SharperDingaan

Up 67% in the main account, & better than we expected, .... but a challenging year. The negatives were a big loss on Poseidon Concepts (systemic fraud) early in the year, & allowing adverse wealth effects to influence our PD hedging. The positives were multiple correct choices under varying conditions (EFN, NBG, BB, ALS, PD, SAN), & a successful stress testing of our softer PM skills. Barring the odd black swan; we are consistently getting better at risk management YOY, but our returns are now coming from patient managing of macro & commodity cycles - & they seem to be getting easier to assess & obtain. It would seem that there is a tipping point that is not in the literature. Hopefully it continues, & others will get to experience something similar in 2014. Good luck. SD

'Cause we are evil, value investing, bastards we want < 3x; & will be swapping distressed paper at face value + interest, for equity! Hopefully we bought the paper for <85-90, & have enough big friends to force the dilution. We get a meaningful position in a coy that is now profitable because of lower interest (& lower rates because of the BS fix) We can get an option market going, & can sell some OTM calls .... & get our total outlay down to around 50% of MV, or less :D Definitely not in the case study. SD

These things are really options; it either BK's, benefits from a specific event, or just bumps along. You could own these small firms individually, or you could own a coy that specializes in it; ALS.TO as an example, that also benefits from professional management - & very good ongoing analysis on this board. However you choose, the length of your holding period is critical ... as your investment is 'dead money' until that exciting promise actually delivers. Generally, the better approach is puts/call options on stronger companies; as there is usually better & deeper liquidity, & less concern over the company itself going bankrupt. The more 'in the weeds' you go, the more critical it is to stay within your circle of competence. Huge numbers of cheap shares are expensive to trade, volatile, & usually not marginable. While waiting, you really need to hold the shares in both taxable & non-taxable accounts, & periodically wash trade with the outside market between the accounts. Losses in the taxable account, & ultra-low cost bases in the non-taxable account. If it works out you get tax free gains & a tax refund less all trading costs. Not for everybody, but just another step on the evolutionary ladder.... Good luck, SD

We would like to see more women participating, especially as their viewpoint is very different. We would also like to see more folks from Asia, Europe, & the Middle East. A little Al Jazeera in your morning coffee never fails to makes things a little more interesting! SD

Add 15% of the cost for the decorating, drapes, furniture, etc. that you do not know about yet ;) Estimate the replacement cost of your major outlays (car included), straight line over the remaining expected lives, & put the monthly depreciation (as cash) into additional mortgage payments. When the roof goes, borrow against the house to pay for it; but in the meantime your mortgage balance is declining & savings are compounding at your mortgage rate. Live in the place, & close your eyes to it being an investment for a good 5-10 yrs. In most cases; legal fees, closing costs, agent fees, drapes, taxes, etc. will more than outweigh any gain from a quick flip. Congratulations & good luck! SD

A few additional considerations .... Your optimal hurdle rate is your margin cost, not 15%. Until you know what you want, you would be temporarily invested in a margined low risk preferred - with a div yield above the cost of your margin; and maximizing your cash-flow. Div yield on your cash, + (div yield - margin cost) spread on your margin (ie: Banking 101). Zero cash drag. You invest based on value proposition, not because ROI is > 15%. This is not equipment where you have reasonable certainty over the direction, magnitude, & timing of the cash-flow stream. NPV is not particularly useful in an investment application. Most hold a passive nominal cash weighting to cover foreseeable outflows; usually via short-term laddered FI. The 2 years of living expenses that posters have already alluded to. The amount you can temporarily invest reflects BS strength, not your cash on hand. Margin agreements, credit lines, quality investments, & deep liquid markets for those investments, etc. are all passive liquidity convertible into cash. If you are optimizing, as long as you can earn more than the service cost on this debt, you should be investing it. You might also want to keep in mind that cash optimization is at the expense of rising risk, & that risk increases exponentially .... ie: plot the functions & the intersect is your optimization point. SD

Re 50% cash hedge: You may have sold 50% of a quality cyclical at what you hope is close to the cyclical top; & are waiting for the cycle to trough again - when you will repurchase. You have no idea how long that may take, but when you act you cannot afford any restrictions on your ability. Therefore you hold either very liquid paper, or less liquid paper with a very high margin limit. Assuming you buy back the same number of shares, your cash return is the realized interest earned on the proceeds + the realized short gain on your repurchase - when it occurs. None of which is really being considered here .... because the underlying premise here is that cash should always be actively invested. Retaining cash for future opportunities is just a passive consideration - until you need the cash! SD

Racemize: Remodel assuming a constant 15% leverage, & a 5% cash weighting in the recession (ie: 20% cash swing). One run with perfect hindsight, one run with changes made after one year (foggy sight), & one run assuming an average constant 5% leverage. Average the results for each year, calculate the standard deviation, then look across your 5 year time series. Use only average numbers as no one can perfectly predict. You should find that for small cash weightings it does not make a lot of difference. And the more volatile the market, the better & more reliable the model becomes. Simply because bigger swings are easier to forsee than small ones, & hence the greater the chance you went to a +5% cash weighting in anticipation. SD

Not sure re the US, but in Canada there are loan forgiveness programs, contingent on your working in a underserviced part of Canada for a minimum length of time. ie: work in Tuk as a doctor, dentist, nurse for 4 years - & the fed/province will pay off a portion of your student loans. There are lots of ways out from under a student loan, but little Suzy/Johnny have to get creative - & grow up. SD

We find that cash wants to be spent, holding it requires a lot of discipline, & that there is a tendency to see just the cash weighting - & not the cash flow. Try holding hedge proceeds for upwards of 2 years! We also find that it pays to maintain a negative portfolio margin, so that any cash being held - reduces your margin until you actually use it. Less pressure to spend it (on something stupid) & more caution when you buy something (as you will be leveraging). When times are good you are usually leveraged, when they aren't so good you're usually 5-10% cash. SD

Quick comment on young & stupid as an excuse ... Used to be that at 18 you got drafted, & there was often a real possibility of either death or maiming within a year. In many places that continues to exist, & it applies to both sexes, equally. If you had not grown up before you were drafted; you were forced to during basic training, & then again when you met your first still warm dead body. Kiddies went in; grown men & women come out. In most places, at 18 you are deemed mature enough to drink, smoke, do drugs, & drive. Be immature enough to do them together, & screw-up, & you will remove yourself from the gene pool. Hopefully, just yourself, & with no damage to passengers & bystanders. Student loans are no different ... you just don't die if you screw up. SD

The argument against cash is the opportunity cost; but it is very much a short-term, & PM view, & supposes that your predictions are perfect. If you are paying for OPM, & getting paid for AUM; to maximize your income - you need all the assets invested, at all times. If the opportunity cost is so bad, you should always be heavily margined; so long as you can invest the cash at above your hurdle rate. The result is a systemic leveraged prediction error, & much of the reason why buy & hold returns are so volatile. According to the investment literature, volatility should be managed primarily through options/futures. The optimal portfolio is narrow scope, highly leveraged, a big user of options/futures, & rebalancing frequently (ie: an ETF). Notice though … that the optimal portfolio is also the highest fee generating portfolio? – more trading commissions, margin spread, & often wider bid/ask quotes. And it could not exist if folks could not be convinced that holding cash is bad. The argument for cash is the opportunity gain; but it is very much a long-term, & neophyte investor view. Virtually all neophytes lose money investing, lose it in large amounts, & never recover it. They would have a material opportunity gain - if they simply stopped investing, & used the cash to pay down mortgages, go to school, or even just go for a beer. But everyone is the next WEB … Different strategies will call for varying amounts of cash, & how much cash you keep on hand will change with circumstance. As most people have been managing a bank account for most of their lives, most are pretty good at assessing how much they need - & in what form. If your advisor ‘loves you’, you are probably too close to the ETF portfolio - & making that advisor very rich while you bear all the risk. The advisor is a salesman, so if you are not hearing resistance … who is the patsy? And if your advisor is so good - why does he/she still have to talk to retail clients – n years after being in the business? … should they not have become rich already? You have to be able to sleep at night, & cash is your pillow. Hard (T-Bill/Gold) or soft (loan agreements, liquid markets) depends on how you like to hold your liquidity. SD

No .... BK is entirely appropriate. If I make an investment, & lose, I do not get bailed out for being stupid. Education is an investment. If the market were corrupted; trades would either be cancelled (ie: flash crash), or recompensed via class action (ie: LIBOR, product miss-selling). Where the required correction is large enough to be an immediate & sustained threat to all society; government intervenes to mitigate the impact (ie: housing crisis). Not every student over-borrowed, & those that did over-borrow are a threat only to themselves - not society in general. No bail-out. Government loans, & outstanding taxes, don't discharge for very good reason; and those loans are offered by society because it is highly advantageous overall to have an educated workforce, & re-payment is guaranteed. Some abuse is expected, but it is not permitted to stop loans to those who would not otherwise be able to go to school. School or no-school is the students decision - because they have to pay the loan back. Most students are borrowing on the implied intent of never paying the loan back, the same way you never intend to repay your mortgage. Debt service in both cases is paid from ongoing income - except the mortgage gets paid back when you sell the house. If in your lifetime you have pay off your school, put your kids through school, & then save for retirement; just how exactly were you planning to pay off school- ie: you were either relying on an inheritance, or never really intending to repay the school loan. Millions of people successfully pay off their loans everyday. You do not get a break because you were stupid, or repaying will be life altering. We make it life altering - if you do not repay; the mob would break your legs & make you a cripple for life. You get to keep your mobility, & those loans stay until they are repaid. Life is a bitch :( SD

Sound familiar ... http://www.cbc.ca/news/world/affluenza-defense-earns-ethan-couch-probation-in-fatal-dui-1.2462273

We see nothing wrong with this at all; folks just don't like the consequences of their decisions. You do not have to go to university.. you could have gone to college & got a technical diploma/designation; You do not have to go full-time ... you could have done a co-op, or gone part-time, while continuing to work; You did not even have to physically attend ... on-line is commonplace, & at both undergrad & grad level; The expectation is that you will work part-time in your field .. & actually apply what you know while going to school; And on graduation, you move to where the work is ... wherever it is. Status is not an excuse, there is nothing wrong with the trades or apprenticing in them; millions do. Stupid is not an excuse, these students knew exactly what they were doing; & are hoping that squeeking will get them the grease. Youth is not an excuse, most youth in the world gets on a plane & travels to the work; wherever in the world it is. Debt is not an excuse, nothing stops you from doing a BK & starting again. These over-privileged thought they were above everybody, chose vanity over reality, & relied on an implicit family bail-out if they got into trouble. And now that the bail-out is not forth-coming, the belles cannot handle the fall from grace. Gimme all your money or I'll put you in a home, is a well worn threat that has been practiced by many generations, & in many cultures. And usually uttered right up till mom/dad kick them out onto the street, change the locks, cut off the trust fund, & go on vacation for a few months These students are not special, they are not owed a job, & there is nothing to prevent them from turning their lives around; millions around the world die every day simply because they cant access clean water. SD

EFN If you want to play in the derivative vehicle space, this is probably one of your better candidates. One of our 2 main picks from early in the year; we are not adding - but continue to hold on to a sizeable position that is up 140% on the year ;) Not for everyone, so look before you leap. SD

Multiple of EBITDA, as we're typically buying into a cyclical. Usually up to 5% over the odds for quality, & in the bottom end of the multiple range; sell at around 90% of the upper end of the multiple range. If we think that this time it may be different; we may keep some upside exposure via call options. Multiples, & their trends (usually technology driven), are pretty consistent across multiple cycles; even though they might not apply exactly to the current cycle. So ..... circle of competence, & industry/company familiarity (Gladwell 10,000 hour rule), has significant value here. We're also happy to capture < 50% of the investment thesis, especially if the typical cycle is fairly short (2-4 years). If we like the firm; over a 10 year period we can expect around 3 complete cycles, & we will be coining on both the up & down legs of each cycle ... as well as compounding all along the way. We don't need to be greedy. Different approach, but it seems to work fairly well. SD

Congratulations ;)

Keep in mind that the apartheid experience is very generational, & todays commentators would have to be 20-30 younger to have actually grown up under apartheid. Apartheid was also less rabid in bordering countries. A lot of very brave men & women died in the atrocities getting to peaceful transition. A young & white male face, whole-heartedly participating at a native beer drink - was a very dangerous thing for both sides; so you blacked out your face/arms/legs (with charcoal that kept running off), before dancing around the fire with your equivalent Zulu age cohorts. But mixing was occurring, you invariably tipped each other as to passing dangers; & that saved countless lives, & maiming. But it also laid the foundation for future reconciliation, & all because the village headman (Induna) was an exceptionally brave man ... willing to risk the lives of both him & his family every time one of these mixings occurred. At a time when 1 in 2 Induna's were being necklaced .. for allowing just such mixing to take place. SD

Look at this months CFA magazine; read the articles on demographics/deflation, & time management. The underlying theme is disconnects: markets & people. The more old folks you have (spending), the more migration (productivity), & the more women leaving the workforce (too small a net take-home pay), the more structural deflation you have to overcome. Demand, not supply, is the dominant velocity of money driver; therefore you can print what you want .... without inflating ... as you still have to overcome structural deflation drag (the dominating money demand). So ... if you are in ageing Europe & importing workers - deflation risk is high, & you can run QE flat-out with little risk. But do it where the workforce is mostly <35 (EM countries), & you will get inflation/hyper-inflation (Zimbabwe) Do you know what your top 3 objectives are? ... so why are you not spending at least 50% of your time on them? SD

This is why you hedge a position ... http://www.calgaryherald.com/business/Precision+Drilling+shares+plummet+Alberta+fund+manager+sells/9251848/story.html We bought in our stake at around the same time as AIM Co, & hedged it at well above the $10 mark. Entirely house funded today, positive carry, & it looks like we might well get our grubstake back a 2nd time over the next few months. Not the easiest thing to manage, but quite the technique if you can master it ;) SD

Bruce Trail Conservancy. Our family are volunteer trail captains to a 4km section of the trail, do 2-3 trail building days a year, & lend some of our time & expertise to the board. Anything that comes out of talking to people while hiking the trail is bonus. Our preference is also to NOT do more of what we already do. http://brucetrail.org/ SD

If you ever get the chance to talk to a lottery organizer... ask them privately what proportion of the big prizes ultimately get quietly put back into the pool - at the winners request (ie: won $100M, but gave back $90M); & the reasons why. It is not immaterial ..... Most newly rich simply blow up either themselves &/or their family; with surviving generations often ending up as in-breeds because the eligible social circle becomes too small (Various Royal Families). The solution has long been to escape the gilded cage, or procreate all over the place, but you have to be your own person (ie: Henry VIII). Most are not up to it though; hence the drugs, booze, break-ups, hookers, etc. trying to escape. The next time you see/suspect a secret Santa; laugh loud, quietly congratulate them, & ask to talk to him/her over a coffee. The conversations are usually very illuminating, & burgers over a bottle of very lux Chateau Laffite - not particularly unusual. SD

Ah, but they keep getting re-incarnated; you could be talking to the nth version of Adam ..... & he could also have been a few versions of Eve along the way! I am not going to argue with a levitating amped up Lola .... though I would like to know how its done :D SD

We live in a world measured on multiple metrics; family, happiness, wealth, health, etc. We know they are interrelated, yet insist on measuring against just one metric - compound growth through to end-of-life. Here lies the richest man on earth .... so what. Some Himalayan nations use Gross National Happiness as their measure of wealth. Laughable to western eyes, but perhaps just maybe ... those monks, who have been around for a very long time, are a little wiser & more worldly than most of us. Wealth is a servant, not the master. Most would argue that if you just make your small part of the world a better place, while you are still living; you have done enough. Different cultures have different approaches, but some money/time/effort out today versus tomorrow is pretty universal; individuals execute according to what make sense to them. SD