Search for the tiny, obscure, and neglected
The above links will show you the methods of a micro-cap investor. You typically won’t find many franchise-type companies in the sub-$300 million market cap area, but you might find a few strong niche companies like MLR (Miller Industries, Inc. – Tow Trucks). Financials are usually easier to follow. You need to be aware of the stock price volatility especially in bear markets (remember those?) to use Mr. Market to your advantage. One of the best investments is to know the value of a company and take advantage of repeated volatility.
Update: Case Study in a Value Death Trap (PRXI).
Mark Sellers discusses the keys to investing (Interview)
Sellers Piling into MCF (Contango Oil & Gas)
What can you learn from his saga?
The market, like the Lord helps those who help themselves. Unlike the Lord, the market does not forgive those who know not what they do. –Warren Buffett
A business that must deal with fast-moving technology is not going to lend itself to reliable evaluation if its long-term economics. Did we foresee thirty years ago what would transpire in the television-manufacturing or computer industries? Of course not. Why, then, should Charlie (Munger) and I now think we can predict the future of other rapidly-evolving businesses? We will stick instead with the easy cases. Why search for a needle buried in a haystack when one is sitting in plain sight.
SPECIAL SITUATION WORKSHOP PRESENTATION
Zack-Buckley-The-Road-Less-Traveled-Presentation Motivated students can download the financials of the companies mentioned and check the authors assumptions/work.
The Current Situation with Our Petrodollar
The above 100-page report on gold will provide a good financial history lesson.
A Reader’s Question
I was thinking about how many people think that the sell-side is just wrong about everything and completely untrustworthy. From what I can tell, they are pretty good with the facts and a really valuable source when you want to learn about a new industry via a primers or initiation reports. This led me to think that most of the sell-side critics think that they have an analytical edge over the sell-siders. Maybe even an informational edge (which I think is very unlikely since these analysts cover one industry full-time.) But certainly an edge in judgment or behavior. This I think is possible if you have a longer-time horizon and no man-with-a-hammer syndrome.What sort of edge do you think is most achievable over the markets in general for an investor that is dedicated? I’m thinking about full-time investors.
It seems to me that analytic edges are often overstated. What are some cases that the sell-side or entire markets are just completely off on their analysis? Maybe the optimistic analysts during the bubble years? Is this just misaligned incentives?I would guess that the market usually mis-weighs the probabilities of what may happen in the future, but that would be more of a misjudgment in my opinion. (Maybe this is just semantics.)
I’d love to hear your thoughts.
My reply: I agree that analysts can provide great overviews of companies and industries in their initiation reports. I will read them as a supplement to my own reading of original source documents. I would not read them for valuation or investment recommendations. The idea that analysts can predict next quarter’s earnings is absurd. Finding a reasonable range of normalized earnings three years to five years out is what matters, not the next six months of earnings.
Another reason I might try to read analysts reports is not for new ideas, but to see the extent to which the market is already discounting my own views. Note the universal calls from analysts at Goldman and UBS for gold to trade to $900 or $800 See www.acting-man.com:
“Goldman Sachs lowers gold price target to $1,050” (Bloomberg, Reuters, etc. sometime in January and repeated ad nauseam ever since)
“Moody’s lowers gold price target to $900” (January)
“Morgan Stanley: Gold price won’t see $1,300 again” (April)
Also, analysts may overlook key values in a company because they fixate on the next six months. For example, the most common way of valuing an exploration and production company is an appraisal of net asset value, based on sum-of-the parts approach. But most appraisals tend to ignore exploration assets which are not going to be drilled within some arbitrary time period, say the next 6 to 12 months. For some companies, much of the value is in assets which are not going to be drilled in the next year.
I think most of an investor’s edge is behavioral. (See http://www.amazon.com/Inefficient-Markets-Introduction-Behavioral-Clarendon/)
Take Coach’s (COH) recent plunge.
Therein lies opportunity or maybe not. But if the markets didn’t act that way, then markets would not overreact. Markets tend to over-discount a known risk or uncertainty and under-discount an unknown uncertainty.
http://www.acting-man.com/?p=31075 Note the ZIRP-induced distortion in the production structure.
PKW is a buy-back ETF which only chooses companies that will buy back at least 5% of their shares per year.
Lecture Links Thanks to a generous contribution! Let me know what you learn.
Tim Du ToitFounder & CEO of Eurosharelab.com
Alice Schroeder, author of The Snowball: Warren Buffett and the Business of Life. Looking forward to your questions. (self.investing)
Royalty Companies: Pierre Lassonde, Chairman of Franco-Nevada. Not cheap but you pay a fair price now for quality.
If you ever wanted the cheapest way to own precious metals and/or copper, then focus on micro-cap companies with good assets and that are NOT producing–got that?
Now if you don’t want to wade through tmx.com then I suggest GLDX.
Counter intuitively, this may be a safer investment than GDX or GDXJ. WHY? Aren’t explorers and pre-production companies risky? Yes, of course, you must diversify, but if gold declines these companies can hibernate by cutting costs sharply–faster than Newmont. And if gold turns, this can double or triple. A 50% loss for a double or triple is what I am assuming. I could be wrong. Remember you are not buying quality but cheap, cheap assets. This is NOT a recommendation but an idea for YOU to investigate or forget about. This is about cheap OPTION value. Do not do anything before going to school.
Go to the mining investment university:
www.goldsilverdata.com then click on mining 101
HAVE A GREAT WEEKEND and MEMORIAL DAY in the U.S.A.
James Turk, a Goldbug, giving a speech last month to a mostly empty auditorium in Zurich last month.
Technical analysis versus value in gold By Alasdair Macleod Posted 16 May 2014
Technical analysts assume past prices are a valid basis for predicting what investors will pay tomorrow. The Warren Buffetts of this world act differently: they care not what others think and use their own judgment of value. This means that value investors often buy when the trend is down and sell when the trend is up, the opposite of technically-driven decisions. A bear market ends when value investors overcome the trend.
Technical analysts go with the crowd and give any trend an added spin. This explains the preoccupation with moving averages, bands, oscillators and momentum. Speculators, who used to be independent thinkers, now depend heavily on technical analysis. This is not to deny that many technicians make a reasonable living: the key is to know when the trend ends, and the difficulty in that decision perhaps explains why technical analysts are not on anyone’s rich list.
Value investors like Buffett rely on an assessment of the income that an investment can generate, and the opportunity-cost of owning it. This may explain his well-known views on gold which for all but a small coterie of central and bullion banks does not generate any income. So where does gold, a sterile asset in Buffett’s eyes stand in all this?
Value investors in gold who buy on falling prices are predominately Asian. For Asians the value in gold comes from the continual debasement of national currencies, a factor rarely considered by western investors who measure investment returns in their home currency with no allowance for changes in purchasing power.
The financial system discourages a more realistic approach, not even according physical gold an investment status. Using technical analysis with the false comfort of stop-losses leads to more profits for market-makers. Furthermore, gold’s replacement as money by unstable national currencies makes economic and investment calculation for anything other than the shortest of timescales unreliable or even impossible. But then this point goes over the heads of the trend-followers as well as the fundamental question of value.
Technical analysis is a tool for idle investors unwilling or unable to understand true value. It dominates price formation in western markets and distorts investor behaviour by exaggerating any natural bias towards trends. It is this band-wagon effect that is the root of trend-following’s success, but also its ultimate weakness. A better strategy is to make the effort to value gold properly and then act accordingly.
Longleaf Partners Presentation
http://longleafpartners.com/ (click on video link on the right side)
A great book on good capital allocating CEOs, The Outsiders: http://www.amazon.com/The-Outsiders-Unconventional-Radically-Blueprint/
Momentum Stocks Crushed
http://covestreetcapital.com/Blog/?p=1173 Icahn slams Buffett on his cowardice.
And in case of Buffett overdose: Crony Capitalist
Bill Miller used to run Legg Mason’s Value Trust but then people learned he wasn’t a value investor and not to trust him –Port Stansberry
Value Investing in India
India’s market seems cheaper than the good ole USA’s S&P 500. The average stock in the US is trading at 25-times earnings. Americans have to look beyond the decks of the Titanic and view foreign shores. I traveled for a half year in India but I am ignorant about investing there, but we can always learn.
This week, Steve Sjuggerud and his good friend Rahul Saraogi, a managing director at Atyant Capital, join Stansberry Radio to share the unique situation in India right now.
AUDIO (A tad obnoxious, but bear with them) http://www.stansberryradio.com/Porter-Stansberry/Latest-Episodes/Episode/541/0/Ep-151-Rahul-Saraogi-Investing-in-India
Rahul is a hedge-fund manager based in Chennai, India. He has been investing in India as his career for 14 years. And he told us on the radio show that India is “looking better than I’ve seen it in my career.”
Rahul wasn’t so concerned about the specific way you invest… as long as you simply get some money in. “India itself is going to do really well,” he said. “You need to have a piece of India in your portfolio.”
Guest: RAHUL SARAOGI
Rahul is a managing director at Atyant Capital and manages the Atyant Capital India Fund. In the last 13 years he’s managed money exclusively in the Indian markets. His mission is to consistently identify the best 10-15 investment ideas from among the thousands of publicly-traded Indian corporations. Rahul’s value-based investment philosophy stands apart due to his belief in the paramount importance of corporate governance, specifically how management operates with its minority shareholders in mind.
Prior to Atyant, Rahul spent four years leading Meridian Investments, generating a 430% absolute return for the firm’s high net worth clients.
Rahul graduated from the Wharton School of the University of Pennsylvania with a degree in Economics. Outside of Atyant, he practices Vipassana, a 2,500 year-old meditation technique that helps people see things as they really are. Rahul lives and works in Chennai, India.
CSInvesting: Color me skeptical, but I will take a look.
If I had to invest with a manager in India (vs. an ETF. See above) I might seek out: Prof. Sanjay Bakshi to the left of Prof. Greenwald of Columbia University.
Prof. Sanjay Bakshi of http://www.value_quest_capital.com/
Revisiting Failure (JCP)
Improving as an investor is hard. You can make money while doing the wrong thing and vice-versa. I always write down the reasons for my investment thesis and then record the result when the position is exited. I will place a tickler in my calendar say eighteen months later to again review my past investment to see if there is more I can learn dispassionately. My last post on JCP, http://wp.me/p2OaYY-1JG. I bought near $20 on the assumption of buying below real estate value with little value for the retail operations, then sold near $15 after Johnson was fired. I was wrong.
Here is an update on the story behind the company’s struggles, How to Fail in Business While Really, Really Trying. Read: http://omnichannelretailing.com/how-to-fail-in-business-while-really-really-trying/ A good read! Investing teaches humility. My take-away turnarounds in a difficult business often don’t turn. The reputation of the business overcomes the management.
Wal-Mart Stores, Inc. was incorporated on Oct. 31, 1969. On Oct. 1, 1970, Walmart offered 300,000 shares of its common stock to the public at a price of $16.50 per share. Since that time, we have had 11 two-for-one (2:1) stock splits. On a purchase of 100 shares at $16.50 per share on our first offering, the number of shares has grown as follows:
|2:1 Stock Splits||Shares||Cost per Share||Market Price on Split Date||Record Date||Distributed|
|On the Offering||100||$16.50|
So the price on August 1974 when a 2 for 1 stock split occurred was $23.
What price would I have paid? I would see 38% ROE with little debt ($10.5 mil.) with 40%+ growth. If I paid 4 times the book value of approx. $31 mil. Plus the debt of $10.5 million ( I would not subtract the cash since I assume it is all needed as working capital) or $124 mil. plus $10.5 mil. or $135 million. Divide by $6.542 mil. shares or $20.63 per share or $21 to round up. $23 to $25 was near the highs for 1975 in the fourth quarter but the price was below $20 in the first quarter of 1975. Could I have bought right after the largest decline in stock market history after the Great Depression and with inflation raging? If I knew the value and rarity of an emerging franchise perhaps. But I doubt it.
I would have paid 4 times book value (better is replacement value but this is back of envelope investing) to garner a 9% return but the long term growth of 5% to 6% would give me my required 15% return. Obviously, if I had paid double, that would have been fine.
The key is in recognizing the source of WMT’s competitive advantage and how large the market opportunity to exploit that advantage. The secret is on page 10 of the 1974 WMT annual report 1974-annual-report-for-walmart-stores-inc and on page 11 here: WAL-MART CASE STUDY on Discount Operations 1986 (email email@example.com if that link is taken down) and ask for the case study.
Note that you would have had to hold on through thick and thin without selling on numerous “market” scares, crashes and fears. You have the key to becoming rich in investing but now you know why investing is SIMPLE BUT NOT EASY!
If you have questions post them on this blog do NOT email them to me. Thanks.