Collected Wisdom from the Blogosphere

“Johansen explained that – to deal with an uncertain future and still move forward – they advise people to have “strong opinions, which are weakly held.” They’ve been giving this advice for years, and I understand that it was first developed by Instituite Director Paul Saffo. Bob explained that weak opinions are problematic because people aren’t inspired to develop the best arguments possible for them, or to put forth the energy required to test them. It was just as important, however, to not be too attached to what you believe because, otherwise, it undermines your ability to “see” and “hear” evidence that clashes with your opinions. This is what psychologists sometimes call the problem of “confirmation bias.
Barry Ritholz’s Blog, Inner Scorecard.

…there is a complicating factor that makes the handling of investment mistakes more difficult. This is the ego in each of us. None of us likes to admit to himself that he has been wrong. If we have made a mistake in buying a stock but can sell the stock at a small profit, we have somehow lost any sense of having been foolish. On the other hand, if we sell at a small loss we are quite unhappy about the whole matter.
– Common Stocks and Uncommon Profits (Phil Fisher)

“I like people admitting they were complete stupid horses’ asses. I know I’ll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn.” –Charlie Munger

“The confidence we experience as we make a judgment is not a reasoned evaluation of the probability that it is right. Confidence is a feeling, one determined mostly by the coherence of the story and by the ease with which it comes to mind, even when the evidence for the story is sparse and unreliable. The bias toward coherence favors overconfidence. An individual who expresses high confidence probably has a good story, which may or may not be true.” — Daniel Kahneman, The Hazards of Confidence

I decided in April to artificially slow down my transaction frequence to 1 transactions per month I did not know that volatility would make a big comeback in the stock market and resemble the “stop-and-go” traffic on Munich’s Autobahn. However, I pretty soon discovered that my restriction had a very calming effect on my nerves. Knowing that I only have one “shot per month” takes away a lot of hectic and pressure especially in volatile times. I discovered for instance that I can better focus on fundamental research if I know that I can’t trade in the next 2 weeks anyway compared to previous times where I would have “watched the tape” all the time and look at all the stocks which would have gone down the most. Also that “gut feeling” when you sometimes have a bad feeling and an urge to sell down at exactly the wrong moment goes totally away. — ValueAndOpportunity

I noticed a few years ago that two common threads ran through all my investing mistakes. The first was that I was buying inferior businesses due to what I perceived at the time to be a low multiple (but alas not a low
valuation). The second was that I was buying inferior businesses due to the prospect of a fast buck or what analysts term a “catalyst”.  I corrected the first mistake by focussing more on the quality of the management and the business model than on the valuation. The second mistake I avoid by opting my investments for an indefinite investment
horizon.  — Robert Vinal, The European Value Investor Interview

This disconnect between knowing that there is something you cannot do and the feeling that *you* personally can do it, has been with me all my life and I think that there is a lot of it on the wall street. […] I call it an “illusion of skill”. You know that it is wrong but you feel something else.
– Daniel Kahneman

Interview with Steve Forbes, Jan 2013.

Most U.S. investors today have a clear opinion about what everyone else has no choice but to do. Which is to say, with bonds yielding next to nothing, the only way investors have a chance of earning a return is to buy stocks. Everyone knows this, and is counting on it to remain the case. While economist David Rosenberg at Gluskin Sheff believes government actions could be directly or indirectly responsible for as many as 500 points in the S&P 500, or 30% of its current valuation, traders have confidence in Ben Bemanke because betting that his policies will drive equities higher bas been a profitable wager. Bernanke, likewise, is undoubtedly pleased with these speculators for abetting his goal of asset price inflation, though we all know that he will not call them first when he decides to reverse direction on QE. Then, the rush for the exits will be madness, as today’ s “clarity” will have dissolved, leaving only great uncertainty and probably significant losses.

Investing, when it looks the easiest, is at its hardest. When just about everyone heavily invested is doing well, it is hard for others to resist jumping in. But a market relentlessly rising in the face of challenging fundamentals–recession in Europe and Japan, slowdown in China, fiscal stalemate and high unemployment in the U.S.– isthe riskiest environment of all.

Only a small number of investors maintain the fortitude and client confidence to pursue long-term investment success even at the price of short-term underperformance. Most investors feel the hefty weight of short-term performance expectations, forcing them to take up marginal or highly speculative investments that we shun. When markets are rising, such investments may perform well, which means that our unwavering patience and discipline sometimes impairs our results and makes us appear overly cautious. The payoff from a risk-averse, long-term orientation is–just that–long term. It is measurable only over the span of many years, over one or more market cycles.

Our willingness to invest amidst failing markets is the best way we know to build positions at great prices, but this strategy, too, can cause short-term underperformance. Buying as prices are falling can look stupid until sellers are exhausted and buyers who held back cannot effectively deploy capital except at much higher prices. Our resolve in holding cash balances–sometimes very large ones–absent compelling opportunity is another potential performance drag.

But we know that in a world in which being anti-fragile is good, what doesn’t kill you can make you stronger. Short-term underperforrnance doesn’t trouble us; indeed, because it is the price that must sometimes be paid for longer-term outperformance, it doesn’t even enter into our list of concerns. Patience and discipline can make you look foolishly out of touch until they make you look prudent and even prescient. Holding significant, low or even zero-yielding cash can seem ridiculous until you are one of the few with buying power amidst a sudden downdraft. Avoiding leverage may seem overly conservative until it becomes the only sane course. Concentrating your portfolio in the most compelling opportunities and avoiding over diversification for its own sake may sometimes lead to short-term underperformance, but eventually it pays off in outperformance.

Seth Klarman via Zero Hedge and csinvesting.

Be patient and tough; one day this pain will be useful to you.
Don’t believe everything you think.
“I will study and get ready, and perhaps my chance will come.” – Abraham Lincoln
Always make new mistakes. — Ester Dyson
“If I had eight hours to chop down a tree, I’d spend six hours sharpening my axe. ” – Abraham Lincoln

Swatch Group

This is a family owned business.

Two types of shares. Bearer shares are 5 x Registered shares. Total of ~ 30M bearer and ~ 124M registered shares.

As of 31 December 2014, the Hayek Pool, related parties, institutions and persons control 63 169 930 registered shares and 1650 bearer shares, totalling 40.8% (previous year 40.8%) of the votes.

The company runs on meager debt and the management has a very long term view of the business (83.7% equity ratio in 2014).

The family-ownership allows the company to “suffer in the near term” to build the brand value. Even after significant appreciation of the swiss franc they continue to invest here.

Because it is also here, in Switzerland, that we want to be established and to manufacture in the future. For you, for us, for industry, for the region and through this, for Switzerland. Because to us, the idea of “outsourcing abroad” is utter nonsense. — Nayla Hayak, Chairwoman, Swatch

What remains is the valuation.

The company is selling for 30xFCF at the moment (morningstar). But, their investments have been quite high and the “normal” value of the FCF is closer to 1B CHF currently. Which puts the multiple at 20 and the growth in FCF for the last decade to be 5% (FCF was 568CHF in 2005). The 20 multiple implies that the discount rate for the DCF calculation is 5%. Assuming these assumptions to be correct, at current prices I am looking at a return of 10% (5% from FCF growth and 5% from the discount rate). This is too high for me. I will probably be more interested around CHF16B i.e., a 20% drop from the current price.

Tandy Leather

Market Cap ~ 80M (Price $7.87)

A whole-seller of leather (derived products) with over 100 stores worldwide.

Management has big shareholding (~ 33.63%). They have been able to the grow the business moderately 5% revenue in the last 10 years and 7% income. So, this checks out.

The company probably has some moat in terms of locations/quality/variety of products they sell. Unfortunately, this does not seem very sustainable to me. This goes into the “Too Hard Pile”.

Dolby (DLB)

Founded by Ray Dolby (wife Dagmar Dolby, son David Dolby). The founder is dead and the company is still largely owned by the family.

The company has two classes of shares A (which is traded) and B (which is largely owned by the family). They are each  50M in numbers. Holders of Class A shares have 1 vote while the holders of class B have 10. The family owns ~ 100% of class B and ~ 0% of class A. Hence, they have ~ 90% voting power.

They develop sound/imaging technologies, patent them and then earn money by licensing them to OEMs (like Samsung for their cellphones, Microsoft for Surface, Movies etc). They do face competition in these. For example, they were not included in Windows 8 or in Samsung Galaxy S5.

There are several open source models and it is difficult to judge for me if they will continue to have the moat. No one buys a mobile, laptop because it has Dolby on it.

The second main problem I see is from the management point of view. The founding family has rightly hired Kevin Yeaman (CFO 2005-2009 and then CEO 2009-), to run the business and are paying him very well, mostly in stocks ( ~ 18M in the last 3 years in total, out of which $9M in options and $6M in stocks). Unfortunately, with the founding member gone and the son controlling the voting power, I am unable to handicap the politics either.

Disclosure: No position. No plan to start one.

America’s Car Mart (CRMT)

I started a position in America’s Car Mart at ~ 33$.


The insiders hold 12.9% of the shares according to the 2015 proxy and the CEO William H. Henderson holds 5.3%.
The management has been quite stable with Mr Henderson as CEO since 2002.
The company pays no dividends and the management wants to return value to shareholders via share buybacks. The shares-outstanding has gone from ~12M to ~9M in the last 10 years.
The management sees the company as “growth” and has target numbers in terms of dealerships going forward.

Balance Sheet

The company has a safe balance sheet with ~ $100M long term debt financed by revolving credit facility.
The company has $229M in equity with book value $25.44/share.


The company gives cars to people with bad credit scores (default risk is ~ 30%). Then, it concentrates on collection. This is a finance and people relations business.

Lesson: Arcelor Mittal (MT), Posco (PKX)

Why did I buy MT ?

  • Cheap on EV/EBITDA. Started buying around $18 and kept it up until $10. Sold at $7.
  • Management owns ~ 40% shares.

I coat-tailed in PKX because of Mohnish and because this is also cheap over EV/EBITDA.

What I learned ?

  • Importance of the business. The iron & steel business is difficult, capital intensive and is a commodity business.
  • I did not want to sell PKX because I think it  has a competitive advantage. But, I feel uncomfortable because I have problems understanding the management culture especially after some of them are being sued.

Distribution Now (DNOW)

Awesome balance sheet (Q2, 2015)

$114M cash/$1.9B equity/$457M Goodwill/$80M LT Debt.
EV ($18) = $1.7B


Same people who ran National Oilwell Varco (Pete Miller, CEO of NOV for 13 years, is executive chairman).


A 5% net margin is quite achievable. With P/S of 0.5 at the moment one is paying a P/E of 10.


Pipe, valves and valve automation, fittings, instrumentation, mill and industrial supplies, tools, safety supplies, electrical products, drilling and production equipment, fabricated equipment, and industrial paints and coatings.