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User 424270

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  • Avoid Buying Individual Stocks In Distress [View article]
    sethmcs, it is important to separate classical value (*margin of safety*) from distressed/special situations. F at 1.96 probably had a 50% chance of going under. Buying it at that time was a speculation. There is nothing wrong with speculating but it is not value investment. Purchasing a *sufficiently well capitalized* company at the bottom of its cycle, when no one wants it, is a different story. I don't closely follow SDRL (have no opinion on it) but can understand you point there.
    Aug 15 09:58 AM | Likes Like |Link to Comment
  • A Few Investment Notes [View article]
    This could become a nice monthly summary... if the author has time and inclination.
    Aug 14 02:29 AM | Likes Like |Link to Comment
  • Volatility In Retirement - What A Drag! [View article]
    Total returns are inherently multiplicative (just convert percentages to factors) rather than additive, so the arithmetic average is a meaningless statistic in this case. One MUST use the geometric average, a.k.a. compound return or CAGR. Thus, the only conclusion I draw from the first half of this article is that applying nonsensical - given the context - techniques (arithmetic averages) leads to nonsensical results (expecting all paths with the same arithmetic average to deliver identical results). Couching this discrepancy in terms of volatility hides the real culprit, which is the idiocy of ever bothering to calculate arithmetic averages.
    Aug 8 09:03 PM | 3 Likes Like |Link to Comment
  • Bulgaria's Strange Bank Run [View article]
    You are confusing understanding with the ability to recite a textbook. Despite the best efforts of modern financial alchemists to convince us otherwise, credit is not money. One of the functions of money is to be a store of value, and IOU's are not going to do it. Your own example pointed out a problem with your beloved fractional reserve system when you said, " might further trade it [piece of paper] with other people **who also trust me**". It's no wonder that central bankers spend so much time in confidence building activities. The system is a huge con. If the banker is not prudent or simply too many people stop trusting him then your pseudo money goes kaput.

    Are you following me? Have you figured out why we should seek out money that is not anyone's liability? Or do you simply prefer to defend what you have become comfortable with?

    In order to conduct a useful conversation, you need to move beyond your circular logic that boils down to a statement like "this is what we have today; therefore, this is what we ought to have forever".
    Aug 2 09:51 PM | 4 Likes Like |Link to Comment
  • Bulgaria's Strange Bank Run [View article]
    Humans used money well before any banks, public or private, were created, so the idea that to have money one must have banks is preposterous. Money should represent the real wealth of real people/societies. We may want to use institutions like banks to facilitate trade, so that one does not have to carry a goat to his haircut appointment. However, letting a bank to issue, for instance, paper notes that are *fully backed* by metals, harvests, goats, or anything else widely considered to be valuable (and clearly disclosed) is quite different from giving that very same bank a license to create credit out of thin air as it sees appropriate (fractional reserves). This issue has nothing to do with any distinction between public vs. private banking. It has everything to do with the question of whether or not we should let a small group of bureaucrats and/or banking insiders manipulate the value of *our* money. My answer is no. I am certain that billions of people around the world will - through their daily toil and trade - figure it out much better. And, as a side benefit, we know upfront that those individuals will act in their self interests, thus we can avoid a "shocking discovery" (LOL) that so will the highly-minded bureaucrats and insiders.

    It's time for me to check out of this conversation.
    Jul 28 11:46 PM | 3 Likes Like |Link to Comment
  • Bulgaria's Strange Bank Run [View article]
    Your point is perfectly understandable. You believe that a financial system must have an actor (actors) to *actively manage* (a.k.a. create) money, and I am saying that such an assumption is widely popular yet wrong. Giving a few humans easy-to-pull levers to manipulate the money supplies skews the cost of money and risk and injects human follies (conflict of interest, ego, bias, etc. etc.) into the system, making such a system more unstable and risky. We don't need central panning to obtain credit. If a deal is good enough then money will come from under the proverbial matrass to finance it.

    You said, "The financial system just tries to measure and predict the risk and to give it a price". If we had a system that simply let its participants, via the combined effect of their actions, to do what you said (measure and price risk) then we would have no reason to argue right now... What we have instead is central banks, which were originally created to mitigate problems with fractional reserves, bending and twisting the system to force everyone to accept their views on risks are prices. In the process, they are absolutely adding - some known and some unknown - risks to our financial system.
    Jul 26 07:11 PM | 4 Likes Like |Link to Comment
  • Bulgaria's Strange Bank Run [View article]
    I hear you, Misho. People could be such a nuisance. We won't let THEIR risk aversion to spoil OUR party. Will just put in charge a few know-it-all savants who can think and plan for the rest of us.

    Worthwhile projects would get funded without fractional reserves. We would have less junk and fewer people employed by the financial services industry. On the other hand, more bright people could stay in the field of their expertise rather than chase a quick buck on "Wall Streets" around the world.

    Imagine a life where our biggest position is stable cash and we invest from time to time, only when we see a good opportunity (vs. being scared into the continual "investment" to combat inflation). How about being able to plan your future without wondering what the prices might look like in 20 years or which speculation the wizards of Fed plan to bail out and which they do not.... The fractional reserve system is nothing but a noose that political elites have put around our necks. Enjoy it.
    Jul 25 12:17 AM | 2 Likes Like |Link to Comment
  • Bulgaria's Strange Bank Run [View article]
    "...without fractional banking would be impossible". Wrong. There would be no credit against on-demand deposits. Duration-matched lending against time deposits will work out just fine. People who are prepared to take on lending risk in exchange for proper returns would be able to do so. Others want nothing but safekeeping of their money (and should pay fees for this service). The latter option is missing under the fractional reserve banking system.

    "...this system allows some people to abuse it ...". Some? SOME? Please name for me a few central banks who have not abused their power, all in the interest of the "larger good" of course.
    Jul 8 11:59 PM | 2 Likes Like |Link to Comment
  • Cherry Hill: Strong Value With Low Credit & Interest Rate Risk [View article]
    Thank you for your great write-up.
    It's a sad sign of the times when LTV of 94 is associated with "fairly strict" underwriting.
    Jun 15 03:56 PM | Likes Like |Link to Comment
  • Maybe I'm Wrong - Justifying $2,000+ Gold [View article]
    Other folks have provided some examples from the US history.
    Let me finish by saying that comparing the US history to the human history is like comparing the stock market of 1999 to the all-time market. A butterfly who started and ended its life during 1999 had all reasons to believe that prices would never go down again and buying "the eyeballs" was the right way to invest. All things considered, these were *abnormally good* periods of times.
    Jun 6 12:33 PM | Likes Like |Link to Comment
  • Maybe I'm Wrong - Justifying $2,000+ Gold [View article]
    I am confused now. I thought you were trying to build a "fair value" model, so one can buy cheap and sell expensive. As far as I know (I am not a trader), trend followers cannot care less whether something is cheap or expensive. They only want to know the direction in which it is presently moving (I am simplifying of course). Which of the two approaches are you advocating?

    I am not sure why anyone would want to *focus* on trading gold when there are so many simpler (no emotional component), supply/demand driven commodities.

    Trading your hedge and expecting to have it on hand (in sufficient volume) when you really need it is, in my opinion, a pipe dream. There are many reasons for that, and I will try to mention a few:
    * geopolitical events happen too fast to anticipate. A simple misunderstanding or accident can (as in the past) start a war
    * we don't get much training in our lives in anticipating catastrophes. And we expect complex societal problems to somehow work themselves out... and they often do, except once in a while when they don't
    * if the price gets high but the inflation is still lagging (it typically is), how would you know that this time is different and you need to buy rather than sell (something that has worked well for you before)?
    * there are smarter and/or better connected people around. They will bid up the price well before most of us know that we are in an imminent danger
    * when a price breakout occurs, how many people will have the gumption to go out and put 20% of their net worth's into gold at already elevated prices? How many of those who have held the metal for decades and finally see blood in the water will want to sell prematurely?
    * etc. etc.

    Holding gold is not to make money but to have money. It is not an investment, and comparing two makes no sense. Who said we have to chose one or the other.
    Jun 5 06:33 PM | Likes Like |Link to Comment
  • Maybe I'm Wrong - Justifying $2,000+ Gold [View article]
    Let's start where we agree: gold is a long term store of value. Nothing works all the time. If we have, for instance, a nuclear exchange then even gold will not work. Let's say gold has 80-90% chance of working in the next 100 years. The precise number does not matter, as I will not try to plug it into any formula.

    There is also a chance that paper currencies will do "just fine" for the same 100 years (our financial leaders define the "just fine" scenario as 2% annual inflation, i.e. $1 having a buying power of 13 cents after 100 years). What is the probability of such a "just fine" case? I don't know. Nor will I even attempt to assign it any precise value because doing otherwise could completely derail this conversation. It suffices to say that based on the long human history, such probability is *substantially* lower than that of gold working out.

    There is a wide range of scenarios under which gold works but a paper currency (pick your favorite) does not in the next 100 years (I would say even next 30-50 years). *Therefore, the price of gold in a paper currency includes the price of a long-term option on the health of that currency*.

    You have completely missed this embedded optionality in your model. The value of such an option (which sits on top of keeping up with inflation) is established by those who buy and sell gold. It has substantially increased in this century because gold market participants collectively believe that the risk (think of it as volatility if you wish) of our societies experiencing a very serious turbulence is up big time.

    Those who trust the continuity of good times can put all their money in S&P (or some worldwide index) and never look at their account statements. For the rest of us, who are not so sanguine and know that most of human history has been pretty grim, it makes sense to own some gold as insurance and long-term savings.

    To summarize, a tangible portion of the gold price is based on human expectations and, thus, cannot be modeled. Whether one finds those expectations rational or not is a personal choice. I am cautiously pessimistic because lots of things that were supposed to "never happen" have eventually happened. Thus, I hedge. The consequences of getting caught without a catastrophe hedge in something like once-in-300-years event may be so severe that it actually does not matter if you buy (for the right reason, not to speculate on its price in 12 months) gold at $800, $1200, or $2000. Just have some.
    Jun 3 11:24 PM | 2 Likes Like |Link to Comment
  • When Cutting Dividends Adds Shareholder Value [View article]
    Business value is what a knowledgeable buyer will pay for the business, so it is synonymous with the shareholder value.

    Not all existing shareholders will fund an enterprise that reduces its dividend suitable to their personal investment needs and may become understandably unhappy about such a decision (have been there personally). That is not, however, a factor that determines whether the reduction is accreting or diluting the business/shareholder value.
    Mar 22 04:02 PM | Likes Like |Link to Comment
  • When Cutting Dividends Adds Shareholder Value [View article]

    You are making perfectly sensible points. Reading your articles, I can clearly see why you are an "early" rather than "late" retiree.

    Some people have too much time on their hands, so they can't stop replying. I missed my "dislike" button. I think it kept conversations much more concise.
    Mar 21 07:27 PM | 1 Like Like |Link to Comment
  • When Cutting Dividends Adds Shareholder Value [View article]

    I think you and those who like you response are lumping together two separate issues: (1) can a reduction in dividend increase the business value (i.e. the right step to take for the company) and (2) are you personally, as an income investor, still interested in owning the business that is undergoing such changes.

    You are saying "no" to #2. That's your decision, but it does not automatically imply "no" to #1. As businesses evolve those who follow them evolve as well. Growth and value crowds move in and out, for instance. Just use Cisco as an example.

    There is no contradiction here.
    Mar 21 07:08 PM | 2 Likes Like |Link to Comment