Pretium

Zombie Dust - 3 Floyds Brewing

The comments in this thread seem to be putting "value" and "growth" in different buckets. As people in this thread know, growth is just a part of value. At the end of the day a stock's value is the discounted cash that can be taken out of the business over it's life. I work in institutional consulting, and yes Morningstar is used for everything. Are we really giving "value" managers a pass because they have underperformed growth type funds? This is just a marketing term Morningstar created to group funds that share similar statistics. Here are the criteria they use to determine a fund's style: Value Price to Projected Earnings 50% Price to Book 12.5% Price to Sales 12.5% Price to Cash Flow 12.5% Dividend Yield 12.5% Growth Long-term projected earnings growth 50% Historical earnings growth 12.5% Sales Growth 12.5% Cash Flow Growth 12.5% Book value growth 12.5% Do you think Warren Buffett or the other managers on this list give a shit about a stock's style as it fits in the Morningstar categories? The best managers I've seen when screening for clients do not care about whether research firms consider their fund to be growth, value, small, or large cap. They buy whatever they think has intrinsic value. It makes marketing the fund more difficult, but it's in the best interest of share holders who believe in the management's philosophy. Do you think Buffett gives a shit about Fama's research that shows a value premium given to low P/B stocks? I think he cares about understanding a business, conservatively forecasting future cash flow, and then discounting those cash flows at the long term treasury rate. Compare the market price to the IV, observe the margin of safety, and then make a decision. Basically I agree with Jurgis that people who underperform for long stretches (especially by enormous margins) should not get a free pass. It's funny how people think about funds. A manager could have an amazing track record for his first 10 years and suck the next 10 years. People will look for excuses about value/growth/sectors to explain the underperformance and still treat the manager like a god. But what the hell? Are we giving more weight to returns that were achieved 15 years ago rather than 5 years ago?

Good call

The ironic part about this question, is that I would rather have all my money in Berkshire at 0.7x book than at 0.1x book. If it's trading at 10% of book, then something is severely broken in the market. I would feel more uncomfortable investing at 0.1x book. I don't believe that a liquid security can become severely mispriced on a quantitative basis in today's markets. There are too many screens that would identify them. If you did come across one, then you can be sure someone else has looked at it. And they decided to pass. That would scare me. There's basically no way to tell why the market is letting you have this opportunity. I would consider a massive position only if the reasoning was more qualitative in nature.I did at one point have 80% of my assets in CSTR. Everyone knows that NFLX and online video will replace DVDs. But the market was pricing in a severe and repaid decline in Free Cash Flow. If you looked at some of the consumer data, it was pretty easy to see that it would take longer for DVDs to die out.

Love: Costco/Starbucks/Chipotle - Friendly workers add value to the transaction experience Hate: Jiffy Lube - The scare tactics and up-selling are absurd

http://mashable.com/2015/04/13/math-is-hard/

I guess Bill Miller was the most famous example I could think of with respect to the "Point in time" concept of performance evaluation. Besides, isn't growth part of value?

The whole investment business is a point in time issue. Studies show that when funds have bad quarters roll of their 3 and 5 year returns that their marketing efforts increase dramatically. I've seen hundreds of funds oscillate from top decile to bottom decile for 5 year return numbers. Today's top performing funds (based on 5year numbers) were mostly in the gutter in 2009. No investment consultants even considered choosing these funds. Instead, they were recommending funds that had low downside capture during 2008. The exact opposite is happening today. Recommended funds all have stellar 3, 5 year track records. Why? Well it's an easier sell to clients. It's much safer to be with the crowd if your goal is retaining clients. Bill Miller's Legg Mason fund beat the market every year from 1991 to 2005. In 2005 people thought of him as a legend. 15 years of beating the S&P 500 seemed like a good enough sample size. By 2009 the fund had completely lost its outperformance against the S&P. After all the hoopla around Miller, a grandma buying the Vanguard 500 Index would have done just as well after almost 20 years. And guess what, grandma probably spent 5 minutes on investing while Miller likely worked 45,000 hours (300 working days per year * 10hr/day * 15 years). Who really knows what is luck and what is skill? I think we can all agree that Warren Buffett has skill. The level of returns over 40+ years is enough evidence for sure. We can all agree that Elon Musk is brilliant. Nobody builds companies, rocket ships, or cars with pure luck. Investing is at its core a marketing business. I've sat through hundreds of product pitches. And everyone always talks about these "Geniuses" from Harvard, Wharton, etc. that have 20 analysts working for them all with their CFA. They talk about sophisticated software with advanced risk controls and proprietary quantitative screens. They hand you 5 white papers on rising rates and how they are uniquely positioned to handle it. At the last second they show you the performance. If they underperformed, there is always an excuse. My favorite is “the market acted unusually during xyz period”. Oh really? I thought the only reason why active management exists is to take advantage of inefficient (unusual) markets? I logged into Yahoo Finance a while ago and noticed a virtual portfolio I made back in 2006. I was in high school then and made a portfolio of 10 or so stocks. It included some well-known names like AMZN, AAPL, UA, HD, IBM etc. I absolutely crushed the S&P 500. I knew nothing about financial ratios or balance sheets. I just liked the products these companies had. I can almost guarantee you that if I had logged in with any frequency and managed that portfolio, I would of done significantly worse. I kind of went on a rant here and maybe drifted away from the Horizon commentary a bit. But I guess the bottom line is, it typically takes decades for any track record to hold statistical significance.

What is long term investing? Q1_2015_Commentary_FINAL.pdf

Brilliant, thanks. Reminds me of what Jeremy Siegel said when he was in Chicago late last year for a conference. "Stocks are the least risky asset in the long-run". https://www.mpmgllc.com/wp-content/uploads/2014/12/siegel-stocks-long-run.png

It boggles my mind that people were investing (and still do) Tens of Thousands of dollars with absolutely zero due diligence. Heck I just spent 2 hours researching mechanical keyboards trying to understand every difference between models. That was a $130 decision. $10,000 is something like 400 hours of work. It's seeing your friends and coworkers make tons of money that sucks you in. I think there's someone's name on this board that's "Innerscorecard". I think that's a great concept.

This might be of interest Thornburg_-_Real_Returns.pdf

My biggest fear about dying is not being able to see how the future turns out. I absolutely hope to live to 200+ years. I do worry how artifical intelligence will play out. Musk, Hawking and Gates have expressed concerns.

yadayada, I too hesitate when recommending index funds to my friends. Yes, index funds have given investors a fair return for the past 30 years. But the historical data itself is meaningless without context. Howard Marks always stresses: Are we extrapolating or analyzing? How will index funds perform moving forward in a different world? Horizon Kinetics does a great job analyzing the environment of the past 30 years in the attached document (page 6 in particular). In my line of business, it is so easy to recommend index funds because it automatically lowers the cost to the client. It's therefore easier to justify your own consulting fees. Problem is, this is happening across the board without analysis of the underlying indices. For institutions, it still makes sense to invest in index funds regardless of whether you think you can find better active managers. Why? Nobody will blame you for picking an index fund. You're with the crowd. I'm not exactly sure how impactful index funds and ETFs have been on individual security prices. There seems to be a lot of disagreement in the industry. Certainly, Horizon Kinetics thinks they've distorted some markets. But at the end of the day, I always worry when something becomes a default option without a second thought. An investing decision made without regard to price worries me. Doesn't matter if S&P 500 P/E is 22x or 12x, just buy the index. Here's a quote from "The Outsiders" about Henry Singleton: Just two years before Singleton died, Leon Cooperman asked him about the many Fortune 500 companies that had begun large stock repurchases, a practice that was now considered a prudent action. Singleton, who pioneered that strategy, replied "If everyone’s doing them, there must be something wrong with them." Q4_2014_Commentary_FINAL.pdf

There is a good book that has data that provides a very compelling case for inverse correlation between GDP growth and stock market returns. Triumph of the Optimists: 101 Years of Global Investment Returns Vinod So this would mean that over long periods stock returns are always negative right? If countries continue go grow (GDP growth) then returns should be negative over the long haul? If you extrapolate out a bit it would mean that equity investing is a losing game, as the world grows we're trying to swim against the tide. Yet this doesn't seem to be the market experience. Since we have numbers the US has grown as an economy and our market has been biased upwards. So how does this jive with the research? The stock market is a discounter of the future? So maybe market goes up when gdp is declining, but expectations are that gdp will rise in the future? Depends on if you take rolling 5-10 year correlations, or 1 year correlation snapshots. I don't know.

The Outsiders

I think the tone of this thread has changed a bit. Initially the question was "Is Elon Musk Human?", with a link to his idea for a Space Internet. In all of history there are a few great minds that have transcended traditional human capabilities. Einstein, Newton, Da Vinci, Hawking, Galileo, Beethoven, etc. One might talk about these people as extraordinary, superb, one-of-a-kind...almost non-human. I took this question to mean, does Elon belong on this list? Personally I always grouped Elon with Benjamin Franklin. Franklin was a pure entrepreneur, superb socializer and negotiater, and also a scientist. Let's not forget that Tesla started with a $465m loan from the government. It also relies on $7500 subsidies when selling its cars. SolarCity relies on government tax breaks as well. Is it genius to create companies that aren't economically viable in the free market? Let's suppose that xyz billionaire replicated Musk's SpaceX path. He gathered the same people, under the same roof, for the same mission and thows in the same amount of money. Does SpaceX still succeed? Or does it only succeed with Musk? I'd say the latter, but still interesting to think about. When Apple threw out Steve Jobs as CEO it went down the drain. No doubt they still had smart people there, but where was the vision? Is someone soley with vision a genius? Is Steve Jobs a genius? (Or non-human)? I'm only trying to play devil's advocate here. I am a huge Musk fan and have watched nearly every interview he has given and taken studious notes.

I have an engineer friend who told me that among his engineering circle of friends, they actually don't find Musk's technical aptitude all that impressive. His main talent is rallying the best engineers together for a common cause (e.g. build a rocket, electric car). Sort of like the Manhattan Project in the USA back in the 1940s. When you throw a ton of money at a project and incentivize super smart people to work together, a lot can happen. The mission in the 1940s was to build an atom bomb to secure the nation's future. Sounds like something that would motivate anyone. Now Musk is doing the same thing by telling us that humanity's future is on the line and how cool it would be to live in space, etc. I have always found Musk extremely interesting and believe he is an absolute genius. I don't know enough about him to judge his technical abilities against other scientists.

Down 8% this year. This is my first year managing money. Was down close to 25% a month ago but doubled my stake in TECU around $2.60 and it's now sitting at $3.70. Biggest takeaway from 2014: Be Patient! I hope 2015 is better to everyone!