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The Stingy News Quarterly (Q3/2012)
New @ StingyInvestor The school of patience and pluck "You don't need special sources of information or cutting-edge analysis to make money in the market. It helps, though, if you have patience and the willingness to buy stocks that other people despise. For proof, look to the career of Walter Schloss." Looking for a bargain? "When I explain the theory of value investing to people, they always love the idea. Everyone is excited by the notion of snapping up a dollar's worth of assets for 60 cents. Then they see an actual value portfolio. And they recoil in horror." Why I'm a value investor "Value investing is all about finding stocks (and other securities) that are both cheap and relatively safe. The two are intimately related because buying at a low price is inherently safer than buying at a high price, everything else being equal." New Value Investing Strategy Lab "Follow my value investing scribblings at the new Globe Investor Strategy Lab." The risky new world of ETFs "A little more than a decade ago ETFs were rare things. The few that were available were much like the chocolate and vanilla of the investment world - plain but satisfying options. They tracked the big indexes and charged relatively low annual fees (MERs). If you pointed new investors to ETFs in those days, they would likely find reasonable funds on their own. But that was then." The Best of Stingy Links Stingy Links: Academia Statistically significant? "A new paper by psychologists E.J. Masicampo and David Lalande finds that an uncanny number of psychology findings just barely qualify as statistically significant." Stingy Links: Behaviour In praise of copycats "The conventional wisdom today is that copying is bad for creativity. If we allow people to copy new inventions, the thinking goes, no one will create them in the first place. Copycats do none of the work of developing new ideas but capture much of the benefit. That is the reason behind patents and copyrights: Copying destroys the incentive to innovate. Except when it doesn't. There are many creative industries, like finance, that lack protection against copying (or did for a long time). A closer look at these fields shows that plenty of innovation takes place even when others are free to copy." After this, therefore because of this "Correlation isn't causation. It's a hint or a possibility, but no sure thing. This entire process is so difficult because we have so much trouble isolating causation. It's easy to see that bad traffic can cause one's commute to be longer than normal, but ascertaining causation where there are huge numbers of variables can be astonishingly difficult. Finding a causal chain in the hard sciences can be made easier by creating experiments that limit the variables or even eliminate all other possible variables. That's simply not possible in the markets." Why we're driven to trade "Most of the folks who say buy and hold is dead don't talk much about their long-term returns. Instead, they stress how they have done recently, a tactic that for many potential clients has the same irresistible appeal as the last couple of pulls on a slot machine." Stingy Links: Bonds We live in remarkable times "As Deutsche Bank points out in its long-term asset return study, the longest series of bond yield data is for the Netherlands dating back all the way to 1517. In June, those yields reached a record low. Not just any old record, then, but a 500-year nadir. In America, yields go back only to 1790 but they too have been at all-time lows. The Bank of England was founded in 1694 but never felt the need to push base rates down so low; not in two world wars or a Great Depression. Nor did the Bank ever feel the need to expand its balance sheet to such a great extent (although Deutsche only has data back to 1830); currently it is around 25% of GDP." All time low yields "According to both the Barclays high-yield index and the CS HY index, yields in high yield have reached an all time low of 6.6%. Further, over the last few weeks, traders and syndicate desks have been whispering of a simply gargantuan amount of high yield and leveraged loans coming this month. Certain desks have been advocating a move to CCC assets as they still yield approximately 100 bps over their all time low seen on...wait for it...May 2007." Stingy Links: Books You can't trust airport security "When the plumber knocks at your door, why do you let him in? He's probably bigger and stronger than you. And he has a wrench. He could easily kill you and steal your money and your stuff, which would certainly be a better deal for him than receiving a moderate payment and having to fix your toilet. But you trust that he won't; and trust, that mysterious and invaluable substance, is the subject of Bruce Schneier's ambitious "Liars and Outliers: Enabling the Trust That Society Needs to Survive," which starts with the homely parable of the plumber and builds into a treatise on every aspect of trust, from marital fidelity to transnational terrorism." David and Goliath "What should the strategy of the weak be when facing the strong? Does being an underdog - whether as a team a country or an individual - help foster creativity?" Figuring it out "Before Benjamin Graham started to work on Wall Street, investment analysis was a hit-and-miss affair, focusing more on recent price movements than on the merits of individual companies. Graham, a brilliant mathematician, took the process to a much higher level." Stingy Links: Buffett Buffett pledges $3 Billion more "Billionaire Warren Buffett has pledged an additional $3 billion of shares in his Berkshire Hathaway Inc. to his three children's foundations." The secrets of See's Candies "Charles A. See, a salesman from Ontario, opened the first See's shop in 1921 in Los Angeles. With its now iconic black-and-white tiles, it was made to look like the kitchen of his widowed mother, Mary. Today the shops still offer the same experience: walk-in customers can sample any piece." Inside Warren Buffett's private poker game "Warren Buffett is a famously world-class bridge player, putting in 12 hours a week at the table, often with Bill Gates, and sponsoring the Buffett Cup, which mimics golf's Ryder Cup, except with cards. 'Every hand fascinates me,' he recently told me, in explaining this obsession. But relatively quietly, over the past seven years he's emerged as the host of one of the planet's most exclusive poker games." Why Berkshire is killing it right now "The reason why the stock has gotten this burst of momentum is very simple - Berkshire is the single greatest play on the housing market resurgence extant. It's got the safety of a well-diversified business and it hits the housing market from virtually every angle - remodeling, re-mortgaging, recovering prices etc." Buffett speaks with Betty Liu "Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., talks about JPMorgan Chase and Co.'s $4.4 billion trading loss at its chief investment office and the U.S. banking industry. Buffett also discusses his investment strategy and holdings, the U.S. economy and housing market, and the outlook for the euro." Stingy Links: Debt The global debt clock "Our interactive overview of government debt across the planet" Stingy Links: Economics Unintended consequences "President Clinton raised taxes in the 1990s and the economy grew. So does that mean it would grow today if we did the same thing?" Muddled models "Economists have regularly failed to predict recessions and were completely caught out by the recent financial crisis, as the Queen famously noticed. The shortfalls of the profession are old news. All the way back in 1994, Paul Ormerod wrote a book called The Death of Economics, lamenting the failure to forecast the Japanese recession or the collapse of the Exchange Rate Mechanism, from which Britain was turfed out in 1992. 'The ability of orthodox economics to understand the workings of the economy at the overall level is manifestly weak (some would say it was entirely non-existent)' Ormerod wrote." Bad policies "It is common to fix the blame for this on the banking crisis. Economies typically take a long time to recover from 'balance-sheet' recessions, as businesses and households focus on paying down debt and rebuilding savings. But what if the problem of slow growth has deeper roots than that? What if slow growth caused the crisis?" Six policies economists love "Tuesday's show presented the common-sense, no-nonsense Planet Money economic plan - backed by economists of all stripes, but probably toxic to any candidate that might endorse it." Stingy Links: Economy Inevitable slow recoveries? "If a slow recovery is the inevitable result of a financial crisis, why was the Administration forecasting the "normal" fast recovery all along? The natural conclusion is that the administration thought, as I thought, that the economy should have grown quickly, as it typically has in the past. The "slow growth after financial crises" isn't a fact in the first place. And to the extent that it is a fact (it's a "fact" over a sample of countries not very representative of the US now), slow growth is not the inevitable result of a financial crisis itself, but a result of the mismanaged policy that typically follows a financial crisis, such as bailouts, close-the-barn-door-after-the-horse leaves banking regulation, trampling of property rights that scare creditors away, high taxes and so forth." Just how bad is the economy? "The second-quarter GDP numbers came out. The newspapers and Republicans pounced on low growth and anemic job growth. The Democrats rebut growth is growth and tell us of the steady job gains. How bad is the economy?" Stingy Links: Fun Fiscal cliff "'What will happen if we hit the fiscal cliff?' asks Merle Hazard, in an animated surf-style music video." Stingy Links: Funds How Eric Sprott got solar burn "The story of Timminco - which concluded early this year with the bankruptcy of the company and the delisting of its stock on the TSX - has, since its beginning, inspired doubters and believers. The company never delivered on its promise to produce cheap solar-grade silicon on a commercial scale. The believers maintain Timminco never got the chance to prove itself because the solar industry collapsed and demand for high-purity silicon dried up almost overnight. The doubters insist the company could never have made the breakthrough." Funds vs. ETFs "The question is, would these studies arrive at a different conclusion if mutual funds were compared to ETFs instead of uninvestable indexes? It's hard to say definitely without getting into the data, but a rough assessment based on the Vanguard numbers would suggest that Canadian equity ETFs would still be leading an albeit closer race. If a charge for investment advice was factored in, it would be a dead heat, with some categories going to ETFs and others to mutual funds." Third Avenue is buying HK real estate "Wolf started buying up Centro's distressed debt at less than 60 cents on the dollar late last year, while it was still in bankruptcy. The debt was converted to equity, and now Third Avenue owns more than 13.8 million shares of the new company." Investors prefer ethical ETF "Of course, what those standards actually are is a complex question, which is why it is important investors make sure they understand the parameters used to make such judgments, Mr. Rothery said. 'I'd caution anyone thinking about buying one of these funds to make sure that your morals and ethics correspond with that of the fund,' he said. 'It can be very tricky.'" [Please ignore the 'financial advisor' reference, it was a holdover from my days working for Dan Hallett. I don't take on private clients these days.] Stingy Links: Government Generational warfare "Flash forward half a century, and the boomers who once sang along with Dylan have become the reactionary elders, clinging to their power and perks at the literal expense of everyone younger. There's a new generation gap opening up, one that threatens to tear apart the country every bit as much as past confrontations over war, free love, drugs, and sitar music. This fight is about old-age entitlements and whether the Me Generation will do what's right for the country and stop sucking up more and more money from their children and grandchildren." The state of the States "For operational purposes, 'states' are best understood as undercapitalized health care and pension funds that write speeding tickets on the side." It's just totally irresponsible "What we're actually witnessing - and have been for years now - is not gridlock, but the abdication of responsibility by Congress and the president for performing the most basic responsibilities of government. Despite the fiscal crisis that Washington knows will occur if it fails to deal with unsustainable spending and debt, it hasn't managed to produce a federal budget in more than three years." Stingy Links: Graham Charting a map for investors "The notion that the prices of stocks and bonds bear a sane relationship to their underlying value is not, at present, in high regard. Wall Street is widely said to be a betting parlor, if not an adjunct of the underworld. Its repute was even worse when Benjamin Graham published 'Security Analysis,' an investment manual that urged investors to calmly dissect securities and then plunge into issues trading at a sizable discount to intrinsic value. Stocks at a discount, Graham wrote, offered a 'margin of safety' - a cushion that would protect the investor from loss and, in time, assure him of a reasonable gain." Graham's Net Net in London "In this paper we focus on the early value metric devised and employed by Benjamin Graham - net current asset value to market value (NCAV/MV) - to see if it is still useful in the modern context. Examining stocks listed on the London Stock Exchange for the period 1981 to 2005 we observe that those with an NCAV/MV greater than 1.5 display significantly positive market-adjusted returns (annualized return up to 19.7% per year) over five holding years." Stingy Links: Hallett Covered-call strategy: expectation vs reality "Investors are snapping up exchange-traded funds (ETFs) that use covered call-writing strategies. The strategy isn't new - covered call writing has been used by portfolio managers for more than two decades - but retail investor interest is growing. Last month alone, covered-call ETFs grabbed a third of the nearly $270-million in net new sales of Canadian-based ETFs. But I suspect that a fundamental misunderstanding of covered call strategies is behind the gap between investor expectations and reality." 50 is the new 40 but ETFs are the new Mutual Funds "For years I've been hearing from individual investors and financial advisors who are disappointed with their meagre long-term performance. This jives with calculations I completed four years ago, which showed that Canadian mutual fund investors largely missed out on the available risk premium over nearly 15 years prior to the worst of the last bear market (as illustrated in this chart). As a result, many have cast their mutual funds aside in favour of cheaper exchange-traded funds (ETFs) expecting higher returns. But I'm convinced that in 2022 or 2027, similarly-disappointing performance figures will be printed about ETF investor returns." Stingy Links: Indexing Shiller launches value indexes "The new indexes look for cheap sectors based on this approach, finding those with low cyclically adjusted price-to-earnings, or CAPE. The numbers are persuasive. Using data going back to 1902, Mr. Shiller found that an investing strategy that focused on sectors with low cyclically adjusted price-to-earnings ratios outperformed by an average of 1.13 per cent a year." Stingy Links: Kahn How to play the market "You stick to value, to Benjamin Graham, the man who wrote the bible for the market. It's a mistake to believe you can do more, I warn you. John Maynard Keynes was one of the most famous economists in history. He was a genius, but he failed as a macro investor. It was hard to believe at the time. But when he became a bottom-up value guy, well, he became very successful. With value investing, you don't have to bend the truth to accommodate periods with derivatives and manias. Value investing will almost always be right." Irving B. Kahn interview "At 106, Irving Kahn is the oldest living, active investment professional. Here, he recalls being mentored by the legendary Ben Graham and learning first-hand the principles of finding large profits in small-risk investments" Stingy Links: Klarman The Oracle of Boston "Mr Klarman is a devotee of 'value investing', a discipline forged by Benjamin Graham and popularised by Warren Buffett, which involves buying stocks at a discount to their intrinsic value. He will look beyond equities for bargains - a good example is Lehman Brothers, which at the end of last year was Baupost's largest distressed-debt position. But in every investment he insists on a 'margin of safety', the buffer between what investors pay for the stock and what they think it is worth, so they are protected against unforeseen events or miscalculations." Stingy Links: Management Business out of excuses "As other economies stumble, the Canadian economy looks golden. But any gold is badly tarnished when it comes to productivity. Output per hour worked in the Canadian business sector has grown less than 1% per annum over the past decade. Productivity from labour and capital combined has not grown at all. This is one of the worst records in Canadian history and one of the worst among developed economies." Stingy Links: Markets Shiller-PE in emerging markets "We test the reliability of the Cyclically Adjusted PE (CAPE) or Shiller PE as a forecasting and valuation tool for 35 countries including emerging markets. We find that the Shiller-PE is a reliable long-term valuation indicator for developed and emerging markets and we use the indicator to predict real returns on local equity markets over the next five to ten years." Disrupting the pipeline business "Perry is quickly discovering the power in cutting out a middleman. In pipelines, heavy oil can only flow if it's diluted. In railcars, it is shipped undiluted - and one shipper observed that undiluted crude is a lot like Bunker C, the sludgy fuel that is used to power ocean-going ships. So now small volumes of heavy crude are being loaded directly into those vessels, skipping refineries altogether. Perry relishes the disruption: 'We don't have to sell this heavy oil to refineries,' he says. Railcars are already 'breaking open the market.'" [Ignore the dumb lifter lead, arbitrage is the important lesson.] Online ads decline "The average cost to reach 1,000 people with an online display ad fell to about $11.50 at the end of 2011 from $13.35 in late 2009, according to SQAD Inc., which tracks negotiated ad deals. In July 1998, Yahoo was getting about $25 per thousand, according to The Wall Street Journal." Stingy Links: Pricing Consumers are hopeless at math "You walk into a Starbucks and see two deals for a cup of coffee. The first deal offers 33% extra coffee. The second takes 33% off the regular price. What's the better deal?" Stingy Links: Real Estate Vancouver crash "The bottom line is that I'm confident that there are many households now reliant on home equity extraction to maintain their current lifestyle and likely to continue making timely payments on debt obligations. I suspect that when the tide goes out, we'll be shocked at how many Vancouver households have been swimming naked:" Stingy Links: Schloss Walter Schloss 2008 talk "Get some inspiration from Walter's talk at the Ben Graham Centre for Value Investing" 65 years on Wall Street "Walter Schloss talks at Grant's event. An oldie but a goodie." Stingy Links: Science Skilled work, without the worker "The falling costs and growing sophistication of robots have touched off a renewed debate among economists and technologists over how quickly jobs will be lost. ... the advent of low-cost automation foretells changes on the scale of the revolution in agricultural technology over the last century, when farming employment in the United States fell from 40 percent of the work force to about 2 percent today." False positives "the lack of an avenue in which to publish failed attempts at replication suggests self-correction can be compromised and people such as Smeesters and Stapel can remain undetected for a long time." Stingy Links: Stocks Big Insurance worries about the future "Life insurance used to be the quintessential safe and boring business in Canada. No more." Stingy Links: Tech No hands "It may sound like science fiction, but much of the technology needed to turn ordinary vehicles into self-driving ones already exists. Indeed, almost all carmakers are developing sensors, control systems and other equipment that turns cars, in effect, into autonomous robots. Prototypes are on the roads today." Stingy Links: Thrift A lost decade for savers "The 1990s were a lost decade for Japan. The 2000s delivered a lost decade to U.S. investors. Now, five years into the onset of the financial crisis, with stock and bond markets booming, housing resurgent, and even Detroit redeemed, it's savers who find themselves in a lost decade." The iPhone's sexy, but 'I save' is far smarter "But iPhones are also symbolic of a change in society's attitude toward money. We now get our gratification through spending money rather than by saving it. The savings rate in Canada has been falling for decades, more or less in line with the decline in interest rates. Today, savings accounts offer less than 1 per cent in many cases and barely 2 per cent at best. As a result, a lot of us have come to believe that saving is useless, even foolish. And so, we've moved on to spending." Stingy Links: Value Investing Global Value: 10 Year CAPE "Over seventy years ago Benjamin Graham and David Dodd proposed valuing securities with earnings smoothed across multiple years. Robert Shiller popularized this method with his version of this cyclically adjusted price-to-earnings ratio (CAPE) in the late 1990s, and issued a timely warning of poor stock returns to follow in the coming years. We apply this valuation metric across over thirty foreign markets and find it both practical and useful, and indeed witness even greater examples of bubbles and busts abroad than in the United States. We then create a trading system to build global stock portfolios based on valuation, and find significant outperformance by selecting markets based on relative and absolute valuation." Howard Marks interview "Howard Marks, chairman of Oaktree Capital Group LLC, talks about Europe's debt crisis, the global economy and investment strategy." Mohnish Pabrai and Guy Spier talk "Mohnish Pabrai and Guy Spier share their considerable wisdom with UC Davis's MBA Value Investing class on 8/22/12." Why does financial strength forecast stock returns? "The authors measure financial strength with Piotroski's F-score. They demonstrate that investors can achieve higher returns by investing in stocks of firms with greater financial strength primarily because of institutional demand for stocks with better F-scores and the gradual incorporation of public information into stock prices. Stock return momentum and institutional momentum trading cannot fully explain the relationships between the F-score and subsequent returns and the F-score and subsequent institutional demand." Tim McElvaine's conference "Tim talks about his portfolio and the world more generally at his partners' conference." Lonely puppies "I have often owned companies with little to no sell-side analyst coverage. Ask yourself this, how many companies trading on US exchanges are there: that have no analyst coverage, that are US-based, that have a Market Cap over $250 million, that aren't passthrough vehicles, and have pitiful liquidity at least" Stingy Links: World A Greek story "Tsanis said he steadfastly refused to bribe anyone. In one incident, in 2005, he appealed to a minister in Athens to get a permit unstuck. "The minister called in the public servant who was refusing to give us the permit and ordered him to issue it the next morning," he said, declining to specify the minister or ministry involved. "When we went back to get it, the civil servant told me: 'Australian, that guy is a politician and he'll be gone tomorrow, but I'll be here waiting for you.'" Apocalypse not "When the sun rises on December 22, as it surely will, do not expect apologies or even a rethink. No matter how often apocalyptic predictions fail to come true, another one soon arrives. And the prophets of apocalypse always draw a following.from the 100,000 Millerites who took to the hills in 1843, awaiting the end of the world, to the thousands who believed in Harold Camping, the Christian radio broadcaster who forecast the final rapture in both 1994 and 2011." Looking at China's problems "The Austrian approach raises the possibility that there is no way for China to make good on enough of its oversubsidized investments. At first, they create lots of jobs and revenue, but as the business cycle proceeds, new marginal investments become less valuable and more prone to allocation by corruption. The giddy booms of earlier times wear off, and suddenly not every decision seems wise. The combination can lead to an economic crackup - not because aggregate demand is too low, but because the economy has been producing the wrong mix of goods and services." A conversation with Ray Dalio "Ray Dalio, founder and co-chief investment officer of Bridgewater Associates, L.P., discusses global economics." China's growing economic crisis "One problem is that China has run out of obvious ways to kick-start its $7.3 trillion economy. It was easy in 2008: Pump tens of billions of dollars into a sweeping stimulus project and 10 percent growth followed. China's success gave markets the impression that its leaders could wave some magic wand and growth would be the result. Magic is in short supply now. Local governments are cash- strapped and awash in debts that could turn bad. The euro zone seems locked into permanent-crisis mode while the U.S. is bogged down with debt, economic stagnation and political paralysis. China proved it can live for a few years without U.S. and European customers, but not forever." Krugman's Baltic problem "All the southern European countries have overregulated labor markets that have caused persistently high unemployment. In Spain, it is easier to get a divorce than to sack a worker -- which explains in part why companies are very reluctant to hire new ones." Hayek on the standing committee "In the past year, the spirits of Keynes and Hayek have done battle for the minds of China's policymakers. This month Andrew Batson of GK Dragonomics, a research consultancy in Beijing, argued that Hayek seems to be winning. China's leadership is now keen to avoid the 'Hayekian risk' of wasted investment, he wrote, even if that increases the 'Keynesian risk' of inadequate demand and weak growth." Ideologue vs. Estonia "'What Krugman has not mentioned at all,' says Urmas Varblane, 'is that when economic crisis entered Estonia in 2008, then we had already our own crisis.' For Varblane, who teaches economics at the University of Tartu, the real crisis was what came before the downturn: unsustainable, debt-driven growth that distorted the economy." The weatherman is not a moron "The one area in which our predictions are making extraordinary progress, however, is perhaps the most unlikely field. Jim Hoke, a director with 32 years experience at the National Weather Service, has heard all the jokes about weather forecasting, like Larry David's jab on 'Curb Your Enthusiasm' that weathermen merely forecast rain to keep everyone else off the golf course. And to be sure, these slick-haired and/or short-skirted local weather forecasters are sometimes wrong. A study of TV meteorologists in Kansas City found that when they said there was a 100 percent chance of rain, it failed to rain at all one-third of the time." | ||||
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