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Nathan Rapport's  Instablog

Nathan Rapport
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I have a BSc in applied mathematics and physics. My basic investment strategy is to buy fundamentally strong companies when I believe they are undervalued. Pretty straightforward, but easier said than done. I also try to look for values in special situations like spin-offs, mergers and... More
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  • Silver Wheaton Corp Notes

    Not much point in writing an article for a stock I'm not going to recommend, but I did some research so I might as well write up my notes.

    * established in 2004

    * market cap down to $7.3B from peak of $13B

    * $40B demand for silver/year

    * SLW revenue < $1B

    * historical growth >30%/year from 2004

    * excellent balance sheet and business model

    * SLW forecasts 9% growth for next 3 years; current PE=10

    * SLW's growth coincided with a decade-long run-up in silver prices, peaking in 2011

    * 33.5M silver equivalent ounces production in 2013

    * SLW's forecasts have been pretty accurate so far (judging by past 10-K's), however, SLW originally forecast that it would reach 43M silver equivalent ounces by 2015 - target now moved back to 2017

    Conclusion: Silver prices may not peak again for decades. SLW is unlikely to continue its 30% growth in coming years. Stock is currently about fairly priced.

    Decision: Pass

    I've also decided not to invest in any other precious metal mining stocks, probably not for several years. If I were going to invest in any precious metal stock, SLW would have been a top choice. Some of them look pretty tempting at the moment, but with gold/silver prices still far from bottoming out, the precious metal mining stocks could still be a long way from the bottom, or end up moving sideways for years to come.

    Tags: SLW
    Dec 14 3:25 PM | Link | Comment!
  • I Want To Write About Osram But SA Won't Let Me

    For the past month I've been invested in a German company called Osram Licht AG (a spin-off from Siemens), which I believe has excellent prospects, and after Osram's first interim quarterly report was published on August 14th, I decided to write an article describing my research into the company, analyzing the company's progress, and explaining my rationale for investing.

    Unfortunately, because Osram is a foreign company with no available ADRs yet, SA's editors wouldn't let me publish. I tried to protest, saying that since Osram is a multinational company with a market cap in the billions, it would be trading as an ADR soon enough, and it would be a waste of time to wait, not to mention that it would short-change a lot of readers who could potentially benefit from my research in the meantime.

    I resubmitted my article with a note to the editors, but to no avail: "Since our rule about only covering US traded stocks stands, we appreciate your resubmitting when the stock trades as an ADR. We understand your position, but we cannot make an exception. Since Osram is the focus stock of this piece, we cannot publish, despite the mentions of Siemens and Cree. We'd, of course, be glad to consider articles discussing the investment theses of those stocks."

    I don't want to publish my article on Osram as an instablog, because I believe it is one of my better ideas and I want people to see it, so instead I am writing this entry to show that I have been following Osram since its inception, and wanted to publish my article on Osram much earlier, but SA wouldn't let me.

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

    Additional disclosure: I am long Osram.

    Tags: Lighting, LED
    Aug 16 10:58 AM | Link | 1 Comment
  • Why Buying Low And Selling High Is Bad Advice

    "Buy low, sell high", the maxim goes. The reason this is bad advice is that aside from the huge unspoken problem of determining whether a stock's price is low or high, there is an implicit assumption being made, which is that you should try to time the market, i.e., follow along with the stock's price until you believe it is low, buy it, follow it again until you believe it is high, then sell it. This is a bad idea.

    The problem with trying to time the market is that first, it is too difficult, and second, it is unnecessary.

    The reason it is too difficult is that timing the market requires you to know what other people are thinking and how they will act on that. Furthermore, there may be far more variables affecting the precise timing of a security than can possibly be accounted for, or even quantified. Take the 2008 mortgage crisis for example: Even the few investors (such as Mike Blurry and Steve Eisman) who weren't entirely caught off guard, and had been saying for years that the bubble was bound to burst, were entirely unsure about how long the bubble could last and when it would finally burst. In the end they did make a profit, but not before losing tens or hundreds of millions on credit default swaps first. Author and statistician Nate Silver provides some more evidence of the difficulty of timing things in his book, The Signal and the Noise.

    The reason that timing the market is unnecessary is that the consistency of your stock picks, i.e., your ratio of winners to losers, is all you need to make money. In fact, if you could consistently pick more winning stocks than losing stocks, assuming that your winners generally gain about the same amount that your losers lose, you could turn a small but consistent profit margin that doesn't even beat the market into a large, consistent profit margin, simply by leveraging your stock picks with calls/LEAPs.

    There are hundreds, probably thousands of stocks trading out there, which if purchased today, would have a better-than-average gain by the end of the year. So if you were able to consistently pick say, at least seven of those stocks out of ten in January, holding onto them for an entire year, you could leverage this consistent gain to become very wealthy in just a few years.

    Thus, your best strategy for making money is to focus your attention on areas of the market that are consistently profitable (not necessarily even consistently beating the market, just consistently profitable), and to do your own in-depth research on maybe 10-15 selections per year.

    The devil is in the details, of course. There's no guarantee that you are good enough to pick seven out of ten winners. So make a little test for yourself. Print out the 10-Q's and/or 10-K's for ten companies you've never heard of from last year, read through them, and then make a decision about whether or not their stock will go up. Then check their price history to see how you did. Rinse and repeat. What is your win ratio and how consistent are you? Sure, all of this reading may be time-consuming and tedious, but this is your money at stake. If you're not willing to put in the time and effort to tilt the odds in your favor, you're not investing, you're just gambling. (That is, unless you put your money in an index fund, in which case you are merely lazy, but at least intelligent enough to do no worse than the market.)

    For those concerned about diversification, 10 stocks is more than enough to protect you from unsystematic risk. There was a study by B.F. King that found that 50% of a stock's volatility could be explained by volatility in the market index. Another study by J.L. Evans and S.H. Archer found that owning 15 randomly chosen stocks would be no more risky than owning every stock in the market. in his book You Can Be a Stock Market Genius, Joel Greenblatt states that 8 stocks is enough to eliminate 81 percent of non-market risk.

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

    Jul 11 4:31 PM | Link | 1 Comment
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