The Aleph Blog » 2012 » November

Archive for November, 2012

If you Want to be Well-off in Life

Friday, November 30th, 2012

I write this because it should be obvious but is not.  I grew up in a house where my Dad earned an average income from his business, but my Mom took around 10% of the income and invested it half in utilities and half in growth stocks.  As my Mom said to me, “My utilities are my bonds.”

Bright lady; my first teacher in investing.  She beat the market for four decades plus.

But the main thing that she did right was to spend less than my Dad earned.  This is critical.  You can’t build capital unless you set assets aside.  This is the most important of the rules.  You must consume below your means, and invest the surplus wisely.  I remember many ways in which she said “no,” to a variety of expenditures.  We didn’t live below the appearances of our neighbors, but we were one of the last on the block to get a color TV.  Good thing, TV is such a waste of time — and I wasted a lot of time there when I was a kid.

The second main thing that she did right was take moderate risk.  Looking at her portfolio, one might ask, “Why so many utilities?”  Or comment, “A lot of boring GARP-y stocks.”  I contrast her with my paternal grandfather, who retired in 1966-7, and sold his business to his two sons, and then lived off the interest income from CDs, etc.  He took no risk in his retirement, though he took moderate risk as a businessman, and as a pool player.  (Rumor is he was Wisconsin state champ at some point… but I can’t prove that.  I played him a kid, and never won.  My Dad, who learned from him, I beat only once, and lost many times to him.)

An investor in CDs will get what he contracted for, absent default.  The investor who is like my Mom will have a more jagged trail, but will earn more.  Even in the late 70s and early 80s, my Mom did not lose confidence in her strategies, even as Grandpa earned 15%/year on his CDs.  Her time was yet to come.

My Mom would hold stocks for 10 years on average.  So long as you pick companies with a sustainable competitive advantage, you will generally do well over longer periods, should you have the fortitude to not trade frequently.

So, my third point is don’t be an aggressive trader.  Yes, have trading rules, but don’t try to make money in the short run.  Try to make money in the long run.

My fourth point would be “do it yourself” if you can.  (Yes, I know I run money for others.  I will say what I believe even if it costs me business.)  But that means you have to learn a lot, like my mom, or me, or my father-in-law, three people all mostly self-taught, with different investing philosophies.  Good investing is like running a business on the side.  It is not easy.

My fifth point is pay attention to taxes, but don’t let taxes dominate your decisions.  There’s a balance here, and for my clients, I try to generate taxable losses on net, while letting winners run.

My sixth point would be that income in investing is important, but not for the reason you might expect.  Income is important because it motivates reinvestment opportunities, not consumption opportunities.  When you are older this changes a little, but in many cases it is smarter to focus on total return, and consume from capital rather than have every stock try to produce income.  That said stocks that pay dividends tend to do better than those that don’t.  28 of the 33 stocks in client portfolios (of which I am a client as well) at present pay dividends, and the portfolio as a whole has an above-market dividend.  Reinvesting income compounds your gains in new ideas that were hopefully more promising in the new environment.

The seventh point is study investing to the point where you have an intelligent strategy, and once you have that, don’t abandon it.  Too many people flit from one hot idea to another, but never end up with a coherent strategy that that employ for decades.  Even if I close down my investment business, I will keep applying the same investment strategy for myself, it has worked well for me, even if at present it has been middling for clients.

Every investment strategy goes through periods where it works poorly.  That’s life.  If you have a strategy that always works well, that means:

  • You haven’t run it long enough.
  • You’re not running enough money.
  • You’re not taking enough risk.

Survive through your bad times, and prosper during the times where your intelligent strategy is paying off.  Patience is a virtue in investing for the most part.

Okay, there are seven points from my experience, from my Mom, and from my late Father-in-law.  None of us trained to invest in a formal way, myself included.  (Yes, I received a CFA Charter, but I knew far more than the syllabus did before I took the exams.  The academic stuff I learned was not a help when I was in graduate school.)

An eighth point to consider is that money matters temporally.  Eternally, no, it doesn’t matter.  No one can buy Heaven, as Psalm 49 points out.  But you can use your wealth to aid those who are trying but failing.  That’s important.  As John Wesley put it, “Earn all you can, save all you can, give all you can.”  I am fairly certain that the first two were honored more than the last one, but Wesley was correct there.

In general, being willing to give also correlates with prosperity.  Doing well means more than becoming rich; it means living your life for the good of others.  We should not live for ourselves.  Money is merely a means; it is not an end in itself.  Use your money to the best end that you see.  Loan money to a poor but honest friend at no interest.  You will do something really good there, and God will bless you.  I have done that many times in my life, and it has paid off, though I can’t prove that empirically.

One more note, when you are a giver, you become more careful with your own spending.  You begin thinking more broadly about the world, and realize there is little advantage to most luxuries.  If you have enough, good.  Even Warren Buffett (No Christian he) likes his Burgers and his Coke.  He does not look to luxury in consumption, even as he owns jewelry stores.

He is a bit of a miser, but as he has aged, he has handed over most of his wealth to the Gates Foundation.

In closing, take care over your saving, investing and giving.  They are all important aspects of how those who are improving their financial well-being improve their lives.

On Human Fertility, Part 2

Thursday, November 29th, 2012

I write about this every now and then, because human fertility is falling faster then most demographers expect.  Using the CIA Factbook for data, the present total fertility rate for the world is 2.47 births per woman that survives childbearing.  Last year it was 2.50, and in 2006 it was 2.90.  2.10 is replacement rate.  At the current trend, the world will be at replacement rate in 2022.  That’s a lot earlier than most expect, and it makes me suggest that global population will top out at 8.5 Billion in 2030, lower and earlier than most expect.

Have a look at the Total Fertility Rate by group:

The largest nations for each cell are listed below the graph.  Note Asian nations to the left, and African nations to the right.

Africa is so small, that the high birth rates have little global impact.  Also, AIDS consumes their population, as do wars, malnutrition, etc.

The Arab world is also slowing in population growth.  When Saudi Arabia is near replacement rate at 2.26, you can tell that the women are gaining the upper hand there, which is notable given the polygamy is permitted.

In the Developed world, who leads in fertility?  Israel at 2.67.  Next is the US at 2.06, slightly below replacement.  We still grow from immigration.

Quoting from my prior piece, why is this happening?  There are many reasons why the total fertility rate is declining:

  • Educating females makes many of them want to have fewer kids, whether the reason is pain, effort, wanting to work outside the home, etc.
  • Contraception is more widely available.
  • The marriage rate is declining globally.  Willingness to have children is positively correlated with marriage.
  • Governments provide an illusion of support, commonly believed, that the government can support people in their old age, so people don’t have kids for old age support.

The rapidly slowing rate of childbearing will have global population peak in the early 2030s at a level in the lower 8 billions, unless there is some further change to attitudes on children that makes people have more or even fewer kids.

Some of those changes may come from:

  • governments looking to stem a shrinking population that is causing a future problem with their social welfare programs.  (Note: in general, whatever governments offer, people don’t have materially more kids. Once women are convinced that kids are more of a burden than an advantage, they do not easily shift from that view, even if that view is wrong.)
  • Various religious leaders realizing that the women are not with the program of growing their ranks, where contraception has become quietly common.  I am speaking mostly of Catholics and Muslims here.
  • Abortion, especially for sex selection reasons becomes more or less common.  Growth in future population depends heavily on the level of fertile women, and if they are being killed or not at birth in places like China, India, the satellite countries of the former Soviet Union, etc… fewer women means a lower growth rate, and unhappier societies 20+ years out.

As I close, I want to list a few nations that are below replacement rate, that would surprise some people:

  • Bahrain
  • Qatar
  • Lebanon
  • Azerbaijan
  • Georgia
  • Tunisia
  • North Korea
  • Uzbekistan
  • Iran
  • Brazil

And those the are close to replacement rate:

  • Turkey
  • Indonesia
  • UAE
  • Saudi Arabia (Wahabism is less strong than believed)
  • India
  • Mexico
  • Argentina

One last point, because the demographics profession has been slow to pick up on these shifts, if present trends continue, within 10 years, I believe you will see a scad of articles talking about the likely leveling off of global population and even future shrinkage of global population, and the effects thereof.  Always something to worry about…

On Math Education

Wednesday, November 28th, 2012

When I was a kid, my life was mathematics.  When I was little, my mom would hand me sheets of addition and subtraction problems that did not involve carrying or borrowing, and I would fill them out for her, and she would give me more.  That’s my earliest memory.  Second earliest is the procession for President Kennedy after his death.  Third earliest might be my Dad changing my brother’s diaper.  My mother once said, “You must have remembered it because of uniqueness.”

Anyway, when I was a kid, before I went into first grade, my mom taught me multiplication and division.  My Dad taught me some heuristic rules around percentages.

So when I came into first grade at age six, I was shocked that no one else could do math.  I was good enough with math and reading that the special education teacher took note of me, and helped give me my unusual education 1967-1969.  Though I was in a normal classroom, I was a “group of one.”  I had my own special reading and math books.  The teachers pushed a variety of enrichment materials to me, but it was like subpar homeschooling.  I was on my own, and no one would correct my work.  For a little kid, I was pretty motivated, but it would have helped a lot to have more adult interaction.

SRA helped on the reading side, and there were later SRA attempts at math though I don’t think that did much.

In third grade, they gave me a programmed instruction curriculum in math, in addition to the ordinary class.  At some points, I acted as a tutor to other students.  The programmed instruction was modeled after the “new math” fad.  I could get it, but at the time, I realized that I was so different from my peers, that I knew that if I could get it, that did not mean that others my age could get it.

Then in fourth grade, they mainstreamed me.  I spent time playing around with how to do square and cube roots by hand.  Tedious, but not that hard to do.

In fifth grade, my Father brought me an algebra book that used programmed instruction.  I puzzled over it, and didn’t get it until I talked to an older friend about it who told that “x’ is a number that we do not know, but are trying to calculate.

There’s more to this story, but I will drop it, lest I bore you…

What I experienced as a child affected me.  I could see the abstraction of math while young, and it amazed me.  But now look through my eyes as I find out that I am unusual.  There is a normal track for math, and a normal way to teach it.  As I tried to tutor my classmates, I realized math was not intuitive for almost everyone else as it was for me.

I became a good math tutor.  Parents would hire me , and ask me what my rates were.  I don’t know how I thought of this, but I said, “Five dollars per sitting.  A sitting could be five minutes or two hours. If I lose their attention span the sitting ends.”  That motivated the parents to motivate the kid.  After one short sitting, future sittings got longer.

As an adult, I married a math teacher.  She admits that I am the better with math, and that I often come up with creative ways to teach concepts that she could not.  She is still quite good with teaching math such that all of our biological and adopted children made progress in their percentile scores in math and other topics as they grew.

I think that I know math, and how to teach math.  I have done it while young, and older with my older children.  I have never taken a course in education, and thus my views of pedagogy have never been sabotaged by what is taught in most colleges regarding teaching children.

Some may think this assessment too harsh, but remember, we had the “New Math” in the Sixties.  It was a disaster.  For me, a math prodigy, thinking about math through the lens of set theory, it was challenging and interesting.  To most students, it was deadening.

So now we have the evil “Common Core Math Standards.” [CCMS] When I was a kid we joked about Communist plots to destroy America.  Well, I think the Communists are pretty weak in general — they don’t understand the nature of man.  But here we are trying to make kids try to make adult judgments regarding math.  That’s just plain stupid, because it doesn’t get the way children develop.

The Holy Grail of Critical Thinking

I don’t think critical thinking can be taught.  If you are smart enough, you will think critically. If not, no.

I say this as one where my wife and I have homeschooled our eight children for 18 years, and as my children get older they disagree with us to varying degrees.  We taught them well.  Sadly, some disagree with our premises.  But, they are all smart and the seven that have gone through standardized testing have all shown significant progress, moving 25% or more in the percentile rankings from elementary school to high school.  My wife teaches very well, and I support her. Please also note that five of the children were adopted, and the same effects happened with them.

But the CCMS flips things on its head.  Children need to learn facts.  They can absorb facts because they are easy for the young  to absorb.  Drill on math facts is a very good thing because it eliminates a hurdle to learning more in math.  Once you know the basics, the mind is capable of absorbing more abstract reasoning.

It is the opposite of what the experts say.  Math should focus on the concrete with young children, and as they get wiser, on to things that are more abstract.  They should not begin with abstraction, and try to move to the concrete.

Think about it for a moment: would you rather hire a guy who understood the basics of your business, or hire a guy who had a theory about your business, but did not understand the basics?  You would hire the former if you were smart.

Understanding the basics is important, and sadly, we have gotten away from it in the last 60+ years in math.  We did much better in the past, and we paid teachers less in real terms back then.  The colleges that teach teachers should be dismantled, and teacher accreditation should be eliminated, because there is no clear value created by accreditation.

We need education to be more like home schools, where teachers train students for many years in elementary grades K-8, where tutoring plays a large role. Understanding the student, and consistent mentoring makes a far brighter student.  Eliminating credentialing would being in brighter, more motivated teachers that ignore the idiocy to the teaching colleges.

Now maybe there is a home and private-schooling cabal, pushing CCMS in an  effort to destroy the public schools, or at minimum, assure that those who go to public schools will be peons to those who don’t go there.  I really doubt that, because those who don’t send their kids to public schools are more upright than those that don’t.  They are putting forth extra effort for their kids, versus people who don’t care.

Practical Advice

I live in Howard County, one of the richest counties in America.  Unique to Maryland, the counties are the school districts.  We homeschool in a county that is one of the best around.  We are evangelical Christians, but most homeschoolers here are secular. Why?

The school districts adopt a variety of dumb ideas like CCMS that hinder reading and math.  If I could vote to eliminate the public schools I would do so not out of ideology, but raw incompetence.

Most parents that we interact with are either hiring a tutor in math, or doing it themselves.  If that is the case, why not homeschool? It’s a lot easier than it looks, and it doesn’t take a lot of effort to outperform the public schools.

The main reason is the two-earner household.  Most could tighten their belts, and have one parent stay at home to teach the kids.  The second trouble is child control/discipline — my comment is if you are firm with them as parents were prior to 1950, you should have no problem, but consult your local statutes to figure what you have to hide from.

With CCMS many families will have to do one of the following:

  1. Tutor their children in math
  2. Pay someone to tutor their children in math
  3. Homeschool
  4. Start a war against those that set the public educational standards

Summary

Children are not capable of absorbing abstraction.  Every real parent knows that.  Fight the educated idiots who are trying to ruin math education with their misbegotten theories that do not understand math or kids.

Recent 13F filings

Saturday, November 24th, 2012

I make changes to my portfolio and those of my clients once a quarter, where I trade out of 2-4 of my ~35 companies, and buy a similar number of new companies.  I have detailed that in this article.

But one thing that I do differently now is where I source ideas.  There are three places:

  1. Articles I read that seem to have good ideas.  I print them out and put them in a folder.
  2. My industry studies.
  3. Scanning the 13Fs of ~75 clever investors.  That’s the new part.

I’m not going to write a lot more commentary this evening.  I’m just going to give you a results dump.  I have already gone through my results and made changes to my clients’ portfolios, save for one stock that is a little illiquid, and will take some time to acquire.

As it is, I want to share the following data with you from my trolling through the 13F filings:

Number of investors adding a new stock:

CUSIPNewTickerName
026874784

6

AIGAMERICAN INTL GROUP INC
25490A309

5

DTVDIRECTV
38259P508

5

GOOGGOOGLE INC.
50075N104

5

MDLZMondelez International, Inc.
65334H102

5

NXYNEXEN INC COMMON STOCK NPV
896945201

5

TRIPTRIPADVISOR INC
37045V100

4

GMGENERAL MTRS CO
399473107

4

GRPNGROUPON INC
46625H100

4

JPMJPMORGAN CHASE & CO
53071M880

4

LVNTALIBERTY VENTURES – SER A

 

Umm, Groupon, GM?  Interesting.

Number of investors adding to a stock position:

CUSIPIncreasedTickerName
026874784

13

AIGAMERICAN INTL GROUP INC
38259P508

12

GOOGGOOGLE INC.
191216100

12

KOCOCA COLA COMPANY
37045V100

11

GMGENERAL MTRS CO
24702R101

10

DELLDell Inc
742718109

9

PGPROCTER & GAMBLE CO/THE
172967424

9

CCITIGROUP INC
50075N104

8

MDLZMondelez International, Inc.
65248E104

8

NWSANEWS CORP
741503403

8

PCLNPRICELINE COM INC
037833100

8

AAPLAPPLE INC
896945201

7

TRIPTRIPADVISOR INC
125509109

7

CICIGNA CORP
78463V107

7

GLDSPDR GOLD TRUST
68389X105

7

ORCLOracle Corp

 

The companies most held by my group of investors:

CUSIPOwnedTickerName
38259P508

28

GOOGGOOGLE INC.
037833100

21

AAPLAPPLE INC
594918104

20

MSFTMICROSOFT CORP
68389X105

17

ORCLOracle Corp
026874784

15

AIGAMERICAN INTL GROUP INC
172967424

15

CCITIGROUP INC
478160104

15

JNJJOHNSON & JOHNSON
931142103

15

WMTWAL-MART STORES INC
084670702

14

BRK.BBERKSHIRE HATHAWAY INC-CL B
24702R101

13

DELLDell Inc
65248E104

13

NWSANEWS CORP
060505104

13

BACBANK OF AMERICA CORP
747525103

13

QCOMQUALCOMM INC
084670108

13

BRK.ABERKSHIRE HATHAWAY INC-CL A
191216100

12

KOCOCA COLA COMPANY
949746101

12

WFCWELLS FARGO & CO NEW

 

Number of investors decreasing a stock position:

CUSIPDecreasedTickerName
38259P508

16

GOOGGOOGLE INC.
594918104

15

MSFTMICROSOFT CORP
037833100

13

AAPLAPPLE INC
931142103

12

WMTWAL-MART STORES INC
68389X105

10

ORCLOracle Corp
17275R102

10

CSCOCISCO SYS INC COM
902973304

10

USBUS BANCORP DEL
084670702

9

BRK.BBERKSHIRE HATHAWAY INC-CL B
060505104

9

BACBANK OF AMERICA CORP
57636Q104

9

MAMastercard Inc – Class A
65248E104

8

NWSANEWS CORP
949746101

8

WFCWELLS FARGO & CO NEW
254687106

8

DISDISNEY WALT CO
717081103

8

PFEPFIZER INC
92826C839

8

VVisa Inc-Class A Shares
931422109

8

WAGWALGREEN CO

 

Number of investors selling a stock entirely:

CUSIPSoldTickerName
25490A101

6

DTVDIRECTV-CLASS A
594918104

4

MSFTMICROSOFT CORP
931422109

4

WAGWALGREEN CO
87612E106

4

TGTTARGET CORP
032346108

4

AMLNAMYLIN PHARMACEUTICALS INC
037833100

3

AAPLAPPLE INC
060505104

3

BACBANK OF AMERICA CORP
57636Q104

3

MAMastercard Inc – Class A
65248E104

3

NWSANEWS CORP
871503108

3

SYMCSYMANTEC CORP
172967424

3

CCITIGROUP INC
78463V107

3

GLDSPDR GOLD TRUST
032511107

3

APCANADARKO PETROLEUM CORP
53217V109

3

LIFELIFE TECHNOLOGIES CORP.
855030102

3

SPLSStaples Inc
053332102

3

AZOAUTOZONE INC
086516101

3

BBYBest Buy Company Inc
64110L106

3

NFLXNETFLIX INC
844741108

3

LUVSouthwest Airlines Co
256677105

3

DGDOLLAR GEN CORP NEW
91324P102

3

UNHUnitedhealth Group Inc
30161N101

3

EXCExelon Corp
778296103

3

ROSTROSS STORES INC
690742101

3

OCOWENS CORNING NEW
46120E602

3

ISRGINTUITIVE SURGICAL INC
726505100

3

PXPPlains Exploration
88023U101

3

TPXTEMPUR PEDIC INTL INC
382388106

3

GRGOODRICH CORP
532791100

3

LNCRLINCARE HOLDINGS INC.

 

As a percentage of market cap, new positions added:

CUSIPNewTickerName
G5784H106

NA

MANUMANCHESTER UTD PLC NEW
64107N206

27.49%

UEPSNet 1 UEPS Technologies Inc
06652K103

27.20%

BKUBANKUNITED INC
86663B102

26.98%

SNBCSun Bancorp Inc
147154207

25.80%

CACBCascade Bancorp
584404107

25.36%

MEGMEDIA GEN INC
09064Y307

23.66%

BIOFBioFuel Energy Corp.
269279402

14.54%

XCOEXCO RESOURCES
912318201

12.88%

UNGUNITED STATES NATL GAS FUND
121220107

12.21%

BKWBURGER KING WORLDWIDE INC
29788A104

10.06%

EOPNE2open, Inc.
G0585R106

10.03%

AGOAssured Guaranty Ltd.
25490A309

9.48%

DTVDIRECTV
44047T109

8.94%

HZNPHORIZON PHARMA INC
92343E102

8.74%

VRSNVeriSign Inc.
57686G105

8.58%

MATXMatson Inc
896945201

7.58%

TRIPTRIPADVISOR INC
39530A104

7.53%

GRHGreenhunter Energy Inc-Restric

 

Increases in positions as a percentage of market cap:

CUSIPIncreasedTickerName
G5784H106

361.97%

MANUMANCHESTER UTD PLC NEW
64107N206

27.49%

UEPSNet 1 UEPS Technologies Inc
06652K103

27.20%

BKUBANKUNITED INC
86663B102

26.98%

SNBCSun Bancorp Inc
147154207

25.80%

CACBCascade Bancorp
584404107

25.36%

MEGMEDIA GEN INC
09064Y307

24.24%

BIOFBioFuel Energy Corp.
912318201

15.09%

UNGUNITED STATES NATL GAS FUND
269279402

14.54%

XCOEXCO RESOURCES
121220107

12.21%

BKWBURGER KING WORLDWIDE INC
53635B107

11.90%

LQDTLiquidity Services, Inc.
29788A104

10.06%

EOPNE2open, Inc.
G0585R106

10.03%

AGOAssured Guaranty Ltd.
25490A309

9.48%

DTVDIRECTV
896945201

9.21%

TRIPTRIPADVISOR INC
779376102

9.21%

ROVIROVI CORP
44047T109

8.94%

HZNPHORIZON PHARMA INC
92343E102

8.74%

VRSNVeriSign Inc.
57686G105

8.58%

MATXMatson Inc
760975102

7.60%

RIMMRESEARCH IN MOTION LTD
39530A104

7.53%

GRHGreenhunter Energy Inc-Restric
07556Q105

7.41%

BZHBeazer Homes USA Inc
194014106

7.06%

CFXColfax Corporation

 

Decreases in positions as a percentage of market cap:

CUSIPDecreasedTickerName
147154207

-28.97%

CACBCascade Bancorp
98417P105

-27.68%

XINXINYUAN REAL ESTATE CO LTD
624756102

-27.02%

MLIMUELLER INDS INC
06652K103

-26.06%

BKUBANKUNITED INC
64107N206

-24.77%

UEPSNet 1 UEPS Technologies Inc
86663B102

-21.46%

SNBCSun Bancorp Inc
83545G102

-18.35%

SAHSONIC AUTOMOTIVE INC CL A
09064Y109

-15.81%

BIOFBIOFUEL ENERGY CORP
014481105

-15.75%

ALEXAlexander & Baldwin Inc
269279402

-13.78%

XCOEXCO RESOURCES
007865108

-11.85%

AROAeropostale Inc
205862402

-11.69%

CMVTCOMVERSE TECHNOLOGY INC
G0585R106

-10.38%

AGOAssured Guaranty Ltd.
499183804

-10.21%

KNOLKNOLOGY INC
25490A101

-9.29%

DTVDIRECTV-CLASS A
74165N105

-8.79%

PRMWPRIMO WTR CORP
760276105

-8.36%

RJETREPUBLIC AWYS HLDGS INC
359360104

-8.22%

FFEXFROZEN FOOD EXPRESS INDS INC
440441400

-8.16%

HRZCAHORIZON TELCOM – CLASS A
647581107

-8.06%

EDUNEW ORIENTAL ED & TECH GRP I
939640108

-7.94%

WPOWashington Post
960908309

-7.67%

WPRTWESTPORT INNOVATIONS INC
871206405

-7.48%

SCMRSYCAMORE NETWORKS INC
863236105

-7.44%

STRASTRAYER ED INC
918866104

-7.31%

VCIVALASSIS COMMUNICATIONS INC
532791100

-7.07%

LNCRLINCARE HOLDINGS INC.

 

Largest amount of stocks sold out in entire:

CUSIPSoldTickerName
147154207

-28.97%

CACBCascade Bancorp
98417P105

-27.68%

XINXINYUAN REAL ESTATE CO LTD
624756102

-27.02%

MLIMUELLER INDS INC
06652K103

-26.06%

BKUBANKUNITED INC
64107N206

-24.77%

UEPSNet 1 UEPS Technologies Inc
86663B102

-21.46%

SNBCSun Bancorp Inc
09064Y109

-15.81%

BIOFBIOFUEL ENERGY CORP
014481105

-15.75%

ALEXAlexander & Baldwin Inc
269279402

-13.78%

XCOEXCO RESOURCES
007865108

-11.85%

AROAeropostale Inc
205862402

-11.69%

CMVTCOMVERSE TECHNOLOGY INC
G0585R106

-10.38%

AGOAssured Guaranty Ltd.
499183804

-10.21%

KNOLKNOLOGY INC
25490A101

-9.29%

DTVDIRECTV-CLASS A
74165N105

-8.79%

PRMWPRIMO WTR CORP
760276105

-8.36%

RJETREPUBLIC AWYS HLDGS INC
440441400

-8.16%

HRZCAHORIZON TELCOM – CLASS A
939640108

-7.94%

WPOWashington Post
871206405

-7.48%

SCMRSYCAMORE NETWORKS INC
647581107

-7.47%

EDUNEW ORIENTAL ED & TECH GRP I
863236105

-7.44%

STRASTRAYER ED INC
918866104

-7.31%

VCIVALASSIS COMMUNICATIONS INC
532791100

-7.07%

LNCRLINCARE HOLDINGS INC.

 

Finally, a list of the largest companies held by my investors where there is still net buying going on:

G5784H106

NA

MANUMANCHESTER UTD PLC NEW
313549404

94.11%

FDMLFEDERAL MOGUL CORP
451100101

92.72%

IEPICAHN ENTERPRISES LP
25388BAD6

51.94%

DRIVDIGITAL RIV INC
09064Y307

40.95%

BIOFBioFuel Energy Corp.
63934E108

33.61%

NAVNavistar International Corp
708160106

31.98%

JCPPENNEY J C INC
254423106

31.23%

DINDINEEQUITY INC
584404107

29.86%

MEGMEDIA GEN INC
64107N206

27.49%

UEPSNet 1 UEPS Technologies Inc
06652K103

27.20%

BKUBANKUNITED INC
86663B102

26.98%

SNBCSun Bancorp Inc
76117W109

24.37%

RFPResolute Forest Products Inc
92552V100

23.72%

VSATVIASAT INC
896945201

23.44%

TRIPTRIPADVISOR INC
L00849106

23.41%

AGROADECOAGRO SA
549463AH0

22.73%

ALULUCENT TECHNOLOGIES INC
405217100

21.86%

HAINHAIN CELESTIAL GROUP INC
165167107

20.76%

CHKCHESAPEAKE ENERGY CORP
615369105

20.32%

MCOMoody’s
912318201

20.06%

UNGUNITED STATES NATL GAS FUND
812139301

19.92%

ZZSEALY CORP
874054109

18.64%

TTWOTAKE-TWO INTERACTIVE SOFTWAR
205363104

18.40%

CSCCOMPUTER SCIENCES CORP
92927K102

17.65%

WBCWABCO HOLDINGS INC
459028106

17.54%

INTLINTL FCStone Inc
92343E102

17.33%

VRSNVeriSign Inc.
42983D104

17.30%

ONEHIGHER ONE HLDGS INC
N7902X106

17.11%

STSENSATA TECHNOLOGIES HLDG BV
913837100

16.53%

USAPUNIVERSAL STAINLESS & ALLOY
194014106

15.31%

CFXColfax Corporation
N93540107

15.30%

VPRTVISTAPRINT N V
760975102

14.96%

RIMMRESEARCH IN MOTION LTD
269279402

14.84%

XCOEXCO RESOURCES
806037107

14.56%

SCSCScansource Inc
79377W108

14.37%

SKSSaks Incorporated
M25082104

14.06%

CKSWClickSoftware Ltd.
151290889

13.89%

CXCEMEX SAB-SPONS ADR PART CER
45166R204

13.86%

IDIXIDENIX PHARMACEUTICALS INC
H84989104

13.58%

TELTE CONNECTIVITY LTD
064058100

13.57%

BKBANK OF NEW YORK MELLON CORP
88033G100

13.46%

THCTENET HEALTHCARE CORP
53635B107

12.86%

LQDTLiquidity Services, Inc.
779376102

12.63%

ROVIROVI CORP
121220107

12.21%

BKWBURGER KING WORLDWIDE INC
345838106

12.16%

FRXForest Labs
79546E104

12.09%

SBHSALLY BEAUTY HLDGS INC
00724F101

11.91%

ADBEADOBE SYSTEMS INC
65248E104

11.82%

NWSANEWS CORP
421933102

11.64%

HMAHEALTH MGMT ASSOC INC NEW
24702R101

11.59%

DELLDell Inc
31428X106

11.54%

FDXFEDEX CORP
62944T105

11.29%

NVRNVR INC
741503403

11.13%

PCLNPRICELINE COM INC
512815101

10.95%

LAMRLAMAR ADVERTISING CO
84264A102

10.87%

SSESouthern Connecticut Bancorp
037604105

10.57%

APOLApollo Group Inc Cl A
90341W108

10.51%

LCCUS Airways Group Inc
150870103

10.28%

CECELANESE CORP-SERIES A
66988K102

10.24%

NCQNOVACOPPER INC
191216100

10.21%

KOCOCA COLA COMPANY
20854P109

10.09%

CNXCONSOL ENERGY INC
14040H105

10.08%

COFCAPITAL ONE FINANCIAL CORP
29788A104

10.06%

EOPNE2open, Inc.
12504L109

10.02%

CBGCBRE GROUP INC
489170100

9.97%

KMTKennametal Inc.
871503108

9.90%

SYMCSYMANTEC CORP
G02602103

9.71%

DOXAMDOCS LTD COMMON STOCK GBP.00
30226D106

9.59%

EXTREXTREME NETWORKS INC
25490A309

9.48%

DTVDIRECTV
G27823106

9.16%

DLPHDelphi Automotive PLC
774341101

9.09%

COLRockwell Collins Inc.
880779103

9.08%

TEXTEREX CORP NEW
984332106

9.01%

YHOOYAHOO! INC
44047T109

8.94%

HZNPHORIZON PHARMA INC
45031U101

8.88%

SFIISTAR FINL INC
447011107

8.68%

HUNHUNTSMAN CORP
66987E206

8.58%

NGNOVAGOLD RES INC
57686G105

8.58%

MATXMatson Inc
003881307

8.54%

ACTGACACIA RESH CORP
887317303

8.36%

TWXTIME WARNER INC
53219L109

8.33%

LPNTLIFEPOINT HOSPITALS INC
808513105

8.28%

SCHWSCHWAB CHARLES CORP NEW
751212101

8.16%

RLRALPH LAUREN CORP
812139400

8.15%

ZZSealy Corp
370023103

7.92%

GGPGENERAL GROWTH PPTYS INC NEW
171779309

7.86%

CIENCiena Corp.
73172K104

7.73%

PLCMPolycom Inc
774415103

7.72%

ROCROCKWOOD HLDGS INC
07556Q105

7.69%

BZHBeazer Homes USA Inc
31620M106

7.65%

FISFidelity National Information
39530A104

7.53%

GRHGreenhunter Energy Inc-Restric
103304101

7.42%

BYDBOYD GAMING CORP
257559203

7.42%

UFSDOMTAR CORP
20451N101

7.41%

CMPCompass Minerals
125581801

7.36%

CITCIT GROUP INC.
45666Q102

7.27%

INFAINFORMATICA CORP
G3157S106

7.26%

ESVENSCO PLC
251893103

7.23%

DVDeVry Inc.
256677105

7.14%

DGDOLLAR GEN CORP NEW
Y2573F102

7.09%

FLEXFLEXTRONICS INTL LTD
439734104

6.98%

HFBCHopFed Bancorp Inc.
20564W105

6.97%

SCORCOMSCORE INC
302130109

6.96%

EXPDExpeditors Int’l Wash Inc
95082P105

6.95%

WCCWESCO INTL INC (this can’t be right)
125509109

6.93%

CICIGNA CORP
192446102

6.86%

CTSHCOGNIZANT TECHNOLOGY SOLUTIO
588056101

6.75%

MERCMercer International Inc.
232820100

6.69%

CYTCYTEC INDUSTRIES INC
591708102

6.68%

PCSMETROPCS COMMUNICATIONS INC
90384S303

6.50%

ULTAULTA SALON COSMETCS & FRAG I
868536103

6.46%

SVUSUPERVALU INC
413160102

6.44%

HLITHARMONIC INC
204018105

6.39%

CPBCCommunity Partners Bancorp
382550101

6.24%

GTGOODYEAR TIRE &
265504100

6.18%

DNKNDUNKIN BRANDS GROUP INC
432589109

6.12%

HSHHillshire Brands Co
918194101

6.08%

WOOFVCA Antech Inc
024061103

5.90%

AXLAmerican Axle & Mfg Hldgs
233326107

5.86%

DSTD S T SYSTEMS INC
58501N101

5.84%

MDVNMEDIVATION INC
867892101

5.75%

SHOSUNSTONE HOTEL INVS INC N
143130102

5.72%

KMXCARMAX INC
073302101

5.42%

BEAVBE Aerospace, Inc.
026874784

5.34%

AIGAMERICAN INTL GROUP INC
863667101

5.30%

SYKStryker Corp
05615F102

5.30%

BWCBABCOCK & WILCOX CO NEW

 

That’s all for now.  Comments are welcomed below.

 

Full disclosure: long ORCL, WFC, SPLS, ESV, TEL

Bombing Baby BDC Bonds

Saturday, November 24th, 2012

After reading Jason Zweig’s good piece, “Should You Bottle Up Your Money in ‘Baby Bonds’?” I said to myself, “But what does the prospectus look like?”  So I went to EDGAR, and pulled up the prospectus for Fifth Street Finance Corp’s 5.875% Senior Notes due 2024.

Please understand — I get squeamish with the unsecured bonds of exotic financial companies.  Losses on the bonds of financial companies when they fail tend to be far worse than those of industrials or utilities.  That is a major reason why financial bonds typically yield more than similarly rated non-financial bonds.  They are more risky.

So, looking through the deal summary terms, we learn:

  • At $75 million, the deal is small.
  • It’s a 12-year deal — that’s done to confuse buyers, because it gets priced off the 10-year Treasury, giving the illusion of more spread.
  • Quarterly pay of interest which raises the effective yield a touch.
  • Senior subordinated, but…
  • effectively subordinated to all our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness, including without limitation, the $206.3 million of borrowings under our credit facilities outstanding as of October 10, 2012; and
  • structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, including without limitation, the indebtedness of Fifth Street Funding, LLC, Fifth Street Funding II, LLC and our SBIC subsidiaries.
  • The bonds are callable at par after 5 years.

The structural protections here are weak.  You are lending to a financial holding company where many of the assets are pledged to other creditors.  More on that in a moment.

The risk factors for a business development company like Fifth Street are significant, and can be found here, all eighteen-plus pages of them.  But the risk factors of the debt are more significant, and can be found here.  Here are the main headings:

  • The Notes will be unsecured and therefore will be effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future.
  • The Notes will be structurally subordinated to the indebtedness and other liabilities of our subsidiaries.
  • The indenture under which the Notes will be issued will contain limited protection for holders of the Notes.
  • There is no existing trading market for the Notes and, even if the NYSE approves the listing of the Notes, an active trading market for the Notes may not develop, which could limit your ability to sell the Notes or the market price of the Notes. 
  • If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes.

Unsecured holding company debt can be weak, because with some subsidiaries there may be regulatory limits or private limits to upstreaming capital to the holding companies.  That puts financial holding companies in a weak position, because when financial conditions get bad liquidity can get very tight.

And with business development companies [BDCs], which own and finance small-to-medium sized businesses, there is a lot of idiosyncratic risk including:

  • Your downside is 100%, but your upside is capped.
  • BDCs tend to be speculative investors.
  • Many of the assets held are subject to third-party security interests, which lessens the rights of unsecured lenders to the holding company.
  • BDCs, life REITs, have to pay out 90%+ of taxable income in order not to face corporate taxation.  That forces BDCs to continually go to the credit markets for financing.  But what if the market is no longer favorable for a year or two?
  • BDCs are placid weather vehicles, and more so the bonds.  One might be better off holding 30% Treasuries and 70% BDC stock.  At least you have more downside protection, and more upside.

So put me in the camp of those that have no interest in BDC debt.  It is a weak instrument, and regardless of what the rating agencies say, they are not investment grade risks.

Sorted Weekly Tweets

Saturday, November 24th, 2012

Politics & Policy

 

  • Was the Budget Deficit Worth the Fight? http://t.co/jDn9r7DC Budget deficits are an assault on the quality of our money & savings $$ @carney Nov 24, 2012
  • None Dare Call It Default http://t.co/4o0lnQoe A nicer term for what’s about to sock the middle class is ‘entitlement reform.’ $$ Nov 24, 2012
  • Judge Pens New Bankruptcy Chapter http://t.co/6V5cUQjS US BK Court Judge Thomas Bennett takes on the Jefferson County, AL Ch 9 filing $$ Nov 24, 2012
  • Banks reportedly lining up against Elizabeth Warren committee spot http://t.co/YRAId5TQ & http://t.co/LFXTCZEb I say give her a chance $$ Nov 21, 2012
  • Globalism goes backward http://t.co/h6kt67Lz As global growth slows, so does its handmaiden, globalization. $$ Nov 21, 2012
  • 2013 Looks a Lot Like 1937 in 4 Fearsome Ways http://t.co/iZjmM1ZA Pre-election spree, post-reduce deficit, class war, prior laws bite $$ Nov 20, 2012
  • FHA running out of money http://t.co/L1M7lRIK “We take the findings of the independent actuary very seriously…” loss reserves too low $$ Nov 20, 2012
  • Pension cuts could boost state’s Social Security costs http://t.co/61jicHRM If benefits drop below certain level, have 2 pay SS/Med taxes $$ Nov 19, 2012
  • Special Dividends Surge Fourfold as US Tax Increase Looms http://t.co/vPVaLNFU Last chance 2 reward shareholders w/low div tax rates $$ Nov 19, 2012
  • http://t.co/LJnienxh San Bernardino: How California law, police/firemen, CALPERS, dysfunctional politics, & bad pension acctg rules killed Nov 19, 2012

 

Monetary Policy

 

  • Soros Buying Gold as Record Prices Seen on Stimulus http://t.co/pJ5FTplo Gold prices react2cost of carry; neg in real terms now $$ #zoom Nov 24, 2012
  • Paula Broadwell’s Radar Tracks Generals, Not Fed http://t.co/WglEhJFo Bernanke’s/Yellen’s ideas will crumble from stagflation $$ @cabaum Nov 24, 2012
  • Abe threatens to turn BOJ into an unlimited piggy bank for the government http://t.co/LxWwmlyP Eventually the real economy will rebel $$ Nov 21, 2012
  • It’s a Good Bet the Fed Doesn’t Know What It’s Doing http://t.co/zG6mepy0 Couldn’t pick a worse Fed 4 crisis: imagines it knows what 2 do $$ Nov 19, 2012

 

Hewlett-Packard

 

  • Hurdling H-P: Oracle Shows Way in M&A http://t.co/fiJvmT2N Point is $ORCL ‘s older deals have been productive, $HPQ ‘s not. $$ FD:+$ORCL Nov 23, 2012
  • H-P’s Deal Process Bypassed CFO Pre-Whitman http://t.co/WfawtYfh Note that Cathie Lesjak opposed the Autonomy purchase. Smart lady $$ Nov 21, 2012
  • Goodwill Hunting http://t.co/ghFrEDlY @epicureandealmaker takes down a generally cruddy Bloomberg article on $HPQ & Goodwill accounting $$ Nov 21, 2012
  • Note to all writing about Hewlett Packard: the ticker is $HPQ, not $HP, which is Helmerich & Payne, which drills oil and gas wells $$ Nov 20, 2012
  • Ironic in many ways. HP should have been happy with their engineer-driven pre-Fiorina culture. It did a lot… http://t.co/rqXEW5Bi Nov 20, 2012

 

Loose Monetary Policy Harms Fringe Nations

 

  • Debt Burden Adds to Won Gains in Crimping Korea Rebound http://t.co/y6uHfFEw Loose monetary policy creates debt bubble in S. Korea $$ Nov 24, 2012
  • S&P: Australia is Spain in waiting http://t.co/usllSlBt Heavily indebted financial systems can be like the snowpack prior 2 an avalanche $$ Nov 21, 2012
  • Prison of Debt Paralyzes West http://t.co/ofJXWyLu Government debt after a point does not stimulate, but perpetuates unproductive policy $$ Nov 20, 2012
  • Purple Palace Abandoned Shows China Shadow-Banking Risk http://t.co/tmg6jPhy China is like Japan 23 years ago: fearsome & malinvested $$ Nov 20, 2012

 

Rest of the World

 

  • Egypt Presidential Decree Sparks Protests http://t.co/a5YUcvtN Anyone surprised that the Muslim Brotherhood came out on top? State Dept Nov 23, 2012
  • Can Xi Jinping bring about the change China needs? http://t.co/i3XGKZBJ Long article on the new Chinese leader; very tough road to travel $$ Nov 21, 2012
  • Pipeline Would Loosen Russian Stranglehold On European Natural Gas Supply http://t.co/3zPUInTZ Where there is a will there is a way $$ Nov 20, 2012
  • Misconstruing Germany Will Prove to Be Death of the Euro http://t.co/nCJ7rLiZ Germany won’t want a banking union; their banks have issues Nov 20, 2012
  • http://t.co/MSqwtq4u China unlikely to make shift to consumption, b/c it means granting freedom to the people & reducing party cronyism $$ Nov 20, 2012

 

Personal Finance

 

  • After Sandy damage, insurance adjusters may bring more bad news http://t.co/GTAhE9x3 If odds of getting flooded > 1% get flood insurance $$ Nov 24, 2012
  • Tax Moves to Make Now http://t.co/TmoaGOCC Balanced piece; worth a read. Assumes we don’t go over the fiscal cliff: a deal is struck $$ Nov 24, 2012
  • Lenders Rev Their Engines http://t.co/5jz3pt3l Surge in Demand for Auto Loans Spurs Push Into Sector; Subprime Is a Big Draw $$ Nov 23, 2012
  • For ‘Credit Invisibles,’ A Market Takes Shape http://t.co/4l849dmK A blast from the past; using payment histories 2 establish credit $$ Nov 20, 2012
  • apparent mojo http://t.co/lDNmxD1s @researchpuzzler does homework, comes to correct conclusion on a tiny junk fund featured in the WSJ $$ Nov 20, 2012
  • Draining Away! http://t.co/hQAqzE9M Universal life policies suffer from low interest rates. B sure 2 check the gteed minimum rate $$ Nov 19, 2012

 

Miscellaneous

 

  • The Great Thanksgiving Hoax http://t.co/kwbE39ee Strangers were the lazy ones; like the Hutterites the Saints could have made socialism work Nov 21, 2012
  • Archbishop Says Church Lost Credibility on Women Bishops http://t.co/n7XkjfDM The “laity” understands the Bible better than the priests $$ Nov 21, 2012
  • Why One Poll Says 45% Would Rather Skip Christmas http://t.co/zwwqY00R Costs a lot; nativity means much to Christians, Christmas is made-up Nov 20, 2012
  • Windows 8 killed my PC http://t.co/slcTSRVA No operating system should expect 2b equally good touch vs keyboard, tablet vs laptop, etc $$ Nov 20, 2012
  • Kill the Password: Y a String of Characters Can’t Protect Us Anymore http://t.co/jPoLzKpK Long but worth it; multifactor ID is the future $$ Nov 20, 2012

 

Market Dynamics

 

  • Kyle Bass gives it to us with both barrels http://t.co/yZLt36kW Very long. Worth it if you want to see what he is up to in investing. $$ Nov 21, 2012
  • Mismeasurement of Pensions Before and After Retirement http://t.co/DwE869Js The full paper, & you don’t have to pay NBER a cent $$ Nov 19, 2012
  • In a Slow Market, Wait for Compelling Values Says Johnson http://t.co/lf891lb5 Expects 5%-ish returns 2013; unusual 2 get small returns $$ Nov 19, 2012
  • Tech Sets Correction Course http://t.co/ct7yaWcb Largest sector of the market is feeling soggy, which does not bode well 4 the rest $$ Nov 19, 2012
  • Why Mutual Fund Guardians Are Failing http://t.co/UMvk4AAB Old/good article on the flaws of mutual fund governance; skewed incentives $$ Nov 19, 2012
  • Investment Falls Off a Cliff http://t.co/GVqnEdLH US Companies Cut Spending Plans Amid Fiscal and Economic Uncertainty; unstable policy Nov 19, 2012
  • Buy on the rumor, sell on the news $$ RT @BloombergNews: S&P 500 rises most in two months amid budget deal optimism | http://t.co/yyR2uiSi Nov 19, 2012

 

Other Companies

 

  • I know the basics on a lot of companies but is the first time I have heard of Schiff Nutrition International $SHF http://t.co/jxHIdf1v $$ Nov 21, 2012
  • Hostess Judge Sees Return to ‘Liquidation Scenario’ http://t.co/OeDI3sTX Twinkies will survive, but many who produce them will not $$ Nov 21, 2012
  • Hostess Seen Attracting Bids for Assets From Flowers http://t.co/vAu1o7Wv The brands will get bought; the value is there, not in plants $$ Nov 19, 2012
  • Drillers Begin Reusing ‘Frack Water’ http://t.co/nOiR3sy5 Energy Firms Explore Recycling Options 4 Industry That Uses Water Like Chicago Nov 19, 2012

 

Wrong

 

  • Bad Headline: Wall St Kept Winning on Mortgages Upending Homeowners http://t.co/fuKDx4ss Most tricky mtges not originated by Wall St $$ Nov 19, 2012
  • Wrong: S&P 500 in Cheapest Bull Market Since Ronald Reagan http://t.co/jNJ1x0SU When will they learn *not* 2 use P/E 4 mkt valiuation? $$ Nov 19, 2012

 

Replies

 

  • @PlanMaestro Thanks — missed that. Nov 23, 2012
  • @PlanMaestro I just can’t believe the 1.5 Billion figure for the Earth’s carrying capacity; even the Club of Rome is more optimistic, no? Nov 23, 2012
  • “How many lines can be drawn in a 2D plane such that they are equidistant from 3 non-collinear points?” 3… http://t.co/QQkn7IcR Nov 23, 2012
  • Grantham is outside of his skill set here, and should be ignored. Also, global population will top out at… http://t.co/ZACbqPQO Nov 23, 2012
  • Nothing against Bill McBride. He deserves praise from all of us. There are three missing pieces though, and… http://t.co/Dfs50uGQ Nov 21, 2012
  • . @Dvolatility H-P CDS Curve Flattens on Write-Down http://t.co/9vWEDzcZ Early buyers of $HPQ protection made decent money, late less $$ Nov 21, 2012
  • @Dvolatility $HPQ CDS spreads did forecast the spread widening, but not the magnitude. It also forecast the stock price move also $$ Nov 21, 2012
  • @japhychron @TFMkts @dvandeventer @Dvolatility Or, does the negative tangible book have an impact on modeling? $HPQ $$ Nov 21, 2012
  • “You can count beans and trace them back to their sources, good. But can you adequately question the…” $$ David_Merkel http://t.co/JS3Jbtnb Nov 21, 2012
  • @dvandeventer @Dvolatility Any read on the level 5Y CDS is trading at? Used to have a BBG terminal, but don’t now… Nov 21, 2012
  • @Dvolatility Where does the $HPQ CDS trade now? Nov 21, 2012
  • @qusmablog Much of the world has to go through a “failure cycle” before “normal growth” can reboot. Many entrenched interests don’t want it. Nov 21, 2012
  • @Nonrelatedsense @researchpuzzler Also not good for the WSJ 2 write about a small fund w/short track record… bigger problem $$ Nov 20, 2012
  • @Nonrelatedsense @researchpuzzler Apologies, Chou Income did beat the Barclays Agg since inception http://t.co/VwYvIVYj Carry does it $$ Nov 20, 2012
  • @CEOofmyFUTURE longer term measures like the Q-ratio, CAPE10, Price to resources, & Hussman has a measure also Nov 19, 2012
  • @BloombergNews Who’s in charge of this page: http://t.co/2sJ5NEDK They changed it last week and made it less useful $$ Nov 19, 2012

 

Retweets

 

  • Notable & Honorable $$ RT @Nati2de: Larry Hagman was married to the same woman since 1954. Impressive, especially for a Hollywood actor. Nov 24, 2012
  • Growth comes when capital, labor & resources have fair prices RT @BloombergView: Greece needs growth, not austerity | http://t.co/f620QBRU Nov 21, 2012
  • RT @retheauditors: #1 cause of accounting fraud is revenue recognition issues and #1 industry for accounting fraud is technology/softwar … Nov 20, 2012
  • Gracias, no se habla $$ RT @besanson: #FunAndFinance Interest Rate Swaps and LIBOR in 5 minutes // Thanks or RT http://t.co/zu2LP7Nx Nov 20, 2012
  • Torture data until it confesses something $$ RT @Alea_: Does “Statistical Significance” Imply “Actually Significant”? http://t.co/BBTfUThF Nov 20, 2012
  • RT @finemrespice: The Federal Housing Administration stands against all prior biological evidence that primates are capable of forming m … Nov 19, 2012
  • Buy on the rumor, sell on the news $$ RT @BloombergNews: S&P 500 rises most in two months amid budget deal optimism | http://t.co/yyR2uiSi Nov 19, 2012

 

Blog News

 

  • My week on twitter: 75 retweets received, 4 new listings, 50 new followers, 92 mentions. Via: http://t.co/SPrAWil0 Nov 22, 2012

 

Stuffing & Thanksgiving

Thursday, November 22nd, 2012

Some of my readers might know that one of my hobbies is cooking.  Today I cooked a 24-pound Turkey, 4-pounds of Roast Beef, made gravies for both, mashed potatoes, mulled apple cider, toffee and stuffing, for a gathering of 25 at my house, who brought other foods (salads, some pies).  My kids made pies, Watergate salad, and fudge.  My wife got the day off, which is actually pretty normal at our house, because homeschooling the remaining four kids takes up her time.  The kids and I cook.

One family at the meal has given up on wheat, because of gluten.  They don’t have the celiac disease, but they say they feel better without it.  The pie crusts, aside from one brave attempt to use rice flour, were the only wheat in the meal. (Note: gluten makes a lot of foods possible.  It holds things together.)

But that gave me a challenge: wheat-free stuffing.  Now, my wife has a rule that she employs for when company visits: “Never serve anything that you have never tried before.”  I don’t follow that rule.  I have a different rule: “Taste. Adjust. Repeat as needed.”  I have enough tricks up my sleeve, that if something is not working, I can usually fix it.  Cooking is fairly intuitive for me; I can usually figure out what is needed to make the dish sing.

But I had never run into a stuffing recipe that did not contain *some* wheat.  After all, most cornbread recipes contain wheat.  But when I saw this recipe, and thought it through, I realized that I could create a non-wheat stuffing recipe that would taste very similar to a traditional Thanksgiving stuffing.  So here’s the recipe:

Ingredients

  • 1 cup (250 ml) butter
  • 2 cups (500 ml) cornmeal
  • 6 cups (750 ml) milk
  • 4 large eggs
  • 2 tsp (30 ml) salt
  • 1 tsp (15 ml) sugar
  • 2 tsp (30 ml) baking powder
  • 2 medium onions
  • 2 stalks of celery
  • 6 chicken bouillon cubes
  • 1 tbl (45 ml) parsley (dried is fine for the spices)
  • 1 tsp (15 ml) sage
  • 1 tsp (15 ml) rosemary
  • 1 tsp (15 ml) thyme
  • butter to grease casserole dish

Procedure

  1. Preheat oven to 350°F (175°C)
  2. Melt butter in a pot on medium heat.
  3. Chop celery & onion and add to the pot.  Cook until softened.
  4. Add cornmeal. Stir mixture to warm up the cornmeal.
  5. Add milk and bouillon cubes. Stir until mixture has thickened.
  6. Add parsley, sage, rosemary and thyme.
  7. Beat eggs. Beat in salt, sugar, and baking powder.
  8. Slowly add some of the thickened cornmeal mixture to the egg mixture while mixing to temper the eggs.  (Note: Do not add the egg mixture to the cornmeal. Some of the eggs will cook on impact resulting in streaks of cooked eggs and a heavier stuffing.)
  9. Stir the egg mixture into the rest of the cornmeal.
  10. Pour the mixture into a greased 9×13 inch casserole dish
  11. Bake at 350°F (175°C) for 30 minutes or until the top has browned

A fusion of two dishes, never tried before, and it was a hit.  Everyone liked it. Note that the amounts on the spices are approximations — I added the spices by hand, not spoon. “Taste. Adjust. Repeat as needed.”

So, for those that want to have stuffing, but can’t have wheat, this could be a good alternative.

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There’s something more to say this evening.  My wife came to me after talking with a neighbor who is having difficulties at work because of a tough boss.  In my own life, I have had my share of good and bad bosses, so I can sympathize.

In this environment, the first thing is to be thankful that you have a job.  Second, if you have a good boss, be very thankful.  A good boss is often worth more than a higher salary.  I learned more from my good bosses than those that were negligent.

And, if you are a boss, consider how you can better teach and motivate your subordinates.  I was working for the guy who I regard as my “best boss,” when he came in and said “Sorry, David, you drew the short straw, and now you have to oversee YYY.”  YYY was a problem employee who was quite bright as a programmer.  He was slow to get work done.  I sensed that he was bored.  Being more of a programmer at that time, I had some sympathy for him — eventually, my thought was, “How can I make his work more interesting?”  The commercial internet was still waiting to be born, and so I suggested the concept of setting up a “bulletin board” that could be accessed via dialup for our pension clients to use.

That caught his attention, and not only did he throw himself into that project, but he did all of his more “boring” projects well also.

I’m not good with people, but I did turn around one problem employee.

Back to my main point: if you have a job be grateful, but if you have a good boss, be more grateful.

From the Merkel house: blessings to all of my readers, not only now, but always and ever.

On Hedge Funds

Thursday, November 22nd, 2012

I don’t think hedge funds are an optimal way to manage assets.  Here are some of my reasons:

  • The fees are too high.  Why pay 2% of assets, and give up 20% of the profits?
  • Hedge funds, aside from Commodity Trading Advisers and Global Macro funds, tend to be correlated, yield-seeking, and volatility-averse.  Why pay up for correlated performance?
  • The statistics behind hedge fund marketing suffer from backfill bias, survivor bias, and a few other biases.

Actual returns from hedge funds trail buy-and-hold returns by a significant margin.  Investors in hedge funds are poor timers of investment.  Though past results do not indicate future returns, investors act like that.  No one will add money to a losing fund, even if that is the point where it might start to do better.

To me it seems that we are running into the limits of arbitrage.  Shorting is unnatural, and so are many derivatives.  How much do you have to pay up to get someone else to take the other side of the trade?

Only so much stock/bonds, etc., can be lent out and shorted with no additional cost.  Beyond that, shorts have to pay up, and that crimps their profits.

This is one big reason why I am happy to be a long-only value investor.  I only have to focus of businesses making money versus their current share price.  I don’t have to deal with the games surrounding shorting.  That simplifies my decision making considerably.

On Hucksters

Wednesday, November 21st, 2012

I get my share of requests for help.  Some are from naive friends (but not so naive that they don’t ask me) are solicited on Nigerian scams.  A few quick analyses, and I can tell them: don’t do it.  This is a scam.

Then there are people who trot a business idea past me.  Some of the ideas sound pretty good, but upon further examination, I wonder why it hasn’t worked so far.  Probing that, the answer is that “business partners failed me.”  Mmm… I can understand that once or twice but when it repeats, it makes me look at the entrepreneur.

There was one guy who had a compelling idea regarding health insurance that I thought was promising, and so I let him into my network of contacts, while saying to them “This might be promising or not.  There are some good ideas here, but he is too certain of his views, and that worries me.”  A variety of talented executives looked at his idea, and passed.  A friend of mine gave it some attention, thought it had promise, and he met with him, worked with him, but he proved unstable.  In the end, he blamed us.

That typifies hucksters.  Someone else is always to blame, and they have this great untapped concept, but no one will help fund their genius.

So now, I have a client who approached me regarding an investment in the energy sector pitched to him by a friend.  I help my clients.  If they have investment issues away from me, I will take some time to give them my opinion.

But here’s the problem:

  1. The illustrated returns are too good to be true.
  2. The CEO has no experience operating an energy company.
  3. The CEO’s career has gone here and there, but has not amounted to much, such that he can’t fund a $500K project on his own.
  4. All of the helpers/directors in the illustration document have other jobs now, and may or may not be available to help if the project develops.
  5. Some of them have overstated their resumes, or have stated things that can’t verified.
  6. Some board members are questionable.
  7. The opportunities, if true, are of a reasonable size such that small cap public E&P companies could take advantage of the opportunities.
  8. The core idea is that there are a lot of small lazy oil producers who are unwilling to invest to improve output.
  9. The pitchbook mixes in gold mining and clever trading of energy contracts — those are different businesses.  I want developmental stage businesses to focus.
  10. If the first opportunity costs only$500K, you mean the whole group of interested parties doesn’t have $500K to invest?  I don’t want to invest where the management/board is not invested to the hilt.

I don’t see this as a valid concept, and will tell my friend/client to not invest.

All that said, I want to say to all my readers that good investing considers uncertainty, and focuses on the possibility of loss.  Bad investing focuses on possible gains.

Good investing sardonically asks “Why am I the lucky one?“  There are a lot of Baby Boomers out there who have not done well, and are looking for one miraculous venture to give them the retirement that they dreamed of.  They will take chances with the money of others that they would never do with their own.

To my readers: be wary of private investment opportunities.  Beware of those that are very certain they will succeed, but they need your money to succeed.  The certainty is incompatible with the request for external funds in most cases.

Hucksters are always certain; good investors are skeptical.

Charlie Brown the Retail Investor

Saturday, November 17th, 2012

 

Last week I tweeted:  Professional investors would be sad if retail left the mkt. Lucy would feel the same if Charlie Brown gave up trying to kick the football.

Now, I don’t like being cynical, but there is smart money and dumb money.  Some of the smart money is retail.  My mother and my late Father-in-law would qualify as “smart money.”  Most retail investors do not qualify as smart money.

Alice Schroeder spoke to the Baltimore CFA Society last week, on 11/7, and talked about Warren Buffett and his thought processes on investing, and the degree of focus he brings to his work.

No, average people can’t do what Buffett does.  99.9%+ of people can’t do what Buffett does.  Buffett leads the league in terms of the number of dollars of excess return he has created.

Most retail investors would be better off outsourcing to an investment advisor running separately managed accounts, which is more tax-efficient than mutual funds, and letting them brave the vicissitudes of the markets.

It is not that the investment advisor will beat the averages, but if he has a long enough time horizon and does not give in to panic and greed as most retail investors do, he will provide value to his clients.  He protects them from human nature.

That said, many investment advisors are subject to the same pressures, because they fear the reactions of their clients, if they underperform.

You might argue, “But I can buy index funds, lower my expenses, and live with modest underperformance, rather than greater underperformance on average from active managers.”  If you can do that, and control your emotions, good.  Most can’t.  They sell in a panic at the bottom, and allocate more near the top.  People can argue over rebalancing, but it does help people make better investment decisions, on average.

Though I am not fully happy with my performance for my clients, I have not changed my methods that worked so well for me in the past.  My methods that have worked well will work well again.

What I can say is that toward the end of a fiscal year, I sell one significant loser.  My clients gain the tax benefit of a long-term capital loss.  I may buy it back after the wash sale rules expire.  If I buy it back, it will be after significant study.  I don’t fall in love with stocks, though I usually hold them for three years on average.

As it is, whatever my clients get, I get.  I am the the single largest investor in my ideas, and clients get a clone of my portfolios, whether stocks or bonds.

Those who invest with me get my slowness to act.  My portfolio turnover is around 30%/year, versus 120% for most mutual funds.  Most investment decisions take time to work out, and retail investors leave before the workout occurs, and after disappointment.

I am not asking you to invest with me.  I am encouraging you to think more long term with your investments, and also consider how you can incorporate a margin of safety in your investing.

Aim for “pretty good” investing, and you might succeed.  Aim for “best” investing, and you will likely fail.  That’s the way of the market, on average.

And if I were Charlie Brown (who reminds me of my father) I would say to Lucy, “Okay, hold it there!”  And then, I would walk home, hug Snoopy and Sally, and get a good night’s rest in bed, and let Lucy suffer from holding the ball.

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.


Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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