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Next the statesmen will invent cheap lies, putting the blame upon the nation that is attacked (Syria), and every man will be glad of those conscience-soothing falsities, and will diligently study them, and refuse to examine any refutation of them; and thus he will by and by convince himself that the war is just, and will thank God for the better sleep he enjoys after this process of grotesque self-deception.” –Mark Twain
“When the rich make war, it is the poor that die.”–Jean-Paul Sartre
Case Study of Cisco:
Case Study on Cisco Third Quarterly Earnings (includes 2012 for comparison purposes). Instructions and questions in the document.
Please explain what you see.
The Lord of Dark Matter
Fleckenstein: “Probably anyone who listens to your wonderful interviews already understands that money printing can’t solve anything … Most recently the housing bubble led to the collapse in 2008/2009, and now we’ve got QE of biblical proportions being foisted upon us by the Fed, BOJ (Bank of Japan), Swiss National Bank, and probably the BOE (Bank of England) soon, etc.
The irony of it all is that 5 years into zero rates, and America alone (with) $5 or $6 trillion of deficit spending, the economy is still crummy. No one ever says, ‘Why is that?’ Well, the reason is because money printing doesn’t work.”
….Everybody and his brother is bearish. I get sent two articles a day about some knucklehead who’s bearish on gold. Well, you know what? They are all bearish for the same two reasons: The chart looks bad, and the price is wrong. Like they know what the price (should be). How do any of us know what the price is supposed to be? It’s just a price.
Click the link below to hear the twelve-minute interview:
P.S. I have been a bit swamped with work, so I will post next week. Be well and BE CAREFUL!
Investing, when it looks the easiest, is at its hardest. When just about everyone heavily invested is doing well, it is hard for others to resist jumping in. But a market relentlessly rising in the face of challenging fundamentals–recession in Europe and Japan, slowdown in China, fiscal stalemate and high unemployment in the U.S.– is the riskiest environment of all.–Seth Klarman
Read more on Buffett’s market indicator flashing red: http://greenbackd.com/2013/05/22/warren-buffetts-favored-measure-of-market-valuation-passes-unwelcome-milestone/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+Greenbackd+%28Greenbackd%29
Reader #1: To give you a bit of an introduction about myself, I am based in Singapore and a third year accountancy student. Have been researching Asian equities for quite a while and would like to seek your opinion on my analysis process.
I have read many books on value investing; Greenwald, Graham, Fisher and also accounting books like Financial Shenanigans. However, this is what I noticed whenever I am about to start working on a company.
Financial statements: I am able to pinpoint out the basic stuff like gross margin, ROA, ROIC, balance sheet ratios etc. But to be able to paint the full picture of a company, I am still not quite certain of my ability to do so yet. I have seen how some investors are able to tell a story using the financial statements (Have seen in newsletters of funds, books). Like picking out the nitty-gritty stuff.
Qualitative aspects: I start out first by reading the past few years of annual reports to get an idea of the corporate structure of the company and the business model. This step is generally OK. However, I am kinda unsure how to proceed on from here. What I usually do is that I just google the business model. Etc this company sells jewelry. I google jewelry business/how is jewelry manufactured and sold…you get my point.
But somehow, I still feel kinda lacking when I compare my analysis with the fund managers here. I read their newsletters, download conference calls transcript to see what questions they ask etc. And their level of understanding of the business simply astonishes me!
Not sure how you go about doing it but would like to hear from you!
My reply: You may need to learn more about analyzing an industry/business. As you first look at a company you want to answer several questions:
Does the company have a competitive advantage as shown by fairly high and consistent profitability and/or market share? If yes, then what is the source of competitive advantage? Patents/Copyrights (Disney), Unique Asset (Compass Minerals) , economies of scale coupled with customer captivity (Coke), etc. Is the moat weakening or strengthening? What price will you pay for growth?
You could draw up an industry map to understand the business better. Read Bruce Greenwald’s Competition Demystified or (Use search box on csinvesting.org and follow links to download cases on Coors, Coke, etc.).
Read: Strategic Logic by J. Carlos Jarillo and The Curse of the Mogul, What’s Wrong with the World’s Leading Media Companies by Jonathan Knee and Bruce C. Greenwald. Also, The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow’s Profits by Adrian J. Slywotzsky.
If the business has no competitive advantage–95% of most businesses–then can management earn a fair return on the company’s assets? Does management allocate capital effectively; do they eat their own cooking?
Always try to find a thesis for a variant perception. Is there hidden value in this company like shutting down a losing subsidiary, NOLs, underutilized assets, etc. Where can I develop an understanding that will give me an edge?
Read with a purpose. Develop a checklist of your own. Try to determine the key metrics of the business. What are the risks in the business?
Try to read biographies of business leaders in a particular industry. You can find books about the cruise ship industry, steel, beverages, sports, media, and airlines. Also, try to speak to people in the business and industry once you have a basic understanding of the business. Read about the history of the industry–its booms and busts–what are the opportune times to buy and sell such a business?
But until you spend about ten years studying hard, it is difficult to develop proficiency in anything, so patience. Good luck.
I have been dipping my toe into gold stocks having owned Yukon Nevada and Energold (EGDFF) over the last year or so. I am thinking along your lines that I need to diversify into ten or so names with a mix of producing and near producing. I wondered if you knew the current top 10 GSA recommendations and if there were any other stocks at the exploration or near producing end that you thought were worth further investigation. I see Weiss has a large position in Seabridge, but I don’t really know how to analyze the opportunity?
My reply: Like this gentleman, http://truecontrarian-sjk.blogspot.com/, I am drawn to cheap assets. Precious metals miners (GDX and GDXJ) certainly qualify. The more I study mining, the more I dislike the business. These businesses are highly capital intensive, they are price takers and subject to many operational risks. Right off the bat, you HAVE to buy these assets cheaply to reduce your risks and you must diversify (8 to 12) names to take advantage of the insurance concept of GENERAL cheapness. One of your companies could get swamped but overall your other companies will flourish. I bought Energold last week once it went 15% below $2.00 per share because then you were buying the company for less than its working capital of which 40% of that was cash. I don’t buy the thesis that Energold has a competitive advantage. I am buying cheap assets.
The mining industry has four tiers: Senior Producers like Yumana, Newmont, Agnico-Eagle, Goldcorp, Barrick. Then you have mid Tier Producers like EGO, GORO, and NGD, then you have developmental companies like Seabridge, Pretium and others which may be years until production. Finally, the lottery tickets like explorers found in GLDX.
If you want exposure to bullion, I recommend CEF at a 2% discount or more. Avoid GDXJ because of some of the low quality names in that index. You might want TOCQUEVILLE. John Hathaway, the fund’s manager, has a long experience and good reputation. Read his letters for several years. See his fund below:
Above, is GROW (US Global Investors) this may be a cheap way to participate in the rebound in precious metals and commodities. The current price seems to be at a discount to its cash and AUM of $1.3 billion using 2% of AUM (pay less than $3 per share).
Another way to reduce your risk through diversification and avoiding operational mining risk is to look at the royalty/streamer companies like SLW, RGLD, SAND, FNV. Though they are not as statistically cheap, they have huge free cash flows. I think those companies will be needed more and more to finance future exploration and development. Put your hat in the ring with experts. Now is a better time to be buying than in the past five years based on valuations.
The safer strategy would be to go with Tocqueville because you get broad diversification with a manager who knows his companies. The downside is the annual fee. However, You can make decent returns when this sector rebounds and be ready to sell when his fund become popular again. Look at Fairholme last year with its heavy investments in financials–a formerly out of favor sector:
The downside in gold and gold stocks may not be over. My thinking is that the current events are VERY bullish for gold long-term but bearish short-term. Japan’s insane policy of currency debasement is forcing down interest rates (for now) and leading to a reach for yield (return) so gold might be under pressure as investors leave gold to pursue stocks. Eventually, Japan’s currency will implode, leading to massive unintended consequences and a rush back to safety. But, gold miners don’t necessarily need gold to go up, they need their inputs to decline more than gold, so their margins widen/stabilize.
Also, gold should just be part, not all, of your portfolio.
P.S: ENERGOLD (EGDFF): Down and Dirty Analysis
Someone sent me this……sometimes the best ideas are the simplest.
Or even better, Energold. I am a proud shareowner. But emotions and will aside. Here you have a biz with 3 operations. Earnings power is the best way to look at it and most valuable, but let’s imagine we just sold for parts:
Dando (worth 3mm or so – bought for 300k or so plus put in working capital)
Bertram (paid 18mm for it. But EBITDA now back up in the low/mid teens – worth at least 30mm today)
Mining Biz (133 rigs, let’s be super conservative and say 250k per rig – so worth floor of 33.25mm)
Impact Silver Stake (3.8mm at today’s prices)
In addition, 91.2mm of working capital (incl. cash and inventories)
Minus the 43mm in total liabilities = $3+30+33.25+3.8+(91.2-43)= 118.7mm ($2.59 per share) vs today’s EV of 68.15 mm.
I am no genius – but that seems silly cheap to me. What’s more, earnings power is substantially higher, and the company is growing, and it has amazing operational leverage. Sure, results may not look amazing until they are back towards 5000k meters per drill annually. But even if they were to only get 3500 meters per drill @ 180 per meter (assuming cost per meter is ~138 per meter) the minimg biz is still FCF positive and earnings positive. And these are bad times. Bertram still doing fine, as is Dando.
Another good blog: http://brooklyninvestor.blogspot.com/
A gold mine is a hole in the ground with a liar on top–Mark Twain
The above chart illustrates how historically cheap gold mining equities are to gold. Not since the Great Depression and Pearl Harbor have equities been so cheap on market cap to production, reserves and cash costs. See the XAU (Index of gold and silver miners) below as a percentage of the gold price–currently below the Great Recession lows of 2008:
For about six years, equities have under-performed due to poor management, rising input costs, dilution, and growth for growth’s sake. That’s the bad news. The good news is that many managements have been replaced and now the focus in on return ON capital. Dividend yields on the senior miners are above 20-year bond rates. The market is forcing managements to focus on returns and that bodes well for the future. And some input prices are falling. However, many weak companies will go bust leaving less competition for the survivors. Therefore, you must diversify into a basket of WELL-FINANCED Companies operating with good properties in safe jurisdictions for mining and, of course, with proven management. Mining is extremely risky. However, the historic cheapness of mining equities give you a margin of error, but choose wisely.
Pessimism is rampant:
Note below that for a risk-free asset, gold which has no counter-party risk, there is a closed end fund holding silver and gold bullion that trades at a 2% to 5% discount (A great way to buy bullion). People want out!
Monetary Mayhem is being overlooked (Many believe central banks have solved our debt problems and can eventually “exit” when the economy reaches “escape velocity.”) Ha! Ha!
The last two charts illustrate growing debt that as the chart below will show below is being monetized–coupled with negative real interest rates–the current environment is conducive to higher gold prices. While Western speculators flee from ETFs, Chinese Grandmas rush to buy gold for their savings.
Real Interest Rates are supportive for gold
If the US government practiced fiscal discipline and interest rates were allowed to rise to their natural level, the bull market in gold would probably be finished. When your cab driver suggests that you buy gold for safety that will also be a read flag. Gold and precious metal miners and commodities, in general, are hated, shorted and/or ignored.
Meanwhile, investors have been flocking (some by selling their insurance like gold) to buy stocks, but risks are rising in the stock market due to higher valuations. Margin debt is near all-time highs, insiders have been selling, and a Barron’s poll recently had 75% of all money managers bullish. Of course, the majority expect gold prices to decline. Note the chart below indicates the stock market relative to its Q Ratio or replacement cost of asset, a proxy for value.
And sentiment is upbeat:
Going contrary to massive market sentiment is painful, but going where the bargains are greatest will lead to better returns and safety in the long run (2 to 5 years). Depressed prices alleviate a lot of your investment risk while elevated prices (MMM, CLX, and junk bonds) raise your risks.
But risks overall have never been so high due to central bank intervention into the credit markets. Be careful and have a great weekend. I will be back next week.
Capitalism without bankruptcy is like Christianity without Hell.–The Two-Penny Philosopher
Looking back at the numerous pronouncements, the numerous projections Bernanke has made over the years, and it quickly becomes evident that he has seldom been right about anything. ….He has yet to figure out that the present crisis is one not of liquidity, but of solvency. American and European central banks, for ten or fifteen years, supplied too much liquidity to the market. There was too much cheap money available. It led to the housing and consumption bubbles, and when those bubbles burst, the world was left with a credit problem.
Loans today are not unavailable to people who are reasonably solvent; liquidity is not the problem. The problem is that too many people are bankrupt.
Bernanke does not seem to understand this. During the Great Depression, LIQUIDITY was indeed the problem. Thanks to misguided government policies, trade began to dry up, there was no liquidity to support the banks, and the whole system collapsed. Unable to distinguish between liquidity and solvency, Bernanke sees the current crisis as the 1930s all over again.
….But you do not solve the problem of too much debt with more debt. If printing money led to prosperity, Zimbabwe would be the most prosperous country in the world. inflationpics251108
Are You Trying Too Hard? http://greenbackd.com/2013/03/07/do-you-think-you-might-be-trying-too-hard/ A fantastic read–if you only read this, you will do better as an investor!
Loews Adjusted Book Value Analysis (Great blog!) http://brooklyninvestor.blogspot.com/2013/03/loews-adjusted-book-value-update.html
Berkshire Hathaway’s Investments per Share http://brooklyninvestor.blogspot.com/2013/03/value-of-investments-per-share.html
What I am reading now:
Have a Great Weekend!
Think about becoming a member. Remember this is the land of pump and dumps, shady promoters, and desperate managements but also extremely cheap stocks. Beginners need not apply, but if you can read a balance sheet, stick with well-funded companies, see that management is aligned with shareholders, you diversify, and give yourself wide margins of safety, then you can really make a name for yourself—the competition is minimal. Begin with a small portion of your capital. Perhaps spend a year researching and talking to other micro-cap investors through this club to gain an education without “paying too much.”
I just want readers to be aware of all the different ways to find opportunity. This is an entrepreneurial area of investing. An experienced investor may even be able to advise the companies and be a catalyst for value. But if you have never learned about micro-cap investing spend a lot of time studying the companies and managements.
Here is an example of the Micro-cap Club founder’s research on a micro-cap pizza company
…..Any way this might be an area of exploration, just be skeptical and do your own work thoroughly. A big plus, is that you can pick up the phone and speak to managements about how they will allocate capital. To understand how to research micro-cap companies read this post on sleuth investing and scuttlebutt research: http://wp.me/p2OaYY-lV.
Tell us about your adventures in the micro-cap world.
|Click on books and download as you wish|
|Accounting, Investment Banking and Business Analysis books.
But don’t forget to do your reading on history, economics and politics to round out your education. A monkey can do a NPV, but figuring out the assumptions–now that takes a lifetime of study.
|Just Click on the Link Below and Download.
Moyer’s book is my recommendation.
I will be answering some readers’ questions and posting how you can buy $1,500 suits for $50 on Ebay this weekend. Value is where you find it.
Take a Valuation Course from Damordaran:
Also, choose amongst 300 courses here……But don’t let it distract too much from your 10-K readings!
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What a month February has been! We’re welcoming 29 new universities to Coursera. This is an extremely exciting announcement for us, not only because we’re nearly doubling the amount of schools offering courses on our platform, but also because of the diverse learning opportunities that these schools will bring to Courserians around the world. For the first time, non-English courses across many topics will be offered in languages like French, Spanish, Chinese and Italian!
Daphne, Andrew and the Coursera Team | www.coursera.org/team
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