Gold making history as October and December contracts tip into backwardation
Gold making history as October and December contracts tip into backwardation
Bruce Murison* contacted me (Toby Carlisle of www.Greenbackd.com) at the start of June with an interesting proposition: He would open a dedicated account to trade the Acquirer’s Multiple All Investable Stocks Screen and post his strategy and results on the site. He thought knowing there was a public eye keeping him on the straight and narrow might assist with his discipline (the same reason I launched Greenbackd in 2008). He wondered if a real time, real money account tracking the acquirer’s multiple’s performance would be interesting to readers of the site. I of course leapt at the opportunity. Bruce hopes that his project might encourage outside the box thinking and maybe lead to others posting their strategies and ideas that could become an interactive community of users. Here begins Bruce’s first post in what I hope will be a long series:
I am dedicating a $25,000 real money account to trade stocks ranked favorably according to The Acquirers Multiple (TAM). Every stock will be chosen and traded according to these rules:
Click here if you’d like to see a current list of deeply undervalued takeover and activist targets using The Acquirer’s Multiple® (it’s free!), subscribe to The Acquirer’s Multiple® or connect with me on Twitter, LinkedIn or Facebook.
Thanks to the GREAT Toby Carlisle whose books, videos and dark sense of humour are an inspiration to all.
QUESTION to all:
Will screening out the companies that may or could go bankrupt (the ones with the worst financial metrics) but are the cheapest hurt performance. Why are money losing net/nets generate better returns AS A GROUP than money making net/nets. Example: Energold (EGDFF).
How to become a better investor: https://youtu.be/eFsF0Z9EKDg
Do you agree/disagree? Why?
HAVE A GREAT WEEKEND. I will be on the road until Monday.
I have been too busy to do another lesson but be ready next week! For those attending the Berkshire Hathaway Meeting in Omaha enjoy the experience. Flash your Deep-Value Group card for up to 95% discounts.
HAVE A GREAT WEEKEND!
I hooked up my accelerator pedal in my car to my brake lights. I hit the gas, people behind me stop, and I’m gone. Steven Wright
The Endless Search for Value
I know we have lessons to complete in Quantitative Value, but I also use this blog as a poster board to refer back to when assessing events, thoughts, and ideas.
After spending four hours groping through the Value Line’s 2,000 companies, I don’t find much of interest besides the uglies of Russian and Brazilian stocks, coal, uranium, silver and gold miners. Most readers here are too refined even to think of investing in such cyclical companies. What would your Momma say?
I find the relentless buying by insiders in small mining stocks to be interesting while corporate insiders in other companies want cash now and not stock. For example, https://www.canadianinsider.com/node/7?ticker=LYD
Here is a company just pulled at random from Value-Line:
We don’t know when the movie ends, just that it will end badly.
Wow, well said and rare. Doubt if control grid mainstream media will be having this white hat on the air. Orioles Executive Vice President John Angelos, son of majority owner Peter Angelos:
“Speaking only for myself, I agree with your point that the principle of peaceful, non-violent protest and the observance of the rule of law is of utmost importance in any society. MLK, Gandhi, Mandela, and all great opposition leaders throughout history have always preached this precept. Further, it is critical that in any democracy investigation must be completed and due process must be honored before any government or police members are judged responsible.
That said, my greater source of personal concern, outrage and sympathy beyond this particular case is focused neither upon one night’s property damage nor upon the acts, but is focused rather upon the past four-decade period during which an American political elite have shipped middle class and working class jobs away from Baltimore and cities and towns around the U.S. to third-world dictatorships like China and others.
The outcome plunged tens of millions of good hard-working Americans into economic devastation. Then they followed that action by diminishing every American’s civil rights protections in order to control an unfairly impoverished population living under an ever-declining standard of living and suffering at the butt end of an ever-more militarized and aggressive surveillance state.
The innocent working families of all backgrounds whose lives and dreams have been cut short by excessive violence, surveillance, and other abuses of the Bill of Rights by government pay the true price, an ultimate price, and one that far exceeds the importance of any kids’ game played tonight, or ever, at Camden Yards.
We need to keep in mind people are suffering and dying around the U.S., and while we are thankful no one was injured at Camden Yards, there is a far bigger picture for poor Americans in Baltimore and everywhere who don’t have jobs and are losing economic civil and legal rights, and this makes inconvenience at a ball game irrelevant in light of the needless suffering government is inflicting upon ordinary Americans.”
We will be looking at accounting metrics to screen out value traps, so I thought some may wish to read: Can-the-piotroski-f-score-also-improve-your-investment-strategy
As an example, if you want to invest with more (RELATIVE) safety in the cyclical oil service business, you would want a company like this: RPC Inc (RES)
Note balance sheet and good operating metrics. It doesn’t mean that RPC, Inc. can’t go materially lower in price, just that the company has a high probability of surviving through this down cycle compared to competitors.
Silver-to-$60 (video during 2011 Silver Mania)
Dollar to Euro Parity (video during 2015 Dollar Mania/Panic)
Beware of “experts.”
We were unable to discover any ‘magic’ qualities associated with stocks selling below liquidation value. — Joel Greenblatt (How the Small Investor Can Beat the Market)
Enterprise Multiple = Earnings before interest, taxes, and depreciation & amortization, (“EBITDA”) divided by Enterprise Value (“EV”).
We need to understand the use of EBITDA, Why we must use EV, and the requirement to use pre-tax owner’s earnings or EBITDA – maintenance capex (“MCX”).
Placing EBITDA into Perspective (from the prior post) Suggested reading
EV The Price of a Business Understanding and calculating EV. Suggested reading
Beginning lesson on Enterprise Value for beginners (Video, Khan Academy)
Pop Quiz: Why do you include minority interests with EV?
Why you use Enterprise Value (Review)
Minority Interests (Review)
Chapter 9 EV Multiples Only if you dare. Heavy reading. Voluntary.
Let’s tackle really grasping the use of EV, EBITDA, and EBITDA – MCX
I will also send out the Little Book via email as supplementary reading for this chapter.
Enron-Case-Study-So-What-is-It-Worth My walk-through. I go straight to the balance sheet then calculate the returns on total capital in the business. These financial statements were easy to discard because of the size of the business and the poor returns. My estimate of $5 to $7 per share worth or 90% less than the current share price, was wrong. The company was worth $0. This is more a case of institutional imperative and incentive-based bias. Wall Street was feeding at the financial trough to keep raising money for Enron (to keep the bad businesses afloat) so guess what the financial analysts (CFAs and MBAs) suggested? Buy! I guess the market is not ALWAYS efficient.
Forget accounting scandals, this was a crappy business based on trading so no way to determine normalized earnings. When I was in Brazil and saw Enron’s newly-built generating plant sitting idle, I asked why. A project developer said he got paid by doing deals by their size not profitability, therefore, the bigger the white elephant, the better. When I called mutual funds who owned Enron as it was trading $77 per share to ask the analyst if he/she was aware of Enron’s declining businesses coupled with absurd price, I was told to shut up. As one analyst (Morgan Stanley?) told me, “I only believe what I want to believe and disregard the rest.”
The above august panel never answered why anyone would give capital to Enron? No one mentions the elephant in the room. Sad.
What does the above case have to do with net/nets and our course. Everything! Look at the numbers, think for thyself, ignore Wall Street, and be aware of incentives. Buying bad businesses at premium prices is a guarantee of financial death.
This is an aside, but based on the above Enron example, does value investing serve a SOCIAL purpose or benefit? Prof. Greenblatt doesn’t think so–you are just trading pieces of paper, but what do YOU think?
See these two venture capitalists explain the social purpose of their business:
h We will discuss Sanborn Map (more of an asset investment) and See's Candies (a franchise) next. As a supplement to Chapter 3 in Deep Value, you have the early Buffett Partnership Letters and the Essays of Warren Buffett. You have a business and investing education right there. Let's look closer at Buffett's discussion of "Cigar-butt" investing. Since Buffett wrote this letter in 1989, has he ever gone back to deep value investing? Imagine Ben Graham reading this passage. What would he say to Warren? What Would Warren Buffett Suggest to a New Investor Starting Today: Buffett - Student Discussion of Investment Style Thanks to a student contribution! http://www.berkshirehathaway.com/letters/1989.html Mistakes of the First Twenty-five Years (A Condensed Version) To quote Robert Benchley, "Having a dog teaches a boy fidelity, perseverance, and to turn around three times before lying down." Such are the shortcomings of experience. Nevertheless, it's a good idea to review past mistakes before committing new ones. So let's take a quick look at the last 25 years. o My first mistake, of course, was in buying control of Berkshire. Though I knew its business - textile manufacturing - to be unpromising, I was enticed to buy because the price looked cheap. Stock purchases of that kind had proved reasonably rewarding in my early years, though by the time Berkshire came along in 1965 I was becoming aware that the strategy was not ideal. If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long- term performance of the business may be terrible. I call this the "cigar butt" approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the "bargain purchase" will make that puff all profit. Unless you are a liquidator, that kind of approach to buying businesses is foolish. First, the original "bargain" price probably will not turn out to be such a steal after all. In a difficult business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen. Second, any initial advantage you secure will be quickly eroded by the low return that the business earns. For example, if you buy a business for $8 million that can be sold or liquidated for $10 million and promptly take either course, you can realize a high return. But the investment will disappoint if the business is sold for $10 million in ten years and in the interim has annually earned and distributed only a few percent on cost. Time is the friend of the wonderful business, the enemy of the mediocre. You might think this principle is obvious, but I had to learn it the hard way - in fact, I had to learn it several times over. Shortly after purchasing Berkshire, I acquired a Baltimore department store, Hochschild Kohn, buying through a company called Diversified Retailing that later merged with Berkshire. I bought at a substantial discount from book value, the people were first-class, and the deal included some extras - unrecorded real estate values and a significant LIFO inventory cushion. How could I miss? So-o-o - three years later I was lucky to sell the business for about what I had paid. After ending our corporate marriage to Hochschild Kohn, I had memories like those of the husband in the country song, "My Wife Ran Away With My Best Friend and I Still Miss Him a Lot." I could give you other personal examples of "bargain- purchase" folly but I'm sure you get the picture: It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Charlie understood this early; I was a slow learner. But now, when buying companies or common stocks, we look for first-class businesses accompanied by first- class managements. o That leads right into a related lesson: Good jockeys will do well on good horses, but not on broken-down nags. Both Berkshire's textile business and Hochschild, Kohn had able and honest people running them. The same managers employed in a business with good economic characteristics would have achieved fine records. But they were never going to make any progress while running in quicksand. I've said many times that when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. I just wish I hadn't been so energetic in creating examples. My behavior has matched that admitted by Mae West: "I was Snow White, but I drifted." o A further related lesson: Easy does it. After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them. To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers. The finding may seem unfair, but in both business and investments it is usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult. On occasion, tough problems must be tackled as was the case when we started our Sunday paper in Buffalo. In other instances, a great investment opportunity occurs when a marvelous business encounters a one-time huge, but solvable, problem as was the case many years back at both American Express and GEICO. Overall, however, we've done better by avoiding dragons than by slaying them.
Course Materials Have Been Updated Here:
Read chapter 3 in DEEP VALUE and Dempster Mills Case Study (Buffett)
Have a good weekend.
Our goals in this course are to learn about investing, especially deep value investing through the book, DEEP VALUE by Toby Carlisle and supplemented by Quantitative Value by Toby Carlisle. Also, many original source readings will be provided to clarify and deepen our understanding of the primary readings. Also, we wish to be skeptical, independent thinkers who prove to ourselves what works and makes sense. We will be open to disconfirming evidence. We will question and help each other learn.
Below are the links in chronological order. The REQUIRED readings are in BOLD. Everything else is supplementary, but I hope you dig even deeper into the concepts and ideas.
OK, so after the chaos of postings and all the videos, you SHOULD have read:
The Preface and Chapter 2 in Deep Value by Tobias Carlisle (primarily supplemented by Chapters 1 & 2 in Quantitative Value). That’s it! All the other material is simply if you wish to go further or want greater understanding and reinforcement. For example, a student asked me what cost of capital would I use to discount the royalty earnings in the Munsingwear case study. If you dug into Margin of Safety by Seth Klarman, he would say to use your required rate of return. Try to find the answers from the investing greats and then determine if it makes sense to you. You should answer for yourself whether the returns to net/nets are due to higher risk or behavioral biases of other investors. Pose questions in the comment section of the blog if you have thoughts or other ideas.
You should after those readings have an understanding of why net/net investing generates superior performance. The returns are generated by the behavioral flaws of other investors. We should understand the concepts of Mr. Market and Margin of Safety. Investing is simple but not easy. Often temperament trumps IQ.
Next to read will be Chapter 3 in Deep Value.
There will be a review of the readings in another post. Our goal is to move DEEPLY and slowly through the readings. If you will notice all the other supplementary readings like Seth Klarman’s Margin of Safety, the Intelligent Investor, the SSRN research are from the footnotes of DEEP VALUE or Quantitative Value.
At the end of the week I will send out a zipped folder containing the books and materials collected for this course. Relax and don’t panic if you don’t have a book. I will email the folder to everyone in the Deep-Value group at Google.
I am sorry for the confusion, and I will strive to clarify.