Category Archives: Special Situations

Gold Stocks: No One Left to Kill?


An Interesting Juncture for Gold Stocks (A good read with links)

Note that CEF in the above chart trades at an 11% discount to its 60%/40% holding of gold and silver bullion after a four year down-trend–note that this is either hyper-bearishness or massive extrapolation of trend-following.   Apple’s cash hoard could buy the entire public mining sector.   Gold stocks are cheap for a reason: poor capital allocation, poor cost control, and dilution of shareholders revealed in the five-year long bust from an epic boom from 2001 to 2011 caused investors to flee.   Since then many managements have gained religion on cost control and capital discipline (Note Barrick, ABX). All cycles turn, but when? If we knew, then no opportunity.

I always hear investors or analysts ask, “So what is the catalyst?”  If the market is at all efficient–and I would say that it is except at major inflection points–then if we knew the catalyst, then the opportunity would be arbitraged away.  How about the law of low prices or the law of supply and demand.


Ironically, as gold has declined in US dollar terms, it has risen in real terms versus commodities showing its mettle in a credit contraction.  TSI BLOG

1-Divergences-complete-772x1024The HUI, a gold stock index, is showing relative strength versus gold.   However, certain gold stocks like Novagold (NG), Sabina Gold (SGSVF) or Agnico-Eagle (AEM) are in incipient uptrends or, at least, vastly outperforming their indexes such as GDX or GDXJ.  You must diversify amongst the highest quality producers, developers, and explorers.

This post is not a recommendation but a historical reference point for a hated asset class.  I see much less RISK in a terrible industry such as gold mining than wonderful businesses such as Amazon, CRM, or GE.

Valeant Case Study in Progress


There is an ongoing battle over Valeant’s (VRX) valuation and business model between short-sellers and investors.   This opportunity allows us to improve our analysis skills and understanding of business models.  Also, how will Sequoia, an owner of over 20% of Valeant’s equity, handle their portfolio?

My first question is whether Valeant is a franchise with durable competitive advantages or a roll-up of commodity products dressed-up in a fancy industry (Pharma)?   We should use this case to learn how experienced analysts present their opposing views.

First: What’s not to like?  Valeant has rapid growth with huge profit margins? Of course, the PERFECT investment is a company that has high returns on capital and can constantly redeploy its capital at the same high returns.  The classic case would be the early (pre-2000) history of Wal-Mart (WMT) as the high returns generated from its stores could be redeployed into new stores on the borders of their regions which had economies of scale in administration, advertising, and management costs per unit of sales.  WMT did not have, for example, advantages in gross margins, but net profit margins. See WMT_50 Year SRC Chart.

What would be the source of Valeant’s high returns and competitive advantages?

Sequoia (a well-known value fund with an excellent long-term record) saw strong competitive advantages.  See their recent investor transcript:

Sequoia-Fund-Transcript-2015-August  Note the date of the transcript and the questions regarding Valeant concerning Philador and Sequoia’s 20% concentration.

Other investors (Charlie Munger, Citron) disagreed:

April 2, 2015 from

…..Recently, during a shareholders meeting for the Daily Journal Corporation, a newspaper where he serves as Chairman, Munger had this to say about Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX): “Valeant is like ITT and Harold Geneen come back to life, only the guy is worse this time.”

What exactly does Munger mean by this?

A little history lesson

Who exactly was Harold Geneen? And what did he do at ITT that’s so infamous?

Geneen took over ITT Corp in 1959 when it was still mostly a telegraph and telephone company. After being blocked by the FCC in an attempt to buy the ABC television network in 1963, Geneen decided to diversify away from the company’s traditional business and completed more than 300 acquisitions during the decade in areas such as hotels, insurance, for-profit education, and the company that made Wonder Bread.

Geneen used cheap debt to finance these acquisitions, which later proved to be the company’s downfall. After Geneen’s retirement as CEO in 1977, subsequent CEOs spent much of the next two decades paying off the debt by selling most of Geneen’s acquisitions.

Is Valeant really comparable?

On the surface, Valeant looks like it could be pretty comparable to ITT. Since merging with Biovail in 2010, Valeant has made more than 30 different acquisitions, most of which were paid for with debt or by issuing shares.

Since the end of 2010, Valeant’s debt has skyrocketed from US$3.6 billion to US$15.3 billion. Shares outstanding have also gone up considerably from 196 million to 335 million. It’s obvious that Munger is onto something.

But on the other hand, I’m not sure Valeant is anywhere close to being as bad as ITT was. For one thing, all of the company’s acquisitions are at least in the same sector. ITT was buying up hotels and car dealerships, while Valeant is buying up pharmaceutical companies. Valeant’s efforts scale up a whole lot better than ITT’s ever did.

There’s also a bit of hypocrisy coming from Munger on this issue. Munger is actively involved in a company that does pretty much the same thing as ITT did back in the 1960s. Sure, Berkshire doesn’t use much debt or engage in hostile takeovers, but Berkshire and ITT have more in common than Munger is willing to admit. Both attempted to dominate the business world using a roll-up acquisition strategy; Buffett and Munger were just a little more patient with their plan.

But just because Munger exaggerates how bad Valeant’s acquisition spree has been doesn’t mean the stock is necessarily a buy at these levels. The company had earnings of just $2.67 per share in 2014, putting the stock at a P/E ratio of nearly 100 times. Yes, earnings are expected to grow substantially in 2015, but the outlook is simple. For the stock to continue performing, the company must continue to make acquisitions.

After making more than 30 acquisitions in just a few years, it’s hard to keep finding deals that will not only be big enough to make a difference, but will also prove to be good long-term buys. There’s so much pressure on management to keep buying that a serious misstep could be coming. If that happens, this hyped stock could head down in a hurry.

Although I don’t buy Munger’s alarmist concerns about Valeant, I agree with him on one thing. The stock just isn’t attractive at current levels.

A potential acquisition target, Allergan, Inc., points out its worries over Valeant’s business model. investor-presentation-may-27-2014-1 on VRX

Citron, a short-seller, attacks with a report: Valeant-Part-II-final-b. Valeant is another “Enron.”  Use the search box on this blog and type in Enron and follow links to review that case.  Enron never showed the profit margins that Valeant is currently showing.   NEVER take another person’s statement on faith.  Check it out for yourself. 

Valeant today (October 26th, 2015) counters Citron and answers investors’ concerns with 10-26-15-Investor-presentation-Final4 Valeant and video presentation:

Ok, so what is Valeant worth?   Can you make such an assessment?  How do you think Mr. Market will weigh-in?   If you owned a 20% stake in Valeant, how would you manage the position?   What are the main issues to focus on?

This may be too difficult to analyze for many of us but we have  or will have many documents and reports to provide insights.  Remember that there are two sides to every narrative. Can we move closer to reality or the “truth”?

Note and type in VRX.   What type of investor owns Valeant?   Will momentum investors stick and stay?

Your comments welcome.

Sign up for Whitney Tilson’s emails on investing.  Worth a look:

Closed End Fund Arbitrage

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Closed End Fund Arbitrage and Hostile Takeovers

Our story begins with a closed end gold trust – GTU – that has been trading at a significant discount to its net asset value.   GTU, like its sister funds “CEF” (a mixed closed end gold and silver fund) and SBT.TO (a closed end silver trust), holds physical bullion in a Canadian vault.   Also, like its sister funds, it lacks a quality redemption feature – by which I mean: the ability to redeem units at their NAV (net asset value).   GTU’s redemption feature provides for redemption at roughly 90% of NAV.  Unlike an ETF,  a CEF (this might get confusing because we’re talking about Closed End Funds, but GTU’s sister fund actually has the ticker “CEF” also…) offers no way for market participants to create new shares: share creations must be done by the trust (they’d do an offering of shares and use the proceeds to buy bullion – if the units were trading above NAV).

When you account for the fact that GTU’s sector – precious metals ETFs/trusts/closed end funds – has been flooded with a variety of competing instruments which have superior redemption features, and that metals sentiment has been waning for a solid 2 years now, it’s not surprising that GTU had recently been trading at apersistent discount to NAV.

Enter:  Polar Securities, who purchased a stake in both GTU and SBT.TO, and then made an effort to get the Trusts to change their bylaws in such a way that would likely narrow the discounts to NAV that both trusts were suffering from.    Polar wrote a letter to unit-holders, and forced each board of directors to call a special meeting to vote on amending the bylaws.

None of this struck me as odd: this is something funds do all the time: buy cheap assets and try to unlock the value discounts that are present.   Amazingly, however, in goldbug-land, Polar Capital taking steps to try to close the massive discount to NAV that these two precious metals trusts were facing turned into cries of Polar attempting to “raid” the metal from the trusts.    While one might expect shareholders to be excited about the prospect of a narrowing of the massive NAV gap they’ve been languishing under, many instead rallied the wagons to fight this proposal!

GTU itself fought back, attacking the points of Polar’s proposal.  The GTU board of trustees noted that

1) Polar’s proposed redemption feature would be available to only a small number of holders, due to minimum size in the redemption requirement.   This is true, but largely irrelevant: all investors would benefit from a narrowing of the NAV discount if arbitrageurs came in to buy cheap GTU shares and redeem them to close the discount.  Although:

2) The board also noted the tax effects of redemptions, where the gains on sale of bullion would be taxable, and be borne by remaining shareholders.  This is true, but the effect would be miniscule compared to the massive discount to NAV that could be closed.

3) U.S. Mutual Funds may sell GTU to avoid these adverse tax consequences.  Reality suggests that GTU’s largest unit-holder, a U.S. based mutual fund, is eager to see the discount narrowed – but more on that later.

4) Polar’s proposal would increase GTU’s operating expenses.  Again, this is true, but we’re talking about matters of basis points – not percentage points that could be gained by the adoption of the proposal and closing of the massive NAV discounts.

So Polar replied with a PR of their own, repeating that the Trustees had no means of closing the discount and no plan to do so.  A common refrain you’ll hear from holders of GTU is something like: “when the price of gold is going down, GTU trades at a discount to NAV. When the price of gold goes back up, the discount will narrow.”

Well: *maybe* it will narrow – or maybe the market has been saturated with superior competing products that have equal “safety” and pareto-superior redemption features that can actually insure that discounts to NAV will be closed.  GTU lacks these features, and thus there is no reason why the discount must close if/when the price of gold rallies.  As I noted in a past post, just because a closed end fund traded at a premium in the past doesn’t mean it will/should trade at one again in the future, *especially* when there are a plethora of other ways to get the same exposure with other products.

Anyway, GTU responded to Polar’s latest PR quickly, noting:

1) Polar is not aligned with long term holders of GTU – I don’t know what this means: Polar wants the discount to NAV closed, which is exactly what the other holders should want.

2) Polar’s proposal is not “the answer” and the consequences of their proposal are real, explaining:

“In fact, Polar’s proposal can only be proven to eliminate the discount for the less than 1% of Unit-holders (including Polar) that could utilize Polar’s proposed physical redemption feature. The remaining 99% of Unit-holders are being asked to trust Polar’s opinion while Polar exits its position.”

That, of course, is nonsense.  Again: if I’m a GTU holder, I don’t care that I can’t buy and redeem enough units to get a gold bar: the act of others doing it will drive the price up and close the discount!  Yes, again we have that tax issue addressed above, if the redemptions actually happen – but more on that later….

3) etc etc etc

Amazingly, next, Institutional Shareholder Services, a proxy advisory firm, came out on the side of the Trust, and recommended that unit holders vote against Polar’s proposal! ISS wrote:

“Overall, the short-term and opportunistic nature of the dissident proposal constitutes a cause of concern for  long-term unit-holders. In addition, by just amending the trust’s Declaration of Trust and not providing a detailed business plan with new strategic initiatives on how to better manage the trust, the dissident’s request to replace the majority of the board appears overly demanding”

I was surprised by this, as there’s nothing “short-term” about a redemption feature that would protect all shareholders from future NAV dislocations.

Polar, of course, “disagreed” with the ISS recommendation, noting, among other things:

ISS displays lack of capital markets understanding” – which I completely agree with.

Polar added a few more bullet points, which I agree with:


  • ISS ignores peer comparisons, governance failures and needless value destruction
  • CGT discount to NAV could widen further without effective redemption feature
  • Polar has proposed the ONLY solution to eliminate the significant trading discount to NAV

This week, Polar figured they’d try to counter some of the GTU Board of Trustees responses that were off base, so they committed to not redeeming any GTU shares for the remainder of 2015.   Why did they do this?  Because again: they’re not interested in “raiding” GTU’s gold: they’re interested in capturing the NAV discount that should be remedied.   Polar knows that even if they don’t redeem, the discount is highly likely to close if a redemption feature is added.  Either the market will correctly price the units to reflect their NAV, or other arbitrageurs will come in an ensure that the price reflects the proper value – redeeming if necessary.

I’ll give you one guess what happened next:  GTU’s board responded again, in a PR titled “Polar’s Empty Promise To Delay Their Redemption Does Nothing to Correct the Fundamental Flaws in Their Proposal.”  Shockingly, GTU basically seems to be accusing Polar of lying about not redeeming, because GTU, like the ISS, seems to lack an understanding of how capital markets work.  GTU’s Special Committee Chairman added:

“…Such a delay does not level the playing field for the over 99% of Unit-holders who could not utilize their proposed physical redemption option, and who would be inheriting the increased cost and potential tax liability that come with it”

Again, this is ludicrous: GTU holders do not have the ability to redeem their shares at NAV.  Under Polar’s proposal, small shareholders would *still* not have this ability, but they’d be massive beneficiaries of the fact that others do have this ability.  Yes, again we have that tax issue, which is like complaining about pennies when someone is offering you dollars.

I already loved this story, as it was a back and forth between some guys who just wanted to help shareholders (and themselves, of course) realize the underlying value of their investment, but were being fought on all fronts by some shareholders and by the Trust itself.   But wait – today the drama kicked up a notch when none other than Sprott Asset Management jumped into the fray, making an unsolicited offer to exchange shares in GTU and SBT.TO for newly issued shares of its own physical bullion trusts: PHYS and PSLV.   Sprott (I’m using “Sprott” for “Sprott Asset Management” here, not to indicate “Eric Sprott”)  is basically proposing a takeover of the Central Trusts, where shareholders would receive shares of Sprott’s trusts instead, and Sprott would merge the underlying metal into their own trusts.

Brilliant!   I would expect that not a single goldbug site will write about Sprott trying to “raid” the Central Trusts, although that’s exactly what they’d be doing: piling the bullion under the Sprott umbrella so that Sprott Asset Management can get the management fees that Central Trust has been getting.  Never mind the fact that Sprott’s total fees are roughly 20 bps higher than Central Trust’s, or that when units are redeemed from Sprott’s trusts there are tax consequences like the ones Central Trust has been complaining about – if I were a GTU shareholder I’d be psyched for this offer! Well, we don’t know the exact terms of the offer yet – Sprott filed an SEC doc with some details, including that the exchange would be on a “NAV for NAV” basis, but I’d like to see the final details before blessing it.

Basically, though, I very much agree with Sprott’s CEO, John Wilson, who noted:

“It’s really just a very simple solution,” he said in an interview. “Why would you own that unit when you have opportunity to own a more liquid unit that does all the things you want and trades at its intrinsic value?”

Indeed!  I have been critical of Sprott on these blog pages in the past, but this one is a no-brainer for Sprott Asset Management, and probably for Central Trust unit-holders as well (side notable: Eric Sprott is no longer the man in charge – at least not officially – at Sprott Asset Management).   Sprott Asset Management knows – or perhaps GTU’s largest unit-holder, Pekin Singer Strauss, told them –  that while Canadian retail precious metals investors might be distrustful of some evil arbitrage fund trying to raid the metal from their trust, Canadian retail precious metals investors love and *trust* Sprott!  Hence, the beauty of this exchange offer, which, if successful,  would result in PHYS increasing its assets by roughly 50%!  You can do the math yourself, but Sprott Asset Management is looking at more than $ 3MM in additional annual management fees alone.  Synergies!

Of course, Polar already put their 2 cents in, issuing a PR that said that they welcomed the Sprott Exchange Offer– which, well, of course they do! The Sprott exchange offer, if it’s truly on a 100% NAV to NAV basis, will narrow the NAV discount that the Central Trusts are facing.

Nothing on this page should be construed as investment advice, which I couldn’t possibly give since we don’t know the details of the exchange offer anyway, but if I were a GTU shareholder, I’d be ecstatic about the Sprott Exchange offer’s preliminary details.   I can’t wait to see how the GTU board of Trustees reacts to this approach, especially since they’ve already pounded the table on the tax issue, while Sprott’s trusts face similar tax issues.   GTU’s board has also brought up management fees, but Sprott’s funds have significantly higher fees.   In other words, I think that it will be very hard for GTU’s board to deny the significant accretion that their unit-holders are likely to see under the Sprott exchange, but it’s also going to be odd to see them ignore the complaints they brought up multiple times in the back and forth with Polar.

Sprott’s CEO insinuated in a Bloomberg interview that it was GTU’s largest shareholder, Pekin Singer Strauss (probably nervous that Polar’s proposal was meeting resistance from GTU’s exceedingly naive shareholder base) who approached Sprott with this master win-win plan: “through that process some of those unit-holders reached out to us and thought we might offer a better solution” – I can’t wait to see how GTU’s Board reacts to this whole thing…

Stay tuned – this is pure gold for closed end fund geek drama…


I have no positions in GTU, SBT.TO, PHYS or PSLV

Letter to Management (SCP.TO)


 As a general rule….people ask for advice only in order not to follow it; or, if they do follow it, in order to have someone to blame for giving it. –Alexandre Dumas

Sprott Resources Corp. (SCP.TO or SCPZF)

In the recent first quarter report, SCP reported $2.06 Net Asset Value (NAV) as compared to a recent $0.99 cents (Cdn) market price or a 52% discount. The details can be found here:

As a recent investor attracted to the large discount, I find this investment ugly but cheap–like me!  But I can’t own much, because I have no way to determine the intrinsic value of ALL the underlying investments held by Sprott. An investment that I own similar to Sprott is Dundee Capital Corporation. This letter/blog post will provide the suggestions of how to communicate to outside investors as partners and the lessons of great capital allocators.   I see four ways to close the discount between market price and NAV:

  1. Kill management at the holding company level.
  2. Buyback shares in the open market or make a tender offer
  3. Sell a fully-valued or poorly/unfixable investment and use the proceeds in another investment or buy-back shares.
  4. Communicate to shareholders so they can close the gap between NAV and market price.

Point 1 is both illegal and immoral and thus a non-starter, but my black humor seeks to point out that the market may be wary of the prior or current management’s capital allocation skills. The market places a negative value on management at the holding company level or anticipates further declines in NAV.

Point 2: With only $2 million in cash or less than 1% of the NAV and with $1.7 million in commitments, $300,000 allows for less than 0.5% to be purchased. meaningless. Yes, debt could be taken on to buy-back shares, but where would be the margin of safety if a prolonged depression occurred?  With global debt levels at 100,000 year highs, dislocation is not a low probability event.

Point 3: This is a capital allocation decision that can only be made by management.

Point 4: Communicate with your shareholders as partners who are investing every nickel into Sprott. If YOU were in their shoes what EXACTLY would you need to know? If you were reporting to your Aunt Millie once a year about her investment in SCP.TO, what would you tell her?

Rather than give you my suggestions why not learn from the best in the world at capital allocation?

the outsiders“The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success” tells the stories of eight successful chief executives. You will meet eight indivualistic, iconoclastic CEOs whose firms’ average returns outperformed the S&P 500 by a factor of twenty (no typo).  Buy the book! Pdf here:  Outsiders_ Eight Unconventional CEOs and Their Radicl Blueprint for Success, The – Thorndike, William N_

There is a chapter in the book about the greatest capital allocator of all-time as suggested by Warren Buffett: Emultate Henry Singleton Read the case study: Dr. Singleton and Teledyne A Study of an Excellent Capital Allocator

Next, of course, study the wisdom of Warren Buffett: Complete_Buffett_partnership_letters-1957-70_in Sections and Essays of Warren Buffett _ Lessons for Corporate America_Cunningham   Note the clarity and simplicity of how he describes his investments. I broke out two of them for you: See’s_Candies_Case_Study     Sanborn_Map_Case_Study_BPLs

Besides reading the above, why not study other great CEOs like:

Finally, here is an example of an investment–simple and direct:

Can you tell your investors in a similar way the reasons for each of Sprott’s investments?

Mr. Yuzpe, this is the voice of experience calling, are you listening?

This irreverent letter is sent with good intentions, and I hope it is taken to heart.


John Chew

Lesson on Franchises in Cyclical Markets




Money Managers Are Price Chasers

Markets can do ANYTHING in the short-term, so the following is not a prediction that miners will rise in price. However, what comes first–the price rising or the buying? :) Miners chop around in a trading range as money managers flee the sector and now sit with record low allocations to this sector. * How good are money managers (on the whole) picking the right sector to invest in?  I leave it to you to find that out.

Wedgewood Partners: Franchises in Cyclical Market and a Lesson on Diversification

wedgewood partners fourth quarter 2014 client letter Look at pages 12-20 where David Rolfe, the manager, discusses NOV, SLB and CLB–high-quality companies in the cyclical oil sector.

  1. clb_vl
  2. slb_vl
  3. nov_vl

He points out diversification may mean the sources of profitability can be different among companies within a particular sector.  (Refer to Competition Demystified by Bruce Greenwald for a course on this distinction). Note the high revenue conversion to free cash flow (page-14) for those companies compared to other companies in the oil services sector.

Now move on to wedgewood partners first quarter 2015 client letter crude realities.  Note on page 13 how he looks at the oil services market–the structural attribute to focus on is drilling intensity.  Interesting…. Look at pages 18 and 19 for a further discussion on NOV and CLB.

To learn, you might download those company’s recent annual reports and try to figure out their revenue to free cash flow conversion.  Look at what the companies use for maintenance capex.  Note how Core Labs is a free cash flow gusher (Charlie Munger would smile on this).  Core Labs is a different business than SLB and NOV, but is grouped in the same industry/index.  When sellers of ETF sell, they don’t distinguish among companies and therein lies opportunity for us. Yeah!

I do the opposite of this:

**Merrill Lynch Fund Managers Survey May 4, 2015

Today’s chart of the day focuses on sentiment in the basic materials sector. Regular readers of the blog already know that I have been closely following Merrill Lynch’s Fund Manager Survey for years now. This months survey was conducted in a period between 2nd to 9th April 2015 with a total of 177 panellists, with $494 billion of assets under management. The survey should be used as a very good contrarian indicator.

According to the recent survey, global fund manager allocation towards global materials declined sharply in the month of April to net 27% underweight from net 16% underweight the previous month. As we can clearly see from todays chart of the day, sentiment is very depressed right now. Merrill Lynch states that the current allocation is 1.8 standard deviation below its long term average.

Furthermore, the overall commodity and natural resources theme is very much disliked by global money managers. Commodity allocation is unchanged for the third straight month and remains at net 20% underweight. That is 1.2 standard deviations below its long term average and even more interestingly, fund managers remain underweight commodities for the 28th month in the row.


Time-Out: Special Situation of a Capital Change (BB) GWW

Thin ICe

 I spilled spot remover on my dog. Now he’s gone. — Steven Wright

W. W. Grainger (GWW)

Someone asked what data tools do I use.  My brain and a Value-Line.

Try to look at the Value-Lines WITHOUT looking at the price of the stock. What would you pay for this entire business–not knowing what it did and the current price of the company?  Start with the numbers (excluding the stock price, at first) so to keep your prejudices at bay.   Maybe have a friend print out the Vale-Line and cut off the top of the page.

GWW_VL Jul 2014 and GWW_VL   Something should strike you about this business. What?  Asset or franchise?

A competitor: Fast VL

Grainger_ Capital Allocation-FINAL Whoa? An announcement of a capital structure change–so a type of special situation.  What does this mean?

Grainger_ 2015FactBook Time to dig deeper Grainger_2014_ARGrainger 14BALSTGrainger 14EARN

Ok, about what is this company worth and what type of return could I expect at today’s _____ price?

Not a recommendation! Do your own thinking because then you learn from your mistakes AND successes.

If you don’t know or are not sure; it is just too tough, difficult, or confusing, then you can always do this:


And when I see the sign that points one way
The lot we used to pass by every day

Just walk away, Renee
You won’t see me follow you back home
The empty sidewalks on my block are not the same
You’re not to blame

From deep inside the tears that I’m forced to cry
From deep inside the pain that I chose to hide

Just walk away, Renee
You won’t see me follow you back home
Now, as the rain beats down upon my weary eyes
For me, it cries

Just walk away, Renee
You won’t see me follow you back home
Now, as the rain beats down upon my weary eyes
For me, it cries

Your name and mine inside a heart upon a wall
Still finds a way to haunt me though they’re so small

Just walk away, Renee
You won’t see me follow you back home
The empty sidewalks on my block are not the same
You’re not to blame

Commodities Carnage; Reversion to the Mean and the Growth Illusion; Net/Nets


CRBSearch Strategy: Go where the outlook is bleakest (John Templeton). Keep his wisdom by your side: Sixteen Rules for Investment Success_Templeton

Commodities (CRB Index) fall back to a 40-year support zone ($185/$205)


As global commodities prices plummet, it’s incredibly convenient to pronounce the commodities super-cycle dead, isn’t it?  Yet banks from Goldman Sachs to Citigroup to Deutsche Bank are on record as saying it’s over.

The point is not to follow the “experts” but search where there is carnage. I am looking at Templeton’s Russian and Eastern Europe Fund TRF Semi Annual Report because:

  • Hated Countries (Russia, Ukraine)
  • Currencies Down,
  • Commodity Exporters and
  • trading at a 10% discount so the 1.4% management fee is covered for six years.
  • Poor performance for the past few years

Things can and will probably get worse. So please don’t follow the blind (me) off the cliff. This is meant as an example of a SEARCH STRATEGY.

More on Reversion to the Mean and the Growth Illusion

We are beating this subject to death but you can’t understand how investing in bargains works without grasping these concepts.

Contrarian Strategy Extrapolation and Risk  Abstract: Value strategies yield higher returns because these strategies exploit the sub-optimal behavior of the typical investor and not because these strategies are fundamentally riskier.  Yes, this is an academic paper, but worth reading to understand WHY and HOW value (buying stocks with low expectations/and low price to business metrics like earnings, cash flow, EBITDA, etc.) provide better returns.

Growth Illusion

The Two Percent Dilution It is widely believed that economic growth is good for stockholders. However, the cross-country correlation of real stock returns and per capita GDP growth over 1900–2002 is negative. Economic growth occurs from high personal savings rates and increased labor force participation, and from technological change. If increases in capital and labor inputs go into new corporations, these do not boost the present value of dividends on existing corporations. Technological change does not increase profits unless firms have lasting monopolies, a condition that rarely occurs. Countries with high growth potential do not offer good equity investment opportunities unless valuations are low.

value-vs-glamour-a-global-phenomenon (Brandes Institute)

Thick as a Bric by Efficient Frontier

Does the Stock Market Over React

Discussion of Does the Stock Market Over React

Criticism of the Over Reaction Theory

The above is meant to supplement your reading in Deep Value Chapter 5, A Clockwork Market


Ben Graham’s Net-Net Strategy Revisited

Ben Graham Net Current Asset Values A Performance Update

Dollar Panic; Valuation Ratios; Buyback Mania, CEFs


If you think nobody cares about you, try missing a couple of payments.- Wright.

Long-term view of the Dollar (DXY)

Oil service, oil producers, mining companies etc. are being hammered by a dollar “shortage.”  Opportunity may be knocking. Remember what Klarman said about forced selling.

An overview of the situation: Dollar Shortage. With money supply rising in the US there is no dollar “shortage”, but there is a fear of inter-bank lending.

Dollar Leverage BIS Report

Dollar Crisis 2009

JPM-dollar-shortage funding

A Guide to the Swap Market

Now the “experts” say confidently cnbc Dollar Euro Parity. Perhaps a bit late in a trend!   If you are to follow a trend then The Whipsaw Song

A Reader’s Question on Valuation Ratios.  This sheet may be good as a guide to go through an annual report, but none of those ratios means anything without context.   Is growth good? It depends. Only profitable growth within a franchise.  How about asset turnover?   For some companies like Costco asset turnover is critical but not for Boeing (gross margin).   Why not take those ratios and work through the financials of these trucking companies.  Which company is doing the best? Why? Follow the money!   Those ratios may help you structure the information you pull out from the financials. But first focus on how does the company provide a service to its customers and then trace the financial effects back to your returns as an investor.

  1. HTLD VL
  2. JBHT VL
  3. KNX_VL

Buy-Back Mania (a yellow light of caution) Stock Buybacks Hit RecordTotal 2 Trillion Since 2009

Emultate Henry Singleton

Case Study in capital allocation: Dr. Singleton and Teledyne A Study of an Excellent Capital Allocator (must read!)

Gold is in a hyper bubble……………….

Gold Bubble

But now not so much…………………Gold Bubble Not Quite as much

Gold is stupid-cheap compared to all the money out there…………………Gold hyper undervalued

What determines the price of gold

2010-06-21 IE Special Report GOLD

A Case Study in investing in Closed-End Funds

Prof. Greenblatt once said that sometimes people just go crazy.

A Lesson in CEF Investing TRF


Investors ran to pay a 90% PREMIUM to NAV AFTER a six-year boom and now after a seven-year decline they sell at a 10.5% DISCOUNT. Go figure.

Interesting video on China–a country brimming with centrally planned mal-investment. Is China Already in a Hard Landing?

Read more at reality-check-how-fast-is-china-growing.

We will get back to Deep Value next week and I will post links to valuation class videos.  Have a great weekend and if you do try to emulate someone, then:

Reader’s Question: Cyclicals

Structure of production


What multiples and metrics to use for different industries? 

A reader struggles with how to value cyclical industries. First you have to understand the particular industry. How to do that–read the reports and financials of dozens of companies in that industry, then note what is important to value such a business.  Take several months.  If you are looking at highly-cyclical businesses, then you should read : Skousen-Structure-production.pdf

Note how long the cycles are in the gold mining industry.  A mine may take a year or two to close or years to open. From discovery of the deposit until extraction may take a decade or more. A gold miner is valued on production, reserves, cost to extract, etc.

Now if you have access to a Bloomberg (expensive!) or go to a library and look at Value-Line, Moody’s Manuals, or industry articles of the industry.   You can scrub around the Internet, but you have to grind through company reports to get a feel.  Obviously, “heavy industries” require analysis of tangible book, replacement value, capital costs, industry capacity and utilization–note what happened in the airline industry when capacity was taken off-line. Go to search box and read my post on CRR, Carbo-ceramics–below TBV and replacement value, for example.

If I seem abrupt with your questions, here is the reason why.

See’s Candies, Sanborn Map, and Inflation Article

SeesA Nor’easter is coming my way (up to two to three feet of snow with high winds) so I may be out of contact for two or three days.  But push on we must. We continue to study Chapter 3, in Deep Value and Buffett’s investing career.Sees 2

The best investment article I have ever read of Buffett’s is:

Buffett & Inflation Highlighted plus if you wish to read all that Buffett has said about inflation then Buffett inflation file.

A key case for you to focus on is See’s_Candies_Case_Study. Combined with Buffett’s Inflation Swindles the Equity Investor (Fortune Article: Buffett – How Inflation Swindles the Equity Investor), you will see a leap in Buffett’s thinking. Both are important to understand and complementary to each other.

Finally, Sanborn_Map_Case_Study_BPLs is another case mentioned in Chapter 3 of Deep Value.

Hopefully, students will discuss in the comments section.

Time to bring out the snowshoes!

It’s not entirely clear what will happen in the near term, but the financial markets are already pushed to extremes by central-bank induced speculation. With speculators massively short the now steeply-depressed euro and yen, with equity margin debt still near record levels in a market valued at more than double its pre-bubble norms on historically reliable measures, and with several major European banks running at gross leverage ratios comparable to those of Bear Stearns and Lehman before the 2008 crisis, we’re seeing an abundance of what we call “leveraged mismatches” – a preponderance one-way bets, using borrowed money, that permeates the entire financial system. With market internals and credit spreads behaving badly, while Treasury yields, oil and industrial commodity prices slide in a manner consistent with abrupt weakening in global economic activity, we can hardly bear to watch..   John Hussman, Jan. 26, 2015