ItsAValueTrap

You mean stop orders?

In the last flash crash, orders that were 30% away from market were cancelled. So... maybe your amazing trades will be cancelled and the exchange will have screwed you over. This could make a future flash crash a lot worse. I know I won't be buying on the way down... I do not want to get screwed over by trade cancellations.

Aren't they generally right in the long term??? Take Michael Burry or any of the subprime CDS guys for example. It took a few years for the "short the housing bubble"-type trades to work out. 2- A lot of short covering has nothing to do with fundamentals. Look at Volkswagen for example (or CMEDQ). A lot of the time, short sellers have to cover to manage risk or because they are literally forced to cover because of buy-ins. I do agree that very high short interest can cause crazy short covering. A tight borrow makes buy-ins a lot more likely. (And some hedge funds go out of their way to engineer these buy-ins. Apparently Goldman admitted to giving out information on the borrow situation for particular stocks to help their hedge fund clients do this.)

I think that this is a good heuristic/shortcut. There are probably many situations where the frequency of an event may appear in "bunches" or the frequency of an event escalates. Suppose you are in Paypal's business and somebody runs a scam where Paypal is on the hook. Thankfully for Paypal, it *really* started paying attention to its fraud problems. Because eventually the fraudsters kept doing more of what they were doing. Paypal is one of the very few survivors in the online payments business. 2- If I was working there, I would feel a lot better if the owner cared about my well-being. The owner's cost of treating his employees well (hiring a security guard temporarily) doesn't seem to be that high.

Well... unfortunately you have to be forward looking. These are depleting assets. All-in costs are also a forward looking figure. Non-cash costs such as D&A depend on estimates of mine life. Estimating the life of a mine is completely tied to the economics of a mine- you need to guestimate reserves and you need to estimate/know your production costs. 2- If you really want to know what you're doing, go read some mine engineering textbooks: http://glennchan.wordpress.com/2012/11/04/reading-round-up-books-on-mining/ Introduction to Mineral Exploration, Introductory Mine Engineering, and SME Mine Engineering Handbook should have information on DCF models and valuing mining assets. (The latter two books are probably better for that topic.) 3- The bigger picture is this: ---Valuing mining assets is pretty difficult. Ideally, you want (A) access to engineering data and (B) a team of specialized engineers. That's how senior miners do due diligence... because you cannot trust a technical report. (Almost all technical reports nowadays are inflated.) ---Very few institutional investors actually know what they're doing in my opinion. Most of the conventional wisdom about mining is wrong and idiotic. Net present value is a much better metric than cash cost, all-in costs, P/E, EBITDA, ounces/reserves per share, etc. Institutional investors should insist on getting NPV estimates for every operating mine and at least 1 page of the spreadsheet to show the assumptions behind the NPV figure. They should also realize that they are being lied to 90%+ of the time. Most technical reports out there use inflated assumptions and are a joke.

It doesn't have to be that complicated. The mine engineers are always building discounted cash flow (DCF) models. You make assumptions about the commodity price (3-year trailing average), what everything costs, and choose a discount rate. That is what mine engineers are taught in school. You plug your assumptions into a spreadsheet and get a net present value (NPV) figure. For an example of this, look at feasibility study technical reports on SEDAR (or on miners' websites). *Of course in practice not everything breaks down into a single number easily. The main problem is "garbage in garbage out". If you are overly optimistic about your assumptions, then the NPV figure will be ridiculously inflated. But if you are going to break everything down into a single number, then NPV is the most sensible figure to use. But it's not like anybody actually bothers to go to the library and read a mine engineering textbook to actually try to understand this industry.... **Nobody knows what the correct discount rate is. Riskier projects deserve a higher discount rate. Even miners behave like Mr. Market so the discount rate paid when acquiring/selling properties fluctuates.

The mines are in the "Democratic" Republic of Congo. I believe the politics there are quite complex and this is definitely not a politically stable country. Some of the genocidaires from the Rwandan genocide fled into the DRC. In the past, Rwandan troops committed mass killings against genocidaires and suspected genocidaires. These tensions have not been resolved. At one point, Rwanda was supporting a rebel group fighting the DRC government (this is related to the genocidaires being in the DRC). That rebel group did not win and hostilities have ended... but those tensions are still there and haven't been fully resolved. Some of the factions in the DRC believes that Rwanda is still supporting the DRC's enemies. Currently there is still armed fighting in the DRC: http://en.wikipedia.org/wiki/M23_rebellion I don't even know the whole story. An oh yes, the DRC government expropriates foreign-owned mines. Anyways, Banro falls into the "too hard" category for me. Anybody trying to build a mine in the DRC is probably not that smart in my opinion.

NovaGold looks extremely difficult to value and it doesn't look undervalued to me. Barrick doesn't think that the property is economic at the gold prices several months ago. If the property isn't economic then it only has an option value. If gold prices rise a lot then it will be economic and worth pursuing.

It's pretty good real estate and it's a ghost town.

They're accessible to the public. The basement level connects to another underground mall which is right by the subway. I'm not sure where you're from but in downtown Toronto there is some underground commercial space. The biggest network is the Path network. http://en.wikipedia.org/wiki/PATH_%28Toronto%29 I suppose Aura is part of the Path network but it's not really connected to the main network. http://www.toronto.ca/path/pdf/path_brochure.pdf

I walked through the basement-level shops at the Aura building here in Toronto. It is a ghost town. Occupancy is less than 20% (I did not bother to count). Almost every unit has a piece of paper taped to the glass with the owner trying to sell or rent the space out. Does anybody understand the (commercial) real estate market and can explain to me what is happening? My guess would be that the builder sold a bunch of very small commercial units to retail investors who don't know what they're doing (all the signs have different names). The way the basement is designed isn't very good at attracting shoppers. The underground entrance to it isn't very inviting (they should have used transparent doors). The commercial units are very small and probably too small for many tenants. There are some pretty good pictures here: http://toronto.kijiji.ca/c-real-estate-commercial-office-space-Aura-Commercial-Retail-Units-Available-W0QQAdIdZ428784091

Metals: Here's what I learned from reading mine engineering textbooks. 1- For any given deposit, engineers will have wildly differing opinions as to the project's economics. And this is assuming that you are dealing with honest people. In the stock market, you are mostly dealing with promoters and other scum. 2- Valuing land is brutally difficult. Textbooks may give you 3 different ways of valuing land. Nobody really knows how to value land precisely. 3- For operating mines, you use DCF. In a DCF model, it is standard to plug in the 3-year trailing average for the commodity price. An exception can be made for commodities with liquid futures markets. Of course you can plug in your own commodity price. But if everybody uses the 3-year trailing average as a baseline, it makes projects easy to compare. In practice, most technical reports are inflated so don't take them too seriously. One of the tricks is to not use the 3-year trailing average so you can plug in a higher commodity price (*this doesn't happen in the gold and iron ore markets that often if the company is trying to pander to analysts, who are permabears on their commodity). --- If a very sophisticated buyer (like Teck in the old days) does their DD and purchases a stake in a mining company or one of its assets, then you can infer the market value. In practice, I think that this is the best easy method to value some of the mining companies out there. But only if the buyer did their due diligence (e.g. having an experienced engineering staff is a prerequisite).

They have depleting assets. I would use discounted cash flow (DCF), or market/liquidation value of all their assets. DCF and market value are linked... in the DCF model, the fudge factor is the discount rate that you use (and commodity pricing assumptions). The discount rate varies because nobody knows what the right discount rate is. Unfortunately that metric is difficult for investors to verify. Yes, many energy companies provide a PV-10 value. However, there are ways to fudge that number due to uncertainties in resource extraction. Look at all the people who believed ATPG's management... 2- Basically, here's how I would value an energy company: a- Value of their assets. Buyers of these assets use DCF. They do not use $/barrel. b- Usually, these companies are incredibly difficult to value. When they sell assets, they will open up a data room for buyers to do due diligence. Smart buyers will do that level of due diligence. Few stock market investors do that level of DD (and few even have the access to data and expertise to do it). c- Does the company deserve a premium or discount for the quality of management? Quality of management is tied to the company's cost structure. Being the low-cost producer is the only advantage you can get in the industry. Those who can explore cheaply deserve to trade at a higher value.

Wasn't Burry referring to the time when options weren't expensed at all?

The Venture exchange is filled with companies that SAY they are going to make money. Very few of them actually do what they say they will do. I think that Energold will be a decent company going forward... I just don't understand its niches enough to get comfortable with it. Plus I could just own Altius instead- Altius has a superstar management team, a track record of doing smart things and making money, and it's cheap. With Energold you have to understand: - The supply/demand situation for portable rigs for metals drilling. This is mostly tied to juniors who go exploring in crazy countries with little infrastructure. - Why they diworseified out of their core competency. - Outlook for energy drilling - Economics of manufacturing drilling equipment (for various uses, some of Dando's stuff isn't for metals or energy drilling). - Is Fred Davidson a good CEO? He originally ran a junior exploration stock... he is one of those part-time CEOs that I dislike (there was a time when he was running two companies). EDIT: Let's this discussion about Energold to the Energold thread: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/egd-energold/

A lot of the companies are there to mine the stock market unfortunately. Usually the senior miners will: A- Overstate their forecasts. B- Say production is going to go up. With gold this hasn't happened despite gold prices skyrocketing over the past decade. Too much money chasing the same projects. C- It's very difficult to prove fraud because resource estimation and production forecasts are estimates based on many subjective factors. Mining is not an exact science. So many people get away with lying. The junior mining sector is far, far worse. It is an awful, awful industry because everybody is trying to mine investors (a negative-sum game after all the ridiculous stock promotion expenses). 2- I own Altius, Northfield Capital, and Pinetree. (Pinetree is a horrible company with an unscrupulous CEO. It's a very small position.) These are ways to play metals right now. Northfield owns a lot of gold stocks but is extremely illiquid. 3- I'm extremely skeptical about companies that constantly raise capital all the time- Sandstorm and Energold are examples. The underwriting commissions and shareholder dilution (from selling stock below market value) are major costs. You sell shares because: A- The company is overpriced. B- The part-time CEO's salary has to come from somewhere. (Yes, most of the CEOs and CFOs are part-time. They have various different companies going on at once. Consolidating the companies would avoid problems with being undercapitalized and they would have lower overhead from listing fees and other fees... but that is not how you mine high net worth individuals.) I do like Sandstorm's royalty strategy though. It's incredibly difficult to value its assets though (except for any Argentinian royalties, which are close to worthless).

The transition to more natural gas usage might take some time. It takes a while for gas power plants to be approved and built. e.g. here in Ontario a natural gas plant was denied due to NIMBYism. I presume vehicles need the refueling infrastructure (and some economies of sale) for natural gas to be viable and economic. Exporting natural gas will take a long time as the plant will take a long time to be approved, financed, and built. etc. etc. In the short run, natural gas producers aren't making money. Natural gas production exists on a continuum (coalbed methane is probably the cheapest)... a lot of the cost curve isn't profitable. Drilling has gone down significantly and shale gas wells tend to deplete fast, so you might expect supply to go down a little soon. Supply changes faster than demand. It takes far less time to permit and drill a shale gas well than it is to build a natural gas power plant.

I think that natural gas prices are really hard to predict. Very, very few people would have guessed that natural gas would dip below $3. e.g. Ken Peak of Contango didn't; his stock went up something like 40x since inception. Even the smartest people in the business can't figure it out.

Isn't Chou in the top 1% of all Canadian mutual fund managers? *There are always aberrations in the top performers. A lot of the top performers in Canada rode the bull market in juniors and commodities from ~2003-2007... since 2007 they have been getting hurt. I think many of those managers were simply more lucky than skilled; they were heavily concentrated in a sector that happened to do really well. Chou deserves some credit for being diversified. I believe he owned very few commodities stocks since inception.

If the stock is overvalued, you should use it as currency for acquisitions. Even Buffett does that sometimes. Otherwise, just sit on cash and wait for opportunities. Buffett kind of did that going into 08/09. He had liquidity to take advantage of situations like the BAC and GS preferred deals.

They were on the other side of a deal with John Malone. I don't get that. *Berkshire owns a lot of LMCA, which is one of the many John Malone companies.

Buffett's latest shareholder letter covers this topic. http://www.berkshirehathaway.com/letters/letters.html

Value Investors' Club has some writeups on title insurance companies. Here's how I see the industry: When you buy a house, you HAVE to buy title insurance to get a mortgage. Usually the buyer will just go with whatever company that the seller recommends. The seller receives kickbacks/commissions for referring the customer (unless they provide title insurance themselves through an affiliated company). The margins on title insurance are insane because the buyer's don't care that much. The cost of title insurance is insignificant compared to the cost of your house. The real estate agents don't care about how much title insurance costs because they just want the deal to close and it's their client that pays for title insurance, not them. I believe the chance of there being a problem with the title is a lot lower than 8-10%...? *I could be totally wrong. I only know a little bit about title insurance from researching Altisource and AAMC.

If you read Tesla's 10-K, it talks about how Musk uses leverage and could theoretically get margin called on his Tesla shares. The DOE loan has provisions that trigger if Musk sells his Tesla shares. If Tesla does poorly and his other companies do poorly, I don't think that he'd be able to put his money where his mouth is. He has certainly gone "all-in" on his company... which at least should be comforting to the longs. *I am short Tesla. So far, it has sucked.

Most of the time when I short those I lose money because I get bought in on the borrow. :( It's not worth it.