Picasso

I think oddball is still missing the point of the OP? For example, I have a friend who started her law career and hated it within two months. Now she's started up her dream career and probably won't make any money for several years. Should she have worked for 10+ years in law before doing something like that? Maybe. But I think it all depends on the person. A lot of people have the dream of starting a successful hedge fund. But how do you do that without a track record, the right process, a network, strong working habits, and stuff you typically learn working under someone else for a long time? Very few can actually just jump right into the "dream" of running a fund. It's one of those things where if you have to ask whether you should start your dream early, you probably shouldn't. Most people should scrub toilets before trying to roll up the toilet industry. But there are obviously exceptions.

This guy fu***.

Office Depot is pretty hated... https://www.google.com/search?q=office+depot&biw=1056&bih=790&source=lnms&tbm=isch&sa=X&ved=0ahUKEwjB9LT-27nOAhVSzmMKHVAZBHYQ_AUIDCgA#tbm=isch&q=office+depot+hitler

You're going to get me all fired up and end our discussion like that? Jerk! :) BerrBBQ, just as an example there's Macy's. They have BBB 2023 debt that yields 3%. Meanwhile the free cash yield on the equity is around 10%, plus they are heavy in different real estate assets that collectively are probably worth the majority of the EV. Maybe there's more risk than I'm giving it credit for, but it seems like the cash generated from owning the equity will be many multiples of owning their debt. I don't own it yet, but looking out for situations in retail where the cap structure is simple telling two different stories. DDS is another like it. Debt yields 4%, equity over 10%, etc. There was a discussion on WMT vs. AMZN at some point late last year. AMZN has gone from $670-770 and all the AMZN bulls are pulling out victory signs and high fiving. Over a 15% return? I think WMT has done about 30% total return since then and I'd argue with way less risk. No Bezo's getting hit by a bus risk. We'll see how they do in five years but I doubt it was risky to buy WMT at $58 or whatever. Wouldn't surprise me if WMT ends up being an easy three year double like when everyone was hating on JNJ...

Jurgis, you're right. Being a contrarian and buying everything that investors hate just because investors hate it will give you mediocre results. Which is why I get annoyed when people quote Buffett in the middle of some beaten down POS pitch. "Be greedy when others are fearful." Or, "buy when there is blood on the street." Sometimes the market is telling you that things are going to get a lot worse, and having a lack of respect for market price action is waiting to get taken to the cleaners. There are so many things that go into buying something that is hated. You need better reasons than "oh, just a silly Mr. Market being Mr. Market." It requires a real understanding on why the market is giving you such a great deal. You need to look at the company of your "co-investors," the probabilities of various outcomes, addressing changes as they come, taking losses and managing your risk, taking big and small bets depending on how probable success looks, living and breathing an idea until it's time to move on and put your capital elsewhere. Deep DD isn't really that helpful when you read all the cues incorrectly or draw bad conclusions, so you need the right mindset from the beginning. It's all very hard right? Which is why I think Buffett is right that almost everyone should just index. It's hard to win long-term if you fail at just a few of the character traits required to take concentrated, contrarian bets. There's so much more that goes into buying really cheap securities... There's a massive difference between buying something beaten down in the hope things turnaround, and buying something beaten down that doesn't require things to turnaround to turn a large profit. I see so many investors get caught up investments that require a turnaround. Those just aren't typically good bets... And there's no playbook that will consistently make value investing look like a piece of cake. It's almost supposed to be constantly changing and in flux. Anyway I could rant about this for hours...

Holy crap Picasso, You are like my internet big brother or something... Agreed 100% again... Value investing has always been dead, and what is dead may never die (isn't that a profound use of GoT quotes? They don't call me The Philosopher for nothing........................) We need more GoT quotes on here. The other thing is that everyone is suddenly the same type of value investor. They all read the same books (you have the bibles like Graham, but everyone reads Greenblatt), the same CFA material, they attend very similar business school programs, their pitches sound the same, they're on Seeking Alpha as a "deep value," "special situation" investor, etc. 9/10 pitches on VIC have the same boring thought process. But you'll learn so much more by talking to PM's, getting a sense for why they shut down ideas, all the biases that form, and really understanding why certain stocks get cheap or expensive. Learning about the kind of pressure that gets put on a manager to sell out of a position even if it doesn't make economic sense to do so. All the rest of the value investing stuff is easy to learn, and with the internet it's free knowledge open to starving kids in Africa.

See, your response illustrates my point. I've doubled my investment in SHLD once before, made a very good return in two of their recent rights offerings, and I'm not even bullish on the name. I make fun of SHLD all the time. But it's not going to stop me from investing in it if an opportunity presents itself. A few months ago I was at this event where Jeff Gundlach was presenting. I heard him talking about all these crazy trades he was placing in his portfolio, long nat gas and short vol, long miners, etc. I thought, hey, he might like to hear this cool bond tender where the bonds are being put back at par (or close to it) but they trade at $65, are owed accrued interest of $8 (plus warrants) and you'll get the par return in a few months. Two guys own 85% of the equity, they need the tender to happen, the senior lenders and noteholders have all agreed to it, etc. So he says to me "this sounds great, so who exactly is selling us these bonds at 65?" Well I did a little digging ahead of time and called up the top mutual fund holders as a prospective investor. One of them flat out said they got rid of, or are getting rid of, ALL their energy/coal exposure. It doesn't matter that they're getting redeemed at par in a few months, they market their funds as having far fewer defaults than the index so they would rather sell ahead of the offer and miss out on 0.001 performance contribution to their fund. At which point Gundlach says "wait, this is a coal company? Ick, that's never coming back." In my excitement I forgot to mention this was the bond of a coal company. He lost interest after that. There are so many securities where the marginal buyer/seller aren't guys like you or me. And these marginal buyers/sellers have all kinds of weird ways of managing money for AUM versus getting the best returns to the detriment of additional volatility. So if you want to really outperform, you have to be willing to step in front of some volatility trains that no one else seems willing to do. Even if the value is clearly there. I only mention retailers because it suddenly seems acceptable for value investors to buy AMZN. The fear of missing that ride has become too much to bear. But heaven forbid you buy a retailer like WMT or M or DDS... you're going to get redeemed. Not that it means to go out and buy retailers, but you'll probably get additional opportunities you won't find in all the securities that have already sucked in the bulk of that marginal investment capital. Being a cigar butt investor is a little different today...

If it's not to late to ask a question... What does Allan think of the fact that Harambe was taken from us in his prime? Thanks.

If you want to be a real value investor these days, buy the type of securities that most managers would get fired for owning. There's simply too much pressure to be like everyone else when you manage others peoples money. It's simply not worth it for a manager to answer why they own Valeant or whatever happens to be taking a beating from popular publications. Creates a lot of opportunities these days. At the moment I'm a bit intrigued by certain stocks in the retail sector...

I think he just started counting certain not-cash assets as cash. Which can be a mistake depending on the asset or business.

Doesn't it just seem like he put 70% of the assets in Treasury bonds, in ten years those bonds would be worth 100% of the portfolio. Then he did a bunch of crazy trades with the other 30%. Combine a bull market in long-term Treasuries with a bull market in stocks = this guy. Or maybe he's also running a ponzi scheme. He looks like he could be from Utah after all...

I put up a screen shot of the biggest negative EPS contributors in the Russell 2000. Lots of energy related write downs (I'm assuming, but you'd have to double check). Yes, before XO are before extraordinary items. Also the balance sheet that frommi requested.

Something like the attachment?

I think that the riskier part of classic cigar butt investing is that there's some probability the market value of a security never trades close to intrinsic value, and intrinsic value keeps falling which eventually leads to a permanent loss. But I also think that risk is lessened by understanding what that probability might look like, getting a sense for what can drive that gap to close before intrinsic value starts falling too quickly, and then managing the amount of capital you have spread into those types of trades. A lot of securities can stay cheap for insanely long periods of time, and during that time anything bad can happen. A lot of investors point to these cigar butts and say "look it went from $2 to $10, but back down to $2!" But I don't think the move back down to $2 means that it was a bad investment. The whole idea of buying cigar butts is to expose yourself to potential upside with a relatively high probability of success (sometimes you have to ask yourself how high that probability can be when the market is pricing it so low), without taking on a lot of downside risk. It's not so much luck as managing probabilities across a certain strategy. You're going to get lots of potential outcomes but as long as you're getting compensated for the risk I don't think it's any worse than buying a compounder at as below average price. But the successful cigar butt strategy takes a lot more skill (there's probably several more considerations to make) than buying a cheap compounder. Bad investment discipline can be very costly in classic cigar butts as well. Like not being willing to take a loss when it's time to take a loss. This sort of thing happens a lot in bonds too. To reference one on this board, LUK had some 6% bonds trading for $80. You knew that every year that went buy it was worth 6% more. Eventually the bond will get back to $100 (absent negative credit events like a default), so buying quality bonds for a nice total return isn't too much different. They're now back at $100. There were a lot of quality energy bonds trading at $55-65 earlier this year that are now back at $90-100 (RRC, CNX, PAA, CLR, APC etc) which have produced something like 50% total returns without a lot of downside risk (each had different situations, but all seemed fairly low risk given the market prices). But if you sell now you lose those 10-15% yields that you locked in order to roll a 50% profit. Best case scenario I compound 10-15% if I leave them alone to maturity. But I can sell them for 50%+ (which I have started to) to start rolling into some other ideas. Buying and holding a compounding stock is not too much different. You have to be very certain about the long term prospects because you miss out on redeploying that capital throughout the life of holding that stock. If you waiver any time during that period, boom, you get hit with taxes and restart the tax deferred compounding clock. The other side to this is thinking what Buffett would be worth had he constantly arbitraged quality stocks for several decades. When factoring in that tax hit, he'd probably be worth a lot less than he is today. Or maybe he would have somehow done better than 23% for 50 years. I'm not so sure of that. Which sort of leads me to my thinking that you need to be incredibly flexible at identifying opportunities over many decades or stick your capital into something you'll hold forever. There's a lot of different ways to arbitrage these gaps in value, and a lot of it depends on your personality and skill set as an investor. I know for myself I'm a lot better at investing in special situations than identifying high quality businesses. I tend to change my mind about that high quality business far too frequently to make it a viable long term strategy. So why not invest in securities that have the best return potential as long as you're properly managing risk? Welcome to the board. There's a rule where every new board member has to go through the entire VRX and SHLD thread. There's a pop quiz on some of the more classic material, so be prepared.

I sense an opportunity to create an ETF: TRAP.

+1

The title on this thread is just classic. I crack up every time.

x2! Worst movie I've ever watched in my life. Haha..I left after I finished my popcorn..only watched maybe 20 minutes Did anyone figure out a way to short this movie yet? Inquiring minds are wondering... I shorted PAA because it seems to have all the downside of oil/gas without the upside. They issued a bunch of 8% convertible preferred to keep paying out distributions, but it converts at $26.25 within a couple years so at the current market price the value is suddenly increased by another 15%. I have lots of other MLP exposure in SXCP/SXC/FELP so it kind of balances it out.

CLMS. I'll probably do a thread on it.

Aren't the central banks keeping long-term rates low? If all the central banks ended QE, wouldn't one possibility be that all interest rates rise, say, 2%? The 10-2 spread wouldn't change. But banks would be more profitable because deposits would no longer be pegged at 0? Interest rates are so low that the proper market clearing rates for insured deposits is negative. But there is psychological barrier against negative interest rates so banks cant charge -1%. -- I can't predict future interest rates, but I am pretty sure current central bank policy punishes financials (and savers and pensions). It benefits borrowers. Maybe I'm not very smart, but I don't see how artificially low interest rates can benefit both the borrowers and the lenders. My read is that central banks cannot directly control long-term rates (indirectly, sure), and rates on various 10-year bonds are very low despite their best attempts to create the opposite effect. When have the equity markets and economy performed best since 2009? It's been when long-term rates shot up even with announcements of large bond purchase programs. The best sign of effective monetary policy is when these central banks lose money on their asset purchases. Instead I think they're sitting on massive unrealized gains because their policy isn't working. Instead of the market taking a clue and letting central banks and governments eat the loss on super inflated bond prices, the market is happy to pay even higher prices than the biggest buyers in the world. Who can buy these bonds if central banks ever started selling? But now it almost doesn't matter what they're doing on the short end or with asset purchases. Long-term rates are contracting all over the world. If the fed announced QE-4ever, bond rates might go up 50 bps, then just go right back down again. If they reversed course, we'd probably see the biggest inversion in the history of yield curves. The marginal impact seems to be less and less for a good reason. It's run its course. Logic would seem to follow that if long-term rates are dropping without similar meaningful drops in short-term rates (they can't drop too much more on the short-end), any "normal" short-term rate would probably end up higher than long-term rates because it seems fairly obvious that 1) this interest rate/asset policy isn't working anymore (aside from keeping the status quo), 2) it's normal for the curve to invert/flat line at this part of the cycle. A steady 200 bps shift across the entire yield curve seems unlikely if short-term rates went to 200 bps. And so instead of facing the cycle, central banks are trying to keep the curve from inverting the best the can, so what does that do to a bank? It makes them take on tons of extra credit risk to lend just as much, while getting paid less to do it! I couldn't imagine being a bank CEO right now. Their shareholders want to see returns in the form of earnings growth or even just stability, but you can only do it by taking on more risk than you otherwise should. There's a reason all these banks trade at big discounts to book value. The result will be the same, but it will take longer to get to the losses and it will just end up being more severe. Normally I'd say ignore macro, but banks have been macro investment vehicles for a while now. Unless it's been some special situation where it just ended up super cheap for non-macro reasons. In fact there are other sectors in similar valuation doldrums. Airlines, automakers, retailers, resources. It's interesting how they happen to be the very cyclical ones. But perhaps the banks have already become cheap enough to overcome all that. And some of them are certainly very well run. We'll see..

How exactly are multinationals supposed to win here? The dollar has a fire lit under its butt. And aren't multinational earnings just a function of global GDP? Look at bond rates across the world, they are super low. If anything multinationals from a U.S. investor perspective are probably guaranteed underperformers. Also, how are US banks supposed to be winners over the next few years? We're closer to the end of the cycle than near the beginning, the yield curve is flat to inverted for all intents and purposes, and they won't be able to return nearly enough capital to shareholders because they constantly have to ask for permission. What exactly is going to change all that? It just seems like a lot of investors on this board see "cheap" bank stocks that are down a lot and the first reaction is that it's overblown and time to buy. We're probably looking at artificially low default rates from all this cheap money (look at what happened with energy default rates as soon as they lost access to the capital markets), so if we do end up seeing a recession ever again (I know, hard to imagine with tons of money printing) these banks are going to get hit from both sides of credit losses and further flattening and inversion in the yield curve. If central banks weren't so fixated on keeping short-term rates low, what would the yield curve look like right now? It would probably be massively inverted. The 10-2 spread is the lowest it's been in a super long time. So saying bank stocks are cheap is just a bet that you think they can keep this game up forever and we wont have to worry about a down cycle for a long time. Plus all these bank stress tests are complete garbage. No one knows what to stress test for under all this market nonsense. If they don't know what they're doing now, how are we supposed to think they know the proper range of outcomes in the future? Sorry just had to rant with all these bank knife catching I see going on lately.

Someone's finally made money on LRE. That's a small club :)

For at least the last decade, Old Dominion Freight Lines has earned ~30% pre-tax returns on incremental invested capital, while reinvesting nearly all of its earnings. It has been able to achieve those returns because it is well-managed and operates in an industry with significant local economies of scale (route density). It's currently trading at 16x earnings, but you'll have to determine whether trailing earnings represent a cyclical peak. Whether the next decade will be as good as the last one likely depends on whether it can continue to take market share. In addition, run-rate margins are beginning to approach incremental margins, so investors cannot expect to enjoy the same benefits from operating leverage as they did during the last decade. Very interesting, thanks.

+1. I don`t know if it was Buffet who said that, but the best investment is one that grows without reinvestment of capital like See`s Candy and throws of a lot of free cash on its way. This whole compounder stuff is way overrated since ROIC is mean reverting. Number one determinant of future rate of return is price paid, every backtest that i have seen confirms that. ROIC doesn`t even have an impact on returns, this was highlighted in "Deep Value". Good points. I think there is so much interest around the compounders because we've gone through a multi-decade bull market and everyone sees a TDG, POOL, BRK, etc, and they think how much better it must be to buy something to compounds tax deferred forever. Well yeah, of course that's better. But actually investing the bulk of your portfolio in a compounder at the end of a 25 year bull market in both stocks and bonds is not an easy task. I know it's in bad form to take someone from this forum as an example, but take a look at gio. He's posted like 6000 times so it's a decent sample size. He's picked out all these "compounders" in the past, and almost every one mean reverted. He bought into Apple, and now it looks like he bought right as iPhone sales peaked. He bought into Oaktree, then realized it wasn't that great. He bought into Nomad, then realized it wasn't great. Bought into Valeant, and then realized it wasn't great. Now he's buying into Google, Nike, Amazon, etc. In the search of finding compounders I don't think he's stuck with a single one? That just defeats the purpose of investing in compounders. You might as well have found a crapload of cigar butts over that time frame. Now it just looks like he's long the S&P 500 at peak everything. Buffett probably identified less than 20 "compounders" over his entire lifetime that he was able to buy at the right price. But he did it during one of the biggest economic bull markets in history. That's a hell of a tailwind to be long a compounder. And he's probably 50x better than most of us at finding something that can keep compounding. How long will you wait to invest your portfolio in these compounders and be willing to sit through nasty bear markets, changes in the economy, changes in competitive advantages, you name it. It's incredibly hard. Look at something like Walmart today. It looked like a great compounder back in 1995 and now no one wants to own it. Anything that looks like a good compounder today is incredibly expensive. 30x, 50x, or 1000x for AMZN. It would be nice to find the next WBA, BDX, CHD, XOM or MO but it's nearly impossible to do in practice. But if you guys come across any cool compounding machines that isn't Amazon, let me know. Out of the thousands of threads on this board, I'm not aware of any others that look like real high ROIIC compounders.

I like the look and feel of this site. I feel like LP's would feel comforted by the general vibe. http://www.themostamazingwebsiteontheinternet.com