dpetrescu

For anyone willing to take a risk of a Chinese company, SORL looks too good to be true and getting cheaper. A PE of 6, EV/EBITDA of 3, growing earnings, growing revenue, generating cash. Makes brakes/safety components for buses/trucks. Didn't buy it but am considering a small portion. Still need to read a lot more into it. Downturn in China is my biggest fear in general.

ASCMA looks interesting. Lunch, do you know what they're investing in? Are they acquiring a lot of companies or just stakes? They invested the equivalent of their market cap in 2012.

True small cap cutoff is at less than 2B so not a small cap (I had to look it up - although at today's rate it might just get there). It recently won the renewal contract for the 100% market with the ICANN, a private US non-profit that oversees the internet infrastructure on behalf of the US government (i've always thought it was interesting it is the US not an international organization). The term for this renewal is 6 years starting end of 2012. The ICANN does have increased competition as one of its goals. So in 2003, VRSN agreed to give up .ORG and the iCANN has now established the generic top level domain names. Roger, do you follow Neustar? Do you think they pose a threat? My understanding is VRSN has been able to keep its contract since 2000 because of support from large companies like Microsoft.

With options, I think the standard means to calculate weight of holdings is with net position delta. Of course the delta is volatile and will vary depending on price movement relative to strike price and other factors. But even if you sold a way out of the money put, you're still long some small position delta. It won't be zero. Technically you could have a net delta of zero and only exposed to volatility but you'd have to spend a fortune on transaction costs and be in front of a screen daily.

VRSN....they are a legal monopoly and owns 100% of the market share for .COM and .NET website registration. A small cut but hen there are quite a handful of websites. They have great pricing power for .NET and limited pricing power for .COM although practically they can also raise rates for .COM. There is the threat of unknown impact of generic top level domains about to appear (.CAR, .DENTIST, etc)

Currently electronic display is compartmentalized...to phone, tablet, or computer screens. Corning is working on allowing display to be seamless and transferred from phones to touch glass panels used as walls, countertops, windows, card dashboards, sheets of paper thin flexible glass, etc

ItsAValueTrap, You did say CLR [corrected] I recently lost 100% of my OTM CRM put so I'm biased

Just wanted to add one more note about the increase in lifetime of software. In Q3 2013 when overstock reported 28% increased earnings, they had also increased lifetime from 2-3 years to 2-4 years in q2 2013. This is completely reasonable, especially in light of CRMs 25 years (good find BTW, I'd be interested in knowing more about how they justify it) What's even more amazing is that although minor, that 1 year adjustment accounted for half of overstock's increase in earnings. Overstock could probably increase it 1 more year and not be too unreasonable. It just shows the possibility for earnings to be manipulated. Theoretically, a company could increase lifetime of fixed assets every year and manufacture growing earnings.

The useful life was just one example. (Before I go on I should say I don't know about overstock aside from what I've read on Sam's blog. I just like to learn about how something is done wrong to look out for it. I have no opinion on the value of overstock equity) Sam noticed that Overstock in the mid/late 2000s was misrepresenting reported EBITDA values. Instead of starting out with net earnings and adding back ITDA, it 1) started with operating income and 2) added back stock based compensation as well as ITDA. This meant that values were misrepresented higher because 1) non operational expenses like 1 time losses were not included and 2) SBCs also not included. For one quarter EBITDA value was 50% overstated compared to proper GAAP. For another GAAP EBITDA was supposed to be negative but SEC filed EBITDA was positive. Eventually in their SEC filing end of 2008, the company added the word "adjusted" before "EBITDA". I guess that's why it's theoretically best to use Excel and calculate your own ratios. I agree about CRM, maybe they are using software that is perfect and will not need updating for a quarter century?...Off topic but...I think in their case they actually bring in high cash flow so cash is there but a lot of expenses are with high stock based compensation so if stock becomes out of favor that cash might not be sustainable if they have to actually pay expenses with real cash. And then they won't be able to buy revenues through acquisitions every week causing a self reinforcing downtrend. I found that particular argument to be incredibly weak. Increasing the useful life slightly makes their accounting *slightly* more aggressive. But the useful life is still very reasonable. A lot of companies out there are far more aggressive in depreciating their software and hardware over a longer period of time. Take CLR for example: http://glennchan.files.wordpress.com/2013/12/clr-aggressive-accounting1.png Software that has a useful life of 25 years... imagine that.

I've made a lot of errors when I first started investing ear trading. The most telling of fraud is a complex ownership structure or complex ownership of investments. Take two examples. 1. Typical book value fraud with investments, especially with miners. when main company invests in non public side company (they are related owners) it can then arrange for a third company to purchase a very very small stake in side company at an inflated price. This will increase the value of side company and main company records twice as much in value of investments. 2. An alternate method, Enron invested in a company that in turn was a customer and turned the invested assets magically into revenue as well. I think it's very valuable to read research reports by short analysts to see typical methods of fraud

I recommend reading Sam Antar's blog . He was the CFO for Crazy Eddy in I think the 90s. The way he manipulated the books was by recording non existing inventories as assets and borrowing against them. It also helped they had an insider in their auditor. The company would drive around inventories to different facilities as they were being audited and use empty boxes. Sam has said that loss reserves and inventories are the easiest adjustments to manipulate. Also, other non cash adjustments such as depreciation period or change in useful life in fixed assets. if there's any doubt, focus should be on cash flow. I've noticed a few on here are long Overstock. Sam has uncovered that the company increased the useful life of software and hardware thus minimizing amortization thus increasing earnings. They did this without disclosing it in their SEC filings. Also almost half of their earnings increase one quarter was a decrease in loss contingency even while litigation costs increased (eg...they were just charged and fined with fraudulently listing competing prices) So stick with cash not earnings

I'm still new to value investing and have made a very great deal of mistakes to get to where I am today. What is everyone's biggest personal mistakes and resulting specific lessons learned, with the investment example? Mine are: 1. Never invest in a company with core business threatened to be obsolete by new technology or other secular trend, no matter how attractive the value. There are plenty of opportunities in other companies with a competitive advantage. EXAMPLE: I invested in Borders because of low market value to earnings and book value. I was aware of the threat of amazon and e-books, I was essentially playing chicken with the brick and mortar decline. This lesson also drove me to my biggest short conviction GME. 2. Avoid companies in a great decline with hope of turnaround completely on the shoulders of management or with management plan for significant change. Too difficult. There are plenty of companies that could do well run by idiots, look for those. EXAMPLE: I invested in JCP because of their high operational margin, underpriced assets and most of all for Ron Johnson's brilliant plan. 3. Do not argue with Chanos or Einhorn, even if Klarman or Buffett is on the other side. Avoid these battleground stocks. There are plenty of options they agree on (eg...all except Buffett own MU). I now consider these two short gurus my pro bono consultants to help me avoid potential disasters. EXAMPLE: I followed Klarman into HPQ while Chanos was short. It seemed like a great value, had a new great CEO with Meg Whitman. Chanos presented great deal of research why it was in risk of decline, I didn't listen. 4. If there is a very high conviction idea, take Buffett's and Soros's advice and use a punchcard, go for the jugular. EXAMPLE: I invested a little in BAC leaps....a Little. I did learn when I went all in with GM leaps and used my first punchcard. I have a lot more, too many mistakes...

Bitcoin is simply amazing. It's not often we can see a bubble of this magnitude in real time. This could go up 1x or 100x more who knows. All I know is one day it will crash back to zero and will become a legendary tale forever. I wouldn't be surprised if Soros owns some, I expect a book or at least a long article about bitcoins by Soros.

I follow the Shiller index. No not the Case Shiller, I just follow Robert Shiller's interviews and writings. He's the only host on CNBC who will say "I don't know", and say it five times in an interview to a confused anchor ("what do you mean you don't know?"). But when he has a high conviction idea, he will create and compile extensive research and publish a book. I've come to the conclusion that behavioral finance provides the most macro insight. Who else not only predicted the last two market collapses but published a book about it right before. His last thought was a few years ago that a bubble could potentially be forming in farmland.

Nothing. I have no new ideas and 40 something % cash. Well I did buy a tiny bit of FIAT based on this board, but I missed the big run. I'll have a lot to research in a few weeks with 13Fs.

I agree that shorting is a lot more risky. Human behavior follows Newtons 1st law of physics, and the easiest thing to do (shortest distance) does not involve being patient and rational. So a company can stay overvalued a lot longer than another staying undervalued. And there is always someone willing to buy an overvalued company (Eg...HP and Autonomy). However, I still think there is an opportunity in predictable declines in certain industries. In 5 years Im as confident that Gamestop will be obsolete as I am that GM or Fiat will be better off than today. I'm just not sure how best to structure that longer term bet. Long leaps puts haven't worked for me so far. Someone here posted a good idea about options combinations but that doesnt work well for 75% decline over 5 years.

For shorts, I'm leaning more and more towards negative tides / open drain bathtubs instead of focusing on gross overvaluations. Gamestop GME, for example is a brick and mortar that rents and sells DVD games. It is surviving the fate of blockbuster for now only because games require a lot more time to download than movies and cannot be streamed. This is also true of Outerwall although to a much lesser extent because they operate vending machines. Would anyone want to own these businesses 5 years from now? Just think half a decade ago before Apple when no one would imagine watching movies on their phones over the internet. This seems to be an advantage available only on the downside in markets. Chanos and Buffett have made similar insights about this. Can't remember the exact quote but Buffett has said that if you could have predicted the turn of the century boom in cars, you would be broke because it was nearly impossible to select the winner from hundreds of auto start ups. Best approach would have been to short horses, and showed a chart showing the 80% decline in horse population. Chanos has made comments similar to Buffett and focuses on secular decline headwinds from technological advances.

I lost 100% on my CRM long LEAPS put at January expiration last Friday. Cost of insurance. CRM is very overvalued but it is in an industry that is near-bubble valuations. The stock could collapse 90% but if it happens in 4 years I can't reasonably structure put options to make a profit even if I will eventually be "right". A better approach seems to me to just short the stock directly because it is tougher to time the collapse and this defeats the purpose of options.

I can recommend "Option Volatility & Pricing" from Sheldon Natenberg. I first read about leaps options in Michael Lewis's Big Short. Apparently, a group of college kids started a fund in their garage and made a few hundred million. They said they learned about leaps from Greenblatt's Stockmarket Genius book, I read that next. A while later I came upon a dusty old 1979 copy of Sheldon Natenberg's Option Volatility & Pricing...what a great book. I second and third it.

This is an interesting discussion. But I'm not clear if the question is 1) will the market keep going up in the near future or 2) is the market right now overvalued. These are two very different questions. I'm more interested in #2. In 97 the market was overvalued and it kept going up. I think it's good to revisit Buffet's end of 2001 article. http://money.cnn.com/magazines/fortune/fortune_archive/2001/12/10/314691/ -market value to GNP is best indicator he knew in early 2000 (GNP includes non domestic products by us ownership) -stocks are really "disguised" bonds with profits and dividends being the coupon, price/book value of 1 being par. - interest rates and direction of rates impact value (discounting) -attractiveness of stocks can be compared to other investments as Dow earnings/average book value -it doesn't make sense for market valuation to increase too much out of proportion relative to GDP -The conclusion was that at end of 2001 after a sell off with a market value/GNP of 133 he was expecting about 7% return for the next decade. My take is that market is not over or underpriced (willing to change given more convincing arguments) 1. Market value/GNP is currently 115. While not the screaming buy of 70 or 80, it is not a clear overvaluation/ bubble territory. This is lower than the 133 at end of 2001 when buffet estimated 7% return. 2. What is throwing everything off is the unusually low rates. Although artificial, this has the effect of making the disguised bonds a lot more valuable than the exposed bonds with no shorts at the beach 3. Still, I am worried about record high margins that are unsustainable 4. There is on average a recession every 7 years. So any rational person should not be surprised if there is a recession (and market decline) in the next 5 or so years. "For investors to gain wealth at a rate that exceeds the growth of U.S. business, the percentage relationship line on the chart must keep going up and up. If GNP is going to grow 5% a year and you want market values to go up 10%, then you need to have the line go straight off the top of the chart. That won't happen. For me, the message of that chart is this: If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%--as it did in 1999 and a part of 2000--you are playing with fire. As you can see, the ratio was recently 133%."

I should add I'm still looking for my forever stock. I confess that I do not and have not ever owned Berkshire. I was always strenuously looking for the gold needle and didn't think to consider the haystack of gold.

I think the answer depends on the investing approach. Why ever sell if you can help it? If you can find a company that you believe is structured to do well for many decades regardless of who might be on the board or who might be the executives in the future, that is the best approach. Pay a little extra and go travel. You never have to sell. You just have to manage cash kept on the sidelines and buy more at opportune times when shares are on sale. Every 7 or so years there will be a Black Friday type sale when a recession is officially announced. Unfortunately, recessions are like apple announcements, you never know when it will take place and what exactly will be announced. But we do know for sure they will take place.

I have not looked at IMOS lately, so your research may be years ahead of mine. I remember looking at IMOS a while back, along with ASX and AMKR but decided to pass. At the time, the CEO or chairman was being investigated for misappropriating funds and the company had a convoluted holding structure ( red flags for me). Moreover their historical FCFs looked poor and debt levels looked high. So wasn't very keen on spending more time researching the company. However I looked at it very briefly after your post and liked what I saw. It seems they have cleaned up quite a bit and are trying to simplify their corporate holding structure and list their shares on the Taiwan stock exchange ( that's a nice catalyst that could lead to revaluation by the market). They also have improved their balance sheet considerably and their GMs also seemed to have improved since I looked at them last. Although, the fact that their GMs are this low means that they don't have much of a competitive advantage or pricing power and little "cushion" ( that does not make the company 'uninvestable', just risky, as they can get crushed during a severe down cycle and see profitability vanish). As for EV/EBITDA ratios, I am sure you are aware that for cyclical industries like semiconductors, P/E or EV/EBITDA ratios get smaller at or near the peak of the cycle, so it's always better to look at the normalized earnings or EBITDA over a complete cycle ( although going by your numbers, if the ratio is already at 2 then there is not much downside, unless the normalized EBITDA over the cycle is very poor and the outlook for the company or industry is dire). Also I am assuming that there's no one time items included in the calculation. It seems like they have been reducing their cap-ex guidance for 2014. They seem to have pulled in some cap-ex from 2014 to meet customer demands. This is fine as long as they don't get caught flat footed when the cycle eventually turns and demand falls and they have to idle capacity. Excess idle capacity can spell trouble. Idle machinery/equipment/facilities can soon become obsolete as cycles can be very short in this industry. A risk for the companies in this segment of the industry is that they have huge fixed costs (as a proportion of their revenues) and often need to spend constantly in order to keep up with the trends in technology and meet the demands of the customer, who often have very short product cycles. Machinery and facilities need to be constantly upgraded to accommodate new generation of chips. The recurring high amounts of spending may also lead to liquidity risks for companies that are heavily indebted.Moreover, when you service big customers like Micron, you fortunes can become tied to that customer and that segment of the semiconductor industry ( look at NTE for how it can affect a company when it invests in new facility and machinery and the customer decides to go elsewhere). Although, that may not be a big risk if the company is adequately diversified across other business segments. I don't know if that was of any help and if I said anything you didn't know already ! Good luck with your investment. Thanks for the response. It is a great resource with so many people from different backgrounds. True about The risks. The stock collapsed during the recession exactly because of a grossly mistimed great cap ex expansion as well as very large debt right before the recession. That difference between that depreciation and current lower cap ex is resulting in large free cash flows. Since 2009, the amount of debt they paid off plus cash they raised and now hold is bigger than their current market cap.

Infinite, Do you have any thoughts why IMOS is valued so low (related to type of work they do and outlook/risks in their industry)? In General why others in this sector have low valuations? IMOS had an EV/EBITDA of less than 2 (not a typo) and a decent/low PE and very low debt. There are other companies in this sector with EV/EBITDA of 3, 5, 6. IMOS is the largest independent provider of testing and assembly services for flat panel display and memory semiconductors. The do a lot of work for Micron. As of Right before the new year it is about 7% of my portfolio. Thanks, Daniel

What about SBC expenses? Even though it is not a cash expense It doesn't really seem right to add back that amount. Sure the cost will be reflected in the future per share amount. But technically Microsoft could pay all expenses with SBCs. If employees or vendors or the company's utility company won't accept msft stock for payment, Microsoft could sell MSFT call options on the open market, and use the proceeds to pay for all expenses including rent, paper, marketing, etc and this would allow all expenses to be net non-cash outlay. Depending on the future results, this might or might not be reflected in the per share amounts in the future. If it will be, earnings are guaranteed to be always positive as opposed to if expenses are recognized in which case negative earnings are possible. If it will not, MSFT paid expense out of thin air with magically high owner earnings.