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Performance Panic; WHO are YOU?

Year-End Performance Panic



An unbiased appreciation of uncertainty is a conerstone of rationality–but it is not what people and organizations want. Extreme uncertainty is paralyzing under dangerous circumstances, and the admission that one is merely guessing is especially unacceptable when the stakes are high. Acting on pretended knowledge is often the preferred solution.”   –Daniel Kahneman

But no guarantee of a sell-off, just an indication of extreme momentum. Be fearful when others are greedy.







Not predicting a crash, but note how little risk is priced into many stocks!   Meanwhile, I am SELLING! to buy more gold and bonds.


If you don’t know who you are, this is an expensive place to find out. –Adam Smith in The Money Game

Intelligent Fanatics, The Outsiders, Good to Great


I have been asked to review the above, Intelligent Fanatics.  Please read the above link.   The question I have for readers: “What EXACTLY can YOU learn from these books that you can apply to your investing?  Or are you just reading narratives of past success?  Think about it for awhile, then reply in the comments section.   Then read on……….



good-to-great (Link:Contrary Research)

From Good to Great … to Below Average

Last week, however, I picked up Good to Great by Jim Collins. This book is an absolute phenomenon in the publishing world. Since it came out in 2001, it has sold millions of copies. It still sells over 300,000 copies a year.

The book focuses on eleven companies that were just okay, and then transformed themselves into greatness — where greatness is defined as a sustained period over which the stock dramatically outperformed the market and its competitors. Not only did these companies make the transition from good to great, but they also had the sorts of characteristics which made them “built to last” (which is the title of Collins’s earlier book).


Ironically, I began reading the book on the very same day that one of the eleven “good to great” companies, Fannie Mae, made the headlines of the business pages. It looks like Fannie Mae is going to need to be bailed out by the federal government. If you had bought Fannie Mae stock around the time Good to Great was published, you would have lost over 80 percent of your initial investment.

Another one of the “good to great” companies is Circuit City. You would have lost your shirt investing in Circuit City as well, which is also down 80 percent or more. Best Buy has cleaned Circuit City’s clock for the last seven or eight years.

Nine of the eleven companies remain more or less intact. Of these, Nucor is the only one that has dramatically outperformed the stock market since the book came out. Abbott Labs and Wells Fargo have done okay. Overall, a portfolio of the “good to great” companies looks like it would have underperformed the S&P 500.

I seem to remember that someone did an analysis of the companies highlighted in Peters and Waterman‘s 1980’s classic book In Search of Excellence and found the same thing.

What does this all mean? In one sense, not much.

These business books are mostly backward-looking: what have companies done that has made them successful? The future is always hard to predict, and understanding the past is valuable; on the other hand, the implicit message of these business books is that the principles that these companies use not only have made them good in the past, but position them for continued success.

To the extent that this doesn’t actually turn out to be true, it calls into question the basic premise of these books, doesn’t it?

I suggest that BEFORE you read any of the above books that you

1.) listen to this:

and read this:halo-effect

A review from a reader:

I read “Good to Great” and “Built to Last” some years ago because they were bestsellers and had good reviews. Although I did enjoy reading them, a voice in my head kept asking questions regarding the reliability of the research and findings. After reading “The Halo Effect”, I was relieved and happy to learn that I am not the only person asking these questions.

The world of business is complicated, uncertain and unpredictable. A company’s performance depends upon a variety of factors beyond the actions of its managers. These include currency shifts, competitors’ actions, shifts in consumer preferences, technological advances, etc. The first delusion is the Halo Effect, the tendency to look at a company’s overall performance and make attributions about its culture, leadership, values, and more. Our thinking is prejudiced by financial performance. In good times, companies are praised and their success is attributed to a variety of internal factors. In bad times, companies are criticized and these factors, which may not have changed, are attributed for the failures. The reality is more complicated and dependent upon uncertain and unpredictable factors.

An interesting section of this book is the one on the delusion of absolute performance. Company performance is relative, not absolute. A company can improve and fall further behind its rivals at the same time. For instance, GM today produces cars with better quality and more features than in the past. But its loss in market share is owed to a myriad of factors, including Asian competitors.

This is an excellent book because it will make you THINK. Is an oil company great if its profits soared when oil prices went up? Can the formulas used by successful companies in the 80s or 90s be applied to guarantee success today? A professor once told me that to predict future performance by analyzing past data is like driving a car forward while looking at the rear view mirror. In the appendix of this book there are tables showing the performance of the companies studied in “In Search of Excellence” and “Built to Last”. It is interesting to note the difference in performance in the years before and after these studies.

The author, Phil Rosenzweig, is a professor at IMD in Switzerland and former Harvard Business School professor. He wrote this book to stimulate discussion and help managers become wiser – “more discerning, more appropriately skeptical, and less vulnerable to simplistic formulas and quick fix remedies.” In my case, this book has given me a new perspective on business books.

The following is a brief summary of the nine delusions:

1. Halo Effect: Tendency to look at a company’s overall performance and make attributions about its culture, leadership, values, and more.

2. Correlation and Causality: Two things may be correlated, but we may not know which one causes which.

3. Single Explanations: Many studies show that a particular factor leads to improved performance. But since many of these factors are highly correlated, the effect of each one is usually less than suggested.

4. Connecting the Winning Dots: If we pick a number of successful companies and search for what they have in common, we’ll never isolate the reasons for their success, because we have no way of comparing them with less successful companies.

5. Rigorous Research: If the data aren’t of good quality, the data size and research methodology don’t matter.

6. Lasting Success: Almost all high-performing companies regress over time. The promise of a blueprint for lasting success is attractive but unrealistic.

7. Absolute Performance: Company performance is relative, not absolute. A company can improve and fall further behind its rivals at the same time.

8. The Wrong End of the Stick: It may be true that successful companies often pursued highly focused strategies, but highly focused strategies do not necessarily lead to success.

9. Organizational Physics: Company performance doesn’t obey immutable laws of nature and can’t be predicted with the accuracy of science – despite our desire for certainty and order.

Another lesson to glean is how to read the business press.   Beware of backward-viewing narratives of company success. See cisco-narrative.
You need to truly dig deep into the specific causes of a company success.   Was Wal-Mart a huge success in its growth phase because of the focus and leadership of Sam Walton?  Sure, perhaps, but that doesn’t tell you much.   How will you find the next Sam Walton?   How did Wal-Mart have such success against bigger competitors such as K-Mart in its early history?  You need to dig deeper!
We will discuss further in the next post.

Back to the Future; NCAV Strategy

The Financial Report

By Janet Tavakoli

The Great Gold Conspiracy of 1869

William Worthington Fowler’s Twenty Years of Inside Life in Wall Street or Reflections of the Personal Experience of a Speculator is a joy to read.  (I second that opinion).

Twenty Years of Inside Life in Wall StreetFowler’s ripping yarn covers the New York traded markets from 1860-1880, a period that spanned the Civil War, the post war bubble, worthless paper money, the Black Friday Gold Panic of 1869, the Great Panic of 1873, and the consequent first and worst seven year Great Depression. Fowler witnessed how U.S. government paper money replaced specie leading to bubbles, panics, and crashes. It is time to revisit Fowler’s classic. Our current crisis is much more similar to the crash of 1873 and the first Great Depression than the 1929 crash and Depression. History repeats itself, especially in finance.

Conspiracies “R” U.S.

Fowler met the most influential financiers of the day including Jay Gould, James “Diamond Jim” Fisk, Jr., Cornelius Vanderbilt, Jacob Little, Daniel Drew, Leonard Jerome, Addison Jerome, David Groesbeck, and Henry Keep. Their fortunes rose and fell on margin, carry, and derivatives including puts, calls, and futures. They risked everything speculating in equities and a wide range of commodities including gold, silver, cotton, and more. Fowler’s tale entertains as he exposes the great corners, trading rings, conspiracies, bear twists, manipulations, and frauds.

Main stream media sometimes suggests that conspiracies are only for anonymous people who lurk on the internet, or people who send you poorly written emails from yahoo accounts. But conspiracies are as American as apple pie. One of my favorite conspiracies is The Great Gold Conspiracy of 1869. Fowler provides details of the New York financiers who cooked that one up.

“Here, sitting at their ease, surrounded by luxury, in a magnificent apartment, with shrewd lawyers at their elbow, two confederates plotted The Great Gold Conspiracy of 1869, and coolly organized the ruin of thousands.”

“From April, 1865, to September, 1869, a period of more than four years, the movements of gold had been brought about by artificial means, in conjunction with commercial causes, or rather pretexts. The price of Government Bonds abroad, wars or rumors of wars in Europe, disturbances of trade, the shipments of the precious metal in payment of our imports, sales of gold by our government; these and a thousand other strings were harped upon by the gold gamblers to produce those singular upward and downward oscillations in the price, which enriched the members of the Gold Board, while they disturbed the peace of commerce and beggared a host of infatuated outside dealers.”

“Wall Street, like history, repeats itself. Every summer, since 1865, there had been a rise in gold. In March, 1869, gold fell to 131. The astute intellect of Jay Gould now foresaw another opportunity to push up the price of gold, and having purchased $7,000,000 of it, by playing on the strings of the Cuban insurrection, the Alabama difficulties, the prospect of a war between France and Prussia, etc., terrified the bears and rushed up the price to 145. Emboldened by the success of this move, he formed a new and daring scheme.”

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An intelligent strategy for some of us

Seek Out the Opposing View; Passive Investing


Ganging up on Gold

Because I hold gold related investments, I always seek out the opposing views to test my thesis.  On the recent 5% fall in gold, a chorus of bears came out.

Natixis offers three main arguments for this call, only one of which makes sense, at least “technically”, if you will:

“For 2017 and 2018, we think that the biggest factor influencing the price of gold is the expected path of U.S. interest rate hikes,” the analysts said. “Also, we do not expect further rate cuts by the [European Central Bank] or [Bank of Japan] as this is likely to damage their banking system especially in the case of Europe.”

Natixis economists are expecting to see the Federal Reserve raise interest rates by 25 basis points three times next year: June, September and December.

Not only will higher bond yields raise gold’s opportunity costs but they will also boost the U.S. dollar, providing another headwind for the precious metals, the analysts explained.”

So when you read the above, always ask for theoretical and empirical evidence of the authors claims.  Is there any long-term correlation between US interest rates and the dollar price of gold?  And why?   More here: Ganging up on gold

Some negative comments on gold is spot-on like


More perspective……………..





Passive Investing

……The most successful professional investors like Warren Buffett, Paul Tudor Jones, John Templeton, George Soros and Jim Rogers, know this well. Their methodologies are even built upon the idea that an intelligent investor can get ahead by taking advantage of those times the crowd becomes irrational, the antithesis of the EMH and MPT.





Search Tool to use words in OTC filings

A Reader’s Question on Modelling (Munger and Buffett’s View)



Just wanted to shoot you a quick email applauding you for putting together the “Ultimate Investor Checklist.”  investment_principles_and_checklists_ordway This may be the most valuable word document I have on my computer.


Quick question, I’m a huge fan of Charlie Munger (currently am reading Poor Charlies Almanack)- In the checklist when he describes being a business owner Charlie says:

      • Ignores modeling forecasts for the next quarter, next year, or next ten years.
      • Ignores forecasting completely. (Search through this link on Munger’s Mental Models.

If Charlie Ignores modeling and forecasting, how does he go about estimating Intrinsic Value? I know Charlie has said in the past that he has never seen Warren Buffett use DCF, so how do they go about estimating Intrinsic Value?

John Chew: A good question.  First, a model is not reality but a metaphysical description of reality.   You probably should build a simple spread-sheet of sales, capex, taxes, etc. to understand the economic model of the business you are looking at–we are not all geniuses like Buffett or Munger.

But rather than have me say what I think Buffett would say, read the source. Note his analysis of Coke and Sees Candies:

Buffett_Lecture_Fla_Univ_Sch_of_Business_1998  Hope that helps!

Arbitrage by Buffett_Research  (just for Buffaholics)

JOB OPPORTUNITY at Value Fund/RISK  Book Mark this site (Risk)


Good luck!


The Search Process

Manual of ideas

There has been a good discussion on the search process from several members of the Deep-VAlue Group at Google Groups.   Join so you can learn and share with them. then follow the link in that post.

Here is part of the discussion


There’s more than one way to skin a cat, so I’m curious how others decide on where to focus their initial research efforts. 

Do you start with an industry you’re familiar with or have an interest in? Do you go off of recent news? Do you look at 52 week lows and go from there? Do you look at insider trades first and go from there?

This is a great question.  I’m an amateur (who hopes to someday go pro!).  I usually get my initial ideas from other investors.  I spend a lot of time reading investment theses.  If I like the company and its competitive position, I add it to my watch-list, then perform my own regular research updates.  Blogs, investment pitches for conferences, podcasts, magazine articles – all are great resources to discover new companies which have attractive economic characteristics.

An example is Input Capital, a canola streaming company based in Canada.  I initially heard about the company from reading a blog article, approximately 18 months ago.  The article piqued my interest, and from there I begun to conduct my own research.  Over the course of the 18 months, I gained an understanding for the business and drivers of value.  Then, in Nov. 2015, the price dropped over 40% in one day when it was revealed that 3 contracts were defaulted upon.  I updated my research over the weekend, talked to management, then made it my largest position.

The danger of sourcing ideas on other’s work is that you may not do your own.  But I think it can be a greater starting point for sourcing ideas, especially smaller, boring companies with little news or analyst coverage.  Just make sure you resist the temptation to get lazy.  I’ve gotten burned on that when I began investing in companies and not just ETFs.  It was JC Penny.  My investment was based on reading far too much into Ackman’s thesis and doing far too little of my own research.  I made the mistake of confusing the number of slides with the quality of research.  Not once did I, or Ackman for that matter, ask if JC Penny’s customers LIKED used coupons and buying items on sales.  Neither of us did the necessary “scuttlebutt” of actually *GASP* talking to JCP customers.  Lesson learnt: retail investing is a lot like political campaigning, it’s all about the ground game.

Hey all,

This is a great thread. I do a lot of what Ian talked about, but recently have started feeling that just reading investment pitches all day long isn’t the best idea. Not saying it shouldn’t be a serious tool in your arsenal, just I feel I need more balance. The old fashion way of just researching companies and industries where one can remain unbiased by outside opinion helps me recalibrate. Being able to maintain independence of thought is critical in investing. This might be obvious to some, but I figured I’d put it out there to see what the group thought.

We also need to a thread on investment process, a subject that is really fascinating to me. It’s an very individualized process that still can be honed by ideas from other investors.

Mr. Munger/Mr. Buffett would suggest that you start with the A’s and white-knuckle yourself through the 2,500 companies in Value-Line and Small-cap Value-Line.  Any major library in the USA should have it online. Better yet, page through the hard copy at the library. The_In-Depth_Guide_to_Reading_a_Value_Line_Research_Report  Now, many overseas readers may not have access to such a database, but some stock exchanges provide lists of companies.

Search is tied in intimately with your investment process which should contain:

  • Search
  • Valuation
  • Risk Management
  • You

Starting out with Value-Line is a great idea for a new investor. Eventually, you will have about 150 companies that are worth watching.

You can eliminate (with practice) many within seconds, but you will

  1. find unusual opportunities that may not be picked up by screens.
  2. build a wish list.  I would love to buy BCPC (Balchem) 35% lower. Ditto with CFX
  3. you build up a knowledge base in your head of various industries and the general financial metrics to compare.
  4. You can come up with your own investment ideas vs. being a late herder into ideas.

A full discussion is here: THE SEARCH PROCESS

Go where it is cheapest:


For you non-drummers out there–did you pick up the Charlie Watts pattern? or view the legend:


“Answers” to Hedge Fund Analyst Quiz on Gold


We pick up from we were last:

Analytical point #1: CPI is a meaningless measure to determine the future dollar price of gold.  CPI is an arbitrary government statistic. You are comparing gold in US Dollars (apples) with an index of oranges, grapes, raisins, etc.)

You must have mentioned this to stay employed at Ackman’s hedge fund.

CPI vastly understates monetary debasement Think Differently About Purchasing Power

The Futility of Price-Inflation Measurements

The practical problems with price indexes such as the CPI are the issues of which prices are to be measured and what “weights” will be assigned to what goods. Another problem is deciding what to do about changes in quality. For example, what do you do when Apple introduces a new and improved iPhone at the same price as the previous version?

To deal with this, government statisticians systematically increase the weights for goods that are going down in price and reduce the weights of things are going up in price. If the quality of a good goes up, the statisticians “hedonically” reduce the price of the good.

Those sorts of adjustments do not seem fair to most normal people. If you are eating more ramen noodles and fewer lamb chops you can take little comfort in the fact that that the CPI is staying inside the Fed’s target range. Moreover, under the system of hedonic adjustments, every time entrepreneurs and engineers come up with better products for consumers at lower prices, the Fed takes credit for keeping inflation under control.

Why hasn’t the CPI picked up since 2008?

The first thing to keep in mind is that the CPI is not an economic variable. It is a statistic that at best gives an inaccurate picture of an economic phenomenon: inflation. To calculate the monthly CPI, the US Department of Labor takes a weighted average of prices of various things that consumers purchase, and then its statisticians try to figure out the various proportions of different items in a “mythical” household budget. For example, the statisticians may hold that housing costs are 30 percent of household expenditures, food costs 20 percent, gasoline another 15 percent, and so on.

Analytical point #2: Gold maintains its purchasing power over

L O N G periods of time. Gold is the “golden constant” (Jastram).  Look at research over the past 600 years: : RoyJastram-TheGoldenConstant

Jastram arrived at four conclusions:

  • Gold is a poor hedge against major inflation. (Jastram finished his book in 1977, only 6 years after the link between gold and the dollar was broken. For the period prior to 1971, gold was fixed in price to the US dollar or British Sterling.
  • Gold appreciates in operational wealth in major deflations. Of course if gold is money (it is!) then it should appreciate relative to the goods it can be exchanged for.
  • Gold is an abysmal/ineffective hedge against yearly commodity price increases.
  • Nevertheless gold maintains its purchasing power over long periods of time. This is not because gold eventually moves towards commodity prices but because commodity prices return to gold.

In contrast in the late twentieth and early twenty-first century it was the market price of old which adjusted so that the purchasing power of gold relative to general prices returned to a constant.

Other main points to glean are:

  • Gold is money – J.P. Morgan
  • Gold maintains its purchasing power over decades but not necessarily year-to- year.
  • Gold at the “Attila effect.” Jastram points out that throughout history men and women have turned to gold in times of distress, whether political, economic or personal.  Gold is sought for two basic needs: the imperative to survive and to be secure; and the desire to possess and enjoy beauty.
  • Gold, unlike all paper-based assets, is no one’s liability. It therefore has a near-unique “safe-haven” quality since its value cannot be eroded by any declining of the creditworthiness of its issuer unlike fiat currencies.

In choosing the title The Golden Constant, Jastram did not imply that there was an absolute mathematical rule to which the purchasing power of gold adhered, but rather that gold exhibited the qualities of constancy in a wider sense. The fact that gold is almost immune to corrosion, rust or decay is one element of this. The metal has an enduring attraction for humankind. Also, the purchasing power of gold, while in fluctuation, returns over the centuries and in different countries to a broadly stable level is testament to all these elements of its constancy.  How many grams of gold to purchase cattle in Rome vs. today in Cedar City, Utah?  Not much difference despite the thousands of years of time and the different local.

You then advise Ackman that if investors lose faith in Central Banks’ ability to manipulate both credit and investors, then gold might be a safer place to hold wealth than dollars.  You then instruct Mr. Ackman to carefully view this video.

In all seriousness, you should have learned two concepts:

Be careful in comparing data sets.  CPI is useless.

If you choose to research an asset or money, then study ALL its history. Don’t look at just the most recent past.

READINGS   Follow the links!

The key to booms and busts




Video of The Fed at Work


Federal Reserve members at work