Jonathan Boyar: Spotting Investment Opportunities In Out Of Favor Industries

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Over the long run, stock markets are fairly efficient. In the shorter term, however, valuations can go to extremes both on the low and high sides. Investors usually create these anomalies by piling into whatever is currently in vogue and indiscriminately selling whatever is out of favor.

When industries fall out of favor, Wall Street sometimes drives the market cap of companies within that sector far below what an acquirer would pay for the entire company. That leads to buying opportunities for discerning investors with the patience to wait for the industry to right itself. Of course, it’s anyone’s guess when the tide might turn—investors may need to suffer through years of under-performance before these investments eventually pay off. It’s often well worth the wait, however.

Peter Sainsbury: Back to backwardation: Why the shape of the futures curve is positive for commodity prices in 2021

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The commodity futures curve has moved sharply over the past few months towards backwardation. This should increase the incentive for long side investors to park their funds in commodities and given numerous macro tailwinds (e.g. a weaker dollar, rising inflation expectations and infrastructure spending), set the market up for a promising 2021.

But first, a little bit of background on the futures curve. When the futures price curve is downward sloping, i.e. the futures price of a commodity in say six months’ time is lower than the current spot price, the market is said to be in backwardation. This is also known as an inverted curve or an inverted market.

Chris Mayer: 100 Baggers, The Lost Chapter

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For 100 Baggers, I originally had the idea that I would pepper the text with little vignettes on people whose stories shed some light on how to nab a 100 bagger. I love these kinds of stories, especially if not particularly well known. So I had nine of them written and more planned. 

Then it occurred to me that, while I thought they were interesting, these stories were distractions to the main ideas of the book. They sometimes didn’t address the core ideas or were just redundant. And they seemed to interrupt the flow. So, I cut them.

Later, while working at Bonner & Partners, I cobbled these vignettes together in a 12-page report and called it -- to make it sound sexy -- “100-Baggers: The Lost Chapter.” 

The "Lost Chapter" contained the following stories:

Felix Dennis: How to Get Rich (It’s not how you expect)

J.R. Simplot: Be Willing to Try Anything

Georges Doriot: How to Make 70,000%

Trammell Crow: Own Real Estate

Arthur Dewing: Forget the Fancy Math – Stick with Common Sense

John Laporte: Buy Right and Sit Tight

T. Rowe Price: Look for Out-of-favor Growth

Philip Carret: Be Patient

Benoît Mandelbrot: Forget About Average – Markets are Wild

Why Buffett Bought Japanese Stocks

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Warren Buffett recently announced he had invested ~$5bn in five Japanese trade companies, a value investment in a country that trades at a steep discount to the United States. The companies Buffett purchased trade at a 35% discount to the broader Japanese TOPIX index and a whopping 79% discount to the S&P 500 on a price-to-book basis.

Why is Buffett investing in Japan today? We bet it has something to do with the massive valuation disconnect shown above: Japan is one of the few value investments available in today’s global developed markets. Large caps in the United States have gotten dramatically more expensive compared to Japan in the last 10 years.

Harris Kupperman: Why This Reflexive Ponzi Scheme Will Continue…

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Since many of you are sick of hearing about Bitcoin, I promise this is my last post on the topic for a while. That said, I’d be remiss if I didn’t point out the unusually lucrative arbitrage trade that is largely responsible for sending Bitcoin parabolic. I glossed over it in my last post and given the questions that I’ve received, a full post on the topic was more than necessary—especially as the mechanism is really quite fascinating.

To start with, I believe that Grayscale Bitcoin Trust (GBTC – USA) is unique in the world of finance in that it facilitates an oddly reflexive Ponzi Scheme. Since we all know what a Ponzi Scheme is, I’m going to gloss over the terminology and instead focus on the concept of reflexivity. Before George Soros focused on destroying American society, he was a remarkably successful investor. His theory of reflexivity asserts that prices do in fact influence the fundamentals and that this newly influenced set of fundamentals then proceeds to change expectations, thus influencing prices; the process continues in a self-reinforcing pattern. In the case of Bitcoin, GBTC is the transmission mechanism for this reflexivity and once you understand how this game works, you’ll realize that Bitcoin is going much higher before it collapses.

Grant Williams Podcast: The End Game Ep. 11 - Jim Rogers

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After a series of brain-churning conversations, take a breather this week and join us for a fun-filled journey around the investment world with the one and only Jim Rogers.

Hear Jim's candid views on Japan, China, North Korea, the UK and the opportunities available in Venezuela, as well as cryptocurrencies, the impossibility of being short anything right now and the subject on everybody's lips post-the U.S. election - Chinese wine stocks...

Goehring & Rozencwajg: Investing in the Uninvestable

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Today’s indisputable un-investable asset class is energy broadly and crude oil specifically. Oil has been (and remains) the most important input to economic growth in the post-World War II world. However, in the span of only a few short years, oil’s importance has gone from being widely accepted to thoroughly rejected. The financial press argues that oil should beavoided at all costs.

Investors are convinced that global oil demand has already peaked and will decline steadily going forward. In such a world, the oil industry’s billions of dollars of upstream capital investments would become economically unviable or “stranded.” Environmentalists meanwhile are beginning to clamor for the oil industry to pay “damages” for the carbon released over the last 50 years, leaving investors to ponder whether energy assets are actually liabilities.

Frank Holmes: Bullish on Dr.Copper and Gold for 2021

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Here at US Global Investors, we're very bullish on commodities, particularly industrial and precious metals. The manufacturing PMI in a number of countries shows that factories are expanding capacity on a greater number of new orders. In August, the US manufacturing PMI registered 56.0, the highest reading since November 2018. The PMI in China – the world's biggest importer of metals and other raw materials – was 51.5 last month, well above the five-year average of 50.6.

 As I've noted before, commodities continue to look remarkably cheap relative to stocks. Below is a chart showing the ratio between the S&P GSCI and S&P 500. At no other time going back to 1972 have commodities been as undervalued as they are today. If Goldman's projections turn out to be accurate, now could be a phenomenal buying opportunity.

Harris Kupperman: My Favorite Ponzi Scheme (Part II)

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Let’s go back to what I wrote about Grayscale Bitcoin Trust (GBTC – USA) hoovering coins. At the end of July when I wrote about it, there were 406.6 million shares of GBTC outstanding. As of Friday November 13, that number had grown to 531.6 million, or an increase of 125 million shares. That’s equivalent to about 119,000 additional Bitcoins purchased during a brief period of time. To put this into perspective, the total “free float” is somewhere between 6 and 8 million coins. Hence GBTC purchased somewhere between 1.5% and 2% of the “free float” during this brief period of time.

Now add in the 38,250 coins that Microstrategy (MSTR – USA) purchased and the 17,732 that CEO Michael Saylor personally owns and you have almost another 1% locked up. There are dozens of entities also hoovering up coins, many of which are not likely sellers in the near term. Almost every week, we learn of a new vehicle with big marketing resources behind it. Do you think Fidelity is launching their Bitcoin vehicle without a substantial marketing campaign? In their mind, unless they raise a few billion dollars, their fund has been a failure. Just think about what that sort of inflow would do to such an illiquid market.

Jesse Felder: Extreme Valuations

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John Hussman: Pushing Extremes

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In calling the current market the third “Real McCoy” bubble of recent decades, Jeremy Grantham described, in his own words, what I call the Iron Law of Valuation: a security is nothing more than a claim on some set of future cash flows that investors expect to be delivered into their hands over time. The higher the price an investor pays today for some amount of cash in the future, the lower the long-term return the investor can expect on that investment.

However, there’s a difference between those long-term return prospects, which are driven by valuations and discounted cash flows, and short-term return prospects, which are driven by the psychology of investors – particularly their inclination toward speculation or risk-aversion. I talk about this in terms of market internals. Grantham describes it as a “psychological node.” We may navigate that aspect of the financial markets in different ways, but both of us recognize that the long-term prospects implied by valuations don’t condense into short-term implications for market direction.

Meb Faber: Episode #266: Best Idea Show – Kiyan Zandiyeh, Sturgeon Capital, “We Have A Blank Canvas To Potentially Create What The Technology Ecosystem Of That Country Will Look Like Over The Next 5-10 Years”

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In episode 266, we welcome our guest, Kiyan Zandiyeh, Chief Investment Officer for Sturgeon Capital, a leading frontier markets investment boutique focused on technology-enabled businesses that offer a product or service which solves an unserved, acute pain point for a large addressable market.

We’re covering Kiyan’s best idea: frontier markets. With the U.S. markets near all-time highs, investors may want to look around the globe for other opportunities and frontier markets offer a unique risk/reward. Kiyan walks us through the current landscape and what countries he’s most interested in. He covers the most common risks investors need to be aware of, and why he’s focused on private companies utilizing technology in the ecommerce and enterprise SaaS spaces. As we wind down, he walks us through a couple real examples of investments he’s made in countries like Iran and Uzbekistan.

Capitalist Exploits: Why You Won’t be Allowed to Participate in the Greatest Bull Market

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The good news is that Communism is coming and the shortages are going to be following close behind.

But really Chris… Communism?

Yes.

Remember, when capital is allocated based on its highest marginal return, individuals… you and I… will invest where there is legitimate value, where we believe our highest risk-adjusted returns will be.

On the other hand, when capital is allocated based on some other set of metrics, such as which company is the most “socially responsible”, this is simply a thinly and poorly masked form of communism.

“The key to understanding the appeal of communism, despite the grim reality on the ground, lay in the fact that it allowed so many followers to believe that they were participants in an historic process of transformation, contributing to something much bigger than themselves, or anything that had come before.”

― Frank Dikötter, The Tragedy of Liberation: A History of the Chinese Revolution 1945-1957

Debunking Modern Monetary Theory (MMT)

 

Old wine in new bottles, and it never tasted good.

Lyall Taylor: Unravelling value's decade-long underperformance (and imminent resurgence)

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In a recent (generally excellent) podcast with Inside the Rope with David Clark (#78), John Hempton discussed (amongst other things) value's past decade of underperformance, and opined that the primary driver was the fact that the pace of technological change had accelerated, such that we have seen an unprecedented level of disruption to traditional business models. Value investors have apparently spent a decade naively riding doomed low-multiple companies like the Myers of this world into oblivion. 

This is a very commonly expressed view/belief, and intuitively it feels right. The danger with intuitively-satisfying beliefs though is that they can discourage you from looking for evidence to confirm whether those intuitions are in fact true. It seems true, so it must be true, right? A surprising amount of the time, the answer is no. Just because something is intuitive does not mean it is correct (after all, it was intuitive to pre-modern humans the world was flat, and it's not very intuitive we evolved from primordial sea creatures), and as Mark Twain once noted, "It ain't what you don't know that gets you into trouble, it's what you know that just ain't so". The story of the emergence of the scientific method is a story of humans starting to demand evidence instead of merely relying on our unsubstantiated intuitions.

Charlie Munger: Be Rational, Not Brilliant

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Rationality is a core skill that any value investor should possess. If you are someone who is looking to buy assets when their owners are panic selling because you believe them to be undervalued, then you - by definition - have to be a very rational person. This type of contrarian behavior can only result in success if you are able to really cut through the emotion of the situation and drill down to the core value proposition of an investment.

Munger's advice is to try and avoid confirmation bias. This bias occurs when investors go looking for evidence that supports a belief that they already hold, rather than looking for evidence that challenges that belief.

Harris Kupperman: Micro Cap Planet Finding Cheap Stuff and Playing it Well with Harris “Kuppy” Kupperman, Founder and CIO of Praetorian Capital

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For this episode of the Planet MicroCap Podcast, I spoke with Harris “Kuppy” Kupperman. He is the Founder and CIO of Praetorian Capital and Chief Adventurer of the Adventures in Capitalism blog. Kuppy, as an investor, has always been looking for cheap stuff, something I think most of us as investors look to accomplish. What we discuss in our interview is how he’s gone about finding the cheap stuff and his game plan on making money on those bets. We cover his background, investing philosophy, event-driven investing, shipping, bitcoin, and more! Please enjoy!

Alta Fox Capital: “Makings of a Multibagger” and the Goal for Constant Improvement

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Alta Fox consistently seeks to identify exceptionally high-quality businesses at cheap multiples of normalized earnings over a medium-term time horizon of 3-5 years. Our hunt for quality at a cheap price often leads us to structurally inefficient small and micro-cap equities where there is less competition from institutional investors. However, at Alta Fox, we have always indicated our belief that high-quality, attractively priced companies can be found in many places, regardless of market cap. 

Ronald Stoferle: All roads lead to gold

 

Charlie Mungers ‘Bag Of Tricks’

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Charlie also revealed how he created near a billion dollars in value for the University of California, Santa Barbara when a friend was struggling to sell her family’s 1,800 acre ocean front ranch. Despite two miles of frontage to the ocean, a perfect climate and great views, draconian planning laws significantly inhibited the use to which the land could be put. Recognising an opportunity to realise value, Charlie donated $70m to the University of California, Santa Barbara to buy the land. Charlie knew the University wasn’t subject to the Santa Barbara zoning laws and could therefore develop needed student accommodation on the site. This outside-the-box thinking effectively created a billion dollars of value for the University and a once unattainable sale price for the friend.

“We all start out stupid, and we all have a hard time staying sensible. You have to keep working at it. Berkshire would be a wreck today if it were run by the Warren I knew when we started. We kept learning. I don't think we'd have all the billions of stock of Coca-Cola we now have if we hadn't bought See’s. Now, you know how we were smart enough to buy See’s. Barely. The answer is barely.”

“I am continuously invested in American equities. But I've had my Berkshire stock decline by 50% three times. It doesn't bother me that much. That's just a natural consequence of an adult life, properly lived. If you have my attitude, it doesn't really matter. I always liked Kipling's expression in that poem called “If”. He said, success and failure, treat those two imposters just the same. Just roll with it.”

Giddy-up: What investment icons learnt from punting (gambling)

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And the great lesson in humility that every gambler learns very quickly – that is, that even the smartest people can’t win them all – is also a lesson that should be imprinted on the brain of every investor.

“Investing is a game of skill – meaning inferior players can’t expect to be above-average winners in the long run,” Marks wrote in a seminal piece on the similarities between gambling and investing, appropriately titled "You bet!"

“But it also includes elements of chance – meaning skill won’t win out every time. In the long run, superior skill will overcome the impact of bad luck. But in the short run, luck can overwhelm skill, and the two can be indistinguishable.”

“Success in gambling doesn’t go to those who pick winners but to those with the ability to identify superior propositions," Marks says. "The goal is to find situations where the odds are generous to one side or the other, whether favourite or underdog. In other words, a mispricing.

“It’s exactly the same in investing. People often say to me, 'YZ is a great company with a bright future, so I bought the stock.' They’re picking a favourite but ignoring the proposition. The former alone isn’t enough; they should consider the latter as well.

“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” Warren Buffett

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A critical pearl of wisdom from Warren Buffett teaches us that with any potential stock investment we may make, as soon as our buy order is filled we will have a choice: to remain a co-owner of that company for the long haul, or to react to the inevitable short-term ups and downs that the stock market is famous for (sometimes sharp ups and downs).

Frank Holmes: Gold Could "Absolutely" Hit US$2,000 Again This Year

The Stoicism Of Ben Graham

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Graham didn’t propose that a stereotypically stoic – that is, unemotional – temperament is a necessary condition of success as an investor. He did, however, consciously imbibe classical Stoicism. Hence the investor should strive to be “inversely emotional” (the term is Jason Zweig’s rather than Graham’s; see “If You Think the Worst Is Over, Take Benjamin Graham’s Advice,” The Wall Street Journal, 26 May 2009). Neither as a friend nor as a parent, spouse, etc., can or should you stifle all of your emotions. But as an investor, you should reason – that is, neither enthuse nor despair. Through reason perhaps you can – and through emotion you certainly cannot – ascertain sensible prices of securities and levels of markets, and act accordingly when prices don’t reflect values.

"The more you do so, the greater is the degree to which you’ll recognise as vices – and thereby discount – those passions that the crowd perversely regards as “good.” Moreover, you’ll acknowledge and cultivate as virtues those attitudes and behaviours that the crowd typically ignores (or regards as “bad”)."

Grant Williams: Super Terrific Happy Hour Ep. 7 - John Hathaway: Being A Doyen Is A Good Thing, Right?

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Join Stephanie and Grant for a fascinating conversation with a true legend of the precious metals industry, John Hathaway.

The three discuss John's storied career, what the gold market looked like twenty years ago, how John's experience of multiple cycles has helped him deal with the volatility inherent in the precious metals space and what he expects to see going forward.

Gold's role in a portfolio, how to identify potential investments and the importance of managing the psychological component of what can be a tempestuous ride all come under the microscope.

Crescat Capital Investor Letter Q3 2020

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History does not exactly repeat, but it often rhymes. The art and science of macro investing is comparing past business cycles with the present across a mosaic of different indicators and time frames to determine the most probable path forward for markets. Throughout time, financial markets and the economy have been intimately linked to cycles of expansion and contraction of money and credit. The Federal Reserve was created by bankers and enacted by Congress in 1913 to provide a more flexible and stable monetary and financial system, but by no means did the Fed repeal the business cycle. In fact, the central bank has often played a role in amplifying booms and busts. For example, after introducing large-scale purchases of government securities to stem the recession of 1923, the Fed continued to expand the money supply and suppress interest rates through the remainder of the 1920s. Such monetary policy fanned the flames of historic stock market speculation which culminated in the stock market crash of 1929 to 1932 and the Great Depression. The macro set-up today is eerily similar as we will explain below.

Policy makers have no choice but to continue diluting the value of fiat currencies to enable a levered financial system to withstand such extreme macro imbalances. If past is prologue, large central bank interventionism leads to the appreciation of monetary assets and, in our view, precious metals will be the real beneficiaries of a global synchronized debasement trend that now seems irreversible. Therewith, gold and silver mining companies should be the largest beneficiaries of this environment. They look fundamentally stronger than any other industry in equity markets today. In fact, free cash flow among the top 20 miners have grown by 132% year over year in their latest report. 

Smead Capital Management: Humility Produces Alpha

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Joe Kennedy was getting his shoes shined in 1929 and the shoeshine boy was giving him stock tips. Think of how humiliating it might have been to Kennedy, who had dramatically reduced his common stock ownership. This upstart had been making money and couldn’t wait to pass along his wisdom to Mr. Kennedy. Joe quickly surmised that there was nobody left to buy stocks and established a huge short position in the stock market. The fortune he made by betting against stocks was part of the wealth which led his son, John F. Kennedy, to become President of the United States in 1960.

We were at our grandkid’s soccer game recently and we struck up a conversation with one of the parents. They worked for a successful fintech company (which we owned for a long time) and explained to us that they had invested in Shopify (SHOP) at around $140 per share. I looked it up over the weekend and was astounded by what the numbers told me.