Everyone tells you that they want to buy cheap stocks. What does that mean? There are so many metrics out there: price to sales, price to book, price to earnings or cash flow. Which are the key ones?
I think people get caught up too often looking at a few key metrics and they lose sight of the bigger picture. In the end, most little companies never become the next General Electric. They either burn out, they hit some plateau and stagnate, or they get acquired by a larger company. When thinking of smaller companies, you really need to ask yourself; what will this company be worth a few years from now and what will a much larger company pay for this business? Remember, acquisitions create cost savings and synergies. For this reason, an acquirer is likely to pay a lot more for a company than the broader market is willing to.
This leads to a bigger question; do this year’s earnings even matter? Probably not. Most people know roughly what this year’s earnings will look like. They even have a reasonable guess about next year’s earnings. No one knows what will happen in three or five years. That’s where you should focus your attention. Look for businesses that can earn many times what they are going to earn this year. Look for growth.
PS: On Sale-Gold and precious metal miners (those that are well-funded and have low market caps to reserves and production) will be on sale today at almost historical prices relative to gold and gold relative to monetary mayhem. Your editor will be puking AGAIN on his computer to try to add ever so gingerly into the bloodbath. We are seeing the extinction of the Goldbug. Pray for me or STOP ME BEFORE I BUY AGAIN. Before you think I am crazy–which is a definite possibility–look at Energold.
The “progressive” vision of a populace dependent on a central government and a European-style welfare state is now at hand. We march on the road to serfdom.
OK, so what can we learn and do? First, educate yourself in the benefits of liberty and free markets, then live your life as best you can. Be an example to others. As an investor, note how hospital stocks were up (yesterday) overall 9%. Industry leader HCA Holdings Inc. is up nearly 10% . Tenet Healthcare Corp. is up 9% to $27.21. Health Management Associate gained 8% and Community Health Systems rose by 6.4%. Medicare and Medicaid insurers were also up. Centene Corp. is up 10% . WellCare climbed 4%. Molina Healthcare Inc. also rose 3.16%.
But in the long-run (three to five years) these companies will be like the protected airlines during the era of the CAB–bureaucratic, sloppy and inefficient. You are better to look for winners in a market that is being deregulated and short the losers. When airlines became deregulated you wanted to own Southwest (low-cost operator) while shorting Eastern Airlines, American, Northwest Airlines, etc. I would rather short those companies as a hedge once they become fat and happy.
Lessons to learn
The book link: bureaucracy
Mises explains that the core choice we face is between rational economic organization by market prices or the arbitrary dictates of government bureaucrats. There is no third way. And here he explains how it is that bureaucracies can’t manage anything well or with an eye for economics at all. It is a devastating and fundamental criticism he makes, an extension of his critique of socialism. It has never been answered.
See the book: Omnipotent Government_Mises
At the close of the Second World War, Mises saw the destruction of the old world and the beginnings of a new one that did not look promising, especially for European politics. Socialism appeared to sweep all before it, and the social democratic variety in the West was not much of an improvement. Mises set out to explain and bitterly denounce the trends toward the total state, and demonstrate that Communism and Nazism were two sides of the same coin.
My Story: From Trader to Investor
At a reader’s request, I will relate my evolution from a commodity trader to a value investor. I started as a trader of physical (real) sugar to a futures trader at the MidAm. I have always been fascinated by markets or the interaction of economics with psychology which I now recognize as human action. I caught a big bull move in grains/soybeans in 1988. I learned that the money is made by riding big moves not by scalping or buying at the bid of 6.01 and selling at $6.02. I moved off the floor to trade upstairs because even then you could foresee that the trading pits would be turned into a food court or be eliminated.
Also, can you see doing this 6 hours a day? There are no old, bold traders.
The problem is that you need to trade big moves to make money and in trendless markets you trade against the commercial traders who have the edge. If you don’t have an edge then you are the sucker. Best to pull on the slot machines for fun. About 1988, I read about the Texaco Bankruptcy (see below) and looked at their balance sheet. Texaco bonds were trading at 70 cents on the dollar but the company had more than enough assets to pay 100 cents on the dollar. Wow, I thought, I can buy a dollar for 70 cents. Sure enough the bonds went lower to 60 cents, but I made decent returns within a year. I wanted to go where the edge was greater or where the markets more mis-priced. Of course, you don’t have the 10-1 leverage that you do in futures but leverage will only get you to failure faster if you don’t have a verifiable edge.
So I began to read as many books on investing that I could–only Graham, Buffett and Klarman seemed to make sense. I took time out to start an Internet company with a friend (www.art.com) and others, then returned to audit investment classes at Columbia Graduate School of Business. The real learning occurs when you apply what you have learned to the harsh reality of the markets.
I have travelled a ways but have much further to go in my learning journey.
Texaco Increases Estimate Of 1987 Loss to $4.9 Billion
By STEPHEN LABATON, Special to the New York Times Published: January 28, 1988
Texaco Inc. said today that it would report a loss of more than $4.9 billion for 1987 as a result of its restructuring and the settlement of its legal dispute with the Pennzoil Company.
In a document filed with the bankruptcy court here last month, Texaco had estimated a 1987 loss of $2.79 billion. The revised figure reflects a $2.1 billion write-down of the value of certain assets.
The company also said it faces $2.1 billion in claims from the Department of Energy, which has accused Texaco of overcharging for crude oil from 1973 to 1981, when price controls were in effect. Earlier this month, Texaco disclosed that the Internal Revenue Service might seek $6.5 billion in back taxes.
The company’s lawyers have contended that the claims by the Energy Department and the I.R.S. are highly inflated. Texaco insiders said yesterday that, even if the Government prevailed, the company had adequate financing to cover most of the claims. The claims are not expected to hold up the bankruptcy proceedings. The company hopes to emerge from bankruptcy this spring.
The stock market did not react strongly to today’s disclosures. In composite trading on the New York Stock Exchange, shares of Texaco closed at $37.875, down 87.5 cents.
The Federal claims and revised income figures appeared in a newly filed version of Texaco’s disclosure statement, a document being prepared to help shareholders decide whether to support or reject Texaco’s $5.6 billion restructuring plan. The plan must win approval by holders of two-thirds of Texaco’s shares, voting in a monthlong election.
Texaco entered bankruptcy proceedings last April after it lost a Supreme Court appeal over whether it had to post a bond of more than $10 billion to continue contesting the Pennzoil award.
A Texas jury in 1985 said Texaco’s acquisition of the Getty Oil Company had improperly interfered with a merger agreement between Pennzoil and Getty. Pennzoil was awarded $10.3 billion. As part of the reorganization, the Pennzoil claim would be settled for $3 billion.
At a hearing today in Federal Bankruptcy Court, the Securities and Exchange Commission questioned the adequacy of the proposed disclosure statement. Nathan M. Fuchs, a lawyer from the S.E.C.’s New York office, told a Federal bankruptcy judge that the statement failed to describe adequately the 16 stockholder derivative lawsuits that have been filed in New York, Delaware and Texas.
Most of the lawsuits accuse Texaco executives of mismanagement and have sought to recoup the money Texaco will lose in the Pennzoil dispute. Getty Executives Named
Several of the stockholder derivative suits also filed claims on behalf of Texaco against former executives at Getty and the J. Paul Getty and Sarah Getty trusts, both of which held large amounts of Getty stock.
Some of the suits also name as defendants the First Boston Corporation and Goldman, Sachs & Company. The two investment banks provided advice during Texaco’s negotiations with Getty. The suits charge that the advice led to the acquisition that sparked the dispute between Texaco and Pennzoil.
As part of Texaco’s reorganization plan, the company has said it will drop all of these derivative actions and will shield all of its employees from legal liability.
But Mr. Fuchs of the S.E.C. and three shareholders’ lawyers asserted at the hearings that Texaco had not provided an adequate explanation in the statement about why the company would want to drop a potentially valuable asset such as the right to assert claims against other parties. Statement From Lawyer
”The shareholders might actually be strengthened if they recovered $3 billion,” Mr. Fuchs said. ”The biggest weakness of the disclosure statement is that it does not say how Texaco can conclude that these derivative cases are without merit.”
After the hearing, a Texaco lawyer said the company was in discussions with the S.E.C. and expected to change the disclosure statement. ”If Mr. Fuchs is not satisfied, then we will continue to work with him until he is,” said the lawyer, Francis Barron.
Melvyn I. Weiss, a lawyer repesenting shareholders in one of the derivative suits, told Federal Bankruptcy Judge Howard Schwartzberg that the sole reason Texaco executives had decided to drop the derivative cases was to protect themselves.
”Texaco’s management is involved in a conflict of interest,” he said. Seeking an End to Litigation
Harvey R. Miller, Texaco’s lead bankruptcy lawyer, said the decision to drop the derivative suits was an effort ”to finally put an end to all the litigation in the case.” Lawyers for Pennzoil and the committee of Texaco creditors said they supported Texaco’s moves to drop the derivative suits and indemnify company executives.
Judge Schwartzberg requested that the shareholders’ lawyers meet with Texaco to propose new language for the statement. Another hearing will be held on the disclosure statement on Friday.
In an important amendment to the earlier disclosure statement, Texaco reserved the right to request that the judge approve the reorganization even if the plan is rejected by shareholders.
Conspicuously absent from the new disclosure statement were any objections by Carl C. Icahn, the chairman of Trans World Airlines Inc. and Texaco’s largest shareholder. Last week, a court ruled against Mr. Icahn’s effort to present his own plan to Texaco shareholders. The Icahn plan would have stripped Texaco of its takeover defenses.
David Friedman, a lawyer for Mr. Icahn, said his client was re-evaluating his earlier position and had not yet decided his next move.
The disclosure statement also estimated that Texaco would earn $626 million in 1988, $729 million in 1989, $941 million in 1990, $1.1 billion in 1991 and $1.2 billion in 1992.
In order to boost the demand for goods and services, one must boost the production of goods and services. For instance, an individual can exercise his demand for bread by producing shirts; or a butcher can exercise a demand for potatoes by first producing meat that he can exchange for potatoes.
Furthermore, producers of final goods can also exchange them for various other goods such as tools and machinery in order to expand and enhance the existent infrastructure, which will permit an expansion of final consumer goods that promotes people’s lives and well-being.
The Bernanke-Woodford plan, which is based on relentless monetary pumping, will lead to a weakening of the economy’s ability to generate final goods and services in line with consumers’ preferences. This will diminish rather than strengthen effective demand for goods and services. Read more: https://mises.org/daily/6200/QE3-Sowing-the-Wind
Henry Hazlitt, noted economist, author, editor, reviewer and columnist, is well-known to readers of the New York Times, Newsweek, The Freeman, Barron’s, Human Events and many others. Best known of his books are Economics in One Lesson, The Failure of the “New Economics,” The Foundations of Morality, and What You should Know About Inflation.
The direct cause of inflation is the issuance of an excessive amount of paper money. The most frequent cause of the issuance of too much paper money is a government budget deficit.
The majority of economists have long recognized this, but the majority of politicians have studiously ignored it. One result, in this age of inflation, is that economists have tended to put too much emphasis on the evils of deficits as such and too little emphasis on the evils of excessive government spending, whether the budget is balanced or not.
So it is desirable to begin with the question, What is the effect of government spending on the economy–even if it is wholly covered by tax revenues?
The economic effect of government spending depends on what the spending is for, compared with what the private spending it displaces would be for. To the extent that the government uses its tax-raised money to provide more urgent services for the community than the taxpayers themselves otherwise would or could have provided, the government spending is beneficial to the community. To the extent that the government provides policemen and judges to prevent or mitigate force, theft, and fraud, it protects and encourages production and welfare. The same applies, up to a certain point, to what the government pays out to provide armies and armament against foreign aggression. It applies also to the provision by city governments of sidewalks, streets, and sewers, and to the provision by States of roads, parkways, and bridges.
But government expenditure even on necessary types of service may easily become excessive. Sometimes it may be difficult to measure exactly where the point of excess begins. It is to be hoped, for example, that armies and armament may never need to be used, but it does not follow that providing them is mere waste. They are a form of insurance premium; and in this world of nuclear warfare and incendiary slogans it is not easy to say how big a premium is enough. The exigencies of politicians seeking re-election, of course, may very quickly lead to unneeded roads and other public works.
von Mises on The Crisis of Government Interventionism
Mises in Human Action (1949) explains how repeated failures of government interventions just bring forth more cries for intervention by government propagandists. Massive bailouts for banks and auto companies will always be justified no matter what the outcomes.
Mises, “The interventionist policies as practiced for many decades by all governments of the capitalistic West have brought about all those effects which the economists predicted. There are wars and civil wars, ruthless oppression of the masses by clusters of self-appointed dictators, economic depressions, mass unemployment, capital consumption, famines.
However, it is not these catastrophic events which have led to the crisis of interventionism. The interventionist doctrinaires and their followers explain all these undesired consequences as the unavoidable features of capitalism. As they see it, it is precisely these disasters that clearly demonstrate the necessity of intensifying interventionism. The failures of the interventionist policies do not in the least impair the popularity of the implied doctrine. They are so interpreted as to strengthen, not to lessen, the prestige of these teachings. As a vicious economic theory cannot be simply refuted by historical experience, the interventionist propagandists have been able to go on in spite of all the havoc they have spread.”
A good review of the principles of Austrian Economics and why it matters to rely on reality not models.
Excerpt: There are important advantages in being familiar with the Austrian theory. This theory helps one keep in mind fundamental principles such as the subjectivity of value and the incompleteness of information that form the basis for human action. This approach makes it easier to spot errors in one’s economic thinking. One of the common errors is treating economic models as normative standards for reality rather than loose metaphors and illustrations of the logical conclusions resulting from prior theoretical analysis. This error creates a temptation to “fix” the reality to fit the model. Often times the fix only makes things worse, because it was not the reality that needed fixing. It was, in fact, the economist’s model that did not capture the key features of reality.
Valuation Metrics:
Several excellent articles on what valuation metrics are useful. Good news for value investors–high EBITDA to Enterprise Value generates better returns than other metrics. Go here:www.greenbackd.com
A hedge fund discusses various investments (Berkshire, Iridium): http://www.tilsonfunds.com/T2pres-4-12.pdf. Note the bullish thesis for Iridium. I discussed MCX and Iridium here http://wp.me/p1PgpH-zt. When every satellite company has gone bankrupt or has been on government support, the burden of proof is on Mr. Tilson.
The establishment’s view (PBS) of what caused the financial crisis of 2008:http://www.pbs.org/wgbh/pages/frontline/money-power-wall-street/. Surprise! No mention of abnormally low interest rates or political intervention to force banks to make uneconomic loans in order to increase home ownership.
EXCERPT: Everyone pays lip service to the rule of law. Indeed I’ve never heard of anyone rejecting it as undesirable. (It has been called impossible under prevailing circumstances but that is a different point.) So why is the principle so flagrantly violated with almost no public outrage?
Take President Obama’s intervention in the Libyan civil war. Even if we grant that he could legally enter that conflict by his own unilateral decision – a big if, which we’ll explore below – the War Powers Resolution of 1973 requires him after 60 days to cease operations or ask Congress for authorization to continue. One week ago today the clock ran out on the Libyan intervention, yet Obama has neither ceased operations nor asked for authorization.
In finance, you cannot easily prove a model right by observation. Data are scarce and, more importantly, markets are arenas of action and reaction, dialectics of thesis, antithesis and synthesis. People learn from past mistakes and go on to make new ones. What is right in one regime is wrong in the next.
In finance you play against God’s creatures, agents who value assets based on their ephemeral opinions. Can you comprehend other pretenders’ uncertainty?–Mark Bradbury
Mark Tier, An “Austrian Investment Guru”
Mark Tier on Effective Investing, Where the World Is Headed and Why Financial Literacy Helps
Sunday, February 26, 2012 – with Anthony Wile
My lessons: Austrian economics is important for understanding reality but beware of being a macro-economist. Mark Tier filed as an investor but then learned from Soros and Buffett. If he can, you can too!
Excerpt:
Mark Tier: I’m from Australia but in 1977 I moved to Hong Kong. I’m still based there, but I spend most of my time these days in the Philippines. In a sense I’ve been a nomad all my life. My father was in the army so we rarely spent more than three years in any one place. We ended up in Canberra − that’s Australia’s equivalent of Washington − where I went to high school and university.
I studied economics and political science at the Australian National University. In my final year of economics I discovered Ludwig von Mises (thanks to Ayn Rand). In what should have been my last exam I made a fundamental mistake: I argued from Mises’ perspective against the examiners. So I had to repeat that final year to get the degree.
Then, when I got out into the real world, I found that I had to unlearn pretty much everything I’d been taught. (I also had to struggle to unlearn nonsense economics from university).
My professors were all Keynesians; reality is Misesian.
Daily Bell: Bring us up to the present and how you began to focus on investing.
Mark Tier: I’ve always wanted to be a writer. When I was 14, I’d get up early and pound an ancient typewriter for a couple of hours before going to school.
After graduating, I started writing a book that was published as Understanding Inflation (and became an Australian bestseller in 1974). I put an ad in the back for an investment newsletter − and I’ve been “unemployable” ever since. When I moved to Hong Kong I renamed it World Money Analyst. In 1991 I sold it and “retired.” That lasted about three months. I was a partner in another newsletter business for a few years. Since 2000 or thereabouts, I’ve written three books and am now working on a couple of others.
Daily Bell: What’s your track record been like?
Mark Tier: Actually, until I figured out what became The Winning Investment Habits of Warren Buffett & George Soros, lousy.
Ironically, in the World Money Analyst I advised other people what they should do with their money. My own forays into the market usually ended with burnt fingers.
Once I applied (starting in 1998) what I call the 23 “winning investment habits” to my own investing, everything changed.
For the next six years my personal stock investments went up an average of 24.4% per year − compared to the S&P’s 2.3% − without a single losing year, compared to three for the S&P. A major, major transformation.
I can’t tell you my precise track record since then as I stopped keeping track of it. Put it this way: except for a dip in 2008, my net worth has gone up or remained stable. And that’s after paying the rent, putting food on the table, putting four kids through private schools and university, and indulging in vices like latest electronic gadgets and expensive cigars.
And when I get up in the morning, I have the luxury of choosing to do whatever I want to do with my day. Mostly, I write.
Experience is something you don’t get until just after you need it.–Steven Wright
Study Break
Let’s take a study break and return to the Coors case study this weekend. You have a strong foundation of strategic logic to study the case. You learned from Wal-Mart that management did not expand from Arkansas into California or the Northeast back in 1985, but expanded at its periphery (like an amoeba), where it could readily establish the customer captivity and economies of scale that made it dominant. And it defended its base. What did Coors do?
Mises Academy Course on Money and Credit
I mentioned the course with links to the books and study guide here: http://wp.me/p1PgpH-ix
Let’s be frank. Mises’s writing at times can be difficult, especially his earlier work when he was writing for other economists, rather than the lay public. The amateur fan of Austrian economics who flips through The Theory of Money & Credit might recoil, thinking it is too hard and that anything important from the book would have been distilled by Rothbard in Man, Economy, and State.
If I’ve just described your view, I suggest doing the first week’s reading (the first two chapters from Mises) with my study guide as a companion. You might be pleasantly surprised to discover that Mises’s prose, though a bit formal, is still accessible to the layperson. If — using my study guide for help — you can get through the first week’s readings, then I believe you have what it takes to get through the whole class. It’s true, we will get into material that is more complicated than what Mises lays out in the opening chapters, but then again that’s what you have me for, to explain it for you.
Now if you determine that you are capable of digesting the material, I would urge you to take the plunge and sign up for the course. Yes, Rothbard and others have explained the Austrian theory of the business cycle in other venues. However, by exploring the Misesian framework of money and banking, you will walk away with a much deeper understanding of his theory of economic fluctuations. For example, the typical objection that “we had business cycles before the Fed, so the Austrians are obviously wrong” will seem quite ludicrous after studying Mises’s classic work.
