Category Archives: YOU

Thinking Mental Models; What Do Investors Want in a Gold Stock?

Posted on February 20, 2013 | 10 comments

Check out: http://thinkmentalmodels.com/

then click on various categories to view other mental models.  You don’t necessarily need to pay $2.99 per PDF, but you can learn more about the particular lesson/mental model.  Become an expert.

How has Nike maintained a moat over the years selling fashion/sporting goods? NKE_VL and NKE_35 Year?

What Do Investors Want in a Gold Stock?

Mark Twain once wrote “A gold mine is a hole in the ground with a liar on top.”

http://www.viewfromtheblueridge.com/2009/10/07/a-gold-mine-is-a-hole-in-the-ground-with-a-liar-on-top/

Note that none other than Klarmen of Baupost has an interest in Allied Neveda Gold (ANV).

ANV

 

Worth a read if you ever want to “speculate” in gold mining shares.

What do Investors Want in a Gold Mining Stock

Gold is in a bubble:

pbergn says:

Gold is in a bubble: It is traded vastly as a commodity–subject to the supply/demand rule… At about $1,500 the World demand for gold has flattened. This was a signal that the gold price is moving into the bubble territory… The prices are also driven higher by paper gold, such as ETF’s… The true appreciation percentage can be discerned from gold mining company stock valuations, which are indicative of the actual demand increases and monetary inflation expressed in the US dollars… Those Libertarians or so-called Free-Marketeers who delude themselves with the idea that gold is money are woefully wrong– gold is not money, since one has to exchange it into one of the hard currencies to be able to exchange it for goods and services (try paying a drycleaner or your local grocer with a hunk of gold and see what happens)… The idea that gold will be the only currency left after all fiat ones finally explode in hyperinflation supernova is neither original nor true. The Say’s law on neutrality of money suggests that a currency is as good as many products and services there are in the market that it can be exchanged with. The money is neutral–that is it has no intrinsic value… However in case of gold and other precious metals, they do have intrinsic value as a commodity used in jewelry, electronics and medical industries… Of course, the lion’s share of demand for gold originates as demand for jewelry, especially from the traditional cultures valuing the noble metal as very special, such as in India… However, the demand for gold as a commodity or as a jewelry is inelastic upwards. That means that the demand curve is bell shaped and is bounded from above… At a certain price point, the demand for new gold will proportionally decrease, being compensated by recycling and dilution of content of the items made from it… IMHO, the fair price for an oz of gold today expressed in US dollars is around $1,400 – $1,500 as suggested by flattening demand for the new mined metal as a commodity at that price point.

 

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Rethinking a Business Major

Posted on February 16, 2013 | 3 comments
from Farnam Street

Melissa Korn reporting in the Wall Street Journal:

“The biggest complaint,” writes Korn is that “undergraduate degrees focus too much on the nuts and bolts of finance and accounting and don’t develop enough critical thinking and problem-solving skills through long essays, in-class debates and other hallmarks of liberal-arts courses. Companies say they need flexible thinkers with innovative ideas and a broad knowledge base derived from exposure to multiple disciplines.”

That gap in my own knowledge was one of the reasons I started Farnam Street.

Robert Hagstrom, author of Investing: The Last Liberal Art, adds: comments

At first, you might think the “art of achieving worldly wisdom” is an elective you can do without. After all, there is simply not enough time to read all that is required before the next day’s opening bell, and besides, what passes for reading today is more about adding information and less about gaining knowledge. But don’t despair. In the words of Charlie Munger, “we don’t have to raise everyone’s skill in celestial mechanics to that of Laplace and also ask everyone to achieve a similar level in all other knowledge.” Remember, as he explains, “it turns out that the truly big ideas in each discipline, learned only in essence, carry most of the freight.”  Furthermore, attaining broad multidisciplinary skills does not require us to lengthen the already-expensive commitment to college education. We all know individuals who achieved a massive multidisciplinary synthesis of knowledge without having to sign up for another four-year college degree.

According to Munger, the key to true learning and lasting success is learning to think based on a “latticework” of mental models. Building the latticework can be difficult, but once done, it can be applied to a wide range of problems.  “Worldly wisdom is mostly very, very simple,” Munger told the Harvard audience. “There are a relatively small number of disciplines and a relatively small number of truly big  ideas. And it’s a lot of fun to figure out. Even better, the fun never stops. Furthermore, there’s a lot of money in it, as I can testify from my own personal experience.”


Original Article: http://feedproxy.google.com/~r/68131/~3/lZyZWLHicRM/

Sign up for a Mental Models Course from Munger 🙂http://open.salon.com/blog/simoleonsense/2012/02/02/attention

_munger_fansa_top_tier_class_on_mental_models_i_recommend_you_sign_up_its_free

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Apple (AAPL) 100 to 1 in the Stock Market

Posted on February 6, 2013 | 3 comments

Apple

After buying Apple during the depths of the Tech Bubble Bust in 2003 around $6.94, I recently had to sell about ten years later around $700 for a compound annual return over 10 years of 58.5%. Eat your heart out Munger, Buffett, Soros, Graham, Tudor Jones, etc., etc.

And now what? 

Ok, Ok, I live in fantasy.  A friend recently said that he wished he had sold his Apple after buying it last year. Coulda, shoulda, woulda doesn’t advance your skills as an investor. What can we learn A Priori (before the fact) to help us as investors in finding and or managing our investments?  What lessons can be gleaned from Apple’s history? In Part 2: We will begin to prepare our case study file on Apple.

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A Reader’s Book Suggestion; Opposing Views of the Manipulated Boom; Lonely Bear

Posted on February 4, 2013 | Leave a comment

Ice

Everyone holds his fortune in his own hands, like a sculptor the raw material he will fashion into a figure. But it’s the same with that type of artistic activity as with all others: We are merely born with the capability to do it. The skill to mold the material into what we want must be learned and attentively cultivated–Johann Wolfgang von Goethe

A Lonely “Bear” on the Market:

As a side note, the Federal Reserve presently has a balance  sheet of about $3 trillion, on total capital of about $54.7 billion, meaning  that the Fed is leveraged about 55-to-1. At an average maturity of over  10-years, the duration of the Fed’s portfolio is about 8 years, meaning that a  100 basis point move in interest rates impacts the value of the Fed’s holdings  by about 8% (about $240 billion). Since July, interest rates have increased by  about 60 basis points, which has undoubtedly wiped out the Fed’s capital,  making it technically insolvent (fortunately for Ben Bernanke, the Fed doesn’t  mark its capital to market). As a practical matter, the only effect is that the  interest that the public pays on Treasury debt cannot actually be remitted by  the Fed back to the Treasury as usual, but must instead be retained by the Fed  in order to recapitalize itself due to losses on the bonds it holds. The losses  therefore effectively represent an unlegislated fiscal expenditure. Moreover,  assuming an average interest rate of about 2.5% on Fed holdings, each further  increase of 30 basis points in interest rates would wipe out a full year of  additional interest payments. Needless to say, nobody cares. These observations  aren’t central to our current concerns, but it’s worth understanding how  reckless Fed policy has already become.

On the subject of Fed policy and market behavior, Bill Hester wrote an outstanding research piece this week – Fed Leaves Punchbowl, Takes Away Free Lunch (of International Diversification). It provides good perspective on the link between economic performance and international market returns, also highlights the growing importance of country selection in international investing. I’ve included a second link to that article at the end of the Fund Notes section.

http://hussmanfunds.com/wmc/wmc130204.htm

http://hussmanfunds.com/rsi/intldiversification.htm

A reader makes a book suggestion

http://boards.fool.com/quotthe-emotionally-intelligent-investorquot-30521293.aspx

A new title that arrived yesterday via Amazon (AMZN) that you’ll also enjoy is Ravee Mehta’s The Emotionally Intelligent Investor. Mehta, the eldest son of immigrant parents, graduated summa cum laude from the University of Pennsylvania with degrees from the Wharton School of Business and also School of Engineering, and later worked for George Soros and Karsch Capital before retiring at a young age to travel the world, teach, and study philosophy at Oxford. Now Mehta manages his own funds and enjoys the freedom of working for himself.

While not having a boss is liberating, I suspect Mehta realizes that he needs a certain amount of structure (as we all do), so he can stay independent and not have to get a job with another financial services firm. In this paperback, whose title is a nod to Ben Graham’s landmark The Intelligent Investor, Mehta tells us what he learned from his search for an investing framework, including the behavioral errors that separate us from our money.

“After writing this book, I have developed daily and weekly routines to understand myself and others better, deal with my particular vulnerabilities, prioritize my to-do list, evaluate investment opportunities, empathize with other market participants, monitor my portfolio, learn from prior decisions, leverage the intuition of others and anticipate danger with individual investments and more overall portfolio’s construction. I also make sure that my investment approach fits with my personality and motivations.

Mehta’s The Emotionally Intelligent Investor, like Train’s The Money Masters, is loaded with useful tips. Despite just 200 pages in length, this is a “big” book.

The companion website: http://theemotionallyintelligentinvestor.com/

Another link: http://www.amazon.com/The-Emotionally-Intelligent-Investor-self-awareness/dp/0615688322/ref=lh_ni_t?ie=UTF8&psc=1

Manipulated Boom: 

James Grant: http://www.economicpolicyjournal.com/2013/02/lauren-lyster-talks-to-james-grant.html

Contrast that video with Krugman calling the artificial boom a “virtuous circle.”

http://www.economicpolicyjournal.com/2013/02/krugman-calls-artificial-boom-virtuous.html

Enroll in a Critical Thinking Course

https://class.coursera.org/criticalthinking-001/auth/welcome?type=logout&visiting=https%3A%2F%2Fclass.coursera.org%2Fcriticalthinking-001%2Fclass%2Findex

FPA Crescent Fund Annual Letter: crescent-2012-q4-1-24-138663BD8AD6C2 . This letter is an excellent read for understanding the current quandary that investors face today. The PM even quotes Von Mises. BRAVO!

 

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My BEST DAY EVER!

Posted on February 1, 2013 | 4 comments

 

Crowded Pit

My Best Day Ever.

No, I am not talking about today, though all my stocks are rising like soybean futures in an August drought.  Why?

http://www.economicpolicyjournal.com/2013/02/s-500-off-to-best-start-since-97.html

I don’t know what the future will bring, but I do know risks are rising. Values are out there, but with more uncertainty attached.  Experience has taught me to deal with excruciating pressure such as whether to buy the yellow Lamborgini Yellow

or the red Ferrari. Red

I am thinking of putting in a fur-lined sink or is that too much? How about I finally do something for the boy scouts. Boy Scouts I’ll hire a bus to New York City for a visit here:

Back Twenty-Four Years Ago in Chicago

But I remember the best day of my life 24-years ago back when I was a young pit trader on the Chicago Open Board (Mid-Am Exchange) doing this, Chicago Pit

when–within 24-hours--I went broke, my fiancé nixed our wedding day, and my suicide attempt failed. Oh, and the Cubs lost again.

Never would adversity teach so much to an arrogant, ignorant, selfish, and insane twenty-two year old.  To be continued………………

Have a Great Weekend!

PS: Three-minute kindergarten course on investing. It is never too late to get started.

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Managing Your Time

Posted on January 29, 2013 | 1 comment

Distract

The additional rise of this stock above the true capital will be only imaginary; one added to one, by any rules of vulgar arithmetic, will never make three and a half; consequently, all the fictitious value must be a loss to some persons or other, first or last. The only way to prevent it to oneself must be to sell out betimes, and to let the Devil take the Hindmost –Anonymous from the book by Edward Chancellor.

My portfolio is on fire. Every stock up 1/4% to 2% today. Thank you Mr. Bernanke for the manipulated boom and punishing war on savers! I wish my IQ was rising as fast. This is every investor’s nightmare, you might have to sell as full value is reached and your cash hoard piles up. Meanwhile clients are begging you to put more money to work.  I miss the dark days of 2009 when clients would sob into the phone, “Will my stocks EVER go up?”  Now I beg, “Will fear EVER return.” These are grim days for the value investor.

I look and look so I need HELP in managing my time:

http://abetterlife.quora.com/How-to-master-your-time-1

 

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A Reader’s Question on Case Studies

Posted on January 28, 2013 | 2 comments

Fall from Grace

On my good days, I think of Wall Street as one large promotion machine and on my bad days, I think of Wall Street as a den of thieves.–Jean-Marie Eveillard

Capitulation everywhere (risks rising): http://www.hussmanfunds.com/wmc/wmc130128.htm

A Reader’s Question on Cases

Hi John: Do you have a compilation of case studies that you’ve found extremely instrumental in learning from, that you’ve collected over time?

I got a lot out of reading your notes on Greenblatt’s classes, so thanks for
that. Last night I read a great small case study from Einhorn and I realized
that the few pages I read was far better than all the time spent studying for my CFA exams. Any good compilation you have would be amazing.
My reply:  Good question. Besides a relentless curiosity, learning how to learn is critical for your development. I believe subscribing to Grant’s Interest Rate Observer then downloading ALL 30 years of his letters while also downloading the SEC filings of any company he mentions over the past 30 years will repay you many times more than any MBA, CFA–if YOUR GOAL IS TO BECOME A BETTER INVESTOR.  You will learn financial history, valuation, about market psychology, business cycles. This is what I am currently doing. I have downloaded 1983 to 1993 newsletters. Now I just need the time to finish reading them!
OK, you don’t want to do that–shell out $990 or whatever–then go here:

Take the first link. Download a research report, look at the name of the company and date, then download the financials for the company mentioned and try to analyze the company BEFORE reading the report.   What do you see? If you don’t understand something, look it up in your finance or accounting textbook that you keep by your side. Then read the report–what did you learn or miss?   Note what you need to learn, then learn it, then go on to the next report.

Yes, this takes hard work, doggedness, and discipline, but you can do it. Not many will, so there is your chance to become great.

Spend time doing this rather than listening to CNBC. Yes, we all laugh when we hear Icahn call Ackman a loser (I was appalled and saddened), but how will THAT help you become a better invesstor?

I will post a link to more case studies tomorrow.   Good luck.

PS: I haven’t forgotten my reply to an investor seeking an answer on what to do with his/her money.

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Improving Your Skills as an Investor (Reading about Apple), Indian Investor

Posted on January 25, 2013 | 1 comment

Service Call

Reading Skills: Apple Case Study

Besides reading about great investors or pouring over your finance text books, you should broaden your perspective and read about industries and business founders. This reading–if done critically–will develop a more nuanced analysis of investments. I don’t know if AAPL is a buy or sell, it is in my too hard pile, but I found the two posts below from The Brooklyn Investor very informative. Do not underestimate the power of a genius. This case offers you a way to see how one investor applied his reading for greater understanding. A broad perspective of the world will help your investing. Remember that if you read the same sources, think the same way, then your returns will be at best average.

Comparing Apple’s leadership to Polaroid’s Founder

Interview with an Indian Investor

chetan_parikh

http://www.safalniveshak.com/value-investing-chetan-parikh-way-part-1/

http://www.safalniveshak.com/value-investing-chetan-parikh-way-part-2/

PS: Money Supply Aggregates are humming along at about a 11% clip. Bernanke is on fast cruise control.

MONEY SUPPLY GROWTH RATE HITS CRUISING ALTITUDE (www.economicpolicyjournal.com)
For the third week in a row, 13-week chained money supply (M2-nonseasonally adjusted)has come in at 11.4%. We, thus, may have hit a cruising altitude as far as annualized money printing.
Here’s the climb over recent weeks.
5.1%, 5.6%, 6.6%, 7.1%, 7.5%, 7.8%, 8.2%, 8.4%, 8.7%, 9.0%,
9.3%, 9.6%, 9.9%, 10.7% 11.4% 11.4% 11.4%

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Socionomics

Posted on January 17, 2013 | Leave a comment

Pond Hockey

www.cafehayek.com… is from David Hume’s 1742 essay “Of Public Credit,” (here from page 350 of the 1985 Liberty Fund collection of Hume’s essays, edited by the late Eugene Miller, Essays: Moral, Political, and Literary) (original emphasis):

[O]ur modern expedient, which has become very general, is to mortgage the public revenues, and to trust that posterity will pay off the incumbrances contracted by their ancestors: And they, having before their eyes, so good an example of their wise fathers, have the same prudent reliance on their posterity; who, at last, from necessity more than choice, are obliged to place the same confidence in a new posterity.

Moods and Markets (Socionomics)

Of course, mood and emotion have an influence on people’s actions. I view socionomics/psychology as a supplement to but not a substitute for understanding Austrian Business Cycle Theory. In the interests of openness and inquiry I am posting on socionomics.  Some may view it as star-gazing. YOU decide.

Socinomics is the study of how changes in social mood motivate and affect social actions and our behavior, not just in the financial markets but also in politics and popular culture. Socioeconomics, on the other hand, looks at how changing economic conditions and social conditions relate. The two fields have different views of cause and effect.

Mood is defined as our underlying confidence which is all about the future and how certain we are, not only about what we believe is ahead but whether our own immediate choice of action—our decisions–will be successful.

The reality, however, is that the future is in no way correlated to our level of confidence. The future is going to be what it is going to be whether we are confient about it or not.

For example, in June 2011, Wells Fargo exited the reverse mortgage business (www.wellsfargo.com/press/2011/20110616_Mortgage) by stating that “The decision was made based on today’s unpredictable home values.”  The press release implies that when Wells Fargo entered the reverse mortgage business in 1990, the company thought that home values were predictable.  The reality is that home values were just as predictable or unpredictable in 2011 as they were in 1990.  When we are confident (good mood) we tend to believe that we can predict accurately and when we are not confident, we view the world as more unpredictable. Read more below:

Socionomics in a nutshell and Social Behavioral Dynamics_Robert Prechter

Online Resources: www.socionomics.net and www.horizonpreference.com

Books: One of the greatest investors of all times was John Templeton who said to buy at the point of “maximum pessimism.” I have been looking for books that explain how to do this, or at least make an attempt.

  • Moods and Markets: A New Way to Invest in Good Times and in Bad (Minyanville Media) [Hardcover] Peter Atwater (Author)
  • The book, “Mood Matters,” makes the radical assertion that all social events ranging from fashions in music and art to the rise and fall of civilizations are biased by the attitudes a society holds toward the future. When the “social mood” is positive and people look forward to the future, events of an entirely different character tend to occur than when society is pessimistic. The message of the book – that the mood of a society dictates what will happen rather than the reverse – is counterintuitive at first sight, but supported by many quite surprising and convincing examples.
  • Mood Matters: From Rising Skirt Lengths to the Collapse of World Powers [Hardcover] byJohn L. Casti (Author)

 

 

 

 

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How Could Ackman be So Wrong? Where’s the Inflation?

Posted on January 16, 2013 | 2 comments

clown

We continue our study of Herbalife’s saga with a recent post from www.brontecapital.com. There are lessons here on conducting research and on hubris.

What this story is really about

Herbalife is a company which combines a lot of good (think the life-saved diabetic above) with some pretty ugly features.

But this is not really a story about Herbalife – Herbalife will survive globally. Like all multi-level marketing schemes it will have its ups and downs. There will be all sorts of problems (such as tax compliance throughout the scheme, cash handling, perhaps even using Herbalife accounts to launder money).

What this has (deservedly) become is the story about how Bill Ackman can be so wrong. He spent (by his own admission) a year and a half analysing this company and his thesis can be falsified by visiting a few clubs in his home city. Bill Ackman’s thesis is the most easily falsified bear-thesis I have seen from a major hedge fund ever.

You have to wonder how this happened. So I am going to tell you: 

Bill Ackman a Harvard educated (magna cum laude) billionaire New York hedge fund manager bet over a billion dollars on a short position (imperilling his fund and his reputation) without checking the facts.

And he did not check the facts because he was so rigid with a misplaced silver spoon that he could not stoop to sit on a subway for thirty minutes and talk with poor people for ninety minutes.

Read the entire article–an important read
http://brontecapital.blogspot.com/2013/01/notes-on-visiting-herbalife-nutrition.html

Also…..http://seekingalpha.com/article/1111331-implications-of-herbalife-s-soaring-short-interest-ratio

 

Expectations of Low Future Growth?

Market Review LMCM See Future Value (See page 5).  Perhaps the market is discounting real growth vs. nominal growth?  Don’t take that chart at face value.

Where is the Inflation (CPI) ?  Another lesson in why price aggregates are so misleading.

Critics of the Austrian School of economics have been throwing barbs at Austrians like Robert Murphy because there is very little inflation in the economy. Of course, these critics are speaking about the mainstream concept of the price level as measured by the Consumer Price Index (i.e., CPI).

….

graph3

High prices seem to be the norm. The US stock and bond markets are at, or near, all-time highs. Agricultural land in the US is at all time highs. The Contemporary Art market in New York is booming with record sales and high prices. The real estate markets in Manhattan and Washington, DC, are both at all-time highs as the Austrians would predict. That is, after all, where the money is being created, and the place where much of it is injected into the economy.

This doesn’t even consider what prices would be like if the Fed and world central banks had not acted as they did. Housing prices would be lower, commodity prices would be lower, CPI and PPI would be running negative. Low-income families would have seen a surge in their standard of living. Savers would get a decent return on their savings.

Of course, the stock market and the bond market would also see significantly lower prices. Bank stocks would collapse and the bad banks would close. Finance, hedge funds, and investment banks would have collapsed. Manhattan real estate would be in the tank. The market for fund managers, hedge fund operators, and bankers would evaporate.

In other words, what the Fed chose to do ended up making the rich, richer and the poor, poorer. If they had not embarked on the most extreme and unorthodox monetary policy in memory, the poor would have experienced a relative rise in their standard of living and the rich would have experienced a collective decrease in their standard of living.

http://mises.org/daily/6340/Where-Is-the-Inflation

 

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