Wednesday, July 27, 2011

Book Review - The Art of Short Selling

Summary:

Staley gives an overview of short selling and profiles of some major players. The bulk of the book (177/278 pages) is then categories of attractive shorts with in depth examples - akin to case studies. In part three, she has brief chapters on:
  1. how shorts often fail (11 pages);
  2. shorting in history (17 pages); and
  3. a how-to chapter (20 pages).











Review:
  • It is much better than that dust jacket makes it look; obviously a different author! (Perhaps the same person who chose the title "You Too Can Be a Stock Market Genius")
  • I noted the number of pages in the summary because I was a bit surprised and disappointed by the focus. I thought the book would have been stronger with more history, much more on how shorts fail, and case studies where shorts failed. Specifically, I sought a book on shorting to learn to avoid buy-ins and short squeezes; her only advice on that is the obvious pay-attention-to-short-interest.
  • One weakness is that the examples were all from the mid 80s to early 90s.
  • The case studies/examples were very good; readable, reasonably thorough with clear references to primary sources, good notes on where shorts tripped up even when their thesis was correct.
Bottom Line:

Definitely worthwhile for anyone planning to short; a good read for other investors, but if you're limited on time choose other books which include forensic accounting. This book alone will not prepare you to short.

(While looking for a book mentioned in the footnotes, I came across this academic paper noting that while short interest is a valuable contra-indicator on individual securities, aggregate market short interest is extrapolative)

Wednesday, July 20, 2011

IBM

It pains me a bit to see IBM do so well recently. I took a look at them a few months back. I like their market, and I love the amount of money they are returning to investors (when I looked at it, the yield including dividends and buybacks was around 10%). But - they have a lot of acquisitions. I don't trust my ability to pick them all apart, so I can't trust the numbers.

Tuesday, July 19, 2011

Book Review - Margin of Safety

Summary - (paraphrased from the book's introduction)
The first section of this book examines some of the places where investors stumble.
  • Chapter 1: differences between investing and speculation
  • Chapter 2: how Wall Street maximizes its own best interests, which aren't necessarily aligned with investors.
  • Chapter 3: the behavior and influence of institutional investors
  • Chapter 4: a case study of junk bonds to illustrate many of the pitfalls highlighted in the first three chapters
The second section...explores the philosophy and substance of value investing.
  • Chapter 5: risk aversion and its investment implications
  • Chapter 6: the philosophy of value investing and the meaning and importance of a margin of safety
  • Chapter 7: three underpinnings to value investing: a bottom-up approach to investment selection, an absolute-performance orientation, and analytical emphasis on risk as well as return
  • Chapter 8: the principal methods of securities valuation used by value investors
The third section...describes the value investment process, the implementation of a value investing process.
  • Chapter 9: the research and analytical process - how ideas are found and evaluated
  • Chapter 10: sample value investment opportunities
  • Chapter 11: thrift conversions
  • Chapter 12: financially distressed securities
  • Chapter 13: portfolio management and trading
  • Chapter 14: investment manager selection

Review -
  • This is the best introduction I've read to investing. The author is clear, concise, and covers all of the important points. If this were an in-print <$10 paperback, I would pass copies out to friends/acquaintences who don't have an investing background.
  • This is not a how-to, like Graham's Security Analysis. The second section is just an overview of valuation methods. As such, this books apparent value as a collectable is confusing to me.
  • The recommended "hunting grounds" in the book's third section is relatively short and weak compared compared with Greenblatt's You Can Be a Stock Market Genius.
  • I would particularly recommend this for pre-college students interested in finance. Klarman's criticisms of academic and Wall Street finance would have been valuable to think about while learning the former and considering employment in the latter.
Bottom Line - Perhaps the best introduction to investing (or value investing).

Monday, July 18, 2011

Patience

written 6/17

I've had my eye on a couple names I'm waiting for moves on. First is MCD. I've seen it mentioned over the last few months as a defensive name. Me, I like their growth prospects. Even though sociology students have decried McDonaldization for a generation, their emerging market footprint is far below Japan/US/France. I also originally looked into them because I expect the wage/exchange rate gap to narrow somewhat over the next ten years (though China's could easily expand short term). Anyway I'm waiting because of McDonald's huge exposure to the euro via France. I had no idea! I suspect but am not confident that the euro will take a major hit at that point. McD looks like uncompensated risk for that possibility. Perhaps more importantly, the popularity of defensive names will eventually pass, providing selling pressure...

The other is Google. I wrestled with considering this one for a while – I really, really don't like their corporate governance, and I'm not confident in their leadership and direction. Their acquisitions and focus on social is particularly aggrevious. Even the way they do that – the letter from the top informing everyone 25% of their bonus is dependent on success in social? Sounds like a fine way to run a manufacturing concern...

But the positives for the stock are immense. Revenue is almost all real time auction based – so they are very well protected from inflation/debasement. I expect their gravy to grow a little faster than the economy/business averages over the long term as the generations that came up on internet take over a greater share of purchasing power. Short term I think there is very good potential for growth in Local. Google maps are superb and android is solid.

But I don't like dual class shares. I wouldn't like to invest in Berkshire Hathaway for the same reason. But at least Buffet seems to put shareholders first...

Postscript (7/18) - I decided to set limits for myself on companies with weak shareholder protection; 10% in a name, 20% portfolio wide (gross? not netting out short positions). I set up a small position long GOOG short RAX. Got lucky on Google; I thought the reaction to increased expenses last quarter was way overblown but the rebound was much higher than I expected!

MCD I'm expecting to wait at least 6 months, likely well over a year.

Driverless Cars – Investment Implications

Summary: -Huge value transfer from real estate/location based advertising to internet advertising (and consumer surplus)

-Large transfer from real estate convenience value to delivery companies, car makers, energy

-Potential huge change in energy inputs


The internet has taken massive amounts of advertising money from TV and print media. Driverless cars though... that takes your attention from your surroundings – to books, TV, internet, work, chatting. How much of the business world relies on physical location for their advertising, or even business plan? This is going to cause a huge transfer of “advertising” money from real estate to the internet. Where do you go get a haircut? I used to go where I remembered seeing one. But if I'm using my computer while driving I haven't ever seen one – so I run a search, or perhaps see what my friends have recommended on Facebook or Yelp.


How much money in real estate is advertising? I have no idea how to break that out. I know when I made a business I paid $1600/mo for a tiny little place for the superb foot traffic. The exposure+convenience was worth about $600-800/mo in my mind.


How about convenience? For some real estate, the value won't change – if I'm in an office building and I want to lunch or coffee on a normal day, it's not worth calling (or even getting into) a car. I'm going to take what's in the building or the next place over. But if you're going to get into a car anyway, there's not a big difference between a 5 minute and a 10-15 minute drive if you're checking your email at the time. So location becomes a lot less important for sit down restaurants and stuff. Automatic pick up or automatic delivery fleets also make 'fat tail' food choices more competitive with McDonald's in terms of convenience. More than McDonald's though, I would expect grocery stores to lose out because of this. I go to grocery stores because it's hard to get healthy food quickly. Someone like Whole Foods, on the other hand, might do very well – they have a strong brand and the kind of prepared foods I would expect to do well.


Some changes depend on how many people would switch away from car ownership completely – opting instead for a taxi service. Full time taxiing cars would probably be most cost efficient as electric or natural gas vehicles. Depending on the number of people who switch, this could pummel petrol heavy energy companies and destroy nations (and their companies) reliant on current oil prices. Travel prices would drop.


It will be interesting to watch the regulatory progress.

[originally written 6/10 - since then, Nevada seems to be pushing forward. I've heard 2018 as a potential production date]