Category Archives: Uncategorized

When is a P/E not a PE: Case Study in Indexing

A tutorial on the dangers of Indexing investing. 

Know what you are doing IF you buy index funds!  You can learn a lot by studying Horizon Kinetics.  The video provides a valuation of the index and how to think about investing or not in indexes.

Also, more on indexing here:





Do Stocks Outperform Treasury Bills?

The above seems to answer the question above.  But what if the returns are heavily skewed to only a few stocks?  Look deeper:  Bessembinder Do Stocks Outperform Treasury Bills

The chart above shows gold “outperforming” stocks, but note the time period. 1971 was when President Nixon unhinged the dollar from gold.  Be careful when assessing performance over a set time period.

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Search for value in high-priced stocks; Shorting; Gold Stocks; James Dimon Letter

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Outperformance without Better Stock-Picking


The Little Newsletter That Crushed the Market

The Prudent Speculator has more than tripled the broad stock market since 1980. What’s its secret?

Feb. 23, 2017 5:48 a.m. ET

Mike Lawrie/Getty Images

It pays to have nerves of steel.

That’s the most important lesson to emerge from the Prudent Speculator’s position as one of this country’s most successful investment newsletters of the past four decades.

The advisory service, which celebrates its 40th birthday March 10, has pursued a riskier strategy than almost all other newsletters—far riskier than many investors can tolerate. But those who could and did were richly rewarded. Its advice has made more money over the past 40 years than any of the nearly 200 other services monitored by the Hulbert Financial Digest.

CSInvestor: the author defines risk as volatility!

Since mid-1980, when we began monitoring the investment newsletter industry, through the end of January, the Prudent Speculator’s model portfolios on average produced a 16,937% gain, versus 4,952% for buying and holding the broad stock market (as measured by the Wilshire 5000 index).

That’s equivalent to the difference between 15.1% and 11.3%, annualized. (These performance numbers assume all model-portfolio transactions were executed on the day a subscriber would have been able to act on the newsletter’s advice; dividends and transaction costs, but not taxes, were taken into account.) To put this into perspective, consider that the best-performing U.S. equity mutual fund over this same period produced an annualized return of 13.6%, or 1.5 percentage points per year less than the Prudent Speculator. (The fund, according to Thomson Reuters Lipper, was Waddell & Reed Advisors Science & Technology [ticker: UNSCX]).

The Prudent Speculator newsletter, which was founded in March 1977 by Al Frank and is based in Aliso Viejo, Calif., was initially named the Pinchpenny Speculator. Frank had become interested in investing several years earlier while working toward his Ph.D. in educational philosophy at the University of California, Los Angeles. He started the newsletter in part to report on the performance of his personal portfolio. From the start, his strategy was to purchase undervalued stocks and hold them through for the very long term. The newsletter’s current yearly subscription rate is $295.

In the 1990s, Frank—who died in 2002—began handing the newsletter over to an associate, John Buckingham, now 51, who had been with the firm since 1987. The transition to Buckingham has been unusually successful; the norm in the newsletter business is for services to either languish or close down completely upon the death of their founders. Not in this case. On a risk-adjusted basis, the newsletter’s model portfolios have performed even better over the past two decades than in the first two.

What’s the secret to the newsletter’s success?

It’s definitely not market timing, since it has actively argued against market timing throughout its history. Most commentators assume that the newsletter must owe its success to superior stock selection. But though the newsletter’s stock-picking has been commendable, many other advisors favor stocks with similar characteristics.

Not for the Faint of Heart

Perfomance of the Prudential Speculator



Recent examples of the newsletter’s picks include Zimmer Biomet Holdings (ZBH),Williams-Sonoma (WSM), Nike (NKE), Schlumberger (SLB), and Digital Realty Trust (DLR). In an interview, Buckingham insisted that he pursues value wherever he can find it. But my computer’s statistical software shows that the newsletter’s recommended stocks tilt to the value end of the value-versus-growth spectrum and the quality end of the so-called quality-versus-junk spectrum, and tend to have smaller market values than the components of broad market averages such as the Standard & Poor’s 500 index.

If neither market timing nor stock selection is the key to the Prudent Speculator’s outstanding long-term record, what is? In my opinion, it’s those nerves of steel I referred to above.

Almost all other advisors who recommend smaller-cap, higher-quality value stocks are unwilling to hold them through thick and thin. Though these value-oriented advisers have longer holding periods than most others, their average currently is 18 months. The average holding period of the Prudent Speculator’s currently held stocks, by contrast, is four years. And there have been many times during the newsletter’s history when its average holding period was even longer than four years. Its current holding period is this short because the market’s extraordinary strength has propelled many of its previously recommended stocks above their target prices.

By selling out too early, Buckingham told Barron’s, other advisors find themselves with either one or two strikes against them. The first strike applies even if those advisors immediately reinvest the proceeds of their premature sales in other undervalued stocks: They still leave too much money on the table, since

The second strike is when advisors go to cash after selling. These advisors often end up bailing out of stocks near the bottom of bear markets. Because it almost always takes them a long time to get back into equities after the market begins to recover, they enjoy only some of the market’s recovery after suffering the bulk of its decline—and therefore lag the market over the long term.

By not deviating from its commitments to equities, the Prudent Speculator sidesteps both of these strikes.

Consider Frank’s reaction to the 1987 crash—the biggest one-day drop in U.S. stock-market history, during which Frank’s model portfolio lost nearly 60%. Far from cashing in his chips and going home, as most of us would have been tempted to do in the wake of a one-day loss that big, Frank said he saw no reason to alter the basics of his long-term strategy.

Similarly, consider Buckingham’s advice to clients on March 9, 2009, the day that turned out to be the bottom of the 2007-09 bear market—though of course no one at that time could have known that. Buckingham’s average model portfolio was sitting with a loss of more than 60% since the 2007 high, and yet his message to clients that day—as it had been every other day during that bear market—was that “our long-term enthusiasm [for stocks] remains intact.”

Many investors no doubt find it boring to remain fully invested to stocks through thick and thin and to hold stocks for many years. In fact, Buckingham says, one of the most challenging parts of his job as newsletter editor is continually finding new and interesting ways of saying the same thing: Remain focused on the long term with patience and discipline.

Easier said than done–90% of investing is character.

Note: He leans toward smaller (more apt to be mispriced) stocks, value more than growth (so he faces lest risk of overpaying for growth), quality over junk (so less chance of bankruptcy risk), and then allows AT LEAST four years for value to come out or be recognized.   His edge is his patient, long-term perspective.

Recent Munger Wisdom

Recent Munger Transcript 340444245-Munger-2017-DJCO-Transcript340444245-Munger-2017-DJCO-Transcript


How NOT to be a Deep Value Investor, Part II; Best Trade Ever?

Remember two years ago?

The inevitable loss when you pay massive premiums over net asset values.  Or you can short the closed end fund for profits.

Two years later, down 12% on CUBA, a closed-end fund investing in Cuba.  The closed-end fund traded at a 70% premium to net assets–so the market is efficient all the time?

Ivanhoe and a small investor’s success

An Investor Greatest Investment Ever_Ivanhoe

An Investor Greatest Investment Ever_Ivanhoe

With full disclosure I also bought in late 2015 and 2016 at an average price of 65 cents and still holding. Why? Three tier one assets in the Congo and South Africa with a world famous promoter.  However, I kept my position 1/2 size unlike the other speculator.   These cyclical resource stocks require years of patience.



Imagine owning a pet that doesn’t need to be trained, walked, fed or groomed — ever. That’s exactly what California ad executive Gary Dahl was after when he came up with pet rocks in 1975. Tired of the hassle and responsibility that came with animate house pets, Dahl developed a toy concept that was 1% product and 99% marketing genius: a garden-variety rock, packaged in a comfy cardboard shipping crate, complete with straw for the rock’s comfort and holes so it could breathe during transport. The Pet Rock Training Manual — a tongue-in-cheek set of guidelines for pet owners, like housebreaking instructions (“Place it on some old newspapers. The rock will never know what the paper is for and will require no further instruction”) — helped turn the scheme from an amusing gag gift into an inexplicable toy craze. By Christmas 1975, Americans were hooked. Although the fad was long gone by the following year, the rocks — which were collected from a beach in Baja, Calif., for pennies each and retailed for $3.95 — made Dahl a multimillionaire in about six months. and The-Care-and-Training-of-Your-Pet-Rock-Manual-by-Gary-Dahl

BEFORE I became a value investor, I was addicted to bubbles.  I have over 1,200 Pet Rocks lining my Python cage.  I don’t know what the price chart says, but it doesn’t look good that I will be able to resell at a profit.

Also, I have 20,000 Beanie Babies rotting/mildewing in my basement as well.

but there is hope…..

An amazing story of mass delusion and the dark side of cute.

How to be a Stoic:

Lessons from Ed Thorp, a self-taught investor:

Edward Thorp: I came at the securities markets without basically any prior knowledge and I educated myself by sitting down and reading anything I could lay my hands on. I began to get oriented, and then I discovered how to evaluate warrants, at least in an elementary way, and I decided that was a way that I could apply mathematics and logical thinking and maybe get an edge in the market.

Chartists and Technical Analysis

Why Value Investing?  (from the Brooklyn Investor)

I don’t intend to tell you here which investment approach is correct. And here, I don’t distinguish between growth and value investing. This just describes my own evolution as a trader/investor over time, moving from charts to fundamentals-based investing. You may have observed different things and may have come to a different conclusion. That’s cool. And yes, there are credible people who swear by charts, and I’ve known some of those people too. This is just how I evolved.

Technical Years

When I first started out in the business, I was in a department that managed portfolios and set investment strategy. I read a lot of investment books and I really got into technical analysis (even though Intelligent Investor was one of early books I read). The idea was appealing to me; that all information is already reflected in stock prices so all we need to do is to study price action. No need to go digging into financial filings and read annual reports; everything is already reflected in the stock price!

The idea that you can draw lines on a chart with a ruler and predict what will happen was highly appealing to me as a young analyst starting out. I also did a lot of quantitative work too, but mostly screening and ranking stocks according to standard deviations off of this or that average, creating multi-factor valuation models for the whole market etc. I went around visiting the largest institutional investors making presentations based on technical analysis, saying things like, “if this sector breaks this trendline, it’s all over…” etc. It was incredibly fun to do. When I say “technical analysis” here, I mean things like trend lines, moving averages, RSI and other oscillators, formations like head-and-shoulder tops, descending triangles and things like that.

I also worked at one of the large hedge funds that was heavily into technical analysis. I was still big into charts at the time as were most people there. While I was there, I got to read just about every newletter that was published, many of them technical analysis related. It was interesting that nobody was ever really right often enough to be useful. Some of the prominent newsletter writers started their own funds; most of them blew up relatively quickly. Of all of the prominent technicans, nobody that I know of had a real, audited track record of actually making any money with what they preach. This was the beginning of my doubt about technical analysis. There is an old adage that on Wall Street, you never meet rich technical analysts. Or that the rich ones have made most of their money from selling books and/or newsletters.

Superinvestors of Edwards-and-Mageeville?

When you go to the bookstore and look at all the books about technical analysis, you will notice that none of them are written by people who have successful, long-term track records. The bible of technical analysis, for example, is Technical Analysis of Stock Trends by Edwards and Magee. Who are these guys? Do they have a track record of performing over a long period of time? Check out the value investing equivalent: Securities Analysis by Benjamin Graham. Benjamin Graham has a long term track record of high performance, and he has disciples that have continued to perform well using his ideas.

Other more recent books are Margin of Safety by Seth Klarman and of course, You Can Be a Stock Market Geniusby Joel Greenblatt. They both have impressive long term track records. Where are the equivalent people in the world of technical analysis? Borrowing Warren Buffett’s concept, “Where is the Edwards-and-Mageeville of technical analysis?” (Warren Buffett wrote an essay about the Superinvestors saying that they all come from the same village, the village of Graham-and-Doddsville, meaning that they all share the same investment concept as taught in the Graham and Dodd Securities Analysis book).

The more I thought about this, the more I observed, and the more I read, the iffier technical analysis got. As I watched professional traders, it seemed to me that the ones that relied a lot on technical analysis actually didn’t make money. I have never been an FX or bond trader, so I don’t know about them, but most people I observed trading off of charts didn’t seem to make money. The big boss trader who loved charts, though, did make money. But he seemed to make decisions based on a lot more than just charts. He would call 10 or 20 different people every day, get their input in the morning, see how people are positioned etc. So he had a lot more information to make decisions than just lines on a chart. If you locked him in a room by himself and made him trade just off the charts with no other information or input, I doubt he would have made the returns that he had.

Also, at the time, people who had impressive long term returns were funds like Tiger, Steinhardt, Soros etc. Those were the funds that put up big figures for decades. Technical-based CTA’s existed too, but they seemed to come and go; there really was no equivalent of Soros or Steinhardt in that area. Soros is a macro trader, but he is very fundamentals based; not really a technician.

Superinvestors of Graham-and-Doddsville

Of course, then there is Warren Buffett and his “Superinvestors of Graham-and-Doddsville”. If you’ve never read this essay before, please read it. It’s free; just click the link. It may be the most important essay ever written in the world of investing. Again, where are the superinvestors of Edwards-and-Mageeville?

But the Fundamental Guys are Wrong Too!

And all of this inevitably leads to the argument that the fundamentals based investors are frequently wrong too. Most mutual funds underperform. Economists are often wrong. Wall Street analyst estimates are no better than random. Well, yes, this is all true. First let me just give some excuses. Most mutual funds underperform, I think, because most mutual funds are asset gatherers, not asset managers. There is more money to be made by gathering assets and getting too large to outperform than by staying small enough to outperform. Having said that, asset managers in aggregate, can’t all outperform. This is not Lake Wobegan. We can’t all be above average. All investors are the market, and less fees, they will underperform.

Wall Street Analysts are Often Wrong!

This is also true, I suppose. I have seen studies that show how worthless analysts estimates are. The problem here, though, is that Wall Street has to always have an opinion on all stocks at all times. If you are a stock analyst, you have to have a buy, hold or sell recommendation. You can’t say, “I don’t know”. Investors have the luxury of saying, “I have no idea” and can move on to the next idea. Too, analysts have to come up with earnings estimates on a quarterly basis, and they are evaluated on their accuracy. Again, most long-term investors don’t really care about earnings on a quarter-to-quarter basis, which can be really noisy and random. But Wall Street analysts must have an estimate no matter how random it is.

Think of it this way. Let’s say you are a baseball analyst in charge of predicting batters’ performances. Your job is, every time a batter steps up to the plate, to guess if he will hit a single, double, triple, walk or strikeout (or whatever). What are the chances that you will guess these things correctly over time? That is like the Wall Street analyst’s job of predicting earnings every quarter. All a long term investor needs to do is to figure out what the current batter’s average will be over the next few seasons. Will this 0.300 hitter be a 0.300 hitter next year and the year after that? That is much easier to predict than what a batter will do on each at bat.

So Anyway

I know people who swear by charts, especially people in FX, bonds and commodities. Locals/floor traders and day traders too often seem to love charts. For people who make money off of chart reading, that’s great (Steve Cohen of SAC/Point72 was known to be a ‘tape reader’ in the early days and probably still does a lot of technical stuff). But for me, I just haven’t really seen any good evidence of the usefulness of technical analysis. I spent many hours trying to find it. And keep in mind that I used to love charts and was an active, professional chartist/technician working for a major investment bank early in my career. This is just how my thinking has evolved over the years.


The Capital Cycle: Junior Mining

Goethe, the poet-philosopher, wrote: “I find more and more that it is well to be on the side of the minority, since it is always the motre intelligent.

The urge that first sent me on a quest that ended in the Theory of Contrary Opinion was the disappointments and disillusionment that come to everyone who seeks a method “to beat the stock market.”

Take many chart-reading ideas, as an example. One can interpret charts almost any way he wishes. He can read into their “formations” just about any probable result he hopes for. Which is to say, that if one is bullish at heart his chart reading is liely to be interpreted optimistically; if bearishly inclined, charts accommodatingly will “say” that the market is going down.

So it was that I soon learned (the hard way) that not only were individual opions frequently wrong but that my own judgement was often unprofitably faulty.

Accordingly, I turned to a study of mass psychology in the hope of finding the answer to the riddle of “why the public is so often wrong.” (and that meant why I was so often wrong).

If individual opinions are unreliable, why not go opposite to crowd opinion—that is, contrary t0o general opinions which are so often wrong?

That said and with severe pessimism coming back into miners and gold circa end 2015/early 2016, take another look.  I suggest reading reports several years back so you can see how managements react to the cycle.

Also, you need to be: