seasaw

Ridley Utilizes Recession to Grow Value

User 459419: are you Mr. Karsan or a friend of his? I notice that this is your first comment and you are following no one and no one is following you.

In any event, I have just presented the facts. They are contained both in the article Mr. Karsan wrote and the content of his e-mail that I presented, so there is nothing at all unbelievable about it. It is simple English comprehension to understand Mr. Karsan's response, "I'm afraid I couldn't provide you with any insight on that without compromising my own research". However, if you found that impenetrable to understand because of its short length, Mr. Karsan clarified in a subsequent e-mail elucidating what he meant: "I conduct a lot of research for the stocks I buy for my fund. If I were to give away sources and facts that I spent time finding, then I am reducing the value of my research - that is what I meant."

The question you should be asking yourself if you are not Mr. Karsan or a friend of his, is why would someone promote a stock and withhold material information about the stock they were promoting?

Orsus: Looking Beyond Risks for Value

I would be extremely cautious about any articles published by Mr. Karsan. I sent him an e-mail requesting information about the main customer, which is the key to analyzing the stock. He refused to share the information he had, claiming now that he doesn't share share his facts and sources. What was the article for then? The content of the e-mails is below:

My e-mail:

Mr. Karsan:

I enjoy your articles. They are well done. Regarding your recent article on Ors, I was interested in seeing if you had any information or knew where to find it concerning the following.

Since Beijing Xingwang Shidal Commerce Co (Xingwang) is Ors’s main client and owe the bulk of the account receivables, I am interested in:
(1) the financial status of Xingwang, including their financial statements, and the state of their business to determine whether they have and will continue to have the ability to pay the accounts receivable;
(2) the level of demand that Xingwang has and will continue to have for Ors’s cell phones. Helpful information would be the levels of sales and inventory of Xingwang to see whether they have sold all the phones and need more or whether they have a backlog and will have decreased levels of orders.

Do you have any of this information or know where to obtain it. I did send an e-mail to Ors contact on their website, but I have not had much success with this in the past with other companies (plus I always ask for only publicly available information).

Thank you,

(name)

Mr. Karsan's response:

Hi Mark,

I'm afraid I couldn't provide you with any insight on that without compromising my own research. Hopefully the company will get back to you! Good luck!

-Saj

Why Krugman's Analysis of Economists Is Wrong, Part II

Krugman criticizes neo-classicist economist, and the overuse of math to make conclusions starting from untrue assumptions. However, Krugman called himself a proud neoclassicist economist who used the same methods he now criticizes and won a nobel prize for. I agree with him but he doesn't focus on those who got it right - perhaps because he criticized them and their methods - including John Kenneth Galbraith and his son, James Galbraith. Krugman falls in the camp that got it wrong, but fails to admit this and fails to focus on promoting those in the camp that got it right.

Hedging the Black Swan Concept

Tom:
I really appreciate your responses. My conclusion is that hedging has a negative expected value and will cause a drag on your returns. The reason is that no one is good at predicting the market in the short term, either whether it will go up or down or how much it will go up or down. Therefore, the better approach is to invest and keep invested when your investment is worth substantially more than it is trading for and sell when it is worth less than it is trading for.
My point with beta is that I think the concept doesn't make sense and is not useful for anything, not small moves or active management. Beta does not make sense - the past volatility of a stock price is not a reliable indicator of its future volatility; this is also true of market volatility and true of the relationship between stock price volatility and market volatility. Indeed, no one has demonstrated any ability to reliably predict a stock's volatility or hte market's volatility - how much it will go up or down in a give time period. Regarding doing your own valuation - you don't have to use a particular valuation model or formulas that are precisely wrong rather than approximately right. You can use rules of thumb. But, in some way or another, you need to value the options to make sure you are benefitting from a mispricing in buying them. Otherwise, you are likely again to have a negative expected value and create a drag on your returns.
You certainly seem very bright and to have thought a lot about what you are doing and come up with some clever methods. It may just be that we have different views in our investments theories.

Additional Dimensions of Value Investing

The basic concept of value investing is too take advantage of substantial mispricings that occur. The most common application is making an estimate of the range of value of a company and purchasing it when it is selling at a substantial discount to this "intrinsic" value. Your article takes a relatively simplistic view of the process of valuing a company but complicates the application unnecessarily by considering factors like beta and volatility, which are irrelevant. Every company that was able to average good earnings compared to the market capitalization when purchased that has not ultimately seen its share price go up and provide a good, market beating return to its investor over time.

Hedging the Black Swan Concept

Pardon me Tom, you would have to spell it out for me because but I don't understand how you first link in the Human Biases section addresses what I said. I'm not saying that it doesn't, just that I didn't see how it did. Also, in the link you discuss Beta. I don't believe the concept of beta makes much sense at all and, although it still receives wide use and references, even its proponents have been backing away from their claims about it.

There Are No Good Choices for the Fed

That said, it is not too difficult to see that we will likely return to inflation sometime in the future (when I don't know, but certainly in less than 10 years). Governments tend to inflate the currency and our government's plan appears to be consistent with this. Although some analogize to Japan, Japan is not analogous because it has had a declining popullation (and is a a small country with a conformist culture).

There Are No Good Choices for the Fed

Successful investing does not require the ability to predict whether we have inflation or deflation in our future (instead, the best way to successfully invest is to take advantage of mispricings - buy assets that are undevalued and sell assets that are overvalued and don't risk going broke by using excessive leverage). No one in history has been able to consistently predict the amount of inflation (or deflation) in a given time frame. Mr. Mauldin himself provides no specific information as to how much inflation or deflation will incur at a specific time.



That said, the likely result is that at some point, and I don't know when, we will

feel that the most fundamental of decisions we face in building investment portfolios is correctly deciding whether we are faced with inflation or deflation in our future

Hedging the Black Swan Concept

The problem I see is that you are very smart and are making something simple more complicated. The fundamental concept in investing is to take advantage of substantial mispricings that exist. For example, if you can buy something at a substantial discount to its value, then you have a good investment.
I liked the Black Swan and also came away with the same two points you did, that insurance for likely, easy to see events have a tendancy to be overpriced. Even more important, insurance for unlikely, hard to imagine or predict events have a tendency to be underpriced.
Therefore, a potential investment opportunity can arise from a mispricing on long dated, far out of the money options, as they tend to be underpriced. However, they are not always underpriced. In other words, this is a good area to look for underpricing, but do a valuation yourself to make sure it is underpriced substantially. If so, it is a good opportunity for investing.
I think hedging is way overdone and often a waste of money. A hedge is really just another investment decision. If the price for that investment which is your hedge is too high, you lose money on average; if it is fair value, you don't lose money but you lose the use of the money thereby losing interest or profit on another investment; if it is substantially underpriced, then it is a good investment in and of itself, and therefore, should be done whether it is a hedge or not.
In other words, most hedging causes an unnecessary loss and is a drag on returns (you may have smoother returns, but they are likely to be lower).
I do believe that there are times that hedging makes sense. For example, your business requires a raw material that you must purchase. At current prices, which seem reasonable, you know you can lock in a good profit. You don't have expertise on the price of the raw material, particularly in the future, and you are willing to pay a reasonable fee to lock in the price of the raw material in the future to guarantee a good profit. In other words, you are willing to pay a fee to avoid the exposure to the price of the raw material going up substantially and causing a substantially drop in your future profit.
There are other examples of sensible hedging.
However, much hedging done by investors in the stock market is just incurring a fee that is hurting potential returns.

Disney Adds Gaming Software Talent to Latest Acquisitions

My immediate reaction is that I like the moves that Disney is making, acquiring Marvel and Wideload Games and I feel that it will pay off for them. However, this is my instinct only. I have not done the analysis (and believe it would be too difficult for me to do anyway) to determine whether Disney is paying too much for these acquisitions compared to their potential payoff. As I said, my guess is that these acquisition will payoff for Disney, buy any projections I would make would be highly speculative.
For disclosure purposes, I have no interest in Disney or their acquisition targets, I am neither long, short or otherwise these stocks.

Why Krugman's Analysis of Economists Is Wrong, Part II

Very good article. The effects of possible externalities, including the potential costs and benefits, should always be considered and explored.

What to Use as the Equity Risk Premium?

I disagree completely with the way Corporate Finance is taught at virtually all of top universities in the country. I had studied investing for many years, reading Graham, Fisher, Buffett, Klarman, Greenwald, Greenblatt, Whitman, and others. Then I started studying for the CFA exam and the textbooks introduced the concepts of modern portfolio theory - efficient market theory, cost of capital, CAPM, equity risk premium, beta, alpha, etc. These concepts made no sense to me. I then went back to Buffett, Munger, etc. to see their comments and they had the same view.
Consquently, I recommend that you develop your own curriculum and start your own book to properly teach corporate finance. You could teach the concepts in the textbook and then criticize them and propose better a proper analysis. Buffett has written extensively on the proper principles that appy to allocating capital.
You are doing a grave disservance to your students if you teach them the concepts in the current Corporate Finance books as if they concepts made sense and were correct. CAPM is not only not pretty good, it is nonsensical.
More specifically, a company has no idea what its stock price will be in the short term, so it can't have any specific "expected return". Likewise, a company really does not know most of the time what return on capital it will make on a new investment or project, so it can't have any expected rate of return for the project. The best you can do is have a generally idea or sense that the project is a good one and has a good chance of generating good returns. In other words, try to learn to make a estimate of the likliehood that the project will be successfull and try to estimate what kind of returns it will make if successfull (and the odds it will be unsuccessful and the likliehood of losses). You can get more detailed with odds of various scenaries of success and returns but it becomes less and less valuable the more detailed (better be roughly correct than precisely wrong).

do not make any sense at all, yet they are teaching them in the top graduate schools throughout the country.

Narrative:
I studied the works of Graham, Fisher, Buffett, Munger, Greenblatt, Greenwald, Klarman, and many others of similar ilk. I then started studying for the CFA exam. When I reached the sections about modern portfolio theory, cost of capital, CAPM, equity risk premium, etc., I thought that it made no sense at all. I went back to Buffett, Munger and others and they also thought these concepts were absurd.
I

Expect Oil Prices to Rise: Three Major Oil Exporters Warn About Production

I am not expressing a specific view on NEP. I will leave that for you to make your own determination of value. I will however disclose that I am long NEP>


On Sep 02 12:03 PM cuewen wrote:

> NEP has fallen more than 15% since last week from 5.60 to 4.40 now.
>
> What is happening Nawar ? Is NEP falling apart ?

Expect Oil Prices to Rise: Three Major Oil Exporters Warn About Production

You appear to be focusing on the short term. In the short term, there can be wide variations between a stock's price and the actual value of the company. However, if the price of a company's stock is signficantly lower than its value and the value of the company continues to rise, particularly due to good return on equity, then the price of the company's stock will inevitably rise.


On Sep 02 12:03 PM cuewen wrote:

> NEP has fallen more than 15% since last week from 5.60 to 4.40 now.
>
> What is happening Nawar ? Is NEP falling apart ?

Bidz.com: Incredible Discount Provides a Margin of Safety

At best, I would entitled this article "BIDZ: a speculative gamble". There is not enough information to conclude that this company is selling at a discount given the number of issues raised by different parties. Furthermore, I do not believe that it has been established taht BIDZ's business model is of such durability and strength that it deserves a premium valuation.
Specifically these are (the author identifies most of these):
1. The SEC is investigating inventory practices;
2. The FTC is investigating the marketing practices;
3. A flurry of lawsuits against the company.
4. Insider selling (wsj reports >900k in last 12months)
5. Problems w/ management/director relationships (unspecified)
6. Concerns surrounding competition (unspecified)

Also, an article indicates that the Better Business Bureau gave the company an "F" due to customer complaints. And, the article states that Saied Afrarmian, the manager and co-owner of the BIDZ's main supplier, Los Angeles Jewelry Production, Inc., served 2 years in state prison in the 1980s for receiving stolen property and was accused in a 2006 civil suit by a jewelry wholesaler of staling jewelry. (see the article at the.honoluluadvertiser...)

Also, an internet search reveals numerous posts can be found about customer complaints and accusing BIDZ of fraud and scams.

The investigations by the SEC and FTC, the shareholder lawsuits, the Better Business Bureau rating and the customer complaints all raise concerns about the practices of the company, particular if you believe the adage that where there is smoke, there is fire. If any of the allegations are true, it raises the question of whether there are any other practices of the company that are questionable that have not been revealed.

Extensive insider selling is generally considered a reason to sell, not to buy, as it is presumed that insider would be more likley to keep or add shares if they thought the prospects of the company were good. If any of the allegations against the company are true, that might provide motivation by insiders to sell.

Stock repurchases used to be considered a good thing, based on the view the company was buying the stock because it was selling below its value. However, the view of stock repurchases has become more ambiguous, as companies caught on and started buying stock to prop up shares prices. Managements motivation to prop up shares prices can be increased when extensive insider selling is occuring. Thus, it is questionable to just assume that management is not so foolish to be buying stock if there is any material risk existing in the companies prospects.

The statement that management is shareholder friendly/oriented is conclusory and without support. I would need much more evidence and examples to make such a conclusion. It is questionable to assume that management is shareholder friendly/oriented merely because it owns a lot of shares, particularly when it is extensively selling shares.

Finally, I cannot agree with the main thesis that BIDZ has a durable and strong business model, warranting a higher valuation and providing a margin of safety at present levels. Perhaps the unspecified concern about competition is a reference to others disagreeing with this thesis as well. The author admits the company is not cheap enough normal valuations as to interest him in an investment, but indicates that his investment is due to BIDZ deserving a premium valuation due to the durability and strength of its business model.

The doubts about the durability and strength of the business model arise from concerns that it may be difficult for BIDZ to retain the current level of business or to increase its business for a number of reasons.
1. The indications from the Better Business Bureau's "F" rating and reported customer complaints, if true, create a concern that customers will migrate to competitors and that potential customers will be dissuaded from using BIDZ.
2. The author indicates that in industries like this, the largest competitor tends to defeat the smaller, me-too enterprises. Here, BIDZ is, according to the author, not the largest. Consequently, the largest competitors may gain market share on BIDZ and squeeze it out.
3. On the other hand, the industry could become more competitive and fragmented as other online retaliers may decide to add jewelry to their sales products and brick and mortar jewelry retaliers may focus on developing or increasing internet sales. The barriers to entry are small - it is cheap and easy to add jewelry to your products and it is cheap and easy to put up a website selling jewelry if you are a brick and mortar enterprise. These companies may be able to provide superior products and services to BIDZ.

While a few internet sellers have been able to establish a durable and strong business model, the internet in general has been more of a benefit to consumers, resulting in lower margines and more fragmentation in most business. Amazon and E-bay are examples of the strong model, although e-bay has been deteriorating as of late. Byeond that, there have been few that have clearly established the durable and strong business model that the author describes.

In conclusion, BIDZ appearsto represent a speculative gamble that the problems with the company, on balance, will be resolved in favor of the company and that its business model will turn out to be durable and strong. However, little evidence is presented to support a high likliehood of these conclusions, thus casting doubt on the conclusion that BIDZ is selling at an incredible discount providing a margin of safety.