Category Archives: YOU

Reader’s Q: Would Graham Consider SHOS (Sear’s Hometown) a Net/Net?

Homestores(SHO-11.01.14-10Q _Final

If we take all the liabilities of $236.576 mil. and deduct from Current Assets of $524.238 = $287.662 mil of net working capital then divide by 22.666 million outstanding shares to have $12.68 per share of working capital minus all other liabilities and leaving out other assets.  Klarman used net-net working capital as  approximating the liquidation value of a company–See Chapter 8 in Margin of Safety.  So current assets minus (current liabilities + all long-term liabilities) = net-net working capital.

big (2)

Today the price of SHOS is under $12.68 or $11.90, so yes, the price is trading below net working capital per share, but Graham would not pay more than $8.46 for SHOS given his penchant for a margin of safety of paying no more than two-thirds of net working capital.  Obviously, investors might be concerned with falling same-store sales. On the flip side, deep value investors may see comfort with asset value and the type of inventory.  Note, that there have been a few well-known deep value investors stepping in 3/Q 2014 like Chou Associates (the Canadian Deep Value Investor) Chou Associates Management-inc-top-holdings/ and video lecture: Guest_Speakers/2009/Chou_2009.htm (worth watching).

The above isn’t a plug for investing in SHOS, but pointing out how I think Graham would view investing in the company.

Advice from Wall Street

The third phone call I made that day was to the brokerage handling the stock offering, Montgomery Securities in San Francisco. The institutional salesman there who had recommended the stock was named Rick. Like just about everybody else at Montgomery, Rick was an aggressive pitchman. The word bulldog gets thrown around a lot, but I don’t think that quite captures the level of mindless tenacity the brokers at Montgomery brought to their work. Picture an angry hyena that hasn’t eaten in a couple of days. Now picture someone throwing a bloody porterhouse in front of it. That is how hard these guys sold their deals.

After I introduced myself, I told Rick about the research I had done and informed him as courteously as I could that I would not be recommending the stock.

“The bank is on the verge of insolvency,” I explained. “If they are this new company’s main customer, that is not going to be good for their earnings or their share price.”

Rick barked into the phone, “How old are you, kid?”

I swallowed hard and replied, “Twenty-five.”

“You’ve got a lot to learn,” Rick growled. “Nobody stops me from collecting a commission. I’m not going to waste my time talking to you. I ‘ll call your boss first thing in the morning.”

The line went dead. I stared at the receiver in disbelief. I didn’t understand d what had just happened. I had informed a representative of a prestigious, well-respected brokerage that a stock they were offering had significant downside risk. I had assumed that he would be grateful for my insights, or at least interested in what I had to say. Instead, he had acted like I had belched in his ear.

In reality, Rick was right: I did have a lot to learn. The idea that someone on Wall Street would give a damn about the truth or doing the right thing by his clients was almost laughably naïve.

…….After thirty years of doing this (analyzing investments and managing money), I can tell you in no uncertain terms that buying stocks on the word of so-called experts in the single biggest mistake an investor can make. … This misplaced faith in Wall Street whizzes is a symptom of a much larger and more destructive problem in the investment world: The cult of the guru. Investors of all types–from fund managers to day-traders to mom-and-pop savers hoping to boost their 401(k) accounts –are constantly looking for a market messiah, someone who’s figured out–once and for all-the magical formula for how to beat the Street. It is an understandable but self-defeating desire, because the people who actually possess these kinds of insights almost NEVER SHARE THEM. (from Dead Companies Walking (2015) by Scott Fearon)

BOILER ROOM: I Became a Stock Broker

Thinking Differently (Money Ball); Munsingwear Analysis

BREAKING BIASES



I HIGHLY recommend you go see Money Ball or read the book by Michael Lewis.  A metaphor for deep value investing.

Case Study – Munsingwear Analysis Q&A

Who earned their wingtips?  That case was about approaching the problem as a business person.  First you had to notice the two businesses, then break them out. Stop the bleeding, then leave the rest.  Often, the smartest students struggle to resurrect the uncompetitive business. (Buffett at Berkshire Hathaway!)

Next, I will post some questions and supplementary readings for Chapter Two in DEEP VALUE (the book) over the weekend.

Enjoy your Weekend!

Reading Assignments; The Institutional Imperative

ThOdysseusAndSirensWaterhou

All Enrollees in the DEEP VALUE COURSE should have been emailed Security Analysis and The Intelligent Investor.

Please read Chapters 42 – 45 (on the Balance Sheet). Especially focus on Chapter 43, Significance of Current Asset Value in Security Analysis, (pages: 548-613)

Read Chapter 15 in the Intelligent Investor (pages 376-402)

Chapter 22, Graham’s Net-Nets: Outdated or Outstanding in Montier’s Value Investing,  (Pages 229-235)

Chapter 2, Contrarians at the Gate in Deep Value, (pages 19 -34)

Chapters 1 & 2 in Quantitative Value (pages 3 – 59)

A total of about 168 pages.   This is to give you an early start for next week.  If you are short on time, then just read Ch. 2 in DEEP VALUE. 

If you didn’t receive any of those books, then 1) check your spam folder, 2. email me at aldridge56@aol.com with the title BOOKS and what you are missing.  3. if you receive an email with material that you have already received, then ignore/delete.

The Institutional Imperative
Sometimes institutions get caught up in the moment as well.  A company I used to work for held the Fairholme fund in two separate strategies in 2010.  At the end of 2010 I was able to convince the group to completely sell out of the fund in the smaller strategy, but it remained in the larger strategy.  In 2011, the Fairholme fund lost about 32% when the S&P 500 was up 2%.

fairx

At the end of 2011 I (the author of this article, link below) was able to convince the group to add the Fairholme fund back to the smaller strategy, but was unable to convince them to even maintain its weighting in the larger one.  Instead the group decided to cut the allocation in the larger strategy in half, despite my objections.  The argument was that the volatility and amount of underperformance (What about Regression to the Mean?) was too great.  The amount of underperformance was one of the reasons to add it back to the smaller strategy and in my experience returns trump volatility as volatility can actually be your friend.  In 2012, Fairholme was up about 35% which almost beat the S&P 500 by 20%.  In the end it was the clients that were hurt as the investment group followed the herd, on the larger strategy at least, keeping a manager after great performance and selling them after poor performance.  Read more….

The institutional-imperative

Institutional Investors and Analysts tend to herd-like behavior by acting late after trends are established.

Goldman cuts oil outlook, so NOW you tell us! (Perhaps, a tad late on the ADVICE!)

Working at Goldman Sachs

 

How NOT to be a DEEP VALUE INVESTOR

Repetitio est mater studiorum,” says the Latin proverb – repetition is the mother of all learning.

Lessons for this post:

  1. Know what you are doing.
  2. Avoid paying massive premiums over net asset values.

Below is CUBA, a closed-end fund investing in companies that invest in Cuba or will benefit by an increase in business with Cuba. Note the spike upward on the announcement that Obama would allow a prisoner exchange and take Cuba off the US’s terror list opening up the possibility of the end of the US embargo.

large CUBA

Now go: CUBA NAV Summary  (Click on the button, since exception on the right side of the page, to see the history of price vs. Net Asset Value (“NAV”). Note the results last time “investors”/speculators or the confused paid in excess of 50% to the underlying stocks. We can argue about the intrinsic values of the underlying stocks but not the prices–because price is what it is. Mr. Market has spoken.

Here we are todaysmall cuba

Go back and click on CUBA NAV Summary and view the one year summary. Note that the price reached a 70% premium to the NAV AFTER the news event of “improving” US/Cuba relations.   Upon hearing the news:

My first post on CUBA (CEF) SELL!  Can I predict? No, just common-sense.

Where is the efficient market? Perhaps the unavailability of shares to borrow hindered arbitrageurs who could buy the underlying stocks and short the closed-end fund (“CEF”), CUBA.  But to pay such a premium is almost a guaranteed loss unless sold to a greater fool who will pay an even more absurd premium. That is speculating not investing. What is business-like about paying a 70% premium after a news event?

A closed-end fund sells a fixed number of shares to investors. For example, let’s pretend we start a closed-end fund to buy stocks, called the BS Fund. We sell 10 shares at $10 each for $100 in capital, then we buy 1 share of Company X at $50 and 2 shares of Company Y for $25 (ignoring commissions and fees). The net asset value (NAV) is ($50 times 1 share) + ($25 times 2 shares) = $100.   The net asset value per share is also $10.  So the price per share of the CEF ($10) trades at no premium (0) to the NAV per share $100/10 shares.  Now an investor wants to sell 3 of his BS (CEF shares) to an investor who bids for them at $9.00 per share.  Unless, the underlying share prices of Company X and Y change, then the discount is now 10%.  We, as the management, must institute a decision to buy back shares of the BS fund to close the discount or investors increase their demand for the shares.

Carl Icahn got his start as a closed end fund arbitrageur, who would force the managements of the closed-ends funds that traded at large discounts to NAV, to buy-back their shares.

Setting aside the emotional impact of the news announcement, the prisoner exchange and Obama’s reducing of sanctions doesn’t change much.  By the way, if sanctions and embargos don’t work (I agree) as Obama claims then why the sanctions on Russia? If the Russians didn’t surrender during Stalingrad, what are the odds now? Color me cynical.

The US is ALREADY one of the top ten trading partners with Cuba. Of course, the embargo is a farce, kept in place for political purposes. Congress still has to vote to remove the embargo, but even without the embargo Cuba lacks the production of goods and services to trade. Why? Cubans lack the capital to produce because they lack the security of property rights and the rule of law to acquire capital. No Habeas Corpus, no freedom of speech, and no rights. No tyranny generates LONG-TERM economic growth.

What returns will foreign investors require to invest in Cuba?  Say you whip out your spread-sheet and suggest 25% annual returns to build a new hotel in Cuba based on your projection of American tourists hitting the shores of Cuba like locusts.  Two years after the hotel is built, Raul Castro and his military cronies tears up your contract. Investment lost.  Without the rule of law and sanctity of contract, the rest means little. The first lesson is to know what you are doing.

Life in Cuba:

  1. Tengo Hambre A Cuban Says I AM HUNGRY!
  2. Life for Cuban Youth (Cuba with highest suicide rates in the Western Hemisphere.

The investor who buys CUBA would have to understand what the current changes mean for the companies in the fund. Anyone who spends time understanding the current economic conditions there would grasp how little the current announcement means for investment there.  Ask the Canadian investor rotting in a Cuban jail today Canadian investor rots in Cuban jail.

Speculators were willing to pay at 70% premium AFTER the price of the underlying companies had moved higher by 10% to 15% on the news.  A premium on top of a premium–a lesson of what NOT to do.   Questions?

If anyone in this class does that, then this awaits: No Excuse

Reading the Financial News; Microdocumentary on Boom/Bust

As Gold Rises; Gold Miners Fall Down By Johanna Bennett

The price of gold may be rising, but gold mining stocks are getting hammered today. And do you know why?

They are still stocks.  (What does THAT mean?)

On the heels of yesterday’s late-day price surge, the Market Vectors Gold Miners ETF (GDX), of fell more than 4.5% amid a broader market selloff that sent the Dow dropping more than 300 points and the S&P 500 declining almost 2%.

The dovish minutes from the Federal Reserve’s September policy meeting have gold bugs buzzing. The precious metal touched a two-week high today, amid easing concerns that the Fed is near to raising interest rates, reviving gold as an inflation hedge.

Gold prices rallied to $1,234 a troy ounce, their highest level since Sept. 23, a day after minutes from the Fed’s September policy meeting revealed officials were worried weaker growth in Asia and Europe could curtail U.S. exports. The central bank also highlighted a stronger dollar as a barrier to U.S. inflation climbing toward the Fed’s 2% target, stoking hopes for a sustained period of low interest rates.

The most actively traded contract, for December delivery, was ended the day at $1,225.10 a troy ounce on the Comex division of the New York Mercantile Exchange, up $19.10, or 1.59% after earlier today climbing as high as $1,380.

ETFs linked to the commodity prices saw little improvement today. The SPDR Gold Trust(GLD) rose 0.25% to $117.76, while the iShares Gold Trust (IAU) inched up 0.21%.

But while worries regarding a weak economy can lift gold prices they can squeeze gold mining companies. GDX has plunged more than 60% over the past two years with the likes of Barrick Gold (ABX) falling more than 65% during that same time span and Newmont Mining (NEM) falling 59%.

The above is an article from an “elite” financial publication (Barrons) where the theme is that miners are being hurt/squeezed because they are stocks.  I ask my readers how are miners hurt LONG-TERM (the next decade) if the REAL price of gold is rising?  Sure miners may have been sold today due to leveraged investors selling to go into cash, but how does that “squeeze” the mining business if gold is risng RELATIVE to input costs like crude oil and commodities? Mining is a spread business. You make money on the spread between input costs and output revenues.  Never take what you read on face value.

gold oil

Gold commodities

 

gdxj gold

Miners realtive to gold in the chart above.

Four Boom and Bust Cycles and the Implications for today’s Cycle (Microdocumentary)

This microdocumentary video examines in detail 4 major booms in the last 100 years and explains how monetary policy and interest rate manipulation has led to the inevitable bust:

  1. The great depression of the 30ies
  2. The recession of the 90ies
  3. The dot com bubble
  4. The housing bubble

http://www.safehaven.com/article/35401/microdocumentary-the-truth-about-boom-and-bust-cycles   A bit simplistic, but a good introduction to the dangers of excess credit growth.

Rap Video on the Boom Bust Cycle or Hayek vs. Keynes

Learning How to Learn (Free Course)

Learning-How-to-Learn-Logo-with-text

 

 

 

 

Welcome to Learning How to Learn: Powerful mental tools to help you master tough subjects

Learning How to Learn is for you—it’s meant to give you practical insight on how to learn more deeply and with less frustration. The lessons in this course can help you in learning many different subjects and skills. Whether you love language or math, music or physics, psychology or history, you’ll have a lot of fun, and learn a LOT about how to learn!
This is a 4-week course. Learning with others is more fun, so please feel free to share this course and these ideas with your friends and family. We’ve found that learners become so excited about these ideas that they can’t help sharing them with those in their circles—and with new friends made on the discussion forums through this course. Sharing helps build your own abilities! We’ve set up a Facebook page to let people know about the MOOC. Please feel free to go to the page and share if you like it and the course, (and give us a “like”)! We also have a Twitter hashtag on the course, #LH2L1 (for “Learning How to Learn, Session 1″).

SIGN UPhttps://class.coursera.org/learning-001

CSInvesting: Wha? Learning how to learn?  Wasn’t that what school was for? I know all that! This course will help you as an analyst and investor process new readings and material more efficiently. Whenever you learn a new industry or company, these skills will come in handy.  I am taking the course. Even an old dog like me can learn. How about YOU?

An investing blog with humor: http://thefelderreport.com/ (Thanks to a reader!)

History

Bear-Markets-1871-to-date-Duration-and-Magnitude/  from Greenbackd.com

us-bear-markets-since-18711

and

us-bull-markets-since-1871

and now? ALL IN!

AAII-Cash-Allocations

http://www.acting-man.com/?p=32263

R .  I.  P.

R williams

Who Are YOU?

about_aptitudes_header

Investing Aptitudes 

Three aptitudes necessary for success in bargain investing would be subjective personality to be able to work alone; facility with numbers to analyze and remember important data; and the ability to defer gratification or see future/distant possibilities.  Also, important are the aptitudes that you are LOW in.  Very high musical aptitudes would create stress for you if you did not fully use that aptitude. High, high ideaphoria (flow of ideas) would hamper your ability to concentrate.  See for yourself…………..

Understanding_Your_Aptitudes   90 page book. Learn more…………..

http://www.jocrf.org/about_aptitudes/index.html

In Gold We Trust; A Reader’s Question

Gold   In-Gold-we-Trust-2014-Incrementum

The above 100-page report on gold will provide a good financial history lesson.

A Reader’s Question

I was thinking about how many people think that the sell-side is just wrong about everything and completely untrustworthy.  From what I can tell, they are pretty good with the facts and a really valuable source when you want to learn about a new industry via a primers or initiation reports.  This led me to think that most of the sell-side critics think that they have an analytical edge over the sell-siders.  Maybe even an informational edge (which I think is very unlikely since these analysts cover one industry full-time.) But certainly an edge in judgment or behavior.  This I think is possible if you have a longer-time horizon and no man-with-a-hammer syndrome.

What sort of edge do you think is most achievable over the markets in general for an investor that is dedicated?  I’m thinking about full-time investors.

It seems to me that analytic edges are often overstated.  What are some cases that the sell-side or entire markets are just completely off on their analysis?  Maybe the optimistic analysts during the bubble years?  Is this just misaligned incentives?

I would guess that the market usually mis-weighs the probabilities of what may happen in the future, but that would be more of a misjudgment in my opinion.  (Maybe this is just semantics.)
I’d love to hear your thoughts.

My reply: I agree that analysts can provide great overviews of companies and industries in their initiation reports.  I will read them as a supplement to my own reading of original source documents.  I would not read them for valuation or investment recommendations.  The idea that analysts can predict next quarter’s earnings is absurd. Finding a reasonable range of normalized earnings three years to five years out is what matters, not the next six months of earnings.

Another reason I might try to read analysts reports is not for new ideas, but to see the extent to which the market is already discounting my own views.  Note the universal calls from analysts at Goldman and UBS for gold to trade to $900 or $800 See www.acting-man.com:

“Goldman Sachs lowers gold price target to $1,050” (Bloomberg, Reuters, etc. sometime in January and repeated ad nauseam ever since)

“Moody’s lowers gold price target to $900”  (January)

“Morgan Stanley: Gold price won’t see $1,300 again” (April)

Also, analysts may overlook key values in a company because they fixate on the next six months. For example, the most common way of valuing an exploration and production company is an appraisal of net asset value, based on sum-of-the parts approach. But most appraisals tend to ignore exploration assets which are not going to be drilled within some arbitrary time period, say the next 6 to 12 months. For some companies, much of the value is in assets which are not going to be drilled in the next year.

I think most of an investor’s edge is behavioral. (See http://www.amazon.com/Inefficient-Markets-Introduction-Behavioral-Clarendon/)

Take Coach’s (COH) recent plunge.

Coach

Coh Comments June 2014  and June 23 VL 2014 The company has to increase its investment to rebuild its brand. Wall Street analysts then act like this:

Over the Cliff

Therein lies opportunity or maybe not.   But if the markets didn’t act that way, then markets would not overreact. Markets tend to over-discount a known risk or uncertainty and under-discount an unknown uncertainty.

A Reader Asks, “How Can I Improve as a Value Investor?”

gdxj-volume

june12goldbears-1024x647 (1)
A Reader’s Question


Thank you once again sharing the links, access to the value vault, and your blog posts. My experience over the last couple of years has been primarily in private growth investing, and the insights you have shared have helped me significantly reconsider my investment approach.

I have been reading your book recommendations and following CBS lecture notes, but is there anything else you would advise me to do to become a better value investor? I am keen to learn and it appears that there is culture of apprenticeship in the world of public equity value investing. Maybe I could reach out to some practitioners in London (where I am based) – would you be able to highlight any you would consider particularly strong?
Thanks in advance for your help.

My Reply: There are plenty of case studies and examples on this site to learn about valuation. You can visit:http://pages.stern.nyu.edu/~adamodar/        https://www.coursera.org/course/accountingand…Value Investing for Grown ups by Damodaran to learn about valuation and accounting. But the secret to investing and improvement lies within you. That sounds either profound or hokey, but true. I don’t believe MBA courses or apprenticeship (if you can find one) will really help.  You don’t want to learn about another person’s style, you want to develop your own.  Google and youtube.com Michael Burry for why this is true.

As an example, you can read 5 Keys to Value Investing.  The author worked as an analyst for Micheal F. Price. He would submit ideas and get grilled by Price. I didn’t see a whole lot of mentoring going on.  Of course, you want to study other investors and the psychology of investment:

  1. Charlie_Munger_The_Art_of_Stock_Picking
  2. Buffett Klarman and Graham on Mr Market
  3. Great Investor Behavior
  4. Investing and Personality Type

But there are no shortcuts to studying yourself. You have to consistently and persistently keep a notebook, log, diary or tape recorder of your trades/investments/decisions. Review them that day and a week, month and year later. Study your proclivities. Can you step outside and see yourself objectively?   Impossible?   Hire a high school kid on Summer Vacation to film your day at work and see if you notice tendencies.  You won’t believe the tape!

Do you have a business plan for your investing career? Goals? Map out the steps.

I highly suggest you see how your countrymen developed their own styles in: http://www.amazon.com/Free-Capital-private-investors-millions/ by Guy Thomas

Review: Conclusion “Free Capital” treads original ground in profiling anonymous, “everyman” successful investors that no one has heard of yet who have interesting stories, experiences and lessons to share all their own. We can all learn from more than just Warren Buffett, after all.

It’s not without its flaws, of course. As the author himself states, the book doesn’t cover losing investors, people who took some of the risks investors profiled took, and failed, or who took other risks that didn’t turn out right, and then explores what lessons can be learned from their shortcomings. As an avid deep value (Benjamin Graham) guy myself, I would’ve done without the day trader and some of the other guys who seem like GARPy, momentum-based swing traders with short time horizons and questionable “value” metrics.

—-

As an example, I know that I am an emotional basket-case. I cry during the cartoons if Tweedy Bird gets hurt (http://youtu.be/89FDAYsTgfs).  If I buy a stock at $7.05 and the next print is 7.04, I am on the floor wailing.  If Jim Cramer on CNBC said buy Tweedle Dumb stock, I would wait for the stock to rally, then buy after the news is priced in only to sell at a loss seconds later.

Also, I have an aversion to paying full price. I went “Dutch” on my honeymoon; my wedding had a cash bar. My guests had to take the subway to the reception; some had to hitch-hike. I am a cheapie.

Ok, I have to deal with serious psychological issues, but how does that help YOU?

Well, even I can develop methods to work around my quirks. See the chart at the top of the page. I have been buying certain gold/silver stocks over the past year because of two reasons: historic/generational low cheapness and lack of the same in other markets, in general. But prices can swing 10% in a day!  How would I survive?

My time frame is the next three-to-five years. I study the companies without input from others, I turn off CNBC, and I place my buy and sell orders BEFORE the market and then check at the end of the day. I may go months without doing anything in terms of buying or selling, but I will keep following the companies and their industries closely.  I have also held stocks like Enstar (ESGR) for a decade.

My time-frame is longer than most participants.  I work around my psychological hurdles because I have faced them. And only YOU can face yours.

I hope that helps.

Why You Win or Lose

Wrong

 Jim Rogers, “Well in my new book, http://www.amazon.com/Street-Smarts-Adventures-Road-Markets/, I explain why many schools now are going to go bankrupt—why American education is going to see some starving, some shocking bankruptcies coming out of American tertiary education—and business school is certainly not much use, I was once a full professor in an Ivy League business school (Columbia GBS), and I will tell you, Jeff Macke, most of what goes on is not very useful at all, except to the professors. They charge huge amounts of money. They teach a lot of conventional wisdom, so the kids who come out, come out in the hole financially but also knowledge-wise; their peers who went to work are way ahead of them financially after two years, but secondly knowledge-wise, too, because a lot of what they teach in business school is flat-out wrong.

These poor kids have to unlearn it and start over. In my view, if you do your own work and teach yourself or start with what you know, you will come out way, way, way ahead of going to business school. I consider business school a complete waste of time, money, energy, and everything else. I’ll tell you what, Jeff, you go down and short soybeans one day, you will learn more in the first six weeks than you will learn in 10 years at any business school. The Internet and real life is a fast way to learn, if your are really interests (Source: pages 26-27 in http://www.amazon.com/Clash-Financial-Pundits-Influences-Investment/).

Why You Win or Lose: WHY_YOU_WIN_or_LOSE_Fred_Kelly (1)

A short synopsis of the 1930 contrarian classic.

Another new investing blog: http://glennchan.wordpress.com/2014/06/14/insider-ownership-is-overrated/#comment-1882

One of my favorites:

http://reminiscencesofastockblogger.com/2014/06/15/a-new-bet-on-hercules-offshore/   (Don’t be lazy–do thy own work)