Category Archives: Search Strategies

The Mining Clock

Mining clock

When to start buying mining shares

Ignore the analysis but note the concept.  The advice to NOT buy the miners was the perfect situation to do the opposite:
mining assets

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.

When to start buying mining shares

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.

Investec writes:

“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.

GDX LT Chart

Aug52016JrGoldbullanalogs

Aug52016HUIBullanalog

Aug52016Goldbullanalogd

xau

ev

http://prostedywagacje.blogspot.co.uk/2016/08/how-to-play-this-bull-market-in-gold-in.html

Last time I sold a few of my miners back in July

july

http://csinvesting.org/2016/07/08/time-to-sell-some-miners-but-not-much/

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?

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HAVE A GOOD WEEKEND!

P.S.: http://donmillereducation.com/journal/   Work on yourself!

Perspective on the Gold Miners; Management

Miners long term

SP long term

lt cape

Gold and Nixon

2Q 2016 Tocqueville Gold Strategy Letter – Final

The above charts came from this article.  I would ignore the conclusions but focus on the historical perspective.

http://seekingalpha.com/article/4003004-gold-mining-stocks-best-investment-asset-next-decade

GOOD MANANGEMENT

Enterprise Product Partners August 2016 Presentation

Note the information they give investors. How management communicates is important. Do they provide sufficient detail for you to assess their capital allocation skills and operational performance. Note page 5.

Celebrate when your stock gets downgraged

Analyst Recommendations Do they add value

Sit-on-Your-Ass Portfolio

art

Position and returns Guess

Position and returns

USE high Price As of 8/5/2016
Date Bot Symbol Company Shares Price Purchased Cost Current Price Mkt. Val. CAGR
Q2 2012 XX XXXXX 580,000 $30.00 $17,400,000 $125.00 $72,500,000 42.90%
Q1 2013 XX XXXXX 1,260,000 $14.00 $17,640,000 $37.20 $46,872,000 27.70%
Q4 2011 XX XXXXX 400,000 $45.00 $18,000,000 $107.00 $42,800,000 19.00%
Q4 2011 XX XXXXX 225,000 $85.00 $19,125,000 $167.00 $37,575,000 14.50%
Q4 2011 XX XXXXX 32,285 $400.00 $12,914,000 $924.00 $29,831,340 18.30%
Q4 2011 XX XXXXX 1,200,000 $6.00 $7,200,000 $21.00 $25,200,000 33.00%
Q4 2011 XX XXXXX 25,828 $300.00 $7,748,400 $804.00 $20,765,712 21.80%
Q2 2014 XX XXXXX 25,898 $590.00 $15,279,820 $781.00 $20,226,338 15.00%
Q3 2015 XX XXXXX 400,000 $34.50 $13,800,000 $38.10 $15,240,000 10.00%
Q4 2011 XX XXXXX 100,000 $75.00 $7,500,000 $145.00 $14,500,000 14.10%
Q2 2016 XX XXXXX 20,000 $725.00 $14,500,000 $768.00 $15,360,000 6.00%
Q1 2013 XX XXXXX 250,000 $30.00 $7,500,000 $55.00 $13,750,000 19.00%
Q1 2012 XX XXXXX 100,000 $44.00 $4,400,000 $95.50 $9,550,000 18.80%
Q4 2011 XX XXXXX 80,000 $54.00 $4,320,000 $114.00 $9,120,000 16.15%
Q1 2012 XX XXXXX 500,000 $7.70 $3,850,000 $9.25 $4,625,000 3.50%
Q2 2016 XX XXXXX 50,000 $47.00 $2,350,000 $46.50 $2,325,000 -1.00%
 Avg holding 4 years Totals $173,527,220 five years —-              380,240,390 17.00%
SPY 125 218 11.77%

HEY! Growing Earnings Don’t Matter

NVGS“I think you have to be very humble about your ability to be smart enough to exploit other people’s stupidity.”

nvgs stock

Navigator’s stock price declines while its earnings rise over the past two years. See page 14  here: Capital-Link-Conference-Mar-21-2016

Wilbur Ross owns a majority position http://whalewisdom.com/stock/nvgs

I am not suggesting this as an investment for YOU, but seek out disconnects like this.   Despite rising earnings, the market may be worried about lower oil prices because lower oil prices may affect the demand for the products that NVGS ships and/or the capex that NVGS is bearing with delivery of new ships.  The question for an investor would be: “Has the market over-discounted the fears of low oil prices or over-supply of ships?”   This company is VERY different than a standard dry-bulk shipper.   These are highly-specialized/expensive ships. Knowledge reduces risk, so really understand the management and its goals.

Search Process–No Hope: Dry Bulk Shipping

MES-to-Build-Bulk-Carrier-for-Malaysian-Owner

From 1975-2001: ROI for T-Bills was 6.6%, S&P 500 14.1% with a 15% std. dev., Bulk Shipping 7.2 with a 40% std. dev., and Tanker Shipping 4.9% with a 70.4% std. dev! (Source: Maritime Economics, 3rd Edition)

Who in their right mind would invest in the shipping business? Well, if you can buy low, then fortunes can be made.  Recently, the Baltic Dry Index (BDI) hit a thirty-year low of 291BDI Index and note the long-term chart below.  Always look at MANY years of past data. The boom of 2007/08 will probably not be seen again for many years.

bdi

See a deep contrarian investor discuss the dry bulk shippers (March 2016):Deep Value Inv./Operator Discusses Dry Bulk Mkt.

“Dry bulk is a screaming buy; one of the best entry points in the cycle in the last thirty years. But be prepared to sustain a prolonged period of poor freight market conditions and have plenty of cash reserves and low leverage. In other words, you have to have a longer-term perspective than most investors–three to five years at least.

Isaac sowed seeds into the land during a drought.  –Leon Patitasas

“That’s the funny thing about ships. They are actually more attractive to buy at 20xs EBITDA, or even negative cash flow, than they are at 4xs EBITDA,” Coco said.

“So you are telling me that investors should seek out money losing shipping deals?” she asked incredulously.

“Correct. And sell the ones that are making lots of money. Itis like that little Napoleon said….”Buy on the sound of cannons and sell on the soundsof trumpets.”    (Source: The Shipping Man by Matthew McCleery).

John Chew: Here is where I wonder if this post helps readers’ understanding of investing because is this investing or speculating?   Note as much as what Warren Buffett does NOT do. He doesn’t invest in mining or shipping stocks. He has already had poor results with the airline industry.   So why even mention an industry in massive distress with historically sub par returns and huge volatility? I would prefer businesses with great reinvestment opportunities or great capital allocators at the helm like Markel (MKL), but a horrific business going from a distress price to a bad price may give much better returns depending upon the price paid.  Also, the worst bear market in freight rates in the past 30 years for dry bulkers means unusual opportunity just as the worst bear market in gold miners in the past 100 years offered bargains galore.

Readers know that I ventured into the miners in mid-to-late 2013, subsequently suffering back-to-back declines of about 25% before seeing the portfolio rally about 100%. So I still do not have a great return (12% after three years), but I bought miners with a five-year-to-seven year outlook and I am only three years into the investment. With Junior miners you can expect to see a 50% decline before they rally five to 10 times (assuming you chose the ones that survive! –Rick Rule).  In a land of negative-to-low interest rates, I have to look further for bargains.

Readers can pipe in what they would like to learn in future posts–let me know.

Dec302015GoldStocksBears

Five years of declines in gold mining stocks and then…..

sc

Are you investing or speculating by dry-bulk shipping stocks?  These are stub stocks where the equity is a small fraction of the enterprise values due to the shrunken market cap and the large debt taken on to finance ship purchases. But if you buy a few well-managed and relatively well-financed shipping companies that can survive the trough of the cycle–two to four more years?– you can tolerate a few going to zero if the ones remaining multiply many-fold. Not for the weak-kneed. Scorpio Bulkers (SALT) has ALREADY diluted shareholders and has taken drastic action to survive. Note management buying shares at $3.00 Scorpio Bulkers Inc. Announces Financial Results for the First Quarter of 2016. An ugly past, but we invest for the future in terms of mean reversion. I have not yet invested in any shipping stocks!

Here is what I love about the shipping business.   10 ships and 11 cargoes, then a BOOM. 11 ships and 10 cargoes, then a BUST.  You are also on the SAME footing as the most experienced ship owners in the world. NO ONE knows when the cycle will turn.   This is like a poker game where the investor that has the ships when others have thrown in the towel takes a lot of the marbles.  The worse the freight rates and the outlook, the better IF you can carry the costs until the cycle turns, and it WILL turn due to the laws of supply and demand.

I view this as intelligent speculation.   I allocate five tranches of investment into five shipping companies.  Say $5 units each.  One unit goes to zero (ouch!), the next to $2 (Boo!), the next to $1 (Damn!), the next to $3 and the next to $50 (Homerun!) and it takes three years.  There is a 31% compouned return.  Though I have no idea if this is realistic because I must study the shipping industry thoroughly.  I am just formulating a possible strategy IF I find the right companies at the right prices.  But I am drawn to the shipping companies because some companies are trading below depressed net asset values. As Mr. Templeton suggests, look where the outlook is most dire.

The best source to learn about shipping is Maritime Economics. And a must read:

51VJQBA-hNL._SX310_BO1,204,203,200_

Meanwhile keep reading………………..

RISK Management Video – Be prepared for the unexpected.

I’LL BE BACK; Meanwhile Keep Learning

Bull_market_03.24.2016_normal

John Chew asked me to post while he goes through his stem cell transplant.  He says, “I’ll be back.” He thanks the many readers for their kind words of encouragement. 

His hospital roommate. John may opt for a radical new therapy.

Unfortunately, John challenged the status quo so he may have to be hospitalized longer.  Sign up to Farnam Street Blog

Novagold Annual Report 2015 This annual report’s shareholder letter including the links provides an excellent example of how several investors view the capital cycle for an asset.  History does provides a guide.

http://latticework.com/featured/ Worth a look

Sign up: http://investorvantage.com/ to receive reading links like:

10 THINGS WE’RE READING & WATCHING:
    1.   Overcoming Their Fears 
    3.   3 Critical Things An Investor Needs – Capital Exploits
    5.   Unique Behind The Scenes Look Into Buffett’s Process – Vintage Value (must read)
    6.   Andy Groove And The Iphone SE – Ben Thompson
    7.   How Maritime Insurance Built Ancient Rome – Priceonomics
    9.   How Buffett And Munger Differ In The Way They Think – Outlook Business
    10. Podcasts: Conversation with Bethany McLean A fantastic interview for aspiring analysts. Her book on Fannie and Freddie seems like a must read!
Ackman: PSH-Annual-Report-12.31.151 See the section on Valeant.
A short summary of the tug of war over Valeant. Setting aside the noise about fraud, greed, and accounting issues, The Valeant Casino, this is a company that financed fast asset growth with cheap debt (at the time) while taking advantage of the flawed quasi-socialized medical system in the US.   Valuation depends on a normalization of true long-term cash flows–VRX_Update_StillOverpriced_2016-03-15 and EV_EBITDA_Misses_the_Point (View video on valuation and ROIC below for more context). The beneficiary of medical care does not DIRECTLY pay ALL of the costs. Who would be willing to accept a $1,000 tube of anti-fungal cream for their itchy feet if a third-party didn’t pay? See Dying with dignity.
Seconal

Meanwhile……be wise not smart and stay-thirsty-my-friends-3

The Dangers of Concentrated Stock Picking; 100 to 1 Returns

snow plow

So you want to be a stock picker: The Agony and the Estacsy of Stock Picking An article on the dangers of concentration.

The above article should be a sobering reminder of how difficult it is to choose exceptional stocks.   Remember when reading about great compounding machines like Wal-Mart in its early days (1970 to 1999) that you must take into account survivorship and hindsight bias.

Picking Stocks and 100 to 1

Wal-Mart 50 Year Chart_SRC

Motilal_Oswal_Wealth_Creation_Study_2009_2014

Ben Graham and the Growth Investor_011415 final

MTY Food Group 100 bagger analysis

100Baggers

Good luck hunting!

How central bank intervention will end: BADLY!

http://www.cnbc.com/2016/03/02/druckenmiller-economy-wont-hit-escape-velocity.html

Shareholder Letters

3-SPX-vs.-Commodities 020116_RearviewMirrorCartoon

Thanks to a member of the Deep-Value Group at Google Groups or

http://csinvesting.org/2015/01/14/deep-value-group-at-google/

Follow the Capital Cycle as a Contrarian

Stanley

Ed Chancellor on the capital cycle…

From his introduction to Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15, which was released in hardcover today (Dec. 2015):
Typically, capital is attracted into high-return businesses and leaves when returns fall below the cost of capital. This process is not static, but cyclical – there is constant flux. The inflow of capital leads to new investment, which over time increases capacity in the sector and eventually pushes down returns. Conversely, when returns are low, capital exits and capacity is reduced; over time, then, profitability recovers. From the perspective of the wider economy, this cycle resembles Schumpeter’s process of “creative destruction” – as the function of the bust, which follows the boom, is to clear away the misallocation of capital that has occurred during the upswing.

The key to the “capital cycle” approach – the term Marathon uses to describe its investment analysis – is to understand how changes in the amount of capital employed within an industry are likely to impact upon future returns. Or put another way, capital cycle analysis looks at how the competitive position of a company is affected by changes in the industry’s supply side. In his book, Competitive Advantage, Professor Michael Porter of the Harvard Business School writes that the “essence of formulating competitive strategy is relating a company to its environment.” Porter famously described the “five forces” which impact on a firm’s competitive advantage: the bargaining power of suppliers and of buyers, the threat of substitution, the degree of rivalry among existing firms and the threat of new entrants. Capital cycle analysis is really about how competitive advantage changes over time, viewed from an investor’s perspective.

  1. Follow the capital cycle as a contrarian (well worth STUDYING!)
  2. Gold miners in the capital cycle (part 2)

http://www.marathon.co.uk/global-investment-review.aspx (Read several articles on the capital cycle in investing).

Watch for errors  (Interview of the gentleman pictured above)

Contrarian Investing (Part II)

swimming-against-tide-one-man-figure-walking-contrary-to-group-crowd-walking-wooden-figures-people-d-rendering-white-35054169

“Bull markets are born on pessimism,” he declared, they“grow on skepticism, mature on optimism, and die on euphoria.” –John Templeton

John Templeton paid attention to the emotion of the stock market. The first half of his philosophy was “The time of maximum pessimism is the best time to buy.” When everyone else was selling, he bought low during the Depression and in 1939 at the onset of World War II . . . and he made millions.

The second half of his philosophy was “the time of maximum optimism is the best time to sell.” He sold high during the Dot.com boom when everyone else was still buying. Founded in the 1950s, his Templeton Growth Fund averaged 13.8% annual returns between 1954 and 2004, consistently beating the S&P 500.

I think there are a few ways to make many times (10x to 100x +) your money over a long period of time.   The first would be to own emerging growth companies that have owner-operators who are both excellent operators and capital allocators who grow the company profitably at a high rate over decades.   The business generates high returns on capital while being able to deploy capital into further growth. Think of owning Wal-Mart in the early 1970s or Amazon after its IPO or 2001.   There will be a post on 100 to 1 baggers soon. I prefer this approach.

Wal-Mart 50 Year Chart_SRC

The second way would be to buy distressed assets and then improve those assets or create efficiencies by creating economies of scale. Carlos Slim, Mexican Billionaire, would be an example of this type of investor. Think activist investing. Note that Carlos Slim has operated at times as a monopolist in a government protected market.  Most of us do not have his options.

The third way would be to buy deeply-distressed, out of favor, cyclical assets and then resell upon the top of the next cycle. Gold mining is a difficult, boom/bust business, for example–see Barrons Gold Mining Index below. All businesses are somewhat cyclical, but commodity producers are hugely cyclical with long multi-year cycles due to the nature of mining-it takes years and high expense to reopen a mine and even if I gave you $2 billion and several years, you and your expert team may not be able to find an economic deposit. Note the five-to-ten year cycles below.

gold mining bgmi

We are focusing on the third way, but in no way do I suggest that this is for you. You need to be your own judge.  There is a big catch in this approach, you need to choose quality assets and/or companies with managements that do not over-leverage their firms during good times or overpay for acquisitions during the booms (or you could choose leveraged firms but be aware of the added risk and size accordingly becasue when a turn occurs, the leveraged firms rise the most). You also need to seek out a period of MAXIMUM pessimism which is difficult to do. How do you know that the market has FULLY discounted the bad news?  Finally, YOU must be prepared to invest with a five-to-ten year horizon while expecting declines of over 50%. That concept alone will make you unique.   Probably most will turn away from such requirements.

We pick up from http://csinvesting.org/2015/12/14/contrarian-dream-or-nightmare/.  Before we delve into the technical aspects of valuing cyclical companies, think about what it FEELS like to have the CONVICTION.  Here is an example:

We last studied Dave Iben, a global contrarian investor, in this post: http://csinvesting.org/tag/david-iben/.   You should read, Its Still Rock and Roll To Me at http://kopernikglobal.com/content/news-views and listen to the last few conference calls at the right side of the web-page.   Note Mr. Iben’s philosophy, approach, and Holdings. His portfolio is vastly different than most money managers or indexers. But being an contrarian takes fortitude and patience. Kopernik Global performance since inception:

koper spy

Next preview the readings below.

First you need to understand Austrian Business Cycle Theory to grasp how massive mal-investment occurs. Why does China have newly built ghost cities? Distortion of interest rates causes mal-investment (the boom) then the inevitable correction because the boom was not financed out of real savings.

Why is the bust so severe for mining/commodity producers?   Read Skousen’s book on the structure of production.  Think of a swing fifty feet off the ground and 200 feet long.   If you are sitting near the center of the swing’s fulcrum (nearest the consumer), then the ups and downs are much less than being on the end of the swing furthest from the consumer (the miners and commodity producers).

4 files were sent to you.
Read Ch. 19 Security Analysis.pdf
Boom/Bust Austrian business cycle theory.pdf
Damodaran Valuing Cyclical Commodity Companies.pdf
Must Read Structure-production.pdf

Sorry: here is the Hooke book (chapter 19 on resource companies)

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Even if you are an expert in valuation, investing in a cyclical company can be lethal: Vale: Go Where it is darkest (Damodaran)

ValeBig Vale

Then Throwing in the towel on Vale. I am not picking on Prof. Damordaran because we all make mistakes, and he graciously has provided a case study for us.  Study the posts and the comments.

Can you think of several research errors he made (BEFORE) he invested?

Remember in the prior post, the long-term chart of the CRB index showing commodities at 41-year lows since the CRB Index is below 175 or back to 1975 prices?  Then why, if gold is a commodity,  doesn’t gold trade at $200 or at least down to $500 to $700 as the gold chart from that time shows?monthly_dollar

Why, if gold is money, doesn’t gold trade in US Dollars at $15,000 or the estimated price to back US Dollars by 100% in gold?  You can change the amount to $10,000 or $20,000, but you get the idea.gold monetary base

 

Gold during the boom of 1980 rel. to Financial Assets in 1980 the price of gold at $800 per ounce allowed for the US gold holdings to back each US dollar then outstanding.

Try thinking through those questions.  Can we use what we learned from gold to value oil?

I will continue with Part III once readers have had several days to digest the readings and at least three readers try to answer at least one question.  Until then……………………….be a contrarian not contrary.

Update on 21/Dec. 2015 http://fortune.com/2015/12/21/oil-prices-low/