Month: October 2018

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Author’s Highlighted Posts – Punch Card Portfolio – A Take From John Hempton @ Bronte Capital

(Travis’s Note:  This article was originally published on October 20th, 2016, and is being republished on October 28th, 2018.  The article highlights the Punch Card Portfolio Concept, originally derived from Buffett, which we talked about earlier this evening with the re-post of the Buy & Hold article, and this will be a regular topic going forward.  Thus,  this is a foundational article for members, in my opinion.)

  • A look at John Hempton’s view on portfolio strategy and construction.
  • What is the 20 punch card portfolio?
  • Why is a long/short portfolio important as a core, which then can be surrounded by concentrated satellite portfolios?

In my reading, I have come to appreciate the musings of John Hempton, who runs Bronte Capital. The following piece has several nuggets of wisdom, including John’s take on Warren Buffett’s punch card approach to investing, which would limit the number of investments you could make in your lifetime to 20. Once these “punch cards” were used up, you would be out of investment choices. This would emphasize the importance of investment selection, not overtrading, and sitting on your hands, which has become one of my favorite investment expressions.

When thinking through my investment career, looking back through the rear view mirror over the past twenty plus years, I can see mistakes I made by overtrading and these were often, some of the costliest mistakes, as I bought attractive investments and then sold them too early. These so called mistakes often ended up being good, or great investments, but they were not the phenomenal returns that really impact portfolio returns and that could have been achieved by buying and holding these undervalued, contrarian opportunities.

Building on that narrative of the 20 punch card investment philosophy, if we could only make 20 investments starting today, which stocks would we buy? Are there any extraordinary candidates today, like Macquarie Infrastructure (NYSE:MIC) was in the spring of 2009? I have some ideas that I will share in the commentary section of the discussion. For now, enjoy John’s view on the topic, his take on portfolio construction, and his evolution as an investor, which has many parallels to “The Contrarian” Portfolios, including the importance of a long/short portfolio, which in our world is the Contrarian “All Weather” Portfolio.

Travis

P.S. Remember the importance of being patient and sitting on your hands! We have seen that lately in our investments.

Comments on investment philosophy – part one of hopefully a few…

This is the first of several investment think pieces I have in my head dealing with investment philosophy, where markets are now and maybe even a stock or two… They are surprisingly hard to write so these posts might come slowly…

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When I was starting out in the investment game I read Warren Buffett’s letters from inception, Ben Graham, Phil Fisher, anything I could on Charlie Munger and the rest of the standard investing canon.

One thing that had a profound effect on me was Warren Buffett’s twenty punch card. ( Quoted here…)

Buffett has often said, “I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”

Buffett is right. That would be a really good way to run your private investments – you would, I think, be very rich by the time you were old. And indeed Charlie Munger has run his career close to that way (though I suspect he is closer to 100 investments by now…)

Charlie Munger has quoted Blaise Pascal approvingly: “all of humanity’s problems stem from man’s inability to sit quietly in a room alone.

There are plenty of people out there who call themselves Buffett acolytes – and as far as I can see they are all phoneys. Every last one of them.

Find any investor who models themselves off Warren Buffett and look at what they do.

And look at their investments against a twenty punch card test.

They fail. They don’t even come close. Several big-name so-called Buffett acolytes have made more than three to five large investments in the last three years and at prices that can’t possibly meet the twenty punch card test. Most phoney Buffett acolytes have been turning stock over faster than that.

Warren Buffett’s two juniors (Todd Combs and Ted Weschler) have turned over many stocks in the past few years too – and at prices that don’t reconcile with any twenty-punch-card philosophy. They are phoneys too. Just a little less egregious than many other so-called Buffett acolytes.

I used to profess myself a Buffett acolyte too. But somewhere along the line I realised I was a phoney too. I just wasn’t close to that selective and when the situation was right I wasn’t anywhere near willing enough to pull the trigger and go really large in a position.

There are psychological feedback mechanisms that stop you meeting the twenty punch-card test. Firstly it is really hard to be that patient. I did not find a new stock that met that test this year. Or last year. Or the year before. Or the year before that. I found one in 2012. And prior to that I had not found a new one since the crisis (when there were many available most of which I missed).

But I am incapable of sitting idle since 2012 (even though the local beach is very good) and so I do stuff. Inferior stuff. Stuff that may produce inferior results.

And some of it (thankfully not much) did produce inferior results. [I was long Sun Edison for example.]

And when you are wrong like that it is scarring. It makes you less willing to pull the trigger in quantity when something does meet the twenty punch-card test.Indeed perhaps the main advantage of the twenty punch card test is the avoidance of mistakes so you can (both psychologically and from a risk-management perspective) take much bigger positions when they come along.

Phoney Buffett-style value-investing is dangerous

A twenty punch card investment portfolio is – by its nature – a concentrated investment portfolio. If I had run my portfolio like that I would have come out of the crisis with maybe six stocks, turfed one or two by now and added a single stock in 2012.

The rest of the time I would have spent reading, talking to management of companies I was never going to invest in, and otherwise tried to work out how the world actually works. (And the world is always more complicated than you imagine so the work is endless even if the activity is muted.)

Many so-called Buffett acolytes (phoneys, all of them) have imbibed that a concentrated portfolio is a good idea. And so they present as having five to twelve stock portfolios and are prepared to take 30 percent positions.

But the stocks often don’t meet the twenty punch-card test. And so these investors wind up with large positions in second rate investments. When one goes wrong it is deeply painful. When three go wrong simultaneously it is devastating.

The lesson here is easily stated: “if you are going to fill your portfolio with crap, it better be diversified crap”.

Several of my favourite phoney Buffett acolytes have been posting catastrophic losses. It was due. The phoney Buffett acolytes still here are just waiting for their turn to have catastrophic losses.

Real twenty-punch-card investing is impossible to sell to clients

Just imagine if I had run a twenty-punch-card style portfolio and sold it to clients. We would have made a bunch of decision in 2008 and 2009 and our numbers would have been stunning to 2012. (Our returns on our longs were very good in those years. Way ahead of market.)

We would have turfed one or two of these. (Some businesses just change, others go up seven fold and are just not worth holding.)

I would have bought a single big position in 2012.

And since about mid-way through 2013 my cash holdings would be going up and up. Partly from dividends, partly from asset sales.

And I would be underperforming now. Quite badly, even though returns would be positive. Come to think of it, my longs mostly are underperforming now. So are the longs of many fund managers I admire.

But mostly I would have been just idle. So in the midst of underperformance a client might ask me what I did last year and I would say something like

a) I read 57 books

b) I read about 200 sets of financial accounts

c) I talked to about 70 management teams and

d) I visited Italy, the UK, Germany, France, Japan, the USA and Canada

but most importantly I did not buy a single share and I sold down a few positions I had.

And I underperformed an index fund.

That is kind of hard to justify. I don’t have a clue how you would ever sell it to clients. I can’t imagine any clients buying it.

And so to my knowledge there is absolutely nobody who is true to the formula and who really runs a concentrated 20 punch-card formula fund.

They are all phoneys because (NYSE:A) the truth is so difficult it hurts and (NYSE:B) the clients can’t handle the truth.

What I did when I realised I was a phoney Buffett acolyte

Somewhere along the line I realised that did not have the temperament to be a true 20 punch-card investor. So I did two things.

a). Rather than accumulate cash and just sit there for very long time periods (five to ten years) I tried to find shorts. The shorts have two benefits (NYSE:I) they turn into cash when the market goes down and twenty-punch-card opportunities arise and (ii) they attempt to make some money on their own.

b) I run a portfolio that is more divesified than I desire. I desire to be 15 stocks in 15 industries and seven countries, though in reality my desire should be to be more concentrated than that. [I would/should be happy with five 20 percent positions as long as they all meet the 20 punch-card test.] Alas (justified) lack of conviction means my portfolio is about 45 long positions – many of which are for sale when a better idea comes along. In other words when I hold crap at least I diversify it.

This is not entirely satisfactory. I get some longs wrong and lose money on those. And the shorts can be difficult to make money on even when you are right. A stock that goes from 10 to zero might look like a great short but if it goes via 50 then you are likely to be forced to cover some on the way up and its unlikely you will ever recover your losses.

We have strategies to manage both those problems and the results have been and will remain satisfactory although they will not always glow. There can be sustained periods of dull performance. And whist this is not as hard to sell to clients (or yourself) as a true 20 punch-card portfolio after a couple of years dull performance can become exhausting. Clients who haven’t lost any real money will leave – because there is always someone else who is making money – and the grass is always greener – and because clients see performance more than inherent risk in any portfolio – and low risk portfolios can be dull.

Portfolio managers I admire

I still admire Buffett’s portfolio management more than I can say. He really is astonishingly good at what I have chosen to do for a living.

But I can’t emulate Buffett and nor can anyone else I know. And if someone uses his name to describe their investment philosophy my (likely accurate) presumption is that they are a phoney.

There are other managers I admire. I still think Kerr Neilson at Platinum is a freak but it is awful hard to emulate him though in at least part of my portfolio I try. I worked for him for seven years and have some idea how he does it. [He is unbelievably good at cyclical stocks for instance – something Buffett professes no desire to do and which I lack some of the skills necessary to do.]

But almost every other portfolio manager I admire is a long-short manager who has come to an investing compromise like mine. They aspire to be world-class long investors but irregularly fill their portfolio with more diversified second-class stock picks. And they run short books.

And the short books hopefully make money on their own – but mostly make money at the right times – delivering their profits in down years like 2008, and stripping them of profits in super-strong markets.

The problem is that almost every one of these managers is having a dull patch at the moment. These are people I think are amongst the best in the world. And I think (without naming names) that they are having the dull patch the same way as I am. In particular it is devastatingly hard to find things that meet the 20 punch card test. [If you have one please email me. I am prepared to listen to almost anything.]

So instead they have been buying things which are “ownable” rather than “buyable”. In other words things that are sort-of-okay in that if you owned them for a decade you would probably be happy enough but not thrilled with the result. And the results from doing this have – at least over the past year – been dull. [Exception: if you bought pure bond sensitives as an alternative to bonds you did really well – but alas I did not do that…]

And the good long-short managers have found it easy to find egregious crap to short. Stuff where the story has more resemblance to fantasy than reality. The typical tell is massive differences between “the story” and the GAAP accounts”.

Some of these fantasy stocks have blown up (Valeant, Concordia) but many are alive and well and when I describe them as fantasy stocks I just get back hostility. And as a rule long “ownable”, short “fantasy” has not worked that well. Truth be told it has produced results that somewhere between 5% positive and 5% negative. It has been hard work to go nowhere.

And there are fund managers who are doing better. Some of them have tricks I do not understand (I put David Tepper in this camp – I simply don’t get how he does it and hence can’t emulate it*). But the ones I do understand I don’t like. Their chance of a plus 20 is clearly better than mine. And their chance of a minus 40 is alas even better than that, and that is something I find abhorrent even if the clients are seduced.

John

*The Tepper trade that most impressed me this cycle was long the airlines. I had enough knowledge to know this cycle would be good if I put the pieces together. But I did not put the pieces together and my allergy to capital intensive competitive businesses overwhelmed common sense. Tepper made a great trade that almost any Buffett acolyte would have ignored.

Disclosure: I am/we are long THE POSITIONS IN “THE CONTRARIAN” PORTFOLIOS.

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

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Toys “R” Us

(This article was published on August 28, 2018, and is being re-published on October 28th, 2018 to add to the archives.)

  • This was an actual conversation today.
  • Seeing the world through the eyes of a 6-year old.
  • Did Toys “R” Us have to liquidate?

Today, I picked up my youngest daughter from school.  The following was the actual conversation to the best of my memory.

(WTK): I am here to pick you up.

(Daughter): Where is mommy?

(WTK): She is teaching middle school today and is with your sister’s class.

(Daughter): Ask Siri on your Apple (AAPL) phone where I can buy L.O.L. dolls?

(WTK): Why would I do that?  They are like $30 or something like that.  The only person L.O.L’ing is the people who are selling these.

(Daughter): What?  Never-mind.  You can buy them at Target (TGT), Wal-Mart (WMT), and you used to be able to buy them at Toys “R” Us.

(Daughter): I have one question.  Why did they close down Toys “R” Us?

(WTK): Do you really want to know?

(Daughter): Yes.

(WTK): Toys “R” Us had too much debt from when private equity players Bain Capital and KKR (KKR) teamed with Vornado Realty Trust (VNO) for a leveraged buyout.  They had to pay too much interest from this debt, and with competition from Amazon (AMZN), Target, and Wal-Mart, it was too much.  Also, believe it or not, five hedge funds who held their debt, including Oaktree (OAK), who you care nothing about, made the decision to close down the Toys “R” Us stores, rather than keep them operating.

(Daughter): Wait…wait a minute.  So they did not close down the stores because people were not buying toys there?

(WTK):  That was part of it, but mostly it was the interest on the too big of pile of debt.

(Daughter): That is so frustrating.  Now I can’t buy L.O.L. dolls at Toys “R” Us anymore.  Life is so unfair.

(WTK): Unfair?  I will tell you about unfair.  Did I ever tell you I got the big picture right for coal, meaning a historic turnaround in coal prices, yet distressed debt buyers got all the benefit.

(Daughter):  I do not want to hear about that anymore.

(WTK): Anymore?

(Daughter): I just want to talk about Toys “R” Us.  It does not make sense.

(WTK):  I know.

P.S. When I was a young kid, all I wanted to do was have enough money to buy whatever I wanted at Toys “R” Us.  I guess somethings never change.

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

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

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Exiting Purgatory

(Travis’s Note:  This article was originally published on June 11th, 2018, and is being republished on October 28th, 2018 to add to the archives.  The title of this article was called “Exiting Purgatory”, however, that was a premature assessment.  Purgatory has continued for many out-of-favor equities, far longer than I would have thought two years ago, however, a historic rotation, even bigger than the reversal and rebound that encompassed out-of-favor equities in 2016 is on the horizon.)

  • 2016 was terrific, one of my best years ever, and this emboldened me heading into 2017.
  • The following 16 months might have been the worst period of my two decade plus investment career, and that is saying something, given the highs and lows I have achieved.
  • During the past two months, prices of my targeted equities have synced up, once again, with the dominant investment narratives that have prevailed since 2016.

It is no secret that the 16 months spanning January of 2017 to April of 2018 brought me to my knees, and then some, after one of the best macroeconomic and bottoms-up research calls of my roughly two decade career.

The investment markets, much like life, offer unexpected twists and turns, and they can humble us more than we can imagine.

As market participants, it is up to each one of us to learn, and benefit from our mistakes and successes.

Staying the course, I remain convinced that we are on the cusp of a generational investment opportunity, and there are valid reasons to be both extraordinarily bullish and extraordinarily bearish.

Last Thursday, I published an article for members, and as one part of the article, I looked at the performance of The Contrarian’s Top-Ten List from 4/5/18 through 6/6/2018.

With the equities names blanked out, here are the performance metrics over this time frame.

  1. Equity One – Gain of 6.6%
  2. Equity Two –  Gain of 41.9%
  3. Equity Three – Loss of -25.0%
  4. Equity Four – Gain of 19.7%
  5. Equity Five – Loss of -19.9%
  6. Equity Six – Gain of 5.8%
  7. Equity Seven –  Gain of 97.4%
  8. Equity Eight – Gain of 60.9%
  9. Equity Nine – Gain of 40.0%
  10. Equity Ten – Gain of 2.7%

Looking at the above list, clearly something has changed.

What has happened?

The short answer, is that purgatory is over.

Hope everyone is having a nice start to the summer,

WTK

Disclosure: I am/we are long the positions in the contrarian portfolios.

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

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My July 18th, 2016 Oil Forecast

(Travis’s Note:  This article was originally published on May 14th, 2018, and is being republished on October 28th, 2018, to add to the archives).

  • The snapshot below shows my 7/18/2016 oil price forecast.
  • How it helped.
  • How it hurt.

One of my long-time members of The Contrarian, a friendly fellow from New Zealand, bookmarked my July 18th, 2016 oil price (USO) forecast, and posted it to our forum several days ago.  Here is the snapshot of the oil forecast below, with the forecast highlighted in yellow.

Ultimately, knowing the “macro”, and getting it right, is usually helpful, however, in this case, it has been very painful, at least in the short-run.

Why is that?

Well, despite a near tripling of oil prices from their 2016 lows, there has been a dramatic divergence in energy equities (XOP), (XLE), (OIH), particularly the energy equities that should benefit the most from higher oil prices.

This has created a huge opportunity right now, IMO.

Hopefully, many can take advantage of this divergence, which is just starting to get resolved,

WTK

Disclosure: I am/we are long the positions in the contrarian portfolios.

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

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Financial Markets Are At An Inflection Point

(Travis’s Note:  This article was originally published on April 24th, 2018, and it is being republished on October 28th, 2018, to add to the archives.)

  • For over nine years, the current bull marked has surprised investors and speculators, including me, with amazing twists and turns.
  • Personally, I benefited at the previous two major inflection points, (2000  & 2008), including making money in 2008, and making a small fortune in 2009 on the long side.
  • Lessons learned in 2008 & 2009, and during the prior 15 years actually created value biases in my investing style that impaired results tremendously in the current bull market.
  • The pain culminated in a horrific 2017 for me personally, which ironically had followed a historic rebound and reversal in 2016.
  • Almost everybody’s an expert today, with biases in their own successes over the current bull market, or over the past 20 years, but that market environment is rapidly coming to an end.

Few investors and speculators have had the highs, which included making money personally in 2008 followed by huge success on the long side in 2009, or the significant lows, including losing large sums of money personally and for individuals that I was/am very close to (there is nothing more torturous than believing in something through thousands of hours of research, sometimes tens of thousands of hours, and the market proving you wrong, and failing people who are close to you) that I have experienced in the financial markets.

I am over 40 now, and I have been investing for nearly 30 years, starting when I had a paper route at 9.  This has accumulated to a fairly large pool of experience.

However, that only tells half the story.  Financial markets, and market history have been a large part of my life beyond simply the years accumulated, as they have been both a passion and a hobby.

From the age of 12 to 15, I consumed every financial book I could find (really ever since that time frame I have been a voracious reader – this is my favorite financial book), and I began more actively investing and speculating in my early years of high school.

One of my favorite books from this time frame was Martin Zweig’s Winning On Wall Street, which was published in 1986.  During my formative years, I also read the Wall Street Journal, Barron’s, and Investor’s Business Daily, which was founded my William O’Neil in 1984.

During college, I switched from a career in teaching, following in the footsteps of my deceased father, into a career in Finance, after I turned a $3,000 student loan into over $300,000.  I spent every free minute or hour studying the markets, and I figured that I should make a career out of the profession, since it was something I had a unique passion for and where work felt more like a hobby.

Academically, I graduated Summa cum Laude, as the Top Finance student in my class, while working all kinds of jobs from resident assistant, to waiter, to hotel front desk worker, to an internship under a renowned value investor at an insurance company.

From there, I have held many licenses, and accreditation’s, including achieving the CFA Charter in 2006, and the CAIA Charter shortly thereafter.

Additionally, I have spent almost my whole adult professional career in the financial markets, working for Charles Schwab, then performing research as an investment analyst for an RIA, then working for one of the largest RIA’s in the country as a senior investment analyst.

Along this journey, I started a boutique invested firm with my own capital in 2009, I have helped to host investment conferences, and I have consulted for some renowned hedge funds.

Then, late in 2015, I founded “The Contrarian“, because I believed we were near another major inflection point.

In 2016, I was spectacularly right with this forecast.

Then, shortly thereafter, I was spectacularly wrong in 2017, where a huge curve ball was thrown by the markets, which has tested my spirit, persistence, and drive like few challenges in my life.

The financial markets are notoriously humbling, as life is, and 2017 humbled me mercifully, as investors went back into the same trades that excelled from early 2011 to early 2016, even though we had major secular turning points in 2016, including bottoms in commodity prices, including in oil, in interest rates, and a top in the U.S. Dollar.

In summary, the gravitational pull of the bull market was so strong, and so distracting, that it lulled everyone into thinking that nothing had changed in 2016, even though everything had changed.

Even more alarming, the increasingly rare events became prized as commonplace in the financial markets.

Building on this narrative, investors and speculators willingly ignored that valuations were at their most extreme levels in modern market history in the United States, investors and speculators willingly ignored some of the lowest volatility in modern market history, and investors and speculators willingly looked past the changes in market mechanics that were leading to anomalies that should not happen.

Ultimately, we have reached a rare point in the financial markets, similar to 1999 and 2000, where an investor can be, “Extraordinarily Bearish & Extraordinarily Bullish“, at the same time.

How does this happen?  The pied piper of the Fed and global central banks have certainly not helped, yet it is just the human condition, where we have all become accustomed to excessive speculation and extraordinary intervention in the financial markets.

Following the most improbable losses of my investing career in 2017, I believe there are extraordinary opportunities in today’s financial markets on both the long and short side.

Thus, while most traditional investors could probably “Take A Ten Year Vacation“, and check in quarterly or annually to see if there are better opportunities, and most likely, come back to better prices a decade from now in the broader U.S. stock and bond markets, the landscape for contrarian value investors is unusually opportunistic, as most trades are extremely one-sided today, and when the pendulum swings the other way, it is going to be something we are writing about like we write about 1999-2002 and 2007-2009.

In closing, I have gone on several tangents, however, the main purpose of this blog entry is to highlight the opportunity, highlight the risks, and just reflect a little bit in a public forum where a dialogue can ensue.

When the extraordinary happens over and over, it becomes routine in a sense.  Thus, for investors who have lived through the late 1990’s and early 2000’s, or those who survived and thrived from 2007-2009, today’s extremes seem commonplace, yet today’s extremes are even more extreme than those historic extremes.

(Source: The Contrarian, GMO)

Think about that for a minute.

If you take away anything reading this, be aware of the market extremes, be aware of your own biases, my own have been exposed and beaten down, and be aware of the historic risk, and the historic opportunity.

WTK

Disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

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Buy & Hold

(Travis’s Note: This post was originally written on March 8th, 2018, and I encourage readers to go to the original post to view the comments. The central theme of this article, which essentially boils down to buying-and-holding compounding equities, is a central theme of mine, from an investment philosophy standpoint.  Additionally, as part of the discussion, I talk about the “Punch Card Portfolio” in this post, and you will see multiple references to that in reading my research.  One last thing, the ground floor of the future sector that I think will thrive is commodity equities, specifically natural gas equities, and more specifically Appalachia natural gas producers, which members of WTKTheContrarian have already received one-deep dive report on Southwestern Energy (SWN), which I believe is the best-buy-and-hold stock in the U.S. market today, with more reports on these companies, and this sector, to be delivered in the future.)

  • Buying and holding quality stocks is a surefire path to investment success.
  • This is harder to do in practice than in theory.
  • Ground floor of a future sector that I believe will thrive.

Wednesday night, and Thursday morning, I worked on, and published, an article for members of The Contrarian that highlighted, what I believe, is one of the brightest future long-term growth opportunities in the United States.

As I was wrapping up this article, and the revisions to the article, it occurred to me, that the best way to participate in this sector is just to buy and hold a select group of companies for the foreseeable future.

Building on this narrative, we all look at the Dividend Champions or Dividend Aristocrats of today, and wish that we could have gone back in time and “bought in” on the ground floor of these company’s eventual successes, like eponymous Seeking Alpha author Buyandhold 2012, who is one of my favorite investors & commentators in SA’s community, and who many investors, including myself, at the tender age of 40, could learn from.

Aside from both being paper boys in our youth (do they even have paper routes for kids today?), our investment paths been very different, and I have learned (often the hard way) that buying and holding quality companies is the best way to get the most out of your investments.

In fact, the more I think about it, there is a compelling case that can be made for buying, and never selling, as this would make investors think about their investments in a different light, and ease the burden of what to do, and when to do it.

Buffett commented about this investment approach, and had a name for it, which he called the “Punch Card” Portfolio, meaning that if you had a punch card, and could only make 20 investments in your life, and that was it, it would make most investors better investors.

Think about that for a minute, as I am sure almost all of us as investors would have run through our 20 “Punches”, as the electronic world of investing is conducive to over trading, and over analysis.

I wrote about the “Punch Card” Portfolio, and John Hempton’s take on this type of Portfolio in an October 20th, 2016 article for members.  If you are a member of The Contrarian, click on the above link, and it will take you to this article.

Looking back, most of my biggest investment mistakes in life have involved selling companies too early, as there is no limit to how much a quality company can compound wealth, given time.

The problem today, is that almost everything is overpriced, including many of the stalwart companies in the in S&P 500 Index (SPY), and many of the Dow Jones Industrial (DIA) components, so it is hard to find a quality company that is attractively priced.

This leaves an investor with two primary choices, including building cash to wait for future opportunities, and spending time looking for undervalued companies in out-of-favor sectors.

Instead of purchasing the broader stock market at all-time valuation highs, would it not be much better to buy a sector, or a group of companies, that was selling at multi-decade lows in terms of valuations?

Do these type of companies even exist in today’s hyper valued stock market?

Said another way, are there any “Punch Card” investment opportunities today?

The answer is a resounding yes.

To find them, though, as an investor, you have to look forward, not backward, and this is hard to do too, as almost all of us want to extrapolate the past into the future.

This is human nature, and it causes us to miss opportunities as the investment markets are non-linear in structure.

What if I said that there is a group of companies as undervalued as the best opportunities at 2009’s market bottom hiding in plain sight, with the wind at their back for the foreseeable future?

Clearly this does not describe the broader stock market today, but there are a group of company’s, much like REITs, or small-cap equities in 2000, that are extremely out-of-favor, while the market is extremely in-favor.

Would it help to know that these companies are profitable today, even at the bottom of a nearly decade long bear market in their industry, and just beginning to pay dividends and return cash flow to shareholders?

Would it help to know that these companies own emerging Tier 1 assets in a world that has largely already been discovered and owned?

Over the next several months, I am going to write several public articles on these companies to get commentary and feedback from fellow investors.

For now though, particularly over the next several weeks, I am going to double my efforts for members of The Contrarian, as after a lot of blood, sweat, and tears, I am increasingly coming to the realization that a huge opportunity is right in front of us as investors.

To read my recent article and get a preview of what I think could be long-term quality companies early in their life-cycle, in an emerging out-of-favor sector, consider taking a two-week free trial to “The Contrarian“.

If it is not for you, there are no hurt feelings.

I am willing to face rejections, as I try to put together a unique group of investors, traders, and speculators.

In fact, we would welcome a few qualified dissenters to the group to take the other side of the thesis, and to flush out these investment ideas further, so if that could be your role, send me a message and I will respond.

Best of luck to everybody, and have an enjoyable end to the week,

WTK

P.S. If you have a “Punch Card” stock idea today, meaning a stock that you would buy and hold forever, share it in the comments section, and we could probably get a good discussion going.

Disclosure: I am/we are short SPY In A Hedged Portfolio..

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

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Once In A Lifetime Market Price Action

(Travis’s Note: This article was originally published on January 22nd, 2018, which, with the benefit of hindsight, ended up being near the peak in the global equity market.  Much like 2000, though, when the NASDAQ peaked in March, then rolled over, however, the S&P 500 Index attempted to make a new high in the Fall of 2000, this time something similar happened, with global equities peaking in January, and then the U.S. stock market, specifically the S&P 500 Index, making new highs in the Fall of 2018).  

  • There is no parallel for today’s price action.
  • Extremes are beyond extreme.
  • There will be a price to pay when overcrowded trades unwind.

One of my favorite authors is Malcolm Gladwell.

One of my favorite short stories is Gladwell’s 2002 New Yorker article “Blowing Up“, about Nassim Taleb & Victor Niederhoffer.

One of my favorite passages (I have many) from this article is the following:

 Physical events, whether death rates or poker games, are the predictable function of a limited and stable set of factors, and tend to follow what statisticians call a “normal distribution,” a bell curve. But do the ups and downs of the market follow a bell curve? The economist Eugene Fama once studied stock prices and pointed out that if they followed a normal distribution you’d expect a really big jump, what he specified as a movement five standard deviations from the mean, once every seven thousand years. In fact, jumps of that magnitude happen in the stock market every three or four years, because investors don’t behave with any kind of statistical orderliness. They change their mind. They do stupid things. They copy each other. They panic. Fama concluded that if you charted the ups and downs of the stock market the graph would have a “fat tail,”meaning that at the upper and lower ends of the distribution there would be many more outlying events than statisticians used to modelling the physical world would have imagined.

Reflecting on a personal level, I have characteristics of both Taleb and Niederhoffer, and I have endured and caused a lot of pain in 2017, both daily , and on a cumulative basis.

Reflecting on the markets, we remain in an unnatural state, where the S&P 500 (SPY) has risen 15 straight months on a total return basis.

It is a melt-up of epic proportions, which comes after an already epic bull market, and the consistency of the advance for the broader market, and for the “Have” stocks (the “Have Not’s” have been left behind in an equally historic move) has removed any objectivity from analysts, speculators, and investors.

To close, we have to chronicle the magnitude and the extremes of the price action, and realize that when crowded trades unwind, there will be nobody else to take the other side of the trades.

Disclosure: I am/we are short SPY As A MARKET Hedge.

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

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Benefits Of Failure

(Travis’s Note: This article was originally published on January 17th, 2018, and I am re-posting today, October 28th, 2018 to add to the archives, and remember the challenges of 2017 as a Learning Lesson).

  • I have learned more in life through my failures than my successes.
  • 2017 was an excruciating, challenging year and I made significant, critical mistakes.
  • Capital was destroyed, which is precursor for what the broader market is going to do to many investors from today’s valuations.

“We all go through trials and tribulations, and when you see how a person handles it, that really says a lot.”

            – Chris Mullin

While most investors and speculators celebrated a fortuitous 2017 in the investment markets, I managed to have one of the worst years relatively, and absolutely, that I have had in my two decade plus career actively investing & speculating.  It was made even more painful, by the fact that this occurred after our terrific 2016, when it appeared that out-of-favor, value-oriented equities turned the corner in significant way.

The non-stop, relentless rise in the broader investment markets, specifically the S&P 500 Index (SPY), which only trades up nowadays, poured salt in the open wound, and all year, it felt like I was fighting uphill, which was the opposite of the remarkable reversal and rebound that we captured in 2016.

Looking back, I made clear, significant mistakes, and I severely, negatively impacted the investment portfolios of people close to me, destroying capital, which has to be one of the worst feelings in the world.

The silver lining to this unexpected turn of events is that I have found in life, that I learn more from my failures than I have from my successes, even the significant ones that I have been fortunate to enjoy (I have had my share of significant challenges too).

Specifically, I have found that, through failure, you learn more about relationships than you do in success, as successes can paper over cracks, fault lines, or real feelings, while failures tend to spur a “circling of the wagons” for those that are truly close to you, which makes eventual victories sweeter when/if they do occur.

On that note, I am very thankful for the members of “The Contrarian“, and everyone I work with directly and indirectly, as we continue to build a special community of members that aims to take advantage of historic price anomalies in the investment markets.

In summary, as a market historian, I have rarely seen price dislocations like we see in today’s markets.

Frankly, the price dislocations today rival the greatest price anomalies in modern market history, including the important calendar dates of 1929, 1973, 1999, and 2007.

Reading that and inferring from the dates mentioned, you may think that I am only focused on the downside, which is significant, but that is only partially true.  There are enormous upside opportunities too, as both long and short trades are enormously crowded right now, in my opinion.

Given today’s valuations, most investors, in traditional stock and bond portfolios, would be better going to cash (where short-term interest rates will rise) and taking a five-year vacation, checking in periodically, perhaps once a quarter, for better buying opportunities.  I will write more about this in the future, as it is the least I can do to preserve capital.

To close, in a picture, this is how I felt about 2017.

Looking forward to 2018, and moving forward from a despondent, depressing year (entirely of my own doing), where almost all common sense with regard to valuations has been thrown out the window.

Thank you for reading, and please be mindful of the rare investment environment that we are in today,

WTK

Disclosure: I am/we are short SPY as a Market Hedge.

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

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Long/Short Investing

(Travis’s Note:  This article was originally published on July 16th, 2017, and it is being re-posted today, October 28th, 2018, to organize for the archives.  Long/short has had a very difficult past decade, but I believe it is primed for a very good decade ahead).

 

The past several days, I have been working on an article for members of “The Contrarian”, that reviews a generational hedge fund call from 2013, and why this call remains relevant today.

In going through my archived writings, I came across an article I wrote on long/short investing in January of 2016, and I wanted to highlight a portion of that article, specifically my comments on long/short investing.

Here is the excerpt from the January 2016 article:

Reflection On My Long/Short Investment Philosophy

Ever since I learned about Alfred Winslow Jones, the pioneer of hedge fund investing, I was fascinated by the long/short investment strategy. Ideally, it performed well in up- and down-market environments, and separated stock picking skill from general market movements.

During my early career as an investment analyst, I focused on value-oriented investment managers and their philosophies. Some of my favorite investment managers were Mason Hawkins, Marty Whitman, Bob Rodriguez, Dan Fuss, and Jean-Marie Eveillard. Reading their analysis and following their investment strategies influenced and shaped my thinking. The 2000-2002 time frame reinforced my value leaning, as value managers, especially the aforementioned ones, strongly outperformed, as the S&P 500 Index declined nearly 40%.

In contrast to 2000-2002, the dramatic downturn of 2008 treated value investors far differently. Many value investors piled into financial stocks as they declined, attracted by the relatively and historically cheap valuations. Trying to buy value investments in 2008 was akin to catching a falling knife, similar to buying commodity stocks over the last three years (Author’s Updated Note: commodity stocks had a historic reversal and rebound in 2016), and many value-oriented investment investors and firms went out of business.

The tremendous volatility of 2008 also negatively impacted long/short equity hedge fund managers. From my perspective covering hedge fund managers at the time, many long/short portfolios experienced historic volatility and drawdowns, especially in the second half of 2008, particularly in the months of October and November. Observing how these managers responded, reducing gross and net exposure, and emphasizing their highest conviction investments, was an invaluable learning experience.

During 2008/2009, I kept my eyes fixated upon the performance of a select few hedge fund managers. One firm that I followed closely for personal and business reasons was Lee Ainslie’s Maverick Capital. Lee Ainslie, one of my favorite investors, is a descendant in the lineage of the legendary Julian Robertson (another one of my favorite investors), and he sparked my curiosity with how his team structured Maverick’s portfolios. Maverick was founded in 1990, and since inception, it has focused on long/short equity investing, eschewing macro, currency, and interest rates bets.

Part of my attraction to Maverick’s investment philosophy was that it was different from my own investment philosophy. Personally, I have always liked macro forecasts and the trading and investing opportunities that they inspire. My strong 2008 and 2009 performance years were largely the result of my macro market views. Because of their love for macro investing, I have been drawn to investors like Stanley Druckenmiller or John Burbank of Passport Capital, and they have heavily influenced my investment philosophy.

To summarize, value investing, long/short investing, macro calls, and a general contrarian stance have all become critical components of my personal investment philosophy. The struggles I have endured trying to buy historically cheap commodity stocks over the last several years has scared me, and caused me to at least consider a worst-case scenario more than I did prior to this experience (Author’s Updated Note: It has also caused me to heavily research the capital cycle, and members of The Contrarian will know what I am referring to specifically).

The resulting compilation of investment philosophies has been mashed together to produce the Contrarian All Weather Portfolio, my version of a long/short portfolio (Author’s Updated Note: This portfolio has has material out-performance since its December 7th, 2015 inception despite the robust performance in the U.S. stock market). At its heart, stock-picking results, netted out by a SPDR S&P 500 ETF (SPY) hedged position, will drive the returns of the portfolio. A majority of the individual stock selections are value oriented in some fashion. Additionally, there will be a macro theme to the portfolio alongside some macro positioning at the margin.

Takeaway: Long/Short Investing Is More Timely Today

Similar to the late 1990’s, which culminated in a period where growth outperformed value for roughly ten years, the past decade has also seen growth outperform value ironically from 2008 through today, in an environment where stock and bond valuations have become historically extended.

The end result is that expected future real returns today, for both stocks and bonds, are some of the lowest projected real returns in history.

Additionally, with bond yields low in nominal terms, the next significant market correction in U.S. equities, will not see investors saved by bond out-performance, in my opinion.

To close, there is a high probability that a traditional “60/40” equity/bond portfolio or “70/30” equity/bond portfolio will have negative real returns over the next decade.  All investors should think about today’s starting valuations when constructing their portfolios.

William “Travis” Koldus

Disclosure: I am/we are short SPY.

Additional disclosure: SPY short is a hedge position to offset long investments in a long/short portfolio. Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

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A Journey From “Unloved” To “Loved” As A Research Analyst

(Travis’s Note: This article was originally published on January 29th, 2017, and it documented a journey from out-of-favor to in-favor, that I anticipate will repeat over additional cycles.)

“Time is the coin of your life. It is the only coin you have, and only you can determine how it will be spent. Be careful lest you let other people spend it for you.”

Carl Sandburg

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria”

Sir John Templeton

“Life and investing are long ballgames.”

Julian Robertson

One year ago, on January 29 th, 2016, I looked at my TipRanks.com profile, and I was the 4,380th ranked blogger out of 4,802 bloggers. Additionally, I was the 7,829th ranked “expert” out of 8,501 ranked “experts”.

Needless to say, my public profile as a research analyst, nearly 20 years into my career, was less than acclaimed. Additionally, I had my fair share of detractors on Seeking Alpha, and outside Seeking Alpha, who did their best to remind me of just how incompetent I was in my research analysis.

Fast forward a year later, and the narrative has changed. Today, January 29th, 2017, I am the 17th ranked blogger out of 5,794 bloggers, and I am the 46th ranked “expert” out of 10,172 overall “experts”.

While I made some big mistakes, and learned some invaluable lessons along the way that I will never forget (I have the scars to prove this) in this constantly learning business, persistence, stubbornness, and hard work ultimately paid some dividends.

The lesson for all investors is that you have to be careful judging an analyst, or even yourself, good or bad, because the view could change as the perceptions and realities of the market change. Additionally, another lesson is that it is difficult to take a variant view, as the markets have a way of punishing the alternative view for a long period of time.

In “The Contrarian“, the premium research service I founded on Seeking Alpha on December 7th, 2015, we actively challenge the status quo in search of out-of-favor investments that have inherent potential opportunity. Additionally, we challenge each other to become better investors, speculators, and traders.

While I could go on and on about the merits of the service (admittedly I have a biased view), and how much I enjoy writing and participating in it, member reviews provide another perspective, and I wanted to share this information once again, as there are now 21 reviews, all “Five Stars” at the current juncture.

Without further ado, here is a link to all the reviews of The Contrarian. Please check them out for yourself. Thank you to all members of “The Contrarian” for creating a unique community that I am privileged to participate in every day. Also, thank you for taking the time to read this article. If you are interested in joining our community, which I think is timely today, follow the prompts, and reach out with any questions,

Travis

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.