Category Archives: YOU

A Reader’s Suggestion for DEEP VALUE COURSE

I have recently received many suggestions to improve this course. There are almost 600 people in our group with many different backgrounds and experiences.  There may be advanced students who wish to discuss current case studies (Why is DLX, Deluxe, not a value trap like Radio Shack?) or potential investments or subjects into greater depth.  This course planned to follow Deep Value (book) while digging deeper into the footnotes without preconceived notions.  If, for example, we read about Buffett’s transition from net/nets to franchises, we will look at franchises but not focus on them. The point is to give students background to understand the distinctions. However, this may be too basic for many of you.

My goal is to make this a learning community. One idea would be to set up another blog (volunteers?) to discuss various ideas if there is enough interest. I won’t give out anybody’s email without their permission, but if a group of students wanted to dig deeper into various subjects, I am happy to provide a link to this new group or discussion area.  I will wait until I hear your feedback.

For example, a reader/student went into vast effort to provide feedback and suggestions.  Dr. K (my nickname for this reader) might be an excellent leader to develop a new discussion blog?  Below are Dr. K’s emails and links.  I will post your suggestions.

EMAIL 1

John; This is Dr. K following up from our phone conversation. So far I am very frustrated with the deep value course and in the following series of emails I will explain why.

Why I hate mechanical investing and problems with back-testing

  • First of all Seth Klarman in his book (Intro xvi, p.13, p.16-18, p.151, p.162) discusses the folly of searching for the holy grail “mechanical” formula for investing success. BG in The Intelligent Investor p.38-46 and p.194-195 also says mechanical formula investing is self-defeating. It contradictory that we are reading about mechanical formula (Toby Carlisle’s books). Mechanical formula (Toby Carlisle and Joel Greenblatt’s 2nd book) come off as lazy, naïve, and immature to me.
  •  Seth also is not a fan of Wide Moats (see p.32-34, p.93) but I guess that’s OK but it’s very confusing how we are jumping around from one investment ideology to another!! Seth also does not think much of EBITA (see p.71-78) while you seem to mention it on the front of your blog home page in a link at the top.
  •  Now go to http://falkenblog.blogspot.com and read as many past articles as you can. You should also get his first book: “Finding Alpha.” There is no need to read the rest of his books. In that book especially key in on p.115-116 “Geometric vs. Arithmetic Averaging”, p.116-117 “Survivorship Bias”, Ch. 6 p. 113-125 “Is the Equity Risk Premium Zero?” especially read p.121-123 “Transaction Costs” , p.47 “the Size Effect” and p.48 “Delisting bias.” These are just some of the many reasons why mechanical back testing is a dead-end path to investing success.
  •  And/or you can go to http://www.efalken.com and watch the Finding Alpha videos. This should take 8 hours but it’s good if you are short on time or you can do both. I also have many of the papers he has written or mentioned. I can send them to you upon request.
  • Next go to www.davidhbailey.com.Click on the Mathematical Investor blog and read all of the articles. Now see that attached papers he wrote along with Campbell Harvey.
  • Go to www.numeraire.com and read all of the links at the top. In the search site map section click on the article about why screening is not valuation.
  • Now go to www.numeraire.com/download.htm . Read every article in the Research Related Letter section. These are short but notice whom he is critical of. Now read all of the articles in the Research Notes section. Especially read “What is Circular Reasoning” which will explain why most stock screens and mechanical formulas (Toby Carlisle, Joel Greenblatt) are garbage! Make sure you click on or go to all of the links in this article. Notice the lists of various forms of logical errors. Notice the cross correlation with behavioral finance! These logical error list need to be studied in greater detail!! Also especially read “What is Economic Simultaneity?”, “A History of the Size Effect” and notice that on p.4-5 he lists some of the variables that are and are not circular!!, “Evolution of Stock Picking”, “Visual Detection of Circular Reasoning” (it’s vital you understand this) and finally “Fatal Summary.” (it’s vital you understand this also) Read all of the articles in Research Presentations and in Research papers (especially “Circling the Square” and notice on p.8 he gives the return formula and it’s vital you understand this).

You should a somewhat better idea of why mechanical investing is not scientific. You should not trust academic research as well as a lot of p-side research! I am not impressed with Toby Carlisle and Joel Greenblatt’s second book. I have a good feeling that many people in this course and google group are more advanced then you are aware of and feel the same way. I can tell you that I have been reading many academic papers over the years and would attach them when I tried to apply for a research job and never got any positive feedback from attaching them!! In addition Alpha Titans such as Seth Klarman, Peter Lynch, Warren Buffett, Ben Graham were not fan of this type of investing approach.

Let me know when you have read this stuff. I think you need to read and understand them otherwise you are not fully grasping how difficult value investing really is!! Keep in mind I don’t fully understand everything in this material but I know enough to not be impressed by mechanical investing research garbage studies!!

Most Factor Models that Explain Returns are False _ 1

Anamolies Don’t Do as Well after Publication

A Skeptical Appraisel of Asset-Pricing Tests _ 3

Backtest Overfitting

Significance Testing Issues for Empirical Finance 5

The Probability of Backtest Overfitting 6

Factor models to sensative to the time period tested 7

Email #2 about Net Nets.

You mentioned www.oldschoolvalue.comon your site in the resource section. I like this site for the free screens and the blog articles which do a good job of teaching quality investment theory. I am not too fond of his software program and he raised the price and his spreadsheets do not include critical off-balance sheet accounting adjustments (I will explain the New Constructs platform in a later email). Jae Jun thinks his spreadsheet program is better than it really is. (in my opinion).

Go to the -VeEV, NNWC and NCAV screens. Some of the stocks duplicate themselves. Now go to Ben Graham Net Net Stocks and a 7 Step Checklist to Make Money with Net Nets . Notice on p.7 Jae says 99% of Net Nets are useless and on p.9 he does not like Chinese ADRs. I think he also does no include financial companies, REITs, CEFs, Shells etc.

Now go to www.grahaminvestor.com.In the screens link at the top go to the NCAV Stocks (Shares Outstanding) screen. Notice it does include Shell companies and Chinese ADRs but only companies listed in the USA. (no Japanese, Canada, Australia, etc.) The next screen is NCAV Stocks (Float). I am not sure what the advantage of this screen is. It only seems to leverage the Current ratio. I have never seen anyone else mention using Float instead of Shares Outstanding instead. This site also gives: NCAV Stocks (Shares Outstanding, new) and NCAV Stocks (Shares Outstanding, new, no Chinese). I sent an email to the people that run this site about the screens but they never got back to me. I would not blindly trust that these companies are true Net Nets. You should verify the numbers yourself.

Go to http://www.netnethunter.com/my-ncav-investment-scorecard/. Does this guy give you the impression that he is a fan of running a mechanical screen and blindly following it?? Notice that he does analysis on the company’s “Burn rate.” Where did Toby Carlisle mention this?? Make sure you read all of the articles.

Now for the subscription. He does screens for Japan, Australia, Canada. The Japanese financials he gets are written in Japanese and gets the aggregated data from Business week.

A good assignment would be to figure out where for free or how you can screen for Japan, Australia, Canada or anywhere else other than the USA. Given the above two mentioned sites we could also for a day analyze (or for a week) every company of the list in greater detail and not do stupid mechanical investing like it has been suggested so far!!

I think I read that www.gurufocus.com has some Net-Net screens for a subscription rate but I don’t know if they are any good or not.

Another reason why Net Net studies and papers are flawed is that they don’t account for Survivorship bias and delisting bias in the historical database the study was conducted from. It’s quite possible that a company could be a “quality Net-Net” from financial standpoint but if the trading volume is too low then the NYSE could delist the company and then the stock loses 90% of its value as it goes from being a listed company to an unlisted (or OTC) company. Most of the deep value research does not discuss how to account for this and how to follow and trade these OTC companies!!

Here is email #3 about Wide Moat Investing.

You mentioned Pat Dorsey and his books. (see The Five Rules for Successful Stock Investing and The Little Book that Builds Wealth).

  1.  I met Pat Dorsey at a CFA Rochester, NY meeting while he was working for Morningstar. Morningstar has The Stock Investor newsletter which gives coverage of about 150 companies Morningstar believes are “Wide Moat” companies.
  2.  You mentioned Bruce Greenwald’s book and presentations about this subject.
  3. Now go to www.oldschoolvalue.com/blog/tutorial/this-is-how-buffett-interprets-financial-statements. This is a good summary article of the book “Warren Buffett and the Interpretation of Financial Statements” by Mary Buffett and David Clark. The authors also wrote “Buffettology” and a workbook about this book.
  4.  Also see What Gross Margins Can Tell You About a Company’s Economic Moat by Old School Value.

The assignment here is using these various books, articles and presentations someone subscribe to Morningstar’s Stock Investor newsletter, tell us the list of the 150 companies Morningstar list for “Wide Moats.” Then once we have this list we all go through each company and analyze and verify why these companies are indeed “Wide Moat” companies. In a presentation that you posted recently by WB he mentioned that there are no “Wide Moat” companies in Japan. I suppose we could locate “Wide Moat” companies in countries outside of the USA.

—–

This is email #4 about Special Situation investing. You mentioned Seth Klarman’s book. In the second half of that book he gives various “Special Situation” opportunities. Joel Greenblatt’s first book also was pretty good (but  now a little out of date while his second book was a bunch of mechanical garbage).

a. The absolute best and easiest site to locate “Special Situations” is Spinoff Monitor – Actionable Opportunities in Special Situations: Spinoffs, Bankruptcy, Restructurings . Notice on the right hand side a very easy list of all of the various situations!! I am very interested in exploring this area of Investing!! Their is no analysis on this site.
b. Other sites that list Special Situations include:
c. You mentioned www.distressed-debt-investing.com in your resource section on your blog. Someone also attached Stephen Moyer’s book about Distressed Debt investing. My advice here would be to stay far away from this area of investing until the investor has more experience under your belt in analyzing distresses equities first. That website and book is very complicated as it requires specialized knowledge of Bankruptcy law, Quant Credit Modeling and simulation. You should not really list this site on your blog unless you make it clear to people this area of investing is not for beginners! It’s for advanced investors!!!!!!!!!!!!!!!! These resources are not written in a way that is easy to learn or read!!
d. There are many sites on the web for following the Insiders. I think I read that www.gurufocus.com gives you coverage of Insiders. Many sites are for free. The absolute best book on Insider Buying is “Investment Intelligence from Insider Trading” by H.Nejat Seyhun. It should be noted that Seyhun’s database goes all the way back to 1975 while I have yet to see any website that goes back that far for a affordable price.
Now here is what I think is going on with Spinoffs. Suppose you have XYZ company with a consolidated financial statement consisting of three divisions: Division A, Division B, Division C. So Consolidated XYZ = [A + B + C]. Now suppose Division B will be Spunoff. Now we have two companies: Parent Company = [A + C] and the Spunoff Company = [B]. I think what is going on here is that when this proposal takes place it won’t occur for a 90 day period so therefore their is a 90 day period where these two companies’ financial statements won’t be in the various databases. Instead Consolidated XYZ = [A + B + C] will still be in the database. I THINK WHAT YOU NEED TO DO IS RECONSTRUCT THE FINANCIAL STATEMENTS SUCH THAT YOU CAN ANALYZE PARENT COMPANY = [A + C] AND SPUN COMPANY = [B] AS TWO SEPERATE COMPANIES. DO NOT ASSUME AS MECHICANICAL INVESTORS DO THAT THE SPUNOFF COMPANY IS THE GOOD DEAL AND THE PARENT COMPANY IS THE BAD DEAL. EVEN IN JOEL GREENBLATT’S FIRST BOOK SOMETIMES THE PARENT COMPANY IS WHAT HE PURCHASED AND SOMETHIMES THE SPUN OMPANY WAS THE BETTER DEAL. I think Joel did an OK of explaining what was going on in his first book but he was not always clear about the timeline of events for how to follow a typical Spinoff situation.
As for the various other types of Special Situations (except for Merge Arb) their is almost no analysis or coverage on how to follow these events!!

Email #5 about “Expectations Investing.”

  1. Go to www.expectationsinvesting.com. Make sure you read “Expectations Investing (2000)” by Alfred Rappaport and Mchael J. Mauboussin and “Creating Shareholder Value (1998)” by Alfred Rappaport. THESE ARE THE ABSOLUTE TWO BEST BOOKS I HAVE READ THAT CLEARLY EXPLAINED WHY CONVENTIONAL ACCOUNTING IS FLAWED AND THE DIFFERENCE BETWEEN ACCOUNTING VALUE AND ECONOMIC VALUE CREATION!! I can’t go into two much detail here but make sure you read and understand every Tutorial on the site!! In a recent post your blog about Enron I think you were trying to highlight the concept of Incremental Capital expenditure. This and Incremental Working Capital expenditure are clearly taught in these two books. These books also do a wonderful job of explaining the underlying drivers of Economic Value creation! You want to understand these spreadsheets in detail!

The assignment here is that New Constructs (See links below) does about 22 various off-balance sheet adjustments. Learn these adjustments and modify the Expectation Investing sample spreadsheets. Know how to do this for companies that New Constructs does not cover. (such as REITs, MLPs, Net Nets, Special Situations, Japan and non-USA stocks). In the case of non-USA companies the accounting conventions would need to be researched.

I think these spreadsheets do such a good teaching job of explaining things!!

(Not posted here-I couldn’t open the zip file)

  1. Michael’s 2nd book “More then you know” and his 3rd book “Think Twice” are gems that do a good job of summarizing what is going on in behavioral finance and must be read. I have many of the papers he mentioned from these books.

30-00 Part 2

The-Best-Primer-to-Valuation-Multiples Part 2

Trouble with Earnings & PEs

Cash Flow vs. NI

Counting what Counts

Financial Ratios

Financial Ratioswheres the bar ROIC

CommonErrors in DCF Models

Decoding Wall Street Propaganda ( A MUST READ!)

NewConstructs_in_DC

Do Investors see through Reported Earnings

Free-Sample-Company-Research-Report-HLS-2013-02-01

NewConstructsIntro_2013

END

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:

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.