It has been a long time. A lot has changed since the Tesoro post. I might delve further into the spiral of the last few years in my personal life and how it has affected my finances or I might not. The spiral began with the selling of Tesoro some time in 2010. Unfortunately, I couldn't stand by my conviction and sold Tesoro before the recent pop due to a chain of events that I predicted couldn't be predicted. World events are strange and markets mirror the story lines. I've become stronger mentally and wiser since, but part of me thinks that history is just rhyming and I haven't really learned anything. It's frustrating to show little return, but a bunch of write-offs in the future due to mistakes I have made in my judgement. I suppose only time will tell.
I was thinking of this blog today and how Newton was talking about the South Sea Bubble in the quote behind this blog and what really is the difference between speculation and investment. The basic premise is that an investment is something that will throw off free cash flow while a speculation is the underlying asset will rise in price not based on intrinsic valuation that is based on free cash flow, but on what the market will pay for it. The line between an "investment" and a "speculation" is thin as all investments are based on some speculation and all speculation is based on some investment. It's the classic value vs. growth when Buffett cut through that debate by stating that "value and growth are attached at the hip." At a certain price/number, the two are the same and at another number the two ideas will differentiate. I want to invest and not speculate, but as I was reading through ideas and what top managers think a thought dawned on me that makes me doubt myself. A little dose of doubt is a healthy thing as it keeps one grounded and renews the process of weighing the facts and logic.
I have a tremendous amount of respect for a few of the "value" fund managers and Bill Ackman is one of those favorites that inspire and has influenced my personal style. His fund is heavily invested in Howard Hughes Corporation which was spun off from General Growth Properties in the aftermath of the recent catastrophic financial crisis. There are many heavy weights that clearly believed in the "value" of the company as it carried several real estate value that was supposedly marked way below market value. That thesis might prove to be correct in the future if one still doubts it today. The stock price of HHC has been a three-bagger since its inception and the heavyweights that support it as a bull is impressive. Its properties that include the Woodlands in Houston, shopping mall developments in Manhattan, master community in Summerlin are just a few of the more impressive highlights of its portfolio. Sure it could be considered an investment as these things have to be worth more money than stated on the balance sheet, but isn't that exactly what speculation is too. Speculation is that someone will pay more for a thing and it has little intrinsic value on its own merit. The flipside is that maybe the intrinsic value of the real estate is the rent that can be collected and when it's developed as is the mission of HHC then its value is added through the developments. The point is the line is blurred many times and I think it's the price that will price in something as more "investment" or more "speculation." At a low enough price, HHC was an investment since the probability was high that its development and existing portfolio is worth much more than "market value. At a high enough price, HHC is a speculation that it will continue to add value and that real estate value will inflate higher. The HHC thesis reminds me a lot of Sears and how I'm not sure is it speculation or a wise investment. It clearly is losing a lot of money each year with no end in sight and the hope that it'll just break even as a retailer seems far-fetch at this point. It seems broken and the investment thesis of Bruce Berkowitz, Francis Chou, and other "value" managers seem to point toward a speculation that the real estate is worth a lot more than the current price. I'm sure the South Sea Company was an investment at one point that trade would flourish and it had a monopoly. Real estate can be thought of as a trade and a "monopoly." I sometimes wonder if there is some "group think" involved with all these "value" investments based on real estate. Maybe I still believe in the thesis of investment and the core philosophy of a lot of these managers, but I will think for myself. I'm glad I'm questioning if I'm succumbing to starstruck fanfare and not thinking if I'm just speculating. I'm glad the question has led to the fundamental question of speculation vs. investment and how I have formulated the difference is thin, but crucial and pricing is just another word for margin of safety. In the future I will always ask two questions before I buy a stock.
1. Is this an investment or a speculation?
2. Do I have a wide enough margin of safety?
I'm going to try to reflect my thoughts and document my logic more in the near future. I'm excited for what the future holds.
