The Art of Contrary Thinking

The above video is a decent book review of the book, The Art of Contrary Thinking found in this link: http://csinvesting.org/2017/12/01/the-art-of-contrary-thinking/

and http://csinvesting.org/2015/12/16/contrarian-investing-part-ii/

You are neither right nor wrong because people agree or disagree with you but because you have your facts and reasoning correct.

Emotionally, going against the crowd will subject you to ridicule.

Focus on Management Excellence; My Interview Did NOT Go Well!

Identifying-Managers-with-Talent-and-Integrity-May-2017

Perhaps you should differentiate yourself by focusing on management’s character and skill.  However, you will need to focus and work hard to make a difference in understanding who is unique.

Find founder-led companies who are mission driven–one place to start your search.

Imagine putting the numbers of Berkshire Hathaway during the early days of Buffett’s takeover into a spreadsheet–would ANYONE have bought Berkshire.   Who would have focused on Buffett’s integrity and skills?

Also: https://microcapclub.com/2018/05/invest-in-owner-management/

My Interview at Goldman Sachs

 

Interviewer: Are you unbiased?
John Chew: What a dumb question! Next.

Interviewer: No matter how you answered that question, how could you have an edge in researching companies?
John Chew: Well, I ……………..

and

Any suggestions? Is it possible to be unbiased? And based on your answer, how can you have an edge researching companies? Prize.

A BUFFETT Buffet

A Complete Video Archive of Warren Buffett

https://buffett.cnbc.com/warren-buffett-search-results/?query=inflation

A Reader kindly shared this: Warren Buffett Letters from 1957 to 2017! Now you can do a search through 60 + years of his writings on any subject.  Use as a learning tool.

Also: https://buffett.cnbc.com/warren-buffett-archive/

Warren Buffett 1957 to 2017 letters

Don’t forget Munger! http://latticeworkinvesting.com/

Here is Charlie Munger’s ‘first rule of value investing’

Ethan Wolff-Mann  Senior Writer       Yahoo FinanceMay 7, 2018

Value investing has changed over the years, but the fundamental way its disciples think about it hasn’t, according to Berkshire Hathaway (BRK.A, BRK.B) vice chair Charlie Munger.

“It’s gotten hard in the United States to find easy value investments because the world is so competitive,” Munger told Yahoo Finance editor-in-chief Andy Serwer after the Berkshire Hathaway 2018 Annual Shareholders Meeting.
“That accounts for a lot of what you see in Berkshire, where we buy securities like Apple that we wouldn’t have bought in the old days when we had more mundane things that were serving us very well,” said Munger.

For a company that operated for decades in the insurance business and other “mundane” areas, Munger and Warren Buffett’s moves at Berkshire Hathaway into tech appear to be a jarring change from the original value investing approach. Tech companies have historically been known to be the paths of “growth-oriented” investors. Value investors focus on a company’s price versus its value.

But Berkshire’s moves of late aren’t a deviation of value investing, Munger says, because rule number one is still the same.

“Now there are various ways to look for value investments, just as there are various places to fish. And the first rule of fishing is to fish where the fish are,” said Munger. “The first rule of value investing is to find some place to fish for value investments where there are a lot of them.“
Now, in a tougher environment, Berkshire has to fish in places it didn’t fish before. “So we’re just looking in different places, but we’re value investors,” said Munger.

In the end, Munger noted, value investing as a philosophy is tough to define precisely because, “All good investing is value investing by definition.”
“Some people, when they say ‘value investor,’ they mean somebody that emphasizes working capital or something,” said Munger. “Meaning, you should fish in that particular place, but I think that’s all a bad use of the language to think that the difference between value investing and other good investing.”
No formulas in value investing

During the Berkshire Hathaway Annual Shareholders Meeting, Munger and Buffett were asked about whether they use a formulaic approach to valuing companies and investing. Munger’s answer shed some light on why Berkshire’s business model is often-attempted-but-rarely-duplicated.

“I can’t give you a formulaic approach because I don’t use one,” Munger told a curious shareholder. “I just mix all the factors, and if the gap between value and price is not attractive, then I go on to something else. And sometimes, it’s just quantitative.”

Munger gave an example about Costco, (COST) noting that the stock was selling for 12 to 13 times earnings. (Berkshire Hathaway owns about a percent of the company.)

“I thought that was a ridiculously low value, just because the competitive strength of the business was so great, and it was so likely to keep doing better and better,” said Munger. “But I can’t reduce that to a formula for you.”
Some things Munger does like when he’s considering a company’s value, like Costco?

“I liked the cheap real estate. I liked the competitive position. I liked the way the personnel system worked. I liked everything about it,” said Munger. “And I thought, even though it’s three times book, or whatever it was then, that it’s worth more. But that’s not a formula.”

In fact, Munger has contempt for formulas.
“If you want a formula, you should go back to graduate school,” said Munger. “They’ll give you lots of formulas that won’t work.”

https://finance.yahoo.com/news/charlie-mungers-first-rule-value-investing-204323719.html

Decadent and Depraved

‘The Kentucky Derby Is Decadent and Depraved,’ by Hunter S. Thompson

“Just pretend you’re visiting a huge outdoor loony bin,” I said. “If the inmates get out of control we’ll soak them down with Mace.” I showed him the can of “Chemical Billy,” resisting the urge to fire it across the room at a rat-faced man typing diligently in the Associated Press section. We were standing at the bar, sipping the management’s scotch and congratulating each other on our sudden, unexplained luck in picking up two sets of fine press credentials. The lady at the desk had been very friendly to him, he said. “I just told her my name and she gave me the whole works.”

http://grantland.com/features/looking-back-hunter-s-thompson-classic-story-kentucky-derby/

 

Is Book Value as Relevant as it used to be? (Part 1)

What Worked in Investing-Tweedy Browne

WhatHasWorkedFundOct14Web

Low price to book value or high book value to price was an INDICATOR of value but no guarantee to coincide with intrinsic value as Buffett explains:

“In past reports I have noted that book value at most companies differs widely from intrinsic business value – the number that really counts for owners.” Berkshire 1986 Letter

“Book value’s virtue as a score-keeping measure is that it is easy to calculate and doesn’t involve the subjective (but important) judgments employed in calculation of intrinsic business value.

It is important to understand, however, that the two terms – book value and intrinsic business value – have very different meanings. Book value is an accounting concept, recording the accumulated financial input from both contributed capital and retained earnings. Intrinsic business value is an economic concept, estimating future cash output discounted to present value. Book value tells you what has been put in; intrinsic business value estimates what can be taken out.

An analogy will suggest the difference. Assume you spend identical amounts putting each of two children through college. The book value (measured by financial input) of each child’s education would be the same. But the present value of the future payoff (the intrinsic business value) might vary enormously – from zero to many times the cost of the education. So, also, do businesses having equal financial input end up with wide variations in value.” Berkshire 1983 Letter

“Some investors weight book value heavily in their stock-buying decisions (as I, in my early years, did myself). And some economists and academicians believe replacement values are of considerable importance in calculating an appropriate price level for the stock market as a whole.

Those of both persuasions would have received an education at the auction we held in early 1986 to dispose of our textile machinery. The equipment sold (including some disposed of in the few months prior to the auction) took up about 750,000 square feet of factory space in New Bedford and was eminently usable. It originally cost us about $13 million, including $2 million spent in 1980-84, and had a current book value of $866,000 (after accelerated depreciation). Though no sane management would have made the investment, the equipment could have been replaced new for perhaps $30-$50 million.
Gross proceeds from our sale of this equipment came to $163,122. Allowing for necessary pre- and post-sale costs, our net was less than zero. Relatively modern looms that we bought for $5,000 apiece in 1981 found no takers at $50. We finally sold them for scrap at $26 each, a sum less than removal costs.
Ponder this: the economic goodwill attributable to two paper routes in Buffalo – or a single See’s candy store – considerably exceeds the proceeds we received from this massive collection of tangible assets that not too many years ago, under different competitive conditions, was able to employ over 1,000 people.” Berkshire 1985 Letter

“Of course, it’s per-share intrinsic value, not book value, that counts. Book value is an accounting term that measures the capital, including retained earnings, that has been put into a business. Intrinsic value is a present-value estimate of the cash that can be taken out of a business during its remaining life. At most companies, the two values are unrelated.” Berkshire 1993 Letter

“We define intrinsic value as the discounted value of the cash that can be taken out of a business during its remaining life. Anyone calculating intrinsic value necessarily comes up with a highly subjective figure that will change both as estimates of future cash flows are revised and as interest rates move. Despite its fuzziness, however, intrinsic value is all- important and is the only logical way to evaluate the relative attractiveness of investments and businesses.

To see how historical input (book value) and future output (intrinsic value) can diverge, let’s look at another form of investment, a college education. Think of the education’s cost as its “book value.” If it is to be accurate, the cost should include the earnings that were foregone by the student because he chose college rather than a job.

For this exercise, we will ignore the important non-economic benefits of an education and focus strictly on its economic value. First, we must estimate the earnings that the graduate will receive over his lifetime and subtract from that figure an estimate of what he would have earned had he lacked his education. That gives us an excess earnings figure, which must then be discounted, at an appropriate interest rate, back to graduation day. The dollar result equals the intrinsic economic value of the education.

Some graduates will find that the book value of their education exceeds its intrinsic value, which means that whoever paid for the education didn’t get his money’s worth. In other cases, the intrinsic value of an education will far exceed its book value, a result that proves capital was wisely deployed. In all cases, what is clear is that book value is meaningless as an indicator of intrinsic value.” Berkshire 1994 Letter

Is Accounting as Useful as an Indicator as it Used to be?

Recent years has seen the brisk rise in market value of businesses defined by their network effects and operational leverage to the new economy rather than those dependent on traditional accounting defined forms of capital. Also, we have seen rising domestic Gini coefficients despite global improvements in aggregate output. Capitalism without Capital investigates the increased investment in intangible assets and their place in the modern economy.

The book is about the change in the type of investment observed in more or less all developed countries over the past forty years.  The authors argue:

  1. There has been a long-term shift from tangible to intangible investment.
  2. Much of that shirt does not appear in company balance sheets and national accounts because accountants and statisticians tend not to count intangible spending as an investment, but rather as day-to-day expenses.
  3. The tangible, knowledge-based assets that intangible investment builds have different properties relative to tangible assets: they are more likely to be scalable and have sunk costs; and their benefits are likely to spill over and exhibit synergies with other intangibles.

Is Book Value Irrelevant?

http://thereformedbroker.com/2018/04/30/is-book-value-irrelevant/

To be continued………..

Bitcoin: the World’s Largest Pump and Dump in History. Who Knew?

The clues and facts add up. Let’s sit and think for a minute:

In what rational universe could someone simply issue electronic scrip — or just announce that they intend to — and create, out of the blue, billions of dollars of value?

Bitcoin tangent

Did you guys notice something really interesting? The financial guys that really love bitcoin are some of the guys that either blew up or closed funds due to poor performance. The two most prominent fund manager bitcoin boosters are like that. It almost feels like they are so happy to have found their Hail Mary pass. And the most prominent guys that have good performance and didn’t blow up tend to be the guys that don’t like bitcoin and think it’s stupid, a bubble or whatever.

Think about that for a second. Oh, and that former hedge fund guy, after bitcoin plunged put his new bitcoin hedge fund on hold (buying high and selling low?). Now wonder he didn’t do well with his hedge fund; if you’re going to be making decisions based on short term volatility like that, you are bound to get whipsawed and lose money.

This is interesting because we can never really understand and know everything. But it is useful to know who you can listen to and who you should ignore. Sometimes, this saves a lot of time! From http://brooklyninvestor.blogspot.com/

Monday, April 30, 2018
Warren Buffett: Bitcoin is Gambling Not Investing

In an exclusive interview with Yahoo Finance in Omaha, Neb., leading up to Berkshire Hathaway’s annual shareholder meeting, which will be held om May 5, Buffett laid out his latest thinking on cryptocurrency investing. He nailed it.

“There’s two kinds of items that people buy
and think they’re investing,” he says. “One really is investing and the other isn’t.” Bitcoin, he says, isn’t.

“If you buy something like a farm, an apartment house, or an interest in a business… You can do that on a private basis… And it’s a perfectly satisfactory investment. You look at the investment itself to deliver the return to you. Now, if you buy something like bitcoin or some cryptocurrency, you don’t really have anything that has produced anything. You’re just hoping the next guy pays more.”

When you buy cryptocurrency, Buffett continues, “You aren’t investing when you do that. You’re speculating. There’s nothing wrong with it. If you wanna gamble somebody else will come along and pay more money tomorrow, that’s one kind of game. That is not investing.”

Buffett’s point is that the assets he lists such as a farm, an apartment house, etc., generate income. Bitcoin does not.

I would add there is another type of asset people hold and that is money. As Ludwig von Mises taught us, money is the most liquid good and people hold because of this liquidity. They know they can instantly exchange it, at a fairly stable price, nearly anywhere for goods and services.

This is where Bitcoin and other cryptocurrencies fail in the money category. They are from an instrument at present that can be exchanged for any good or service and they are far from stable in price. Many people who have purchased Bitcoin over the last 6 months have lost as much as 50% of their purchasing power. That is not a stable asset, not even when compared to the U.S. dollar which is run by the Federal Reserve in crony reckless fashion.

Moreover, the idea of a world where a cryptocurrency is the world’s medium of exchange is a frightening notion. It is quite simply a remarkable way for government to track all transactions and prohibit transactions in specific books and other goods that it doesn’t want individuals to buy.

The idea that the government can’t track Bitcoin is a delusion view held by Bitcoin fanboys.

The Intercept recently reported:
Classified documents provided by whistleblower Edward Snowden show that the National Security Agency indeed worked urgently to target bitcoin users around the world — and wielded at least one mysterious source of information to “help track down senders and receivers of Bitcoins,” according to a top-secret passage in an internal NSA report dating to March 2013. The data source appears to have leveraged the NSA’s ability to harvest and analyze raw, global internet traffic while also exploiting an unnamed software program that purported to offer anonymity to users, according to other documents.
Although the agency was interested in surveilling some competing cryptocurrencies, “Bitcoin is #1 priority,” a March 15, 2013 internal NSA report stated.
-Robert Wenzel

What is money Bastiat?  If you understand money, then the Bitcoin Scam becomes obvious.

Bitcoin is the greatest scam in history
It’s a colossal pump-and-dump scheme, the likes of which the world has never seen.

By Bill Harris Apr 24, 2018

Okay, I’ll say it: Bitcoin is a scam.

In my opinion, it’s a colossal pump-and-dump scheme, the likes of which the world has never seen. In a pump-and-dump game, promoters “pump” up the price of a security creating a speculative frenzy, then “dump” some of their holdings at artificially high prices. And some cryptocurrencies are pure frauds. Ernst & Young estimates that 10 percent of the money raised for initial coin offerings has been stolen.

The losers are ill-informed buyers caught up in the spiral of greed. The result is a massive transfer of wealth from ordinary families to internet promoters. And “massive” is a massive understatement — 1,500 different cryptocurrencies now register over $300 billion of “value.”

It helps to understand that a bitcoin has no value at all.

Promoters claim cryptocurrency is valuable as

(1) a means of payment

Bitcoins are accepted almost nowhere, and some cryptocurrencies nowhere at all. Even where accepted, a currency whose value can swing 10 percent or more in a single day is useless as a means of payment.

2. Store of Value.

Extreme price volatility also makes bitcoin undesirable as a store of value. And the storehouses — the cryptocurrency trading exchanges — are far less reliable and trustworthy than ordinary banks and brokers.

3. Thing in Itself.

A bitcoin has no intrinsic value. It only has value if people think other people will buy it for a higher price — the Greater Fool theory.

Some cryptocurrencies, like Sweatcoin, which is redeemable for workout gear, are the equivalent of online coupons or frequent flier points — a purpose better served by simple promo codes than complex encryption. Indeed, for the vast majority of uses, bitcoin has no role. Dollars, pounds, euros, yen and renminbi are better means of payment, stores of value and things in themselves.

Cryptocurrency is best-suited for one use: Criminal activity. Because transactions can be anonymous — law enforcement cannot easily trace who buys and sells — its use is dominated by illegal endeavors. Most heavy users of bitcoin are criminals, such as Silk Road and WannaCry ransomware. Too many bitcoin exchanges have experienced spectacular heists, such as NiceHash and Coincheck, or outright fraud, such as Mt. Gox and Bitfunder. Way too many Initial Coin Offerings are scams — 418 of the 902 ICOs in 2017 have already failed.

Hackers are getting into the act. It’s estimated that 90 percent of all remote hacking is now focused on bitcoin theft by commandeering other people’s computers to mine coins.

Even ordinary buyers are flouting the law. Tax law requires that every sale of cryptocurrency be recorded as a capital gain or loss and, of course, most bitcoin sellers fail to do so. The IRS recently ordered one major exchange to produce records of every significant transaction.

And yet, a prominent Silicon Valley promoter of bitcoin proclaims that “Bitcoin is going to transform society … Bitcoin’s been very resilient. It stayed alive during a very difficult time when there was the Silk Road mess, when Mt. Gox stole all that Bitcoin …” He argues the criminal activity shows that bitcoin is strong. I’d say it shows that bitcoin is used for criminal activity.
In what rational universe could someone simply issue electronic scrip — or just announce that they intend to — and create, out of the blue, billions of dollars of value?

Bitcoin transactions are sometimes promoted as instant and nearly free, but they’re often relatively slow and expensive. It takes about an hour for a bitcoin transaction to be confirmed, and the bitcoin system is limited to five transactions per second. MasterCard can process 38,000 per second. Transferring $100 from one person to another costs about $6 using a cryptocurrency exchange, and well less than $1 using an electronic check.
Bitcoin is absurdly wasteful of natural resources. Because it is so compute-intensive, it takes as much electricity to create a single bitcoin — a process called “mining” — as it does to power an average American household for two years. If bitcoin were used for a large portion of the world’s commerce (which won’t happen), it would consume a very large portion of the world’s electricity, diverting scarce power from useful purposes.

In what rational universe could someone simply issue electronic scrip — or just announce that they intend to — and create, out of the blue, billions of dollars of value? It makes no sense.

All of this would be a comic sideshow if innocent people weren’t at risk. But ordinary people are investing some of their life savings in cryptocurrency. One stock brokerage is encouraging its customers to purchase bitcoin for their retirement accounts!

It’s the job of the SEC and other regulators to protect ordinary investors from misleading and fraudulent schemes. It’s time we gave them the legislative authority to do their job.

William H. Harris Jr. is the founder of Personal Capital Corporation, a digital wealth management firm that provides personal financial software and investment services, where he sits on the board of directors.

Read full article here: https://www.recode.net/2018/4/24/17275202/bitcoin-scam-cryptocurrency-mining-pump-dump-fraud-ico-value

COUNTER-ARGUMENT:  https://www.forbes.com/sites/ktorpey/2018/04/24/founding-paypal-ceo-bill-harris-says-bitcoin-is-a-scam-heres-why-hes-wrong/2/#2d9379a166b9

Where have we seen this type of behavior before?

UPDATE: Friday April 27th 2018

Read: http://thecharlieton.com/whitney-tilson-why-the-hell-didnt-i-listen-to-charlie-munger/

Lesson be humble about what you attempt.

Below is an email from Whitney Tilson from Kase Learning announcing his:

Program Guide-Kase Learning Short Selling Conference-May 3,__ 2018

Attached is the program guide, which includes an agenda for the day and bios of all of the speakers. Registration and continental breakfast begin at 7:15am, the first speaker is at 8:15am, there are morning, lunch and afternoon breaks, and the last speaker ends at 4:15pm, followed by a networking cocktail reception until 7:00pm. The NYAC is on the corner of Central Park South and Seventh Avenue, and it has a dress code – no jeans, shorts, sneakers or t-shirts.

This full-day event is the first of its kind dedicated solely to short selling and will feature 22 of the world’s top practitioners who will share their wisdom, lessons learned, and best, actionable short ideas. I’ve seen many of the speakers’ presentations and they’re awesome! Companies that will be pitched include Tesla, Disney, Kraft-Heinz and Stericycle, plus internet ad fraud and gold.

The idea for the conference is rooted in the fact that this long bull market has inflicted absolute carnage on short sellers, and even seasoned veterans are throwing in the towel. This capitulation, however, combined with the increasing level of overvaluation, complacency, hype and even fraud in our markets, spells opportunity for courageous investors, so there is no better time for this conference.

Reporters from all of the major media outlets will be there, and CNBC is covering it as well. I was on their Halftime Report yesterday discussing the conference: www.cnbc.com/video/2018/04/26/kases-whitney-tilson-talks-the-art-and-pain-of-short-selling.html. I also just published the fourth, final (and my favorite) article in a series I’ve written entitled Lessons from 15 Years of Short Selling: https://seekingalpha.com/article/4166837-lessons-15-years-short-selling-veterans-advice

I’d be grateful if you’d help spread the word about the conference among your friends and colleagues, and wanted to pass along a special offer: when they register at http://bit.ly/Shortconf, they can use my friends and family discount code, FF20, to save 20% ($600) off the current rate.

I look forward to seeing you next week!

Sincerely yours,

Whitney Tilson
Founder & CEO
Kase Learning, LLC
5 W. 86th St., #5E
New York, NY 10024
(646) 258-0687
WTilson@KaseLearning.com

Speculation during the Great Crash of 1929

https://www.theatlantic.com/magazine/archive/1931/04/whirlwinds-of-speculation/307112/?utm_source=twb

This 1931 article written in the aftermath of the Great Crash of October 1929 and in the teeth of the Great Depression illustrates the pattern of human emotions in the boom/bust cycle. This should be read alongside Murray Rothbard’s excellent work, America’s Great Depression which analyzes in detail the causes of the depression.

But can speculation be fettered? Are we dealing with human emotions which defy control? Certainly, we cannot fetter speculation by our naïve American tendency immediately to enact a law. Making short selling—a that bête noire of the amateur economist—a crime or attempting to forbid speculation in securities by imposing a heavy tax upon the resale of stock recently purchased, would obviously be impractical as well as futile in a democratic state. So, too, an effort to distort and distend the functions of the Federal Reserve System, by charging it with the power and duty to ration supplies of credit to the stock market, would be an unworkable and paternalistic venture.

A Great Depression_Rothbard

EVERYTHING You need to understand Markets

Hedge Fund Question:

You are being interviewed by Ackman while the CNBC TV scrolls in the background. Suddenly at trader screams that Valeant is getting hit–THERE ARE more sellers than buyers!   Ugly.

A technical analyst runs into the office yelling that he accidently read the chart upside down–Valeant is a SELL!

Ackman turns to you with a worried expression and asks you to confirm or deny the trader’s statement. What do you say?  You will be thrown from the 20th floor if you get this one wrong.

A SERIOUS QUESTION:

Is there one price or two prices at any one time in the marketplace?  A transaction occurs at one price but what determines which of the two prices at any one time?

 

Buffett at his Best

The “Hunger Games” Economy: The FOUR

Those four companies touch our lives whether we want them to or not.  How did those four firms amass so much power and what does that imply for our futures? 52% of Americans have Amazon Prime while 51% go to church.  You may know of these firms, but you and I probably vastly underestimate them, especially Amazon.

Whether you invest in those companies, you need to understand their effect on other industries.  How is value created and destroyed in the digital age?  While Amazon grows other retailers are barely treading water.  Amazon’s cost of capital is vastly lower than its competitors.

GM has 215,000 employees with a market cap per employee of $231,000 while Facebook has 17,048 employees with a market cap of $20.5 million pr employee. We are in a “Hunger Games” economy. Page 268: “We have a perception of these large companies that they must be creating a lot of jobs, but in fact they have a small number of high-paying jobs, and everybody else is fighting over the scraps.  America is on pace to be home to 3 million lords and 350 million serfs.  Again, it has never been easier to be a billionaire, but never been harder to be a millionaire.”