Monday, August 24, 2015

Ten Cate being taken private at Graham Value

TEN CATE is being taken private for €24 . Good for shareholders who bought at levels under the Graham Value, but not those who paid more than €30 per share.  see also

Wednesday, March 06, 2013

Ten Cate earnings per share from €2,3 in 2011, drop to €0,9 in 2012

Ten Cate old

Chart above before 2012 results, chart below with 2012 results.
Ten Cate new
SECTOR: [PASS] Ten Cate is neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES: [PASS]  The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Ten Cate's sales of €1049 million, based on 2012 sales, pass this test.

CURRENT RATIO: [PASS]  The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. Ten Cate's current ratio €413m/€179m of 2.3 passes the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for Ten Cate is €280 million, while the net current assets are €234 million. Ten Cate fails this test.

LONG-TERM EPS GROWTH:  [FAIL] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. Ten Cate's EPS growth over that period of 23% fails the EPS growth test.

Earnings Yield:  [FAIL] The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. Ten Cate's E/P of 5% (using the current Earnings) fails this test.

Graham Number value: [PASS]  The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Ten Cate has a Graham number of (22,5 x €1,7 EPS x 17,25 Book Value) = €26

Comments, questions or E-mails welcome:

Monday, August 17, 2015

Oops. Wrong in 2013 about Imtech Intrinsic Value

The banks have pulled the plug on Imtech. Using Graham Value without taking debt into account (as Benjamin Graham insisted for the defensive investor) is dangerous. At we are paying more attention to debt today than in the past.

August 2015 Imtech shareholders get ZERO, a permanent loss of capital. Jeroen Brenninkmeijer of  was right about not buying Imtech after the first bad news appeared.

Here my previous posts on Imtech.

Imtech a possible BUY at around €10

Old chart February 1st 2013

Imtech 2012 numbers were expected February 5th, now they are delayed. 

2011 Imtech Graham screen: FAILED in CURRENT RATIO and LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS. Which is the reason they are now in trouble with the banks after a major loss in Poland. 

Book value 2011 was €932m/87,5m shares is €10,6 per share. The loss in Poland is at least €100million. Too be safe, we'll make it 232m. Guesstimate book value per share = €700/€87,5 = €8,-

New lower EPS estimate for 2013 €1,30 (was €1,7 in 2011). €0,- for 2012.

Guesstimate of Graham value: Graham number of (22,5 x €1,3 EPS x €8 Book Value/per share) = €15,2

Imtech guesstimate with 232 million Polish write off and 0.- profit in 2012 (February 4th, 2013)
Comments, questions or E-mails welcome: ajbrenninkmeijer (a)

Tuesday, June 30, 2015

Money Making Machines Juni 2015

Money Making Machines, de fonds die ik beheer is bijgewerkt voor juni.

Comments, questions or E-mails welcome:

Monday, June 29, 2015

Musk's musings on moving money and the markets.

PayPal, Tesla Motors, SpaceX and SolarCity founder Elon Musk thinking in one of his factories.

The new Elon Musk biography is fascinating. The book is about "solving cars, global warming and making humans interplanetary."...big subjects. As Larry Page of Google puts it, "Good ideas are always crazy until they're not." It's also interesting to gets Musk's insights on more mundane things like investing and moving money around and banking (Musk was one of the founders of PayPal that was sold to eBay).
Page learnt from Musk that: "Your intuition about things you don't know that much about isn't very good. The way Elon talks about this is that you always need to start with the first principles of a problem. What are the physics of it? How much time will it take? How much will it cost? How much cheaper can I make it? There's this level of engineering and physics that you need to make judgments about what's possible and interesting...You should have a pretty broad engineering and scientific background. You should have some leadership training and a bit of MBA training or knowledge of how to run things, organize stuff, and raise money...When you're able to think about all of these disciplines together, you can think differently and can dream of much crazier things and how they might work. I think that's really an important thing for the world. That's how we make progress"

Musk on moving money;

"I've thought about trying to get PayPal back. I've just been too strung out with other things. Almost no one understands how PayPal actually worked or why it took off when other payment systems before and after it didn't. Most of the people at PayPal don't understand this. The reason it worked worked was because the cost of transactions in PayPal was lower than any other system. And the reason the cost of transactions was lower is because we were able to do an increasing percentage of our transactions as ACH, or Automated Clearing House, electronic transactions, and most importantly, internal transactions. Internal transactions were essentially fraud-free and cost us nothing. An ACH transactions costs, I don't know, like twenty cents or something. But it was slow, so that was a bad thing. It's dependent on the bank's batch processing time. And then the credit card transaction was fast, but expensive in terms of the credit card processing fees and very prone to fraud. That's the problem Square is having now. Square is doing the wrong version of PayPal. The critical thing is to achieve internal transactions. This is vital because they are instant, fraud-free, and fee-free. If you're a seller and have various options, and PayPal has the lowest fees and is most secure, it's obviously the right thing to use.
"When you look at a business making 10 percent profit on sales, if using PayPal means you pay 2 percent for your transactions and using some other systems means you pay 4 percent, that means using PayPal gives you a 20 percent increase in your profitability. You'd have to be brain dead not to do that. Right? 
"So because about half of PayPal's transactions in the summer of 2001 were internal or ACH transactions, then our fundamental costs of transactions were half because we'd have half credit cards, we'd have that and then the other half would be free. The question then is how do you give people a reason for keeping money in the system?
"That's why we created a PayPal debit card. It's a little counter-intuitive, but the easier you make it for people to get money out of PayPal, the less they'll want to do it. But if the only way for them to spend money or access it in any way is to move it to a traditional bank, that's what they'll do instantly. The other thing was the PayPal money market fund. We did that because if you consider the reasons that people might move the money out, well, they'll move it to either either conduct transactions in the physical world or because they're getting a higher interest rate. So I instituted the highest-return money market fund in the country. Basically, the money market fund was at cost. We didn't intend to make any money on it, in order to encourage people to keep their money in the system. And then we also had like the ability to pay regular bills like your electricity bill and that kind of thing on PayPal.
"There were a a bunch of things that should have been done like checks. Because even though people don't use a lot of checks they still use some checks. So if you force people to say, 'Okay, we're not going to let you use checks ever,' they're like, 'Okay, I guess I have to have a bankaccount.' Just give them a few checks, for God's sake.
"I mean, it's so ridiculous that PayPal today is worse than PayPal circa end of 2001. That's insane.
"None of these start-ups understand the objective. The objective should be - what delivers fundamental value. I think it's important to look at things from a standpoint of what is actually the best thing for the economy. If people can conduct their transactions quickly and securely that's better for them. If it's simpler to conduct their financial life then it's better for them. So, if all your financial affairs are seamlessly integrated one place it's very easy to do transactions and the fees associated with transactions are low. These are all good things. Why aren't they doing this? It's mad.

Musk on the markets:

From: Elon Musk
Date: June 7, 2013
Subject: Going public

Per my recent comments, I am increasingly concerned about SpaceX going public before the Mars transport system is in place. Creating the technology needed to establish life on Mars is and always has been the fundamental goal of SpaceX. If being a public company diminishes that likelihood, then we should not do so until Mars is secure. This is something that I am open to reconsidering, but, given my experiences with Tesla and SolarCity, I am hesitant to foist being public on SpaceX, especially given the long term nature of our mission.
Some at SpaceX who have not been through a public company experience may think that being public is desirable. This is not so. Public company stocks, particularly if big step changes in technology are involved, go through extreme volatility, both for reasons of internal execution and for reasons that have nothing to do with anything except the economy. This causes people to be distracted by the manic-depressive nature of the stock instead of creating great products.

(In a presentation in 2015 Musk said: "For example, with Tesla, any given week, it’s very confusing. I’ll say things where, if people understood what I was saying, then the stock should go up, and it goes down. It’s like, what the hell? And vice versa. So I think it’s actually quite distracting to have public stock. And the time to go public, ideally, is when things are fairly stable. But I think we’ll get the benefits of stock appreciation over time, without the downside of going public, and then maybe 20 years from now or something like that, go public.")

It is important to emphasize that Tesla and SolarCity are public because they didn’t have any choice. Their private capital structure was becoming unwieldy and they needed to raise a lot of equity capital. SolarCity also needed to raise a huge amount of debt at the lowest possible interest rate to fund solar leases. The banks who provide that debt wanted SolarCity to have the additional and painful scrutiny that comes with being public. Those rules, referred to as Sarbanes-Oxley, essentially result in a tax being levied on company execution by requiring detailed reporting right down to how your meal is expensed during travel and you can be penalized even for minor mistakes.


For those who are under the impression that they are so clever that they can outsmart public market investors and would sell SpaceX stock at the “right time,” let me relieve you of any such notion. If you really are better than most hedge fund managers, then there is no need to worry about the value of your SpaceX stock, as you can just invest in other public company stocks and make billions of dollars in the market.
If you think: “Ah, but I know what’s really going on at SpaceX and that will give me an edge,” you are also wrong. Selling public company stock with insider knowledge is illegal. As a result, selling public stock is restricted to narrow time windows a few times per year. Even then, you can be prosecuted for insider trading. At Tesla, we had both an employee and an investor go through a grand jury investigation for selling stock over a year ago, despite them doing everything right in both the letter and spirit of the law. Not fun.
Another thing that happens to public companies is that you become a target of the trial lawyers who create a class action lawsuit by getting someone to buy a few hundred shares and then pretending to sue the company on behalf of all investors for any drop in the stock price. Tesla is going through that right now even though the stock price is relatively high, because the drop in question occurred last year.
It is also not correct to think that because Tesla and SolarCity share prices are on the lofty side right now, that SpaceX would be too. Public companies are judged on quarterly performance. Just because some companies are doing well, doesn’t mean that all would. Both of those companies (Tesla in particular) had great first quarter results. SpaceX did not. In fact, financially speaking, we had an awful first quarter. If we were public, the short sellers would be hitting us over the head with a large stick.
We would also get beaten up every time there was an anomaly on the rocket or spacecraft, as occurred on flight 4 with the engine failure and flight 5 with the Dragon prevalves. Delaying launch of V1.1, which is now over a year behind schedule, would result in particularly severe punishment, as that is our primary revenue driver. Even something as minor as pushing a launch back a few weeks from one quarter to the next gets you a spanking. Tesla vehicle production in Q4 last year was literally only three weeks behind and yet the market response was brutal.


My goal at SpaceX is to give you the best aspects of a public and private company. When we do a financing round, the stock price is keyed off of approximately what we would be worth if publicly traded, excluding irrational exuberance or depression, but without the pressure and distraction of being under a hot public spotlight. Rather than have the stock be up during one liquidity window and down during another, the goal is a steady upward trend and never to let the share price go below the last round. The end result for you (or an investor in SpaceX) financially will be the same as if we were public and you sold a steady amount of stock every year.
In case you are wondering about a specific number, I can say that I’m confident that our long term stock price will be over $100 if we execute well on Falcon 9 and Dragon. For this to be the case, we must have a steady and rapid cadence of launch that is far better than what we have achieved in the past. We have more work ahead of us than you probably realize. Let me give you a sense of where things stand financially: SpaceX expenses this year will be roug[h]ly $800 to $900 million (which blows my mind btw). Since we get revenue of $60M for every F9 flight or double that for a FH or F9-Dragon flight, we must have about twelve flights per year where four of those flights are either Dragon or Heavy merely in order to achieve 10% profitability!
For the next few years, we have NASA commercial crew funding that helps supplement those numbers, but, after that, we are on our own. That is not much time to finish F9, FH, Dragon V2 and achieve an average launch rate of at least one per month. And bear in mind that is an average, so if we take an extra three weeks to launch a rocket for any reason (could even be due to the satellite), we have only one week to do the follow-on flight.


Below is my advice about regarding selling SpaceX stock or options. No complicated analysis is required, as the rules of thumb are pretty simple.
If you believe that SpaceX will execute better than the average public company, then our stock price will continue to appreciate at a rate greater than that of the stock market, which would be the next highest return place to invest money over the long term. Therefore, you should sell only the amount that you need to improve your standard of living in the short to medium term. I do actually recommend selling some amount of stock, even if you are certain it will appreciate, as life is short and a bit more cash can increase fun and reduce stress at home (so long as you don’t ratchet up your ongoing personal expenditures proportionately).
To maximize your post tax return, you are probably best off exercising your options to convert them to stock (if you can afford to do this) and then holding the stock for a year before selling it at our roughly biannual liquidity events. This allows you to pay the capital gains tax rate, instead of the income tax rate.
On a final note, we are planning to do a liquidity event as soon as Falcon 9 qualification is complete in one to two months. I don’t know exactly what the share price will be yet, but, based on initial conversations with investors, I would estimate probably between $30 and $35. This places the value of SpaceX at $4 to $5 billion, which is about what it would be if we were public right now and, frankly, an excellent number considering that the new F9, FH and Dragon V2 have yet to launch.


Comments, questions or E-mails welcome:

"Outsource thinking" explained by Warren Buffett

“When I was 21 years old, I could have been saying the most brilliant things on earth and nobody would have listened to me. Now, I could say that the moon was made of pink tissue paper and everyone would go, ‘Wow, look! It really is.’ And they would believe me, because I am Warren is the strangest thing.
Comments, questions or E-mails welcome:

Wednesday, June 24, 2015

Jeff Bezos: "We go against the math which always says that the smart move is to raise prices."

Amazon's book value at the end of 2005 about $250 million, at that time Amazon founder Jeff Bezos wrote;

"As our shareholders know, we have made a decision to continuously and significantly lower prices for customers year after year as our efficiency and scale make it possible. This is an example of a very important decision that cannot be made in a math-based way. In fact, when we lower prices, we go against the math that we can do, which always says that the smart move is to raise prices. We have significant data related to price elasticity. With fair accuracy, we can predict that a price reduction of a certain percentage will result in an increase in units sold of a certain percentage. With rare exceptions, the volume increase in the short term is never enough to pay for the price decrease. However, our quantitative understanding of elasticity is short-term. We can estimate what a price reduction will do this week and this quarter. But we cannot numerically estimate the effect that consistently lowering prices will have on our business over five years or ten years or more. Our judgment is that relentlessly returning efficiency improvements and scale economies to customers in the form of lower prices create a virtuous cycle that leads over the long term to a much larger dollar amount of free cash flow, and thereby to a much more valuable"

In the 10 years following the statement above Amazon's book value increased more than 4000% to $10,7 billion today.  

Sam Walton of Walmart and Amazon’s Jeff Bezos both got this. They understood the value of leveraging supply chain capability to delight a critical market segment, or to support an initiative that differentiates them from the competition, or to focus on the “big” economics (top line or total profit, for example) rather than traditional supply chain cost minimization (lower cost of goods sold % ie increasing gross margin %s). Bezos is often credited with developing the “Amazon Flywheel of Growth” on a napkin.

Exhibit 1
The reality is when several senior executives from Walmart joined Amazon, they brought with them the concept of Sam Walton’s “Productivity Loop,” which Bezos then adapted to Amazon. (Exhibit 1depicts the Flywheel and Productivity Loop.) The point is that for both Walmart and Amazon, value and service drive revenue growth; revenue growth drives efficiency, leading to more value and more customers; more customers drive more efficiency, value and growth; and the loop or flywheel continues to spin.

Comments, questions or E-mails welcome:

Tuesday, March 10, 2015

Keeping an eye on IV intrinsic value and Margin of Safety instead of Net Asset Value

A blogpost about value investing. In Dutch waardebeleggen. Warren Buffett showed Book Value in his reports, but earnings are just as important. A combination is the Graham Number. So I would like to show my fellow investors the development of the intrinsic value (in Dutch Bedrijfseconomische waarde), tracked as Graham Number. (At the moment March 2015 I am having a problem because the IV is "increasing" quickly due to holdings in dollars being tracked in euros which is falling. A "Big Mac" total would make more sense, also seen from the perspective of changing inflation.)

A second graph shows the Margin of Safety. "Whether it's sock or stocks I like to buy when something is marked down." (Mark down in Dutch = Korting). So when the price of the stocks go up the Margin of Safety goes down. When the price of stocks goes down, like last October the Margin of Safety increases, like last October. That should make investors happy and enthusiastic to buy when stock prices go down. This is to some extent a Net Asset Value chart upside down, but it never goes above 100% or under 0% even after decades.

1. Stock overview and Graham Value calculation           Yield Possible   Calculated   Total 
        "Mr. Market"   EPS / Growth Per Share Graham Margin of Graham Number
  Stocks I own Ticker #stocks Price EPS Price per Share Book Value Nr. Value Safety Value
Oil Fugro   101 € 25,00 € 2,00 8% 10% € 17,00 € 27,66 0,10 $2.991
  Agriculture Company AGCO 33 $48,00 $3,50 7% 5% $41,00 $56,82 0,16 $1.875
  Alamo Group ALG 0 $51,11 $3,80 7% 10% $30,50 $51,07 0,00 $0
Oil Atwood Oceanics ATW 75 $29,00 $5,00 17% 5% $41,00 $67,92 0,57 $5.094
  Berkshire Hathaway BRK.B 3 $144,00 $12,00 8% 12% $100,00 $164,32 0,12 $493
OIL Chicago Bridge & Iron CBI 25 $46,00 $5,80 13% 12% $26,39 $58,68 0,22 $1.467
  City Developments CDEVY 73 $7,20 $0,62 9% 5% $8,36 $10,80 0,33 $788
  Cheung Kong CHEUY 84 $19,00 $2,50 13% 5% $22,00 $35,18 0,46 $2.955
  Amcon DIT 6 $82,00 $8,00 10% 5% $90,43 $127,58 0,36 $765
  EZCorp EZPW 671 $10,25 $1,05 10% 10% $16,18 $19,55 0,48 $13.119
  Gafisa GFA 1100 $1,15 $0,64 56% 10% $6,18 $9,43 0,88 $10.377
Oil Hollyfrontier Corp HFC 44 $38,00 $3,50 9% 3% $30,00 $48,61 0,22 $2.139
Oil Lukoil LUKOY 20 $44,00 $10,00 23% 2% $106,00 $154,43 0,72 $3.089
  Markel MKL 4 $740,00 $65,28 9% 14% $544,00 $893,88 0,17 $3.576
  Reliance Steel & Alu RS 28 $56,16 $4,70 8% 6% $53,00 $74,86 0,25 $2.096
Oil Solar City SCTY 43 $50,00 $12,00 24% 70% $25,30 $82,65 0,40 $3.554
  SouFun Holdings SFUN 54 $5,95 $0,64 11% 15% $1,54 $4,71 -0,26 $254
Oil Surgutneftegas SGTZY 100 $5,60 $2,00 36% 5% $15,75 $26,62 0,79 $2.662
Oil Sasol SSL 43 $32,75 $4,19 13% 8% $25,23 $48,77 0,33 $2.097
  Sun Hung Kai Prop. SUHJY 33 $15,00 $1,60 11% 0% $19,87 $26,75 0,44 $883
  Tech Data TECD 20 $57,00 $5,50 10% 5% $56,29 $83,46 0,32 $1.669
oil Transglobe TGA 405 $2,90 $0,30 10% 10% $7,00 $6,87 0,58 $2.784
  Universal Corp UVV 37 $46,00 $4,30 9% 3% $53,90 $72,21 0,36 $2.672
  W. R. Berkley WRB 39 $50,00 $5,00 10% 15% $37,10 $64,60 0,23 $2.520
  World Acceptance WRLD 14 $83,00 $10,00 12% 15% $33,09 $86,29 0,04 $1.208
  Test CBI 15 $47,73 $5,80 12% 10% $26,39 $58,68 0,19 $880
  Bench:   10% or more cash.            Total Graham Number value of stocks     $71.126

Comments, questions or E-mails welcome:

Wednesday, February 25, 2015

Logic to avoid mental effort?

I am not trained in logic, but something seems screwy here at second glance.

Statement 1. You can beat market research by doing your own research.

Could this be true? Maybe.

Question 2. Every investor can beat the average (simultaneously) by reading the same information?

Answer: Yes Is false, not mathematically possible.

Question 3. Why don't more people do it?

Answer: Just lazy I guess.

The key is the word "simultaneously" , it is inferred in the second question, but not actually said. The correct answer is: many investors don't even try. They are the "dumb money" picking stocks based on emotion or buying (mutual funds that track) indexes. Pointy hair guy is making an assumption: Every investor who does do her research can beat the market averages long term, based on the assumption that the other investors will remain lazy (or believe they don't stand a chance and thus don't even try.)

My conclusion: The author Scott Adams is making a point that you shouldn't even try to beat the index, because it is impossible. In reality things might not add up as neatly as it seems at first glance. As casual reader who believes in the Efficient Market Hypothesis, will just see a confirmation of her bias and laugh at how people could be so stupid as to try beating the market.


Comments, questions or E-mails welcome:

Friday, February 13, 2015

IPPC prediction from 2001 almost 15 years later

1998 was a very warm year in 2001 the UN Intergovernmental Panel on Climate Change made published a report:

With the following prediction for temperature on page 70. I have added the rough line until today, compared to the median prediction. We are still in the range the IPCC predicted, but just. Catastrophic anthropogenic global warming (AGW) might not be happening?

Nullius in Verba.

Comments, questions or E-mails welcome:

Money Making Machines: How to buy a dollar for forty cents

Price is what you pay $10 stock price, value is what you get $25 intrinsic (bedrijfeconomische waarde), but you need to do some simple math.


This is what they should teach in high school.

Comments, questions or E-mails welcome:

Thursday, February 05, 2015

Virtual Reality Retail

Just got this from Daniel Schlapkohl in the same week PurplePillVR is building their second camera.
Reminds me of my thoughts on C&A and Internet in 1996. Regarding the last question: No contest, we're gonna fight to be Nr. 1 : Providing the latest fashion at highest quality/price ratio to our customers through any channel that makes cents.

"The future of retailing
Aim of the company is, to develop Virtual Reality (VR) solutions for retailers to
support tasks in the Value Chain as well as lifting the customer experience on a new
level to secure future business.
Status quo
-Retail business in 2015 is based on two pillar, offline and online shops. German
retail business in total increased from 2000 (428 Bill) to 2014 (459 Bill) by 7.2%,
mainly because of online business, the turnover in stationary shops decreased by
2.4 %. Shopping behavior changes drastically over the last years. 48 Bill turnover
online only in Germany has become a serious retail market that can not only be
handled besides the normal business.
-Companies like Google, Microsoft and Oculus invested millions over the last years
into new technologies that combines the real and virtual world, Virtual Reality. Via
mobile devices like glasses, the user can interact in the VR and experience the
virtual world with senses you can normally only use in the real world. The
technology reached the state of end-user ready devices that allows unimaginable

Desired Outcome
-Prepare C&A for the challenges of future retail market
-To be THE fashion retailer, offering clothes via new technologies
-To counteract negative trends in stationary markets
-New way of collection building

-Set up a “Future Lab” -> as a team or an independent company
-Specialists in design, programming and retail developing ideas and concepts
of new technologies in retail, specially fashion retail
-Target setting to minimum, keep the mind open and ensure the fail of
“ One successful project out of ten,
instead of 2 halfhearted from beginning“
-Constant research of potentials for retail business
-First idea -> Virtual Reality, Augmented Reality
-Creating a Virtual Store -> Online Shop 2.0
-Personalized collections
-Intimate atmosphere
-Virtual Changing Room
-Helpful in Collection Building internally, setup the perfect showroom
via drag and drop in seconds

-We have to invest proactive in ideas to support our future business
-A Future Lab with specialists to make 1 + 1 = 3
-Stagnation is backlog -> we have to question our way of working every day,
we can adapt it to future technologies and ways of thinking
-Do we want to be a follower our a winning leader in retail? "

Name: Daniel Schlapkohl
Phone: +49 211 9872-3635 

Date: 04.02.2015

Comments, questions or E-mails welcome:

Sunday, January 11, 2015

Myopic risk aversion, keeping investing clients happy

Studies have shown that over a 70-year period, stocks yield average returns that exceed government bond returns by 6-7%. Stock real returns are 10%, whereas bond real returns are 3%. However, academics believe that an equity premium of 6% is extremely large and would imply that stocks are considerably risky to hold over bonds. Conventional economic models have determined that this premium should be much lower. This lack of convergence between theoretical models and empirical results represents a stumbling block for academics to explain why the equity premium is so large. 

Behavioral finance's answer to the equity premium puzzle revolves around the tendency for people to have "myopic loss aversion", a situation in which investors - overly preoccupied by the negative effects of losses in comparison to an equivalent amount of gains - take a very short-term view on an investment. What happens is that investors are paying too much attention to the short-term volatility of their stock portfolios. While it is not uncommon for an average stock to fluctuate a few percentage points in a very short period of time, a myopic (i.e., shortsighted) investor may not react too favorably to the downside changes. Therefore, it is believed that equities must yield a high-enough premium to compensate for the investor's considerable aversion to loss. 

Seth Klarman in the most expensive investment book ever written "Margin of Safety" explained the difference between long term and short term thinking as follows: "" Loss avoidance must be the cornerstone of your investment philosophy. The avoidance of loss is the surest way to ensure a profitable outcome. This does not mean that investors should never incur the risk of any loss at all. Rather ‘Don’t lose money’ means that over several years an investment portfolio should not be exposed to appreciable loss of principal.

The goal is not to maximize returns in the short or medium term. “Outperformance” in one or more years may be irrelevant. That is because it is very difficult to recover from even one large loss, which could literally destroy all at once the beneficial effects of many years of investment success. In other words an investor is more likely to do well by achieving consistently good returns with limited downside risk than by achieving volatile and sometimes even spectacular gains but with considerable risk of principal.

An investor who earns 16 percent annual returns over a decade, for example, will, perhaps surprisingly, end up with more money than an investor who earns 20 percent a year for nine years and then loses 15 percent the tenth year.

There is an understandable, albeit uneconomic, appeal to the latter pattern of returns, however. The second investor will outperform the former nine years out of ten, gaining considerable psychic income from this apparently superior performance. If both investors are money market professionals, the latter may also have a happier clientele (90 percent of the time, they will be doing better) and thus a more successful company. This may help explain why risk avoidance is not the primary focus of most institutional investors."
Comments, questions or E-mails welcome:

Golden eggs, geese and investing in Russia

Buffett “I have no views as to where the gold price will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola (KO) will be making money, and I think Wells Fargo (WFC) will be making a lot of money, and there will be a lot — and it’s a lot — it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that."

Putin 2014: A prominent businessman said that Mr. Putin had eroded the very notion of property rights in Russia, even for those who displayed fealty. He said that Mr. Putin himself had described private ownership of strategic industries with the Russian word to roost. “A chicken can exercise ownership of eggs, and it can get fed while it’s sitting on the egg,” he said, “but it’s not really their egg.”

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Saturday, November 22, 2014

Reaching Out

Photograph by Larry Burrows
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Sunday, November 09, 2014

SolarCity, an Exponential Organisation

My friend Yuri van Geest, just finished his book: Exponential Organisations . A good example in my view is SolarCity, a company founded and chaired by Elon Musk.

Numbers in millions of dollars. Market cap today €4,7 billion, share price should double well before 2020.

Comments, questions or E-mails welcome: