Sunday, April 30, 2017 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CCXXIV

American Diet from 1971-2014

Here are some interesting facts about food consumption in America. Several other Western countries probably have similar trends, although the actual foods may differ somewhat (I expect Canada to be at least 90% identical to USA). The following charts depict various types of food consumption from 1971 to 2014 (there is also some data for Britain here).

I'm sure there are investment implications but I'm not sure how easy it is to predict such trends. When reading these charts do keep in mind that comparisons are complicated given that there is quantity but there is also price (not shown) i.e. some item may cost 2x what something else does.

Some trends are driven by changing economics of the business. For instance, Americans used to consume less chicken (in terms of weight) in 1971 than beef but now they consume 2x as much chicken. Consumption of chicken has gone up around 2x while beef has declined and this is mostly due to cheaper cost of producing chickens. I'm guessing that the increase in consumption of strawberries, bananas and a few similar things are driven by cheaper production costs as well (including cheaper imports from Mexico and central America). A few trends are probably driven by changing demographics and introduction of new foods/diets (increase in avocado is probably driven by increased Hispanic population and food types).

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Saturday, April 29, 2017 0 comments ++[ CLICK TO COMMENT ]++

Howard Marks: Markets Richly Valued but You Don't Have a Choice

Howard Marks gave his opinion on the markets and I thought it succinctly captured the current state quite nicely. His area of expertise is the credit market but given how stocks and bonds are all at high valuations, the views are applicable across the whole investment universe in my opinion.

He basically says the market is richly valued but does not think it is overvalued or in a bubble. He thinks high-yield spreads--this is the spread between junk bonds and treasuries--needs to be smaller for it to be a bubble, at least in bonds.

I also like how he thinks about the market and talks about how it is what it is and you don't get to pick how you want it to be. He states the market can be highly valued, fairly valued, or undervalued and right now it is highly valued--but you don't really pick how it is.

If you are a professional investor or money manager, you kind of have to be invested in something so it comes down to earning the best out of the various possibilities. It will be difficult to earn high returns and investors will be reluctant to give money to managers (maybe that's one reason passive indexing is taking off?).

The current situation poses a bigger dilemma for small investors (who have more discretion on where and when to invest) and those nearing retirement (who can't afford to lose money; even if markdowns are temporary, they don't have enough time to "make it back"). It's kind of scary to be investing right now because you are basically locking in low future long-term returns. And if you tried going for higher returns, there is high likelihood you are reaching into lower quality securities and possibly increasing risk.

I see numerous amateur investors, including so-called value investors, who appear to be taking on much higher risk in order to aim for higher returns--the worst thing is that I don't think they realize they are doing that. Examples include some who are investing in preferred shares, which are generally poor investments (neither safe as bonds nor provide potentially high returns like stocks) and are better suited for corporations (depending on country, it can be tax-advantageous for corporations to own preferred shares of other companies) and certain special investing styles/strategies. I also see some investing in large-cap or mega-cap companies at P/Es over 20 even though those companies have low growth prospects (since they are so large) and questionable capital allocation (so many are buying back shares at seemingly high valuations).

It's really tough to invest right now. I have been researching a bunch of stocks and hardly anything seems cheap; and the ones that do appear cheap are cyclicals vulnerable to economic recession.

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Sunday, April 23, 2017 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CCXXIII

Cannabis (Marijuana) Stock Performance

Still not fully legal and market likely to be limited for a few years more but the Bloomberg Intelligence Global Cannabis Competitive Peers Index is worth around $55 billion. Not all stocks are 100% marijuana-related and most of the value is so far in the bio-pharma sector but still indicates market pricing for this emerging industry.

source: "54 Stocks Deep in the Weeds," Laurie Meisler, Bloomberg, April 20, 2017

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Friday, April 21, 2017 0 comments ++[ CLICK TO COMMENT ]++

Sold: Khan Resources (KRI)

Some third party is making an offer (approved by Board) for $0.05 for remaining shares of Khan Resources and I figured the deal was going to be approved by shareholders so I sold out at $0.055. Overall I'm satisfied with this return given how most of the capital was returned very quickly last year. This is an ideal liquidation situation and I would invest most of my money in these situations if I could. Unfortunately the stock was lightly traded and hard to acquire many shares so couldn't build up any meaningful position.

Sale Price: $0.055
Total Return: 5.1% (annualized approx. 10% -- meaningless since less than 1  year holding period)

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Thursday, April 20, 2017 0 comments ++[ CLICK TO COMMENT ]++

Graham and Doddsville 2013 Li Lu Interview

The game of investing is a process of discovering: who you are, what you’re interested in, what you’re good at, what you love to do, then magnifying that until you gain a sizable edge over all the other people.
-- Li Lu, Graham & Doddsville newsletter, Spring 2013
When I first encountered him many years ago, I didn't know how good of an investor Li Lu was. Now, it seems like he is one of the top ones. I don't consider him a superinvestor (yet) but that's partly because his record and his stockpicking is unclear to me. In any case, Charlie Munger is a big fan of him so Li Lu is definitely in the top 25% of the investing world.

I ran across a very good interview with him in the Spring 2013 Graham & Doddsville newsletter (Columbia Business School). Some of you may have seen it already but it was the first time I read it--I was away from investing the last few years around the time of this report--and it is an excellent interview. If you haven't read it before, I highly recommend it. Even if you don't care for Li Lu or his investing style, the content is very insightful.

The good thing about Li Lu is that he is very open and tries to explain his thoughts so newbies and amateur investors can learn a lot. In contrast, there are many other successful investors who don't really say anything insightful and I hardly learn anything from them. In fact, I think this interview might be one of the best investment pieces I have read in my investing career. It covers so many important topics and Li Lu's thoughts are worth pondering. For future historical purposes, I thought I would extract the key points and post briefly about them. I recommend that you read the full interview though.

(as is usually the cast on my blog, anything in bold is by me and my comments within quotes are in square brackets)

On Shorting
G&D (interviewer): You don’t short stocks at Himalaya, correct?

LL (Li Lu): That’s right; not any more. That change occurred nine years ago. Shorting was one of the worst mistakes I’ve made.

G&D: Is your lack of a short book due to your desire to be a constructive third-party for companies and their management teams?

LL: Yes. But also, you can be 100% right, and you could still bankrupt yourself. That aspect of shorting just frustrated me too much! [laughs] Three things about shorting make it a miserable business. On the long side, you have 100% downside but unlimited upside. On the short side, you have 100% upside and unlimited downside. I do not like that math. Second, the best short has some element of fraud. However, a fraud can be perpetrated for a long time. Of course you borrow to short, so they could really just wear you down. That’s why I could be 100% right and bankrupt at the same time. But, you know what, you go bankrupt first! Lastly, it screws up your mind. Shorts just grab your mind and take away from the concentrated effort that is required to do proper long investing. ... economy overall has been really growing at a compounding rate for 200-300 years, ever since the modern science technology era. So, naturally, the economic trend favors long positions rather than short.
I don't short so I don't have much to say. The only time I ever did was through an inverse ETF about 10 years ago--it was more like a bet against a market--and I said that I would never do that ever again. I actually made a positive return and it contributed to better performance during the stock market sell-off in 2008 but it was an unpleasant experience. The problem for me was that I had no idea what was going on (regardless of whether it went up or down) or what  the end result was. It is completely unlike a long position where you have some idea of why a position is rising or falling. The market rises in the long run so you are really fighting against time.

As Li Lu also points out, short selling sort of messes up your mind and is totally distracting. If you are betting against anything--in my case I was betting against the market so it was even worse--it just clouds your long positions and any positive thoughts you may have. For instance, it's easy to second-guess any bullish thought if you also have any sort of short position.

Finally, short selling is very expensive for small investors (whether you are borrowing shares, using inverse ETFs, or buying/writing put/call options). I never actually short sold directly because whenever I inquired, the costs seemed really high. It seemed like it wasn't for small investors. It sort of reminded me of bonds, where I'm quoted really high costs (bid-ask spread for instance) and feel that bonds aren't cost-effective for small investors.

Sourcing Investment Ideas
G&D: Can you talk about your investment process?

LL: Ideas come to me from all sources, principally from reading and talking. I don’t discriminate how they come, as long as they are good ideas. You can recognize good ideas by reading a great deal and also by studying a lot of companies and constantly learning from intelligent people...

G&D: Are the people that you talk to fellow investors or are they people like customers, suppliers, and management?

LL: All of them. I don’t talk to as many investors – very few. I am more interested in talking to people who are actually running businesses and entrepreneurs or CEOs or just good businessmen. I read all of the major newspaper publications and annual reports of the leading companies. I get a lot of ideas out of those too.
One interesting thing is that Li Lu says he doesn't rely on investors for ideas. Instead, he gets ideas from management, media, etc. This is sort of opposite of many others I have read who ignore management and instead rely on other investors. I think this depends on your investment style and your personality and thought processes.

Always Need to Beat Opportunity Cost

I really like how Li Lu thinks about portfolio management:
You start out by holding cash, and that is a pretty good opportunity cost, because it doesn’t go down. So any time you find an investment, it has to be an improvement on an overall risk-adjusted basis. You may find some very interesting things, and now you’ve got a basket of a few interesting securities plus cash. That is a pretty good opportunity cost, and the next time you add another security, it better make the portfolio better than the existing one. You just constantly improve your opportunity cost.
Sounds obvious but I have a feeling many don't think about this much. I see a lot of people just adding money to whatever position or selling something because it has gone up, and then seemingly pursuing even worse ideas. I think people often go off on tangents and weaken their portfolio.

For small investors, it's probably better to follow some rigid approach that forces you to think about whether you are actually improving your opportunity cost. I like some of the things Geoff Gannon has said, such as limiting yourself to five stocks at a time or one new stock purchase per year (this is along the same line as Warren Buffett's thinking that small investors should limit themselves to 20 picks--punches in a punchcard--over their life). Even if you don't follow that perfectly, some approach like that will definitely force you to think about whether you are indeed improving your overall portfolio.

Change & High Technology Companies
G&D: How to you get comfortable with the risk/ reward of a high tech company like BYD that is undergoing pretty rapid technological change? Do you think you have a good sense of what BYD will look like 10 years from now?

LL: Most businesses are subject to change if you stay with them long enough. There’s not a single business that I know of that will never change. ... Every company in today’s age is a technology company somehow, but the technology may not be on the cutting edge, and may not play an important role in the success or failure of the overall business. ... So culture really plays an important role in those faster-changing environments, enabling certain companies to always surge ahead of everybody else.
Many value investors mistakenly think that it is high-tech (or similar) companies that change rapidly but as Li Lu alludes to, almost every industry can change. In fact, right now, I think the retail industry is going through even faster change than most technology companies. There is probably more innovation and disruption at Macy's and Ralph Lauren and Under Armour than at Oracle, Alphabet or Intel.

One thing I learned from Bill Miller is that some technology companies actually don't change much, even if they appear to. The products might change but their market share doesn't. In other words, just because some company introduces a new product every year doesn't mean the company is changing rapidly. A company like Intel might introduce a new microprocessor every few years but it isn't really changing much and the relationship with customers isn't really changing.

When to Sell
G&D: How do you make your sell decisions?

LL: One should make sell decisions on one of three occasions.
Li Lu goes over three reasons one should sell:
Number one, if you make a mistake, sell as fast as you can, even if it’s a correct mistake...Let’s say you go into a situation with 90% confidence that things will work out one way and a 10% chance they work out another way, and that 10% event happens. You sell it. Then there’s a mistake that your analysis is completely wrong. You thought it was 99% one way but it was actually 99% the other way. When you realize that, sell as fast as you can. Hopefully at not too much of a loss, but even if it is a loss it doesn’t matter – you have to sell it.
Easy to say but many people, including me, hang on to mistakes way too long. I haven't done it but one thing I plan to do, based on advice from others, is to write down why I would sell (the negative scenario) and do it if that scenario develops. Easier to think about it when you buy the stock than trying to do it when the adverse scenario is unfolding.
The second time you want to sell is when the valuation swings way too much to the other end of the extreme. I don’t sell a security because it’s a little overvalued, but if it is way overboard on the other side into euphoria, then I will sell it.
Warren Buffett obviously doesn't sell even if the valuation is extremely high (likely to preserve his reputation and relationships e.g. Coca-Cola in late 1990's) but most other investors should.
The third occasion when to sell is when you find something that is better. Essentially, a portfolio as I said is opportunity cost. Your job as a portfolio manager is to constantly improve on your basket. You start with a high bar. You want to increase the bar higher and higher.

Li Lu's Intellectual Honesty
The most important thing in our business is intellectual honesty. What I mean is four different things: know what you know, know what you don’t know, know what you don’t have to know, and realize that there is always a possibility that “you don’t know that you don’t know.” Those four things are distinctly different. In a crisis, things emerge that test you on all four categories.
That’s why people freeze in the midst of a crisis. People freeze because they were not intellectually honest before. They never quite distinguished certain issues or questions and put them into the appropriate basket.
Christopher Davis’s grandfather used to say that you make the most money out of a bear market financial panic – you just don’t know it at the time.
Probably the hardest thing for newbie investors like me is to understand what I know and what I don't know. This is probably the hardest thing to develop and probably takes time and experience.

Macro Thoughts or Lack Thereof
G&D: How do you view the overall attractiveness of equities today?

LL: I also put that into "too hard" and "I know I don’t have to know." ...

G&D: A lot of smart people believe that renewable energy is the next big revolution. You’ve done a lot of work on battery technology and BYD, so is that something that you think about beyond batteries? What do you think the energy revolution will look like?

LL: I pay attention to those macro trends only in the hope that I can have comfort that they’re a tailwind as opposed to a headwind. Now, how much they can help if they’re a tailwind, or how much they can hurt if they’re in my face, I don’t know. But I want such macro trends to be behind me rather than in front of me. So that’s the extent that I want to know mega trends.
You could tell Li Lu is a pure value investor: he doesn't really care about the macro situation or where market valuation is at. The advantage of ignoring macro stuff is that you don't get confused by macro thoughts and don't waste time sifting through macro data/arguments/etc. The downside is that you are vulnerable to macro-driven "storms," such as when many value investors suffered huge losses on real estate and financials in the financial crisis (many macro investors were bearish on housing due to price run-up in mid-2000s but value investors piled into financials/homebuilders/etc because they were very cheap), or how numerous value investors were exposed badly to oil&gas a few years ago but many macro-oriented investors were very concerned.

I don't think being macro-oriented is necessarily better. One just needs to figure out what they are good and try to get good at it. Macro is definitely distracting and confuses you more.

Parting Words

Advice for upcoming investors:
LL: Understand one business and what really makes it tick: how it makes money, how it organizes its finances, how management makes its decisions, how it compares to the competition, how it adjusts to the environment, how it invests extra cash, and how it finances the business.
The way I categorize what Li Lu is saying is sort of like the following:
  • how it makes money [business model, business analysis]
  • how it organizes its finances [structure of the corporation, financial analysis]
  • how management makes its decisions [corporate culture, management incentives]
  • how it compares to the competition [competitive landscape, moat]
  • how it adjusts to the environment [employee capabilities, culture]
  • how it invests extra cash [capital allocation, ownership]
  • how it finances the business [capital structure]
These are all important things one should keep in mind! If I get some time, I might write a post on this alone. I think I'm going to incorporate this into all my future investment evaluations. I should use this as a broad checklist going forward.

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Sunday, April 16, 2017 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CCXXII

Source of American Government Funding

Ever wondered how taxation has changed in America over the last 100+ years?

Following charts show the sources of government revenue in America from 1873 to 1940. Other developed countries are somewhat similar from a long-term perspective.

Until the early 1900's, there was really no personal income taxes or corporate income taxes. Most of the revenue in the distant past was through customs levies and tobacco/liquor taxes. So basically nearly all government tax was consumption tax. The amount government collected was very small by modern standards (US government collected no more than 800 million in taxes in the 1800's whereas it generated 3+ billion by 1918).

Government wasn't large and it didn't provide much in the 1800's (there was no standing armies for a long time, not to mention any notion of social welfare, public education, large-scale healthcare, no major public infrastructure projects, and so forth.) Government became very large in the 1900's and started providing way more services (particularly public education and healthcare). I would guess that large government probably didn't have as much positive impact on economic growth but it probably increased standard of living by orders of magnitude (which isn't really captured in GDP or other economic measures).

Chart stops in 1940 but my opinion is that, by the 2000's, government in most countries, certainly developed countries like USA or Canada, have gotten too large. I think the pendulum has swung too much towards larger government and government needs to shrink. I don't think we should go back to the 1800's but society will likely benefit if government were, say, 1/3 smaller.

(click on image for a larger version; note that top graph scale is different from bottom one)

source: Extracted from the book, Wall Street Waltz (Ken Fisher, 2007)

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Sunday, April 9, 2017 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CCXXI

American Retail Bankruptcies
(to Q1 2017)

So far, retail industry is on pace to set a post-financial-crisis peak. Retail is definitely overbuilt in America and consumer debt is also too high, so the shrinking of the industry is not a huge surprise to me (the industry is growing overall but most of it is in Internet sales and the number of retailers are shrinking). Internet cannibalization is also hurting retail but I think that is a slow long-term threat; the real issue is overbuilt retail with way too many retail chains, not to mention malls/shopping centers/etc.

Retail is a tough industry for investors--generally no barrier to industry of any kind, and driven a lot by unpredictable hits, fads and trends (sort of like the consumer technology industry)--but I wonder if the current situation presents an opportunity.

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Friday, April 7, 2017 0 comments ++[ CLICK TO COMMENT ]++

Purchase: Syngenta (SYT)

Added more to my risk arbitrage position in Syngenta (SYT). American and more importantly, European regulators approved the buyout a few days ago and I think this deal will close (a few other countries like China and India still need to approve but they generally don't challenge such deals). There is still a spread of a few percent and I figure it is a low risk bet. I think the spread should be smaller and not sure why it still exists (there is the possibility that this deal is too big and all risk arbitrage firms are tapped out; it's also complicated by the fact that the underlying shares trade in Switzerland).

Purchase Price: $89.70

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Sunday, April 2, 2017 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CCXX

Forbes 2000 Largest Companies in the World (2016)

Top public companies in the world according to Forbes, which uses a combination of revenue, profits, assets, and market value.

source: "The World's Largest Companies 2016,", May 25, 2016.

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