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Brian Abbott
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In investing, I have a heavy focus on reinsurance companies, and I enjoy learning how to value their investment portfolio and underwriting ability, taking inspiration from the reinsurance companies that Warren Buffett used to help build Berkshire Hathaway's investing empire. The other focused... More
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Montana Semi-Precious Metals
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  • Discounting Everything By 30%

    I have a theory I plan to test on some earnings announcements and analyst reports, but in advance of that, I wanted to get it out on my instablog. The theory is that all estimates should be discounted by 30%. This number is my first guess of how to incorporate all the cognitive biases that are known to exist (overconfidence, confirmation bias, hindsight bias, and many others) into a rough estimate.

    Interestingly, in my own work in biotechnology research which involve clinical trials, the discount should be much, much more than 30%. If a collaborator says a trial should take one year to complete, you can bet that it will take two. In fact, I budget it that way. If they say they can accrue 200 subjects (patients), you better start looking for a publication that will accept as few as 50. The benefit to the organization is that we control our enthusiasm and also avoid the smaller, riskier projects that probably would never have even obtained publishable results.

    The theory is a way of using the research that other people perform, while applying a discounting mechanism to account for the high likelihood that even if they are directionally correct, they have a high likelihood of being numerically incorrect.

    This theory also tangentially gets into value investing theory, in that a margin of safety is sought, for similar reasons: even the best analysis is still flawed in some way.

    That's all for now, but I hope to write more on this once I find some good examples based on stock analyst reports and the ongoing earnings season. Who knows - maybe the discount should be 20 or 50%. Thirty percent was just my first guess at what it should be.

    Disclosure: I am long INTC.

    Jan 21 12:32 PM | Link | 2 Comments
  • Hedge Funds To Return 4-5% Per Year Through 2018?

    Wow. That's all I can say after reading this article in Business Week quoting the recent forecast from Goldman Sachs (NYSE:GS) Private Wealth unit.

    Goldman Sachs Group Inc. (GS)'s private- wealth-management unit expects hedge funds to return an average of 4 percent to 5 percent over the next five years as the industry struggles amid low interest rates.

    "Everybody hopes to get the five hedge funds, all of whom are going to have 15 percent returns," Sharmin Mossavar- Rahmani, chief investment officer of Goldman Sachs Private Wealth Management's Investment Strategy Group, said at a press briefing today. "People need to be more realistic."

    This is amazing. Hedge funds typically charge 2% a year for management fees, plus 20% of gains. Plus, your money gets locked up with restrictive provisions dictating specific timing and procedures required in order to get it back. So a 4 to 5% annual return for the next 5 years is extremely significant, as forecasts go.

    I am going to spend some time digesting this. Maybe there are some other factors behind this forecast, such as other investments that Goldman Sachs gets more fees from, for example. I agree we're in a low return environment for a while longer, most likely. But hedge funds have a bunch of MBA's from Harvard. They're supposed to be really smart to deserve all those fees. 4 to 5% ? That makes bonds yielding a pretty safe 2 or 3% look like a pretty good deal, even with their interest rate risk.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: GS, hedge funds
    Jan 11 6:58 PM | Link | Comment!
  • Is Tin A Semi-Precious Metal?

    OK, semi-precious may be a stretch. We'll come back to that choice of title at the end. I am trying to pay homage to the mini-boom we experienced in "rare earth" metals a couple of years ago. After all, the first step of a bubble is having a catchy meme. If in a few years we see a boomlet in tin mining stocks.... well, perhaps you heard it here first.

    An introduction to tin

    Tin is usually considered a base or industrial metal. Tin (Atomic Number 50, symbol Sn) is used in the manufacture of solder for electronics and a variety of metal alloys. It is a significant component of pewter and bronze, for example. It has also found more use in manufacture of plastics and fire retardants.

    The US Geological Survey has a nice overview of tin statistics. A brief summary of the variety of uses of tin, from the USGS:

    Today, most tin is used as a protective coating or as an alloy with other metals. Tin is used as a coating for steel cans, in solders for joining pipes or electrical conductors, and in bearing and other alloys for widely diversified applications. Tin is essential to an industrial society and in many applications for which there are no completely satisfactory substitutes.

    The largest producer of tin, by far, is Indonesia. In the past, the instability of this region has led to price spikes in tin. Essentially no tin is mined or smelted in North or Central America. Tin's price per pound is about 3 to 5 times that of base metals such as zinc, lead, and copper, yet it is much cheaper than precious metals such as silver, gold, and platinum. Hence, I think tin could in the future be considered a "semi-precious" metal.

    Tracking tin prices

    A number of price charts for tin are available at infomine. I happen to like the 5-year tin price chart - long enough to show some trends, but not so long as to be overwhelmed by the impact of chronic inflation like the longer-term charts suffer from. As you can see, recent prices have been US$8-14 per pound, which is about 2-3 times the low reached following the 2008 financial crisis. This is similar to the behavior of many other, more common commodities.

    (click to enlarge)5 year Tin price chart

    This compares with copper recently at $3 per pound, zinc at under $2 per pound. On the other hand, the least expensive precious metal is silver, at approximately $30 an ounce. This is why I introduce the concept of tin as a "semi-precious" metal. I hypothesize that if and when global inflation ramps up, and silver becomes priced out of reach for low-end investors, that tin could become considered an "investable" metal. Of course, this is pure speculation on my part. But just as a thought exercise, I wanted to go through the process of finding out exactly how to invest in tin.... just in case!

    Investing in tin equities

    There are no US-based companies with significant exposure to tin. The equities that trade on global markets are predominantly listed in Canada and Australia. Since those markets aren't discussed on Seeking Alpha and are generally risky investments that trade on the US OTC market, I didn't go any further into them at this time. The closest US equity miner listing I could find was the Market Vectors Rare Earth/Strategic Metals ETF (NYSEARCA:REMX). While its top holdings do not include any primary tin miners, the movements of this fund do seem to track with tin prices. Plus, one would get the added benefit of diversification, which is a plus when investing in the volatile sector of mining.

    Another way of getting even more direct exposure to the metal is the exchange traded note, iPath Tin ETN (NYSEARCA:JJT). A more diversified base metal ETN is the ELEMENTS Rogers International Commodity Metal ETN (NYSEARCA:RJZ). Other base metal ETFs and ETNs are listed here, but none have as much tin exposure, if any, compared to the Rogers fund. As a reminder about risk, ETNs carry the credit risk of the issuer, which did become material during the 2008 credit crisis.

    Tin futures and physical metal

    For even more esoteric and possibly riskier ways to invest more directly in tin, futures traders could trade tin on the London Metal Exchange, via futures (where prices were recently US$24,000 per ton). Obviously, futures are risky and potentially illiquid in a market such as tin. You can buy and take delivery of smaller quantities (with a markup, of course) from metal suppliers such as Rotometals (a supplier I have dealt with over the past years a number of times). Finally, I have seen tin ingots for sale on Ebay!

    Conclusions

    So this initial foray into tin as an investment metal has yielded a few conclusions thus far:

    • There are few ways to get exposure to tin mining in the US markets
    • The most direct exposure is the exchange traded note, JJT
    • Physical markets are available, but not widely

    The contrarian in me wonders if the lack of interest in tin means I might be on to something.... a potential future trend. The spike a couple of years ago in the rare earth sector was on my mind as I did this initial research. Successful investing sometimes requires looking in unexpected places for the trends of the future. The nature of the thinly-traded tin market, along with continued global growth, potential global inflation, and the concentration of tin mining in volatile unstable, parts of the world, could create the makings for a base metal bubble.

    Thank you for reading, and good luck in your investing endeavors!

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in JJT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Jan 06 6:01 PM | Link | Comment!
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