Category Archives: YOU

Gold Stocks: No One Left to Kill?


An Interesting Juncture for Gold Stocks (A good read with links)

Note that CEF in the above chart trades at an 11% discount to its 60%/40% holding of gold and silver bullion after a four year down-trend–note that this is either hyper-bearishness or massive extrapolation of trend-following.   Apple’s cash hoard could buy the entire public mining sector.   Gold stocks are cheap for a reason: poor capital allocation, poor cost control, and dilution of shareholders revealed in the five-year long bust from an epic boom from 2001 to 2011 caused investors to flee.   Since then many managements have gained religion on cost control and capital discipline (Note Barrick, ABX). All cycles turn, but when? If we knew, then no opportunity.

I always hear investors or analysts ask, “So what is the catalyst?”  If the market is at all efficient–and I would say that it is except at major inflection points–then if we knew the catalyst, then the opportunity would be arbitraged away.  How about the law of low prices or the law of supply and demand.


Ironically, as gold has declined in US dollar terms, it has risen in real terms versus commodities showing its mettle in a credit contraction.  TSI BLOG

1-Divergences-complete-772x1024The HUI, a gold stock index, is showing relative strength versus gold.   However, certain gold stocks like Novagold (NG), Sabina Gold (SGSVF) or Agnico-Eagle (AEM) are in incipient uptrends or, at least, vastly outperforming their indexes such as GDX or GDXJ.  You must diversify amongst the highest quality producers, developers, and explorers.

This post is not a recommendation but a historical reference point for a hated asset class.  I see much less RISK in a terrible industry such as gold mining than wonderful businesses such as Amazon, CRM, or GE.

Avoiding the Death Zone–the Four Horsemen and the Nifty-Fifty


Climbers say that when you are over 24,000 feet, you enter the “Death Zone. Mistakes become lethal.

The death zone is the name used by mountain climbers for high altitude where there is not enough oxygen for humans to breathe. This is usually above 8,000 metres (26,247 feet).[1] Most of the 200+ climbers who have died on Mount Everest have died in the death zone.[1] Due to the inverse relationship of air pressure to altitude, at the top of Mount Everest the average person takes in about 30% of the oxygen in the air that he or she would take in at sea level; a human used to breathing air at sea level could only be there for a few minutes before they became unconscious.[1] Most climbers have to carry oxygen bottles to be able to reach the top. Visitors become weak and have inability to think straight and struggle making decisions, especially under stress. WIKI

So what does this have to do with investing?  When you pay too much for growth or quality, you may never recover. VALUATIONS MATTER ALWAYS!

First review the Nifty-Fifty Era when fifty stocks were “must own” for institutions in the 1970s due to their growth and quality.  Money managers herded into them similar to this: Money Managers Herding Video.

valuing-growth-stocks-revisiting-the-nifty-fifty  (Note page 22, you as an investor would have eventually broke even, but almost no one would have been able to seat through the 1980’s UNDER-PERFORMING a declining stock market!

Nifty Fifty   Ignore the second half of these notes.

Now think about how the pattern repeated in the Internet years of 1996 to 2000 when MSFT and INTC were the must own stocks of their era.

MSFT Monthly

INTC monthly

Congratulations! If you bought back in 1999/2000 when the press was lauding these “must own” stock for the future, you are now in the black.

Even if you pay too much for stable, high quality companies, you can lose even as the companies grow sales, cash flows and earnings year after year after year. Note: KO_VL_Jan 2013 (See P/E ratio as a proxy for investor enthusiasm and compare to financial metrics).   What is not to like?  So why did the price go sideways for almost a decade after 1998?   Investors adjusted their expectations.

Sun MicroSystems Case Study

One thing to never forget is that the market is mostly efficient but not ALWAYS efficient or correct. 2 plus 2 equals 4 not 10.   The last Internet frenzy gives a perfect case study in Sun Microsystems (SUN).

Sun Microsystems has always intrigued me. For a number of years, it seemed as if the company could do no wrong. During the early 1990′s, Sun occupied the top position in high performance computer workstations, a category of computing that has since virtually disappeared thanks to advances in PC hardware. Despite desperate attempts to unseat it from its leadership position by worthy competitors like HP, DEC, and IBM, Sun was able to prevail.

If you had purchased Sun stock in May of 1994, you’d have seen it skyrocket to nearly 100 times its value by August of 2000, just 6 years later. Had you kept it at the historical high price of $253/share, you’d have seen your investment lose more than 98% of its value when it came back down to just $3.17 a share by October 2008.

SUNW/JAVA stock price meteoric 100x rise and fall


It is easy to pull out a historical chart and say, “Look at the bubble popping.”  But note what the CEO had to say about the price of his company’s stock in 2002:

Q: Sun’s stock hit a high of $64 or adjusted in the chart above of $250. Did you think what tech stocks were doing two years ago was too good to be true?   (Date of the interview was March 2002).

A: No, she trained me well, and the stock made a nice move since we got married. But two years ago (2000) we were selling at 10 times revenues when we were at $64. At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?

Now, the same music is playing but the players have changed. 
New Four Horsemen1

New Four Horsemen

Are now driving the performance of the general stock indexes:

Fab Five

The Fab Five are “NEED TO OWN” stocks for money managers who wish to NOT underperform in the short-term.

  1. AMZN VL
  2. Goog_VL
  3. FB_VL
  4. MSFT VL
  5. GE_VL   certainly the the financial metrics, growth, and rising stocks prices make these easy “one-decision” stocks.

Let’s take AMZN because this company has a dominant position in retail that seems to be growing.

Amazon Key Stats

  • Trailing PE: 950.63
  • Forward PE:  117.65
  • Market Cap: $311.04 billion
  • Book Value: $26.50 per share
  • Share Price: $663.54
  • Price/Book: 24.27

Read more at How Amazons Long Game Yielded a Retail Juggernaut. Can’t you see many Americans becoming addicted to Amazon’s Prime service? Poor Wal-Mart and other retailers. However, IF AMZN doubles in market cap over the next 10yrs or a 7% annual return, and ends up trading at 21.9x earnings (current SPX p/e) in 2025, it needs to grow net income 55%/yr! Since 1973, 0.28% of companies have grown earnings at 55% for 10 years (Source: O’Shaughnessy). Do you like those odds?  Or are you so smart that you can tell that AMZN will win the lottery?

While valuation augur for CAUTION for stocks IN GENERAL:

GMO 7-Year 2015-11

The Bubble Right in Front of Our Faces

The True Contrarian

A MUST-READ ARTICLE:  The Nifty Fifty Becomes the Feb Five

Because when you enter the death zone you need to remember:


Have a great weekend and Thanksgiving for those in the USA!   How is your analysis of Valeant progressing? I hear crickets.

Update: The top 10 stocks in the S&P 500 are +13.9%. The other 490 are -5.8%. Largest spread since the late 1990s. Can you hear the bells ringing?

How Momentum Investing Works–A Parable

Infinite growth

A few years ago Larry approached his Guadalajara neighbours and announced that he would buy monkeys for $10 each. The neighbours, seeing that there were many monkeys around, went out to the forest and started catching them. Larry bought thousands at $10 and, as supply started to diminish, the neighbours stopped their effort. He next announced that he would now buy monkeys at $20 each. This renewed the efforts of his neighbours and they started catching monkeys again. Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each and the supply of monkeys became so scarce it was an effort to even find a monkey, let alone catch it!

Larry now announced that he would buy monkeys at $50 each! However, since he had to go into town on some business, Darren, his son, would buy on his behalf. In the absence of Larry, Darren told the neighbours: “Look at all these monkeys in the big cage that my dad has already collected. I will sell them to you at $35 and when Dad returns from the city, you can sell them to him for $50 each.” The villagers rounded up all their savings and bought all the monkeys. They never saw Larry or Darren again, only lots and lots of monkeys! Now you have a better understanding of how the stock market works.

Find Your Purpose


If you don’t know who you are, the market is a very expensive place to find out. – The Two-Penny Philosopher

Find Your Purpose (Podcast)


More stories:

Worth Reading Best blogs and info sources.



The Ongoing Saga of Valeant Part II

Dead Cat

Post 1 on Valeant is here

Is Valeant the Next Enron–NYT

  1. Bronte Capitals Comments on Valeant Conference Call  The Bronte posts will give you a thorough background on the controversies surrounding Valeant and Philidor.
  2. Valeant and its captive pharmacies-Bronte Capital
  3. Simple Proof that Philidor has shipped drugs where not licensed

A torrent of SeekingAlpha articles:

You can follow the reactions of investors and analysts at Seeking Alpha.

Hedge Fund Herding  The psychological aspects of following others and the pressures of the short-term performance derby. Lesson: Never cease to do YOUR own thinking and analysis.

Ackman down 16% and will hold CC on Valeant this Friday (Oct . 30th)  Below are charts of Ackman’s portfolio. The sharks front-run the potential liquidation as Ackman’s investors go queasy.

Ackman Portfolio

Ackman Blowup?

Link to CC on this Friday at 9 AM EST

Readers should share if they believe there are actionable lessons here for investors in terms of psychology, portfolio management and analysis.  Time is precious so we need to learn the important lessons.

My take-away so far.

First, Valeant’s Low Valuation and Rip Roaring Growth (Aug. 20th 2015 by Barrons  Note the author’s focus on growth–but IF that growth is not sustainable within a franchise (protected above the cost of capital profit margins) then  cause this: changed investor expectations:


And that ladies and gentlemen is called a permanent loss of capital IF investors paid too much for growth in a company doing roll-ups of commodity-like products (generic drugs) at unsustainable retail prices (competition and insurer push-back will cap price gains).


Meanwhile, investors face the second most overvalued equity market in history (Source: Hussman Funds).

The Stoics and Investing; Volatility and the Prisoner’s Dilemma


The Stoics

Stoics understood that if negative emotions such as anger, envy, greed, fear, and grief plague your life, then soundness and peace of mind will elude you. Serentiy in the midst of adversity–which is hardly the same thing as the modern, Western and secular notion of “happiness”–is a necessary condition of a well-lived life.

nov15_newsletter-1 How the Stoic Philosophers influenced Ben Graham

feb16_newsletter-2 Part 2



Valeant Case Study in Progress


There is an ongoing battle over Valeant’s (VRX) valuation and business model between short-sellers and investors.   This opportunity allows us to improve our analysis skills and understanding of business models.  Also, how will Sequoia, an owner of over 20% of Valeant’s equity, handle their portfolio?

My first question is whether Valeant is a franchise with durable competitive advantages or a roll-up of commodity products dressed-up in a fancy industry (Pharma)?   We should use this case to learn how experienced analysts present their opposing views.

First: What’s not to like?  Valeant has rapid growth with huge profit margins? Of course, the PERFECT investment is a company that has high returns on capital and can constantly redeploy its capital at the same high returns.  The classic case would be the early (pre-2000) history of Wal-Mart (WMT) as the high returns generated from its stores could be redeployed into new stores on the borders of their regions which had economies of scale in administration, advertising, and management costs per unit of sales.  WMT did not have, for example, advantages in gross margins, but net profit margins. See WMT_50 Year SRC Chart.

What would be the source of Valeant’s high returns and competitive advantages?

Sequoia (a well-known value fund with an excellent long-term record) saw strong competitive advantages.  See their recent investor transcript:

Sequoia-Fund-Transcript-2015-August  Note the date of the transcript and the questions regarding Valeant concerning Philador and Sequoia’s 20% concentration.

Other investors (Charlie Munger, Citron) disagreed:

April 2, 2015 from

…..Recently, during a shareholders meeting for the Daily Journal Corporation, a newspaper where he serves as Chairman, Munger had this to say about Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX): “Valeant is like ITT and Harold Geneen come back to life, only the guy is worse this time.”

What exactly does Munger mean by this?

A little history lesson

Who exactly was Harold Geneen? And what did he do at ITT that’s so infamous?

Geneen took over ITT Corp in 1959 when it was still mostly a telegraph and telephone company. After being blocked by the FCC in an attempt to buy the ABC television network in 1963, Geneen decided to diversify away from the company’s traditional business and completed more than 300 acquisitions during the decade in areas such as hotels, insurance, for-profit education, and the company that made Wonder Bread.

Geneen used cheap debt to finance these acquisitions, which later proved to be the company’s downfall. After Geneen’s retirement as CEO in 1977, subsequent CEOs spent much of the next two decades paying off the debt by selling most of Geneen’s acquisitions.

Is Valeant really comparable?

On the surface, Valeant looks like it could be pretty comparable to ITT. Since merging with Biovail in 2010, Valeant has made more than 30 different acquisitions, most of which were paid for with debt or by issuing shares.

Since the end of 2010, Valeant’s debt has skyrocketed from US$3.6 billion to US$15.3 billion. Shares outstanding have also gone up considerably from 196 million to 335 million. It’s obvious that Munger is onto something.

But on the other hand, I’m not sure Valeant is anywhere close to being as bad as ITT was. For one thing, all of the company’s acquisitions are at least in the same sector. ITT was buying up hotels and car dealerships, while Valeant is buying up pharmaceutical companies. Valeant’s efforts scale up a whole lot better than ITT’s ever did.

There’s also a bit of hypocrisy coming from Munger on this issue. Munger is actively involved in a company that does pretty much the same thing as ITT did back in the 1960s. Sure, Berkshire doesn’t use much debt or engage in hostile takeovers, but Berkshire and ITT have more in common than Munger is willing to admit. Both attempted to dominate the business world using a roll-up acquisition strategy; Buffett and Munger were just a little more patient with their plan.

But just because Munger exaggerates how bad Valeant’s acquisition spree has been doesn’t mean the stock is necessarily a buy at these levels. The company had earnings of just $2.67 per share in 2014, putting the stock at a P/E ratio of nearly 100 times. Yes, earnings are expected to grow substantially in 2015, but the outlook is simple. For the stock to continue performing, the company must continue to make acquisitions.

After making more than 30 acquisitions in just a few years, it’s hard to keep finding deals that will not only be big enough to make a difference, but will also prove to be good long-term buys. There’s so much pressure on management to keep buying that a serious misstep could be coming. If that happens, this hyped stock could head down in a hurry.

Although I don’t buy Munger’s alarmist concerns about Valeant, I agree with him on one thing. The stock just isn’t attractive at current levels.

A potential acquisition target, Allergan, Inc., points out its worries over Valeant’s business model. investor-presentation-may-27-2014-1 on VRX

Citron, a short-seller, attacks with a report: Valeant-Part-II-final-b. Valeant is another “Enron.”  Use the search box on this blog and type in Enron and follow links to review that case.  Enron never showed the profit margins that Valeant is currently showing.   NEVER take another person’s statement on faith.  Check it out for yourself. 

Valeant today (October 26th, 2015) counters Citron and answers investors’ concerns with 10-26-15-Investor-presentation-Final4 Valeant and video presentation:

Ok, so what is Valeant worth?   Can you make such an assessment?  How do you think Mr. Market will weigh-in?   If you owned a 20% stake in Valeant, how would you manage the position?   What are the main issues to focus on?

This may be too difficult to analyze for many of us but we have  or will have many documents and reports to provide insights.  Remember that there are two sides to every narrative. Can we move closer to reality or the “truth”?

Note and type in VRX.   What type of investor owns Valeant?   Will momentum investors stick and stay?

Your comments welcome.

Sign up for Whitney Tilson’s emails on investing.  Worth a look:

A Reader’s Question on Franchise vs. Asset-based Investing


Greetings from Finland,

I have been a long-time reader of your blog as well as member of your Deep Value group. I am studying in a business school and I’ve been investing in stocks since I was 15 (now 23). I have read the basic Graham’s Intelligent Investor and Security Analysis and lately I have found the statistic, Deep Value approach very interesting.
For me it’s very hard to choose between franchise type investment strategy and more statistic, asset based valuation strategy. I acknowledge that my skills for identifying those Buffet- type-compounders at low prices are lacking but I also know that sticking with asset based strategy is mentally difficult. I have been trying to find asset-based valuation strategies from your blog and Deep Value group and wanting to be better at valuating businesses. I also found Tobias Carlisle’s books helpful and encouraging about finding great picks using quite simple ratios such as P/B or Acquirer’s multiple.
I believe my problem is quite common and you hear this quite often. I am really convinced about your knowledge and I find you to as a great teacher. I hope you could email me those books you took off from your blog because of the copyright reasons. And of course if you can give some tips and hints I would be very thankful.
My reply: Yes, your worries/problems are endemic and natural to anyone developing their investment process.  You have two major goals:
  1. How to value a business
  2. How to think about prices

Point 1: In valuing a business you have either an asset or a franchise (or franchise 2% to 5% of businesses or non-franchise) to value.  The terms are not important, but the concepts are.  If you pay over asset value for a business then growth will not bail you out.  Time is not on your side.   Therefore, step one in improving your results is do not mistake a non-franchise business for a franchise business.  You are in the death-zone where you risk a PERMANENT loss of capital.  See below, dead Russian soldier during WWII invasion of Finland.


Examples would be swks vl.   There is almost no way in a competitive world that SWKS’ returns on capital will remain at those levels (20%+) over the next ten years–and that is what speculators (NOT investors) are betting on.

Buying net/nets and working capital bargains (buying at a discount to liquid working capital and paying nothing for fixed assets) is probably the safest type of investment IF done as a group.   For example, Energold, Inc. (EGDFF) is a working capital bargain with a decent balance sheet but if frontier drilling does not increase over the next five to ten years then it could go out of business. If you invest 10% in ten of those net/nets and working capital bargains, then the ODDS are with you. This is NOT a recommendation for Energold, inc. because it is just a fair business in a hugely cyclical industry, but it is cheap based on its balance sheet.


The bottom-line is that you need to practice and DO valuation all the time.   Value a company every day or every week.   Go through a Moody’s manual or value-line (or the equivalent in Finland) and look at a lot of companies.  Reading about sex, or sky-diving or war is not the same as participating.  Yes, go ahead and read, but request annual reports from all the companies in Finland and start valuing them. If you have trouble, then set aside and come back later when you have more knowledge.  Don’t be afraid to call up the companies.   If you find a company that is really cheap, ask the CFO why doesn’t he sell his home to buy more stock?  The point is to be ACTIVELY valuing companies ALL THE TIME.   Practice, practice.

Take KO VL Last I looked Coke was trading at about 16 times EV-to-EBITDA while HNRG trades at 4 times EV-to-EBIDA (deduct $1 per share for subs.). Cheap!?  Well, hold on, for every dollar of sales Coke makes about 80 to 85 cents in free cash flow while for Hallador Energy (Coal Producer) every dollar of sales generates about 15 cents of free cash-flow right now. I expect that to rise to 20 cents but you can see that Mr. Market handicaps each business properly–usually (but not always).  Hallador has unused capacity and can grow profitably but to a certain limit.   I would characterize Hallador as a non-franchise but with quality assets compared to its competitors in the coal industry (second on cost curve behind Foresight Energy (FELP).

When you buy a franchise then you must expect that barriers to entry will hold-off regression to the mean. The strategy is almost opposite to buying assets where you expect regression to the mean to occur.

Point 2: How to think about prices.    This comes down to knowing yourself?  How do you think, how do you react under stress? Only YOU (not me or other “experts”).  Here is an example of a true value investor:

You have to keep a log of your investments and decisions.  What patterns do you see.  Are you patient?   How will you develop patience.  If you have $1,000 US dollars, then if you make 5 investments of $200 each, write-up each investment–its value, why you made the investment, what would cause you to sell and/or abandon the investment. Then keep meticulous journal entries.   You buy at $10 then the price rises to $15 then declines to $8.   Will you buy more?  Why or why not?   The famous Seth Klraman, sells some at $15 because he knows he will be too upset to buy at $10 or $8 if he hasn’t sold some of his stock. The point is that Mr. Klarman has found a method that fits HIS personality.

Spend more time in introspection and practicing investing.   Let me know your progress and GOOD LUCK.


John Chew

More readings

Strategies used by Munger Buffett and Davis to outperform

Has Buffett Lost the Midas Touch




Brazil EM

Friday, September 25, 2015

No Mas, No Mas! The Vale Chronicles (Continued)!

Some of my Brazilian readers seem to be upset that I used “No Mas”, Spanish words, rather than Portuguese ones, in the title. To be honest I was not thinking about language, but instead about a boxing match from decades ago, where Roberto Duran used these words to give up in his bout with Sugar Ray Leonard.

I have used Vale as an illustrative example in my applied corporate finance book, and as a global mining company, with Brazilian roots, it allows me to talk about how financial decisions (on where to invest, how much to borrow and how dividend payout) are affected by the ups and downs of the commodity business and the government’s presence as the governance table. In November 2014, I used it as one of two companies (Lukoil was the other one) that were trapped in a risk trifecta, with commodity, currency and country risk all spiraling out of control. In that post, I made a judgment that Vale looked significantly under valued and followed through on that judgment by buying its shares at $8.53/share. I revisited the company in April 2015, with the stock down to $6.15, revalued it, and concluded that while the value had dropped, it looked under valued at its prevailing price. The months since that post have not been good ones for the investment, either, and with the stock down to about $5.05, I think it is time to reassess the company again.


John Chew: At least the author has a process to reassess his investment.  I believe the critical flaw in his analysis (easy to say in hindsight) was not noting the massive mal-investment due to distorted credit markets caused by central bank policies. To normalize iron ore prices you would need pre-distortion prices going back twenty-five years.

Read more: No Mas!

A Short Selling Primer


For the millions of investors in buy and never sell strategies today who look at the values on their statements today, trusting that the Federal Reserve will always cut rates and always flood the system with more cheap debt as though this were some sacred rite of passage for the American investor, I can only say two words. Wake up! Read more: BMI_TheBigNastyDWordIsHere_Sept22.15

no easy fed helps stoks You may not wish to become a short-seller due to the asymmetrical risk and reward, but you can certainly improve as an analyst to become more skeptical by taking on the viewpoint of a short-seller. Riders on the Storm or Short Selling  An overview and primer. The best book yet that I have found: short selling Bear market  For those who wish to learn what a REAL BEAR MARKET is like then:

miners horrific