TomB16 investing blog

This is today's thought, for what it's worth.

If you feel you are a gifted trader, well above everyone else, and if you find yourself frustrated with others for not following your teachings, you may wish to face the fact that you are an asshole.

The best investors I know plod along and make a nice living, content with making decent returns. Striving to make a lot of money in a short time is an excellent way to lose a lot of money quickly.

The best we can do is to find our way and try to improve our investment program over time by pursuing knowledge and researching business. A key to success is to ignore other traders and focus on our own program.

 

Continued...

For me, investing is a 100% personal pursuit. To proxy my nest egg is to lose it.

If my portfolio performs better than yours, so what? If yours performs better than mine, so what?

I'm here for information on market mechanics, market segment ideas, exposure to different philosophies (including trading). It would also be nice to have some pleasant social interaction. These things will expand my consciousness. I will integrate these influences, as I see fit.

This is why the idea of trying to dominate other people on a chat forum, such as this, strikes me as obnoxious social behaviour.

I am delighted with my portfolio but I can't imagine others would be. Meanwhile, others seem mostly delighted with their own portfolios. This is as it should be.

If you're a carpenter, I'm sure you can watch a brick layer and gain some knowledge but it probably wouldn't be a great idea to start building tables out of bricks. The point being, stick with what you know but always strive to expand your world. People get into trouble when they think they know something and they do not know it.

To sum up the theme of today's blog post: Stay within your knowledge zone, find someone who is outside of theirs, and take money from them.

 

I want to keep beating the dead horse that is the definition of personal financial success. It's important and I don't feel I've done a good job. lol!

A friend of mine has a defined benefit pension and also a defined contribution pension. The DB is good. The DC is OK. She has been over-contributing for the last several years with the goal of retiring at the end of 2020. She has zero interest in managing money. She wants someone to tell her how much she can spend every month. She is going to have a decent retirement. She knew what she wanted, went after it, and achieved it. I consider that successful.

A couple of other friends constantly explain to me that it isn't possible to do better than couch potato. I smile and listen to their situations. They have done very well, the last few years. I expect they will have decent but austere retirements. Still, considering they just started couch potato a few years ago, I consider them both to be on a successful path.

This year is the fourth best year in the 35 years I've been investing. We have been on a rocket ride the last three years. We are successful, not because of how our returns compare to anyone else but because we had a goal, worked hard, executed well, and arrived at the goal. That is a success, no matter how anyone else is doing.

No one has to fail, for us to succeed.

 

So, I just got out of a micro position in Wilmington. We made a few bucks.

Entry = $3.81
Exit = $7.02
Time in market is about 4 weeks.
Money made = Not enough to brag about

I'm the opposite of a trader. Picking up a few thousand dollars is good but Wilmington only moved me down the road a few weeks. I am looking for long term, stable, companies that will carry us 3+ years into the future.

Right now, I hold quite a few small cap energy companies and they are doing miraculously. Seriously. I hesitate to cite performance because it would not be believed.

I'm buying energy companies because there are amazing bargains in this sector, right now. These are the only strong bargains I see, at the moment.

These energy companies are a casino to enjoy while we wait for a good value on long term investments. The trade volumes are so small, it isn't possible to buy enough to have a significant impact on our portfolio, good or bad. With Wilmington, so few shares trade that it was tough to get a partial fill of a few thousand shares when my limit order was setting the market price. I was soaking up every available share, for a few days. Interestingly, it was easier to sell.

Crown Point Energy is a similar holding. I bought what I could get when the price was way down. We've held that for over a year and continue to hold. Between dividends and a return of capital, it has returned just over 100% of the original investment. Another RoC is scheduled for mid December, BTW.

This pass-time is classic value investing, as per Benjamin Graham. It involves finding a ton of companies, crunching a ton of numbers, and sorting for best value.

Having a bunch of money around is when mistakes are made. I'm literally thinking of buying a couple of contracts for Tesla. When Model Y start rolling out of Freemont in January, the price is likely to top $360. This is a crazy way to think, for someone with my strategy. I can only consider it because I would be happy to own more Tesla, anyway.

This takes me back to the previous point. Our goal is long term investing. We want to own productive companies. Short term gambling is not success, because it does not contribute to our goal of long term stability. It is, however, fun.

 

[Edit: post will be replaced with thoughts on value]

 

Let's talk about how to value companies. First, I won't share all of my techniques. They are mine and are not open source. I highly doubt anyone will share their valuation techniques. Warren Buffett has talked about this at length and given a reasonable idea of how he does it but he has never laid it out. In my opinion, most techniques are variations of the same. It's not difficult to figure out and do.

Lots of ways to value a company.


The Benjamin Graham technique has been examined molecule by molecule, like the Zapruder film.

https://en.wikipedia.org/wiki/Benjamin_Graham_formula


There is also the ratio comparison technique. It goes like this:

Oil company A produces 500M barrels of oil per year and has a value of $10B

Oil company B produces 6M barrels of oil per year and has a value of $80B. Compared to oil company A, company B looks to be valued OK. Because of the scale differences, they will not compare directly.

Company B is already cheaper, per barrel, than company A but what if company B were on track to hit 15M barrels per year? Perhaps you are aware that company B is engaged in some exploration that has a a high chance to bear fruit? That nearly tripling of output would bring economies of scale plus it would undoubtedly also bring an expansion of petro chemical endeavours and perhaps even contracted refining.

At this point, you would look at the financial statements. Can B scale without raising capital on the market? An IPO would dilute the value of existing shareholders. Does company B IPO each time they drill a new well? Some companies raise as much capital as they possibly can.

Some companies, particularly oil companies, are run by cowboys. It's obvious from the financials they run a tight ship, are adverse to debt, don't dilute their issue, and return capital to shareholders. Look at Crown Point Energy for an example.


A quick case study of Tesla.

Tesla has a market capitalization similar to Ford. Even now, Ford builds 14.5 times more vehicles than Tesla. CNBC analysts continually point to how ridiculous this is, with respect to Tesla and Ford having a similar valuation.

Ford outsources a lot more than Tesla. Tesla even makes their own seats, the only major auto manufacturer to do so. Tesla makes money from the supercharging network. Tesla makes money from energy storage.

Tesla is a growth company. Ford is shrinking, slowly. Tesla's revenue from vehicles, charging, and storage is generally expected to double in the next 12 months. Revenue from solar should start coming in again in the next year, also. Ford is unlikely to double revenue from anything on the one year time frame.

So, how ridiculous is the Tesla valuation? If Tesla lives up to the dreams investors like me have, it is a reasonable value, right now. On the other hand, any company trying to hyper-scale, as Tesla is, is exposed to more risk than a stable company like Ford. I'd say Tesla is priced in a rational range but if you have any expectation of automated taxis becoming a thing, Tesla is cheap as dirt.

The Tesla ride service will be a game changer and is likely to put legacy automakers out of business, according to people like me.

Speaking of autonomous driving, this video of a Model 3 driving around a snow covered parking lot to pick up it's owner is why I think Tesla is in the lead, with respect to autonomous driving. No lines. No signs. The pavement isn't even visible. Check it out.

 

Good morning, Shaw.

Two of the stocks I follow show reasonable value and are close to my trigger points, after taking a hit yesterday. None of my stocks show good enough value that I would buy them at retail.

The WBI has backed down a small amount, so that helps put me in the buying mood.

Not only do I not make specific recommendations, I don't talk about the next crop of companies with anyone; that includes my wife. It's the next crop that are most interesting. It's pretty rare for a company to be an extremely interesting buy and remain so for a long period. They come and go. With most of my holdings, I would not buy them again at present price.

I hope you don't plan to invest in a specific company, based on an Internet recommendation. That's never a good idea. The whole point I've been trying to make is that we all have to think for ourselves.

Here is some specific advice: If you don't know what to invest in, you should consider either not investing or index investing.

 

Thank you for the civil conversation, Shaw. I appreciate it.

WBI isn't a real term. It's just something I made up but I've noticed several other people using it. It is a variant of the Buffett indicator (total market capitalization divided by GDP). I add the "W" because I use the Wilshire 5000 index in place of the total market cap. It's not a perfect substitution but it's close and easily available.

If you go back a few pages, you will see how I use this indicator to gauge market frothiness.

 

The WBI is back up over 149%. This is a very hot market.

These high prices are good for my ego and bad for our portfolio. We would benefit greatly from a crash or a market decline of any kind.

Consider value.

Let's say you do a bunch of research and end up buying a Toyota Camry. Nice car. Meets your needs. Good reputation for quality. $35,000.

Is the Camry good value? Probably. If there was something better for the same price, or the same for lower cost, you probably would have bought it.

Ok. Let's say you do the research, decide on the Camry, go to the dealer and there is a shortage of Camrys. The dealer won't sell it for less than $70,000. Is it a good value? Probably not. At that point, there are any number of other cars that will suit your needs and do a good job for a lot less money.

And so it goes with stock. Whether a company is a good value depends on price. A company with an ROI of 8 years is worlds different than a company with an ROI of 12 years. I want 100% of my money back in 7~8 years.

These high valuations are causing long ROIs that put me out of the market. There are still a few companies that are close to the value line, even in this market. My job, as an investor, is to find them. The task at hand is to value companies in bulk quantities and look for companies that meet my shopping list of my needs.

 

I just sold some Tesla contracts that were purchased last week. The reasons why are all discussed in the Tesla thread, in another forum.

It was a lot of fast money, for sure, but I doubt I'll do it again. It's not my style of investing. It makes me nervous, for good reason.

The reason I can justify it is because I would buy the shares at that price, anyway. If the price had gone down, I would have simply purchased shares at the call price.

 

The current market reminds me of the situation in 1990. Everyone thought they were expert traders because everyone was making money. I was part of that group. Markets were strong. Returns were amazing. We were all genius level traders.

Everyone is a great sailor when the wind is blowing where you want to go.

 

Hi Scope.

Graham is useless on Tesla. I seem to recall Graham showing Tesla at a negative value. Graham is useless on many companies, actually. One of the keys to value investing is knowing what analysis to use on various companies. The Graham formula simply does not apply to growth companies.

Graham valuations can fluctuate wildly on quarterly results. One of my REITs merged with another REIT a few years ago. The books looked pretty ugly, the quarter following the merger. That drove the price down which was a buy opportunity for me. The recovery took longer than expected but I was confident the acquisition would be successful and the new assets run as efficiently as the original assets had been. To be honest, it took courage to hold on through that rough patch and my confidence wasn't total but it was enough to get me through and pay off with several years of funded retirement from that one event.

Patience and belief in people is needed to make money with long term investing. The most money is made when fickle owners lose faith and you hang in there, buying abandoned positions at a deep discount, but this can also be where money is lost. It is important to know it's the same management team with a successful track record moving through rough waters.

Wilmington.... that was hardly a stroke of genius. It came up on a screener, the value was excellent, so I swooped on a very small amount of it. When it went up like a rocket ship, I sold a few weeks later. That was based purely on corporate valuations.

If I had been familiar with Wilmington for years and believed in their management, I'm confident I would still own them.

I feel I've gained a feel for oil industry management based on looking at the books. There are some hard-assed cowboys who run companies ruthlessly with zero or near zero debt and a relentless work ethic. I love these guys. When I see certain things in the books, I am confident I know the management archetype.

There is another archetype of pedal to the metal, max leverage, max production, maniac that I also like. I wouldn't want to be in business with that sort of management through an extended hard time but during decent times, like now, I'd partner with them in a heart beat.

Wilmington was 90% luck and 10% relentless stock screening. I'm still not sure selling it was the best move but I'm happy to hold a lot of cash, right now.

 

I think my position on industry analysis is pretty clear but let me put a finer point on it.

I have seriously considered following mostly Morgan Stanley but also Goldman Sachs analysis of non-core stocks and doing the exact opposite of their recommendations. They seem to be wrong over 90% of the time. I've been keeping track.

They are so wrong, so often, it cannot be explained by entropy.

This is not hyperbole. I may still do this, at some point.

 

We are in an interesting situation.

WBI = 149.30

A few of our core holdings tumbled significantly, yesterday. Not enough for me to buy in wholesale quantities but they are close to the value again.

When our staple holdings go down and the market goes up, I take that as a strong bull indicator.

 

WBI = 150.2

With the Dream sale, we are now in the most difficult position an investor can be in. Never have people made more mistakes than when they have a bunch of cash laying around. We are choking on it with more to come.

An investor wants to own companies, not have cash. Long term, cash is a loser.

On the other hand, I'm in no hurry to make any moves. Steady as she goes. Our DRIPs will be turned back on shortly, even at the extreme valuations.

 

The Tom Potato.

If I were to have some money that needed investing, and I didn't know much about investing, I would consider the following approach:

10% actual corporate bonds (no ETFs)
90% Vanguard S&P 500 index
* No balancing. Ever.

If someone could fund that program at $500/mo (today's equivalent) for 30 years, they would be in amazing shape by now.