ItsAValueTrap

Contango Oil & Gas MCF: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/mcf-contango-oil-gas/msg93785/#msg93785 Contango got hit really hard by the recent drop in natural gas liquids prices. NGLs used to be their main source of revenue. I think that MCF is clearly better managed than almost everybody else out there. What they're doing makes sense and the long-term track record is amazing (you can go back all the way to Zilkha Energy... Contango's exploration partners are from Zilkha).

No. I'm assuming that you are talking about the Pentium bug issue. How did that help them?

In my opinion it's somewhat good for Lululemon that this sheer fiasco is happening. It's wonderful for their brand and image. It reinforces the notion that their clothes are sexy but not slutty. A lot of articles quote men (and women) who say that ("non-sheer") yoga pants make you look hot. This is good for their brand.

Um... a lot of women have ridiculously large wardrobes and they spend ridiculous amounts of money on "overpriced" apparel. Louis Vitton bags, True Religion jeans, etc. Men do that too, though it's less prevalent. Nike makes shoes for athletes. Many people do not wear Nike shoes for athletic reasons. These brands are about aspirations and identity. The clothes are status symbols, they make people feel good about themselves, it's an expression of identity, etc. etc. 2- What people say and what people actually do are two different things. People rag on McDonald's all the time for unhealthy food. But it's not like people bother ordering salad at McDonald's (which are actually pretty good). A lot of people eat at McDonald's... it has long lines. Even chefs eat there (e.g. Anthony Bourdain). Women complain about misogyny, complain about creepy guys and sexual harassment, and they definitely don't want to feel judged for being slutty. (I do not believe that women should be subjected to misogyny or sexual harassment.) But most (though not all) women will put a lot of effort in their appearance... they want to feel attractive (even if they have a significant other or don't want one). And some women get the idea that you have to dress like a sex object (or dress "slutty") to be attractive. If you Google image search "princess leia cosplay"... you see that many females opt to cosplay as the sex object version of Princess Leia... the version that is literally a sex slave. Sometimes it's about being attractive without other people judging you for being slutty. Even if you are dressing in a way that some might consider to be slutty. Tight yoga clothes that make you look hot is kind of a good thing for Lululemon. A lot of women (though not all women) go to the gym or yoga because they want a hot body. That's just how it is.

The thing about the retail industry is that reversion to the mean usually doesn't happen. Sam Walton of Walmart was at one point richer than Warren Buffett. Great businesses tend to chug along and grow for a long time. The Lululemon manufacturing problems seem to be an aberration to me (though I haven't researched it)... much like American Express' salad oil scandal.

Argentina is an odd country and their economy is getting out of hand (e.g. expropriation of foreign assets). Their currency is in big, big trouble and everyday people there are trying to get physical US dollars on the black market (and they pay a premium for them). They aren't hoarding gold. I think buying quality businesses is probably a better idea. If you are wrong about inflation, you will do ok. If there is high inflation, you will do ok. If there is hyperinflation, you will lose purchasing power but quality businesses should beat most other asset classes (except for maybe gold or commodities). Berkshire Hathaway for example is slightly cheap right now. 2- Out of the money call options on commodity futures might be worth looking at if you really knew what you were doing. e.g. future options on cotton weren't that expensive last time I looked. (But in my opinion cotton prices are more likely to skyrocket due to weather destroying crop somewhere, rather than hyperinflation of the US dollar.)

Apparently 10% downpayment is ok for Clayton Homes if there is income to back it up. This is what I recall from one of Buffett's letters. Of course Clayton may be different than everything else because manufactured housing doesn't receive the same financing subsidies as other forms of housing, manufactured housing is cheap, it's not a luxury like a bigger home, etc. I do agree with you that this is not how things should work.

FMCN is a Chinese reverse merger currently being taken over. (There are few others.) You can bet against the merger arb by buying put options on FMCN. In the unlikely event that the takeover doesn't close... presumably it will be because there is fraud. (At least that's what the shorts hope.) The stock will likely drop from either (A) concerns over fraud or (B) merger arb folks exiting their positions all at once. The Bronte Capital blog is where I saw/stole the idea.

Sometimes stocks are heavily shorted because it's about where the puck is headed. Some companies with very high short interest at one point in time: FSLR BBRY GME SHLD RSH GMCR Some of these companies were profitable when they were being shorted. Sometimes the shorts correctly figure out that earnings are about to take a plunge. *Short GMCR. Weak cash flow may be a sign that they aren't actually profitable. The patent expirations will likely affect earnings.

Perhaps the problem with Icahn taking everything over is because he was a big part of the leveraged buy-out wave in the 80s. (This is sort of depicted in the 1987 film Wall Street.) People like Icahn would try to buy out entire companies and liquidate their assets, looking for quick short term profits even if it destroyed value in the long run. The amount of debt used to buy these companies can also cause problems. I could be wrong though.

Hmm I might be wrong about the maturity date on that loan. It looks like it will be repaid between now and Dec 2017, unless the loan is amended. For the most post, everything from Tesla is extremely promotional. Tesla is prepaying the loan early because it has to, not because it volunteered to do it. The interest rate on the loans are extremely attractive (and could arguably reflect a hidden asset). Because it is the government that gave out this loan, funky stuff could happen. The loan may not be as dangerous as I hope it will be... the US government could conceivably give Tesla more slack.

Buy-ins, trending markets (can cause the ETF to go up 3-4X or more), short squeezes. If the ETF were to suspend its arbitrage mechanism for some reason (this happened with UNG, which is not a leveraged ETF), a short squeeze could occur.

Tesla put options. 1- They are losing a lot of money. 2- Management says that they are going to lose money (read their press releases carefully). They will not be GAAP profitable next quarter, cash flow will be awful, etc. 3- Imminent catalyst: the DOE loan is due in around a year. 4- Valuation is high. 5- The options, while not cheap, aren't crazy expensive. Almost everything you can ask for in a short position.

It was disallowed because all or none orders are a scam. Suppose you have a AON (all or none) buy order for 100,000 shares at $10.00. Suppose the bid becomes $9.00 and the ask becomes $9.90. There are 100 shares at the bid and ask. Your AON order doesn't fill because not all of it can be filled right away. So the market maker sits there with a reserve order at $9.00 and slowly tries to buy up 100,000 shares. THEN, your AON order will get filled for 100,000 shares at $10.00. 2- There are all sorts of other shenanigans that go on. Sub-penny front running is one of them. You're not allowed to bid for Citigroup shares at $3.0001/share, while market makers are allowed to do so. So the market makers get to front run you at the expense of a fraction of a penny. (They also battle each other so the front running isn't quite so bad.)

A lot of resource companies own shares in each other because they are undercapitalized. It takes a lot of money to build a mine... typically several hundred millions, if not more. The reason why it costs a lot is because higher capex gives two benefits: - Economies of scale. A bigger mining machine still only needs 1 operator. - Mining faster yields a higher rate of return (up to a point). To bring a deposit to a production decision takes tens of millions of dollars. Very, very few juniors have that kind of money. Even if they find something, they often won't have the money to prove that the deposit is economic and to bring it close to production (where a senior miner will want to buy the deposit). This is one reason why they always need to raise money. It makes sense for them to buy properties with shares, not cash. The second reason is greed. A lot of the part-time CEOs and CFOs and directors in the junior mining space are overpaid. They mine high-net worth "investors". Their salaries have to come from somewhere... that's another reason why they always want to raise money. Most of the Venture exchange is garbage. The companies that aren't involved with mining have similar problems, though maybe to a lesser extent. The business models often don't make sense (their small size means that the overhead of a public listing is very high). 2- Look at Northfield Capital, Pinetree, and Aberdeen. Pinetree and Aberdeen have some very serious "corporate governance" issues. All three sell for less than liquidation value (I'm not sure if Aberdeen does). I own Northfield. It's extremely illiquid though.

You can look at it this way. With options, you are making a bet on two main things: A- Volatility B- The direction of the stock (*Ignore other things that affect options pricing like borrow costs, dividends, interest rates, interest on short sale proceeds, taxes, etc.) If dynamic hedging and delta hedging worked perfectly, then B is not really relevant. It comes down to a bet on volatility. If you want to bet on the direction of a stock, then just buy the stock. Doing the trade through options will increase your transaction costs and you might be on the wrong side of the volatility bet. You might also forget to exercise your options before dividends.

I would second that. It's kind of confusing and unintuitive, but the direction of a stock more or less doesn't matter when it comes to pricing the option. If you delta hedge the direction of the stock price mostly doesn't matter (and if dynamic hedging worked in real life, the direction of a stock really wouldn't matter at all). Another common factor that affects options pricing is the borrow cost to short a stock. Bargainman mentioned EBIX. The costs to short sell EBIX is probably very high since put/call parity for the options have broken down (I am too lazy to check the borrow costs). If you are a retail investor, the options on heavily shorted stocks can make A LOT of sense. Because your broker usually does not pass the borrow costs onto you (they lend your shares out, collect interest, but don't pay you that interest)... the options market allows for an easy arbitrage trade (the risk is that your broker blows up, causing you to lose money in your margin account; this risk is low in my opinion). If a stock is heavily shorted, it's probably a bad sign for the stock though.

Northfield Capital (NFD.A on the Canadian Venture exchange). Almost everything they own is in stocks or cash. It is extremely illiquid.

Cash costs/ounce have steadily gone up over the past decade. In aggregate, the gold industry has had very poor performance over the past decade. The price of gold has skyrocketed but the industry's production has been flat. In aggregate, junior explorers are NEVER cheap because the "industry" in aggregate is a destroyer of capital. They spend too much money on things that don't create value... corporate overhead, stock promotion costs (sometimes outright paying for shills), dumb drilling campaigns (to get results to promote the stock), underwriting fees and costs associated with raising capital, excessive salaries for the part-time CEO and other insiders, etc. etc. And it's common to lie about reserves and the economics of their deposits. This is extremely common in technical reports. Technically it's very difficult to prove that they are lying or committing fraud because these things are uncertain and are estimates. 2- There are some things that are selling below liquidation value... some of the closed end publicly-traded funds, Pinetree, Aberdeen, and Northfield Capital. These things are easy to analyze because almost all of their assets are in stocks (with the exception of Aberdeen, which has private companies with questionable valuations). Only Northfield doesn't have "corporate governance issues"... insider compensation is very tame.

Personally, I'm not a fan of shorting common stock. (Even though I am short individual stocks.) And because of that, I'm not a fan of market neutral strategies. Problems with shorting: 1- You have to pay interest on the borrow. 2- There are too many people shorting, which can make #1 nasty. ATPG for example had the borrow shoot up to over 90%. That's way more than credit card debt... or what Warren Buffet can make with less than $1 million. 3- You can get bought-in and be forced to cover. 4- The Jim Cramer and Michael Steinhart types out there will engineer #3. 5- Crazy stuff like CMED(Q) and Volkswagen will happen and a bunch of shorts will get hurt. 6- In general, most hedges won't work all the time. When they don't work, sometimes supposedly safe strategies can blow up in an awful way (e.g. LTCM). 7- There is a tendency for people to pile into positive carry trades. Whenever people pile into a trade... things get really nasty when they all try to exit that trade at the same time. It also reduces the profitability of the trade. I think that this fits the innovators -> imitators -> idiots pattern. At the end of the day, it might just be more profitable and less risky to buy quality businesses at fair prices (with honest management that is not incompetent). The problem is that understanding businesses is hard, most people don't have the patience/time horizon, etc.

In hindsight, a lot of market neutral strategies weren't market neutral in 08/09. But I think that Warren Buffett has always been saying that he would be 100% long, and that 130%/30% short (which he did in his partnership days) is statistically about the same as 100% long. I don't think that the would make Ben Graham's mistake of going more than 100% long.

I don't think it was... at least, that's what I got out of reading The Snowball and Tap Dancing to Work. Buffett did do some things differently from Graham. Tap Dancing to Work discusses how it took a long time for Buffett to really learn his lesson about buying great companies. Berkshire Hathaway was his biggest mistake. Watching that video... the question is a bit leading but Warren starts to mention how he'd buy stocks that Graham wouldn't. I think that Buffett would have most of his portfolio in concentrated positions in great businesses rather than lots of small positions in cigar butt stocks. If he had to do things over, I think he would own more great businesses (e.g. GEICO, see's candies) and less cigar butts.

I think that he would try to invest mostly in great businesses with fair prices as opposed to cigar butts. Even in his partnership days, he invested in American Express (which at one point was his largest position)... so I don't think that he would restrict himself to microcaps. I have no idea if he would invest in LEAPs or other options. Certainly nowadays Warren owns warrants, has sold puts on BNI, has written put option contracts linked to equity indexes, etc.

1- In general, I'm not sure if an analogy could be drawn to investing. Poker is a game with a fixed set of rules and fits very well with game theory. Investing is a lot messier and is sometimes difficult to model mathematically. 2- As far as the poker study goes... isn't that just a case of adverse selection? There are some really awful strategies in poker (e.g. doing far too much or far too little of calling, betting/raising, and folding). If you win a lot of pots, you are probably using a bad strategy (e.g. calling or raising far too often, not folding often enough). So is it surprising that these people are the least profitable? 3- Ed Thorp has a lot of interesting articles and interviews on gambling and investing. He figured out card counting for blackjack and wrote a paper on it. He also ran a profitable hedge fund, invested money for Buffett's ex-investors, etc. In David Swensen's book, he advocates for institutional investors to rebalance between their asset class allocations. This takes advantage of excess volatility in the market. If you don't pay tax and your trading costs are low (neither is the case for retail investors), it is an ok strategy to sell a bit of what has gone up and to buy a bit of what has gone down on a daily basis. Ed thorp (stat arb), Ben Graham (cigar butts, merger arb), and Joel Greenblatt (e.g. magic formula) all have implemented strategies that involve a lot of trading. It's a different style than Buffett's and Munger's bread and butter, which is waiting around for fat pitches and buying excellent businesses at fair prices (and holding them for very long period of time). Though Buffett did engage in strategies which involved a lot of trading.

For customers with a single server, it seems to me that the business is more service-oriented. Small customers may want some technical support (e.g. Rackspace/RAX is good at this). There may be some value-add here if you can deliver great service in a cost-effective manner. Service, reliability/reputation, and cost are probably key things customers look for. Location is a minor concern as you don't go to the data center very often (only to install and when your server breaks down or needs to be replaced). For larger customers, it gets to be more of a commodity business. The largest customers tend to roll their own data center to drive down costs. Google is the most extreme example of this... their whole data center design is fundamentally different than what Peer 1 (PIX.TO) is doing. Google's servers don't have cases that impede airflow, Google has its own custom power backup solution, etc. etc. Rackspace may be the best managed data center company and should grow the most over the long run. (The valuation is very high though.) *Shame on me for shorting some of these stocks as they sometimes get bought out for large premiums.