Baoxiaodao
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Posts posted by Baoxiaodao
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I tend to favor small caps, I'll really look at anything from the Magic Formula stuff, to net-net's. I like small caps because they're often a lot simpler so it's quicker to analyze. As an example I was looking at Renault recently and to get a good grasp on their operations I'd have to dig through about 150pgs of reports and filings. I also looked at a small pink sheet company, the annual report was 15 pages long.
To me the goal is to turn over as many rocks as possible, the more rocks overturned the better the chance of finding the fat pitch. I would rather sit on cash and look than invest in marginal investments. Small caps make it easier because I can read the annual reports of 10 companies in the time it takes me to read about one mid/large cap.
I don't limit myself to any size though, I'll invest in anything. I own shares of Intel ($127b) and shares of Titon Holdings ($6m) and anything in between.
That makes sense--do you generally try to diversify on these small cap stocks (or said another way, not take large positions)? I've been keeping my portfolio at less than 10 stocks (I'm actually more like 4 at this point), but it seems like these smaller caps are much more prone to going under than the big ones and/or it would be harder to get as much details about them. I know Greenblatt talks about having 20 or so, but he doesn't bother to analyze, so that's probably not as relevant.
As a side question, does anyone know if Greenblatt's system actually works? The numbers he puts in the book are pretty high and the backtesting data from other sources I read could not reproduce them--it seemed like he cherry picked the best back test for his returns.
I know a lot of investors on this board really love concentrated investing, knowing everything about a company and then dividing investments into 10 or 20 holdings. I know Buffett and Munger have talked about this, some discussion recently about Pabari as well. The idea is that the 25th idea isn't as good as the 1st idea. This sounds good, and I'm sure there's some merit in it for the full time guys. The problem is as an external investor you are always at a disadvantage, no matter how much you know you're still an outsider. I know this is true for companies that I've worked in, I've read some of the most detailed industry analysis and research reports yet the information is lacking compared to what I knew working in the company, and lacking in a large way. Having that intimate knowledge is critical, I think this is what Wall Street misses the most. Obviously you can handicap that a lot and that's what most people do, but I just can't get comfortable myself with this approach.
I take a bit of a different approach, I diversity because this isn't my full time job and I can't spend hours each day keeping pace with each investment. All I care about is that a business is cheap enough, and has a large enough margin of safety, if it meets these requirements I'll usually add it to the portfolio. Sometimes I'll add a small position and increase it over time as I learn more or as I'm looking and realize that the idea is a lot better than others out there. Sometimes the position will stay small because I find better ones.
The advantage of the concentrated approach is that with five stocks if you get a five-bagger your portfolio rockets to the moon. I prefer to look for $.50 dollars. A lot of these can be chumpy companies and I've had a few go under, but I've also had a lot do really well, enough to more than compensate for the disasters. I recognize that holding a bunch of stocks (20 currently, not evenly distributed) could limit my gains, but I'm fine with that. I'm more concerned about my downside, if I have a large margin of safety the gains will take care of themselves. In addition if I can't check a company for a few weeks because of other obligations I'm not concerned that some development will wipe me out.
Hope this helps!
The besting investing method is the one you are the most comfortable with. Well said, Oddball.
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Racemize, there is no mystery about small caps. It depends on how hard you look. It also helps when you find some original ideas. I apply Joel Greenblatt's concept to small/micro cap investing. The result is very satisfactory. I bought a few issues last year at 2-3x normalized earnings with high ROIC. And they returned triple digit.
So, are you adding anything to his magic formula, or are you just selecting particular ones you like? Any additional criteria you use?
I am the last person to add anything to Mr.Greenblatt's brilliant work. I did pick up everything he said and applied to investing and it worked very well. The only thing different is that sometimes the screening will not do the trick. It is especially true when the company is at the end of a restructuring process. Reading annual reports without looking at the stock price, in my opinion, is the best way to go.
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Racemize, there is no mystery about small caps. It depends on how hard you look. It also helps when you find some original ideas. I apply Joel Greenblatt's concept to small/micro cap investing. The result is very satisfactory. I bought a few issues last year at 2-3x normalized earnings with high ROIC. And they returned triple digit.
can you give me detail in the process you look for them ? And how you value them?
Read annual reports. Dive into markets people do not want to go. That is what I do.
How do I value my investments? That is a great question. To be honest I do not have a model for things. I never take a single factor into consideration. For me, the quality is more important. When you read a lot annual reports, you start to develop a sense as to how good this business is. Sometimes after reading an annual report for 5 mins, I can reasonably decide if there is anything interests me.
The hard thing is to pick your spot. When I buy stocks, I really do not know if they are going to work. Those picks last year were good, but things can go either way. A huge amount of knowledge can increase your chance to figure things out, but remember, nothing is for sure. Even the greatest investor with best intention can make a disastrous mistake. So when you think this is bullet-proof or cant-lose investment, you need to be really careful about it.
Small caps are very good for small investors because it is much much easier to analyze. Many people, including people on this board, prefer large-cap companies. But think about it. If you ever ran a business with 50 people and a business line, is it hard? How about multiply that by a factor of 1000? Many companies, in my opinion, are beyond 99.99% of people's comprehension. Yet they put money in them anyways.
Sorry to disappoint you for failing to give you a definite answer, but this one is the best I can get.
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Racemize, there is no mystery about small caps. It depends on how hard you look. It also helps when you find some original ideas. I apply Joel Greenblatt's concept to small/micro cap investing. The result is very satisfactory. I bought a few issues last year at 2-3x normalized earnings with high ROIC. And they returned triple digit.
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There is a secular wind behind SMT Scharf's business. It will goes on for many years. Chinese are very practical people. Almost every river which is suitable for power generation is used. Wind and solar is the future. However, even if we give them 2 decades, it will not address the need. The only practical solution is coal. Coal is dirty and dangerous. In UK a few hundred years ago, people's average life was 21 years when coal was heavily used in a city which I do not remember the name. However, people keep using it. The business is getting harder and harder. If China wants to develop further, it has no choice but to heavily invest into products like SMT Scharf's. Many people might worry the slowdown in China. I worry about that too. I always tell people how scary it can get in a financial crisis. My mother went to a shopping mall at the height of the financial crisis. Everything is 70-80% off, yet there were only 3 people shopping on the entire floor. China's demand for coal is everything for this investment to work.
Let's go back to the business itself. SMT Scharf's traditional business is underground transportation using disel trains. Last year, it acquired Dosco and another brand in the UK for around 2 million. However, the pension deficit was funded by 180k shares. So the total cost is more like 6 million. The acquisition is very accretive financially. I estimated the acquisition will contribute around 3 million to the bottom line. Dosco is a very well-known company specialized in road headers. It also manufactures equipment for mining coals. At the moment, SMT Scharf is trying to cross-sell its products among the customers. The CEO indicates the company would like to acquire more companies like this to expand its product line. If every acquisition can work like this, then we should buy more shares at every announcement.
Currently, there is a bottleneck in manufacturing capacity. The order book went up by 100% compared to last year, but the orders cannot be delivered as required and many were delayed until next year. The company is ramping up the production and that had an impact on profits. I am not worrying too much about it since it is very common during this stage. EBIT margin is over 16% and ROIC is very respectable. Excluding cash, SMT Scharf is trading at 6-8x this year's earnings. For a company that has grown its core earnings at 20%+ over the last few years, this multiple is low. If my reasoning is correct, the demand in China will be explosive over the next few years. When the market's perception changes, SMT Scharf is going to be a home run because of earnings increase and multiple expansion.
I wrote all this mostly using my memories. So if the data is incorrect, please point it out.
Fan
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To understand the coal market in China, it is impossible not to mention the electricity market. While electricity price is highly regulated, coal price is mostly market oriented. I do not know much about metallurgic coal, but thermal coal is the most important resource in China's power generation. There are two parts of the power generation business, generation and transmission. The power generation is very competitive, but the transmission is a monopoly. With a regulated electricity price, the soaring coal price made made many power plants unprofitable. As a result, power plants simply chose not to generate power. Some of you might have heard the electricity shortage in China. It is not the physical shortage. There are enough coal and generation capacity.
The government raised the electricity price by 3 cents per KW yesterday. The immediate effect is obvious. Many marginally profitable capacity will be put in use and the demand for thermal coal will go up. However, as long as electricity price is regulated, there will always be shortage in electricity. As I said previously on this board, as the urbanization goes on, the demand for electricity will increase steadily over many years. TV was scarce 2 decades ago, today many households have multiple TVs, computers, air-conditioning and much more. This hunger for power has no immediate cure other than coal. Coal was and will be a big part of China's development.
Every year, power plants will fight fiercely against coal miners because for every RMB/ton it saves, it falls to the bottom line. It is just as true to coal miners. Other than state-owned mines, many private-owned mines today are trying hard to sell coal to power plants. It almost always involves bribes and kickbacks. What else can be easier to increase profit than investing in mining technology when other costs are rising? My conclusion is that the more consolidation happens in the coal industry, the stronger the incentive to invest in mining equipment and technology.
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The profit margin is thin nowadays in coal mines and the market is competitive. And this is another reason big mines are increasingly using automated mining equipments to reduce costs. Underground transportation is only a small part of those products. SMT Scharf is leader in this niche. The main competitor is Ferrit, a Czech company. I compared the products of both, but could not tell from an amateur's perspective. However, Germany's products are very well trusted in China and people are willing to pay a premium price for that. My father used to be a mid manager in NGC(HK:0658). A big reason why NGC grew from a single factory to a big group today was because of the adoption of Germany machine tool early. I do not have an opinion on the stock itself, but it is kind of funny to reflect those top managers in my mind since I knew them when I was a child.
Big Chinese mining groups are introducing SMT Scharf's products into their mines. Among those groups, a group sometimes will assign employees to study other group's business. Do not be surprised. Since they are all stat-owned, it is very normal for sister companies(groups) to learn from each other. When company A see something good in company B, A will try to catch on as fast as it can. If one of the units of a group adopts SMT Scharf's products, it opens a huge market because once the product is tested, group wide adoption will follow quickly. When SMT Scharf announced it sold to a major coal mining group in Anhui, it was an indication that SMT Scharf finally cracked an important market. The latest Q revealed that SMT Scharf received initial orders from other big mining groups. Although the revenue will ramp up later, it is a signal that significant sales will follow.
Germany's machines and tools will play a more important role in China's future. In fact, if any country wants to climb the ladder of global economic system, it needs Germany's help. Unlike the US, Germany actually provides important "things" to the world. In my opinion, Germany will perform better in the next few decades because of this strength. Like many of you, I worried about the EU debt crisis. So I bought companies in Germany with revenues in BRIC countries. This is a hedge I feel more comfortable with than holding gold.
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In 2005, the coal price was regulated. Coal was trading around 300 and lots of coal mines were losing a ton of money. After costs and depreciation, the mines earned no economic profits. After the deregulation, the coal price soared. However, the real incentive for investing in mining technology is the consolidation of the sector. There were a few stages in private ownership of coal mines. Before 2002(if my memory serves me well), investors in coal mines did not have the ownership of the mines, but the right to mine coal. This created an incentive to mine as much as possible and a disincentive to invest anything into the mines. During that period, it was very common to mine one ton and discard two tons because the investors wanted the best possible quality. It resulted huge waste of resources. After 2002, the government permitted the ownership of the coal mines and the investment in the mines went up dramatically, both in productivity and safety. However, the investment soon faded because the private ownership of the coal mines was a very vague concept and was not protected by law. Private investors only put amount enough to boost productivity. As a result, the safety condition of the mines deteriorated again and mine accidents happened more often since the mines went deeper. Then, the government proposed in 2005 that those private ownership should be bought out on a negotiated basis(or forced), and the state-owned mine groups should consolidate those mines and create coal mines with scale. After 6 years, there are a handful of mining groups now controlling the best coal mines in China. Since those mines are managed by state-appointed officials, it is not surprising that they are now investing heavily in anything that can to boost safety and productivity.
Another reason for investing in automated mining equipment is that labor costs are rising rapidly. I do not have the exact figure here, but I can infer from other sources, for example, manufacturing. When the coal mines were consolidated, it makes sense to use automated mining technologies because of economies of scale, especially when the mines are geographically close. Again, I do not have a figure as to how much productivity can be gained through the adoption of technology. However, it is very clear that the coal mining industry in China is still very primitive. For a mine producing two million tons a year, two train sets from SMT Scharf represents only a fraction of initial investments. As mines go deeper, the investment becomes even more compelling because there are more occasions at which heavy equipment needs to be hauled. It is hard to imagine people spending one hour just to get to the working location underground and then have to dissemble the equipment and move them by hands.
I will continue tomorrow. Time to sleep.
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The managers of the coal mines earn considerably more than people think in China. Coal is a complicated business because there are two systems. One is the market-oriented, another is policy-oriented. As you may know, there is room for arbitrage. For example, the government dictates that mine A will have to sell one million ton of coal to a electricity generation companies for 500 per ton. However, many coal mines do not want to sell because the market price is way higher than the regulated price. Because the electricity company cannot buy enough coal, it has to raise price one way or another. For example, how about giving 20 per ton more as an incentive for the managers to sell? As long as the market price is more than 20 per ton higher than the regulated price, this kind of gray transaction is unavoidable. For a typical one million ton coal mine, this difference can earn insiders 20 million RMB a year. Of course, this is just one way the insiders in the coal mines making money.
The lucrative career in a coal mine is a very strong incentive for managers to avoid accidents, large or small. It is no wonder in many cases, managers or even local governments tried to cover the accident up, sometimes in a uncanny way. A while ago, around 30 people were trapped in a coal mine. Miraculously, after more than 24 hours, most of them were rescued. But some people with sharp eyes pointed out that those people who were rescued were not those trapped in the mine. The coal dirt was put on faces as makeup. In other words, this is a outright fraud to cover up. Believe it or not, this one was reported on CCTV, the national TV station. It seems to me a coal mine accident is even more life threatening to coal mine managers and local government officials.
Just today, the Chinese government announced that the electricity price for companies will be 3 cents higher although the price for residents remains unchanged. In addition, the government ordered that the price of coal for electricity generation cannot exceed 800RMB per ton while the market price is around 850. The problem is, most coal mines do not even earn 50/ton. In coal business, the miner sells its production on the spot. Currently, the price is a little over 400 RMB per ton. After taxes and mining costs, the profit margin is 30/ton. Of the 850 per ton terminal price, more than half is all kind of fees and transportation costs. In my opinion, the price limit is very impractical. Coal price in China is going nowhere but up.
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AAOI, my sharing of this idea is inspired by your help and detailed write-up of EGD. Although I still have my concerns over EGD, your analysis definitely opened doors for me. Thank you very much for that.
Every time I was looking at EGD, I could not help but comparing it to my largest holding, SMT Scharf. The Strangel's review outlined this investment a few months ago. Here are some more thoughts, in addition to the information you can find on the Internet. Many people missed out on Delticom, so I hope this information will lead you to a profitable investment.
SMT Scharf is a company specialized in underground transportation in mines. Currently, the major clients are the coal mines. I read a lot of annual reports, so this is an original idea. The income statement remained flat from 2006-2010. However, the international expansion was masked by the severe decline in domestic business. So naturally, this aroused my interest. I think anyone can look at the financial statements, so I'd save my time here.
SMT Scharf's products have an interesting twist. For every set of equipment sold, roughly 800k, there is a stream of revenue in the following years. Typically, after the warranty period, the average life of the income stream is 10 years, and 55K every year. Currently, if I remember correctly, the maintenance and service is 40% of total revenue. So basically if SMT Scharf put its equipment in place, you can expect cash flow over many years. It is even better than the software business. But the story does not end here.
SMT Scharf's products address an acute problem, safety in the coal mines, especially in China. Open-pit mining is already a past in China. The mines go deeper and deeper. In inner Mongolia, there were open-pit mines discovered a few years ago. No more. A typical coal mine in China now runs 200 meter deep or more. The deeper the mine goes, the more easily accidents happen. In China, a coal mine accident is more than a normal course of business. It is a political issue with massive public outcry. Every time a coal mine has an accident, nearby mines will all be closed for a few weeks for safety inspection. Top managers of the mine with accident will be sacked. So for a typical accident where 20 workers died, the costs are enormous. The latest compensation is around 100K USD per head. Assuming 5 mines each producing 1 million ton per year are closed for 2 weeks, the lost production is around 200K ton. Assuming 60 USD per ton. The total costs of a single accident is 12+ million. Of course this number is for illustrative purpose.
Most of the mines, or most large coal mines today in China are owned by the state. The state assigns a technocrat to manage this mine. An accident not only means the end to a get-rich-fast career(more on this later), it can also lead to criminal charges and prison. So the managers at coal mines have very strong incentive to avoid accidents since they are using other people's money. Underground transportation will lead to around 20% of accidents, although those tend to be minor compared to other causes. I talked to a sales person in China. Normally to move something around 3-5 tons, it requires 15 people a week to finish the work. With the train, it takes 2-3 people an hour to finish the same task. The less people involved, the less likely there will be human error.
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AAOI, thanks a lot for the update. I do not argue with any of your facts or numbers. A very large percent of my asset has already committed to a similar business in Germany so it is hard for me to make the decision to have more exposure to the same sector(begging for persuasion :P). A few questions and comments:
1. How do you get comfortable with the massive dilution in the previous years? How does management intend to deal with this in the future? How did the management distribute those options, i.e. give it to themselves or to the employees?
2. One of my rules to look at investments is to calculate ROIC using magic formula. EGD has a unspectacular ROIC but I can see it is changing because of the pricing power. But as with most good business, there is a limit where the gross margin can go. And to all have experience in home runs, it normally requires a combination of rapid revenue growth and expanding margin. My questions, how far do you think EGD will be able to push the price since it is already 190/meter?
Fan
A few thoughts on the spectacular quarter (its only just beginning :))...
Revenue per meter increased 8.3% sequentially, from $169 to $183. This resulted in an 8% gross margin expansion in mineral drilling, from 28% to 36%. This is much further along than I was expecting. 40% gross margins should be attainable at $190/meter pricing (assuming all of pricing gains continue to fall to bottom line). My guess is that they will be there by year end. I don’t know exactly what the mix shift is or what the breakdown of revenue per meter is when looking at brownfield vs frontier, but +40% gross margins by this time next year seems very attainable.
Tough to get a feel on what Dando and Bertram will be contributing on a full year basis and we don’t have financials to see the SG&A or cash flows, but I think it is safe to assume that this is trading below 5x 2012 earnings using some commentary from the last conference call. Bottom line is that this business remains crazy/unsustainably cheap all things considered.
The numbers below were calculated a little earlier today when the stock was up 14%.
Valuation - Normalization of Existing Asset Base
Rig Count 129
Meters Per Rig 6,500
Average Revenue Per Meter $190.0
Total Revenues (MM) $159.3
Cost of Drilling $95.6
Gross Profit $63.7
Dando Gross Profit Est $3.8
Bertram Gross Profit Est $13.5
S,G&A $20.0
Operating Income $61.0
Taxes $20.1
Net Income $40.9
Shares Outstanding (MMM) 48
Current Price $4.25
Market Cap 204.00
Debt $10.0
Unadjusted Enterprise Value $214.0
Less:
Cash $25.5
Impact Silver Stake $12.0
Adjusted Enterprise Value $176.5
EV / NI 4.32x
EV / Operating Income 2.89x
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Thanks HJ for the thoughtful post. I want to point out that if the housing price remains unchanged, the real estate will depreciate 10-15% a year in real value because of the inflation. With the massive printing in China, it is hard to imagine the housing market will go down in nominal terms.
Isn't it somewhat of a meaningless statistic? Even just for yuks, is it in USD or in RMB?
The last real estate cycle in Shanghai peaked in 1992, bottomed in 1999-2000 in the aftermath of the Asian crisis. Back then market was different for foreign and domestic buyers, the foreigner market fell from 30,000 RMB per square meter to 7,000-10,000 RMB per square meter, but RMB also devalued against USD by 50%. The domestic buyer's market didn't really quite exist, but basically fluctuated between 1,500 RMB - 3,500 RMB per square meter throughout. But in the end, the government support to the real estate market was such that the cost of purchase can be used to offset your taxes.
This cycle will clearly be very different. Can't extrapolate from past experience. I'd expect that before it all ends, government will interfere heavily to exercise price control in an RMB denominated market. A big chunk of the price action will also be reflected among the interplay between domestic inflation rate (however interfered that may be by government as well) and USD exchange rate. But that subject has become so political that it's really hard to say how much pressure can be let off from that channel.
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Regarding Munger and BAC, I only have the frame of reference from listening to him before Buffett made his "sweetheart deal," and what he said was unkind period. It should be duly noted that they're a competitor to their favorite bank holding, Wells Fargo, therefore the reason behind what is factually at stake in the world of finance, should be measured very carefully by those jumping on "naked equity." Buffett does not own "naked equity," and has arranged for sweeteners along the way.
Since when are Buffett and Munger, Capitalists at their core, not looking to KILL their competitors as opposed to offering them LIFELINES? You figure that out!
Munger would sue a business owner in heartbeat for wearing his "COLORS" and trying to compete next door to him!
This is pure speculation, not unlike AIG, with respect to "too big to fail," and belief systems that the Fraudulent Reserve would bail them out come hell or high water. Indeed, that's why Buffett front ran the preffered deal for the minds of the investment public to absorb rather than hearing it was their "PRINTING MACHINE" with "INTEREST" doing it for SCOUNDRELS again!
I have no idea if your comments relating to Munger a second time, was before or after Buffett's investment, with an original assumption that they came after.
Carl,
You are completely wrong on this. Buffett bailed out Munich Re, as well as Lloyds. Prem just bailed out Bank of Ireland. They have no problem bailing out their competitors, if it makes money for them and they restore the business. Buffett is a capitalist no doubt, but his intent is to make money, not lose money. He invested in Bank of America because he likes Moynihan...otherwise, don't you think he would have put money with Vikram Pandit if he was just interested in making a buck! He likes Moynihan's nose to the grindstone attitude.
You also made another comment in another post regarding past experience with mortgage insurers. We bought mortgage insurers as you know, but we bought them through options and a basket of them in MPIC Fund I, LP. We do not trade options in MPIC Canadian LP and we unfortunately bought a basket of equity. We expected huge losses in shareholder equity when we bought them, but the magnitude that occurred was our worst case scenario.
I do not have that same feeling or theories about BAC, and the margin of safety is actually significantly larger than when we bought the mortgage insurers back in 2008...double actually! Capitalization is significantly better, they are squeezing the size of their book, and they are running off poor business and writing new business that is far better...not unlike what Fairfax had to do. The earning power and reach of the business is terrific, and they've got a CEO who eats his own cooking and is a tireless worker. In this case, I'm extremely comfortable buying equity and buying one single company. I think the market reaction is incredibly wrong in BAC's case. Like with the mortgage insurers, we are buying to a level we are comfortable with, where our other holdings will offset any possible loss if they were to occur in the worst of circumstances. You calculate your odds of success versus your odds of failure, and you mitigate as much of that risk as possible. That's all you can do. Cheers!
Parsad, I admit I have no knowledge about BAC. But calling a person completely wrong is kind of overreacting. No one can be 100% right about things.
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Problems in the US is no longer about financial institutions; it is about the political systems.
And Munger, thanks for pointing out any short or long position is just speculative.
BAC will probably survive, but there is an elephant in their kitchen that won't go away. That elephant is piled high with the credible claims of everyone who held their stock during the crisis and lost much more than the current market cap of the stock after management rushed the acquisition of ML while covering up the huge MTM losses in their portfolio. Their conduct in the coverup was blatant. Lewis actually fired one of his high level managers for standing up at that time and saying, "This is wrong!"
I am highly skeptical that anyone can have an informed, bullish opinion on BAC common stock -- too opaque. Any long or short position in the stock at this point is essentially speculative, in my opinion. And I do believe BAC as an institution will survive in some form but that doesn't mean the common stock will prove a good investment.
However, to be fair, any litigation against BAC re the acquisition of ML is completely bogus and I don't believe will lead to any meaningful, negative consequences for BAC or even Lewis. While Lewis was foolish (understatement) to initially agree to buy ML and did wrongly fire a subordinate who voiced opposition, Lewis did try to back out of the deal when it became apparent to even him that ML was a house of cards -- the MAC clause was a legitimate out. Paulson/Bernanke/Geithner literally forced Lewis/BAC to complete the deal under the threat of severe retribution -- this fact has been reported in The End of Wall Street (Roger Lowenstein), Sellout (Gasparino), and Too Big To Fail (Sorkin). The litigation trail will ultimately lead to Paulson/Bernanke/Geithner -- I think any litigation would be shut down at that point, with BAC/Lewis agreeing to a modest settlement at worst.
I would recommend reading each of those books. I would also recommend Reckless Endangerment (Gretchen Morgenson and Josh Rosner) -- another fantastic book. While the bank executives deserve enormous blame for their role in the financial crisis/real estate bubble, Reckless Endangerment shows that James Johnson (Fannie Mae CEO)/Franklin Raines (Fannie CEO following Johnson)/Angelo Mozilo (Countrywide) are the primary culprits, with great help from Barney Frank/Chris Dodd and to a lesser extent, Cuomo/Cisneros of HUD during the Clinton admin -- without their collective actions, the real estate bubble could have never lifted off. As Josh Rosner and New York Times reporter Gretchen Morgenson show in Reckless Endangerment, the system (US housing policy) became totally corrupt.
Banks (as well as other mortgage originators) operated under the cover of Fannie/Freddie/Countrywide and no doubt helped push the bubble to levels that could not have otherwise been reached without their actions.
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Me neither. The key words are "kicking the can as hard as you can".
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Hope everyone is enjoying the recent activity in the markets.
Hopefully some of the younger investors have realized how foolish it is to focus on the macro and make doomsday predictions. I don't need to tell you how well were doing, all you have to do is read my post history, but yeah were doing pretty damn well! :)
Equities were extremely cheap for the past 60 days, today's move on the S&P was almost shocking but is merely indicative of the fact that most investors were not positioned for this. Quite the contrary word on the street is short interests were near historic highs going into this week which would explain the strength in today's move.
Bottom line, the old adage of price is what you pay value is what you get only works if you can actually recognize the divergence of price from value. And thats pretty hard to do when you become obsessed with macro predictions and end of the world scenarios.
Cheers!
Moore, you were right this time. However, things could go either way. It is hard to say if this crisis is over.
Have you experienced the bear market in China from 2002-2005? My family did and people did not want to talk about it because it was so painful to watch it going down, and down. I did not single out 73-74 bear market because I was not even born then. But I guess the new generation of investors really have not experienced a bear market. If a bailout is ready every time there is a crisis, it only tells you bigger trouble is ahead.
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u guys have to go there to see things.. there are bad things but many good things going on as well.
alertmepp, many of my posts about China are about good things happening there, but hardly anyone is paying attention. China is more complicated than what the media is saying.
http://www.charlierose.com/view/interview/11799
I recommend this video for those who are interested in China.
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Not a fan of how things went down between him and Dr. Michael Burry but his insight is always interesting.
I've learned over the years that you cannot based your judgement on one-sided stories, even it was written by Michael Lewis. So many opinions I formed in my 20s turned out to be too radical or pessimistic. My policy is like this, unless I am 100% sure about something, I declined to take side. It has saved me a lot of miseries.
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40% annualized return as a bar for each investment would stop me from ever investing in anything. I have yet to find a stock I would be reasonably sure could give me that kind of return. In the last two years I have spotted three stocks which I was reasonably sure* could get me 20% for a couple of years.
*barring deflation/other macro risks and/or company specific black swan events
It really depends on where you'd look for those things. I am not talking about things that appear on VIC. Because if those smart guys noticed it, the bargain is no more.
I bought AMA.ax and CMI.ax at 1-2x normalized earnings. It turned out to be great investments.
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I read the little book about magic formula like 5 times and I have nothing but great respect to this thoughtful and yet humble man. Now all my stocks were chosen based on those metrics and it helped with the performance greatly.
Thanks for posting.
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Guys, thanks for the posts. I enjoyed reading them.
Over the years, I found out that by requiring a very high return in a conservative scenario you would gain in the following aspects:
1. A potentially large gain.
2. Big margin of safety.
3. Avoid doing things that does not make sense or are not worth doing at all.
#3 is the most important to me. Many years ago, a friend told me that I have eyes for value. However, my hands are itching all the time. I changed from A to B to C only to see them double or triple again in a few years when the current purchase sinks. Well, it still happens all the time.
I set my bar very high, which is 40% per year over three years in conservative scenarios, not because I really want to make 40%. What I am trying to tell myself is that there are just so many things interesting there and I have to pick my spot. So far, it had worked great to me.
I dunno any of you had the same problems like mine. Just my 2 cents.
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This thread has really made me think. It makes some very good points and has really changed some of my ideas about investing. Just as an example, I recently found a couple stocks that I am positive are 8 or 9 baggers, but I've throw them back. They're guppies! I only focus on stocks that are AT LEAST 10 baggers now. If my money won't increase 10x, I don't want to hear about it. I want to be a super investor too, after all. I just cleaned out my office and threw away anything dealing with Ben Graham (the real one, not the board guru), Schloss, Cundill, Brandes and Donald Smith. They are worthless. I mean, come on, they find things that have perhaps 50-100% potential upside. Guys, get out of the sandbox, we only deal with 10 baggers.
Ben, I wonder why you bother replying to him while he obviously was not interested in a well-intended discussion. Parsad should close this one. Waste of time.
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It seems that there is always something to worry about.
It will probably be something that nobody is talking about that end up hurting us.
I am convinced that governments around the world will rig things so the things we worry about today will be taken care of.
If we have deflation, I think it will be a fraction of a % per year.
I can t see the government allowing market to crash ala 1929-they will just buy ETF's, stock indexes to prop up market.
There are a lot positive things happening in China, but just like having major surgery you never know when you get a complication either during the surgery or in the immediate post operative period. I am sure there will be bad things that happen in China as well. In the long run I am bullish on China + China succeeding will help the rest of the world.
I think its good to have something to worry about. It makes one be more careful + thoughtful.
I could not agree more with this. 95% of my money is in 2 stocks(used to be 4 this year). Despite this financial crisis, it has done well this year. Of course portfolio managers do not have the luxury to own so few stocks and that fact makes me feel better when I have so little money to run :)
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When reading about Germany and France put up a deadline for a solution, I realized that markets are going to be disappointed. 2 weeks for a solution? EU does not have 20+ states; EU has 20+ COUNTRIES! Anyone who claims that those problems can be solved in the near future is just day dreaming.
I never sold anything in the crisis and rode it out OK. However, when I was reading this, I am seriously considering selling part of holdings. If everything works out as promised, there is very little upside from today; if there are things like Slovakia keep happening, we'd expect disasters coming very soon.
Be careful and do not trust French politicians.
small cap advice
in General Discussion
Posted
Hi King, I have been thinking about giving an example. Here it is.
I own a company in AU called Jumbo Interactive. I bought it @ 30 cents. The annual report laid out everything very clearly. It is trading at 2.5x P/E before cash. JIN's business is to sell lotteries on the Internet, which is highly scalable. In the last five years, the business has grown just like other online businesses. In normal condition, this kind of business should garner 20x P/E. This is an outstanding business trading at ridiculous price. You see, magic formula wants good business trading at cheap prices. That is simply not enough for me.
But the situation is not normal here. JIN's online business hangs on a contract with Tatts, which is expiring at the end of 2014, although the contract will be renegotiated a year earlier. Tatts is a monopoly in the lottery industry which owns the only nation-wide license given by the government. Recently, Tatts launched its own website to compete with JIN. Therefore, the probability that JIN will renew the contract seems low.
I believe each of us has different opinion about risk/reward and you can make your own guess. Here is mine. Let's say JIN simply operates until the end of 2014 and then liquidate, the cash will cover more than the current market cap. This is third grade math so I would not give the details here. This is is the bottom line. I personally believe, after some thinking, that there is around 30% chance that the contract will be renewed as it is now. If it is renewed, I will hit a home run; if it is not, I would not lose much. There are also other complications, but I will keep things simple here.
This is basically how I make my investment decisions. Hope this helps.