SharperDingaan

As soon as you compared your house to an alternative investment, you made it an investment; your direct comparison is the Palm Springs real estate broker, you are doing it because your business is buying/selling listings, & if you aren't doing similar things to that real estate broker you aren't very good at it. Nothing wrong in that, but houses just happen to be the investment vehicle. As soon as you see your house as a place to live, it is no longer an investment. You simply shrank your BS to permanently remove risk, you are not trying to buy/sell/rent, you enjoy the property for what it is (not as a bank account balance), & you earn your return in piece of mind. You could also buy a new Porsche for piece of mind, but you probably paid more for it than you did for the house. And ... the guy who owns the house may well also get your Porsche as well - in a yard sale, after you blow up :D. Compare apples to apples, & if the comparison is not flattering - fix it. SD

But what if the house is also an investment …. that $5M mansion in Palm Springs with 10% down. Then treat it as an investment … - Maximum optionality … non-recourse, minimum DP, revolving heloc loans. - Cost minimization … real estate licence, move between houses; live in whatever you cannot rent. - Revenue maximization … short term rentals, & many of them. - Sell & move to equities when the sector over-values …. reverse, rinse & repeat. - Multiple geographies …. domestic & global Or use a proxy …. - Fully paid of mansion in Palm Springs …. - And margined investment in global developers/house builders or mortgage insurers. Unless you are a real-estate agent, & your business is buying/selling listings … there is little reason to NOT have your mortgage paid off. And if you need proof … look at the millions around you (or your parents) who lost their houses because they speculated poorly. Nothing wrong with greed; just make sure you use it intelligently. SD

A few things being missed …. You may be the greatest, & luckiest, stock picker in the world – but if you are not periodically taking cash off the table, you are just upping your ante; & eventually you will be wrong. Removing cash & putting it into a bond or blue-chip is also not really removing it; you simply moved to another table in the house with lower stakes. For normal people; if that cash just pays off the mortgage &/or student loans – whatever happens, you cannot lose the roof over your head. Net worth did not change (portfolio + house + mortgage + student loans), you have truly removed risk, & you get a significant non-taxable benefit to boot. SD

We all have experience with rapidly expanding companies; seeking funds to push their first mover advantage. All very sexy .... but apparently nobody has ever actually understood what a cost accounting text - is actually telling you. If you use absorption costing (IFRS methodology), an inventory increase will reduce operating expenses by capitalizing some of it as inventory cost. The result is artificial higher earnings per share, discounted at a rate that includes future growth; & the faster the rollout - the more the benefit ;) All perfectly legal. So next time you get the fast mover doing a stripper dance, & everyone is hot & bothered; you should be too - selling the hell out of it! Something your broker is definitely not going to tell you. SD

Auditors do not give absolute assurance, & are not there to catch fraud. And they are not saying there are no miss-statements ... only that the net miss-statement is within a defined acceptable limit. SD

Talk to your friends in low places.... for a modest order specification fee, & new paint job, & a 5th person pick-up at some industrial site ;) SD

Stab the tires of all my competitors, & add $2 onto my delivery charge! ...... now do I have the job, & where do I need to send my people. SD

You might what to take a powder. You were told "we don't want you". Maybe because we want another guy, & need you gone to free up head-count. You were told "you are our insurance policy". The biz is underperforming, there will be cuts, & they will go by bonus level. You are being driven to walk, & so far - are performing right on plan ... So ... Obviously you hedge your bets - & discreetly look elsewhere; your employer will know, but will not act against you. Stay & network the other desks. It costs to exit a bad trade, & your desk is either going to pay it to your new desk, or you directly; via a payout. To your new desk you're just a trade, they get maximum gain if you have just turned down a very recent outside offer - & you have demonstrated that you know the game. Then accept the next offer, remove the liability, & take your new rabbi for a beer. The rabbi will not hold it against you - & will probably thank you for the head count room; which he can now justify filling with his choice, at your new salary & bonus level! Don't take it personal, it's just business. SD

Not popular but we prefer the use of margin for exactly this reason; when proceeds pay down margin, it really puts a brake on activity ;) SD

Sad to say, but it is usually best to pass, say nothing .... or point to a name brand financial planner. Yes they will be pissed because you didn't help them, but if it blows up you will keep a friend. One of the hardest things to do is learning to pass, & how to firmly say no. SD

The underlying assumption is that you are going to grow the coy at something above its organic growth rate; that's why you need the access to public markets. Your competitors also have to not react to the threat your growing size poses to them. If you want the empire, you really need to be the CFO of someone else; & with most of your stake in vesting options. If it fails to perform during your term (average 2-3 years) you walk away rich from the parachute, & with your wealth intact; if it works, great for you. As you have independent wealth you would also hedge your position, so no matter what - you are going to come out ahead. Question is: do you really need the stress that goes with it, & is this not really an ego thing. Small is not just beautiful (no reg filings or external audits required), it is also a lot easier (& more fun) to actually run; & if its any good - it is not hard to find a larger entity willing to buy out all the owners simultaneously. Financing reflects the quality of the proposal, & as CFO you control it. Equity raises also do not have to be via market issue - pre-selling goods, crowd funding, or private placement are all common practice. In the brewing business; most kraft breweries, & good distribution outlets (1,000,000 beers/yr), are private. That should tell you something. Good luck. SD

O/G Engineering, Manufacturing, Fin Services, Government (MOF), Academia, & Brewing ;) Always close to the money, operational, & governance focused. SD

To do this well you have to think for yourself - & not blindly follow: A BS is just as at a point in time & essentially useless for analytical purposes; it becomes valuable when you compare over time. Doing a 5 or 7 factor Dupont analysis as at the same date, over a 10 year period - gets rid of a lot of the noise. There will have been 2-3 CEOs over the period, multiple product line changes, 1-2 full commodity cycles, & you will know exactly how & why the firm is generating its current earnings. Baseline trends. Most firms do not have everything on their BS, & do not have to MTM. The unamortized cost of that $5B oil sands plant built 5 years ago is totally useless when there is either significant inflation, or a hot market; replacement &/or acquisition (company or plant) cost is much higher. Market reputation (ie: value of a big 4 US money-bank), off BS derivatives, & legal liabilities are routinely unrecorded because they either cannot be quantified or are too uncertain. Skeletons in the closet. BS ratios themselves are backward looking & not particularly useful for forecast purposes; their usefulness is because debt covenants drive off them. Focus on the knowing how the firm is making its earnings, your best assessment as to what is not on the BS - & whether they are likely getting bigger or smaller ;) SD

We are implying that MTG has an off BS call on the underlying bonds that caused the write-downs, and that they are really being held to maturity; but indirectly. Essentially a sale at MV (to the Fed) and a conditional later repurchase; but as repurchase is not certain they are required to take a MTM write-down. The derivative arises as the payouts were under insurance claims, & as a result - MTG will have subrogation rights on any/all future recovery on the underlying assets. Total 2012 loss was 532M; if they break-even in 2013 they must have earned this. Share count of 338M. $1.57 is 532/338; assume 10% estimation error & you get $1.41. SD

Re MTG upside; we are looking at the business case, not the BV metric .. They broke even during Q3 2013, & reduced 9M YOY losses by 372,591 to (159,548); a little over $1.00/share, & during a period when green shoots were not as evident as they are today. With loss reduction of around 124,197/quarter (372,591/3) they should come out at essentially break-even for the year. Sentiment changer. Most would expect some quid-pro-quo over the Dodd-Frank negotiation; an additional equity injection to below 20:1, & a firm trend-line; for a limited hands off period. To inject equity under these conditions is a very strong insider buying signal, then add in cheap refinancing of the expensive debt coming due over the next 1-2 years; fuel for the fire. Recovery related improvements in asset quality & valuation are additional. At $8.40 a $2.10 increase is a 25% gain. Simply break even & they will demonstrate around $1.40 of earnings in sh1te economic conditions. Improve those conditions, change sentiment, & start putting out strong buy signals - & it may well be that a $2.10 change is on the light end. It does not mean that it will actually happen, or within the anticipated timeframe, but it does at least seem a reasonable proposition. Of course if you think the US/global recovery is just illusion, you will have a different view. Probably not in the circle of most folks .... SD

MTG (MGIC Investment Corp) Resources are commodities, & they rise/fall with economic demand. So does mortgage insurance ...... Tapering is occurring because the main street US economy is improving ... & hence the risk attached to a mortgage defaulting must be getting smaller - reducing both the size & probability of write-offs, & raising the odds on seeing positive net income. And if you have a big market share of all insured mortgages in the US .... At todays prices .... It will not take much to move the dial ;) SD

Perhaps the best lesson for us all .... is everyday recognition that money is the servant, not the master. Last year we won, but did you take some of that win off the table to make your life going forward better (ie: extra mortgage/student loan payments, crossed off a bucket list item, etc.). And if you did not take money off .... then just what, exactly, did this servant actually do for you. We are in a casino; & we all could lose at any time. SD

Re the outsized returns: It is highly likely that most of these portfolios are very small; it doesn't take much to move the dial. There is material survivor bias; it is highly likely that without the boards feedback most would have had far worse reversals - & some of them fatal. The portfolios are usually all equity, & not blue chip; betas > 1.0 are exagerating market gains. Risk/return is not really a consideration, & nor is compound YOY return. Most folks on this board would probably average around a 9-18% compound annual return over the next 10-15 years - by simply developing thier own approach & sticking with it. For many, that is essentially a fully paid off house by around age 50, inclusive of the expense of spouse & kids. Hard to knock. SD

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