Tag Archives: Brazil


Brazil EM

Friday, September 25, 2015

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

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

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


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

Read more: No Mas!

Comprehensive List of Investing Books

Ordway Letter

As per the last post:http://wp.me/p1PgpH-WS, I mentioned signing up for a free newsletter at pcordway@gmail.com.

Below is an example of his letter. His reading list on value investing is  comprehensive. My suggestion is to read the Intelligent Investor by Graham, then Margin of Safety (posted on this blog and in the Value Vault) several times to understand the mindset of a value investor, then move onto the Buffett readings. Question and reread. Study accounting and competitive advantage while perusing annual reports of companies that interest you. If you don’t understand something, then try to find the answer through sleuthing. Practice THINKING INDEPENDENTLY (The experts don’t know the future either!) Apply principles to specific examples, that is why this blog emphasizes case studies.

Be patient. If it was easy, then the rewards wouldn’t be there. Competence will begin to appear in five or six years of intensive study and perhaps expertise after ten to fifteen years. I am still a student after 25 years with a long journey ahead.

An analysis on Share Repurchases: MauboussinOnStrategy_–_ShareRepurchaseFromAllAngles_June_2012

Bearish_on_Brazil I worked in Brazil, and the problems come down to abuse of property rights and poor laws and institutions. Don’t be fooled.


Suggested reading material or any other commentary is always welcome — just send me an email. I hope everyone is doing well and has a great 4th of July holiday next week.

  • “Former Treasury Secretary Henry Paulson said the U.S. will emerge relatively unharmed from the debt crisis in Europe as efforts by Greece, Spain and other nations to stabilize their economies persist for the long-term. ‘Although Europe is a drag, the U.S. will continue to muddle along with growth that really isn’t enough to make a dent in employment,’ Paulson…said at a [June 19] biotechnology industry conference in Boston. Europe will eventually stabilize and avoid a ‘catastrophic outcome,’ he said, [but] under the best circumstances, ‘this will drag on over time.’” (Source: Bloomberg)
  • Regarding the outlook in Europe: “I’m sure of three things. I  don’t know what’s going to happen; nobody else knows what is going to  happen; and all the experts are predicting different outcomes so 90% of  them must be wrong, if not 100%. It is a folly to listen to anyone who  says they know what is going to happen and make investments on that  basis.” — Howard Marks*
    • * Remarks delivered at a conference in New York on June 12, 2012. Any misattributions or mistakes are my own. Further comments are paraphrased as follows: Europe will probably get by, with the governments — namely Germany — doing the bare minimum. But there is certainly a non-zero chance of of something very bad happening. Either way, Europe in general is a huge mess and will likely remain so for years. The wall of worry in today’s market is well deserved; the litany of macro concerns prevalent today may be the most extreme in my or anyone’s career, but they also have existed for years — we just weren’t focusing on them. The riskiest thing in the world is a lack of belief in the presence of risk in the market; that is certainly not the case today. Act cautiously; insist on value and safety. Low-priced, well-capitalized corporate assets are — as always — the best options in this environment.

Facts and Figures

  • In the past six years, the balance sheets of the world’s eight largest central banks have more than tripled (in dollar terms) from $5.4 trillion to $15+ trillion. (Source: Bianco Research)
  • Coca-Cola will return to Myanmar (Burma) for the first time in 60 years. The only two countries left in the world without Coke will then be Cuba and North Korea. (Source: Bloomberg)
  • “From 1985 through 2011…for every dollar spent in [capex, M&A, dividends and buybacks], roughly $0.55 went to capital spending, $0.27 to M&A, and $0.18 to dividends and buybacks.” (Source: Michael Mauboussin — see attached; note: dividends and buybacks were about equal at ~9% each)
    • In the past 10 years, dividends and M&A have remained about the same (~9% and ~26%, respectively), while capex has fallen to 50% and buybacks have climbed to 14%. In the last five years, the trend is even clearer: still almost 9% in dividends, only 43% in capex, 16% in buybacks and 32% in M&A


  • Reading List — A couple of friends asked for this recently, so I thought I’d send it around in case you’re looking for some good reading material this summer. The “top 100” and groupings are just my opinion — there should be something for everyone on this list, and hopefully some new or overlooked books or articles. Please let me know if you have any suggestions or corrections to the list.
  • “Share Repurchases from All Angles” — An excellent article from Michael Mauboussin offering some clear-headed thinking on share buybacks.
  • “Bearish on Brazil” — A great debate about Brazil’s economic prospects. The attached is an essay in Foreign Affairs adapted from the author’s new book Breakout Nations: In Pursuit of the Next Economic Miracles. I haven’t read the book yet, but the essay is interesting. The author, who is head of Emerging Markets and Global Macro at Morgan Stanley Investment Management, explores Brazil’s lofty reputation as a growth market and attributes most of the successes to a heavy reliance on rising commodity prices driven by Chinese demand. The author also believes Brazil has a “hidden cap” on growth — due to high interest rates, inflationary feedback, uncompetitiveness, an overvalued currency, chronic government overspending and misinvestment, lack of productivity growth, and a lack of investment in anything other than a welfare state — that will be exposed as commodity demand/prices weaken.


  • Hedge Fund Market Wizards Jack Schwager has just released the fourth book in his Market Wizards series. I’ve read the others, which began more than 20 years ago, and this one is the best yet. They’re all focused more on “trading” than “investing,” and some of the trade-y stuff really makes me cringe, but even the staunchest Grahamite still has something to learn here. In particular, Schwager’s interview with Edward Thorp is excellent — that material alone would make a great book.The only overlap with The Alpha Masters is a chapter on a Ray Dalio, which is longer and more detailed in Schwager’s book.  And if nothing else, Schwager’s interview with Joel Greenblatt gives this book all the credibility it needs. Highly recommended.
    • An interview with the author by Opalesque (via a great blog) is here.


  • Debunking the Myth of Intuition” — A great interview with Prof. Kahneman on a range of topics.
  • Julian Robertson Interviewed on Bloomberg TV — A rare interview with Julian Roberston. Topics include hedge funds and investment strategy, Europe and the debt crisis, and American politics.
  • The Five Mega-trends Shaping Tomorrow’s Customers” — An op-ed by Coca-Cola CEO Muhtar Kent about the key forces driving the world’s consumers.
  • The Formula That Killed Wall Street? The Gaussian Copula and the Material Cultures of Modelling” — Don’t let the title scare you.
  • Why I’m Betting Big on Europe— A profile of David Herro and his investments in European banks. Regardless of an opinion on the merits of these investments, this is certainly not a mutual fund manager with any fear of a little tracking error!
  • The State of the Nation’s Housing” — The latest annual report from The Joint Center for Housing Studies of Harvard University. I’ve always found this report to be one of the very best ways to understand the conditions in the housing industry (and it’s free!). This year’s press release reads: ““While still in the early innings of a housing recovery, rental markets have turned the corner, home sales are strengthening, and a floor is beginning to form under home prices. With new home inventories at record lows, unless the broader economy goes into a tailspin, stronger sales should further stabilize prices and pave the way for a pickup in single-family housing construction over the course of 2012.”
  • This is Your Brain on Bargains: JC Penney and the Curse of Discounts” — An interesting look at consumer behavior, the history of coupons and discounts, and the potential impact on JCP’s strategy.
  • Shatel Q&A: Friendships are Buffett’s Sport Riches” — Speaking of Michael Lewis (see below), I thought Moneyball was a pretty good book. In this interview, which is more of a curiosity than anything else, Buffett said in response to a question about sports figures asking for advice from him: “I get a lot of them that just want to talk. Billy Beane called. He’s a  Berkshire shareholder. He was running the A’s. He was running them like  Berkshire, he thought. There’s a fair number of them who are  shareholders.”
  • In Insider and Enron Cases, Balancing Lies and Thievery— I think this is a really interesting debate. And this essay is amazing — the lead Enron prosecutor walks through a very honest assessment of the case; admits that it had “fundamental weaknesses” and that Skilling “took steps inconsistent with alleged criminal intent”; and states that his trial strategy breakthrough came after watching the movie based on Bethany McLean’s outstanding book The Smartest Guys in the Room (which is highly recommended, by the way).


  • Remarks at the Festival of Economics — A recent speech by George Soros in which he outlines his theory of reflexivity and his thoughts on the euro/EU crisis. It’s long and a little dense — and the reflexivity stuff certainly isn’t new — but there are worthwhile thoughts and analysis in here if you wade through it. And here and here are other Soros articles on the topic.
  • Don’t Eat Fortune’s Cookie” — Michael Lewis’s recent speech to the graduating class at Princeton. I have mixed emotions on his articles and books — I love some of them, others not so much — but in the spirit of the recently passed graduation season, this is worth a quick read. Other commencement links:
  • Unequal Shares” — A look at dual-class share structures and public company governance in light of the recent Facebook IPO. A recent issue of The Economist also looked at the possible demise of the public company, which obviously a bit of hyperbole but has some worthwhile thoughts behind it.
  • “Not So Expert” — A column in The Economist about psychological biases and financial decisions. “The need for financial advice may be more psychological than practical.”
  • NYSE CEO: Public Has Lost Trust in Market — I think there is something to the NYSE’s side of the argument. And much like the move from private partnerships to publicly-traded corporations, I would view the exchanges’ decisions to IPO as a seminal moment in the evolution of the environment we have today.

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Questions from Readers-Emerging Franchises & Fusion Investing

Questions from a Reader:

Subject: Competition Demystified+Fusion Investing


I am currently reading Bruce Greenwald’s Competition Demystified, and I am not finished. However, I remember asking you before about emerging franchise, and you replied that Prof. Greenwald covered this topic in the book. I would appreciate if you can direct me to this chapter and where he exactly tackles the strategic issue of emerging franchise and company strategic actions.

Answer: Let me be sure we have the same definition for emerging franchise. This would be a franchise in its early to middle stage of (typically rapid)growth like Wal-Mart (WMT) in the early 1970s and 1980s as it grew through local economies of scale on the edges of its local territorial advantage. WMT could earn high returns while also redeploying its capital at the same high  returns (high marginal returns to capital) thus funding its growth and compounding capital at high rates for a 20-year period. No wonder WMT created more millionaires than any other company in history.  Now, of course, WMT can not grow by redeploying its capital at the same rates since it has saturated the US market, and the company does not have unique cost advantages in foreign markets. The first two cases on Wal-Mart and Coors will cover local economies of scale. See pages 77 to 112 of the book, Competition Demystified.

Then you have entrant strategies for a company trying to enter against established incumbents like Kiwi enters the airline industry–see pages 238 to 254. The entrant has to go into niches that are not of interest to the larger incumbents, then build from there. Note the Japanese Car companies entrant strategies into the US auto market–from small, fuel-efficient cars to Lexus! The Japanese took market share from the Americans.

Now if you are thinking of smaller, dominant companies in their niches, you might enjoy reading, Hidden Champions of the 21st Century: Success Strategies of Unknwn World Market Leaders by Hermann Simon (2009)


  1. What is your take on Fusion investing approach (blending Fundamental (value approach) +Technical + Quant+ behavioral + intermarket ). I noticed some successful money managers who are in the minority adopted this approach successfully over long periods of time. Names like : John Palicka, who this week published his book on fusion investing, John Bolton and Michael Burry).. http://www.amazon.com/Fusion-Analysis-Fundamental-Technical-Risk-Adjusted/dp/0071629386#_

Mr. Palicka is  a CFA and CMT. The value of a CFA designation: http://www.businessweek.com/bschools/content/apr2011/bs20110426_844533.htm

Answer: I don’t know if John Bolton and Michael Burry use technical analysis, but any tool which helps you understand who is on the other side of the trade from you is helpful. If I saw Seth Klarman, Einhorn, and Buffett on the Buy-side against my short position, I would seriously recheck my work or at least find out their reasons for owning the company. You have to respect the other side or else you discover the fool is you.

I am not an expert on technical analysis but I do know that when I traded soybeans and T-Bonds on the trading floor in Chicago (1980s) finding out who the supra-marginal buyer or seller was and then doing the opposite was almost a guarantee of making money at least in the short-term (one hour to three days). The price would rally up for two or three days into long-term resistance and the chart breakout players would come into the market following the price, and I would sell responsively into their demand because the market orders were from small, weaker speculators whom were buying from commercial hedgers. I wanted to be with the strong against the weak.

If you see prices flat-lining for several years, it means that there is little new supply or demand, and people become used to this price level. If there is a breakout to the upside (especially if the marginal cost of production is above average costs), then I would buy on the higher price. There are economic reasons behind the price rise. However, what possible edge can you have (Barriers to Entry?) reading charts since everyone sees the same thing as you do? nGo where you have the biggest edge.

But I do not know in what exact proportions to “fuse” all the different methods.  All I am trying to do is figure out what something is worth and then pay a whole lot less for it. For most companies and for much of the time, I can’t figure it out. But there are certain times when the world goes crazy and prices become extreme then even I can find opportunity.

I can guarantee that too much complexity will hurt your results.  Also, I am extremely skeptical that Mr. Palicka with a CFA, CMT writing a book will provide anything new.  Having a CFA, CMT may not hurt you, but I do believe those designations are neither necessary nor sufficient to help you as an investor. I know that comment may find much disagreement, but I am happy to post such rebuttals in the comments section. At the risk of alienating some readers, I will call it; like I see it–like the umpire says.

I have heard Joel G. explain that despite going to Wharton MBA school, he learned value investing through Graham and Buffett and then his application of those principles.  There is no secret to investing–just relentless application over years with the right framework and independent thinking.

If you want a philosophical background to think for yourself then read, Atlas Shrugged or The Fountainhead by Ayn Rand.


I would also appreciate if you can share your reading list with us.

Do you mean a recommended list or what I am reading now? My current reading list is below. Since I live five blocks from a good research library, I can check out many interesting books on diverse subjects.  Also, I often just skim books.

  1. The Rise and Fall of the Third Reich by William Shirer–with the passage of the expanded “Patriot” Act, the U.S. President can arbitrary detain, torture and execute American citizens without Habeas Corpus and Due Process provided that they are “Terrorists.” How convenient. I don’t like my neighbor because his dog uses my motorcycle like a fire-hydrant.  He makes the perfect terrorist suspect don’t you think? …….So I want to study the lessons of Fascism and totalitarianism.
  2. The Great A&P and The Struggle for Small Business America by Marc Levinson. This books shows that corporate goliaths are not immune to the insistent forces of competition and change. Perhaps I can find a case study here.
  3. The Ikea Edge by Anders Dahlvig. Some people read Wall Street Research, but I find business histories on companies and CEO’s  a great education for studying competitive advantage and how companies evolve–the inevitable ebb and flow of success and failure.
  4. Uprising by George Magnus. Will emerging markets shape or shake the world economy? I have traveled and worked in Brazil, Cuba and other countries. I am not so enthused as the public hype about emerging markets.  Take China–how does a dictatorial regime that is directing the banking sector (similar to the Fed in the US) not go through a massive boom/bust? Brazil’s business regulations require 200,000 pages of fine print. Absurd! No wonder large segments of the economy operate on the black market. Using the best lawyers, we opened a business in Brazil after ten months–ten months of paperwork, delays and denial.

Thanks for the questions.