Old West Investment Management Q3 2020 Investor Letter

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Where does the market go from here? Hard to say, but look at these eye-popping returns of

certain stocks since January 1:

PAYPAL + 77%

TESLA + 422%

NVDIA + 120%

APPLE + 54%

These returns are for the first nine months of 2020. One has to ask: have these businesses improved that much in nine months, or is the market forming a bubble ala 1999? In determining whether the market is in bubble territory, I love a quote from legendary investorSir John Templeton: “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.”

The returns shown above, in my opinion, smack of euphoria. 

Smead Capital Management: Energy in the Icahn-ic Green Room

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David Dreman’s book, Contrarian Investment Strategies, was gospel to investors when it was first published in 1979. Investors had been decimated by markets going nowhere over the prior 10 years. Stock investors were ready for something new. Dreman had produced a lot of success as an investor and wanted to share his gospel of contrarian value investing.

The perfect picture of Dreman’s gospel comes from his opening chapter. He refers to the stock market as a casino with a green wing and a red wing. Looking into the green wing, “the atmosphere is unhurried, the blackjack tables are sparsely attended, and every player sits behind a mound of green and black chips.” As he points out, everything is so mundane that “you think you’ve come to the wrong place.” The next thing you notice is the players in the room, “they’re all winning.”

Bob Farrell: Learn a lesson -- before you get one

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Ten rules to remember about investing in the stock market

1. Markets tend to return to the mean over time

2. Excesses in one direction will lead to an opposite excess in the other direction

3. There are no new eras -- excesses are never permanent

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways

5. The public buys the most at the top and the least at the bottom

6. Fear and greed are stronger than long-term resolve

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

8. Bear markets have three stages -- sharp down, reflexive rebound and a drawn-out fundamental downtrend

9. When all the experts and forecasts agree -- something else is going to happen

10. Bull markets are more fun than bear markets

Charlie Munger: On the Value of Patience

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Patience is widely seen as a virtue, and for good reason. But it can also be profitable, according to Munger. Indeed, he has claimed publicly that Berkshire's market-beating success can be attributed in large part to his and Buffett's supremely patient approach.

"If you took our top fifteen decisions out, we'd have a pretty average record. It wasn't hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor."

In other words, a few key investment decisions – made over the course of several decades –made the difference between an average performer and a titanic success. By remaining patient and keeping a cool head, an investor is able to both avoid making bad decisions and be ready when rare moments of opportunity emerge.

Seth Klarman: The Value of Not Being Sure

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A key psychological barrier that prevents most people from seizing the day when prices are low is the fear that the turmoil of today will continue forever. In actuality, bear markets are typically much shorter than bull markets. As the saying goes, markets take the stairs up and the elevator down:

"It is easy for the volatility of one's thinking to match the volatility of prevailing conditions. Time horizons have shortened even more than usual, to the point where the market's 4:00 p.m. close seems to many like a long-term commitment. To maintain a truly long-term view, investors must be willing to experience significant short-term losses; without the possibility of near-term pain, there can be no long-term gain."

Paul Tudor Jones says he likes bitcoin even more now, rally still in the ‘first inning’

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Billionaire hedge fund manager Paul Tudor Jones has turned more bullish on bitcoin, calling it the best inflation hedge.

“I like bitcoin even more now than I did then. I think we are in the first inning of bitcoin and it’s got a long way to go,” Jones said on CNBC’s “Squawk Box” on Thursday. He first revealed his bitcoin investment in May and he said Thursday he holds a “small single-digit investment” in the cryptocurrency.

MacroVoices #242 Stephanie Kelton on Modern Monetary Theory

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Erik Townsend and Patrick Ceresna welcome Stephanie Kelton to MacroVoices. Erik and Stephanie discuss:

Why using taxes to pay for government spending is a myth

If the government can print money, why are taxes still necessary?

What measures does MMT use to overcome inflation risk?

Debunking the myth that the future generation will have to pay for the current national debt

Risk of dilution in value of dollars due to government money printing

Constraints of MMT

Chris Mayer: Reflections on 100 Baggers

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“What is the key ingredient to a 100 bagger?”

Ah well, always the big question. In my view, the key ingredient is return on capital. That’s the gin. And the ability to reinvest is the vermouth. 

Now, return on capital is a vague term. And this is an area I am still refining. But broadly considered, the key ratios to consider include “return on invested capital,” or “return on capital employed” or “return on assets” or “return on equity” or… 

And since the road to 100 baggerdom is a long and twisty road with lots of hills and valleys, you can’t just do it one year. You want a business that can crank out those high returns year after year. That means you have to think about a lot of other things as well, like competition and growth potential and the ability to withstand economic cycles, etc.

Grant Williams: The End Game Ep. 9 - Felix Zulauf

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Bill and Grant welcome the incomparable Felix Zulauf to The End Game.

What follows is a true masterclass in macro thinking as Felix joins a complicated series of dots to lay out both a cohesive vision of the present, and an impressive roadmap for the future.

The likely end of a 40-year bull market in bonds, the all-important inflation vs deflation debate as well as gold, the dollar and so much more all come under Felix's acute gaze.

Episode #254: Ken Nguyen, Republic “In The Past Ten Years, The Private Market Has Become Larger Because Companies Are Taking Longer To Go Public”

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In episode 254 we welcome our guest, Ken Nguyen, co-founder and CEO of Republic. In today’s episode, we’re talking startups, and how to make private investing widespread and available to everyone.

Traditionally, investment minimums have been high, but in grappling with their mission to bring startup investing to the masses, Republic has brought investment minimums down to twenty and even ten dollars in some cases. We get into Republic’s investor friendly model, and some of the advantages companies may gain from fund-raising on the platform.

We cover some background on laws that shaped who can invest in private companies and discuss recent developments that have brought about some welcome change to accredited investor rules. As we wind down, you definitely don’t want to miss the innovative approach Republic has taken to offer yet another iteration on startup investing through the Republic Note.

"Cover Your Ass": The Guiding Principle Of Our Time

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What is the dominant guiding principle of western societies today?

At the risk of sounding crass, let me suggest that it is the “cover your ass” or CYA principle. This principle has always been fairly prominent in participative democracies. But now it has gone into hyper-drive - so much so, that the CYA principle is also now an important driving force even in financial markets.

Now that every policy choice is reviewed and debated in real time by millions of people around the world, CYA has become all-important. Politicians have to put policies in place to hedge against the wildest tail risks imaginable. At the same time, the first instinct of policymakers (and of investors—but more on this later) is to avoid doing anything that diverges too far from the pack. Any policymaker anywhere looking at the opprobrium heaped on Sweden will surely agree with John Kenneth Galbraith’s observation that “it is far, far safer to be wrong with the majority than to be right alone”.

MacroVoices #241 Mike Alkin & Guy Keller: Uranium Special

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Erik Townsend and guest co-host Kevin Muir welcome Mike Alkin & Guy Keller to MacroVoices. Erik, Mike and Guy discuss:

Future of nuclear power industry

How big is the Uranium mining industry post-Fukushima

Collapse of market capitalization of Uranium mining

How Uranium market works

Investment opportunities in Uranium market

Meb Faber: Episode #255: Matt Peterson, Peterson Capital Management “We’re In A Global Pandemic; In A Recession…People Are Scared; That Creates Opportunity”

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In episode 255 we welcome our guest, Matt Peterson, Managing Partner of Peterson Capital Management. In today’s episode, we’re getting into concentrated, deep-value investing. We get into Matt’s long-term value based framework and a truly concentrated portfolio of about 12 names right now.

We cover his position entry strategy of writing cash-secured puts, which has helped the fund during periods of heightened volatility like we’ve experienced recently. We explore some interesting insights on Charlie Munger’s Daily Journal Corporation, and jumping on the opportunity to purchase Berkshire class B shares by writing puts as shares came down in price earlier in the year.

We get into some high level thoughts on the economy, the risk of holding cash and bonds, and the need to be prepared for some inflation down the road.

John Hathaway: Gold, The Simple Math

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The very strong investment fundamentals for gold and gold mining shares are based on what has been a slow irreversible drift towards significant U.S. dollar (USD) devaluation.

In simple mathematical terms, the gold market could not clear at current prices if 1% of the $100 trillion4 or so of institutional assets under management were to move into the physical metal. Record year-to-date inflows into gold-backed ETFs have exceeded any previous year. But in dollar terms, this amounts to a paltry $51.2 billion requiring the acquisition of 936.2 metric tonnes of gold (according to Meridian Macro Research). By contrast, a $1 trillion inflow into gold bullion would require 18,000-19,000 tonnes, equal to roughly six years of annual world gold production. A shift of this magnitude by asset allocators would require a bullion price of $5,000-$10,000 an ounce.

Jesse Felder Podcast: Leigh Goehring On The Generational Opportunity In Energy Stocks Today

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You could say that natural resources run in Leigh Goering’s blood. The son of two oil and gas engineers, Leigh has spent nearly his entire life studying markets and investments related to commodities. Over the past 30 years, he has become one of the most brilliant and passionate analysts and money managers in the industry. In this conversation, Leigh shares the details of his macro and micro research process and how he applies them to investing in natural resource stocks. He also details the case for a coming energy crisis and why energy stocks present investors with a generational opportunity today. Below are several notes and links related to this episode:

Chris Mayer: The Scarcity of Industrial Land

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Here’s an idea I’ve been thinking about this week: the scarcity of industrial land near big markets. It’s getting harder and harder in the US to find land to build things like service centers for trucks, used car lots, warehouses and the like. Ergo, the companies that have consistently invested in land over the years have a massive advantage over those who have not…

I have two examples that show what I mean: Old Dominion Freight Lines (ODFL, which we don’t own - yet) and Copart (CPRT, which we do).

Chris Mayer: The Coffee Can Approach

Link:

Chris Mayer, a friend of our firm who authors a well regarded publication titled Capital & Crisis, was kind enough to contribute an article for this edition of The World According to Boyar. 

His article touches on a theme we discussed in our latest quarterly letter: How investors can be their own worst enemies by focusing on short-term performance and selling stocks too early. 

This behavior is in part aided and abetted by the short-term focus of financial news outlets (with notable exceptions) and their desire to sensationalize stories to drive ratings and/or sell newspapers. This “noise” puts pressure on investors to take action each time a company they own temporarily stumbles or when there is geopolitical uncertainty that causes a near-term correction. 

In the vast majority of cases, however, the best course of action would be for an investor to stay the course. In this article, Mayer maintains that investors should focus on finding great investments and buy them with the intention of holding them for the long-term. He discusses a strategy called the “coffee can portfolio” advanced by long-time money manager Robert Kirby as a way investors could avoid the temptation to act.

Charlie Munger: 25 Cognitive Biases that Ruin Your Life, Explained

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Want to practice better decision making?

Unfortunately, your natural brain’s pretty dumb and easily tricked. To save energy and make faster decisions, it relies on cognitive heuristics to make fast judgments.

In prehistoric days when we had to avoid getting devoured by lions, these fast heuristics worked pretty well. Now that life is more complex, the decisions you need to make are more complex, and your cognitive biases trick you into making bad decisions.

These 25 cognitive biases come from “The Psychology of Human Misjudgment,” a talk by Charlie Munger, Warren Buffett’s partner at Berkshire Hathaway.

By learning these biases, you’ll guard yourself against people trying to exploit you. Even better, you’ll guard against your worst enemy: your own brain.

Russell Napier: Gold, The Euro, and Capital Controls

 

Russell Napier is the Author of "The Solid Ground", an independently published global Macro investment report. Russell is also a Co-Founder of ERIC (www.eri-c.com) the platform for the sale of individually priced investment research. He was a Consultant Global Macro Strategist with CLSA Asia-Pacific Markets for almost twenty years. In 2013, Russell was elected as a fellow of the CFA Institute of the UK.

Russell Napier: Central Banks Have Become Irrelevant

the market:

The Scottish market strategist Russell Napier warns that investors should prepare for inflation rates of 4% and more by next year. The main reason: Governments have taken control of the money supply.

In the years following the financial crisis, numerous economists and market observers warned of rising inflation in the face of the unorthodox monetary p0licy by central banks. They were wrong time and again.

Russell Napier was never one of them. The Scottish market strategist has for two decades – correctly – seen disinflation as the dominant theme for financial markets. That is why investors should listen to him when he now warns of rising inflation.

"Politicians have gained control of money supply and they will not give up this instrument anymore", Napier says. In his view, we are at the beginning of a new era of financial repression, in which politicians will make sure that inflation rates remain consistently above government bond yields for years. This is the only way to reduce the crushing levels of debt, argues Napier.

Frank Holmes: Some Are Betting on Red, Some on Blue. I'm Betting on Gold

US Global Investors:

Whether you support President Donald Trump or not, you must acknowledge that one of the bedrocks of his governing style is unpredictability. To some critics, Trump’s behavior and decision-making process may seem erratic, but I believe they make a sort of sense when viewed through the lens of game theory.

Take, for example, his hot-and-cold stance on a new coronavirus stimulus bill this week. On Tuesday, Trump unexpectedly tweeted that negotiations with House Speaker Nancy Pelosi would halt until after the election. “After I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Businesses,” he said.

That same day, Trump appeared to change his mind—reportedly after he saw how the stock market, and particularly airline stocks, reacted to the news. (I often say that he’s the first American president who keeps his eye on the stock market and sees it as a gauge of his success.) “The House & Senate should IMMEDIATELY Approve 25 Billion Dollars for Airline Payroll Support,” he tweeted.

Capitalist Exploits: Investing For The Greenwash Bubble

Capitalist Exploits:

Greenwashing, in case you don’t know, is the “disinformation disseminated by an organization so as to present an environmentally responsible public image”.

This is taken from the time of the now infamous Volkswagen emissions cheating scandal. Since then, other large car companies have faced similar controversy — jumping on the green band wagon. It’s because these days, it pays to be “green” (for more information, see Elon Musk).

But here’s the thing that otherwise intelligent people seem to fail to comprehend: Greenwashing extends way beyond false advertising in consumer goods. It’s made its way into politics, investment products, journalism, and now mainstream opinion in “the West”.

Greenwashing is actually now the norm, which we’re now going to get into after I fire off an early warning trigger alert.

Charlie Munger:The Psychology of Human Misjudgement

 

Audio of the often referred to speech by Charlie Munger on the psychology of human misjudgement given to an audience at Harvard University circa Jun 1995. Mr. Munger speaks about the framework for decision making and the factors contributing to misjudgements. c. Jun 1, 1995

Kevin Muir: MMT, Inflation, Stock Market Bubble, Japan

 

Howard Marks: Real estate, retail, entertainment and hospitality stocks are the real opportunities for investors now

Market Insider:

Howard Marks has a new message for investors, look at 'out of favour' assets as they have a better chance of getting returns at a time when interest rates are at rock bottom. 

The assets that Marks, who is co-founder and co-chairman of distressed-asset fund Oaktree Capital Management,  considers to be "out of favor" are those that suffered the worst from the lockdowns, including retail, entertainment, hospitality and real estate stocks. 

"Out of favour, we have real estate, especially retail real estate and real-estate in big cities. We have entertainment stocks, cruise stocks and hospitality stocks," he said. 

In Gold We Trust 2020

In Gold We Trust 2020:

Since 2007, the annual In Gold We Trust report is THE authoritative report on gold investing, and is required reading for anyone interested in the precious metal market. As a team, Ronald-Peter Stöferle and Mark Valek analyze the state of the global financial markets, monetary dynamics and their influence on gold price developments like no other.

Market Huddle Podcast with Guest Harris Kupperman

https://youtu.be/bMUlybI8smk?t=4086

Kuppy talks about his highest conviction idea.

Adventures In Capitalism: Playing The Housing Recovery

 AIC:

Over the past few months, I’ve been writing a lot about Event-Driven strategies, mainly because I see an unusual amount of opportunity there. That said, Event-Driven remains a small piece of my book. The core of what I do is inflection investing—finding a theme that’s inflecting better and get there before anyone else realizes it.

With that preamble out of the way, today the government announced that seasonally adjusted new home sales for August hit 1.011 million. For those keeping score at home, this is the highest that this figure has been since 2006 and up 43% from last year.

It’s Time To Get Greedy In The Energy Sector, Part Deux

The Felder Report:

The contrarian case for buying energy stocks just keeps getting stronger and stronger. Exxon, after getting booted from the Dow Jones Industrial Average, just experienced its worst 30-day stretch of stock price performance in at least 40 years, according to SentimenTrader.

 And it’s not just this sector flagship; energy stocks now represent the most hated stock market sector of all time according to the firm. To top it all off, The Economist recently proclaimed the death of oil (once again: see 1999 and 2003).

Smead’s Folly Becomes Newsom’s Folly

Smead Capital Management:

We became extremely bearish on energy in 2011. At the time, we saw interest in Seattle for hybrid and electric cars. This convinced us that 10% of the cars on the road nationwide might be hybrid and electric by 2020. In actuality, only 2% of total unit sales in the U.S. were electric vehicles over the last ten years. We also felt back then that the enthusiasm among investors for emerging markets/China was overblown and would cause oil demand forecasts to fall short of expectations.

It turns out we were wrong, because we were too early in our prediction. It wasn’t until 2016, and then more recently with the COVID-19 lockdowns in 2020, that oil prices declined steeply. From the summer of 2014 to the summer of 2019, we benefited from having no participation in the energy sector.