I've probably covered this but I'm about to cover it again. Valuation of stock using experience. I consider this to be the most accurate method of stock evaluation. Perhaps this method could be called Dead Reckoning. This technique requires careful study so, it's not for everybody. Actually, given that it requires work, patience, and attention span, it's for nearly no one. I got it from Warren Buffett. I will explain using fictitious numbers. For the high speed crypto traders among us, "fictitious" means I made them up. Let's say I've been following oil and gas for 20+ years. Over that period of time, I've seen all kinds of problems that have driven the price of oil to near zero and I've seen problems that sent oil skyrocketing. I've read a ton of quarterly reports and am familiar with profitability of various companies. I own one or more companies in this field. Something unusual happens. How do I make sense of it? Perhaps I've come to know Exxon as a $100B company. Their MarketCap may vary from $60~200B but they are generally worth about $100B when the planet isn't on fire. They have a network of 5000 fuel stations, petrochemical contracts, and refining contracts. I also know how many barrels of oil they pump and how many they buy. This would not be a deep dive, to say the least. This is knowledge of rudimentary numbers. A new company, Whyon, comes into the market. This will be a merger or joint venture. They share their vision with big ideas. They have 1000 fuel stations with plans to expand to 10K. They don't own a refinery but perhaps they own part of one or they have started construction on one. What then are they worth? I may have estimated Exxon fuel stations as worth $10B. How could I isolate them? One way would be if I've also followed a company that is a pure fuel station business. Maybe they are worth $8B and they have 4000 fuel stations. That would be an extremely nice sanity check, if it existed. Whyon has 1000 fuel stations. That would value around $1B, all else considered equivalent. But, they are expanding like crazy. If the fuel market has space for this expansion, I would consider them with perhaps $2B of future value. Whyon has a refinery project that is 3/4 complete. What's that worth? Perhaps Exxon has 10 refineries. Those 10 refineries drive fuel and petro chemical business that is worth roughly $90B, so about $9B per refinery. When Whyon gets their refinery online, I would expect they will gross just as much as Exxon. There are situations where one company will gross more or less for the same product due to franchise value, geographic advantage, or, to an extremely tiny extent, vertical integration. The Whyon refinery will be in debt to the legal allowable limit. The LTV is probably more than 1, so it would be really hard to estimate. Over the next 10 years, assuming normal inflation and competent operation, it might be worth about half of an Exxon refiner. That brings it in at $4.5B. I've just valued Whyon at 6.5B. I would not buy it at a market cap of 6.5B. It's going to IPO at $25B. All IPOs are wildly optimistic, in terms of real value. That IPOs go up right away has nothing to do with corporate value. So, Whyon IPOs or is currently trading at $10 with a market cap of $25B and debt ratio perhaps just a bit higher than Exxon. I'm going to want to buy it with a market cap around $4B to account for risk, and that's if I think management is great, so I'm looking to buy in at a discount to allow for risk so I'm going to peg this company at roughly $1.60. I probably wouldn't place a long term buy order for Whyon at $1.60. Instead, I'd just watch it. They will be superstars for the first while, until their track record is tangible. At that time, they may be framed as bums when people realize their shares are worth no where near $10. Whatever the case, Whyon is very likely to over-correct at some point in the next couple of years. $1.60 is very doable for the patient investor. Again, $1.60 is the *maximum* I would pay for Whyon. I would probably buy a certain amount and then buy more if it goes down. If it goes up, I would just be happy with the original tranche. If I have one Whyon, there is a very real chance I will not invest or make money. But, what if I'm following 10 Whyons and finding another every few months. Over the years, I will have plenty of opportunities to buy companies with strong value for long term hold. Gamblers among us will point out the folks who bought the Whyon IPO at $10 and sold at $18 after three weeks made out better than a long term investor ever would. This is partly true. If you can do that reliably, it's quick money. Help yourself. I've found the guys who double and triple their money every week or two never seem to have a lot of capital of their own to invest. At that rate of return, they should be billionaires in the first year, if they threw down $100 to start. Value investors tend to do pretty well. I estimate market investors (untimed S&P500 buy and hold) do substantially better than value investors and value investors do wildly better than traders.
As it happens, I do follow oil and gas very closely. This is how I was able to value Tesla's SuperCharger network when others gave it $0 value. 100 SuperChargers would have been worthless. If Tesla went bankrupt, those chargers would have been shut down and the land repurposed. Unlike a fuel station, no expensive cleanup would be necessary so it may have been slightly cash positive. 1000 SuperChargers certainly had value. Tesla blew by this number some years ago. EVs were starting to be a thing. Had Tesla gone bankrupt, someone would have wanted the charging network. I estimated it's value using a fuel station and pump analogy. The value in a fuel station is selling gum and cigs, so being electric seemed equivalent. It wasn't long after Tesla started production on the 3 I valued them higher than BMW at the time. I portioned 0% for the cars and 100% for the charging network. Even now, the charging network is a huge asset. This approach can be surprisingly useful.
This is for Canadian investors. With Tarifs around the corner and a recent flurry of bonds, this seems like a good opportunity for short term capital gains on bond offerings.
I'm no longer as scared of deflation. Deflation, at least for short periods, does not appear to be a problem. Oddly, it is still portrayed as a boogyman by people at the treasury who have a fetish for printing money. As best I can tell, deflation tightens money at the bottom of society. Meanwhile, inflation tightens money across all of society but tends to hit the bottom most impactfully. Basically, if you are on the bottom, you aren't going to do well. No shock there.
Consider, if you will, the Chinese invasion barges and the Boeing Orca autonomous submarine. Both systems seem to have been specifically developed to either conquer or defend Taiwan. The Orca project has other uses and may have been commissioned without tension in Taiwan but Taiwan has undoubtedly expedited the project. All of this is posturing for an upcoming contest over Taiwan. From what I can tell, 75% of the interest in Taiwan is TSMC. We are in an era where IT is power. Taiwan will be the first war over IT in human history. I have zero doubt, it will not be the last.
This is a continuation of the Tariffs post I made in The Long Term Investor thread. It's possible to reshore production and it's possible to balance trade. These things aren't the same but they are a Venn diagram with 80% overlap. Tariffs are the way to make it happen. Unfortunately, it is being done wrong. Done correctly, IMO, would involve slowly ramping tariffs over time. Perhaps they would start at 3% and increase 1% per year? Something like that. They wouldn't be universal, either. Tariffs could target industries that are almost viable. If we could produce some electronics here viably, but not others, adding a 5% tariff should cause an increase in the amount of electronics produced in North America. We might not get everything but it should trend in that direction. If adding a tariff doesn't make a difference, it needs to be reconsidered. If you have to add a 100% tariff to something to make production viable in North America, adding that tariff is a bad idea from a production efficiency point of view. It should be done slowly, over a period of time.
Targeted tariffs on certain industries for a specific purpose could be useful. That is not what is being done, and is not what will be done. Trump doesn't know what tariffs even are and legitimately thinks they are taxes that other countries pay us. Like they write us a check. He's believed this since the 80's from what I can tell. This is nothing but a self-inflicted wound. The question that is yet to be seen is will it be a papercut, falling down and scraping your knee on the pavement, or a limb amputation. I'm a union guy and big believer in on-shoring manufacturing as well as keeping what we have here, but most of Americans are not if they had it explained to them properly. Tariffs to bring back some manufacturing (if it worked) would raise the cost of their goods. Businesses that have to pay more for labor will have a financial obligation to their investors to still make a lot of money. They will not eat the cost out of the goodness of their hearts to benefit the American consumers. It sounds good to say we want to bring back high paying manufacturing jobs. People in that industry would benefit. Yes, we will pay more for those goods, but because we're getting paid more we will largely benefit overall. What most people don't realize if they haven't thought about it on a deeper multi-faceted level is that most Americans would not benefit. Teachers would not benefit. Cops would not benefit. Healthcare workers would not benefit. Etc. The costs of goods for all of those workers would go up, and maybe their wages would a little bit to help compete with the market of American wages in manufacturing, but those wages would not offset the cost of all goods going up. I believe most Americans - if they haven't thought about it - would say "Oh yeah bring everything back to America. Keep our jobs here." They do not realize that means everything costs more, and depending on their field of work, they would not see the benefits, only the cost of everything go up. If they were explained properly, they would prefer the current situation with free trade and cheaper goods. I'm personally in favor of more American manufacturing. At the very least, keep what we have and tariff anything that leaves from this day forward. That's not what's happening, and to be blunt, most Americans don't actually want it if they realized the cost.
We do not disagree. Very few people are able to think beyond a single variable. That includes people who think they're smart. In fact, it's probably mostly people who think they are smart. I'm just saying tariffs aren't the worst idea, and they are probably the best solution for security and prosperity over time, although they are currently implemented in the worst possible way.
Agreed. That is the administrations sales pitch. The plan "sounds" good, but it is not like these huge companies are just going to throw away their investment and footprint in these other places out the window. It would cost a lot of money....and that cost will be paid by consumers. Secondly, think of the huge investment they would have to restructure here. Do we even have the infrastructure for it? The sales pitch resonates, as you have mentioned, but "they" are not seeing the bigger picture. In addition, these have all been executive orders. Which means they will likely at some point have a limited lifespan. They also have been on/off again...back on...and now this current announcement. If I were a company, I would not even remotely begin thinking about spending billions to enter that type of game. What I would consider, is where I can cut costs and keep my company in business until something changes. For many companies this will be raising their prices and reducing headcount. Anything to weather the storm until it passes. If for some reason it doesn't....then I am running a more efficient business based on the circumstances I have been dealt. Good post and explanation Tormented.
