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Why Guy Spier Says Will Never Invest in Retail (SHLD...)


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i never say never

 

Shouldn't it always depend on the price? At some price, it will be an obvious good investment.

 

Both quotes above are correct.  Everything at some price has value relative to its intrinsic value.  We've never invested in commodity companies until Sandridge earlier this year, and now I find myself digging through junior mining companies.  Never say never, because worlds collide when industries fall in value investing.  Cheers! 

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Interesting - quite a lot jumior gold mine names were mentioned here, but I didn't dig into any of them.

 

i never say never

 

Shouldn't it always depend on the price? At some price, it will be an obvious good investment.

 

Both quotes above are correct.  Everything at some price has value relative to its intrinsic value.  We've never invested in commodity companies until Sandridge earlier this year, and now I find myself digging through junior mining companies.  Never say never, because worlds collide when industries fall in value investing.  Cheers!

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I am a newbie to the mining sector.

So how do most junior mining corps destroy shareholder capital even when gold prices rise ?

 

Watch out, most of the junior mining sector is a huge value trap.  In aggregate, they destroy shareholder capital even when commodity prices rise.

 

I'd much rather index retail stocks than junior mining... it's not even close.

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So how do most junior mining corps destroy shareholder capital even when gold prices rise ?

1- Waste money on stock promotion, insider compensation, directors & officers insurance (that covers them from shareholder lawsuits...), and other G&A.

2- Chase dumb projects.  At the extreme, some juniors will chase stuff with no hope of being economic- underwater mining, mining placer deposits, etc.  More typically, juniors will often continue to sink money into a project where the initial results aren't that great; this is to keep the story going.  Some of these CEOs are very good at promotion but have no clue on how to make money (or they don't care)... e.g. Robert Friedland.

 

Some different viewpoints:

 

http://sprott.com/news-centre/why-i%27m-excited-about-this-market/

 

http://adventuresincapitalism.com/post/2010/03/07/Mining-worse-than-airlines.aspx

 

(mine) http://glennchan.wordpress.com/2012/10/08/investing-in-junior-mining-a-recap/

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Here's an old thread that's pretty relevant:

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/gold-chart-gone-hyperbolic/msg52543/#msg52543

 

PARSAD:  "It is simply the most corrupt industry I have seen!"

 

MOORE:  "Don't get it twisted, the Juniors, are our national treasure."

 

(I agree with Parsad on this one!  And I disagree with Moore.)

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It seems that the general consensus is that you can't call yourself a value investor if you gamble on gold or gold mining stocks. WB would NEVER invest in gold and gold miners.

 

Even if gold mining stocks always destroy value and never offer a decent return it doesn't seem like a terrible idea to at least look at the space if sentiment is universally negative and the shares of a particular junior gold miner are trading at less than tangible book value minus liabilities.

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I happen to be reading John Train's excellent 1980 Money Masters. In it, Warren Buffett describes his 'bad investments' and includes retailing as an investment type that he avoids:

 

"Buffett's worst investments have been in retailing (including trading stamps), a field he says he never really understood. In addition to investment losses on several retailing securities, his negotiated purchase of Hochschild Kohn, a Baltimore department store, also proved a dud. Figures and close observation are not enough: you need a special flair to understand what's going on in that field. A store can report good figures year after year and then, as Buffett learned the hard way, suddenly go bankrupt... (In checking back with him before publications found him buying another retailer: the moth returning to the flame.)"

 

 

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I am a newbie to the mining sector.

So how do most junior mining corps destroy shareholder capital even when gold prices rise ?

 

When I look at a resource (commodity producing) company, the first thing I look at, even before the story, is how they are financed as an on-going concern. The rate of share dilution can be eye-opening, as can the growth in debt. Then a look at maintenance vs growth capital expenditures. While in the early years negative free cash flow is to be expected, at some stage I expect any company to be able to produce enough return that it can finance its own operations without recourse to capital markets, and even have the option of sharing excess with owners.  Applying these up front reduces the amount of digging and analyzing I end up doing, and it helps prevent me from violating Rule #1.

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WB would NEVER invest in gold and gold miners.

He hoarded physical silver and owned Cliffs Natural resources back in the day.

 

I suppose that it's interesting that he didn't seem to have invested in silver mining companies.  Certainly Buffett has a good track record because of things he didn't own:

- Investment banks going into 08/09

- he sold out of Fannie/Freddie

- Tech stocks in 2000

- things outside his circle of competence

etc. etc.

 

Even if gold mining stocks always destroy value and never offer a decent return it doesn't seem like a terrible idea to at least look at the space if sentiment is universally negative and the shares of a particular junior gold miner are trading at less than tangible book value minus liabilities.

With a restaurant company, it's easy to do a cursory check for fraud.  You can Google street view their locations and read reviews of their locations.

 

With an exploration company, it's so much hard.  If you look at the Bre-X fraud, the senior miner that was about to buy Bre-X didn't get burned by fraud.  That's because they were going to run their own assays on Bre-X's drillcore.  It so happens that Bre-X intentionally destroyed their drillcore (!!!).  So Freeport McMoran brought in their own drill rig (or drill contractor) to re-drill holes.  At the bare minimum it cost them several thousand dollars (probably a few million though).

Institutional investors didn't do that level of due diligence and ignored the red flags (e.g. destruction of drillcore).  They got burned.

Retail investors obviously didn't do their DD.  They got burned.

And Bre-X like frauds still exist today.  The idiot geologist in Bear Lake Gold falsified assay results.

 

Investing in this sector is hard.  It's probably easier to stick to one foot hurdles like Altius Minerals and Northfield Capital.  These companies have good management teams (their compensation is very low by junior mining standards) and they trade at discounts to private market value.

 

tangible book value minus liabilities.

In my opinion, book value is a very poor proxy for the private market value of a junior's project.  And it's incredibly hard to value exploration/development stage projects to begin with.  There is a huge amount of uncertainty before you start exploring and the value of the project changes rapidly as more information is uncovered.

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Here's an old thread that's pretty relevant:

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/gold-chart-gone-hyperbolic/msg52543/#msg52543

 

PARSAD:  "It is simply the most corrupt industry I have seen!"

 

MOORE:  "Don't get it twisted, the Juniors, are our national treasure."

 

(I agree with Parsad on this one!  And I disagree with Moore.)

 

I'm not looking to invest in one, but take one over for the cash...there are many that are stuck between closing shop and the difficulties of finding financing for exploration.  I'm more than happy to take over one that is well under net cash.  If there is any value in the property, then that is just icing on the cake.  I don't plan on running a mining company, but dismantling it and using the cash for other things.  Cheers!

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I wish you luck!

 

You may find Selwyn Resources to be interesting.  An activist shareholder tried to get the company to dividend out its excess cash.  Then the CEO (who was actually pretty good for a junior mining CEO) turns into a complete asshole and tries to hold onto his job.  Drama!  I don't think some CEOs will be too happy with you disrupting their management employment agency.

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I wonder why Buffet says he "does not understand retail".

 

He owns several companies that are retailers OR have significant retail operations.

 

For example, Dairy Queen, See's Chocolates, Cavalier Homes, Nebraska Furniture Mart.

 

There may be other examples too.

 

Running a retail establishment is not rocket surgery.  Find stuff people want to buy, get it at a good margin, keep inventory turning, keep overhead relatively low, don't use a lot of financial gearing....Wash, rinse, repeat.

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Running a retail operation is really hard.  That makes it possible for some people like Sam Walton, Costco's founders, etc. to be a lot better at it than others.  It's open ended and there are different ways to create value.

 

It's really hard and a lot of intelligent people fail at it.

 

2-

don't use a lot of financial gearing

In the past, some retailers have used too much leverage.  Just like any other industry.

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I could take anyone on a drive into the smaller towns and countryside North of Toronto and show you hundreds of boarded up retailers in a matter of 4 hours driving.  For all of these hundreds I could show you a dozen or so that were really successful. 

 

People think its going to be easy.  Its not easy.  Its long hours, and incredibly hard work. 

 

Why was Nebraska Furniture Mart so successful?  The owner was an anomaly of hard work and resourcefulness.  Same with Borsheims.  Dairy Queen has been through the wars.  Buffetts stable ownership probably saved it. 

 

  Even the biggies have to constantly reinvent.  Starbucks averages less than $ 100000 profit per store.  And they get the benefits of scale.  Walmart is the same.  Mr. Spier is right.  Identifying the next hot retailer is next to impossible.  That leaves you with turnarounds. 

 

Junior miners and E&P companies are equally problematic.  Its a bit like venture capital in the tech industry.  Spread your money around on 50 good ideas and a few may pan out - so to speak.  I have a stock stuck in my RRSP that is apparently still listed but has a value of zero - going on ten years now - the company had developed card readers for vending machines.  It stares at me every time I check that account as a reminder of what makes a bad investment.  I have had similar experiences with Canadian E&P cos.  Fortunately I began investing right when Bre-x exploded.  It took me 5 minutes to determine the stock was a bad deal.  If all the gold in their "find" in Indonesia actually existed, the market cap was still too high by a magnitude of 10 or so. 

 

The longer I am at this game, the tighter my requirements get.  I definitely want businesses with constantly recurring cash flows, that are hard to disrupt by technological change.

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Spread your money around on 50 good ideas and a few may pan out - so to speak.

That's not really the problem.  Most of the people running the juniors are in it for themselves.  And many of them don't even have mining backgrounds.

 

The people running the hot Internet companies- Facebook, Groupon, Amazon, Webvan, Pets.com, etc.- are actually trying to make you money.  The valuations might be dopey but at least they're not corrupt.  Very few of the juniors out there are trying to make money for shareholders.  The level of corruption there is absurd.

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Spread your money around on 50 good ideas and a few may pan out - so to speak.

That's not really the problem.  Most of the people running the juniors are in it for themselves.  And many of them don't even have mining backgrounds.

 

The people running the hot Internet companies- Facebook, Groupon, Amazon, Webvan, Pets.com, etc.- are actually trying to make you money.  The valuations might be dopey but at least they're not corrupt.  Very few of the juniors out there are trying to make money for shareholders.  The level of corruption there is absurd.

 

You do have a point.

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Spread your money around on 50 good ideas and a few may pan out - so to speak.

That's not really the problem.  Most of the people running the juniors are in it for themselves.  And many of them don't even have mining backgrounds.

 

The people running the hot Internet companies- Facebook, Groupon, Amazon, Webvan, Pets.com, etc.- are actually trying to make you money.  The valuations might be dopey but at least they're not corrupt.  Very few of the juniors out there are trying to make money for shareholders.  The level of corruption there is absurd.

 

I would say the ratio is 1:1 or 2:1 at best.  For every legitimate company, there is another one that is simply being run to raise funds from shareholders and used as a piggy bank by the founders and promoters.  Cheers!

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