Myth465

I used to read your blog a long time ago. Being quite small and an individual I typically really sell when I find something else or on a material change in my thesis. You are correct when something moves up it kinda loses its sexiness and I tend to move on. How is the money Management world treating you? RRJ - LUK does the same thing. Value guys are funny. I remember one guy saying, we like to leave something for the next guy :). Whitman has the most interesting sell strategy I have come across.

” He also spoke about how his view on housing has changed recently, saying that, “We’ve seen a major financial shock and it’s the kind of thing that could change public attitudes for a long time.” http://www.gurufocus.com/news.php?id=127488 I like Robert Shiller for some reason. All the behavioral economist are so humble. Also we have several themes going on here, to recap My thoughts are listed below. Single Family Home that one plans to live in for 30 years - Probably a great time to buy. Very personal decision. The thought of living somewhere for 3-5 years brings me sadness. Investment property - Decent but will have to deal with the headaches of RE for a not so great unlever return. Housing Direct Bets (Carpet, Home Building, and other related services) - Essentially a macro bet on US Growth and recovery. Will make money but when and whats it look like annualized. Would rather hold cash, and wait. I think there are easier macro bets to make inmo. Housing has too many variables and too many vested parties all pushing different directions.

People do it because they have to (I hope lol). I think you are right. Booomers will buy Condos and new construction perhaps on the cheap. Tell your 7 year old to man up.

I stole this from Bill Miller or Monish Pabrai. Perhaps both. Nowadays I sell generally because I have found a better options (typically cash). 3 Reasons for Selling 1) The investment has reached its intrinsic value. 2) You have found a better investment opportunity. 3) Your original reason / thesis for the investment is no longer true or valid. Caveat on #3 - You have to be convinced that the situation has deteriorated and that there is a substantial risk of a permanent loss of capital. If the situation is unclear and the position is at a lose then the investment should be held until a clearer picture emerges or for a minimum of 2-3 years.

You guys make some good points. I guess its easy to call them out. Something to keep in mind.

http://blogs.forbes.com/ericjackson/2011/03/28/why-stock-analysts-are-clueless/ I love his detail on the conference calls. I always laugh when they ask some retarded question that doesnt matter at all. --- I thought this little exchange was funny. Jon Ehrlichman says: “Please correct me if I’m wrong but I was looking back over the Bloomberg and it says you’ve had an outperform rating on the stock since September 2008. That’s during period in which RIM has lost half its value while the S&P has fought its way back to even. Can you clarify that?” Tavis’ response: “… No, that’s accurate… um… some stocks go up, some stocks go down. They’ve done much better internationally than what I would have expected and much worse in the US.” Betty Liu: “Right, but I think Jon makes a good point that you’ve had this outperform rating for a long time on RIM. What would it take to make you change that?” Tavis: [now angry and somewhat dismissive of the direct criticism] “yeah yeah, look… this would be an easy job if we all just looked backwards…. But, we don’t… and, uh, and, uh, so… you know, I think what it would take would be if there was any meaningful slowing in RIM’s international growth.” This would be an easy job if we all just looked backwards.” There are so many funny replies to that one.

This is similar to natural gas. At some point you will get a decent return but is it worth the wait? You are essentially making a macro bet on recover in the US economy. If things get worse then households wont be formed and immigrants will stop coming or will be kicked out. Growth is not for sure inmo. The public sector is getting its ass handed to it and that will result in shrinking household formation. Kids coming out of school are leaving dorms and headed straight for their parents house decreasing the number of households. We will need to build houses at some point, but if its 2014 or 2015 your annual compound will suck. If its later then it justs worse. You should be asking yourself how you feel about Macro, because thats the key to that call. I would prefer to play the banks and may have to take them out of the too hard pile. Anyone got a banking for dummies book?

One thing no one has harped on is regulatory risk. Everyone is gunning for housing changes which will crash that market. Amercans wont do well with 20% down, we are struggling with 3% down. I think its a cant lose trade if you are prepared to sit on a house for 20 years. At some point you will make money but if its just picking an asset thats going to outperform for 20 years I would rather own FFH or BRK with none recourse leverage. http://www.washingtonpost.com/business/economy/housing-regulators-propose-20percent-down-payment-for-best-rates/2011/03/29/AFIRw5vB_story.html 20% down would kill the high end to mid end markets.

That was a top notch post and I think you are right. I just dont want to deal with the headaches of RE. I will have to say it is becoming tougher to find value in the market these days.

I agree Ireland shouldnt be "bullied" out of its low tax rate (though there should be a bottom level of tax to prevent endless blackmail), but a company operating in Britain shouldn't flow taxes through LUX when effectively 100% of operations are in Britain. We will have to agree to disagree with regard to everything else. I think you have basically missed my point entirely. Its not a pro government or anti government, leftwing or rightwing, or pro business or anti business sort of thing. Thats an endless debate and frankly a waste of my time, yours, and everyone else's (though I have time to kill lol). We are discussion or were discussion specific situations, not ideology. You seem to carefully avoid all of my examples (Vodafone, Big Pharma, Verizon) and want to debate / discuss / comment on ideology. Scandinavia is quite a nice place (except for the winter) I have a trip planned for June. Its expensive as hell though. Regards.

I dont know how anyone defends this as competition. Thats my beef. Thanks for the post. Mr. DRUCKER: Yeah, I mean, Forest has a nearly identical arrangement. They manufacture their drugs in Ireland. What makes Forest a little -what makes them a little bit different is that Forest, for its most valuable drug, an antidepressant called Lexipro - which is one of the bestselling antidepressants of all time - they're actually licensing those rights from an unrelated company. They didn't come up with that drug, or they didn't largely come up with it. They contributed a little bit to it. But what's so interesting about Forest is that Forest kind of demonstrates how transfer pricing really just kind of removes real-world economics from the world of taxes for multinationals. I mean, Forest is a company that does almost 100 percent of its sales here in the U.S. They have almost 100 percent of their employees in the U.S. They're headquartered in New York City, and yet the majority of their profits show up overseas, most of them attributed to a mailbox in Bermuda. DAVIES: Does anybody know how much money the U.S. Treasury is missing because of companies that have taken advantage of these techniques? ------ But you know, kind of what also goes on is a few years ago, in 2004, Congress passed the American Jobs Creation Act, which permitted companies to bring back profits from offshore one time, at a reduced tax rate - paying 5.25 percent instead of 35 percent. And companies brought back about $312 billion that qualified for the break. And you know, there's a fair amount of academic literature that shows that very little job creation investment went on as a result of that. And in fact, most of that money was used to buy back stock. And companies right now are lobbying for essentially, a repeat of that break. You know, John Chambers, the CEO of Cisco, has been kind of the most vocal person leading this charge. And so we may see a reprise of that. Mr. DRUCKER: Well, I mean, there's a kind of - it's a great question. It's ultimately, a very complicated question. I mean, you know, there are many different aspects to different countries' tax systems that are different from our own, that kind of make income-shifting more difficult in some other countries. You know, I think a very easy thing to understand is that a lot of these other countries that have what are called territorial systems for tax and corporate income - the U.S. taxes corporate income on a worldwide basis. Pretty much every other country in the world taxes just what goes on within that country. It's not quite that simple. I mean, they all have some form of taxing income outside the country, but basically that's what they're doing. A lot of those countries have much higher marginal income tax rates on individuals. I mean, you know, if you were a multimillionaire in, you know, France, Germany or the U.K., I mean, you're looking at marginal rates, you know, sometimes close to 50 percent. A lot of these countries also have valu-added taxes - basically, what's effectively a national sales tax. So you know, a lot of these other countries kind of have other sources of tax revenue. You know, and the U.S. should probably explore some of these other avenues. I mean, at the very least, the U.S. should probably be exploring kind of some way to deal with the fact that we're losing $90 billion a year to this. I mean, we're in a situation right now - you know, Camden, New Jersey, is in the process of laying off nearly half its police force. And we can see kind of what is going on with kind of called-for cuts to teachers' salaries, and laying off teachers around the country - when there are tens of billions of dollars in tax revenues being pushed into mailboxes offshore. ----- Thanks again great article. Competition at work perhaps, but sounds like a parasite to me. I mean, the situation with Google, also - obviously - is very interesting because, you know, Google, as we know, is a company that has its start because of U.S. taxpayer funding. I mean, both the original grant at Stanford University, and the scholarship that sent one of its founders, Sergey Brin, to Stanford - those were both funded by you and me, by the taxpayers. And so the question is: Should we have a system where taxpayers essentially help to fund success and create profitable companies, but then don't fully share in the thing that they need to pay when they make profits, which are their taxes? People want t o reduce our Corporate taxes also dont want a VAT and dont want to raise personal taxes. Its quite interesting isnt it?

US gives you a decent size exclusion if you meet a few requirements. If you are married a nice chuck or most of your gain is typically tax free (as long as you live in it or have lived in it for a number of years) --- $250,000 Exclusion on the Sale of a Main Home Individuals can exclude up to $250,000 in profit from the sale of a main home (or $500,000 for a married couple) as long as you have owned the home and lived in the home for a minimum of two years. Those two years do not need to be consecutive. In the 5 years prior to the sale of the house, you need to have lived in the house for at least 24 months in that 5-year period. In other words, the home must have been your principal residence. You can use this 2-out-of-5 year rule to exclude your profits each time you sell or exchange your main home. Generally, you can claim the exclusion only once every two years. Some exceptions do apply.

Thanks FFH, I am looking at a decent time to buy a small position back and look forward to the report. The metrics look great for the industry but I think Fibrek will continue to disappoint. The returns will accrue but havent reflected the bull market in pulp.

Now thats competition done the right way in Illinois. Lets make some tough decisions. Cat should leave or stay, but should pick one. Buying a building in the Cayman and saying they are now a Cayman company and not changing anything is a cope out. I pay no state tax in Texas ;D. Though the Texas model is showing cracks of late with massive cuts due to budget defecits. We have a winning plan bad education and low taxes (see the economist state taxes). We import our talent though when grads from other states (Michigan) cant find jobs;D. Great for Texas but not sure how sustainable it is for the US. Again its perhaps a race to the bottom with everyone devaluing and cutting to win business. One state wins, but as a whole the US is weaker for it (poor education due to crappy states gaining all the good jobs and growth). Its a tough deal. With that said I prefer no State Tax and dont know how you all deal with it. ------ INMO this is ass backwards. We should agree on the level of services and the type of society we want (keeping in mind the price) and then decide on a way to collect it, but what the hell do I know. I was so proud of you and myself lol. Oh well. 1 thread here and there want kill anyone.

Basically I am all for a company calling up a Governor and saying I would love to build a plant here but it doesnt make sense given ......... Then building the plant in another country, hiring people in that country, and doing business in that country. I dont even have a problem with them importing the goods to the US (at some point the US will lower taxes and raise imports). This is good competition, and drives good changes politically. I am not for Vodafone or Verizon setting up a phony tax dodge when the business is completed, administered, processed, and sold in the US or UK. I am also not for companies claiming US tax credits for items researched in the US and then transferring the patent at the end of development to a low tax country. This isnt competition its just a tax dodge. There is a tax issue in the US, and we need to change but these are largely legalize tax dodges that skirt the spirit of the law and are inmo unethical and should be illegal. ------ Competition is fine. Countries should be able to lower tax rates to a point to compete (perhaps not below 15%) It is however a race to the bottom. The Cayman islands can charge 2% and have every company reincorporate there. They wouldn't have to actually provide any services to these companies and these companies wouldn't do anything in the Cayman they would just be basic flow through entities. Basically all I am saying is companies are free to leave for "competition" but they should leave. They should give up the benefits of being US based like individuals do when they leave for tax reasons. My annoyance is you are debating competition when these are just largely tax dodges. Vodafone does business in the UK, sells in the UK, hires UK employees, and should pay UK taxes. As should Big Pharma with regard to the US. Grow a pair of balls and move. If Vodafone doesnt like the UK tax system they can exit the UK market and move the assets (people, phone lines, infrastructure) to a better market. I dont know how anyone can defend Vodafone or Verizon.

Fair enough Bronco. I would agree with 10% on repatriated earnings. We need a VAT system and a lower tax rate. Hopefully congress gets into gear. It sucks they get 30% from Walmart, Home Depot, and thousands of small to medium businesses. Lowering the rate would cause a loss in trillions, but multinationals will continue to move if the face overseas competition. Its tough. The system works for domestics but sucks for Multis.

Surprising I agree with you on this. The video talks about some of the worse aspects of this though. I am all for companies leaving. I just have a problem with them receiving the benefits and profits of being in the US and then shifting profits overseas. Basically they leave without really leaving. If I move to Luxembourg or Switzerland I have to actually move, they should as well. The video I linked for you though focuses on the so called cash repatriation holiday that you like to talk about. Basically says it happened in 2004 and few jobs were created. Companies paid dividends and just bought back stock.

I am all for competition but I dont see how anyone can defend a company which makes most of its profits in the US claiming US tax credits for R&D and then transferring the patents / profits to Luxembourg or Ireland to claim a lower rate. The US is subsidizing the research, paying for the product via high healthcare costs (basically subsidizing the rest of the world in regards to pharma) and then not collecting any of the profits via taxes. Our tax system is screwed up, but this is basically parasitic. Similarly it makes no sense that a local cell phone company which provides service in a country can someone say the income should be taxed in Luxembourg, Ireland, or Switzerland. ---- I just dont see your side of the argument. This has nothing to do with competition and is just accounting / legalize tricks inmo. Every US job should go overseas if our tax rates are too high / uncompetitive, but if you are selling into the US, producing into the US, or are basically a domestic company you should pay US taxes. Companies should be forced to pay up, or really move. If more moved the laws would be changed. Opening a mail box in a town with 10,000 people doesnt count. If I gave up my US Citizenship you can best believe I would actually leave the US. These companies have claimed they are not American companies and havent left the US. If they had balls or basic integrity they would actually move and congress would figure it out and lower the tax rate. I own stock in Ensco which re domiciled to the UK. I support the move. They moved to the UK (execs) and have most of their revenue overseas. They also have alot of US based income. The US tax system is retarded, personal taxes are based on world wide income (not sure on Corporate).

LOL INMO you are part of the reason why this country ..... You are really for billion dollar Corporations paying nothing in tax? Seems like a weird position unless you own a big chunk in a billion dollar company. JOHANN HARI - But, you know, just to talk to something that Allison Kilkenny was saying, as well, about GE, these big companies, they justify this behavior by saying, "Oh, we do it all ourselves. We produce all this profit ourselves." I’d just like to say, try—let’s just do a thought experiment. You know, for one month, I’d like to do an experiment. Say Philip Green, the guy—hugely wealthy guy, refuses to pay taxes in Britain. Let’s take one of his stores for one month and take away all the services he refuses to pay for. So we won’t collect the garbage out of the back. When the rats come, we won’t send pest control. If there’s a shoplifter, we won’t send the police. If there’s a fire, we won’t send the fire brigade. If the staff get sick, they can’t get treated in public hospitals. And let him come back at the end of that month and say he did it all himself. He doesn’t do it all himself. These people make money using the infrastructure that all of us pay for. Now, there’s a term for that in medical literature: it’s called parasitism. If you are feeding on a body but contributing nothing to it, you’ve turned yourself into a parasite. --- I tend to call a spade a spade, or a tax dodger a tax dodger. If you dont like a countries tax rates dont do business in that country or lobby to change them.

Bronco I want your thoughts on this. http://www.cbsnews.com/video/watch/?id=7360936n&tag=contentBody;housing You harp on this issue like it will solve all our tax issues.

Thanks for the link. This has been going on for years but wont sell well with austerity. Both parties are wholly owned subsidiaries of Big Business though. This will be fun to watch.

http://www.ft.com/cms/s/0/8836f284-592a-11e0-b9f6-00144feab49a.html?ftcamp=rss#axzz1Hwh9a14J I think the big countries should set a minimum progressive tax rate of (pick whatever earnings numbers you want) 5% - 10% - 15% or 20% on corporate tax rates (includes state, local, and federal taxes). You can do more but, no less. No loopholes, no dodges, no subsidies. Otherwise things will keep ..... Thoughts. Bronco I know you have something to say.

A negative EV is tough to find. I have only seen it in a stub situation. You are saying the company has more cash on its book then debt or MC. Thats awesome if it also has positive FCF. I would sell everything and buy it and probably get a personal loan and go on margin as well lol. Yes regarding the price. If its stable with good management and I understand it I get excited with a 20% yield (with current risk free (or free risk) rates at 1%, if rates were 15% I would want more than a 20% yield). No debt and growing I get gitty like a school girl lol. Sometimes I use Market cap, and sometimes EV. It depends with a REIT I tend to ignore the debt as long as the prices were purchased cheaply. If its a company with extremely stable earnings like a REIT or Utility or FTR, I tend to not be bothered by the debt and focus on the yield. Otherwise I use EV to factor in the debt and to make it apples to apples in terms of a comparison.- HarryLong makes an excellent point. Your competition Mr. Market aggregated is pretty smart. You are basically saying he is wrong when you buy. You must know inmo what he thinks, why he thinks it, and how its wrong. WDC has a great FCF yield. Mr Market thinks HDDs are dying and Ipads and Iphones will take over. I think he is less right and they will play nice together for quite a while so I buy WDC. ATPG was $8 on the gulf closing due to debt and prospects. Crappy cash flow, tons of debt, but assets worth $80. Would they survive? Its now $19 with the gulf open and permits in hand anyone who bought 2 year leaps is sitting pretty. They were $24 pre spill and are now in much better shape. The list goes on and on. Either you clip coupons or you outsmart Mr. Market on key easy to call bets. You really only get a good price if the company is going through stuff, people are generally panicked, or the company is unknown. Otherwise you are buying things for a 10% yield and clipping coupons or expecting outsized growth. --- Forgot to answer your question lol. The logic in using EV vs. Market cap is a company could generate $1 of earnings and have a $1 market cap. You would think great, but what if it had $100 of debt. Not so hot. You to get an idea of what the company makes from Debt and equity. So you add them up. Leverage is nice, but I want to know how the business does pre debt. Then want to know can you pay off that debt.

I dont think you should add BV to EPV. They are 2 separate analysis unless the assets arent being used. I cant say SDs oil assets can generate $1 billion and then add that to the current value of the assets. Thats double counting. Listed below is what I do, I dont really do excel or anything fancy. Its typically very obvious when you buy something cheap. It sticks out like damn I get all that for this price. Also you are correct. You are a passive investor. Unless a takeover is coming, you can buy enough shares to kick out Management, or Management is receptive to your ideas you have a value trap. Plenty of cheap stocks out there with great assets. You need control, or need someone who can take control to really make anything happen. SD is a good example of an asset play - they bought assets for $200 million which could be worth $4 - $5 billion. The dfiference is they are realizing that value by selling it, drilling it, or JVing it. You need management to make it work so you were right there. ----- I look at things slightly different. Think like an owner but a passive one. Add up the market cap, minus cash, plus debt (in some cases for me). Thats your Enterprise value. Then take a stab at your normalized free cash flow. Then look at the yield and decide whats a fair price for that. If there is growth you pay a bit more, if its shrinking alot less. If you are certain of the cash flow more, uncertain less. Whats a fair return for the risks you are buying? In this rate envirnoment with treasuries paying nothing 7% - 10% is a fair return for equity. So I want to buy something stable with no growth for 14% - 20% and wait for Mr. Market to pay up. Also inmo 75% of time stocks trade around IV. Generally they trade down when everyone is scared or when the stock has something horrible going on. ------------------------ Filter #4 – Does the price make sense? Note - Warren E Buffett "If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger margin of safety you'd need. If you're driving a truck across a bridge that says it holds 10,000 pounds and you've got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay, but if it's over the Grand Canyon, you may feel you want a little larger margin of safety…" No Growth Valuation - Monish Pabrai regarding FCF calculation. "There is no need for Excel. If a business has zero growth and consistent stable cash flow, that business is worth 10x FCF plus any excess capital." This assumes approximately a 10% discount rate and results in a 10% free cash yield. Conservative Growth Valuation - Monish Pabrai regarding FCF calculation. If there is growth, depending on how much and how consistent, I’d be willing to value it at 12-15x plus excess cash. ---------- This quote has really grabbed me and sums up quite nicely what we do. Is Mr. Market right or wrong about RIMM, Dell, MSFT, WDC, SD, ATPG, BRK, MBI, or a whole host of numbers. If he is right then the stock is fairly priced, if not then they are all cheap. Ian Rushbrook - The market does 95% of the work for you - your problem is not to duplicate research but to identify errors of logic in company evaluations.

That should be pretty straight forward and much easier to bet on. Its a function of housing starts, needs, and available homes. Once excess capacity is soaked up homes will need to be built. For me there are easier ways to make money.