Graham Osborn

SaaS stocks going crazy, financials swooning, commodities getting crushed.. sound familiar? Late 90s (MP1) leading up to tech bubble -> present (MP2) leading up to another tech bubble? Of course, if the S&P/ Gold ratio is worth anything, we're all drowning in fiat currency anyway - but the returns might look good on paper! Thoughts appreciated. late_90s_vs_present.pdf

Depends on how you want to use free cash flow. If you put a multiple on it, you are doing a shortcut for a DCF, which means you shouldn't include it unless you think it will be an ongoing expense. The key is "recurring." Although it seems quaint to say, companies acquiring for the right reasons (sustainable FCF growth) make large acquisitions only periodically, and take time to digest them. Although it would still be best to deduct the cost of acqs from FCF in this case, the sporadic nature makes it hard to forecast and omitting is an OK approximation. Not so for repeated or serial acquirers. We're talking repeated annual acquisitions at a decent fraction of the parent's EV. Companies may do this for different reasons, i.e. (1) to eliminate competitors or create synergies (2) to obscure or buy their way out of poor operating results in a loose-capital environment, including from prior acquisitions (3) to take advantage of the purchase accounting rules to create artificially nice operating results. The latter 2 reasons originate the need to deduct the total acquisition expense in CFI when acquisitions are both large and recurring. Serial acquirers often tout themselves as "more efficient capital allocators." While this is conceivably true (look at historical BRK), it's not the norm. More often management is buying crappy assets with declining or limited cash flows and then using the accounting conventions plus more acquisitions to cover up the fact. As an extreme but instructive example, imagine a hypothetical business that purchased assets with cash flows of 1-year duration. Those cash flows are used to purchase the equivalent amount of new assets each year. An FCFAA analysis would show the business to have FCF=0. Now, if we imagine each of those assets had a 5-year wasting life rather than 1, their cash flows would pile up assuming you purchased an equivalent number of assets each year. However, more than offsetting this would be the purchase multiple to buy the assets. This might well result in FCF<0 although the cash flows generated by the assets would pyramid for a few years before the company ran out of financing. In both cases, FCFAA is needed to provide a picture of the "sustainable cash generating ability" of the business.

I agree with all your points except the last one. While I have made as many mistakes as anyone (perhaps more), I have never made a decision I felt was poor on account of too much research or too deep an understanding of the security/ asset. There have of course been times where I focused on the attractive current operating metrics at the exclusion of cyclicity, or the balance sheet at exclusion of ownership structure, etc. But these were defects in research emphasis rather than an excess of research. Research also has a benefit independent of its product: it forces you to move slower in your trading. I believe very strongly that to get the best entry timing as a retail investor you need to act either faster (hard to do) or slower than the majority. Naturally one is going to have some well-researched positions that are dogs. That's where liquidity and portfolio management come in. But if you weight the position according to the risk/ reward based on research and establish position limits, there's no reason for the dogs to bring you down unless your research quality is lacking. When I refer to research, I mean all variables pertaining to a position including trade structure and macro factors. "Circle of competence" is a somewhat self-defeating phrase in my view. Certainly, one must be competent on a security to invest in it profitably (given enough trials). But competence in an area can be acquired through research. Correspondingly, competence does not ensure a profit and IMO exposes the investor to a risk of conducting inadequate research by trying to extrapolate knowledge from other companies or areas. If you think about what happened with Valeant, part of the reason it was a darling for so long was because healthcare analysts were analyzing it using the traditional metrics rather than watered-stock analyses. What they believed to be inside their circle of competence was actually just designed to look that way. Lesson: start from square one on every company or asset. And if you believe your own research abilities are lacking, please read all the outside research you can locate. Back when I was getting started my rule was to read everything analysis I could find on the stock and throw it out if I found one cohesive bearish view. I still do this. This rule would have kept you clear of most of the aforementioned disasters. So in summary, the problem is not too much research but rather inadequate or biased research, or poor trade structuring/ PM. There is another aspect to research which may relate to your comment, which might be called the "law of diminishing returns for positive research." That is to say, if you are making an argument that a position should be taken, the probability-vs-research curve will level off (although not asymptotically) with additional research. The shape of the curve encourages people to get lazy as they approach the more level portion of the curve. This was why Graham focused on the protection-of-principle aspect, which is the probability of losing money on the investment. This curve is simply 100% minus the previous curve. Unlike the former curve, the latter curve falls by a significant percentage for each additional unit of incremental research. Hence, if the defensive investor ("negative analyst") can reduce the probability of loss by 50% by doing an additional hour of research, his time is better spent than for the "positive analyst". The corollary here is bearish analyses may have greater investment value for people selling than for people selling short, since the bearish trader is making a positive statement ("this stock will decline over time interval T") whereas the seller is making a negative statement ("this stock is risky and should be sold"). Broadly speaking, positive statements have a lower probability of being realized than negative statements. One final point is the danger of overconfidence in the analyst. This is akin to the 3 stages of driving: 1. The student driver is totally incompetent, and knows he is totally incompetent. (Middle risk) 2. The student driver is imperfectly competent but believes he is more competent than he actually is. (Maximum risk) 3. The student driver is imperfectly competent and (is aware of/ plans according to) his competency level. (Minimal risk) The danger for many analysts (and certainly I have been victim to this) is that as one's competence grows one's confidence grows quicker, which encourages excessive and ultimately fatal risk-taking. This is why car accident rates peak in the late 20s and why so many young people blow themselves up in the markets at around the same age. However, risk remains elevated as people age in both groups due to people's difficulty in correlating risk-taking behavior with intermittent negative outcomes. This leads to your argument that a stage 1 investor is actually better off than a stage 2 investor, since he will essentially rely on portfolio management, a generally uptrending market, and perhaps "red flag" analyses by others to protect his principal. I agree - with the caveat that Graham's stage 3 investor can outperform him - at least theoretically. As you know, Graham assumed most investors would fall into stage 1. In summary, the greatest risk for an investor is believing that you know more than you do. And owing to the diminishing returns of positive (speculative) research, the discrepancy between perceived and actual knowledge is likely to increase proportionately to the amount of research performed - just as a driver who has avoided accidents for a long time will tend to become more careless. I do believe this bias can be counteracted by insight - which is where we differ.

Anyone who regards Silicon Valley as a bed of conservative startup investing clearly wasn't around in the late 90s. If the VCs that are left are a bit smarter it's just because they watched so many other late entrants get wiped out.

It's hard not to value the opinion of a guy who was once worth somewhere between 100-150B. That people can amass less wealth than they did back in the days of Rockefeller/ Carnegie has partly to do with GDP growth and inflation. Nowadays the only people with a realistic shot at breaking the 100B barrier are the tech industrialists - Bezos, Zuckerberg, Page/ Brin, etc. Unfortunately, valuations are probably going down and not up! If we used adjusted CPI or gold, Gates has been losing billions each year since 2000.

Some good discussions here. Now an interesting corollary is: if we accept for the sake of discussion that gold or some other commodity with a relatively stable supply would be a better measure, and that the revised S&P is more representative, it raises the question of what is the effect of central banking policy these last 10-15 years? Clearly part of the losses have already been taxed away from the world's population through "adjusted" inflation. But additionally, one must remember that the effect of debt is to migrate future cash inflows to the present. This may help explain why in at least parts of the developed world (such as the US) the economy feels to be booming even though we are in a 15-year deepening recession. But it also means that new stimulative fiscal policies will have to fight the effects of older stimulative policies that are now entering their anti-stimulative (repayment) phase. I refer of course significantly to the QEs. This implies that while these MPs can delay the onset of the austerity that should accompany such an economic downturn for a time, in the end those policies will only worsen the fate of debtor nations. People have been talking about this since the 80s at least and predicting an imminent collapse which has never occurred. I guess the question is, when you are near the bottom of a paper recession/ depression, is it reasonable to think that the non-financial world will start to "feel like a recession" or "feel like a depression" in the next 5-10 years? Another interesting thing is if you look at the stock market collapses of 29 and 74, the SPE of the stock market was very low. To date we haven't seen that at all, although certainly the SPE in 2000 was higher than 2007/ 2016. The denominator is clearly worth less since corporate profits are also reduced by inflation, but even thus adjusted they would be quite high particularly for dividend-paying stocks eg utilities. My guess is that the answer has to do with record levels of corporate debt which are supported by QE particularly in this last leg of ECB bond purchases - so perhaps the multiple compression will occur as corporations start defaulting on front-loaded debt servicing programmes - viz SPE ignores whether those earnings are leveraged although that is a key determinant of their forward stability.

This is just what I have heard in my investigations. Everyone has told me IB is the way to go if you are trying to combine easily portability with low cost. But naturally, there's only one way to test portability and you seem to have found it not as easy as expected. Supposedly the administrators have a set of 3rd-party platforms that will enable you to port the TR data between any system - but I'll believe it when I see it.

I agree. These data, combined with the obvious inflation in asset prices and therefore cost of shelter and cost to retire, make me think we are actually in the midst of a huge inflation, with more to come. Retirement cost is an interesting point, particularly when you consider the relative absence of pensions relative to the mid-1900s and the substantial losses to pension funds these past 16 years.

Hi KA, thanks for this link - it's an interesting read. I guess it's not surprising that Greenspan championed the policy in the 90s given that it would later provide a cloak for his/ Bernanke's stimulatory policies in the 2000s as the recession set in.

Where do you live just out of curiosity? I would say what you've observed is pretty atypical relative to my experience. There are many ways to slice it, but if you think of a situation where you get unprecedented home ownership (for example) and you're only tracking rent payments, you may be missing a big piece of the cost for families. If (hypothetical #s) it costs an average family 50k/ year to live whereas it cost 30k/ year 5 years ago, I'd argue that should be reflected in CPI whether it is considered investment or not. My FCF analogy was likely flawed because CPI is not like CapEx - what you are trying to measure is how much money people are throwing at the same old things. So if families typically invest in a home and have done so for many decades, that cost should be reflected. Conversely, atypical or inhomogeneous costs (say fine art purchases) probably are best excluded or the calculation would get too complex.

Echo the above. I'm constantly amazed by how few sites really earn a dedicated value following, but this site has more than most. Thanks for your work building a community. I can easily see this site blowing up in a few years after the winnowing - I use this board as one of my "enthusiasm indicators" and there are many days where you could almost hear a pin drop :)

Here's the detailed weighting: http://www.bls.gov/cpi/cpid1605.pdf I am looking at this document for the first time but a couple things stand out. For some reason tuition is only given a 3% weighting. And home-buying costs are excluded as "investments" (a typical mortgage/ rent payment is 18-30% of household annual income and mortgagers/ renters ratio is probably procyclical): http://www.bls.gov/cpi/cpiqa.htm I'll have to dig through this more, but the home exclusion obviously helped hide the inflation in money supply leading up to and following the housing bust. It's a bit like not deducting recurring acquisition and debt repayment outflows from FCF - you are ignoring a large/ recurring cash outflow for American families even though that outflow may have been one of the most significant cost-of-living increases over the past few decades. If a small isolated country debases its currency you should be able to see that in the exchange rates. But if the world's currencies were to be symmetrically debased, looking at just the exchange rate could be misleading. It seems to me that any government agency-defined CPI would have the same conflict of interest since watering the money supply is an indirect form of taxation.

S&P/ Crude looks qualitatively similar: https://www.google.com/search?q=world+supply+of+oil+chart&rlz=1C9BKJA_enUS633US633&hl=en-US&prmd=nisv&source=lnms&tbm=isch&sa=X&ved=0ahUKEwiepvKr69XNAhUDkh4KHUOaDJwQ_AUICCgC&biw=768&bih=909#hl=en-US&tbm=isch&q=s%26p+to+crude+oil+ratio&imgrc=43RiJ_ft9waAuM%3A I generated the hypothesis that gold would be a better metric than USDs before generating the chart. I think you could do a similar analysis for other commodities as well. I think we shouldn't give any particular denominator a priori favor, including CPI.

I'm increasingly starting to feel that CPI is meaningless in the face of QE. The true cost of living is just not being captured. And if CPI is meaningless, money is meaningless even if there is relative meaning through exchange rates. And if money is meaningless, the indices we use for tracking the performance of financial assets are meaningless as well. I am not a gold bug and actually think gold is a bad buy right now. But gold at least has some sort of tangible reality which is lacking in the world of fiat money. For this reason, I think the S&P/ Gold index is a far more meaningful indicator than the S&P of market values. Here's the link: http://www.macrotrends.net/1437/sp500-to-gold-ratio-chart Make sure to turn off log scale for the full impact. According to this way of thinking, we are in the final stages of the greatest economic collapse since 1929 and 1974, with probably 15% to go to reach rock bottom. The market profits people have enjoyed the last 10 years have been more than offset by the vastly reduced purchasing power of the dollar. The magic of central-bank policy has been to hide rather than change the outcome.

Poor Soros. I wonder if Buffett would be hated as much if he still shorted. Soros is much more entertaining during times like these because he is a trader, whereas Buffett just yawns and says the world will work itself out in 10-20 years (not his problem). To Buffett's credit, he understood the PR value of being long-only by mid-life. One thing I like about Soros is he shows how you can have a long-term view but express it through shorter term market moves, much as PTJ did. Sounds like he was long the pound, but short stocks, and once he knew the results he went short DB and I presume some other EU banks. It takes a lot of guts to sell after that kind of drop. Soros knows the cogs and wheels of Europe like few others. Although he's willing to flip any trade on a dime based on what the market is telling him, his broader portfolio strategy operates over a span of decades. That's why he's been around all these years, and will hopefully make it a few more :) Point being, if two old guys (Soros and Rogers) - who beat the market for decades, made some incredible macro predictions (Rogers predicted in the late 90s that the 00s oil boom would end about 2015), and lived through WW2.. the breakdown of Bretton Woods.. the collapse of the former USSR.. - think that Brexit might be a major step in Europe's decline, I'm paying attention. I may not agree with everything they say, but I'm definitely not brushing them off like the words of some EU finance minister.

Thanks for posting. I think most people would agree that the most significant risk here is that we run out of exits - "Brexit," "Nexit," "Frexit," "Grexit," ?"Gerxit".. The essential point which both Soros and Jurgis bring up is the relationship between debt and populist movements. QE is a great way to make people with no savings feel slighted - particularly if combined with local austerity measures. In that sense, I think the populist campaigns in Europe and the US do have parallels. Paradoxically, the very QE that is widening the wealth gap is also providing life-sustaining intervention for not only the banks of Europe (remember that though they are hurt by low rates they are helped by monetization of their crappy balance sheets), but countless companies the world over that have grown inorganically through cheap debt. Because the EU banks did not receive "adequate" support during the last financial crisis, many of them are additionally too crippled to withstand any serious disruption to their liquidity. And if enough banks fail synchronously, confidence in the ECB itself might be undermined. Any serious threat to the integrity of the ECB over the next few years would be - to put it mildly - catastrophic, owing to the ECB's position as lead bond-buyer in a world of low/ negative rates. To use a Mungerism, the world is addicted to crack, and the ECB is the biggest dealer in town - especially corporates. If they get busted, we're all going into detox. The only conceivable backstop I can think of then would be some sort of international banking consortium including the Fed to buy European sovereigns and corporates. The day that happens, I'm packing my bags for Switzerland. But I don't think the US would ever go that far.

Here's my 2 cents, echoing others mostly. I think: (1) Whether or not the euro is a good currency, it has become a currency people rely on. And if the dependability of that currency is undermined it will a source of uncertainty, which tends to increase discount rates. (2) Many European banks were never properly bailed out in 2008-09, leading them to retain many assets that should have been written down on their books, hence their instability in the early 2010s and today. It won't take much to finish them off, as the markets today implied. (3) Most of the market move magnitudes today probably didn't have much to do with Brexit itself but rather with the same kind of fear we saw last August and earlier this year. While I think the imminent collapse of the EU has been somewhat exaggerated, I am also not siding with the camp that views Brexit as imply another buying opportunity. The forces driving these moves are much larger. I wonder if it doesn't have something to do with a fear that the IV drip called QE might be suddenly turned off due to political turmoil. The last 2 years have encouraged people to think that the way to make money is by buying into dislocations - the investing version of Russian roulette. On the short side, I agree that such events present liquidity opportunities, but the reverse logic has never worked for me. Like many on the board, I didn't buy anything today.

Here is Soros's world survey which covers the topic: http://www.nybooks.com/articles/2016/02/11/europe-verge-collapse-interview/ His general thesis seems to be that the European banking system was gravely weakened by insufficiently timely/ concerted central banking action by the Germans particularly, and this has set the stage for various forces to split the EU, such as countries like Greece and Britain pulling out. So if the response is large it will be more about EU fears vs Britain fears specifically. The immediate economic impact on Britain specifically is considered to be minor: https://woodfordfunds.com/economic-impact-brexit-report/ The problem, as we saw with Greece, is that although these events are not individually earthshaking they take place in a dual stimulative/ deleveraging environment. The US/ EU markets are looking for a reason to crack, and if that happens to align with Brexit then that's what folks will blame it on.

Seems that's what happens in US residential real estate whenever increases in US mortgage rates hit the popular press. Refi volume seems to be triggered by the fall in rates but fear of rates going up drives potential buyers to pull the purchase trigger now vs risk being priced out later. That's an interesting point. I hold the point of view that CPI (and even "unadjusted" CPI including food and energy) massively underestimates price increases across the asset spectrum. I realize this more generalized view is not widely held but I think that QE has tended to hand more wealth to the upper-middle-class and the rich relative to those below them. The key capacitance for increasing CPI is in that lower bracket (they are the ones buying fewer groceries and cheaper cars during a downturn). This doesn't mean the wealth won't leak to this segment over time, but it takes time at full employment for the fiat money to equilibrate. As a result the central banks will overdo QE as well as the monetization/ stimulation phase and be deluged in a pent-up wave of classical inflation within the next 5-10 years I speculate. Since deflation can always be cured by printing more money over the long term, I think the deflationary fears mask the opposite - a money bubble. If your assertion holds true than there may yet be borrowers who will not add to the debt pool unless rates are seen to be rising in earnest. It is an effect I didn't think about but I doubt the Fed would be quick enough to react to save real rates, just as they were in the 70s. I like to think of the Fed as like the present-day healthcare system. Physicians are obsessed with prolonging life. When you walk into a hospital, you observe how this ideology has been reduced to a caricature. Countless moribund and often demented old people are kept alive by extraordinary means and undergo countless procedures with the goal of extending their lives by a few months here, a few months there. No hospital employee would ever seriously question whether "everything should be done" because it might be malpractice to do so. The Fed and its central bank counterparts are like those physicians, trying to bump the world's moribund developed nations along by 6 months here, 6 months there. They don't care about the long-term outcomes any more than the physicians do because they won't be penalized for those outcomes. Rather they are most concerned with appearing to act properly in the short-term. The interesting thing is how often, if the course of administering a marginally life-prolonging therapy, you end up killing the patient.

For some months now I've assumed that Clinton would ultimately win simply because she was an established Washington presence who at least sounds at least sounds presentable on a stage. However, I recently heard a presentation by David Landers at MFA (a Republican admittedly) who described Trump as a 3rd-party candidate who has formed a provisional alliance with the Republican Party. According to him this enabled Trump to partially split the Democratic vote. He went through a fairly detailed analysis of the electoral districts to show how the votes might fall, and said he thought a Trump win was more likely. I am guessing if he had to put a probability on it though it would have been 50-60%. My personal experience is that people I consider rational conservatives have rationalized Trump, although I consider him a demagogue who has engaged in questionable dealings with lenders. Clinton of course is a demagogue as well and had her own history of corruption. This suggests to me that Trump can hold the Republicans. That makes it an offensive fight for Trump. I'll probably vote for Trump because his positions are less well defined, whereas I disagree with much of Clinton's activist platform. I think Trump will need to lean on his administration and Congress for policy development, which will enable Republicans to have a significant say in the provisional government. However, I am watching his stance on the national debt. If I don't vote for him, I'll probably abstain. As many here have said, there are no good options among candidates, reflecting the fact that we have few good options as a nation.

I think one thing can be said with fair reliability - very few people have made and lost 4.5B of paper net worth so quickly in the US since the tech bubble. Going from zero to hero and back to zero without leverage is no mean feat. If you were Bill Gates in 1999-2000 perhaps 4.5B was just a turn and toss in bed, but for most millennials that's a lot of Netflix binges ;)

Guys, I had lost this discussion until now. There is no doubt I have been very wrong with VRX (it was a large position), I have been wrong with AGN (it was a small position), while I had no particular view about Theranos except the article I had read and posted… Though I surely have learnt some lessons, basically I keep looking for great managers at the helm of great businesses that could be bought at fair enough prices. Over the long term I think this strategy could yield stock market returns that are in the range of 7%-9% annual, while my own businesses could on average generate 5%-6% of additional free cash. That is still my goal, but I am very aware of the fact I might never achieve it. Why do I choose to invest in specific businesses instead of simply investing in the S&P500? Because I enjoy the process of following real businesses and I believe that to understand their dynamics helps me very much in managing my own companies. At least, this has been my experience until now. Cheers, Gio Just so it's clear Gio, the "?" in my post was in regard to your gender and not whether or not you are a nice guy :) I respect your opinions even when I don't agree with them. I have no idea what your returns have been but there is no question VRX/ AGN gave their investors a great ride on the way up. Michael Burry bought a stock in the late 90s that looks a lot what they were doing early on. There's nothing wrong with making money in the stock market so long as one understands the dependencies and the risks. Furthermore, I will say this: I was among EH's admirers. I am the first person to root for a woman who is ambitious and willing to take on a moonshot like that. Sure, I thought 9B was a nifty valuation for a biotech company with lots of uncertainty still to traverse, but I never did serious DD on it since I wasn't considering a buy. Even now I know little more than what the media presents; I just via it as another indicator of sentiment on the biotech sector since unlike the 90s these unicorns aren't publically traded. EH is still young and hopefully she can take some time off to reflect and become a more long-term thinker. Becoming a billionaire too quickly can be hazardous to one's health.

Not to needle Gio too badly as he (?) really is a good guy. But the bullish posts on VRX, AGN, and Theranos all originated with him. I think it just illustrates how intense the euphoria has been in the pharma/ biopharma sectors over the last few years. By the sounds of it he had a killing in the first 2, and there's nothing wrong with profiting from mania as Soros likes to say - provided you bought BEFORE the mania. But you always had to wonder why a sector with limited underlying technological/ productivity gains (unlike say tech in the mid 90s) should generate those kinds of returns. And so the moments where ValueAct started dumping, where PFE/ AGN was announced, and where Theranos announced its technology required individual test approvals were all sell signals - assuming selling was an option ;)

I actually liked CAT a tad less after Einhorn picked it for Sohn. Not because of anything he said (I actually haven't read the presentation), but simply because his shorts historically have been rather quixotic.

The AMGN pick is dumb. AMGN's top products all have low cost competitors nipping at their heels and the company has over 30B of debt. 10x EBITDA is way overkill for this pick this far in the cycle and with pricing reform in the works although I wouldn't go so far as to call AMGN a good short by any stretch of the imagination. They are shifting to a stalwart IMO. I'm not surprised he owns AAPL; if you look at the balance sheet and EBITDA multiple you pretty much have to own it as a value investor. Luckily I am not a value investor in the classic sense to I don't feel compelled to follow :) IPhone sales and margins mirrored the economic recovery which is now flagging, and I expect now will be the time where customers tighten their belts and diversify into cheaper brands or models. I doubt whether AAPL has the leadership at present to achieve significant returns on capital from their large cash hoard. They've become like Xerox - bloated and cautious to invest in an uncertain future. There may be a buy point, but I don't see it coming anytime soon and certainly not before iProduct sales start to fall off the cliff. I do think the move out of longs is significant. It dovetails nicely with what we said earlier that the financial institutions where probably post-recession QE plays held for a period of years. I maintain that TLRD and HCA make no sense at this point in the cycle. Their risks are much the same as financials. Burry has historically been one to exercise directional bets. As such, individual picks should have meaning without knowing the whole portfolio. I don't, for example, worry that AMGN is some kind of pair trade. But if you wanted to know how bearish he was or what specifically he was bearish against, the 13F won't help much. I hope someday the SEC requires short positions to be disclosed, although in Burry's case this wouldn't be that helpful since he prefers to implement bearish bets in other ways.