locutusoftexas

I would like to echo the posts on the oil and inflation crisis during the mid-1970s, which included the winding down of the Vietnam War. My perspective is that the mid-1970s were the greatest financial and political crisis post WWII and not the current one. Everything went to hell in a very big way. I remember my favorite all-time contrarian signal in fall of 1980, when the Wall Street Journal cited several notable economists who stated that our economic system was on the verge of failure and would not survive into the future. In fairness, stocks were at an average PE of around 7, but of course inflation was massive, as were interest rates ultimately. So the relevance of the comparatively low PE (that is relative to present times) is a bit murky. I have an opinion and a suggestion. The fear now is massively out of proportion to the level of the so-called "present financial crisis." This dominance of fear, anxiety, and perceived pain has been a consistent aspect of the US personality since 9/11. In the mid-1970s, people were worried and irritated, but less fearful and much more determined to work at surviving the crisis. Buffett was ecstatic; I remember a quote something like "He felt like an oversexed millionaire in a house of prostitution." He has also been buying recently. Regardless of the existence of blood in the streets, people now are scared to death and extremely risk averse. This is way overdone. Seems like another contrarian buy signal to me. The suggestion: People wonder where the "boost" to our psychology and economy will come from. I believe that unwinding the wars in Iraq and Afghanistan will boost both, just as the unwinding of Vietnam did post 1974. A country just can't throw away 1-2 trillion dollars on useless and longlasting wars and expect not to pay a severe price economically. Once we stop throwing money down those black holes, the US economy will improve and the global level of pessimism will subside. I say "Enough already!" Best regards, Tex

The "Prudent Speculator," Al Frank used margin successfully in his investment plan. You might wish to read his book on the topic. Intuitively, I believe that this requires discipline and restraint. There are probably successful methodologies other than Frank's. On the other hand, traders who "go for broke," like the legendary Jesse Livermore, learned discipline and restraint the hard way, by losing an entire fortune, perhaps more than once. Good luck, Tex

Okay, I admit it. I am a big fan of LUK and its primary owners/managers. However, for the value investor, there are many huge positives: (1) LUK teaches us about value investing and about accounting. (2) LUK managers teach us about practical management of a portfolio for people who are very risk averse. In other words, they are willing to sell too soon and they are willing to pass up a purchase at a price that is just good rather than great. They do not mind holding cash. (3) LUK is fun. I love hearing the shareholders of acquired companies squeal about their managers selling out to LUK at a price that was too low. (4) LUK is easy to track. The only question to ask regards the health of Cumming and Steinberg and whether they plan to continue running the company. This is great for the passive value investor who wants a reasonable return on investment, as defined by Ben Graham, and over the long term, a return better than reasonable. (5) The managers (at least the CEO and Chairman) are honest, as near as I can tell. (6) These guys return capital to investors from time to time in significant amounts. (7) LUK has made a lot of money for me. I am getting ready to sell my BRK.B and maybe even Fairfax and double down on LUK. Best wishes, Tex

I would offer another take on the periodic selling by C&S. Being an old-timer, I am cognizant that I could kick the bucket at any time and that my family will be stuck with my portfolio, as it exists when I die. Thus I am forced to begin liquidating and to reinvest and reallocate so that they will be able to obtain cash when they need it and so that they will be protected from market and management risk. In the case of Cumming and Steinberg, I have no confidence that their successors will be even half as good as managers and investors. So C&S must also recognize this and would liquidate at least a small percentage every year or so, in order to account for the uncertainty of the future. This is reinforced by the fact that equity holders incur most of the risk of a company's performance and viability. Finally I have learned first hand that anyone can suddenly and inexplicably drop dead, even a young person in apparent perfect health. For these reasons, prudent investors must take some money off of the table periodically, except at propitious times like March, 2009, and even in that case, must be prepared to take profits fairly soon after. C&S are probably value investors in every phase of their lives and would thus be cognizant of the downside in all aspects. Such periodic sales make perfect sense in this context. Regards, Tex

I retired in 2008, have a very frugal lifestyle and support my wife and two kids attending college and living at home. I have been a rather passive buy-and-hold investor over my career and spend my free time on part-time scientific research. I have had around 80% of the portfolio in stocks and stock mutual funds. From our peak portfolio value in May, 2008, we are presently down 15%. I started buying into the market too early last fall, and then in March of this year, I cleaned up the portfolio and used the proceeds to add to the holdings of LUK near its low. The latter action pulled my performance up a bit, since LUK has doubled since then. I guess that you could consider my performance to be a proxy for the passive, somewhat knowledgeable investor. I don't plan on doing options or holding the peddle to the metal, as I don't need to do that. However, I am planning on trading the market on a time scale of months, since I have become cynical about the financial markets and also because I now have an intermediate trend indicator that appears to be satisfactory. I am not looking forward to paying taxes on the gains. If the portfolio reaches a sufficient level (whatever that is), I will probably trade LEAPS, which I find to be very tempting, but that would be just for the challenge of learning a new investment vehicle. To the active traders who reported, congratulations on some very impressive numbers. Best wishes for the future, Tex

I looked at this in some detail around two years ago. As much as I liked the sound of it and the discussion value investing by management, I decided that these guys were not oriented toward the shareholders. In the end, I decided that I could not trust them to treat the shareholders as part owners or even to treat them as they would their lenders. My take was that it could be a great investment but that this outcome would occur in spite of management. So I had to pass. Best wishes, Tex

Thank you for a very thoughtful and tolerant post. Your point of view is certainly reasonable and very even-handed. You have thought a lot more about this than I have and are more likely to be correct in your expectations. For what it might be worth, let me expand briefly: After a lot of reflection, I realized (or at least believe) that the small shareholder has little to show for his investment unless he receives dividends or trades on some reasonable time scale. The latter requires some skill and discipline, as well a detailed knowledge of the company's situation in near real time. However, most very large companies are opaque, even to the professional. I believe that this is the source of Ben Graham's difficulty with developing an objective valuation measure (like a central value equation). Mere numbers like earnings, P/E, sales, ROE, free cash flow are useful, but cannot tell us how well the management is using the cash. Further, the small investor has no influence over almost any reasonable sized company, while accepting the full risk associated with bankruptcy, etc. Since the CEOs and boards are also composed of humans, they can make silly mistakes with the cash. I prefer folks like the Leucadia guys, who recognize when they have too much cash to invest efficiently and return it to the shareholders, so that the latter can actually manage the money, as part-owners would. The big pharma sector has represented a value investing dilemma (cf. Graham and others), in that the P/E is almost always very high relative to the rest of the market. One does not achieve value investing nirvana unless the P/E is well below the average S&P P/E of around 14. So by standard value investing measures (e.g., P/E) one should not be investing in these things. If Berkowitz is trading from the market low of March, then big pharma is fine, but I cannot see holding these things for a long time. Every time that I heard about a new drug and saw estimates of its future sales, the numbers seemed too small to have much of an effect on the company. So I could not see the big payoff, even when the pipeline was successful. Admittedly, I do not enjoy (and lack competence for) reading medical research articles nor assessing for myself the impact of various developments on the pharmaceutical companies and medical patients, so I have stayed away from them. What I have seen over the last ten years tells me that genetic science and related basic biochemical research will likely provide the breakthroughs that society is seeking. In this regard, the most important thing that the new Administration can do is to unleash the forces of research that have been restrained over the last 8 years. What has become painfully clear is that engineering (to develop new technologies) cannot be successful without the underlying knowledge base that research provides. With the required knowledge base, the big pharma companies can then develop new applications from the research results and everyone can prosper. Meanwhile, I expect small incremental steps from the types of drugs that were developed in the past and are still be developed presently. This of course is just an opinion from a relatively disinterested observer, but lies at the base of my disinterest. Thanks again and best wishes for the future. Tex

Sorry, but for the small investor, these companies are still overvalued from the standpoint of dividends, which is the bottom line for such investors. They lack other characteristics that would indicate a commitment to shareholders, such as large insider ownership (they are just too big and have a float that is too large). Worst of all, they have become sales and marketing organizations rather than innovators, having exhausted their longstanding paradigm for developing breakthrough treatments. They now invent variations of diseases to fit the replacement drugs that they have developed rather than to address longstanding diseases and conditions. Instead they must attempt to purchase innovative companies in order to develop such drugs. Even then the capitalization is so large that highly successful drugs might have minimal effects on the bottom line. For the small investor, a broad based index fund is superior, avoiding the risks of owning equities of individual companies that are too big and whose stocks are too expensive to offer superior performance anyway. Good luck, Tex

This is my gift to the nonprofessional-quality shareholders on the board (of which I am one), i.e., those with a limited amount of time to spend on finding the really great investments: Forgive me for just stating my bottom line on this after studying the company for the last 10+ years. It is not overvalued. Yes, it will double sooner than it will go down by half. These guys are among the very few who run a company for the shareholders. They deserve what they are paid. They have on one occasion returned over 1/3 of the market capitalization to the shareholders in the form of a long-term capital gain distribution; in other words, when they cannot invest all of the cash to their satisfaction, they return the money to the shareholders. They do sell some of their personal holdings in LUK when they feel that it is fairly valued. On this one, it is worth your while to work a lot harder before you throw it out. Don't miss out on the joy of reading about shareholders of acquired companies suing their managements because they sold too cheaply to Leucadia. This is a truly fun company and has made a nice amount of money for me. By the way, I cleaned up my portfolio and doubled down in the $10-13 range in March. I would have gone all in at $5. The NOLs are a red herring. Good luck, Tex

I hear you. Over much of my investing career, I bought the line that you are espousing and I made (for me) a lot of money. However, my point is that I was lucky. Business value is a useful concept, if you are going to buy the business, lock, stock, and barrel, as Warren Buffet has always preferred to do, since the 1960s. Then you become the owner and get the cash that the business generates. However, I am speaking about a small investor, who can only hope either for the business value to be realized in the market price or for a return through dividends. The people running the company decide what to do with the earnings. I have concluded that they are not trustworthy in general, and they can easily make mistakes, misuse the earnings, and cause a disaster. The problem is that we do not know which ones will avoid disaster and work for shareholders (see below). Hence my belief that, on average, the only way a small investor should value a company is by actual cash return. Anything not realized can disappear, just as "receivables" often do. As Ben Graham found, one can analyze the value of a large number of businesses and rely on statistics to achieve a good return. As you point out, not all companies go bankrupt or lose money. (Many "undervalued" businesses probably lost money last year however.) So investing in a considerable number of undervalued businesses and taking profits (sell strategy!) can work reliably. However, in the end, I believe that the failure to remunerate shareholders with dividends is a very large negative in a small investor's method of assessing business value (to that investor). Regards, Tex

Forecasting the stock market is much more difficult than, say, the weather because we know the differential equations governing the weather but there is no such knowledge of markets. There we have a very large number of degrees of freedom and relatively few numbers with which to characterize the system. With our superior knowledge of the atmosphere and the huge number of data points with which to populate the models, we still do a very lousy job of forecasting the weather. Further, humans are linear thinkers. These interacting systems are most likely nonlinear. There is no reason to assume that we can forecast the markets with any accuracy. Meanwhile, upon reviewing the stock market history of the 1920s, Ben Graham's frustration with attempts at valuing stocks (i.e., at developing formulas) became more understandable to me. The only value to an individual investor is the amount of cash that the investment generates, i.e., the dividend yield. Since the 1950s (and maybe earlier), the return has been gauged in terms of capital appreciation rather than dividends. As we have seen over the last year, capital appreciation is ethereal. On the basis of dividend yields and bond yields, stocks have been overvalued for decades. This is more apparent with the lack of investor influence over company policy (vis a vis capital allocation and return to investors) and the fact that companies become bankrupt, resulting almost always in complete loss of value of the equity. Given the present situation, the emphasis of the individual investor must be on risk management. The concept of a stupidly undervalued stock is itself an illusion as we cannot know what the managers are doing with the company from day to day and what decisions they are making. For this reason, a selling strategy must be as important as what to buy. Buying what we understand, if properly applied, would prevent our buying more than one or two stocks. Large corporations, like pharmaceuticals, are vastly overvalued as the dividends do not compensate us sufficiently for risk and we cannot influence their policies at all. Regards, Tex

Bargainman, Thank you for your interest. My goal is not to trade on a short time scale, but rather to be in the market when the indication is positive on a six-month time scale and to begin taking profits when that changes to flat or negative. I am afraid that what I am doing is nothing magical. I plan to track Fed moves to increase or decrease the money supply and to track increases or decreases in key interest rates, as a method of estimating the future course of the economy. This includes derived indicators such as the inverted yield curve, which would have kept me out of the market last year long enough to see that really bad things were happening At the same time, I plan to use what I consider to be a reliable indicator of the stock market trend on a time scale of 6-10 months. The key is to start selling when this longer term trend indicator is flat or moving downward and to buy when it turns positive. I realize how naive this sounds, but the net effect is to reduce the risk of holding stocks by controlling market exposure. This means giving up the maximum return from holding over a 20-year period. As a value investor, I have resisted this, especially when I have held superior companies like FFH and LUK. The key then is to find a longer term trend indicator that appears to work. I am reluctant to give the details of what I am using. However, I can say that after studying the data over the last 10+ years, I have found that a fairly well-known indicator has been misinterpreted to be a contrarian signal. The logic seemed inescapable but in fact it did not hold up under comparison to historical indexes. Instead it appears to work well as a coarse trend indicator. I must admit that using only 10-15 years of data lends doubt to my findings. However, one only lives so long. On the other hand, what I tried to say in my previous post is that after around 30 years of studying the stock market, I can only conclude that not much has changed over the last 80 years. Rather, companies do not last forever and the stock holders get screwed in bankruptcy. By the best measure -- dividends (cold hard cash) -- current equity investors (in well-known companies) are not being compensated for the risk. The only thing that makes sense for a guy like me (who does not want to spend his life trading daily) is the following: (1) Diversify with an index. (2) Be wary of stocks that do not pay a dividend greater than the prevailing short-term to mid-term interest rate, since otherwise one is not being compensated for the risk of holding stocks. (3) Take profits and pay the capital gains taxes (hard medicine to take). (4) Control risk. An example is the point of view that I offer above. This means giving up maximum return with minimum taxes. (5) Determine the prevailing opinion on Wall Street and treat it as falsehood (for example, the common wisdom that a recession is not in force until two consecutive quarters of negative GDP growth have occurred). (6) Identify the main question that is being asked on Wall Street and assume that the most market-damaging alternative is correct (again, early in 2008, CNBC endlessly debated whether the country was in recession and of course the answer was already, "yes."). I hope that this helps. I must admit that I will find it difficult to sell stocks of companies that I believe in, especially when I doubled down on LUK near its recent lows. Best wishes, Tex

I have decided to force myself to take profits periodically after a lifetime of buying and holding. This requires a strategy for selling, which I have now finalized after studying the last 10 years of market and economic statistics that I have been recording. The main reason for this is that over the last few years, I have realized that stocks are much riskier than Wall Street would have us believe. (Okay, so I am slow.) Reviewing my old copy of Ten Years of Wall Street, published by Bernie Winkelman in 1932, I was particularly struck by the much higher dividends that high quality stocks paid then (at least in the early 1920s) relative to bonds, in recognition of the much greater risk of equities. Given that, in bankruptcy proceedings, the equity holders often receive nothing and that bankruptcy is the eventual fate of a high percentage of corporations (maybe after many years), the riskiness of stocks becomes much more apparent. After years of investing, one also realizes that the machinery of Wall Street (including supposedly objective information sources) is designed to separate the public from its money in return for (now virtual) pieces of paper called stocks. Winkelman said this as well. The above fact that dividend yields have not recognized the greater risks of equities for many decades further tells me who the patsy is (in the words of Warren's poker table story). So where do I think that the market stands? In a word, I see the market as "flat" on average and over a time scale of several months. Currently I would put its range at SP500 of 900 +/- 30%. However, my trend indicator on that time scale is close to becoming "positive" from "flat." My monetary indicator is positive, but is moving toward flat. So I see us in an improving market, but I have no current illusion that we have begun a new bull market, and I see another dive below 800 as a possibility. Tex

Terry, Thank you for a most interesting post. I need to read it carefully and think hard before I say much. However, I will say this: For around 10 years (off and on), I have worked on understanding space weather forecasting in the context of meteorological forecasting. Our best shot at making predictions are systems like this, for which we believe that we actually know the dynamical equations and processes underlying the phenomena to be forecast. To summarize: even in such cases forecasts are very untrustworthy, because our underlying observation set is relatively sparse for any given preceding epoch (say 6 hours, which is used for some types of meteorological forecasts). Regarding forecasts of economic time series, I am virtually certain of the present impossibility and in fact the future impossibility (a prediction itself, which one must distrust -- Ha Ha. Also, "impossible" is a bad word to use but I use it just to express the idea of extreme difficulty.) In this latter case, we do not have accurate dynamical equations governing the system, which is effectively infinite dimensional (in terms of degrees of freedom) and further involves human psychology, which is very poorly understood. Among the topics that we could discuss in this context are persistence and multivariate regression-based forecasting, as well as data assimilation. I believe that Soros is quite disciplined and his speculation category might place him with Jesse Livermore. The risk reduction strategy involves placing severe constraints on the amount of time that is allowed to pass in order for the expected scenario to take place. In contrast, my impression is that Graham and Dodd and, by extension, Buffet could actually estimate with superior accuracy the actual underlying and realizable value of specific equities and similar investments. The latter investors are willing to allow sufficient time (i.e., a long time) to pass for that value to be recognized in the marketplace. That is their risk reduction strategy. Both investor types require exceptional discipline to be highly successful and I expect that neither is reducible to equations or algorithms. That is just my opinion, somewhat based on the severe limitations of our ability to predict the economy or the markets based on merely quantitative data, which themselves are almost certainly too sparse to describe even a past state accurately. Thanks again. I will study your post but may have nothing further to add. Tex

My original post specifically said that neither Warren nor George is lucky. You may also note that Soros has been predicting the disintegration of our economic system. So in fact he does believe that he can predict the future; otherwise he would state his prognostications differently. He has ascribed his own success to being able to recognize when his predictions are wrong. This is the part of the equation that is not often cited. I believe that Soros is a great trader and a hard worker. I also believe that, with his book and predictions, he has obviously stepped outside his circle of competence. Almost all predictions are no more accurate than a coin toss and are not worth publicizing. He might be right in his current grandiose predictions; that would be luck. Kondratiev went to prison for demonstrating that historically, the US economy cycled between boom and bust but survived intact over the course of such cycles. I will bet with history on this one, but as Dirty Harry said, I know my limits. Regards, Tex

The most recent thread pays homage to George Soros and Jim Rogers, who have publicly declared the doom of our society and financial system. All comments on CNBC range from caution to anger to personal capitulation. Any amateur nontrader who has been paying attention must now have decided to keep holding whatever remaining stocks he or she has after selling in response to the extreme negativity that we have seen since August. Warren Buffett, Bruce Berkowitz, and similar investors are buying. They and their investors have all lost money in the last few months. Short-term paper losses happen to value investors, even the best; this is nothing new. I distinguish these knowledgeable fundamental investors from gunslingers like Bill Miller, who has finally been caught with his pants down. I cannot tell you how many times over the last 20+ years I have read or been told that Buffett is lucky and his luck has run out "this time." There is no doubt that Soros is a tough and resourceful guy and further, no doubt that he is a true trader, able to change his mind and his investments on a moment's notice. He also likes the spotlight and he is presently selling his latest book. However, even George Soros cannot tell the future. Yogi Berra, who proves much smarter with regard to this topic, tells us that "It's tough to make predictions, especially about the future." This is obvious, since the economies of the world have too many degrees of freedom for even the ~100 billion neurons in George Soros's phenomenal brain to follow. George is overstepping his bounds and in fact the bounds of our physical universe. Periphrasing Bob Dylan in an interview during the 1960s, my or your predictions are every bit as good as George's at this point. George's predictions are so much hot air, and, as a trader, he will forget them as soon as they prove false or true. This is like speculating on a coin toss and therefore provides no particular insights to us. Let us return to Warren, who has commented and has been quoted often about the short and long term views of markets. Rather than speculate on today or next month, how about considering the risk-reward of the market over the next several years. Based on history, dating back to the early 1800s, one can give bounds to the range of prices over the next 5 years of up 100%+ or down 60%. These are bounds on the range of prices, not predictions of the actual range from this day forward over the next several years. The upper bound of up 100% (or more) is based primarily on the action of the bear market of 1967-82, which the present market pattern resembles very closely and which bears many economic similarities to the present. The negative lower bound is based on the result of the contraction of the money supply by 1/3 during 1929-32 and therefore ignores the fact that the current US administration is not going to allow a similar contraction in money supply to take place. Personally, I believe that neither Warren nor George Soros has been "lucky." However, I further believe that Warren understands stock valuation and stays within his circle of competence. With regard to actual investments Soros probably does, too; however, his public pontification takes him far outside of his or anyone else's circle of competence. With regard to predicting the downfall of our society or economy, I think that he should invest in a copy of Yogi Berra's quotes and stop embarrassing himself. Meanwhile I thank Soros for the contrarian signal and attach a much higher probability to the above upper bound than the negative lower bound. This board is populated by really smart and astute investors. I am sure that they can provide a much better set of upper and lower bounds to medium term future market prices than I have. I look forward to hearing your estimates and reasoning. Regards, Tex