SharperDingaan

Sloth just sucks. Get involved in a production start-up - & it'll quickly take care of the problem ;) SD

+1 SD

We got into distressed investment because investments failed, & we hadn't the brains yet to sell early or recover our cash before entering the swamp; we also blew up a few times before we learnt. We hold a CFA designation, were trained in credit by the US Fed, & have spent some time as a corporate treasurer; assume that you are playing against a GS in this space. If you don't intimately know IPS risk limits, the exit procedures, duration, convexity, etc. - you're the one wearing milk-bone undies in the pack of wolves. Long time ago Canada hit the debt wall, & medium term coupon rates were routinely 14%+. Canada's were routinely stripped into IO & PO tranches in the secondary market, & longer dated zero-coupon PO's routinely sold at compound yields of 25-30%. We loaded up & simply let everything mature. We had realized that while sovereigns cannot go bankrupt (they just print more money), it is not a problem if you live in the sovereign - & are not buying anything from abroad (FX devaluation). We also hold a degree in Economics, amongst others. Paul Martin & Jean Cretien arrived, the economy was grown, budget deficits turned into surpluses, & surpluses were used to pay down debt. Debt was refinanced at lower coupons, & debt paid down extremely rapidly. Mid-term yields fell dramatically & all our Canada's went to massive premiums. Because we had the sense to ride the yield curve & go with long dated zeros on very high coupon bonds, these were the first bonds repurchased - & our 20-25yr terms shrank to 5 years or less. Punch card stuff. At the time the $C was ridiculed as the Canadian Peso, & frankly was worth about as much. There was no cash in the economy, mortgages routinely were at 17-20% - if you could get one, & anyone doing this strategy was considered 90% in a mental institution. Very similar to many parts of Europe, in the last 5 years or so. Not all distressed bonds are the same. SD

Where to begin .... ! A priori. No idea what our, or others, results will be 1 yr out. Yesterdays great result also doesn't mean that todays result will be great (I could just have been lucky). But I can say that the successful guy with 40 yrs+ of results (40 yr compound return > market rate) very likely knows his business very well. All athletes believe they are better than every other athlete at the start of the race, but every race has only one winner (assume no draws). Which race. Every sprinter is faster than a marathoner over a short distance, but most can't run even a quarter marathon before collapsing exhausted. Yes, I may know this market very well & have been through a few cycles - but the marathoner has been through many more, dealt with repeated secular change, & come out successfully. Either there were billions of monkeys clattering on typewriters when this marathoner started (Taleb), or this marathoner is a pretty special monkey! Baggage. Small & private doesn't have the burden of fiduciary restriction (investment policy), size, marketing, & regulatory burden; its easy to get in/out, no explaining yourself to shareholders, & no need for a 2.5B+ profit, per quarter, to demonstrate to the world that you still have it. Many folks on this board routinely outperform WEB (.. ericopoly!), but were we WEB's size ? - probably not. Compare sprinters to sprinters, not marathoners. Rubber measurement. Take 50% of your capital off the table today, & double your remaining investment in 1 year; your opportunity cost is 50%. Do it again the following year, & the opportunity cost is now 75% - you're a terrible investor! Apparently, consecutive returns of 100%/yr is terrible performance? SD

OK. Just for the hell of it ... Pretty sure that a priori, WEB, Munger, etc. are better than we are - even after fees. Theoretically we should just give them our money, & they should accept it, making us both wealthier. Pretty much everyone on this board should all be holding Berkshire Hathaway - but we don't because we're never going to get to be that good unless we practice, & the opportunity cost is our annual tuition fee. But we're greedy - & hold a hedge fund with a 3 & 50 fee structure ;D No way this fund can get away with the 50% fee unless they are taking far more risk than their 2% & 30% fee counterpart - & either winning by luck or manipulation. The SML tells us that for more risk, we need a higher return - excluding the jail possibility. So ... after a great year, our fund charged us 3% + 30%, leaving us with a 27% return. In the same year, our alternate (WEB) made 22% & the market was up 15%. If I want an additional 10% for the additional risk our fund is taking, the fund had to return 32% (WEBs 22% + the 10% risk premium) to us. The bums only made us 27% - so we fire them. .. we also say a very big thank you that they didn't blow up while we foolishly held them! SD

Keep in mind that with most value investments, it is very obvious that a small improvement in business outcome will improve price dramatically. It is the 'when' that something may happen, that we have to cover. So ... a 2-5yr holding period - for the best possibility of capturing that business improvement. Consider all the buys/sells you made over the last 3 years. We put it to you that in the vast majority of cases, the thesis was basically correct; but the timing was off - by years. So ... you need a process to cut losses, let winners run, and remove the timing issue from yourself (as you're so bad at it). One alternative is to give your $ to somebody better than you. Most of us realize that yes they will make more than you, but after fees & risk adjustment - you usually end up making less. Another alternative is the much maligned cyclicals, where it is far easier to identify where you are in the cycle. Simply buy & sell the cycle, invest in just the top 5 players, rinse & repeat. No cigar butts, minimal research requirements, simple, simple, simple. SD

The reality is that you are not going to buy XYZ today, & do absolutely nothing with it for X years. You want your cash back asap. Therefore you either bought something paying a dividend (cash every quarter), you are repeatedly writing out of money calls for premium (every quarter), margining to buy something else (profits recovering outlay), are hedging by periodic sale & repurchase (hedge gain as cash), or are taking directional trades. And you are using your liquidity & long horizon to mitigate your risk. SD

A few added things to bear in mind. The bond is distressed. (1) You need to be sure in your credit analysis; if XYZ bankrupts there isn't going to be a payout on maturity. (2) Buy at 40-50 & you have the aces; at 55-80 institutions hold the aces. Know the limits on the typical institutional FI Investment Policy Statement. Know what game you're playing. Buy a 5yr, 6% coupon at 50; & your cash yield is 12% - if it actually gets paid. If you are not intending to put the bond up as collateral to buy something else & earn a positive carry; why are you doing it? We've been in distressed bonds & prefs on 5 separate occasions & done very well by them, but it was because we also bring a CFA skill-set to the table. Level the playing field. SD

Just keep in mind that you are a very minority partner, hoping that majority partners will transact fairly at IV less an appropriate liquidity discount. Majority partner abuse is quite common (take-under), & forced minority sales (majority partner > 90%) at manipulated prices is not unheard of. Also keep in mind that liquidity & time horizon are assets, they have value, & they were sold when the illiquid stock was purchased. You should be paid for it with either a deep discount up front, inflated cash yield, or both. How much, depends on the pessimistic probability weighted prospective risk of XYZ. SD

Most of the $ will be made by trading against order flow, as a 2nd market marker. To do any volume you have to buy in disruption & sell into a maturity/takeout. You will seldom get full price, & unless its a bond/deb the holding period could be almost forever. Take the same approach on a brand-name, & marginable, cyclical stock - & there is some merit. Rinse & repeat on the same cyclical & you will be one of the few who actually knows something about the stock & its business prospects. Do it on a junior, & you deserve everything coming to you. Where liquidity is an issue, expect to pay a discount on both entry (30-40%) & exit (10-20%), & make your $ from dividends - not trading. Usually not the game most people thought they were getting into. SD

As soon as velocity increases the central bank would stop printing, to stop inflation. Scale lowers the price you pay for a good, but debt remains the same if the result is just more purchases. It also breaks down when goods are imported (from an Asia) into a largely service economy (a US, Europe). If you cannot leverage your service people, the exporter gets most of the benefit. Lot of command economies in the world. Nobody wants technology permanently displacing large numbers of unskilled labour, causing unrest, & toppling the regime. Starve enough people of food & opportunity, & they will rise up. Egypt, Ukraine, Germany, etc. SD

Velocity of money (Total supply = Quantity of Money x Spend Velocity). Increase the quantity (by lending) but spend it slower (too many old or unemployed folks) & total supply falls. Increase quantity (QE) to offset velocity reduction, & keep interest rates low. Taper, & total supply falls, raising the cost (interest rate) of money. Inflation only increases if the additional quantity from additional spend - cannot be met from incremental production or imports. Debt increases efficiency by bankrupting poor producers & suppliers quickly. Scale advantage just increases the average size of the collapse when it happens. SD

Most cultures segregate schooling by gender, stratify by some kind of test, & include some kind of boarding school. Education to some minimum age is usually mandatory, if you don't agree; either don't have kids - or live someplace else without these terrible restrictions. Boarding schools are great levelers, they set-up routine, instil responsibility & create stability. State-run boarding schools for under-privileged kids attending school probably ranks right up there as one of the best things you could do for them. Give tough kids extended respites, allow them to learn, & let the magic happen. Play yard hazing usually wilts under the fists of my army & I, & we know that snide comments produce the Al Capones of the world. Everybody gets to be very good, very quickly ... & knows who their friends are in high & low places - for later. Hard to think you're smart when everyone around you is also smart. But what you will learn, & very quickly, is that there are many kinds of smart - & that you need to be better than your peers (ie: master) in at least one or two of them. Put 1000 senior school boys or girls in a same gender school, & there will be fights. Pecking order is being established, & everybody learns how to deal with the bullying, drinks/smokes/money lending/drug dealing businesses, theft, & gay bashing that is everyday occurrence. Crème rises very quickly, & matrons are there to clean up the blood & broken bones along the way. Boys & girls learn differently, get over it. Focus on the physical, application, applied projects, let them fail, & make them compete against each other in supervised competition. There would be a lot more lady engineers if girls were allowed to build cars, robots, or machinery with female classmates; & put their brainchild up against their male counterparts - with full intent to win. Hormones, & brotherly/sisterly pride working for you, not against you. Kids aren't pets, don't smother them to death. SD

It has long been understood, in virtually all cultures, that when you are poor - swell the numbers in your group as much as possible. Birth, migration, aging, etc. - any way possible. 5 poor people in a suburb means you get hurt; 500,000 in that same suburb makes it a ghetto - & you the king of that ghetto (mafias, hongs, etc); 50,000,000 makes it a political force strong enough to feed at the trough - & you a playa in deciding who the next prez will be. Lose the numbers, & you lose power & privilege. Privilege corrupts across generations, & in-breeding accelerates it. But it is the same as the thieves problem - steal from the bank & the full force of law will hunt you down; steal from the thief & what can he really do. The good thief puts up gates & uses the state to keep the rabble out. The really good, use the FSB & divide the pie into oligarchs. But .. your population has to play the game. Keep people content, do it over a long time, & folks don't notice how hot the water has become - because they adapt. But take away/reduce the subsidy, or change social structure rapidly, & you get almost instant rioting & revolution. In the old world one simply disappeared the reporters, removed the cameras, & none were the wiser - in the new world you cant remove the cameras fast enough, or reliably enough. So .... you get to see the bullets & bombings. The US & UK financial markets have long been corrupt, but it was stable, contained & controlled. White-wall firm partners usurped the Dons role, but ruled their hierarchy's along the same lines, & spawned generations of over entitled. Problem was the entitled weren't that smart (1st copy degeneration) - f'kd up badly, & couldn't contain the instability that selling the jewels (via IPO) generated. The result has been the ongoing financial crisis. There will always be unrest as those with lots to lose, bump up against those with nothing to lose. You don't have to play the same game. SD

Every university in the world has an instructor guiding/directing students in specific subjects. The process goes back at least as far back as the ancient greeks, & most would argue that it works - & works very well. However; universities do not teach application. Before the internet; you had to 'do', & ask your colleagues or circle of acquaintances as to the how/what/where/why/when. If you had access to investment folk it was pretty hard to screw up - as godfathers usually kept a close eye. The system worked very well, & continues in virtually every A list I-Bank today. You still have to 'do', but now your circle is wider - & works differently. If you cannot handle the emotions, don't have the discipline, or cannot keep your head - you aren't going to be investing very long. But do it well ... & your spurs will take you anywhere. Just keep in mind that godmothers also exist, they are usually just as ruthless, & they live longer. Who do you think the other 50% of the population learns their craft from .... SD

If you have to read the 10-K cover-to-cover every time out, you are trying to substitute numbers for confidence/intuition. Most everyone would use the tede02 approach. A 10-K is no different to a text-book. Read/scan it once to understand & apply the content, then it is reference only. Nobody would re-read version 2, version 3, etc. of the textbook as it came out - at best they would scan for just the changes, & use an app to do it. SD

What do you mean by 1-2 full cycles? Commodity cycles. Most of the time these will be commodity businesses, where that commodity market crashed during the year. Quality is your MOS that the coy will not BK, & that ultimately it will be worth the time investment. If you bought a cigar butt, you failed. SD

We look at the index 52 week high/low to identify the depressed sectors. It should capture the cyclical & company specific crashes. Look at just the top 5 sector names. Drop if there are not marginable or there is no option market. High level research on sector events over the last 3 years. Research relevant commodity cycles. Global index scans. Drill downs. The expectation is that whoever you buy, you will be there for 1-2 full cycles, & only involved in name-brand companies. Almost always you will be buying in pessimism, using options to control risk, & margin to cover any unexpected need you may encounter. Top down approach. Commodity/industry knowledge & quality matters. SD

The reality is that good engineers only get to do engineering for a very short time. You very quickly end up managing other engineers, or managing engineering projects, for which you have zero training; hence the PEng->MBA migration. Do well, & those business skills combine to produce very strong hands-on owners, who grow their businesses from the ground up. Linear process, but investment knowledge is just a by-product picked up along the way. To know the investment side you really had to have worked in the investment industry, got your CFA along with your PEng & MBA, & then moved back to engineering. You aren't going back as a project manager, your intent is to buy out retiring partners, & your aim is to expand an allready established but limited business. Your Wall-Street/Bay Street time was purely to teach you the skills & funding techniques by which to do it. Zero interest in PM management. Very different engineering game. Most investors will never see this 2nd group of engineers as almost always they will work for private firms. They only become visible when their firm IPO's & then only untill they get bought out by somebody bigger & the interim emloyment contract runs out. Then it is rinse & repeat. SD

Started life as a petroleum engineer, opening up the arctic during the Dome Petroleum days. Then the bottom fell out of the petroleum market, & we all became masters at applying Albertas depression error laws - & using sheriff sales to flip our houses to our neighbour for $1, & screw the bank. Agreed the appeal of hard numbers & higher order math has its attractions - especially arouund derivatives, but it is the geologists & resource industry engineers handling risk every day - that have the real advantage. To us, rocks covered in dirt all look the same; but show us a seismic - & we can make it dance. Circles of competence. The downside of engineering is insistance upon elegance; every bridge has to be a masterpiece in elegance, form, & function - & testimony to future generations. Russian & Chinese bridges usually have no such pretensions, & the uglier they are - the longer they usually last. That ability to conceive, & build, over such a wide range is extremely valuable. SD

..... hence the Jockey brand !!!! SD

Entitlement only prevails because shareholders permit it, & it is cheaper than more frequent C-suite replacement. The more ruthless firms typically have their top 6 execs on staggered 18-24 month contracts with everything spelled out. Change the brass like the underwear they actually are, every 3-4 strat plan update cycles. Pay very well for the time they are there, grant no share options, & have no hesitation in cutting throats. Call all bluffs. It means the share price is more volatile, but that is why there are option markets. There will always be a mercenary & ruthless bastard at the top, & shareholders have darwinism working for them to ensure that he/she does not overstay their welcome. Get rich by delivering the promised result, & keep it by disabling your competitors from stealing it. Notable is that the approach is also a favourite of many of the worlds leading criminal organizations; where competition is often more intense, brutal, & gaming is everyday business practice. They have the same business problem. Shareholders can be bastards too ;) SD

Lot simpler than you would think ... - Prospects for significant dilution/BK 6 mo out? If not good - sell. - What is your EMV for XYZ coy 6 mo out? P(x) x Price(Optimistic) + P(y) x Price(Realistic) + P(z) x Price (Pessimistic) - Higher than price today? Dont hedge - Lower than price today? If there is a compelling reason to stay - 50% hedge; if not - sell & move on. Just keep in mind that you are taking the long view, & coining it by market making against crowd sentiment & investment horizon. As long as the underlying doesn't BK (ie: buy quality) you should essentially steam-roll to a successfull result. Not textbook, & not what your advisor wants you to practice ... SD

We see ‘value’ primarily as a function of marketability, sentiment, & liquidity; other than as a basic screen, CF generation is pretty far down the list. Very little of this, is something that XYZ coy actually controls. We see the cost as what we paid, less any capital recovery to date. MOS may also not be readily extractable. The small, private, partnership of professionals with a dominant share in a great niche business – that trades at a 40% liquidity discount; if/when a buyer can be found. Extraction is by working for the business & taking annual dividends, not trading. MOS is not static. To reduce your cost base you must replace the market maker during liquidity events. But to work for you, you also had to initiate your position at/near the bottom of the business cycle. If value & cost base are both falling simultaneously - there may be little difference. Corrosive risk measurement. Buy 10,000 XYZ for $1; sell 5,000 XYZ for $2 to recover the 10K investment, & retain 5,000 XYZ worth 10K. MOS remains 10K, but how you view it - is now radically different; ROI is no longer 100% - it is infinity. Realized MOS, is expressed as a rising fixed income position - if capital recovery is reinvested in risk free treasuries. That initial 10K in 100% XYZ risk , becomes 10K in 50% XYZ risk (10K XYZ value + 10K in treasuries) ….. or close to ZERO risk if you hold & compound over an extended period (Coca-Cola) Commit that pool of treasures to a limited liability insurance UW group - & you have a Berkshire or FFH. SD

We hedge extensively, & pretty much the same way as LC. Sale & repurchase of up to 50% of a holding has the advantage of capturing both downside, & downside estimation error (more valuable), & doesn't expose you to the risks of shorting. Reinvesting the proceeds in high quality corporate bonds also gives you liquidity, CF, & a 'flight to safety' gain on exit - to offset portfolio drag. The cost is 4 commissions + possible loss on share repurchase - interest earned/saved(debt repayment) - flight gain on bonds. The benefit is the loss avoidance + possible short gain on share repurchase. Almost always, this is higher than the premium you might have earned had you sold calls instead. The major advantages are no requirement for an option market, & commission as a % of total transaction value rapidly declining as transaction size increases. Were we institutional we would overlay a short benchmark equity index & long bond index. SD