SharperDingaan

So we have that Graham formula of <1.5x BV and <15x earnings. Well, the earnings part is still quite valid, but the BV criteria not so much. Why? I wonder if in the old days companies either: a) retained earnings out of a deep conservatism due to the Great Depression causing BVs to be inflated. Today such companies might buyback stock or return to shareholders. If they didn't they'd meet the criteria. b) companies were more capital intensive due to the industrial/manufacturing stage in human evolution and less globalization. Today, many companies are in the 'cloud' and so the average P/BV is going to creep up as more money is made with less physical investment. So if you keep the P/E criteria as a reasonable price for growth, it does still look very similar. Of course quality of earnings and qualitative factors are another thing to look at, but you can't really put a number on them. +1 Keep in mind that these formula were developed when 'big' businesses were primarily 'value chains' and everybody was using Porters 'differentiate' or be the 'lowest cost provider' strategies. Scale, brand-name, capital intensity, operating leverage, etc. mattered - & underpinned the 'moat' that every 'value' investor strived for. P&G, or Coke, were great businesses - in large part because their scale was prohibitive to replicate, & they were too big to acquire outright. All good - but pre internet. Todays model is internet enabled 'platform' business - driven by network effects. IT/Capital Intensity is cloud sourced, & value is measured entirely differently. In the 'old days' we called this 'platform' business the 'brokerage' business, as it does the same thing; for a small fee, bring buyers & sellers together to purchase a good or service. The management of the hotel, mutual fund, and head hunting industries have long been brokerage businesses - it is not restricted to just the tech sector. However, one of THE biggest enablers in this brokerage industry - is the new 'blockchain' technology; & its ability to dramatically improve the standard operational metrics of efficiency, effectiveness, speed, flexibility, data quality, and transparency. We just don't want to hear it, because its new - & disturbing. Nobody likes being reminded of their obsolescence. Hence you are valuing 'potential' - where most of the metrics are actually non financial, & the smaller P/E multiple has to be compensated for by large volume. Seeing where 'XYZ coy' could be in 2-3 years, handicapping the various possibilities for likelihood & ability, how (& if) it monetizes, & whether 'XYZ coy' is the right kind of firm for that future space (buy-out, die-out, etc.). It is really a form of venture capital investing, but we think of tech - primarily because it has been the poster child for this kind of approach. Very different from Graham, but very much in the same grain as well. Grandpa used formula & pen & paper, we just use different techniques, & we can expect our successor generations will do much the same. All good - but it highlights that all techniques have a natural lifespan to them. SD

Value investing is not hard science my friend. Its subjective and hence most people are not going to "get it". I love picasso more than warhol. Does it mean " i dont get art". Repeat value investing is not hard science. +1 That's why we don't use either the 1 year, or compound return; Its also why we buy cyclicals - at their lows, & sell near their highs. We let the commodity price do the 're-rating' for us; And, why we hold both long & short term views on any given cyclical. Gains on the way down, AND on the way up. If we tried to use 'hard science' most of this wouldn't work. But it means that we periodically consult the academic literature, & apply whatever is new. No 'one' formula, or 'technique'. SD

Most folks just don't 'get' value investing .... You are not doing 1-year, or a 'forever' investments; you are also looking at 'lumpy' returns, & extended holding periods - assessing return based on monthly/annual/compound return is just BS measurement. If your intent is fashionable 'talking points' to use on the cocktail circuit, there are many cheaper ways of doing it. You are also not applying 'magic' formula. An established firm that is growing rapidly - is just as much a 'value' investment, as buying cheap & hoping for mean reversion to produce a price increase. Just because 'growth' doesn't have a 'magic' formula, does not make it a 'not value investment'. If you just want to be fashionable ... you really shouldn't be value investing. SD

There is no disagreement this a legal case. There will be an outcome - the speculation is a recompense. It may/may not happen. We just point out that even if there is recompense - it doesn't mean that you will actually get paid. Many a parent successfully suing for child support has found out that ultimately they couldn't collect, despite having a legal judgement in their favor. Hence its not the legal judgement itself, its the collectability on it. Related. Not too sure what the legal authority was for rescuing banks, forcing bank mergers, and re-writing MTM/regulatory requirements during the 'crisis' - but it occurred, & continues to this day. We put it to you that this type of 'arrangement' would follow similar lines. Of course, it may never happen. Our point is that predicting outcome isn't enough. SD

What does this have to do with any ruling by any court? Even if you win, you just get paper - not cash. And if you can actually sell it - its at cents on the $ SD If I expect the UST defease my 6.4% coupon to perpetuity, I won't let it go for cents on the dollar. Neither will anyone else, because it will be worth 160% of par at a 4% government rate. A UST defeasance payment is not a 'guarantee' that the UST will defease all future payments - there will not be a 160% of PAR value, & you will not be able to borrow against an 'implied' versus 'explicit' guarantee. There is also nothing to prevent a UST intervention from simply calling/buying in everything > the 4% government rate, issuing new UST debt at a fixed 4% to pay for it, & then having FNMA/FMCC defease that newly issued UST debt. Defeasance works both ways, at most you might get 105-110% of PAR on a forced redemption. But if at any point in the extended life of this new UST (50-100 year) debt, the market rate significantly rises > coupon rate - these things will trade at a steep discount. A simple swap of new FNMA/FMCC debt for old UST debt; will produce a healthy gain on the FNMA/FMCC books. It's just a different POV. SD Relevance to legal. Agreed, the best legal result is a 'win' and a recompense of some kind. But that recompense could be in the form of an immediate cash payment, or in the form of an annual interest payment at the prevailing rate on the value due, or even in the form of a series of zero coupon instruments redeemable many years from now - AND THE PAYER MAKES THE CHOICE. Sure, the receiver is better off in 'value' than they were - but that 'value' is not necessarily cash. SD

What does this have to do with any ruling by any court? Even if you win, you just get paper - not cash. And if you can actually sell it - its at cents on the $ SD

You may want to rethink this entirely ... It is far cheaper for the fed to simply defease the dividend payments & issue new paper; shareholders are never going to get their money back. All the fed need do is take out the old prefs out at a premium to market, pay for it with new long-term (50-100yr) prefs at a modest premium to todays rates, & pay the dividend out of general funds (defeasance). Even if it were 7% on 140B of new prefs, it is only a cash cost of slightly less than 10B/yr. Furthermore, it is highly likely that over a long enough time horizon - the entire problem will eventually self correct; if only because todays asset values appreciate under 50-100yrs of continuous inflation. So ... we are ultimately really looking at an eventual federally guaranteed perpetual. Lot of opportunities here, but its not much different to holding a Greek (or Italian) sovereign bond. The big difference is just a dividend guaranteed by a much better creditor. SD

You could also stop the piddling around & just go straight to the Statement of Cash Flow 'cashflow from operations' - where the reconciliation has already been done for you. To project the operating cash flow forward - either model each line item on its own, or use some kind of adjustment factor. ie: If you expect year-on-year cash flow growth of around 33.33% (oil/gas) and the last 4 quarters of operating CF were 200M, you might apply a 20x multiple to the historic 200M to get 4B. Alternatively you could project a forward CF of around 266 (33.33%) and apply a 15x multiple (because you could be wrong) to also get 4B. Many would simply look to managements most recent guidance & apply a 'quick & dirty' multiple of 15-20x depending on the degree of confidence in managements numbers. If there's a sizeable hedge book removing most of the price risk, lots of drilling activity adding new barrels, & a rising commodity market - most would tend to the higher multiples. SD

Great quote. Agreed Bitcoin is much closer to the original concept, but I also live in the real world - & the real world is full of competing product. Sure a central bank crypto/digital currency forces everyone to rely more on the central bank & less on distributed security, but its no different to what we already do every day. Every time we buy a US Treasury, UK Gilt, German Bundt, or a Canada - we are relying on the central bank to make good on the bond at maturity. Most of the central bank interest is also in the block chain, & not purist cryptocurrency. The central bank crypto/digital currencies are basically 'tokens' guaranteed by the central bank, & every hash validation is essentially a central bank confirmation that the payer has the tokens claimed. In this system the distributed ledger is a centralized ledger held & updated by the central bank guaranteeing the token; much faster, & way more transparent. There is an domestic token-cash FX rate, & multiple domestic-foreign central bank token FX rates. It is essentially Bitcoin 'light'. The first mass produced car (in the US) was one colour & one model - & it changed the world; today we can have whatever we want. Current central bank crypto/digital currencies are at pretty much the same stage as that first Model T. SD

Bitcoin is literally just one of thousands of virtual currencies; we know it - because it was one of the first to be popularized. The same way we generally recognize the Motorola 'brick' as being the first 'cell' 'phone. Central banks already have their own digital currencies, & most are far along their development cycles. For many there is a strong argument to using the digital currency to settle all electronic transactions, & using coinage/cash 'bills' only for everyday purchases. We aren't going to be settling in Bitcoin. Its more reasonable to think of Bitcoin as collector pieces (not much different to the value of a historic sports car), particularly as there is a finite number of them. However unlike most collector pieces (cars, art, jewels, etc.) you don't have to pay to maintain them, & there is minimal frictional cost to purchase/sale. If you like the idea, but not the concept of 'Bitcoin as the actual store of value' - there are many alternatives. BitGold is one choice ... but it could just as easily be BitPlatininum, BitSilver, BitIridium, etc... SD

The bulk of the BRK ‘value’ is off-book & not represented anywhere on their financials. It is their reputation, long term approach, ability to do big transactions, the fact that everybody is getting old - & the likelihood that BRK may well be broken up into smaller more manageable units, once the masters are gone. That’s not a bad thing, & many would argue – long overdue. More than a few have suggested, at various times, that the world is currently going through the greatest depression in history; that big cash balance is a very nice thing to have, & the ability of the subs to borrow in a big way – is simply icing on the cake. The strategic value is enormous. You could park your $ in a US treasury, or BRK; for many the risks are about the same. If you think the masters are wheezing a bit more than they used to –adjust your weighting accordingly. SD

+ 1 .... & a few things to add to this. The BoE, the BoC, the US & China all have the equivalent blockchain Shekel; what isn't being talked about is their FX conversion rate between other blockchain &/or paper currencies. We assume that the FX conversion rates for both the blockchain & paper versions of a currency will be the same; when in fact - it is highly unlikely. Material & significant disruption. Replacement of credit score with a 'reputation score' as the loan granting criteria. It's brings 2B+ more people (& billons of other micro applications) into the banking system, - opening the door into micro-banking. This isn't possible under todays cost structure. JIT & systematic removal of 'float', drastically reducing profitability. NA equity 'trade through to settlement' can now be done in 10 minutes (& less), versus 3 days; bond settlements are going the same way. Trillons of $/day that don't have to be financed - is a lot of saved interest. Global versus bank network. The entire global network of a 'Google Pay' versus the more limited network of even a major global bank. Hawala systems, & remittance payments - moving onto the global network for the cost & transparency benefits. Expansion feeding expansion. No people, significant job loss, & lower wages for the young. There are few youngsters in the developed world, lots of competition for their labour, & therefore push towards higher & rising wages. With blockchain the automation does the work, there is no demand for labour, & wages decline - & fall. Scaling up doesn't increase the labour requirement either - just add another server. Higher speed, reliability, flexibility, & transparency. Terrifying to many bankers, & the opposite of what their banks are about. It's already here; just in the early stages of being rolled out. SD

All contributions/withdrawals to/from the TFSA are recorded, & the individual reports it in their annual tax return. As a withdrawal this year does not increase your contribution room until next year; both the taxman, & your FI, will discourage you from using the TFSA as a tax free chequing account. Withdraw 50K when the life-time limit to date is 46.5K, & you will meet resistance. The FI would rather not have the exposure of a potential rule violation - & recommend delaying until Jan-01 (when the limit will be 51.5K). The taxman will also not give you extra lifetime credit for the extra 3.5K (46.5-50) withdrawn. SD

Just so that you know ...... TFSA's were not designed for withdrawals greater than the lifetime contribution limit. Most everyone will not allow a withdrawal > the lifetime contribution limit (unless you're dead); even if you have well over that amount in the TFSA. (because you invested wisely). SD

CPI is pretty meaningless as a personal cost comparative - if only because if your basket of goods is significantly different from the CPI basket, you are comparing apples to oranges. You may have different weightings, &/or entirely different purchases altogether. The reality is that both your costs (in fiat $), & the benchmark (gold) are moving - so you are measuring 'relative' change. Both periodic debasement of the fiat $, &/or panic buying/selling of the benchmark - screw up the comparison. The whole 'basket of goods' concept is a diversification measure aimed at reducing this problem. For most of us - the working measure is monetary growth (central bank target) + GDP growth (export/import) + local area growth (where we live). In simple terms; at 1% monetary (inflation), .5% GDP, & 1.0% local - you would have 2.5% cost growth/yr. The technical measure is ((1+monetary)*(1+GDP)*(1+local) - 1) x 100. If you consume a lot of imported product (foods) & your local currency has devalued - your local growth could be a lot higher (5-10%+) As most of us are primarily concerned with daily cost of living increases - local growth affects us most. Hence the focus on 'cheapness', clipping cents of the cost of gas, coupon clipping, etc. SD

Apologies for this. We had a bad data feed. SD

You might want to keep in mind who voted for what. It was primarily London, 40% of the population & home of the rich, that voted to stay. Outside of London, an average 7 of every 8 people voted to leave. Adjust for Scotland which also voted strongly to stay - and ALMOST EVERY PERSON outside of London & Scotland voted to leave. Sample the press in these areas & you quickly conclude that EU membership isn't benefiting them - & in many cases; is actually making them a lot worse off. They had nothing to lose. Trickle down economics isn't working for the vast majority of the global population. Toronto had 'Rob Ford', the US has Trump & Sanders, the UK has voted to exit the EU. Europe is experiencing the largest migration of people since WWII, & there just isn't the work to go around. The 'city' of London is in denial, & starting to panic as the big players begin on execution of Plan B. The 'establishment' lost here - not the 'people'. The current way of doing things is going to be changed, & you either get on board - or go the way of the French Revolution. The problem with Europe is that this type of thing tends to drag the whole world into it - & the usual solution has been armed conflicts. SD

Give it a week or so. Too much emergency liquidity holding the balloon together right now. One has to think that anything trading in London without either a British, or European headquarter - is in trouble. Commodity miners in particular. SD

We like to buy the 'widow & orphan' dividend payers - just after the dividend has been slashed 65-100%. Eventually the dividend gets restored, continues to grow, & the market price rises back to where it used to be. As we typically buy at 60% off, & are patient; we routinely end up with a rising annual 15-25% cash yield on our investment every year. The overvalued (cash yield) stock problem. We just hedge the material risk events via a sell & repurchase of 50% of the stock. As every repurchase raises the average cost base & reduces the cash yield, our cash yield will eventually approximate the dividend yield - when we permanently exit. If you can repurchase at a lower price, & keep the size of the position constant - every roundtrip will also be returning cash. After 2-4 round trips you've recovered the original outlay. SD

Thanks for the response. I know "efficiency" is dependent on the price of oil, but I was hoping to find something that would ignore the price of oil (there's probably an industry-specific term for what I mean but I don't know it). I'm trying to find out whether the cost per barrel is stable year-to-year. It would be great to find a table or something that shows cost per barrel ("C") at year 0 [so C(0)] and the various probabilities and values of C(1) [the distribution function of the cost of oil extraction?]. Does anyone know this information informally, just to get an idea? How variable would this distribution be by location? Look for companies with the bulk of their production in ONE field; look up their annual reserve study on either SEDAR or EDGAR. It will be very technical, but will lay out the various cost and probabilities at different production rates. Compare the same field over 2-3 companies to get a rough idea of what variables, how to use them, & their magnitude. Cost can vary quite a bit between fields, & when the well was drilled. Harder formations take more hours to drill the same length. Drill in a boom and the cost per hour can easily be 50-70% higher than 'normal'. Broad strokes; Variable lifting cost/bbl rises as the field depletes. Occurs in production steps Fixed cost/bbl drops as price rises. More oil becomes extractable, creating a larger denominator. SD

To most folks ‘efficiency’ = outputs/inputs = value of whatever is extracted/(variable cost to extract + the fixed cost (equip amort etc.) of the well). If the rise in the YOY average commodity price is higher than the depletion rate – the well is getting more efficient (top line of the equation). The same thing will happen if you can buy it cheaply, cut variable costs, or drill more from the same platform – to lower the fixed costs (bottom line of the equation). Perspective matters. If you think WTI has moderately further to go – you want to be in names that have been cost cutting aggressively, AND that have lower depletion rates; to benefit from BOTH an improving top AND bottom line. The ‘hidden’ value in many of the PWE producing & shut-in assets. Geology matters. As the well depletes, there is less output - & more of that reduced output is water, & other liquids. A shale oil depletion rate of 25% is often because of primarily water; especially in areas where water flood is the major extraction technique. Exploration is relative. Wild cat through to deep sea drilling (fishing pool), technology A versus B (shale boom), politically stable versus chaotic (Brazil, Nigeria, etc.). Arguably an investment in Petrobras – post scandal; is a more reliable & less risky exploration play - than an investment in a wildcat play. Different risks. SD

Backwardation/Contango began oscillating about 6 weeks ago - indicating that the current cycle was bottoming; since then the front months have progressively gone into backwardation. Assuming a Doha decision to freeze, most would expect the spot to rise & backwardation to extend out into the middle months as well. As most oil is 'paper' oil, a position is very easy to reverse - but execution is volatile; in every month of a 100 bbl/day short, one has to buy in 200 bbl/day - pressuring the entire forward curve. The more that collectively rush to unwind at the same time, the more the forward curve moves up - & the greater the magnitude of the potential price spike. This is essentially the rationale behind the forecasts for higher prices over 2016-2H. Inclined to agree that $40 ish is likely the new bottom - but we see it primarily as a spike to something higher, & a fade down to $40. At current workforce levels it will take a little time to get additional physical into the pipeline. SD

When you leverage you simply increase risk - the higher highs, lower lows, more volatility, etc. ... but almost nobody want to recognize that risk is simply just a part of life. Your choice of spouse was a leveraged bet on long-term happiness. The decision to have kids, buy a house, type of car, choice of degree, etc., etc., etc. ...were additional leveraged bets You knew going in that sometimes it works, & sometimes it doesn't; and that the greater loss was in 'not stepping up to the plate'. You benefited - because you recognized that risk is part of life. Investment is no different. SD

Drill a US shale well (at todays low cost); & it will be profitable at USD 40. US shale isn't going away. But for the reasonably foreseeable future; it will cost way less to just buy a US shale well in a BK purchase - than drill for it. Most pundits see the waiting 'wall of money' as being primarily hedge funds; it is far more likely to be Indian or Chinese. India has very little of it. China is the 4th largest producer in the world; and mostly using what it produces. Consumers buying options (BK purchases) on future supply. All told its quite bullish. SD

Mathematics. The reality in all global cities is that the ‘average’ growth rate on the price of land within the down town of the city, greatly exceeds the ‘average’ wage increase of the local citizen. Compound the difference over an extended time frame, & down town land ownership becomes more and more out of reach of the local citizen. Local citizens live further out (where it is more affordable); & only tourists & the very rich live in the down town. Time & popularity determines affordability. London, Paris, Rome, etc. have been around for hundreds of years; simple compounding has made their down town living unaffordable. The solution has been separation of land from dwelling, via a lease (UK); to live down town does not mean that you have to own the land – the norm is to rent. If you want to live in a very desirable place, rents are of course - high; no different to any other rental market in the world. We just don’t want to hear it. SD