Category Archives: Uncategorized

Capitulation Part III

Scarcity rising

Gold making history as October and December contracts tip into backwardation

See https://monetary-metals.com/why-are-we-here/ and Gold Slammed Again

gold chart Geopert

spy commodities

twitter gold

Least Bullish

gold stock analogsDeepest Bear Market Ever in Terms of Price and Time?

Highest volume day ever

http://www.businessinsider.com/now-is-the-time-to-get-greedy-in-gold-2015-7

Sales Decline for SP 500 SP500-vs-CRB-Commodity-Index

 

hy vs stocks

 

The Acquirer’s Multiple Investment Plan

 Miranda

A Mechanical Investment Plan Using The Acquirer’s Multiple

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:

http://acquirersmultiple.com/2015/06/a-mechanical-investment-plan-using-the-acquirers-multiple/

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?

The Pampas precedent – Woodford Funds

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HAVE A GREAT WEEKEND. I will be on the road until Monday.

 

Prof. Greenwald on Value Investing

OVERVIEW Value_Investing_Slides

Greenwald_2005_Inv_Process_Pres_Gabelli in London

Greenwald Overview of VI

A Value Investing Class in Three Minutes

sentiment_cycles
Buying High

Next Week

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 See Dead People

Dead people

https://youtu.be/QUYKSWQmkrg

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

http://wolfstreet.com/2014/09/23/what-are-corporate-insiders-seeing-that-makes-them-dump-their-shares-like-this/

 Here is a company just pulled at random from Value-Line:

CPST_VL There is always hope   Value or Death Trap?  Going up the capitalization scale doesn’t help either: CRM The profits will come tomorrow. intc Will the bad news be priced in?

Where is the value 

Fair value on the S&P 500 has three digits

We don’t know when the movie ends, just that it will end badly.

Good Reading

https://www.santangelsreview.com/2014/06/16/interview-with-2014-ira-sohn-contest-winner-michael-guichon/

http://alephblog.com/

http://brontecapital.blogspot.com

 

A WHITE HAT’S STATEMENT ON BALTIMORE RIOTS

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.”

Can the Piotroski F Score Improve Your Investment Strategy?

Bar

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.

 Market Psychology

Silver-to-$60 (video during 2011 Silver Mania)

Dollar to Euro Parity (video during 2015 Dollar Mania/Panic)

Beware of “experts.”

Lesson 4: The Acquirer’s Multiple

End nearWhat happens if you get scared half to death twice?  –S. Wright

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.

Good luck.

Enron Case Study Analysis. Ask Why? Why?

Enron3

Case-Study-So-What-is-It-Worth    Prior Post where students discussed the case.

Turn up the VOLUME: Don’t believe the …..?

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.”

Enron Annual Report 2000  Ha, ha! and Is Enron Overpriced?

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:

Cigar Butt Investing. Graham and Buffett Discuss

cigarette
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.

Subjective Value:

http://www.learnliberty.org/videos/subjective-value/

Deep Value Course Materials (Updated)

cattle drive

 

Course Materials Have Been Updated Here:

https://www.hightail.com/download/UlRRN3RVdGp0TWx1a3NUQw

Read chapter 3 in DEEP VALUE and Dempster Mills Case Study (Buffett)

Have a good weekend.   

Course Review/Index to Date

Revolutionaries

Course Review

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.

  1. Toby Carlisle talk on DEEP VALUE Investing at Google (This was a preview/introduction to the course)
  2. Introduction to the course and book DEEP VALUE
  3. Lesson 1 Read PREFACE in Deep Value, Margin of Safety chapter in Intelligent Investor, Mr. Market and Behavioral Investing The first REQUIRED readings (Preface in Deep Value book (required), then supplemented by the other three readings.
  4. Lesson 1 Emergency Crash Landing The purpose of this post was to show the element of character, temperament, and training to maintain a process in the face of extreme stress. Investing is more about discipline and character to stay with the right process than IQ.
  5. Announcement that Margin of Safety by Klarman was emailed to participants
  6. Announcement that Value Investing by Montier was sent out as a supplement reading
  7. Rodney Dangerfield Video about Questioning Traditional Concepts, Deep Value Author Lectures
  8. Review of readings, a video of a deep value and activist investor valuing a company and an activist in action from Other People’s Money Munsingwear Case Study provided to test students’ ability to approach a business problem.
  9. An example of paying a huge premium for net asset value or What NOT to do as an investor
  10. Major Reading Assignments, Chapter 2 in DEEP VALUE book, Graham and Net/nets, liquidation value The institutional imperative was introduced. As deep value investors we feast on the errors of others due to cognitive biases or the institutional imperative (We can’t hold this poor performing stock because what would the client think?) I emailed out the books Security Analysis and Intelligent Investor to all in the course.
  11. Hannibal Lecter lecture on how to do the readings-Simplicity Try to focus on the main points and how you can apply them. Humor 
  12. How to join Deep-Value group at Google I ask enrollees to join to make communication easier.
  13. Videos on search and Net/Net Investing. This post supplements your reading in Chapter 2, DEEP VALUE
  14. Munsingwear Case Study Analysis See #8 above.
  15. Supplementary Original Source Documents for Chapter 2 DEEP VALUE See #10 above. Net/Net research and Graham’s testimony to Congress, Liquidation of American Businesses in 1932—Are Companies Worth More Dead Than Alive by Graham.
  16. httpAnalysis of Liquidation Valuation from Klarman’s Margin of Safety book in Chapter 8 (Valuation) Supplement to Chapter 2 in DEEP VALUE
  17. Supplementary Readings: Buffett Partnership Letters and King Icahn emailed. Next reading assignment will be Chapter 3 in Deep Value book.

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.