Intelligent Fanatics, The Outsiders, Good to Great

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https://microcapclub.com/2016/01/how-to-find-intelligent-fanatic-ceos-early/#comments

I have been asked to review the above, Intelligent Fanatics.  Please read the above link.   The question I have for readers: “What EXACTLY can YOU learn from these books that you can apply to your investing?  Or are you just reading narratives of past success?  Think about it for awhile, then reply in the comments section.   Then read on……….

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good-to-great (Link:Contrary Research)

From Good to Great … to Below Average

Last week, however, I picked up Good to Great by Jim Collins. This book is an absolute phenomenon in the publishing world. Since it came out in 2001, it has sold millions of copies. It still sells over 300,000 copies a year.

The book focuses on eleven companies that were just okay, and then transformed themselves into greatness — where greatness is defined as a sustained period over which the stock dramatically outperformed the market and its competitors. Not only did these companies make the transition from good to great, but they also had the sorts of characteristics which made them “built to last” (which is the title of Collins’s earlier book).

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Ironically, I began reading the book on the very same day that one of the eleven “good to great” companies, Fannie Mae, made the headlines of the business pages. It looks like Fannie Mae is going to need to be bailed out by the federal government. If you had bought Fannie Mae stock around the time Good to Great was published, you would have lost over 80 percent of your initial investment.

Another one of the “good to great” companies is Circuit City. You would have lost your shirt investing in Circuit City as well, which is also down 80 percent or more. Best Buy has cleaned Circuit City’s clock for the last seven or eight years.

Nine of the eleven companies remain more or less intact. Of these, Nucor is the only one that has dramatically outperformed the stock market since the book came out. Abbott Labs and Wells Fargo have done okay. Overall, a portfolio of the “good to great” companies looks like it would have underperformed the S&P 500.

I seem to remember that someone did an analysis of the companies highlighted in Peters and Waterman‘s 1980’s classic book In Search of Excellence and found the same thing.

What does this all mean? In one sense, not much.

These business books are mostly backward-looking: what have companies done that has made them successful? The future is always hard to predict, and understanding the past is valuable; on the other hand, the implicit message of these business books is that the principles that these companies use not only have made them good in the past, but position them for continued success.

To the extent that this doesn’t actually turn out to be true, it calls into question the basic premise of these books, doesn’t it?

I suggest that BEFORE you read any of the above books that you

1.) listen to this: https://youtu.be/LK8sxngSWaU

and read this:halo-effect

A review from a reader:

I read “Good to Great” and “Built to Last” some years ago because they were bestsellers and had good reviews. Although I did enjoy reading them, a voice in my head kept asking questions regarding the reliability of the research and findings. After reading “The Halo Effect”, I was relieved and happy to learn that I am not the only person asking these questions.

The world of business is complicated, uncertain and unpredictable. A company’s performance depends upon a variety of factors beyond the actions of its managers. These include currency shifts, competitors’ actions, shifts in consumer preferences, technological advances, etc. The first delusion is the Halo Effect, the tendency to look at a company’s overall performance and make attributions about its culture, leadership, values, and more. Our thinking is prejudiced by financial performance. In good times, companies are praised and their success is attributed to a variety of internal factors. In bad times, companies are criticized and these factors, which may not have changed, are attributed for the failures. The reality is more complicated and dependent upon uncertain and unpredictable factors.

An interesting section of this book is the one on the delusion of absolute performance. Company performance is relative, not absolute. A company can improve and fall further behind its rivals at the same time. For instance, GM today produces cars with better quality and more features than in the past. But its loss in market share is owed to a myriad of factors, including Asian competitors.

This is an excellent book because it will make you THINK. Is an oil company great if its profits soared when oil prices went up? Can the formulas used by successful companies in the 80s or 90s be applied to guarantee success today? A professor once told me that to predict future performance by analyzing past data is like driving a car forward while looking at the rear view mirror. In the appendix of this book there are tables showing the performance of the companies studied in “In Search of Excellence” and “Built to Last”. It is interesting to note the difference in performance in the years before and after these studies.

The author, Phil Rosenzweig, is a professor at IMD in Switzerland and former Harvard Business School professor. He wrote this book to stimulate discussion and help managers become wiser – “more discerning, more appropriately skeptical, and less vulnerable to simplistic formulas and quick fix remedies.” In my case, this book has given me a new perspective on business books.

The following is a brief summary of the nine delusions:

1. Halo Effect: Tendency to look at a company’s overall performance and make attributions about its culture, leadership, values, and more.

2. Correlation and Causality: Two things may be correlated, but we may not know which one causes which.

3. Single Explanations: Many studies show that a particular factor leads to improved performance. But since many of these factors are highly correlated, the effect of each one is usually less than suggested.

4. Connecting the Winning Dots: If we pick a number of successful companies and search for what they have in common, we’ll never isolate the reasons for their success, because we have no way of comparing them with less successful companies.

5. Rigorous Research: If the data aren’t of good quality, the data size and research methodology don’t matter.

6. Lasting Success: Almost all high-performing companies regress over time. The promise of a blueprint for lasting success is attractive but unrealistic.

7. Absolute Performance: Company performance is relative, not absolute. A company can improve and fall further behind its rivals at the same time.

8. The Wrong End of the Stick: It may be true that successful companies often pursued highly focused strategies, but highly focused strategies do not necessarily lead to success.

9. Organizational Physics: Company performance doesn’t obey immutable laws of nature and can’t be predicted with the accuracy of science – despite our desire for certainty and order.

Another lesson to glean is how to read the business press.   Beware of backward-viewing narratives of company success. See cisco-narrative.
You need to truly dig deep into the specific causes of a company success.   Was Wal-Mart a huge success in its growth phase because of the focus and leadership of Sam Walton?  Sure, perhaps, but that doesn’t tell you much.   How will you find the next Sam Walton?   How did Wal-Mart have such success against bigger competitors such as K-Mart in its early history?  You need to dig deeper!
We will discuss further in the next post.

The “Dangers” of Deep Value Investing

 

 

Fidel Castro and a Glimpse of Cuba

 

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Must Read: https://mises.org/blog/fidel-castro-hero-or-cold-blooded-murderer

FREE SPEECHfree-speech-in-cubaFREE HEALTH CARE

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FREE EDUCATION

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THE RIGHT TO PROTEST

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a-glimpse-of-cuba   Let the Cubans tell you their stories.

Cuba in socialist context: http://www.321gold.com/editorials/thomas/thomas120916.html

 

Where to Search

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helped by ultra-easy-money

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us-dollar-divergencegold-open-interest-dec-4-2016Specs liquidating at a furious pace in gold.   US Dollar on the cover of the Economist, insider selling in stocks–all lend support to real asset undervaluation.

Who wants gold?

gold-oi

dow-vs-fiatThe Dow in dollar terms (yellow) and the Dow in gold terms.

Remember that you don’t have a good contrarian trade UNLESS this happens:

Case Study of a 100 Bagger: Middleby

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https://microcapclub.com/2016/05/middleby-corporation-midd-case-study-intelligent-fanatic-led-100-bagger/

How many lessons can you pull out of this case study?

Also, a must read on finding fanatics: https://microcapclub.com/2016/01/how-to-find-intelligent-fanatic-ceos-early/

More studies: https://www.youtube.com/watch?v=KoOEE8GI-Ko

SEARCH STRATEGY: Look off the beaten path (Joel Greenblatt)

https://youtu.be/sYJaF86zY0E

 

India’s Economic Suicide; Quantitative vs. Qualitative Research

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Indian Prime Minister Nahendra Modi has declared 500 and 1,000 rupee notes illegal for exchange. Since these are worth a mere $7.26 and $14.53, he has de facto ended paper currency for use in all major transactions.

Half the population do not have bank accounts, and consumer trade has come to a screeching halt. That is because the highest permitted denomination fetches only about one US dollar, and exchanging the larger notes requires long waits and government identification, which a quarter of Indians do not possess.

Beyond the self-inflicted economic crisis, Jayant Bhandari says India is becoming a police state. She is on a fast track to banana-republic status, before fragmentation into smaller political units.

The gold market in India is in chaos, as people rid themselves of the domestic fiat currency: the price per ounce has skyrocketed to above $2,000, and tax authorities are blocking the retailers. This means the black market is set to boom, as smugglers adapt to the new opportunity, but import demand from India has dropped momentarily, since the formal markets are under the gun.

Hear the podcast: http://goldnewsletter.com/podcast/jayant-bhandari-indias-economic-suicide/

See articles: http://www.acting-man.com/?p=47966

Another dent in confidence of fiat currencies. What are YOUR thoughts. Lessons?  I will pay $1 million dollars to ANYONE who can tell me how central planning helps people increase wealth over time vs. free exchange.

The balance between quantitative and qualitative research

“There’s so much you can tell in a 10-minute tour of a plant.

I can tell you right away whether we’re making money, if we have quality or delivery issues (so customer issues) and if there’s a morale problem. It’s easy to tell.

But you can’t tell until you go there.”

– Linda Hasenfratz, CEO Linamar Corporation, in conversation with The Women of Burgundy, September 21, 2016

One of the familiar tensions underlying the quality-value investment discipline is the balance between quantitative and qualitative research. Many investors intuitively understand the importance of assessing the quantitative aspects of a business. We analyze the numbers to understand what level of return the business is generating for its shareholders, what level of debt sits on the balance sheet, and whether the cash flows into the business are stable and recurring, for example.

While a quantitative assessment is vital to an investment decision, it is not complete without a qualitative framework to guide its meaning. For instance, it is not just the level of debt on the balance sheet that matters, but whether those debt levels are appropriate for the business. It’s not just a historical record of stable cash flows that gives us confidence, but rather an understanding of the economic moat that protects those cash flows from future competition.

It is with this background that I find Linda Hasenfratz’s quote truly compelling. As CEO of Linamar, she is responsible for running a global manufacturing business that spans 13 countries around the world. She may be able to look at the financial metrics to assess how her business is doing, but for Hasenfratz it is clear that a true, holistic understanding of the business comes from walking the halls of manufacturing plants and speaking face-to-face with her management teams around the world.

Her words were a welcome reminder about the importance of being there, on the ground, to gain a complete qualitative understanding of the operations. As I listened, I felt as if a member of our Investment Team had been dropped into her seat. Take, for instance, the excerpt below from the June 2016 issue of The View from Burgundy, “Boots on the Ground,” which brings us along on a site tour of a Chinese flavour and fragrance company’s R&D facility:

“Normally lab environments are tightly controlled, but in this case, rooms labelled ‘temperature controlled’ had open windows, letting in both the hot summer air and a fair share of local insects. What’s more, the facility was curiously devoid of employees, and the few research staff we did encounter were surly and unapproachable. It seemed odd to us that a company could have its main R&D facility in such a state of inactivity and disrepair, while reporting seemingly world-leading profitability in a highly competitive research-driven industry.

Our negative impression from the site tour provided useful information that would have been difficult, if not impossible, to acquire had we not done the on-the-ground work. It prevented us from making an investment in what had appeared on paper to be an attractive business, provided one didn’t scrutinize its operations – an example of why relying on company-produced financial statements alone is not sufficient when conducting due diligence.”

In other words, the science of investing is never complete without the art.

PS:

India Confiscates Gold, Even Jewelry, in Raids on Hidden Money

Global financial repression picks up steam, led by India. After declaring large denomination notes illegal, India now targets gold.

It’s not just gold bars or bullion. The government has raided houses, no questions asked, confiscating jewelry.

For background to this article, please see my November 27 article Cash Chaos in India, 86% of Money in Circulation Withdrawn; Cash Still King in Japan.

Large denomination means 500-rupee ($7.30) and 1,000-rupee notes ($14.60), which account for more than 85 percent of the money supply. They are no longer legal tender, effective immediately.

As one might imagine, chaos ensued. And it continues.

India Confiscates Gold

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Picking up where we left off, please consider Message to Modi: Do No More Harm by Mihir Sharma.

The chaos accompanying “demonetization” hasn’t eased up noticeably. It seems likely the disruption to the economy, especially in cash-centric rural India, will hit growth sharply for at least a few quarters. It’s tough to say for how long and by how much; we are in uncharted territory here and guesses have varied widely. But many analysts agree with former Prime Minister Manmohan Singh, who’s predicting the new policy will knock 2 percentage points off that world-beating GDP growth rate.

Demonetization was originally sold as a “surgical strike on black money”— the illicit piles of cash many rich Indians have accumulated out of sight of the taxman. It’s now clear the policy has been anything but surgical. Worse, uncomfortable questions are being asked about whether the complicated rules and exemptions that have accompanied demonetization have allowed black-money holders to launder most of their cash. Of late, Modi’s chosen to focus instead on demonetization as means of advancing a cashless economy.

Yet the idea of a war on unaccounted-for wealth remains central to demonetization’s popular appeal, which means Modi will have to find other ways to keep that narrative going. So the government has now begun to push income-tax officials to conduct raids on those who might be concealing assets in forms other than cash, such as gold.

There’s already enough fear of such raids becoming common again that the government felt the need to step in to quell some of the anxiety. That didn’t help much. The government “clarified,”  among other things, the rules governing when tax officials could seize gold: Nothing would happen “if the holding is limited to 500 grams per married woman, 250 grams per unmarried woman and 100 grams per male.” It also said that there would be no limits on jewelry “provided it is acquired… from inheritance.” Also, the “officer conducting [the] search has discretion to not seize [an] even higher quantity of gold jewelry.”

What this means, unfortunately, is that India’s income tax officers have just won the lottery. During a raid, they can, on the spot, decide whether or not to confiscate a family’s gold holdings. And remember, India has an enormous amount of gold — 20,000 metric tons, much of it inherited. (The rules governing simple searches are different, but few know that.) Rather than cleaning up tax administration, the government has handed tax officials more power than they’ve had for decades. The rich will pay what they need to escape harassment; the rest will suffer.

Rich Escape, Poor and Middle Class Suffer

The last line in the preceding article says all you need to know about what’s happening: “The rich will pay what they need to escape harassment; the rest will suffer.”

Evidence suggests the politically connected, and their friends, knew about the ban on cash and acted in advance. Everyone else is stuck.

India’s raid on gold reinforces its ban on cash. Short term aside, these kinds of actions will increase demand for gold.

What’s Next?

I keep wondering: what’s next? People pretend they know, I admit I do not. However, I am quite sure a currency crisis is coming. Where it strikes first is unknown, but the list of likely candidates increases every year.

My spotlight has been on Japan, China, and the EU. India caught me off guard, but it adheres to my general theory this pot will eventually boil over in a cascade from an unexpected place, outside the US.

US actions may cause a currency crisis, but I believe a crisis will hit elsewhere first. If I am correct, gold will be the safe haven, regardless of currency, but especially where the crisis hits.

Mike “Mish” Shedlock

 

When No One Wants ‘Em–Search Strategy

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HUI represents unhedged miners. In January 2016, the HUI dipped to $99.13 then rose 2.84 xs to $286 when the $BPGDM, Bullish Percentage Index, was less than 15%. Then in mid-July the bullish percentage was 100%! Prices dipped, but then made a marginal new high.  Sentiment is not an EXACT timing device. Now, the index is near 7% bullish after a 37% decline and four months.  Talk about swings in sentiment. Buy high and sell low.  Interest rates are rising, gold is falling, the dollar rising, so who would be in the stupid 7%?

Update: Nov. 27th, 2016

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As of Nov. 27th, not every data point shows a turn in the gold market, but bearishness quite high. https://monetary-metals.com/good-news-and-bad-news-report-27-november-2016/

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gold-stocks-bullish-sentiment-nov-16th-2016   Assuming you have found cheap, well-capitalized miners, developers and/or explorers, there is a time to buy and a time to sell.  I think this is a time to be greedy when others are fearful. Also, if this was a sell-off after a long bull market (not a six month rally) where large amounts of capital investment entered mining, then bullishness might be less warranted.  ey-m-a-exchange-performance-comparison Place information into context.  A good read: commodity-resource-stocks An investment only a mother could love.

hui-to-djiaHUI in relation to the Dow Jones.  Be careful, though, the starting and ending periods are deceptive. The point is that miners have been scorned despite or even because the recent rally/sell-off.

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Positive Signs: Juniors holding better than Senior Producers

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As deep value contrarians, we aren’t able to have absolute certainty, but we can put probability on our side along with the laws of supply and demand.  If you don’t feel ill when buying your resource stocks, then don’t do it. Forcing yourself through the fear (assuming you have done your homework) to ACT, is the key.

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Investors fleeing the miners over the past few weeks

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Update Nov. 30th 2016

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If we are in a bull market, then a healthy position, but more to go if we are in a bear market. But base metals continue to show strength.

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Recent headlines imply near total bearishness:

Battered Gold Looks at Risk of Further Thumping

  • ABN Amro, OCBC see bullion dropping to $1,100 by end of 2017
  • Higher interest rates, stronger dollar seen pressuring gold
Photographer: Akos Stiller/Bloomberg

The worst is yet to come. At least that’s the opinion of the top two gold forecasters who say bullion will suffer further losses in 2017 as interest rates climb and the dollar strengthens.

Oversea-Chinese Banking Corp. and ABN Amro Group NV see gold sliding to $1,100 an ounce by the end of next year as the Federal Reserve tightens monetary policy, real Treasury yields increase and the U.S. currency rises. Prices were at $1,185.77 Wednesday. The banks were ranked first and second as forecasters in the third quarter, according to data compiled by Bloomberg.

After briefly soaring to $1,337.38 as it became clear that Donald Trump was about to pull off a shock victory in the U.S. presidential election, gold slumped to a nine-month low of $1,171.18 last week on speculation that his pledges to increase spending and revitalize the economy would boost interest rates and augment the attraction of other investments such as stocks and bonds.

“From an investor point of view there is little reason to hold gold,” said Georgette Boele, a currency and commodity strategist at ABN Amro. “Rising inflation expectations are more than countered by the rise in U.S. Treasury yields and expectations about upcoming rate hikes by the Fed. As long as real yields rise and there are no major inflation fears, prices will go lower.”

Global bond yields have climbed to 1.58 percent from a record low 1.07 percent in July, according to the Bloomberg Barclays Global Aggregate Index. The odds of the Federal Reserve hiking in December are 100 percent, up from 69 percent a month ago, before the election, and a gauge of the dollar against its major peers surged to the highest level since at least 2005 last week.

Gold is set for its worst month in more than three years, with investors dumping bullion at the fastest pace since 2013. Assets in bullion-backed exchange-traded funds have shrunk 5.3 percent in November, the biggest monthly drop since June of that year. Billionaire Stan Druckenmiller sold all his gold on election night. “All the reasons I owned it for the last couple of years seem to be ending,” he said in a CNBC interview shortly after the vote.

In the month through Monday, investors pulled $4.4 billion from exchange-traded funds backed by precious metals, the biggest redemption among all asset classes offered in such funds globally that are tracked by Bloomberg. Money is moving out of gold and other precious metals as U.S. equities rally to a record and traders boost bets on further rate increases.

Boele from ABN Amro sees the negative environment for gold continuing into next year, with a recovery for prices expected in 2018. The bank cut its prediction for the end of 2017 from $1,150. Before the U.S. election, Boele was already bearish, lowering her outlook in October.

Barnabas Gan, an economist at OCBC in Singapore, was predicting $1,100 by the end of next year before the U.S. election. He kept to that view in a note on Monday and cut his call for the end of this year to $1,200 from $1,300. He’s factoring in three rates hikes — one in December and two in 2017 — which will drag bullion down to his target by the end of next year.

“Political uncertainties continue to persist,” Gan said. “Note the upcoming Italian referendum as well as next year’s French election. Contrast this with the relative certainty over U.S. economic growth under President-elect Trump’s proposed fiscal plans which gives rise to reflationary and higher U.S. rates expectations into 2017.”

Risk Appetite

While Gan and Boele already saw lower prices for next year before the U.S. election, a Trump win was interpreted as bullish in a Bloomberg survey of more than 20 traders and analysts published before the vote. A victory for the Republican was seen pushing Comex gold futures to $1,395 within a week. Instead, the reverse happened.

Not everyone is bearish going into 2017. Bullion may average $1,300 next year, says Robin Bhar, head of metals research at Societe Generale SA in London, the third-best gold forecaster in the data compiled by Bloomberg.

“All in all, gold prices are at the mercy of risk appetite. Buying on dips is likely to provide support given a view that gold is a good portfolio diversifier, hedge, insurance policy,” Bhar said in an e-mail last week. At the same time, he acknowledged the downside risks because changes in fiscal policy could push real interest rates higher, offsetting haven demand.

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Thinking about Prices

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http://energyandgold.com/2016/11/14/moriarty-there-is-more-opportunity-today-than-there-has-ever-been-in-history/

 

Moriarty: There is More Opportunity Today Than There Has Ever Been in History

by Ceo Technician |  posted in: Bob MoriartyGoldGold Stocks |  0

Given the surprising US election outcome and the tumultuous market environment we wanted to connect with 321gold founder & editor Bob Moriarty for his latest thoughts on geopolitics and of course, markets. Bob obliged and this is an interview that you definitely don’t want to miss!

CEO Technician: Does the election result have any impact on gold and markets?

Bob Moriarty: I’m not sure it has any impact. Everyone wants to connect news with price movement and it just doesn’t work that way. We’ve been taught since we were two years old “the stock market went up today for reason xyz,” the financial news media needs news but the market goes up and down for many reasons and there is not a direct correlation between news and price movement.

I think Donald Trump is a fool but he’s not nearly as big of a criminal as Hillary Clinton. For whatever reason Trump’s surprise win sent precious metals tumbling and I see this as the real opportunity to load up and get aboard the train before it leaves the station.  I will be buying silver on Monday.

CEO Technician: Russia is getting even more serious in Syria by moving their sole aircraft carrier to the region in order to assist in bombing “terrorist” groups. With Turkey moving land forces inside Syria and the usual cast of characters remaining very much involved in the power struggle inside the country and in Iraq next door, the situation doesn’t look like it could be much more dangerous. What’s next in Syria?

Bob Moriarty: Hillary Clinton got us involved in Syria. Syria is a completely different situation from Iraq although the two are often confused. Israel came out with a proposal in 1996 called “The Clean Break From The Peace Process,” it’s on Google. In this proposal Israel says it needs to destroy Syria and that’s exactly what they’re doing. It’s a plan that’s been in place for 20 years. The US is in Syria because of Israel but if you step back for a minute and ask yourself “what interest does the US have in Syria and why do we care who runs Syria?” the answer would be “we have no interest in Syria.” We are destroying the Middle East and the 65 million or so refugees from the Middle East are going to destroy Europe and the EU.

CEO Technician: The refugee situation in Europe is out of hand and Europe faces a terror threat from within its own borders of an unprecedented scale.

Bob Moriarty: If you’re in a village in Syria and someone comes in and bombs the shit out of you, then you do 1 of 3 things: You die, you leave, or you fight back. If there’s another option please let me know. When you leave you’re angry. Syria is a 7-dimensional chess match and there’s no good guys. The refugees are angry, by creating refugees we are creating terrorists. The key to solving the terrorist threat is to stop creating refugees.

A lot of people act like this refugee crisis isn’t going to come to the United States, of course it’s going to come to the United States. We need to stop bombing countries and creating refugees.

CEO Technician: I was at the New Orleans Investment Conference a couple of weeks ago and there were a couple of themes that stood out to me and I’m interested to hear your thoughts. Big discoveries are becoming extremely rare and the biggest investment profits come from big discoveries. Another theme of the conference is the idea that yields have bottomed and we are now in a rising rate environment.

Bob Moriarty: That’s correct. The last big discovery I can think of is Fruta Del Norte down in Ecuador and that was about 10 million ounce (20-30 million ounces over the long term). There are some big deposits of lower grade but those require several billion dollars to move into production.

Here’s what used to happen, the majors had big exploration teams and did a lot work themselves while partnering with high quality juniors. Suddenly 200-300 juniors skyrocketed to 1,500-2,000 juniors due to the evolution of the internet and the rapid access to information. It is more important than ever to distinguish high quality well run juniors from the rest of the crowd. I believe this is the best time ever to be a junior mining investor but you must do your research and pick the companies with top tier management teams. There is more opportunity today than there has ever been in history.

Yields have bottomed but you must remember that the Fed follows the market, not the other way around. Interest rates are increasing but with the entire world awash in debt and an extremely unstable financial system it will be an increase in interest rates that blows the whole thing up.

CEO Technician: What do you think about gold in a rising interest rate environment? I posted a chart last week on CEO.CA showing that over the last 40+ years gold has more often than not been positively correlated to interest rates. It’s only been in the very recent history (since the Global Financial Crisis) that we have witnessed a negative correlation between rates and gold.

Bob Moriarty: I’ll tell you something that few have the guts to say. Gold is expensive relative to other commodities (such as oil, pigs, platinum, etc.) because gold is the #1 real asset. The real interest rate environment is what matters to gold, if inflation is 4% and interest rates are 3% that’s a very positive environment for gold. Gold can do well in a rising rate environment but it’s the real rate of interest that matters.

CEO Technician: Any thoughts on lithium, cobalt, and renewable energy revolution?

Bob Moriarty: The key to lithium is how soon they can get it into production. Lithium is actually a very common element but we are having a revolution in energy storage. By 2025 solar power will be comparable in cost to coal and that’s going to create an absolute revolution, fortunes will be made between now and then. Cobalt is much less covered than lithium, if you can find real cobalt companies with legitimate projects I think you will do very well. There are way too many lithium companies and many of them will go away.

CEO Technician: We’ve seen the sharpest move lower in precious metals and mining shares in more than 3 years since Trump won last Tuesday night. Where are we at and is it time to buy?

Bob Moriarty: Trump didn’t win the election, Clinton lost it. There is a difference. If Clinton had read Nobody Knows Anything, she would have known to not trust the “Experts” and “Gurus” and the other fools. Trump has never worn a uniform or held a public office. He will either be the best president in US history or the worst. Flip a quarter and find out. This is the bottom and the buying opportunity in gold and gold shares, right now. I am buying silver this morning (Monday 11/14).

There is a time to buy, a time to sell and a time to do nothing. Now buying miners.   Note the extreme swings in sentiment

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Lookin’ cheap: http://ericcinnamond.com/look-away-im-hideous/

RISK/ Aftermath of Trump Election: Independence Revoked!

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A LETTER TO THE US FROM JOHN CLEESE

To the citizens of the United States of America, in light of your failure to elect a competent President of the USA and thus to govern yourselves, we hereby give notice of the revocation of your independence, effective today.

Her Sovereign Majesty Queen Elizabeth II resumes monarchical duties over all states, commonwealths and other territories. Except Utah, which she does not fancy.

Your new prime minister (The Right Honourable Theresa May, MP for the 97.8% of you who have, until now, been unaware there’s a world outside your borders) will appoint a minister for America. Congress and the Senate are disbanded. A questionnaire circulated next year will determine whether any of you noticed.

To aid your transition to a British Crown Dependency, the following rules are introduced with immediate effect:

1. Look up “revocation” in the Oxford English Dictionary. Check “aluminium” in the pronunciation guide. You will be amazed at just how wrongly you pronounce it. The letter ‘U’ will be reinstated in words such as ‘favour’ and ‘neighbour’. Likewise you will learn to spell ‘doughnut’ without skipping half the letters. Generally, you should raise your vocabulary to acceptable levels. Look up “vocabulary.” Using the same twenty seven words interspersed with filler noises such as “like” and “you know” is an unacceptable and inefficient form of communication. Look up “interspersed.” There will be no more ‘bleeps’ in the Jerry Springer show. If you’re not old enough to cope with bad language then you should not have chat shows.

2. There is no such thing as “US English.” We’ll let Microsoft know on your behalf. The Microsoft spell-checker will be adjusted to take account of the reinstated letter ‘u’.

3. You should learn to distinguish English and Australian accents. It really isn’t that hard. English accents are not limited to cockney, upper-class twit or Mancunian (Daphne in Frasier). Scottish dramas such as ‘Taggart’ will no longer be broadcast with subtitles.You must learn that there is no such place as Devonshire in England. The name of the county is “Devon.” If you persist in calling it Devonshire, all American States will become “shires” e.g. Texasshire Floridashire, Louisianashire.

4. You should relearn your original national anthem, “God Save The Queen”, but only after fully carrying out task 1.

5. You should stop playing American “football.” There’s only one kind of football. What you call American “football” is not a very good game. The 2.1% of you aware there is a world outside your borders may have noticed no one else plays “American” football. You should instead play proper football. Initially, it would be best if you played with the girls. Those of you brave enough will, in time, be allowed to play rugby (which is similar to American “football”, but does not involve stopping for a rest every two seconds or wearing full kevlar body armour like nancies) You should stop playing baseball. It’s not reasonable to host event called the ‘World Series’ for a game which is not played outside of America. Instead of baseball, you will be allowed to play a girls’ game called “rounders,” which is baseball without fancy team stripe, oversized gloves, collector cards or hotdogs.

6. You will no longer be allowed to own or carry guns, or anything more dangerous in public than a vegetable peeler. Because you are not sensible enough to handle potentially dangerous items, you need a permit to carry a vegetable peeler.

7. July 4th is no longer a public holiday. November 2nd will be a new national holiday. It will be called “Indecisive Day.”

8. All American cars are hereby banned. They are crap and it is for your own good. When we show you German cars, you will understand what we mean. All road intersections will be replaced with roundabouts, and you will start driving on the left. At the same time, you will go metric without the benefit of conversion tables. Roundabouts and metrication will help you understand the British sense of humour.

9. Learn to make real chips. Those things you call French fries are not real chips. Fries aren’t French, they’re Belgian though 97.8% of you (including the guy who discovered fries while in Europe) are not aware of a country called Belgium. Potato chips are properly called “crisps.” Real chips are thick cut and fried in animal fat. The traditional accompaniment to chips is beer which should be served warm and flat.

10. The cold tasteless stuff you call beer is actually lager. Only proper British Bitter will be referred to as “beer.” Substances once known as “American Beer” will henceforth be referred to as “Near-Frozen Gnat’s Urine,” except for the product of the American Budweiser company which will be called “Weak Near-Frozen Gnat’s Urine.” This will allow true Budweiser (as manufactured for the last 1000 years in Pilsen, Czech Republic) to be sold without risk of confusion.

11. The UK will harmonise petrol prices (or “Gasoline,” as you will be permitted to keep calling it) for those of the former USA, adopting UK petrol prices (roughly $6/US gallon, get used to it).

12. Learn to resolve personal issues without guns, lawyers or therapists. That you need many lawyers and therapists shows you’re not adult enough to be independent. If you’re not adult enough to sort things out without suing someone or speaking to a therapist, you’re not grown up enough to handle a gun.

13. Please tell us who killed JFK. It’s been driving us crazy.

14. Tax collectors from Her Majesty’s Government will be with you shortly to ensure the acquisition of all revenues due (backdated to 1776).

Thank you for your co-operation.

* John Cleese [Basil Fawlty, Fawlty Towers, Sir Lancelot of Camelot (Monty Python & The Quest for the Holy Grail), Torquay, Devon, England]

market-risk

What is Risk?    A Great Post on Risk

risky

Readers’ Questions

control-what-you-can
When you have questions–first try to solve the problem for yourself–build a good investing/accounting/finance library. Then join and reach out to the Deep-Value Group at http://csinvesting.org/2015/01/14/deep-value-group-at-google/
There you will find many serious investors who are nice enough to answer an intelligent question.  Many are far more knowledgeable than this wretched scribe.
Ok, your questions………..
Estimated Reproduction Cost is Above your EPV
My question pertains to circumstances in which your estimated reproduction cost of assets is above your EPV. If this circumstance arises not because of managerial incompetence or malfeasance, but rather because the industry as a whole has significantly overinvested and faces excess capacity, does this change what you use as your estimate of intrinsic value?
No.  You have to normalize your earnings power value, EPV, (See Graham’s discussion in Securities Analysis, 2nd Ed.) using a long-enough period like ten years to average mid-cycle (if highly cyclical company) earnings and eliminate the highest and lowest values.  Reproduction value will have to decline to EPV or, mostly likely, EPV has to rise to reproduction value as capital leaves the industry. 
Do a search on CSinvesting (use search box at top right corner of this blog) and look up Maritime Economics.   Then Capital Returns.  Right now Shipping companies are not able to cover their voyage costs, but new builds trade above scrap.  The market estimates that eventually rates have to normalize and ship owners cover their costs.  
QUESTION
 
Am I wrong to think that although this industry is viable, you should use your calculated EPV as the more conservative estimate of intrinsic value rather than current reproduction cost of assets because presumably some of the capacity that will subsequently come offline will be that of the firm you are valuing? Accordingly, the firms in this industry will return to earning the cost of their invested capital but this will be achieved through some combination of increased prices as capacity comes offline and a reduction in individual capital bases.
The only circumstance I can think of in which this situation warrants using the current reproduction cost of assets would be if all the capacity that exited the market was the capacity that belonged to firms other than the one you are valuing.
Greenwald from Value Investing, pages 93-94:
In Chapter 3, we defined  the EPV of a firm as earnings after certain adjustments time 1/R where R is your current cost of capital. The adjustments mentioned:
  1. Undoing accounting misrepresentations, such as frequent one-time charges that are supposedly unconnected to normal operations. The adjustment consists of finding the average ratio that these charges bear to reported earnings before adjustments, annually, and reducing the current year’s reported earnings before adjustment proportionally.
  2. Resolving discrepancies between depreciation and amortiztion, as reported by the accountants, and the actual amount of reinvesatment the company needs to make in order to restore a firm’s assets at the end of the year to their level at the start of the year. The adjustment adds or subtracts this difference.
  3. Taking into account the business cycle and other transient effects. The adjustment reduces earnings reported at the peak of the cycle and raises them if the firm is currently in a cyclical trough (know your company and industry to do this effectively!)
  4. Applying other modicifations as are resonable, depending on the specific situation.

The goal is find distributable cash flow (owner’s earnings) Buffett used EBITDA minus maintenance capex for pre-tax owner’s earnings where maintenance capex kept the business competitive at the current level of operations.  If a competitor in your motel business puts in HD TV, then you might lose customers to your competitor unless you join the “arms race.”

Reproduction value is a signpost.  If the reproduction of a mine today is above the required capital returns, then you know that capital will have to be leaving the industry.   Who will build and/or operate a new mine.   Know your industry.   Mines can take over a year to shut-down or restart.   Finding an economical deposit and building a mine may take over 25 years.  You have to have industry knowledge to make a reasonable assessment.   Make sure you give youerself a big margin of safety.   

Take bulk shipping companies, you can see that new orders are slim and scrapping is taking place, so supply will be lessening. The question is how long before supply/demand equals. The pendulum swings. 
Follow up Questions
I have an additional question. This one is regarding Greenwald’s discussion of expected growth rate. He says that your expected return on a growth stock is the (current earnings yield*payout ratio)+(current earnings yield * retention ratio *ROE/r) + organic growth. I really appreciate how intuitive it is and how it forces you to focus on the core issues that generate returns on growth stocks. Moreover, I understand that the formula is not intended to spit out an exact figure of prospective returns, but rather to guide the investor towards a yes no decision about whether or not the stock can be reasonably classified as a bargain.
But one issue I have remains–it seems to me that to a certain extent the organic growth and reinvestment growth are comingled, at least to the extent that Greenwald suggests estimating organic growth by looking at the growth of the market that the business is in. I suppose I’m just worried about any embedded circularity/double counting in disaggregating the growth figure into two figures that may have some overlap with one another. Thank you.
Answer: I don’t know if I fully understand your question. You need to separate maintenance capex from growth capex. So the change in sales over the change in fixed assets shows you total capex, so then you need to subtract maintenance capex to see the remainder, growth capex.  You either find maint. capex in the 10-K or call the CFO/Inv. Relations.
Another Reader
Can you help help me to make the estimates on current earnings, I know Bruce said to do five years average, but he also said add back one time charge, and any cyclicality. Conversely, Joel Greenblatt mention he add back pension liabilities, is he talking about adding back maintenance cap ex  ? This is the only issue I have been having for the last year.. I would appreciate your help.
If you are figuring Enterprise value, then you need to add back liabilities to the market cap, including operating leases, unfunded pension funds, long-term debt, etc. Then deduct non-operating cash –depending upon the business, usually 2% to 3% of sales.
You want to figure out what distributable earnings the company can give you, the owner.    Depreciation and Amortization is an accounting principle while maintanance capex is a TRUE cost to stay in business. 
You drive a cab so your fares minus expenses, including maintenance of running your cab and REPLACING it.
IF you can’t figure out a company, then pass on it.
Good luck,