Ugh. Penny Stocks.? Ads for any stocks, much less penny stocks.? Now the ad to your left showed up on my blog’s ads, and I said, “I have to respond to this.”? Sadly, if I write about the evils of penny stocks, I get more penny stock ads.
But if you clicked on the banner to the left as an ad, you would be taken here.
The banner ad there tells you how important and profitable the industry is that Nova Mining claims to be in.? They are the only American firm traded on an American Exchange in the diamond industry.? They mention how diamonds are used in “rail guns” and oil drilling.
But how much revenue have they obtained from selling diamonds?? Zero.? There is little to no revenue for the firm.? Earnings are negative, net worth is negative.? The company lives off of borrowing money, and issuing equity.
They own mining rights on a few properties — that’s the only asset.? It is a long shot gamble that some properties in Canada and Guyana may produce diamonds.
Rule of thumb: long shots are usually losers, because investors overpay for the possibility of the big score.? There is a subset of investors that are risk loving, to the same degree that people buy lottery tickets.
Now, as for the ad, I can’t understand it, unless the connection is diamond tipped drills will produce more energy, thus hurting Iran and Venezuela.? That’s a pretty tenuous connection, in my opinion.
As with most of my posts on penny stocks, let me list what are the risks from the documents filed with the SEC:
WE HAVE LIMITED BUSINESS OPERATIONS AND A SINGLE MINING CLAIM. WE HAVE NOT IDENTIFIED ANY ALTERNATIVE BUSINESS OPPORTUNITIES. OUR PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS WILL CONSIST OF EXECUTING OUR BUSINESS PLAN AND RESEARCHING NEW OPPORTUNITIES.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING. (and cash is much worse now)
WE HAVE LIMITED OFFICERS AND DIRECTORS (only 2 people working, or so)
WE DEPEND ON MANAGEMENT AND MANAGEMENT?S PARTICIPATION IS LIMITED
WE MAY CONDUCT FURTHER OFFERINGS IN THE FUTURE IN WHICH CASE INVESTORS’ SHAREHOLDINGS WILL BE DILUTED. (And that has happened multiple times.)
BECAUSE OUR STOCK IS A PENNY STOCK, STOCKHOLDERS WILL BE MORE LIMITED IN THEIR ABILITY TO SELL THEIR STOCK.
The more I review penny stocks, the more hopeless they seem.? Good businesses start with strong capital, and go from strength to strength.? Lousy businesses start undercapitalized, and go from crisis to crisis, which almost never improves value.
Don’t buy penny stocks, or any stock that is promoted.? Never buy stocks where financing is an issue.? Only buy sound companies, large, small, or in-between, that do not need frequent refinancing.? Companies that must refinance are rarely good investments.
Before I start this evening’s book review, I would like to ask a favor of my readers.? If you like my reviews, maybe you can say that they are helpful at Amazon.? I rank in the 2000s at present, which was a challenge to get to, because not many reviewers of finance, investing, and economics books get to levels like that.? So, to the degree that you like my reviews, and have extra time to do this, I appreciate it.? If not, no worries — I’ve well exceeded my expectations; I appreciate that you read me.
I have never taken a course in accounting.? But I have had to do accounting for most of my working life, including doing financial reporting inside life insurers, which is the most complex industry for accounting. I have even opined on 10+ financial accounting standards over time.? And Aleph Blog is a leading accounting website as a user of accounting. (Dubious distinction, I know, but when you are a blogger, you take what you can get. 😉 )
As a value investor, I have taken a skeptical view toward the accounting of the companies that I invest in.? Cash entries can be trusted; accrual entries are less trustworthy in proportion to the length of time and uncertainty to the collection of cash.
This book relates accounting principles to value investing principles, and it is uncanny as to how they overlap.? It also attempts to connect it to Modern Portfolio Theory [MPT] concepts where it makes sense, but with less success. (No surprise, because value investing has a decent theory behind it and MPT doesn’t.)
The cornerstone of this book is return on net operating assets [RNOA].? The idea is to split the company in two, and separate operating results from financing results.? Give little value to financing results, which are likely no repeatable, and give significant value to operating results.
Note: this means that there is no way of evaluating financial companies under this rubric, but that’s a common problem.? Financial companies are a bag of accruals; value is difficult to discern.? That is why I spend most of my time analyzing the management teams of financial companies to see if they are conservative or not.
The book offers two measures of accounting quality, the Q-score and the S-score.? You would have to do more digging to make these practical, but at least you get some direction in the matter.
There are two simple prizes that the book gives to readers:
1) Profit results mean-revert; don’t trust strong or weak current ROEs. (or RNOAs)
2) Stocks with low P/Es and P/Bs do well.? Each works well, but they work better together.? Maybe if Ben Graham were still alive, he would not have been dismissive of his life’s work at the end, value works.? It’s an ugly brain dead strategy, but it works.
Full disclosure: The publisher asked me if I wanted the book, so I asked for the book and he sent it to me.
If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.
This should be a short post, because my comprehensive view on tax reform is found here.? The summary is that the problem is not tax rates.? The problem is the definition of income.? Just as in ancient times, people would make themselves look poor when the taxman came, so do the wealthy do today.? “Income? I hardly earn any income.”
And that is because of loopholes in the tax code for social engineering purposes, but even more for the ability to defer taxation of what should be income.? My view is that we should all be taxed like traders, with no opportunity to defer taxation.? No tax deferral for IRAs, HSAs, 401(k)s, DB pensions, insurance, annuities, endowments, stock (even private stock will have to report transactions).?? As asset prices rise, you would get taxed.? No deferral.
You might think this is an ugly system, and it is, though Zillow would have one amazing business when the government uses it to tax increases in housing values, with a true-up at the eventual sale.? They might even find new business by creating pricing grids for other sets of illiquid assets.
The idea is that taxation should follow value creation, which is income, even if it is not cash income.? Gone would be the days where one has an appreciating asset, and borrows against it, and pays no tax.? All increases in value would be taxed, and assets where the increase can’t be measured would assume a 15% annual return for taxation purposes, with a true-up at the sale of the asset.
Deferred tax liabilities would be made payable in a few years, and deferred tax assets would receive payment in the same period.? Deferred gains in stock would be immediately taxable.? Hello, Mr. Buffett, you want the rich to pay taxes, here is your bill.
This would include an elimination of all deductions, corporate and individual.? And, I would beef up the IRS to enforce this.? Once the concept of income gets simple and immediate, enforcement gets easier.? The IRS could focus on one question: how much are they prospering?? Tax in proportion to that.
A proposal like this could rapidly balance the budget without raising tax rates.? Now none of the midgets running for President would adopt such an idea — it offends both the left and the right.? But it would raise taxes on the rich, unlike what an otherwise bright guy like Buffett proposes.? Rates aren’t the question, the question is the definition of income.
And until we focus on the definition of income, we will continue to drift as a nation, at least until a crisis hits that reveals our weakness.
I have long wanted to see a book that would teach ordinary investors how to avoid being cheated by those that create/sell financial products.? If this book isn’t it, the one that surpasses it will be astounding.? If Wall Street is a show, this book gives you a peek behind the curtain.
This book is really four mini-books in one:
1) How the author became a broker, and the ethical difficulties that were forced on him in the process.
2) The difficulties faced by do-it-yourself? investors, and the benefits of exchange-traded funds [ETFs].
3) On Brokerages, and all their conflicts of interest, culminating in the straight line pitch.
4) Investments to avoid, and advice from the wise.
That it is four in one is not a weakness but a strength.? Wall Street has many ways to skin investors, and each section provides insights that different people will benefit from.? It is a more comprehensive book in its short 240 pages as a result.
On Brokers
The first part of the book describes Wall Street as it was and is, with all of the players and their motives.? Josh spares no one; the tone of the book is cynical, but not unduly so, noting all of the problems with a profane sense of humor.? Some of the funniest bits of the book are recollections of conversations with greedy parties seeing an edge.
There is a certain level of despair for young brokers as they “cold call,” knowing that if they don’t succeed, they will be let go, but driven by the possibility of riches should they succeed.? Those who are successful gain money, prestige, bragging rights, and some level of freedom from tight control.
I have my own experience with this. though mostly on the institutional side where I told such brokers “Why would my client want that?!”? It’s astounding what level of deception those who sell investments will engage in, until they realize you can’t be conned, and then they use your ideas to con others.? (The institutional brokers only make money on transactions; if they know you are smart, they facilitate your ideas at the expense of those less talented.? Ugly, I know, but I didn’t invent this.)
On Do-it-Yourselfers
Now, if you are a total “do-it-yourselfer” like I was in the ’90s, where I researched and bought my own stocks for myself, with some success, this is not for you.? This is for those who research and use mutual funds and ETFs.? It goes into the history and development of asset management fund structures, explaining why they are how they are.
He also describes how the modern era came into existence with discount brokerages in the ’70s, and how during the bull of the ’90 it morphed into anyone can make tons of money, just buy stock!? One thing Josh does not talk a lot about, but was significant, was how when fixed commisions ended, the real reason for maintaining research staffs died.? And, when tick sizes moved from a eighth to a sixteenth to a penny, the reasons for having market makers and specialists dried up.? But you can’t cover everything.
One particularly funny part is page 110, with its real-life definitions of fund types.? Josh is at his best in the section where goes after leveraged and inverse ETFs, where a lot of investors lose money because they are meant to track daily performance of indexes, and generally lose money for those that hold them long-term.? He is similarly good when he criticizes the proliferation of ETFs that are too unique, and will never get a broad following.
On Brokerages
Brokers position themselves as experts, when they are really order-takers.? They hire analysts that are not that good on average, and issue more buy than sell opinions, which facilitate the investment banking and trading businesses.? It talks about the stories that brokerages tell in order to captivate people and make them invest.
And then, Josh discloses the “Straight-Line Pitch,” which has been used on many investors to make them invest with the brokerage.? I have to admit, given some of the initial publicity on this point, and my own experience with brokers, I was dubious about this part of the book, and, Josh leaves it to the end — this is the climax!
I was pleasantly surprised, and I would recommend that all investors read chapter 20.? Why?? To immunize yourself from the clever talk that boxes you in as they offer slick answers to your objections.? That is a major reason why I read books on marketing: I can’t be tricked!? (But it does force me to do my own research.)? If you don’t want to be tricked by clever brokers, read chapter 20.? It isn’t necessarily the best chapter of the the book, that will depend on your own needs, but chapter 20 is unique.
Oh, and why have I not experienced this? Being a total do-it-yourselfer, I told brokers that I knew better than they did; it led to some weird conversations as they found I knew more about it than their talking points.
Investments to Avoid — Advice from the Wise
Most bad investments are either volatile or illiquid.? Why do brokers sell illiquid investments?? Because they get high commissions.? Same for insurance agents.
Then there are investments that sneak between the regulatory cracks, like Chinese reverse mergers, Special Purpose Acquisition Corporations, and anything with secondary guarantees, or the sale of options to enhance income.
Ask the broker this: who can I sell this to if I don’t like it someday?? Who makes an active market in this?? Any pause on this, and don’t buy.? No pause, but an answer — write it down, and check it out.
In one sense, part of the answer to the problems this book brings up is to realize there is no urgency.? If it is a good idea today, it will be good a week from now, let me talk with smart friends and figure out if the idea makes sense.
As for advice from the wise, he invites about eight of his friends to opine on a variety of topics.? Most of them are well-known, but at least a few of them are obscure, unless you are in the business.? I found the counsel to be sound, aside from an obscure former actuary who writes on investments.
Quibbles
On page 118, he talks about how Vanguard would have been a natural for the ETF business, and how Bogle delayed them from getting in.? This is true, but Bogle resigned in 1999; I was at a dinner for his retirement in 1998 in Philadelphia, and met him and Brennan, his successor.? The first Vanguard ETF was created in 2001, VTI is the ticker.? Vanguard did not play a large role in ETFs until 2005, but to say they weren’t in the business is not correct.
Also, ETFs are not as good as they seem, because average investors in them trade them wrong, buying high and selling low.? ETFs do not correct for bad investor timing, even if they are lower-cost.
Full disclosure: The author is a friend of mine, so I asked for the book.? He said ?yes? and he sent it to me.
If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.
I?m working on my quarterly reshaping ? where I choose new companies to enter my portfolio.? The first part of this is industry analysis.
My main industry model is illustrated in the graphic.? Green industries are cold.? Red industries are hot.? If you like to play momentum, look at the red zone, and ask the question, ?Where are trends under-discounted??? Price momentum tends to persist, but look for areas where it might be even better in the near term.
If you are a value player, look at the green zone, and ask where trends are over-discounted.? Yes, things are bad, but are they all that bad?? Perhaps the is room for mean reversion.
My candidates from both categories are in the column labeled ?Dig through.?
If you use any of this, choose what you use off of your own trading style.? If you trade frequently, stay in the red zone.? Trading infrequently, play in the green zone ? don?t look for momentum, look for mean reversion.
Whatever you do, be consistent in your methods regarding momentum/mean-reversion, and only change methods if your current method is working well.
Huh?? Why change if things are working well?? I?m not saying to change if things are working well.? I?m saying don?t change if things are working badly.? Price momentum and mean-reversion are cyclical, and we tend to make changes at the worst possible moments, just before the pattern changes.? Maximum pain drives changes for most people, which is why average investors don?t make much money.
Maximum pleasure when things are going right leaves investors fat, dumb, and happy ? no one thinks of changing then.? This is why a disciplined approach that forces changes on a portfolio is useful, as I do 3-4 times a year.? It forces me to be bloodless and sell stocks with less potential for those with more potential over the next 1-5 years.
I like some technology names here, some energy some healthcare-related names, P&C Insurance and Reinsurance, particularly those that are strongly capitalized.? I?m not concerned about the healthcare bill; necessary services will be delivered, and healthcare companies will get paid.
A word on banks and REITs: the credit cycle has not been repealed, and there are still issues unresolved from the last cycle ? I am not interested there even at present levels.? The modest unwind currently happening in the credit markets, if it expands, would imply significant issues for banks and their ?regulators.?
I?m looking for undervalued and stable industries.? I?m not saying that there is always a bull market out there, and I will find it for you.? But there are places that are relatively better, and I have done relatively well in finding them.
At present, I am trying to be defensive.? I don?t have a lot of faith in the market as a whole, so I am biased toward the green zone, looking for mean-reversion, rather than momentum persisting.? The red zone is pretty cyclical at present.? I will be very happy hanging out in dull stocks for a while.
P&C Insurers and Reinsurers Look Cheap
After the heavy disaster year of 2011, P&C insurers and reinsurers look cheap.? Many trade below tangible book, and at single-digit P/Es, which has always been a strong area for me, if the companies are well-capitalized, which they are.
I already own a spread of well-run, inexpensive P&C insurers & reinsurers.? Would I increase the overweight here?? Yes, I might, because I view the group as absolutely cheap; it could make me money even in a down market.? Now, I would do my series of analyses such that I would be happy with the reserving and the investing policies of each insurer, but after that, I would be willing to add to my holdings.
Do your own due diligence on this, because I am often wrong.
First, I have some blog news:? my hosting provider made me delete 7000 spammers out of my user database.? That left me with 200+ users.? Inadvertently, in the process, around 70 bona fide users with surnames starting with the letters J-Z got deleted.? So, if you got deleted, and have to re-register, my apologies.? I tried to be careful, but made an error when matching databases.
Second, MetLife should not have to undergo the stress tests that banks do.? Banks borrow short and lend long; they are inherently unstable.? Insurance companies generally match assets and liabilities, and are stable.? The only insurer of consequence to fail in the crisis was AIG, and it was because of derivatives and securities lending issues, areas that other insurance companies do not touch, or handle differently.
Third, why does an institutional investor use an investment bank?
When I was a corporate bond manager, we used everyone.? We wanted access to deals, and if you don’t deal with all of the majors, you are shut out.? Of course every manager deals with Goldman Sachs even if they don’t trust them.? The big guys know this and keep their brokers at arm’s length.
If you are a reporter, that is why managers will not speak on record.? If the syndicate desks on Wall Street don’t like you, they won’t give you good allocations on contested deals.
Bond managers are wise to use Goldman.? They are wiser to realize that Goldman does not act in their interests, and so, be cautious.? And to the degree that you are a smart manager, you can lessen your dependence on the big guys, and work with the hungry second tier, who know that money can be made by implementing the ideas of smart investors, so find ways to buy cheap bonds for smart investors from dumb investors, and sell rich bonds from smart investors to dumb investors.? After all, brokers only make money when assets are bought or sold.
There are few friends on Wall Street.? Big institutions know that, retail investors should learn that.? But the guy who resigned from Goldman should be aware that not all clients were muppets.? Firms I was with would avoid derivatives unless we were the ones structuring them.? If we have control, derivatives are good.? If we don’t have control, derivatives are bad.? Control is good….
You should always be thinking that those who you deal with may not be acting in your interest, and often, it is because of forces beyond their control.? I was pinned with $10MM face of Teleglobe bonds and the main broker dealing in them held (unknown to me at the time) $100MM+ of the bonds.? My efforts to sell the bonds failed because the broker had a larger position, and there was no active market.
Fourth, just because you live in America, it doesn’t mean you should get a high wage.? Particularly for manufacturing wages are declining, and why shouldn’t they decline, because productivity is not rapidly advancing.? It’s like my article on comparable worth.? Most Americans are going to have to get used to being poorer, because there are many others who can do what they do for less.? And, that partly explains the 1% vs 99% argument, because as the rest of the world grows, and the US doesn’t, it has impact on those in the US that earn too much relative to their productivity.
Fifth, imagine for a moment that you are in charge of an organization that is going to play a baseball game against the winners of the World Series.? You can choose any people to be players that have not been employed in MLB for the last five years.? How well do you think you will do?
Duh. You know you are going to lose.? Well, the same thing applies for those that are arguing that the 99% can dominate the 1%.? Short of Soviet tyranny, it won’t work.? The 1%, should it really exist as a stable organization, is too smart, and will beat the 99% nine times out of ten.
We talk a lot about democracy, though our government thwarts it when it can.? Government typically boils down to aristocracy — the rich rule, and it can’t be otherwise, unless we want Communism, like China under Mao.? In the Eurozone, under the “socialism,” the wealthy happily rule.? Only societies that are wiling to destroy wealth are willing to deny power to the wealthy.? And China is a great example here, as the wealthy increasingly dominate their government, to a greater degree than is true in the US.
Money talks, losers walk, and I never give money to politicians; it is all too corrupt.? Just realize that the deck is stacked against you.? Money finds a way to win in the process eventually.
Sixth, California will suffer for making retiree healthcare unchangeable.? Retiree healthcare in its present form is not affordable by almost everyone.? Why destroy your state by making? promises that can’t be upheld?
Seventh, after you read this, explain why you might trust Chinese statistics.? I reminds me of AIG where bad news had a hard time traveling to the top.
Norway Faces Housing Bubble as Krone Steals Policy Agenda http://t.co/15hzb0So By cheapening the currency Norway gets an asset bubble $$ Mar 17, 2012
Unintended Consequences http://t.co/eLrKtCJc Sprott suggests that the financial system has a chemical dependency on the Central Banks. $$ Mar 17, 2012
Is the bond market tightening for the Fed? http://t.co/iRSerA8X The bond market is larger than the Fed; they can’t control the curve $$ Mar 17, 2012
Germany Turns Up Pressure on ECB http://t.co/w2yyfvU1 Difficult to see how the liquidity drains out of the ECB ~3 years from now $$ Mar 13, 2012
China central bank news conference on policy, yuan http://t.co/w8cy5K1Z & http://t.co/XcIFAbvb Japan buys Yuan, don’t think it means much Mar 13, 2012
Bond market certainly did not like the FOMC statement. “Don’t worry about energy prices, we got it all under control.” $$ #fuelinginfltion Mar 13, 2012
Investment Banking
Why banks will continue to rip off clients http://t.co/oTT9fd2i Conflicts on Wall Street, especially at $GS. Big guys know that. So what? Mar 17, 2012
Goldman Sachs?s long history of duping its clients http://t.co/2sXmKl0D Tells the story of how $GS foxed its way out of Penn Central CP $$ Mar 17, 2012
The CMBS maturity wall is here http://t.co/GrcEm1KO I remember buying CMBS deals 11-12 years ago. Bullet loans weak if can’t refinance $$ Mar 17, 2012
Goldman Roiled by Op-Ed Loses $2.2B for Shareholders http://t.co/yz0f0oLy A passing matter; of course IBs have conflicts of interest #duh Mar 17, 2012
China
Bo?s Ides of March http://t.co/mnKFU8Zx Not so much a move to the right as a statement against being flashy and self-promoting $$ Mar 17, 2012
Chinese Economy Already in ?Hard Landing,? JPMorgan?s Mowat Says http://t.co/kwFW2Ty6 Cyclical industries will produce less in China 2012. Mar 17, 2012
China’s official admission of slowing commerce activities http://t.co/br7H4D2o When a long trend changes, often moves further than expected Mar 17, 2012
China’s fixed asset investment growth moderating http://t.co/CEl5mZTc “Growth in real estate and manufacturing projects remains steady.” $$ Mar 13, 2012
GMO: Something’s Fishy in China http://t.co/DO8v4w8p Goes through the 10 signs of a bubble; finds that Chinese economy has most of them $$ Mar 13, 2012
US and Europe Move on China Minerals http://t.co/xyGsdkDq WTO ruled against China in January, pressing similar case 17 rare-earth metals Mar 13, 2012
Another call for an end to China driven industrial commodities “super-cycle” http://t.co/VAd5gR0D Investment is way too high & unproductive Mar 13, 2012
Rest of the World
?
Sarkozy?s Yield Drop at Risk With Hollande Victory http://t.co/ti25ozdq Surprise, if Hollande cares for poor in France, E-Zone suffers $$ Mar 17, 2012
Saudi Arabia Lifts Curtain on Diplomacy as Syria Killings Spur King to Act http://t.co/H8g8D5nG Favors 85% Sunnis over ruling 15% Alawites Mar 13, 2012
How about those Japanese net-net’s? http://t.co/SAZEcofy Making money in very ill-known small companies in Japan $$ Mar 13, 2012
Portugal Yield at 13% Says Greek Deal Not Unique http://t.co/bPBconfk After Greece, the next places to watch are Portugal & Spain. $$ Mar 13, 2012
Iran-Israel History Suggests a Different Future http://t.co/M1IzxuuB I never knew that Israel sold weapons to Iran in the ’80s. $$ Mar 13, 2012
?
Financial Sector
?
MetLife CEO’s Stress Test http://t.co/YaVV4GMp $MET doesn’t deserve to be treated as a systemically risky firm. Long liabilities protect Mar 17, 2012
Assurant Falls as California Seeks Rate Cuts http://t.co/d0OcDS09 FD: long $AIZ; this is overrated; ability of the commissioner limited $$ Mar 17, 2012
Felix Salmon At Columbia Journalism School: Don’t Blame Journalists For Failing To Prevent Financial Crisis http://t.co/0LrCwisB true, but Mar 13, 2012
Journalists, even if they understood what was going on in the finl mkts would face a tough time writing warnings in the midst of boom $$ Mar 13, 2012
US Government Agencies Comparing Notes On Algo Feeds http://t.co/15oAxpn9 Little speed advantages w/econ data can lead to big profits #SEC Mar 13, 2012
Marketview:Point of Reference http://t.co/Xlp5jczH “4 the 1st time this yr I can feel the true bullish sentiment among the investing public” Mar 13, 2012
Banks foreclosing on churches in record numbers http://t.co/fR3Ro9CJ Frankly, I am surprised that banks lend to some churches. $$ Mar 13, 2012
Banks Buy Treasuries at Seven Times Pace in 2011 http://t.co/SDKsJIUB What else to do with all the excess liquidity & weak borrowing $$ Mar 13, 2012
US Government-Related
Pension Benefit Costs Cut by Record 43 States, Study Says http://t.co/B8ZRg4gZ State take actions to reduce benefits to active employees Mar 17, 2012
Best Treasury Forecaster Says 10-Year Yield to Drop From Highs http://t.co/ma8YoN4u Don’t be too sure about Treasury rates rising $$ Mar 17, 2012
International Demand for U.S. Assets Rises http://t.co/FwdXqrWH As the E-Zone gets worse, demand for US debt improves. $$ Mar 17, 2012
Investing
Temporary Hedges eventually force Deleveraging http://t.co/0jVSWRzw On Energy Future Holdings, & why predicting the future is tough $$ Mar 17, 2012
Cyclicals persistent underperformance http://t.co/KkJ2q05p Cyclicals started underperforming in August. Relatively they never recovered. $$ Mar 17, 2012
Magnetic Fields http://t.co/S6VYIe5Y Good post. This graph is worth a look: http://t.co/EBhPh6ZN May help explain recent lost decade $$ Mar 13, 2012
Stock Compensation, Tax Law, Financial Reporting and Facebook’s IPO http://t.co/ULyVLNkr Future dilution may pressure $FB shares $$ Mar 13, 2012
A Value Investor’s Take on Shorting http://t.co/cZYueqGH Tactical discipline, not structural, b/c market can go nuts. Can help hedge $$ Mar 13, 2012
Miscellaneous
Considering Bankruptcy? Head to the Mall http://t.co/UvgEArMj Legal services offered for simple situations in mall locations. $$ Mar 13, 2012
How does one write a review for a book when it has been praised by Jack Bogle, Jeremy Grantham, Joel Greenblatt, Seth Klarman, and Warren Buffett?? I am a midget among giants.? I can’t write this, but I am going to try.
Being a teensy part of the investment fraternity that calls itself value investors, I do have some perspective on this book.? The joke of sorts is that there are many things that are “the most important thing.”? But I think the point of the author is that what is most important shifts, depending on the market environment.
But all of “the most important things” can be boiled down to four main concepts:
Margin of Safety
Buy it Cheap; Valuation
Contrarianism
Think beyond the initial effects to secondary effects.? Think holistically.
By margin of safety, there are many things implied — a strong balance sheet, strong cash flows, conservative accounting, and/or protected market position.? The important thing is to prevent a large loss.? If you can prevent large losses, the gains will come eventually.
Buying it cheap is also a simple concept, though hard to implement well.? What metric to use?? Price to Earnings, Cash Flow, Book, Free Cash Flow, EBITDA?? Where to look in the capital structure for value?? The equity may be too risky, but maybe the preferred stock or bonds might be interesting.
Contrarianism means looking for what others rely on that may not work, and investing against it, whether positively or negatively.? It can’t be mere opinion; the other side has to be invested, and relying on their hypothesis to succeed.? That is the situation where investing contrary to the consensus can succeed.
Thinking holistically comes from being a bright student whether in the sciences or the liberal arts.? It comes from being a life-long learner, and applying oneself to the problem until it yields at least a hint of an answer.? Where it doesn’t, cutting losses pays off.
I recommend this book to all who aspire after value investing.
Full disclosure: The publisher asked if I wanted the book.? I said ?yes? and he sent it to me.
If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.
This is two books in one, and very well done.? The main part of the book explains risk and uncertainty in general terms, such that most people can understand it.? But for those that can deal with complex math, the latter part of the book offers a lot of additional firepower.
Risk is a tough subject because history only vaguely informs you as to how bad things can get.? Past is not prologue.? There are two possibilities, the past contains and event that was so horrible that it can never happen again, or, the past does not tell you how bad things can be.
Market observers took the first view, that the Great Depression could not repeat.? As a result, few prepared for a situation where there was too much debt, and insufficient ability to service it.
The subtitle of the book is rightly “Uncertainty at the Core of Finance.” Not risk, but uncertainty.? The distinct is important, because risks are things that we know some things about the possible economic outcomes, and can control them to a degree.? Uncertainty is where we don’t really understand the dimensions of the outcomes, and have little if any control.
There is fundamental uncertainty to the simplest aspect of finance, money.? Money seems stable enough in the short-run, but every now and then it fails due to hyperinflation, or the slow steady failure in the store of value sense of moderate inflation over long periods.
Wealth itself is uncertain.? Even if you own it free and clear, there’s no way to tell what it will be exchangeable for next year, much less further out.? There are a lot of people who thought they knew what their homes were worth 5-7 years ago that are decidedly disappointed.
Government debt is uncertain, as governments think they can always roll it over, but political and other obstacles can lead to a refusal to pay when debt service becomes high relative to tax revenues.
Banking is uncertain, mainly because of borrowing short to lend long.? If banks limited themselves to facilitating transactions, a lot of the uncertainty would go away.? Banks would be a lot smaller, less profitable, and there would be fewer of them, and the economy would be more stable.? (Entities with longer liability structures, like pension plans, endowments, and life insurers would become the new source of lending. More would be financed through equity.)
Credit is uncertain.? During boom times, corporate bonds behave independently, and diversification evens out results.? As a result, corporate credit seems safer than it really is, and marginal ideas get to borrow.? During bust times, far more corporate debt defaults than would be expected — there’s almost no such thing as an average year.? It’s either feast or famine.
There are things that can be done to try to mitigate uncertainty: credit ratings, or any scoring system for assets, lending at a more senior level, and Value-at-Risk.? Also using more robust assumptions on possible outcomes, which would lead to smaller position sizes, less leverage, or more cash.
The book has a real strength in showing how the the assumption of normally-distributed risks fails dramatically in many cases, and offers alternatives that would work better.? Trouble is, once you realize how volatile the world really is, a lot of strategies either don’t work, or need to be scaled back.
The book praises actuaries as risk managers, with their ethic codes and stress tests, as opposed to quants with Value-at-Risk and no ethics code.? Banks and Wall Street would be better off in the long run hiring actuaries, who think about risk more holistically, and getting rid of the quants in their risk control departments.? Same for the regulators who evaluate banks.
There are other controversial ideas here: is it possible that the strong economic growth of the past is an anomaly?? Is it possible that growth for nations, and the world as a whole follows S-curves, like products and companies?
This is an ambitious book, and I like it a lot because it is willing to cross boundaries and apply the principles in one? area to another that seemingly should not receive it.? I liked it a lot, and would recommend it to many.
Quibbles
On page 17, he thinks of currency as a put option, but I think of it as 0% overnight commercial paper.? On page 37, he confuses Moses and Joseph, having Moses predict the 7 good followed by 7 bad years, when it was Joseph who did that.
Who would benefit from this book: Every financial regulator should have this book.? Every academic burdened by the lies of Modern Portfolio Theory should get this book.? Anyone who fancies himself to be a risk manager should have this book.? Finally, if you want to understand why financial markets are inherently uncertain, this book will teach you well.? If you want to, you can buy it here: Pandora’s Risk: Uncertainty at the Core of Finance (Columbia Business School Publishing).
Full disclosure: The publisher asked if I wanted the book.? I said ?yes? and he sent it to me.
If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.
Don’t buy what someone wants to sell you.? Buy what you have researched, and know that it is what you want to buy, because it is valuable.
I have an irregular series on penny stocks, largely off of advertisements mailed to me, or things found on the web.? Every promoted penny stock I have run into has done badly.
Now for all of my prior penny stocks that I have been written about, all have done horribly.
Today’s gem is iTrackr [IRYS], which the advertiser says is the “Groupon Killer,” complete with a cover page that has a dinosaur labeled “Groupon,” being hit by meteors labeled “iTrackr” and “IRYS.”? Now, this time I got a full 16-page shiny brochure, which had quotes on iTrackr from two notable publications, but in 2006 & 2007, long before Groupon was prominent… and iTrackr did not gain in profitability since then, rather, it had larger and larger losses.
In five-point (or so) type, near the back of the brochure, there is the disclaimer.? I scan it with OCR so that you can read it at a normal size:
Disclaimer:
The xxx Newsletter and/or its publisher, Author Inc., dba blablabla.com did not receive any direct compensation (other than future subscription revenues, the amount of which is not known at this time) with respect to the publication of this Advertisement. Author Inc. has received ten thousand dollars in cash compensation to assist in the writing of this advertisement. BHB Marketing paid eight hundred thousand dollars to marketing vendors to pay for all the costs of creating and distributing this report, including printing and postage, in an effort to build investor awareness. BHB Marketing was paid by non- affiliate shareholders who intend to sell their shares.
?This publication does not provide an analysis of a company’s financial position. iTrackr Systems, Inc.’s financial position and all other information regarding iTrackr Systems, Inc. should be verified with the company. Information about many publicly traded companies and other investor resources can be found at the Securities and Exchange Commission’s website at www.sec.gov. Investing in securities is speculative and carries risk. It is recommended that any investment in any security should be made only after consulting with your investment advisor and only after reviewing all publicly available information, including the financial statements of the company. This mailing piece is not intended to be, nor should it be construed as, an offer to sell or a solicitation of an offer to buy securities, nor should it be construed as the provision of any investment-related advice or services tailored to any particular individual’s financial situation or investment objective(s). The xxx Newsletter is a bona fide publication of general and regular circulation offering impersonalized investment-related research to readers and/or prospective readers and is not an investment adviser. As such, it relies upon the “publisher’s exclusion” as provided under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. The xxx Newsletter is not a registered broker dealer. Staff members of The xxx Newsletter and its affiliates may hold positions in investments mentioned herein, and may buy or sell their interests on the open market at anytime. The xxx Newsletter presents information in this report believed to be reliable, but its accuracy cannot be guaranteed. Additionally, it includes forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding expected growth of the featured company. Any statements that express or involve discussions with respect to predictions, expectation, beliefs, plans, projections, objectives, goods, assumptions or future events or performance may be forward-looking statements. The forward-looking statements contained herein (which include all statements other than historical information) involve significant uncertainties. Factors that could cause actual results to differ from the results or implied in forward-looking statements include the size and growth of the market for the Company’s products, the Company’s ability to fund its capital requirements in the near term and in the long term, pricing pressures for the Company’s products and services, the Company’s ability to obtain needed resources, and the local, regional and global markets. Forward-looking statements are based on expectations, estimates and projections at the time the statements are made that involve a number of risks and uncertainties that could cause actual results or events to differ materially from those presently anticipated. Past performance does not guarantee future results.
Emphasis mine. I wanted to split and highlight the juicy stuff.
Now, let’s think about the math of the scam: they pay the author $10,000 to sell his limited credibility to pump a penny stock.? They put $800,000 into the production and mailing of the glossy brochure.? But the market cap of the company is only $6.7 million.? They think the advertisement will create a lasting 12%+ rise in the stock that they can sell into.? Pump-and-dump.? Proclaim a biased story in big print; offer retractions in small print.
No surprise to me, this company has negative earnings (which are getting worse) and a growing negative tangible net worth.? For fun let’s look at the risk disclosures from the 10-K:
Because there is doubt about our ability to continue as a going concern, an investor may lose all of his investment in our company.? [Oh yeah, the auditors don’t believe in us.]
iTrackr has a history of losses and may not be able to generate sufficient net revenue from its business in the future to achieve or sustain profitability.
iTrackr?s cash on hand and anticipated near term sales may be insufficient to fund operations for the next 12 months.
If iTrackr is unable to fund its operations and capital expenditures, iTrackr may not be able to continue to develop and market its products and services which would have a material adverse effect on its business.
iTrackr is dependent upon key personnel whose loss may adversely impact iTrackr?s business.
iTrackr?s management systems and personnel may not be sufficient to effectively manage its growth.
If we are not competitive in the market for online sales, marketing and customer service solutions, or online consumer services our business could be harmed.
We are dependent on technology systems and third-party content that are beyond our control.
Our services are subject to payment-related risks.
We may be liable if third parties misappropriate personal information belonging to our clients? Internet users.
Our products and services may infringe upon intellectual property rights of third parties and any infringement could require us to incur substantial costs and may distract our management.
Technological or other defects could disrupt or negatively impact our services, which could harm our business and reputation.
Our promotion and marketing of our websites may not result in generation of significant revenue which may cause our business to fail.
Unauthorized disclosure of sensitive or confidential client and customer data, whether through breach of our computer systems or otherwise, could expose us to protracted and costly litigation and cause us to lose clients which may result in our going out of business and for you to lose your investment.
Competition in the social networking, online marketing and e-commerce industry is intense and our competitors have greater financial resources and development capabilities than we have, and we may not have the resources necessary to successfully compete with them.
Our services may become obsolete and unmarketable if we are unable to respond adequately to rapidly changing technology and customer demands.
The loss of our executive officers or directors, could adversely affect our business.
Our Controls and Procedures may not prevent misstatements.
Our Financial Statements for the year ended December 31, 2009 and the quarterly periods ended March 31, 2010 and June 30, 2010 were Restated as a Result of a Re-Audit by our New Independent Accountant Which was Necessitated Due to Revocation of our Former Auditor?s Public Company Accounting Oversight Board (?PCAOB?) Registration.
There will be a substantial number of shares of iTrackr?s common stock available for sale in the future that may be dilutive to its current stockholders and may cause a decrease in the market price of its common stock.
Our common stock is considered ?a penny stock? and may be difficult to sell.
iTrackr may be unable to receive a listing of its securities on NASDAQ or another national securities exchange, and this may make it more difficult for its stockholders to sell their securities.
One stockholder owns a majority of our common stock and may act, or prevent certain types of corporate actions, to the detriment of other stockholders.
If we issue additional shares of common stock in the future this may result in dilution to our existing stockholders.
There is currently no market for trading our common stock, and when such a market does develop, the trading price of our common stock may be volatile, with the result that an investor may not be able to sell any shares acquired at a price equal to or greater than the price paid by the investor.
The trading price of iTrackr?s common stock is likely to be volatile, and you might not be able to sell your shares at or above the public offering price.
The concentration of iTrackr?s capital stock ownership with insiders will likely limit your ability to influence corporate matters.
The Company does not expect to pay any cash dividends for the foreseeable future.
Not too optimistic, as you can see, and one looking through the financials would note that they are running out of cash.
Do the large holders think that they will dupe enough people to buy their shares from them, and at advantageous prices?? Hmm… maybe any price above zero is an advantageous price.? As with many promoted penny stocks, it usually looks like a future zero.
Even if the scam is legal, I don’t get how the math works.? They really think they will get a sustained 12%+ rise in the stock, adequate to turn over the entire capitalization of the company into the hand of suckers?
Which makes this double-dumb.? When even the scammers don’t make money, it is one really dumb scam.
Main lesson: don’t buy promoted stocks, and particularly not penny stocks.
PS — Why did the advisor decide to write this?? Was he that desperate for money?? If I were one who bought newsletters, I would not be impressed with the lousy analysis here.
I have never taken a course in accounting.? But I have had to do accounting for most of my working life, including doing financial reporting inside life insurers, which is the most complex industry for accounting. I have even opined on 10+ financial accounting standards over time.? And Aleph Blog is a leading accounting website as a user of accounting. (Dubious distinction, I know, but when you are a blogger, you take what you can get. 😉 )
This is two books in one, and very well done.? The main part of the book explains risk and uncertainty in general terms, such that most people can understand it.? But for those that can deal with complex math, the latter part of the book offers a lot of additional firepower.