them to be equally probable in order for the reader to infer that the expectations are identical between problem 1 and problem 2.

The reason being is that without defined probabilities on the possible ratios the long run frequency of draws from the second bag isn’t calculable. Hence the expected value cannot be computed and therefore cannot be used in comparison to the EV of problem 1 (you need probabilities in a probability weighted average after all).

You could suggest that the offeree has a 50/50 chance of choosing the correct colour (even if the long run frequencies are not known). But this not an argument born from expected value. This is an argument of chance and it assumes the offeree has no additional information from which to make their decision (which is hardly ever the case).

There are 100 possible choices for the proportion of red/black: 100 red balls/0 black balls, 99 red balls/1 black ball etc., 98/2, 97/3     with 100%, 99%, 98%, 97% probability of choosing a black ball all the way………… to 2 black balls/98 red balls, 1/99, 0/100. Put equal weight on them since random.  When computed, the average of the expected payoffs across all these alternative realities, one got an expected value of $5,000, the same as Game 1.

The two games describesthe Ellsberg Paradox, after the example in Ellsberg’s seminal paper.  Thinking isn’t the same as feeling.  You can think the two games have equal odds, but you just don’t feel the same about them.   When there is any uncertainty about those risks, they immediately become more cautious and conservative.  Fear of the unknown is one of the most potent kinds of fear there is, and the natural reaction is to get as far away from it as possible.

So, if you said the two games were exactly similar in probabilities, then A+.  The price you would bid depends upon your margin of safety/comfort.   You would be rational to bid $4,999.99 since that is less than the expected payoff of $5,000.  But the loss of $4,999.99 might not be worth it despite the positive pay-off.  A bid of $3,000 or $1,000 might be rational for you.   The main point is to understand that the two games were similar but didn’t appear to be on the surface.

The Ellsberg paradox is a paradox in decision theory in which people’s choices violate the postulates of subjective expected utility. It is generally taken to be evidence for ambiguity aversion. The paradox was popularized by Daniel Ellsberg, although a version of it was noted considerably earlier by John Maynard Keynes.  READ his paper: ellsberg

Who was fooled?

Anyone not answering correctly or NOT answering has to go on a date with my ex:

The Stock Market: Risk vs. Uncertainty

Life is risky. The future is uncertain. We’ve all heard these statements, but how well do we understand the concepts behind them? More specifically, what do risk and uncertainty imply for stock market investments? Is there any difference in these two terms?

Risk and uncertainty both relate to the same underlying concept—randomness. Risk is randomness in which events have measurable probabilities, wrote economist Frank Knight in 1921 in Meaning of Risk and Uncertainty.1 Probabilities may be attained either by deduction (using theoretical models) or induction (using the observed frequency of events). For example, we can easily deduce the probabilities of the possible outcomes of a game of dice. Similarly, economists can deduce probability distributions for stock market returns based on theoretical models of investor behavior.

On the other hand, induction allows us to calculate probabilities from past observations where theoretical models are unavailable, possibly because of a lack of knowledge about the underlying relation between cause and effect. For instance, we can induce the probability of suffering a head injury when riding a bicycle by observing how frequently it has happened in the past. In a like manner, economists estimate probability distributions for stock market returns from the history of past returns.

Whereas risk is quantifiable randomness, uncertainty isn’t. It applies to situations in which the world is not well-charted. First, our world view might be insufficient from the start. Second, the way the world operates might change so that past observations offer little guidance for the future. Once bicyclists were encouraged to wear helmets, the relation between riding the bicycle—the cause—and the probability of suffering a head injury—the effect—changed. You might simply think that the introduction of helmets would have reduced the number of head injuries. Rather, the opposite happened. The number of head injuries actually increased, possibly because helmet wearing bikers started riding in a more risky manner due to a false perception of safety.2

Typically, in situations of choice, risk and uncertainty both apply. Many situations of choice are unprecedented, and uncertainty about the underlying relation between cause and effect is often present. Given that risk is quantifiable, it is not surprising that academic literature on stock market randomness deals exclusively with stock market risk. On the other hand, ignorance of uncertainty may be hazardous to the investor’s financial health.

Stock market uncertainty relates to imperfect information about how the world behaves. First, how well do we understand the process that generated historical stock market returns? Second, even if we had perfect information about past processes, can we assume that the same relation between cause and effect will apply in the future?

The Highs and Lows of the Market

Warren Buffett, the world’s second-richest man, distinguishes between periods of comparatively high and low stock market valuation. In the early 1920s, stock market valuation was comparatively low, as measured by the inflation-adjusted present value of future dividends. The attractive valuation of stocks relative to bonds became a widely held belief after Edgar Lawrence Smith published a book in 1924 on stock market valuation, Common Stocks as Long Term Investments. Smith argued that stocks not only offer dividends, but also capital appreciation through retained earnings. The book, which was reviewed by John Maynard Keynes in 1925, gave cause to an unprecedented stock market appreciation. The inflation-adjusted annual average growth rate of a buy-and-hold investment in large-company stocks established at the end of 1925 amounted to a staggering 32.13 percent at the end of 1928.

On the other hand, over the next four years, this portfolio depreciated at an average annual rate of 17.28 percent, inflation-adjusted. Taken together, over the entire seven-year period, the inflation-adjusted average annual growth rate of this portfolio came to a meager 1.11 percent. Buy-and-hold portfolios in allegedly unattractive long-term corporate and government bonds, on the other hand, grew at inflation-adjusted average annual rates of 10.18 and 9.83 percent, respectively. This proves Buffett’s point: “What the few bought for the right reason in 1925, the many bought for the wrong reason in 1929.” One conclusion from this episode is that learning about the stock market may feed back into the market and, by changing the behavior of the market, render our “learning” useless or—if we don’t recognize the feedback effect—hazardous.
Is Tomorrow Another Day?

Risk and uncertainty are two concepts that stem from randomness. Neither is fully understood. Although risk is quantifiable, uncertainty is not. Rather, uncertainty arises from imperfect knowledge about the way the world behaves. Most importantly, uncertainty relates to the questions of how to deal with the unprecedented, and whether the world will behave tomorrow in the way as it behaved in the past.

This article was adapted from “The Stock Market: Beyond Risk Lies Uncertainty,” which was written by Frank A. Schmid and appeared in the July 2002 issue of The Regional Economist, a St. Louis Fed publication.

(Source: St Louis Federal Reserve)