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Category Archives: Humor & Entertainment
Excellent Podcasts on Investing
This is when you want companies to buy back their stock: Industry hated, operations improving, multi-year lows. https://finance.yahoo.com/news/goldcorp-announces-commencement-normal-course-103000479.html
From Best to Worst. There are typically two ways to make 100 to 1 on your money. 1. The preferred way–in my view because the company has more control of its destiny–would be to invest early in a high ROIC company that can redeploy capital at high rates for MANY years.
Note how the chart has gone sideways for 18 years as the ability to redeploy at high rates has declined. WMT can’t grow with regional economies of scale in Germany as it could in Arkansas back in 1965. You have to hold on through the inevitable 50% price plunges which you are able to do because of your understanding of the company’s competitive edge in the market.
2. Or, you find an extremely cheap, beaten-up cyclical company (TECK) in an industry that has had low capital investment, then hold on for the boom which you then sell out at the top–harder and more nerve-wracking than the example above.
The worst performing sectors are where you want to look, but realize that some industries like phone companies may be under structural change.
The Anthesis of Out-of-Favor
The Psychology of Sales
Hedge Fund Pop Quiz (Accounting)
Why is EBITDA so different than operating cash flow? Is that a problem or an opportunity. See: WTTR Mar 31 2018
A good research report on WTTR: Permian WDDC
Value Investing Seminar in Cyprus
I know nothing about this but to let you know: https://cyprusvalueinvestor.com/
Why Everyone Hates Finance and What to Do about It
By Paul McCaffrey
Finance can be a noble profession, yet too many people don’t see it that way.
Mihir A. Desai, the Mizuho Financial Group Professor of Finance at Harvard Business School and professor of law at Harvard Law School, explained why finance has a trust problem and offered a simple strategy to address it at the 71st CFA Institute Annual Conference.
“Finance is being demonized, and it’s being demonized because people don’t understand it,” he said. “If we want to stop demonization, we have to make it accessible . . . And it turns out stories and the humanities are a really powerful way to do that.”
Though he says much of the criticism of finance is unfair, Desai, the author of The Wisdom of Finance: Discovering Humanity in the World of Risk and Return, acknowledged that some of the industry’s reputational wounds are self inflicted.
“Why do we have more than our share of Martin Shkrelis?” he asked. Largely because of attribution error. What sets finance apart from most other disciplines is that performance feedback is clear and constant. And that can breed arrogance.
“If you’re an investor,” Desai explained, “you get feedback all the time about how you’re doing every day. And it’s super precise and inflated by leverage. What happens in those settings? Human beings do what human beings do everywhere. Every good outcome is because of me. Every bad outcome is because of the world.”
As that process continues through the years and the outcomes are mostly good, people come to believe in their skill, that they earned and deserve their returns.
But in finance and investing, skill is difficult to assess and practically impossible to prove.
“The greatest lesson in finance, of course, is it’s very hard to tell the difference between luck and skill,” Desai said. “It’s better to operate as if it’s luck.” He also pointed to the emphasis on value extraction over value creation in recent decades as another culprit behind finance’s lackluster standing among the public.
These criticisms aside, Desai believes that finance does much more good than harm and that finance professionals need to highlight the benefits that it creates.
“If we re-aim the practice of finance and the underlying ideas that are incredibly noble, we can make finance into something aspirational, which is what it should be,” he explained. That requires thinking about the big ideas, the first principles of finance, and explaining them to people in ways that resonate.
“And frankly equations and graphs don’t work for many people,” he said. “It turns out there’s a whole section of the population that just doesn’t get that.”
That’s where literature and the humanities come into play.
Inspired by the structure of The Wisdom of Finance, Desai broke finance down into seven concepts during his presentation, what he calls “the biggest ideas in finance,” which are
- risk and insurance;
- risk management —
- value creation and valuation;
- corporate governance;
As Desai explains it, when reduced to its essence, finance comes down to insurance. “Insurance is underneath all of finance in a remarkable way,” he said. “Once we think about risk and insurance, we have to think about risk management. That’s going to be about options and diversification. Instead of doing it with fancy calculus, we’re going to do it with stories.”
Risk and The Maltese Falcon
To explain risk, Desai recommends the Dashiell Hammett novel, The Maltese Falcon, which was made into a motion picture starring Humphrey Bogart as the hard-bitten San Francisco private detective Sam Spade. In the novel, Spade recounts a story about a man named Flitcraft, who disappears one day, leaving a wife, family, and career behind. Some years later, the wife receives word from an acquaintance that Flitcraft has been spotted in Spokane, Washington. She calls Spade to investigate.
Spade learns after traveling to Spokane, that the man is Flitcraft, as it turns out, only he’s changed his name to Charles Pierce. Spade confronts him and Flitcraft admits his ruse and explains why he abandoned his family.
“‘I was walking along, and a huge iron beam fell right next to me, and a piece of sidewalk jumped up and hit me in the face,’” Desai said, quoting Flitcraft’s words. “‘And at that moment, I realized that life was totally random. And I’d been living my life as if the universe was well ordered so my life had to be well ordered. But, in fact, the universe is random. So I’m going to change my life at random.”
So Flitcraft left to build an entirely new identity. “But then,” Desai continued, “Sam says, ‘The best part of the story is, when I found him in Spokane, he had recreated the same life he had . . . He had the same kind of wife and house and job and kids and everything was exactly the same.’” The names Flitcraft and Charles Pierce were not chosen by chance. Allen J. Flitcraft was a leading actuary and author of a life insurance manual. Charles Sanders Peirce was a philosopher dubbed the “father of pragmatism.”
What Hammett and Spade were getting at was that what looked chaotic and haphazard was not entirely unpredictable. There was an underlying order to it.
“The fundamental thing in life is randomness,” Desai explained. “And what do finance and insurance understand? They understand that we can navigate it by looking for patterns. Things that look totally random are not. . . That’s what the foundation of finance is: Seemingly random outcomes actually behave along patterns.”
Pride, Prejudice, and Risk Management
So how does Desai explain the concept of risk management?
“We could talk about options and diversification with modern portfolio theory and stochastic calculus,” he said. “Or we could use Jane Austen.”
It turns out her 19th-century English romantic novel Pride and Prejudice, describing the courtship rituals of the day and how the heroine, Elizabeth Bennet, and other young women respond to their various suitors, has a lot to teach on the subject.
“So what’s the risk management problem?” Desai said. “Potential suitors come by and you don’t know which one to take. And there’s always a problem. Some of them are rich, some are drunk, some of them are nice, some of them are ugly.”
Indeed, the novel features one of the worst marriage proposals ever. A Mr. Collins asks Bennet for her hand rather bluntly: “You’re not that pretty. You’re not that rich. Here’s an offer. I suggest you take it,” Desai recalled. “And of course, what’s he doing? He’s playing off her risk aversion.”
Bennet rejects the offer, but soon after, Collins shifts his attention to her friend Charlotte, to whom he makes a similarly mercenary proposal, one that that she excitedly accepts.
“The neat part about that story is the risk management problem is solved with options and diversification,” Desai said. “These characters give voice to what we think of as modern financial institutions.” “Finance needs some humanization.”
Desai’s message was simple: The best way to reclaim finance’s reputation is to demystify it and to do it through literature and the humanities, through storytelling.
“If it becomes all about spreadsheets and screens, then we detach ourselves from humanity,” he said. “We should think about the human consequences of what we do. And these stories are a wonderful way to get reattached to what the moral content of our ideas are.”
‘The Kentucky Derby Is Decadent and Depraved,’ by Hunter S. Thompson
“Just pretend you’re visiting a huge outdoor loony bin,” I said. “If the inmates get out of control we’ll soak them down with Mace.” I showed him the can of “Chemical Billy,” resisting the urge to fire it across the room at a rat-faced man typing diligently in the Associated Press section. We were standing at the bar, sipping the management’s scotch and congratulating each other on our sudden, unexplained luck in picking up two sets of fine press credentials. The lady at the desk had been very friendly to him, he said. “I just told her my name and she gave me the whole works.”
Hedge Fund Question:
You are being interviewed by Ackman while the CNBC TV scrolls in the background. Suddenly at trader screams that Valeant is getting hit–THERE ARE more sellers than buyers! Ugly.
A technical analyst runs into the office yelling that he accidently read the chart upside down–Valeant is a SELL!
Ackman turns to you with a worried expression and asks you to confirm or deny the trader’s statement. What do you say? You will be thrown from the 20th floor if you get this one wrong.
A SERIOUS QUESTION:
Is there one price or two prices at any one time in the marketplace? A transaction occurs at one price but what determines which of the two prices at any one time?
SURPRISE! Look what just landed in my inbox today. I wonder if THIS is FINALLY my chance to get rich. Lucky me:
ZENITH BANK COMPENSATION UNIT, IN AFFILIATION WITH THE UNITED NATIONS.
How are you today? Hope all is well with you and family?, You may not understand why this mail came to you.
In regards to the recent meeting between the United Nations and the
Present United States Government to restore the dignity and Economy of the Nations. Base on the Agreement with the World Bank Assistance to help and make the world a better place for all with the sole aim of abolishing poverty.
We have been having a meeting for the passed 7 months which ended 2 days ago with the then secretary to the UNITED NATIONS.
This email is to all the people that have been scammed in any part of the world, the UNITED NATIONS have agreed to compensate them with
the sum of US$ 250,000.00 (Two Hundred and Fifty Thousand United States Dollars). This includes every foreign contractors that may have not received their contract sum, and people that have had an unfinished transaction or international businesses that failed due to Government problems etc.
Your name and email was in the list submitted by our Monitoring Team of Economic and Financial Crime Commission observers (Creepy! Is someone spying on me?) and this is why we are contacting you, this have been agreed upon and have been signed.
You are advised to contact Mr. Jim Ovia of ZENITH BANK NIGERIA PLC, as he is our representative in Nigeria, contact him immediately for your Cheque/ International Bank Draft of USD$ 250,000.00 (Two Hundred and Fifty Thousand United States Dollars) This funds are in a Bank Draft for security purpose OK? So he will send it to you and you can clear it in any bank of your choice.
This meeting was first held on the 8th of April 2003. You can view
this page for your perusal: http://www.un.org/News/Press/docs/2003/ik344.doc.htm
Therefore, you should send him your full Name and telephone number/your correct mailing address where you want him to send the Draft to you.
Contact Mr. Jim Ovia immediately for your Cheque:
Person to Mr. Jim Ovia
Good luck and kind regards,
Any ideas of what I should reply? I will split the profits!
Written in 1998 during the Internet Riot (from Cove Capital Blog)
First of all, stock prices are volatile. Well, duh. If you buy shares in a stock mutual fund, any stock mutual fund, your investment value will change every day. In a recession it will go down, day after day, week after week, month after month, until you are ready to tear your hair out, unless you’ve already gone bald from worry. It will insist on this even if Ghandi, Jefferson, John Lennon, Jesus and the Apostles, Einstein, Merlin and Golda Maier all manage the thing. Stock markets show remarkably little respect for people or their reputations. Furthermore, if the fund has really been successful, you might be buying someone else’s whopping gains when you invest, on which you may have to pay taxes for returns you didn’t earn. Just try and find somewhere you don’t, though. Dismal.
While the long-term bias in stock prices is upward, stocks enter a bear market with amazing regularity, about every 3 – 4 years. It goes with the territory. Expect it. Live with it. If you can’t do that, go bury your money in a jar or put it in the bank and don’t bother us about why your investment goes south sometimes or why water runs downhill. It’s physics, man.
Aside from the mandatory boilerplate terrorizing above, there are risks that are specific to the IPS Millennium Fund you should understand better. Since most people don’t read the Prospectus (this isn’t aimed at you, of course, just all those other investors), we thought we’d try a more innovative way to scare you.
We buy scary stuff. You know, Internet stocks, small companies. These things go up and down like Pogo Sticks on steroids. We aren’t a sector tech fund, we are a growth & income fund, but right now the Internet is where we think most of the value is. While we try to moderate the consequent volatility by buying electric utility companies, Real Estate Investment Trusts, banks and other widows-and-orphans stuff with big dividend yields, it doesn’t always work. Even if we buy a lot of them. Sometimes we get killed anyway when Internet and other tech stocks take a particularly big hit. The “we” is actually a euphemism for you, got it?
We also get killed if interest rates go up, because that affects high dividend companies badly. Since rising interest rates affect everything badly, we could get killed even worse if the Fed raises rates, or the economy in general experiences higher interest rates beyond the control of those in control, or gets out of control. Whatever.
Many of the companies we buy are growing really fast. Like, 50% – 100% per year sales growth. Many of them also don’t make any money, although they may be relatively large companies. That means they have silly valuations by traditional valuation techniques. We don’t know what that means any more than you do, because we have never seen anything like the Internet before. So we might overpay for these companies, thinking we are really smart and can get away with it because they are growing so fast. It doesn’t take a whole lot for these companies to drop 50% or more, because nobody else knows what they are worth either. Received Wisdom can turn on a dime in this business, and when that happens prices fall off a cliff.
Even if we were really smart and stole these companies, if their prices run way up we are still as vulnerable as if we were really dumb and paid that high a price for them to start with. If we sell them, you will get pretty irritated with us come tax time, so we try not to do any more of that than we have to. The pole of that strategy, though, is that if we are really successful, you will have a lot of downside risk in a recession or a bear market. Bummer.
Finally, if you haven’t already grabbed the phone and started yelling at your broker to sell our fund as fast as possible, you should understand the shifting sands of technology. It doesn’t take billions of dollars to start a high tech company, like it did U.S. Steel or Ford Motor. Anybody can do it, and everybody does. Many of our companies are small, even though they dominate their market niche. It’s much easier for a new technology to blow one of our companies out of the water than it was in the old days of canal, mining, railroad and steel companies.
Just so you know. Don’t come crying to us if we lose all your money, and you wind up a Dumpster Dude or a Basket Lady rooting for aluminum cans in your old age.
Back to Index Page
Note: The Value Vault will be down for a few months for reorganization. For new readers just use the search box or start at the beginning of the blog and go through the 1,200 posts. By the end you can run Berkshire of Blackrock.
What We do Not want to learn
We want to learn from professionals who are putting their money on the line: Michael Price, Seth Klarman, etc.
You ONLY need to learn two skills:
- How to value a company
- How to think about prices.
Unfortunately, the devil is in the details and within YOU.
How to value a company: So What’s it worth?
You must learn how businesses allocate capital.
How to think about prices
How Wall Street Works
If you actually studied the above videos, you would find much wisdom.
The good news about the course is that I have ALOT of material, the bad news is that I have ALOT of material to reformat and organize.
Part two will be your suggestions and comments. Thank you for those who have made the effort so far. So keep them coming.