Richard Oldfield: Simple But Not Easy–A Deep Value Investor Speaks


Simple But Not Easy

“Value investors are born not made.” Richard Oldfield

I am an investor similar to Walter Schloss and Peter Cundhill.

Simple But Not Easy Quotes
“One should invest in equities, which are volatile, only with a long-term perspective, and in the most volatile of equities with an especially long-term perspective – 5 years or more – and only with money which one can be sure of not needing in the next few years.”
“Different meanings of safety to different investors. For someone needing a lump of money in a year’s time, the only safe investment is a cash deposit or a short-term government bond. For someone with no imminent need of the money and a desire to accumulate capital and increase purchasing power in the long-term, it may be safer to invest in equities – volatile but with the historic and likely future characteristic of a high return after inflation – than to put money on deposit with the risk that over the years the real value of the investment will be eroded by inflation.”
“A share looks cheap; you buy it; it goes down and looks cheaper; you buy more; it goes down and down, getting cheaper and cheaper, until it reaches what practitioners call euphemistically the ultimate cheapness – zero. This is what is generally called the value trap.”
“A long-term temperament as well as long-term circumstances A Japanese man went into a bank to change some Japanese notes into sterling. He was surprised at how little he got. “Please explain,” he said to the cashier. “Yesterday I was changing same yen for sterling and I received many more sterling. Why is this?” The cashier shrugged his shoulders. “Fluctuations,” he explained. The Japanese man was aghast. “And fluck you bloody Europeans too,” he responded, grabbed the notes, and walked out. Fluctuations matter if the money could be needed soon. Money invested in equities must not be money which will be wanted in a year or two, or might be urgently wanted at any time, because there is a fair chance that the moment when it is needed will be a bad one for the stock market and the investor will therefore be selling at low prices. If investors think they might need the money soon, the message is clearly stay away: the chance of a minus return is just too great. Even if investors are in a position to allocate a fair amount to equities, they should not necessarily do so. It is not enough that the circumstances are right. Investors need to be temperamentally inclined to the sort of long-term investment which equities are. Long-termness must be subjective as well as objective. The fact that the circumstances of a particular investor might objectively lead to a certain viewpoint does not mean that he or she necessarily has that viewpoint. A baby is in an objective position to take a long-term view, but will not actually look beyond the next feeding-time.”
“The great advantage of the property-centred policy was that in a panic property was very difficult to sell. The British kept their property because they could not do otherwise, and prices always recovered. They were prevented by the illiquidity of property from selling at the bottom.”
Richard Oldfield, Deep Value Investor from the UK VIDEO Worth the view and to be seen with this presentation:
2016_Oldfield  Presentation on March 2, 2016

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



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


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

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

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

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

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

Buffett_Lecture_Fla_Univ_Sch_of_Business_1998  Hope that helps!

Arbitrage by Buffett_Research  (just for Buffaholics)

Coal’s Sunset/The Capital Cycle; Graham Bangs the Table

millenniumforce02wide was our last discussion on the capital cycle.


Now, look at these two excellent posts on Coal.

A perspective on current conditions in other markets:

The Big Long – Final Feb 28 2016 The writer promises a follow up to discuss catalysts–which, I believe, will be the change in supply and demand dynamics and the capital cycle. See article referred to here: 2_Buffett and Graham Call the 1974 Market Bottom

and for more historical and emotional perspective:


Course on Buffett-Style Investing from NYU


Hi John,

New York University’s School of Professional Studies is offering an online class focused on the time-honored techniques of value investing, as practiced by the world’s most legendary investor, Warren Buffett. We thought you might be interested in knowing more about this class, and perhaps in sharing this information with your readers.

By examining case studies of Buffett’s acquisitions, students will explore the real-world principles that Buffett uses to pick companies. The class starts April 2nd and is open to the public for registration.

For more information, please see the attached press release.

Thanks so much,

Details: Fundamentals of Buffett-Style Investing_PR2016 (3)
Email with questions:

Alisa Koyrakh
Assistant to James Berman

JBGlobal LLC
41 East 11th Street, Fl 11
New York, NY 10003


Berkshire Letter_2015   The Recent Buffett Letter

John Chew (Editor, I am not endorsing this class per se because I don’t know the professor or the details of the course material, but for those of you who seek a more structured learning experience then perhaps this class is for you.  Let me know if you take the class, so I can share your experience with others.  Also, remember that if you use the search box at, you can find dozens of Buffett case studies for FREE.

Just remember that trying to copy Buffett will NOT work, but applying the Buffett principles of investing to YOUR OWN methodology will help you.   Be the BEST YOU can be not a second-rate copy of another.

More reading of interest:


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


Good luck!


The Search Process

Manual of ideas

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

Here is part of the discussion


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

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

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

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

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

Hey all,

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

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

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

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

  • Search
  • Valuation
  • Risk Management
  • You

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

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

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

A full discussion is here: THE SEARCH PROCESS

Go where it is cheapest:


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


Door #1 or Door #2? You Choose.

The Dao of the Austrian Investor

DECEMBER 20, 2013Mark Thornton

TAGS Financial MarketsGlobal EconomyHistory of the Austrian School of Economics

[The Dao of Capital: Austrian Investing in a Distorted World. By Mark Spitznagel. Wiley Press, 2013.]

The economy is extremely complex. As Leonard Read taught, no single individual in the world knows how to make something as simple as a pencil. The level of complexity has only increased over time with the expansion of knowledge, technology, transportation, and international trade. Our individual labor is increasingly focused on a narrower slice of the overall process of production.

Even the static picture, if it could be seen, is complicated by the fact that our world is a work in progress dating back thousands of years. Look around you and you will see the savings, investments, and work of individuals who are long dead. Previous generations made their choices, some of which have been maintained, repurposed, neglected, or destroyed. Ownership of all that capital is recognized in the form of stocks, bonds, titles, and deeds.

Austrian economics teaches that understanding the “economy” can only be undertaken with the aid of economic theory. There is no formula or equation for understanding the economy. It cannot be measured in any meaningful scientific way. Only the logical construction of cause and effect aid us. A simple example of this is when John trades his three apples to Mary for her three oranges because both John and Mary think they would be better off from doing so.

Mark Spitznagel, a hedge fund manager, tries to take economic theory, specifically Austrian economic theory, and breathe life into understanding how the economy works and why it sometimes doesn’t. In his book, The Dao of Capital: Austrian Investing in a Distorted World, he uses these insights to explain the process of investment that he uses.

The title refers to the paradoxical Chinese philosophy of Daoism. In this philosophy, in order to achieve your goal you must do the opposite, or Shi. For example: “turn right in order to go left.” This is used, ultimately, to underscore the roundaboutness of the market process, where production processes become increasingly more complex in order to become more productive. In investing, for Spitznagel, it means to step back and take small losses in preparation for making larger gains, a variation of “value investing,” where you must keep your vision of the future as one of a process that takes place over time.

As a young trader in the bond pit at the Chicago Board of Trade, the author was lucky enough to come across Hazlitt’s Economics in One Lesson and Mises’s Human Action. He found in these books a theoretical explanation for the otherwise perplexing world of primary markets at the Chicago Board of Trade. He later partnered with Nassim Taleb ofBlack Swan fame and later still opened his own firm to employ his concept of “Austrian Investing.”

Spitznagel begins with the metaphor of the forest and the trees. Briefly put, conifers cannot compete with hardwood trees on the fertile plains so they retreat to higher ground that is less fertile and more intemperate where they can outcompete the hardwoods. Here they thrive under harsh conditions, even battling glaciers of various ice ages. This is an illustration of competition and comparative advantage in nature.

Fire plays a role in the competition between conifers and hardwoods, serving to clear small areas with dense underbrush free for new competitions among seedlings. This ebb and flow between conifers and hardwoods shows how apparent losses from fire can lead to strength and an overall growth in productivity. In the economy, firms go bankrupt, products are displaced, and new production processes emerge over time.

In a similar manner, he shows how fire-suppression policies of the government are like government intervention in the economy. Fire-suppression policy aims to put out most forest fires as soon as possible. This can lead to too much underbrush so that fires can become catastrophic is scope. This is an illustration from nature of the havoc caused by government intervention meddling in nature’s competition. In the economy, the government’s central bank can try to suppress recessions and deflation, but this can result in catastrophic depressions, like the Great Depression. As Rothbard showed in his America’s Great Depression, President Hoover’s interventions to suppress deflation and depression only made things worse.

In chapter 3, “Shi: The Intertemporal Strategy,” the insights of the famous military philosophers Sun Tzu and Carl von Clausewitz are discussed in support of the Daoist concept of Shi. This is the concept of strategic advantage in war where you do not hurl your troops headlong directly at enemy positions for an immediate victory. Rather, you conserve your troops and resources and take advantage of points with defensive and strategic advantages in a more roundabout approach to final victory. Military history has confirmed the wisdom of this approach from the battlefields of the American Civil War to the more recent guerilla wars fought against the modern empires of the United States and the Soviet Union. As applied to investment, this discussion is meant to make the reader prepared and even eager to take small losses in order to achieve the ultimate goal of growing your wealth into the future.

Normally, I do not like examples from nature and war to serve as illustrations of the benefits of roundaboutness of production, preservation of capital, and competition, but I will admit that in this case they are effective.

The book takes us on a trip through time to explore the character, history, and contributions of the Austrian economists. He begins with Frédéric Bastiat (the seen and unseen), and moves onto J. B. Say (entrepreneurship), Carl Menger (marginal utility and price formation), Eugen Böhm-Bawerk (roundabout production and interest), and even Henry Ford (the assembly line as an example of roundabout production). This is followed by a fascinating discussion of the critical role of time preference in life before he turns his attention to Ludwig von Mises (monetary and business cycle theories and the market as a process). According to Spitznagel, Mises was “perhaps the greatest economist of all time.”

Since I am not an investment expert, I will not comment on the chapters on investing or the author’s tweaks of Austrian economics that try to bring Austrian economic theory closer to the understanding of reality for the non-economist. However, I applaud the book as a look into the thinking process of a great investor, especially one that has a clear and consistent understanding of the market process, the dangers of government intervention, and the benefits of Austrian economics.

The roundabout path to profits: Mark Spitznagel on the Dao of Capital

How a hedge fund manager with floor trader roots embraces the Q Ratio, Austrian economics, tail hedging, libertarianism and Daoism to prepare for the next market crash.

Mark Spitznagel is an accomplished trader and hedge fund manager who has learned to take advantage of market distortions he blames on an overly involved Federal Reserve and government, while preparing for the consequences of those distortions. Instead of fighting what he knows is an illogical distorted market he has learned to ride those irrational markets while preparing for the inevitable snap back, where he then can profit in an exponential fashion through the perfecting of tail hedging strategies.

However, his book “The Dao of Capital: Austrian Investing in a Distorted World” is not an explanation of his trading strategy but an in-depth study of economics and human nature, the inevitable result of which is the philosophy of building a successful enterprise through the understanding of the roundabout, and learning to delay gratification to gain an advantage down the road. He does it through the study of Austrian economics and the application of the roundabout method of investing.

Spitznagel could have simply have written that investors need patience and must avoid the temptation of the quick profit; that building a successful strategy, and life, involves a longer-term approach foregoing instant gratification; that establishing a solid foundation while appearing not to create progress puts you in position for much greater success later on. He did not do that. Instead, he takes you on a tour of history and nature that illuminates these long held truths. Just as the technical trader delves into cycle analysis and Fibonacci numbers, Spitznagel illustrates how these truths are imbedded in history and nature and are not just platitudes to throw around. In the end his message is simple, but by providing the historical underpinnings he brings them to life in a much more vibrant way.

He travels a long way to come to a pretty simple message. It is through his vast research and study that he shows that this message, though simple, is essential. He has documented how it has been so throughout history.

Futures Magazine: Your book cites some of the most accomplished economists, military and historical figures as inspiration but at the top of your list is an old grain trader and family friend Everett Klipp. Why?

Mark Spitznagel: He was a close family friend, very close to my dad. I caught the [trading] bug from him early on and he said simply ‘to be successful you have to love to lose.’ Even at the[Chicago] Board of Trade, it is not like pit traders do this. But when I was 14 I thought that’s what trading was. This is the discipline of trading, loving to lose and nothing about winning.

I immersed myself in it and became obsessed with the grain markets. Through high school and even through college, I wanted to be a corn trader. I clerked for many summers in the grain [room] and ultimately the bond [room]. It slowly became obvious that is where someone’s got to be.

FM: It is no huge revelation that a lot of our recent economic problems can be blamed on short-term thinking; never looking beyond the next quarter. You take a circuitous route in your book to describe this. Is that on purpose?

MS: It is on purpose. The whole point is there is a lot you have to build up along the way. There is a path you have to follow to get somewhere and it is not the direct path. For instance, it is not enough to give someone an investment strategy, the key is what is underlying that investment strategy, why these things should work, what the thinking behind it is. It is very easy to say this is a strategy that works and it will continue to work. There are data mining issues with that. You need to approach trading in a much more deductive way. It was the point to build up the necessary tools to code to the strategy.

FM: It seems that we intuitively know some of these things but often don’t act on it.

MS: People say it is a long term thing. It is almost a cliché to say that. They use it as an excuse for what is not working at the moment. What I am talking about is not just about waiting, it is about working in the present to gain an advantage in the future as opposed to just putting something on and twiddling your thumbs and watching it work. Yes, we are all very short-term minded. Corporate managers are thinking about the next quarter. This is all very rational for them to do. There is the [Stanford professor Walter] Mischel study (an experiment to determine whether kids would be willing to wait to get more marshmallows or take one immediately). It turns out that the reason they don’t wait is not because of impatience, it is that they don’t believe you are going to come back with more. Any investment manager is right to think that if I don’t get my marshmallow now, do well now, you are not going to give me an opportunity to do better later. And they are right about that. It is a structural problem. These people are acting very rationally based on the structure of these industries. I firmly believe the big problem here is one of being trapped in the present and all that matters is that next slice of time. It is both a structural problem in history and our psychology.

FM: You successfully called the market turns of 2000 and 2008. Was your tail hedging strategy perfected or was it just forming?

MS: I was on the floor from 1993-97. In ’98 I was a swaption trader at Credit bank primary dealer arm. In 1999 I started a hedge fund with Nassim Taleb, who was at the [Chicago Mercantile Exchange] when I was at the CBOT; 2000 was our big play there. In 2005 I went to Morgan Stanley within its stat arb group. In 2007 I left to start Universa [Investments] and we all know what happened in 2008.

FM: A lot of people saw the 2000 crash coming as the market appeared overbought throughout the late 1990s but lost money by being wrong on the timing. Is your strategy a fix for that problem?

MS: Absolutely. You can’t short markets that are running like that. You are going to blow yourself up. It goes back to Everett. That’s the reason I approach market this way: the idea of taking a one tick loss. If you want to trade that market with S&Ps you would short it, but when you are wrong you will have a tight stop. And throughout the ’90s you would have taken a lot of losses. Eventually you would have been right, whether you would make up all your losses, I can’t say.

What I do with options is nothing more than a fancier way to do that. Right now I would say the market is massively distorted, we are going to see a huge sell-off but I would never advise someone to be short this market. You would blow yourself up. The market will balance itself; as it has in all the other bull moves caused by distortions in the last 100 years. It managed to right itself but the path there is difficult and there is no telling how far it can go.

In the late ’90s clearly [Fed Chair Alan] Greenspan was the driver of that boom. There was a nice believable theme behind it that we were in a new economy. The market went further than it ever had in recorded history. Here we are again on the cusp. If the market rallies much from here, now we are back in this territory like 1999. It is possible the market could double from here or triple from here. I happen to think it is not the likely path.

FM: Isn’t it different now. In the ’90s we had a booming economy. No one would confuse the last six years with a booming economy, we know it is struggling and the Fed is trying to keep us above water waiting for stronger growth to happen.

MS: Agreed. But I would argue in both situations ultimately there were delusions. The booming economy of the ’90s was happening but it was not based on anything real. At some point monetary distortion can easily lift asset prices but it also could make it look like there is activity in the economy that is artificial. They both had similar sources. The late ’90s look very different than today and for that reason it will probably be very difficult for us to go too much higher.

FM: What was the misallocation in the ’90s? It seem that they were constantly raising interest rates anytime growth went beyond 3.5%.

MS: It was the Fed keeping interest rates too low. Rates were too low in the ’90s. We don’t understand why Greenspan kept rates as low as he did in 1996. The general argument was rates were too low for too long. I know by today’s standards it seems benign. They were artificially low in the ’90s (see “Way to busy,” below).

FM: In 2002 when GDP was growing by more than 4% two quarters in a row, the Fed went from 1.75% down to 1%. Is that the seed of the current problem?

MS: Yes. The same thing happened. How people can’t see how that for instance created the real-estate boom is inconceivable. The question is how much do we bring Fed Funds back up again. In 1996, why didn’t you let rates go up more quickly than you did? And rates were lowered in ’02 all for the same reason. You change the structure of the economy when you artificially move them in the first place. When the government sets the price of things typically our culture is such that we don’t like it.

If the government set the price of LCD TVs we would think there is something weird about that, and yet we don’t think it is weird for them to set the price for the most important price in the economy, which is interest rates. We don’t have a free market in interest rates. When you do that, complex distortions happen.

FM: How patient would you have been if you developed this strategy in 1990 and had to wait a long time for the market to correct?

MS: You had to wait until the mid-1990s before the MS Index or Tobin’s Q ratio, put you at the levels where it is today (see “The Mises Index,” below). Let’s remember 1982 was a generational buy and then the market ripped. It wasn’t until 1995 or 1996 where it reached that level where every market topped in the last 100 years: 1917, 1929, 1937, (1973) and 1996. It wasn’t until 1996 if you were following this MS Index that you would have stated maybe it is different this time because the market screamed from there but throughout the first part of the 1990s, it was not terribly overvalued.

FM: Your philosophy is based on non-intervention but 2008 was pretty extreme crisis. Do you think the Fed needed to do anything?

MS: People who are Libertarian are always put in this unenviable position where we look like people who don’t care because we are saying you shouldn’t do anything; you should let the forest burn; let people suffer. It is unfair to start with the tragedy, you have to start with the build-up. It is interventionism that got us there in the first place. Go to my forest analogy that is central to my book. If you don’t allow any forest fires for many many years and then all of a sudden a little fire starts at that point you get painted in a corner where you have to put out every fire. And now if you step aside at that point now the whole forest could get destroyed. The mistake you made was not letting the little fires burn in the first place.

FM: To continue with your analogy; now there are houses built in the path and we can’t just let people’s homes burn down. Right?

MS: In the economy—and I have a 100 years of evidence to show this—if people are going to build homes in this parkland where we don’t let fires go, those homes are doomed regardless. We can continue to put out fires but that is only going to make a bigger fire later. It is inevitable that this thing is going to blow. The question is how long are we going to let it go and how many people are we going to let get trapped into building more homes in this tinderbox, to extend your analogy.

Should we have done nothing in 2008? I strongly believe that we should have let the market correct itself. I strongly believe that TARP (Troubled Asset Relief Program) was a terrible thing to do. I strongly believe that the auto companies should have gone through bankruptcy.

FM: So you are saying we need to go cold turkey on intervention? Haven’t we gone beyond the point of no return in Keynesian economics? This was not started in this administration or this Fed. It is a process that has taken decades. How would you get to where you want to go from where we are right now?

MS: To start off, what Bernanke has done is unprecedented. We haven’t manipulated the yield curve like this ever. While there have been monetary manipulation that has caused booms and busts—and I strongly believe that booms and busts are caused by monetary interventions and it is not a natural feature of capitalism—but what Bernanke has done has been an experiment the likes of which we have never seen. Look at the history of rates. The last four years will stand out. It is very extreme and it is scary and the move down will be worse.

Are we past the point of no return? I think we are. If this is the way the Federal Reserve Chairman will have to look at it. [New Fed Chair Janet] Yellen is going to have to deal with the consequences. All this talk of tapering. I don’t think it is going to be an option for the Fed. I don’t think the Fed can taper. If you saw a headline; ‘Yellen decides to let all interest rates float, free market in interest rates.’ Then you would see the market down 50%. Most people agree with me on that. I don’t know what the yield curve would look like but the market would crash. What they are doing now is waiting and hoping that something happens in the economy that allows them to taper. They are going to be waiting for a long time. You will end up with a situation that the Fed’s hand is forced or with what the Fed’s is doing stops mattering and that will come when more leverage in the system is not possible and we are probably not far from that.

FM: But the Fed is tapering.

MS: Those expectations keep on getting pushed back. I agree with your statement that we are passed the point of no return. I don’t think the Fed can taper without crashing the market. The market is only at where it is at because of the Fed. I don’t want to predict what the Fed will do but one way or another it won’t matter what they want to do. Unless the Fed is willing to crash the market, which I don’t think it is, I don’t see this big taper happening willingly.

FM: Jim Sinclair said to us two years ago that quantitative easing was the only tool Bernanke had to avoid a catastrophe and the only measure of success is that when the economy begins to grow more robustly whether or not he can drain the excess liquidity safely. Do you agree?

MS: I think you will be waiting a while for it. When companies start borrowing not to buy back their own stock, not just to raise their dividend but instead borrow in order to do more capital expenditures, then we will start seeing some growth but don’t hold your breath for it. I see his point: Will the Fed be able to drain the liquidity fast enough to avoid inflation?

FM: Was QE not necessary?

MS: It depends on what you are trying to do. If you are trying to prop up the stock market, if you are trying to save people who own risk assets like banks, it was absolutely necessary, in the short-term. There is no doubt that the Fed is capable of pushing risk assets. We shouldn’t be surprised that the market has gone up and continues to go up but it can’t go on forever. It is an artificial world we are living in. If we were able to manipulate it like this permanently than obviously this would be a formula that would work everywhere.

FM: I don’t think anyone believes that this is good policy in general just that it was necessary to avoid a disaster. We kick the can down the road to a point that growth improves and we can better handle the excess. Can it work?

MS: You certainly are looking for a precise, perfect scenario. I am not necessarily calling for hyperinflation but with the money being printed it is [possible]. Be careful what you wish for. If you start getting growth I totally recognize how we could get very high inflation, but first you have to have growth, you have to have people investing capital.

Interest rates are the most important economic variable out there. Entrepreneurs base their activities on that, whether you engage in production what is your return over your cost of capital. When interest rates are very low in a free natural market that means that there is a lot of savings, people aren’t consuming but they are saving. They call that a consumer recession, it is a very nice homeostatic system. Entrepreneurs respond to that. It incentivizes them to extend their period of production. Austrians call that more roundabout. They create more efficient production. The civilization and economy progresses and that production completes around the time that consumers are ready to consume again and save less. Remember we save to consume more later. There is a nice temporal structure that goes on in the economy. But what happens when interest rates are low for artificial reasons; actually the opposite happens.

The whole point of low interest rates is not only do central bankers want to goose asset prices but they are trying to get entrepreneurs to invest more and when they invest more, progress comes from them. But when interest rates are lower than what we natural want it to be based on our time preferences, it is now this weird thing where people are trying to chase yield just to make a little carry. Zero rates are unacceptable to people. So we are looking for dividend yielding stocks. At the end of the day investors are not looking for more roundabout production but instead are looking for companies with high dividends.

This is considered a puzzle by Keynesian Economists. [Paul] Krugman himself called it a puzzle. When Tobin’s Q is high and rates are low why don’t companies invest more? It makes perfect sense because it is a distorted environment. They are not low for natural reasons. This is why we shouldn’t expect the economy to progress just because rates are low. The opposite is happening now. Many government programs create the opposite affect [of its design].

[Economist Ludvig von] Mises says when a person gets run over by a car, the last thing he needs is for that car to then back over him. And that is the cycle that we are in. Each time the government intervenes, it is making things worse. We are worse off now than when we were in 2006-07, for no other reason than there is no more back stop.

FM: But these misallocations have been going on for a long time. Is there a way to do this gradually or does it have to happen all at once?

MS: I would be perfectly happy with a taper that ends over a period with a free market in interest rates. It doesn’t have to be that we close the Eccles (Federal Reserve) building over night. It could be gradual. [But] if the market caught wind of what they were doing it would crash. A taper [with a goal] of a market determined interest rate would force discipline on our fiscal policy. So much of the debt that we are running up right now is because our rates are artificially low. I would be all for that.

FM: Many experts suggested that regulations and policy needs to be countercyclical. Do you agree?

MS: They look the other way when everything is going well. I totally agree. But it shouldn’t be so much about them in the first place.

FM: Discuss your trading philosophy and how it can be used.

MS: You simply step aside when markets get distorted. What does that mean? You have to watch all your friends making money when you are sitting aside making nothing. You are no longer focusing on your returns today but the return opportunities you will have later when markets reset. I am thinking about the advantage that you will have with dry powder when the markets crash and not about return today. By doing nothing I am doing something real big. I am allowing myself opportunities later.

A higher level example of that is what I do, which is instead of doing nothing you actually have positions that will [create] a tremendous amount of cash. What is the hardest position to have right now? It is cash. The Fed knows what it is doing. It is pushing you out of something it doesn’t want you in. It is not an accident. If your focus is only on that next slice of time like all the professionals, then it is not an option. If you can plan for those other slices of time, they should be far more important to you than the current one.

If you had followed the strategy you would be far ahead of the market. You would have been out of the market since 1996, which is a very hard thing to do.

FM: In your strategy do you constantly have the same hedge on or do you increase and decrease it based on the MS Index?

MS: You can increase it or decrease it. I showed an example in the book that it is the most affective when there is a high MS index; when it is low there is not a lot of room for a systemic crash. When that is low a tail hedge is not critical. The great thing about what I do is that the more distorted the market gets, the cheaper my trade is and the better the risk/reward looks. It is a very convenient property. For instance the VIX tends to go down when the S&P rallies.

FM: How much do you underperform the market when things go well?

MS: It is complicated because I do some complex hedges and spreads. What I talk about in the book is a very simplistic naïve representation where you are just buying out-of-the-money puts. But it costs you a low single digit percentage a year—in that naïve case. I could be short premium meaning if the market shuts down I am earning premium but if the market crashes I am long gamma.

FM: There has been a lot of criticism of alternatives. Is this dangerous given that it will push people to long equity strategies?

MS: All bets are interconnected. There is one big systemic bet that everyone is taking right now. Diversification is hard to come by. It is a shame. We are very good extrapolators.

FM: How will the current distorted market be resolved?

MS: At some point whether it is quickly or not [there is so much leverage a system can take] markets will crash. In classical economic perspective they say that when interest rate get lower we have higher liquidity preferences, people don’t want to lend anymore, they don’t want to borrow anymore. That is why balance sheets at banks get so bloated. It will probably happen quickly when it happens but at the end of the day when markets are this distorted you will find your way back.

FM: What is your goal with the book? It includes concepts that are very easy to understand but difficult to execute in investing and in life.

MS: That’s kind of my thinking. It sounds like a cliché. These are the tools of what got us here in the first place. The idea of a roundabout. Focusing on the means and not the ends. It is so obvious but it helps to understand the role it has played. You can’t just focus on outcomes, you have to have something else to lean on. It is not empiricism that you should lean on because it can guide you down the wrong way so you need these concepts and in order to understand them and believe them [you have to see how they came about].

Half of it was good introspection for me. It is a travesty what the smaller investors go through so to me it was important to try and get people to understand this perspective. So much of Austrian theory is difficult to get through. Though I went about it in a roundabout way, my goal was to make it somewhat approachable.

FM: For people to adopt this is it just going to take pain? Another crash or event to reorganize ourselves?

MS: I think it will. And capitalism will be blamed again when it happens. All the scary stories that we heard when they jammed through TARP, a lot of it was overstated. I can’t prove it and I don’t think others can prove the other side of it. But this idea of the end of the world scenario is entirely wrong. We should look at this as a healthy process, as a cleansing process. We would be on the road to very healthy real growth today if we just let it cleanse itself. My ultimate message is one of great optimism. Seeing optimism in a crisis or a tragedy. It is a means to a much greater end.  We need to recognize that. Politicians can’t because politicians will not get reelected during a crisis. They are rational to try and stop all pain. …We should have had more banks fail.

Read the book :513atRougrL._SY344_BO1,204,203,200_


“Investors of all kinds will find immeasurable value in this convincing and thoroughly researched book where Mark champions the roundabout. Using thought-provoking examples from both the natural world and the historical world, The Dao of Capital shows how a seemingly difficult immediate loss becomes an advantageous intermediate step for greater future gain, and thus why we must become ‘patient now and strategically impatient later.’”—Paul Tudor Jones II, Founder, Tudor Investment Corporation

“At last, a real book by a real risk-taking practitioner. The Dao of Capital mixes (rather, unifies) personal risk-taking with explanations of global phenomena. You cannot afford not to read this!”—Nassim Nicholas Taleb, Author of The Black Swan

“You really should read Spitznagel’s book because you will learn a lot whether you agree with everything he says or not.”—Jim Rogers, Author of Street Smarts—Adventures on the Road and in the Markets

“Wall Street gamblers who believe the Fed has their back need to read this book. Mark Spitznagel provides a brilliant demonstration that the gang of money printers currently resident in the Eccles Building have not repealed the laws of sound money nor have they rescinded the historical lessons on which they are based.”—David Stockman, Former U.S. Congressman, Budget Director under Ronald Reagan, and Author of The Great Deformation

“A timely, original, right-economic principles and history-based approach to investing. Drawing on impressive philosophical building blocks, The Dao of Capital illuminates the wellsprings of capital creation, innovation and economic progress. Dazzling!”—Steve Forbes, Chairman and Editor-in-Chief, Forbes Media

“This is a magnificent, scintillating book that I will read over and over again. Every page is eye-opening, with numerous areas for testing and profits in every chapter. Here’s an unqualified, total, heartfelt recommendation, which coming from me is a rarity, and possibly unique.”—Victor Niederhoffer, Author of The Education of a Speculator

The Dao of Capital is an impressive work. Spitznagel’s approach is refreshing—scholarly without being tedious. What a broad look at economic history it provides!”—Byron Wien, Vice Chairman, Blackstone Advisory Partners LP

“Spitznagel has written an essential new book. Indeed, The Dao of Capital: Austrian Investing in a Distorted World might be one of the most important books of the year, or any year for that matter.”—Forbes

Travel to Cuba with Bridges/Investing in Cuba


As anyone who has met me knows that I am half Cuban.


Once you go Cuban, you NEVER go back. (A joke!).  However, there are two sides (of many!) to Cuba.

GranmaMyth1 I know the founder and he knows the many sides to Cuba. He can help make your trip more authentic and interesting.




We last spoke about SELLING THE RALLY in CUBA here: It doesn’t take investing brilliance to sell hype over reality and a 50% premium to the underlying assets.

Investing in Cuba: Opportunities Develop (BARRONS)
There haven’t been big breakthroughs since U.S.-Cuban relations were re-established. But investors should be aware of smaller signs of progress.

By DIMITRA DEFOTIS    November 21, 2015       Emerging Markets

In Cuba-U.S. relations, so much has changed in 2015. For U.S. investors, however, things have stayed much the same.

It’s been nearly a year since President Barack Obama and Cuban President Raúl Castro announced warmer relations. The U.S. removed Cuba from its list of state sponsors of terrorism. But Cuba still has a Marxist-Socialist economic model, a two-tiered currency system that favors locals, and no stock market.

What investors have, for now, is improved diplomacy: After a year of tense negotiations, Cuba is home to a newly opened U.S. embassy in Havana, and it opened its own embassy in Washington, D.C. More flights and mail between the countries could be imminent.

Still on the books: a trade embargo by the U.S. that may not be lifted ahead of the 2016 U.S. presidential election. Those who want the embargo lifted hope a Democrat wins the White House in 2016. Republican presidential candidate Marco Rubio, a Cuban-American from Florida, has promised to undo Obama’s Cuba detente.

Meanwhile, the number of U.S. tourists visiting the island may have spiked by 40% this year, underscoring the travel-related investing opportunity just 90 miles from Key West, says Pedro Freyre. The Miami-based attorney and Columbia University adjunct professor of law is a man with his bags forever packed. He consults with U.S. companies in agriculture, technology, health care, and other sectors where limited trade with Cuba is already allowed.

Cuba is actively courting foreign investment as it seeks to build its creditworthiness, and it’s already doing business with China, Russia, Brazil, and a host of nations that showed up at the annual trade fair in Havana earlier this month. Freyre was there; he likens U.S.-Cuba ties to those with Saudi Arabia, Vietnam, and China: diplomacy despite differing views.

PRIVATE-EQUITY INVESTOR Redux Capital Advisors, a London-based asset manager focused on Cuba, sees big opportunities. It hopes to close the first piece of a $300 million fund this year as the embargo slowly unravels. Just last week, the U.S. Treasury’s Office of Foreign Assets Control removed the names of a handful of Cuban bankers, mostly in Europe, from a list of banned business partners. Also last week: MasterCard (ticker: MA) and Stonegate Bank in Fort Lauderdale, Fla., announced their debit card can be used at select Cuba locations.

Both Redux and Freyre believe that other countries have a leg up on Cuban investment, and that the U.S. Congress needs to move. Cubans on the street hold American accomplishment in high regard, and seem delighted with the idea of doing business. That was the reaction Freyre got when surprising people with “Yo soy Cubano, mi hermano!” or “I’m Cuban, my brother.” The lawyer and the investor may be on to something. Regularly scheduled flights between the U.S. and Cuba could be negotiated within the embargo parameters by the end of this year, and unification of Cuba’s currency may also be imminent, Freyre says.

What’s an investor to do? The closed-end Herzfeld Carribean Basin fund (CUBA), a proxy for growth in Cuban tourism, soared a year ago. But it is down 24% this year, trading in line with its underlying asset value. While the travel and infrastructure stocks in the fund are not pure-Cuba plays, lifted travel restrictions could lift returns. Another top holding, Panama-based Banco Latinoamericano de Comercio Exterior (BLX) jumped nearly 5% last week.

Editor: Cuba will move forward but mostly after the Castro Brothers are gone. You can make a lot of money from a small base but you have to do it in the Black Market (about 60% of Cuba’s economy).


Free Stuff Investing Strategy; Tracking Stocks


You can make a lot of money buying from forced selling. Buy from Wal-Mart’s liquidation sales then sell on Ebay/Amazon at 200% mark-ups.   You are helping your fellow human beings.

Also, learn about EMC tracking stock.

Read more:

Too Much Debt, Too much Capacity (mal-investment), then Inevitable Bust/ King of Buy and Hold


The Western banks that financed commodity production are insolvent, though few yet realize it.


Like the flawed analysis of the CDO market in 2007 the conventional view is that the subordinated lenders may be in trouble, but the senior banks with the senior debt are safe. Deloitte has just punctured this myth with a report stating the obvious: “Not even a wave of oil bankruptcies will shrink crude production.” This is because oil companies go bankrupt not when the price of oil falls below the cost of production, they file much sooner: when the cash flow is no longer sufficient to pay the debts. After bankrutcy, the creditors become the equity holders and get any remaining cash flow–they don’t turn the well off. Not until the price sinks below the raw cost of production–and then for a time necessary to exhaust any capital reserves–does the well actually close. In other words, the oil spigot will not turn off until all residue of the debt is completely erased, and the same dynamic applies to the other commodity sectors.

Myrmikan has pounded the table since August that history is not rhyming but repeating nearly perfectly the 1929 model–first overcapacity drives deflation, then market collapse, then more deflation, until finally a dramatic devaluation of the currency to resolve unpayable debts. The value of capital falls to levels that seem almost inconceivable. This pattern has repeated without fail since the time of Solon, in 594 B.C. Athens, and it is doing so again now.

Deloitte study says 2016 is a period of tough financial and strategic choices for E&P companies

Published 17 February 2016

With more than $150 billion in debt on their balance sheets, nearly 35 percent of pure-play exploration and production companies (E&P) listed worldwide, or about 175 companies, are at high-risk of slipping into bankruptcy in 2016, according to a new Deloitte study, “The Crude Downturn for E&Ps: One Situation, Diverse Responses.”

The outlook is almost equally alarming for about 160 other E&Ps that are less leveraged but cash flow constrained.

Deloitte vice chairman and US oil and gas sector leader John England said: “2016 will be the year of hard decisions. We could see E&P bankruptcies surpass Great Recession levels as companies struggle to remain solvent.

“Access to capital markets, bankers’ support and derivatives protection, which helped smooth an otherwise rocky road for the industry in 2015, are fast waning. A looming capital crunch and heightened cash flow volatility suggest that 2016 will be a period of tough, new financial choices for the industry.”

Seeing the cash crunch, E&Ps worldwide have saved or raised cash to the tune of $130 billion, since the oil price crash. Surprisingly, two-thirds of the savings have come from non-capex measures such as asset sales and equity issuance.

However, considering further equity issuance and asset sales will come at much lower prices, the report notes that E&Ps worldwide are entering 2016 with the only option of cutting their already reduced dividends and share buybacks.

“Considering the industry will have fewer financial levers to pull in 2016, operational performance will be the key to sustainability and growth,” said England.

“There is still more that can be done by oil players, particularly large ones, to reduce costs. Prices will eventually rebound and companies need to focus not only how to survive, but also how to position themselves to thrive for when things turnaround and demand picks up.”

One of the key ways companies have managed to remain viable has been through the reduction of production costs, starting in 2015. Today, about 95 percent of production costs (lease operating expenses and production taxes) of U.S.-origin players operate below $15/boe, versus 65 percent in 2Q14.

The report states that questions on current breakeven prices and near-term cash flows should give way to the future return on capital employed (ROCE) potential of the industry. As the industry improves performance on costs/efficiency, its future emphasis will not be about its ability to make profits at low prices, but generating sufficient ROCE on a large base of devalued investments made in the past.

Further, economies of scale and scope appear to be benefitting natural gas players more, reflected in the widening gap between large and small gas-heavy companies and marginal cost differentiation between large and small oil-heavy players.

That noted, spending cuts in 2015 and 2016 – the first time since the mid-1980s that industry will reduce capex for two consecutive years – will likely have a substantial and long-lasting impact on future supplies and open new chapters in the geopolitics of oil. E&Ps risk slowing the conversion of resources to reserves in frontier locations and the capex required to maintain aging fields and facilities, the report warns.

The report further anticipates that future M&A activity will most likely go beyond the typical buying reasons of the past-preference for oil-heavy assets and buying for growth/scale. Companies that prioritize returns over size, have a balanced and flexible production profile over a deep inventory of non-producing asserts, and give thought to economies of scope over economies of scale will most likely thrive when the price environment improves.

Deloitte Center for Energy Solutions executive director Andrew Slaughter said: “There is no silver bullet solution that applies to the whole industry; in fact, the landscape has never been more complicated.

“Each company has its own set of unique factors to consider – from issues specific to each producing region and asset, to various states of financial circumstances. Staying solvent will require the same level of perseverance, innovative thinking and creativity as the technology breakthroughs that led to the boom in supply we have seen over recent years.”

MUST READ: Nick Train – The King of Buy and Hold

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