rb
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Posts posted by rb
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IMO you should care about exactly WHY the market is disagreeing with you. When you make a stock purchase (which probably should be done only a few times a year) you should have an understanding as to why you think the market is getting the price wrong. Is it simply because your valuation is different than the market's valuation? In this case, the investor should tread carefully and reconsider - it is difficult to successfully go against the wisdom of the crowd on a regular basis. But if you think the market is getting the price wrong due to some clear irrationality (biases, problems with uncertainty, etc.), you can be more comfortable making your investment, knowing that you are not going against the wisdom of the crowd, but rather against some identifiable foolishness of the crowd.
Note I make a distinction between:
variant perception: your appraisal of the company is different than the market's; perhaps you think a company's future growth is greater than what the market thinks it will be
inefficient rationale: WHY is the market getting it wrong; what irrationality, systemic constraint, short-term thinking, etc. lies behind the market placing an incorrect price on this stock.
I respectfully disagree. First of all, about the only thing that you disagree with the market is about the valuation. You think it's worth X, it thinks it's worth Y.
But I know what you mean. So let me give you an example about pure valuation. Back in 2012 BRK was trading at around 1.15 P/B. I thought the value was about 50% above that. This is a big company not some obscure venture. There was no market chatter about it. No worries that the insurance companies cocked up, really no opinions on anything and everything was running smoothly. So that was purely a difference of opinion about valuation between me and the market. I bought a ton of BRK and made about 100% return on in. According to you since there were no other points of contention I should have just said that the market is probably right and I'm probably wrong and move along. If I did that I'd have less money today.
Also how do you even know what the market's opinion is? The market is the collective presence of all participants and as another poster said we don't have the ability to read minds. So how do you find out what the market thinks? From the newspapers? Talking heads on CNBC? Analysts? In reality when you hear anything about what the market thinks, it's not the market that thinks it, but some rather small (compared to the whole) but really loud participants in the market.
Let me use another example. The short attack on Fairfax. In the middle of that storm what you would deduce is that the market thinks that Fairfax is a fraud. But Kynikos, SAC, et all were only a small part of the market for Fairfax, the much larger part of the market was Watsa family, Southeastern, Cundill, and a lot of ppl on this board. So really the market believed that FFH was a nicely run and undervalued company, but you sure didn't hear any of that about FFH back then.
So yea, I think it's best for one to just do their own homework, come up with a valuation, act on that, and not worry too much about the market.
Personally, I prefer the situations when the only point of contention between me and the market is just the valuation and no other pending items. Sometimes stuff is just on sale. But life is messy and I don't think that I (or for that matter most people) have a very good ability to handicap the outcome of major events. It's much easier to just wait for the sale and buy squared away companies.
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Well one way would be to buy oil companies whose stock prices dropped. While the prices look small, let's take a deeper look. Let's pick two good oil companies. One American - XOM, and one Canadian - CNQ.
The companies you've picked are the best run/lowest cost/biggest/almost biggest in the US and Canada respectively. They are probably the least levered to oil prices of any producers, due to balance sheet, and the ability (and willingness) to take advantage of the downturn by purchasing assets on the cheap. This is especially CNQ, they're taking market share by buying assets from forced sellers at distressed valuations. The longer prices stay low the bigger they'll be on the eventual upswing.
If you want to look at what's happened on the downside, you should look at something other than the most stable ones. Those company's would also have the most torque to the upside, as some of them have high operating leverage and high financial leverage, which makes them a lot like a call option. (Big upside, but if oil doesn't pop they'll be worth zero)
Well as an investor aren't those the characteristics you look for in companies to own? If one would like more torque as you put it why wouldn't one just buy a call option on these companies or just use margin? Why buy crappy companies?
Whether XOM and CNQ are less levered to oil prices, yes to some extent, but a small one I would say. The still get oil out and get paid based on the price of oil so I don't see how oil prices don't matter a great deal for them.
However my point was that a drop to $83 for WTI in 2012 caused these companies to drop to prices similar to today I don't see why in the current environment the valuations of these companies shouldn't be much lower. Unless they were trading at some 75% discount to value back in 2012 I think it's more likely that they are still overvalued at current prices.
Btw, I think the crappier oil companies are overvalued too. As you say they may go to zero. I think quite a few will actually do that. I didn't like a lot of these cos even when oil prices were high.
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Well in general I am definitely not an oil bull. Actually I don't like the economics of any of the companies that are involved in extractive industries. In fact I believe that the only time when serious money can be made in the industry is when you buy at distressed prices -- maybe times such as these?
My view is that the world cannot be profitably supplied with oil at current prices and the equilibrium price will be higher. I don't think it'll be 100 or so, but at least 60. That's still at least 50% upside for WTI from here. But how does one profit from this.
Well one way would be to buy oil companies whose stock prices dropped. While the prices look small, let's take a deeper look. Let's pick two good oil companies. One American - XOM, and one Canadian - CNQ.
Currently WTI is around $43, XOM is trading at 78 and CNQ at 30. In June 2012 (another bear time for oil cos) WTI dropped to around 83. Back then XOM was trading at 78 and CNQ at 28. So looking at this one can deduct that the oil cos were either incredibly cheap back in 2012 or they're pricey now.
Another way to profit form the low oil price is to go and buy physical oil, or actually oil futures. That's basically a negative carry trade where one pays interest and storage fees while one waits for the price appreciation. While I know that no one likes negative carry, this one is more than likely to pay out. The problem with this trade is that it's expensive. If oil goes to 60 then that's 50% profit minus negative carry over time. Also each contract is 1000 barrels so the trade is in increments of 40K USD. that's not a problem for us who handle large funds but it may be for smaller investors on this site.
That's just they way I see things. Thoughts?
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Seems few safer, cheaper, faster growing alternatives.
That's all true. It is a testament to BRK's value creating abilities that they can still be cheap after the great run the stock had for the past couple of years.
The real question is what to do from a portfolio management standpoint. I think this may apply to a lot of people here. What do you do if you already have a large BRK position and you have cash and you are looking at this market. Do you say that position sizes don't matter and go and buy more? Or are you satisfied that you have a large position in something that is undervalued and will appreciate further and wait for something else to come along?
I'm guessing opinions are all over the spectrum but I'd be interested if someone has a well thought out and rational position rather than just gut feeling.
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All of this talk about "variant perception" makes my head feel like it is going to explode. "Variant perception" sounds like a term that was coined by someone looking to justify their excessive 2 and 20 compensation.
In investing, every trade you make is ultimately taking a position (buyer) that is different than another market participant's position (seller). Thus every position you take is a "variant perception" relative to someone else. Even indexing has an element of "variant perception" since you are making the conscious decision to put money in the market as opposed to selling your position in the market.
Ultimately the concept of "variant perception" is irrelevant, IMHO. All that matters is whether you got the direction right or wrong at your entry point. And in that respect, I tend to think it is easier to get the direction right when your view/perception contradicts the prevalent view of the market.
I completely agree, the whole concept is meaningless. As an investor you analyze the company and come up with an estimate. At the end of the day why should one care if the market disagrees with him.
Also if one is good at what he does it's better if the market disagrees with him often. That means opportunities.
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It's just half a million. Could be just a tracker, but who knows.
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When you say petro dollar, do you mean USD or what exactly?
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Jeff Mathews is actually a pretty decent writer, but sometimes he blurts out stupid things like that
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Ew, alcoholic root beer? That sounds gross.
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Don't like the sugar in the mixes. Getting thirsty reading these...
I did too, so for today I picked out some Blanche de Chambly. A nice unfiltered wheat bear made by a company outside of Montreal. Not a big fan of white beers, but this one hits the spot once in a while.
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Looks like BRK is building some equity stakes somewhere. Maybe that's why they financed part of PCP with debt?
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Sleeman’s beer is way better, & just up the road from me.
And the reason for the 50 year interruption – they got caught bootlegging into the US prohibition. Can’t ask for a much better pedigree than that!
SD
Umm yes you can Kronenbourg since 1664. Sleeman's history is actually not that good. They had a good brewing team then pushed them out when they sold. Now those guys make Steam Whistle and that's actually a really good beer. Can't figure out why it's so expensive.
Boy all this talk kinda makes me wanna grab one.
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Try Cohiba #2. That's a great cigar. And you can find it here :)
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I like my beer and wine. Lately for the beer it's been Kronenbourg and for wine a Côtes du Rhône-Villages. But it's nice to end the night with a nice Macallan or Laphroaig.
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Except getting hit with a hammer never felt this good. Record margins and solid employment.
Perhaps it's like that ball busting fetish -- looks painful but people seem to like it.
Lol I'm not gonna debate fetishes, but that's a good one :)
The employment part is where it gets a bit murky for me. Yes, the headline unemployment rate looks good, but if you look at employment for working age population, that doesn't look so good. So that kinda signals to me that either a) the recession destroyed a lot of human capital or b) there's still a lot of discouraged workers out there and unemployment is quite a bit worse than it looks.
Not sure which one is it but I'm leaning towards b because if a was the case then we should see inflation at this unemployment level especially with zero rates.
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You make good points on the debt. It's basically not so much about how much debt there is and yes the service ratios are pretty good. Yet as you say, people are paying it down, when really a rational being would look at rates and conditions and load up. The overhang is not really the level of debt or the debt service. It's the fact that it is being paid down at a pretty decent clip which creates demand drag.
There's not much mystery here as the topic has been thoroughly researched. Basically what happens after an RE bubble bursts is that people's comfort level of debt declines. So if they were comfortable with X% of income in 2006, now they're comfortable with less, no matter what the rates are, so they pay down the principle until they get to their new comfort level then u get a demand constrained economy, zero interest rates and the whole jazz you see now. Hopefully there's not a lot left to go.
I disagree that this is a good place to be in (i.e. have an output gap) just because we have momentum. That's kinda like hitting yourself with a hammer cause as the paid dissipates you'll feel better so you'll have positive momentum.
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It's a question.
I'm asking if rising sales indicates poor demand.
It's definitely a good thing. It points that the demand picture is improving, and pretty much all the other indicators prove that the picture is slowly improving.
On the other hand some improvement from a low level doesn't mean that demand is good. The economic indicators also show that the US economy is still suffering from demand deficiency. So basically demand is still bad, better then it was before, and slowly improving, but there's still a ways to go.
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The US doesn't have consumer debt overhang in the way that matters -- monthly payments. Lately retail sales have been strengthening which must speak to the lack of demand right???
Well if there's no debt overhang than why are people using gas savings to pay down debt in a low interest rate environment?
Also just because retail sales have been strengthening lately doesn't mean that the economy is not still demand constrained. If the economy is not demand constrained then why do you have low inflation in a zero interest rate environment? Why is anyone even mentioning deflation?
Is demand falling or flat if sales are rising?
Despite paying down debt, no less.
They are buying more AND paying down debt. Must be terrible out there.
Is that an economic model?
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The US doesn't have consumer debt overhang in the way that matters -- monthly payments. Lately retail sales have been strengthening which must speak to the lack of demand right???
Well if there's no debt overhang than why are people using gas savings to pay down debt in a low interest rate environment?
Also just because retail sales have been strengthening lately doesn't mean that the economy is not still demand constrained. If the economy is not demand constrained then why do you have low inflation in a zero interest rate environment? Why is anyone even mentioning deflation?
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Well if we're talking about deflation then the economy must be demand constrained. Personal debt overhang is a big part of that story. In that case aren't oil prices a good thing since it helps people pay their debt faster? As for the oil companies, yes they have been spending a lot of money, but that is actually still small compared to the whole economy and as others here mentioned it tends to be very clustered. Certain people and certain places mostly benefit.
On the RMB devaluation I don't really see this as some big race to the bottom. The RMB appreciated a lot in the past 5-6 years. Back then US economy was in the pits and China was firing on all cylinders. Now the US is recovering and China looks like is stalling. There's also large amounts of capital flight out of China. Now if the RMB was a floating currency would we not expect to see a depreciation against the USD under these circumstances?
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Well, from my limited understanding of macroeconomic I think Chinese devolution is bad for the US. It does reduces the competitiveness of the US, no argument there. Also it puts the US in a though spot because they will have a hard time raising rates as it will further increase the value of usd. This low interest rate issue will over time fuel bubbles which is very destructive for the economy.
Finally a short term increase in consumption is unlikely to offset the loss of competitivity. From my experience as a product manager, currency fluctuations are passed to the consumer. Tales some time and in happens. Apple is not a good example, their products are not commoditized yet.
I'm not saying that the Chinese devaluation is good for the US economy. I'm pretty sure it's not. My point was that I don't think that it's as bad as one might think. Things have changed a lot over the past 10-15 years. It's probably worse for other emerging economies with whom China competes directly.
Also I don't see how it's bad for the US economy is the Fed has to delay tightening.
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Wouldn't the impact on domestic incomes come from domestic manufacturers?
If you produce widgets in the U.S., your overseas competitors' products just got 5% cheaper, so you would need to lower your own prices causing higher unemployment, lower wages, etc.
I thought US manufacturers (the domestic ones) were the ones making those widgets in Chinese factories.
Is Apple going to pass along the IPhone manufacturing savings to US consumers or will they just report fatter margins?
I think Ericopoly is right. I don't think at this point a lot of made in America products are in direct competition with Made in China products. So the Chinese products do not displace American products. That ship sailed long ago. Furthermore, savings from made in China products may make their way into lower prices or higher profits. As Ericoploy points out in the case of Apple, they'll sell the iPhone for the same price and pocket the extra savings. For products with higher competition you'll probably have a bit of trickle down.
Another thing to keep in mind is that generally at a minimum 70% of an economy is not tradeable. So that Chinese product that one purchases it isn't really Chines. It has a lot of local value added in it. The Chinese value add could actually be microscopic in some cases. So cheaper Chinese goods could actually (depending on the value add %) drive US growth.
I don't want to go too deep on this one, but I can elaborate if anyone cares.
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Chris Shackelton/Jim Lindstrom - PRSC
because?
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well if you are not bullish on energy prices why would you buy those names?
Oil, wow, WTF happened to all of the oil bugs on this site?
in General Discussion
Posted
Ok, it makes more sense now. In that quote I was referring mainly to the fact that the economics of oil are not as good as the economics of other industries and to make good return one has to buy at distressed prices (to bump up the return) not distressed companies. So basically buy XOM and CNQ at prices lower than these.
I fully agree with you that XOM and CNQ will probably never become distressed companies. I'm just surprised that the prices are this high. I see no reason for them not to revisit their 2009-2010 lows in this kind of oil environment.
I think one area where we disagree are the lower quality companies. I think that some (maybe a lot) of these will cease to exist so I'm very wary of low quality names.
Btw, I highly appreciate your opinions and your contribution to this topic. You know a lot about this stuff and add a lot of value to the discussion.