Shorting is Anti-Investing

 I made a lot of mistakes, but I made one real doozy. So, this is kind of a funny story, at least it is 15 years later because the pain has subsided a little. But in 1999 after Yahoo and America Online had already gone up like tenfold, I got the bright idea at Soros to short internet stocks. And I put 200 million in them in about February and by mid-March the 200 million short I had, lost $600 million on, gotten completely beat up and was down like 15 percent on the year. And I was very proud of the fact that I never had a down year, and I thought well, I’m finished. - Stan Druckenmiller

Shorting has to be anti-investing as it is not providing any capital to grow and reinvest the profits. It is dumb. It is assymetric the wrong way with unlimted theoretical risk and limited upside. It is involving way too much emotion. It will not allow for taking advantage of riding out volatility and will put the portfolio at its whims. It will put the portfolio at risk as in "permanent loss of capital."

I should not do it. Yet here I am with TSLA and the airline shorts that have run way up. Expensive lesson. If Druckenmiller got burned with the 200mm and I think all 10 of those stocks that he had shorted eventually went bankrupt,what makes me think I am that lucky. I am nowhere as good.

 

ABC: A Buying Checklist

 Checklists are very useful even if they seem hackneyed. They might should be redundant. I am not going to have a full checklist, but a few principles to my checklist in this post.

 “The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble.” 

- Ralph Waldo Emerson

I am investing to provide the best risk adjusted return to compound my purchasing power. At a minimum this will involve beating inflation. 

It will be prudent to invest in companies that have a low capital expenditure as in an inflationary environment, it should capture royalties from the capital expendture of others.

Three hallmarks of a security that warrants further investigation: certain/recurring revenues, high return on capital, and the option of growth.

I will think about this as I investigate a list I have going forward: CDLX, ROKU, FTCH, Z, TDOC, GDRX and RCI. Seems like I have converted into the "growth" names, but I need to remind myself not to be fighting the last war. 

Past and Present

"Predicting rain doesn't count. Building arks does." - Buffett

Macros are hard. I cashed out of my bet on RFP last year. I topticked it in May 2021 at ~$16 at about a third of my position. The final 2/3rds in August when I panick sold at $11.50 because I was worried about the lumber price. I got lucky. Lumber was an optionality of the original thesis. It was a favorable outcome for the bet once again. Unfortunately, I sunk most of the capital by beginning to use margin, shorting TSLA, and China. I was extremely worried about the valuation of the US market and inflation and thought the three would protect my portfolio. I still took on way too much risk for the reward says hindsight.

Maybe I should have just held on to cash as I had life needs. The eternal question of utility value vs. expected value. I have always trained myself to always go for expected value, but as I grow older, does it really matter the return on the capital rather than the return of capital.

Finally, ask yourself why you want to beat the market anyway. I once interviewed dozens of residents in Boca Raton, one of Florida’s richest retirement communities. Amid the elegant stucco homes, the manicured lawns, the swaying palm trees, the sun and the sea breezes, I asked these folks — mostly in their seventies — if they’d beaten the market over the course of their investing lifetimes. Some said yes, some said no. Then one man said, “Who cares? All I know is, my investments earned enough for me to end up in Boca.”

It was in July that I made most of the bets. The road not taken would have been a big position on MO at $48 (3.72 dividend for 7.75%), IMKTA at $60, and SFM $25. As of today, those would have been $55, $96, and $31 missing about a mean of 33% in returns vs. drawing down close to 60%. (Life comes at you fast.) 

Those would have been protection for my worries on inflation at a low risk, albeit boring. I chose to be fancy as I still think I learn more the way I went about, but expensive as it is now. Pain = Growth. Maybe still young enough to feel that way.

I made the BABA bet not just because of Charlie. I fell in love with the narrative of the TAM, the business models (Helmer's powers of scale, network advantage, and cornered resources). I thought China would be a hedge on the high valuations on US market and the headwinds of the inflation/deficit. I thought the fine BABA paid meant the CCP extracted their pound of flesh. I thought on a $200 entry x 2.72 billion shares for a market cap of 540 billion dollars was a decent price after backing out of the cash/investments to get a yield of 30b/480b conservatively for a 6.25% yeild on a growing company (I will post more on the other side of my China bet of ATHM in another post as it deserves a detailed dive). I forgot that cash flows are not predictable and maybe I didn't understand how not durable their competitive advantages would be if CCP decides to cap their growth or if the US negative sentiments might force a delisting/decoupling. It's hard to factor in Macro or try to factor it in even though in the end it does matter. Like clutch hits, there are definitely clutch hits but no clutch hitters.

Enough ruminating on the past. The possible mistakes that were made and lessons that can be drawn can't be dwelled on forever. Most importantly, can't be trapped in the past and need to live life forward.

“I know a lot of people have very strong and definite plans that they've worked out on all kinds of things, but we're subject to a tremendous number of outside influences and the vast majority of them cannot be predicted. So my idea is to stay flexible.”  

Henry Singleton

I need to focus on the most important thing. Compounding. Can't stop. Consistency. Continuation. I will keep reading to prepare for that opportunity even with low capital presently. I will continue to write and transcribe my thoughts to strengthen those preparations. I will continue to connect those strengths. I will continue growing.  

 

Been a While and BABA

I need to start posting more because writing helps record my thought process in the moment. It helps with thinking and communicating. I will try to reconcile some of my past holdings that I neglected to post about here with the present and ultimately they will all lead to future decisions.

RFP worked out well in the past, but I have continued to change. The Terry Smith of Fundsmith has a pitch of what 2/20 means. In 2010, 45 years after the start of BRK, $1,000 would have compounded into 4.3 million dollars or 4,300x. If it had been structured as as 2/20 vehicle, the investor would have only compounded it to $300,000 or 300x. It is 13.5% CAGR vs. 20.5% for the 45 years. Yes, there are nuances in the calculations, but my takeaway is it will be far better to bet on myself and learn how to invest than pay fees.

It is difficult to pay anyone that amount, but one man that I probably would would be Charlie Munger. I am not sure if I am blindly just cloning him as I knew all the hype with China TAM yet it is a very red country and the Tech crackdown should show how everyone that is not the Party is just a cockroach. The Party does as it pleases like one can squash a cockroach at ease.

I truly believe BABA is a great business with a low capex in its core business of E-commerce. That excess cash flow is being invested into a variety of businesses and the crown jewel of AliCloud. AliPay can be considered a write-off even considering it was once valued at more than the 300 billion or so that the entire BABA is trading at today. Today, the Company is at 100 dollars a share or 273 billion dollar market cap. My various entry prices are averaging to 186 dollars. It has been brutal, but volatility is the price of equity returns. Hopefully, just the return of my capital here. Charlie is using leverage in this investment and I get his reasons. I am doing the same and had been before knowing he was "doubling down." I am not 98 and financially independent. I should be more cautious in my investments, but I also need to be aggressive if I ever want to "get there."

No matter the outcome of this one decision, the decision to learn from the wisdom of Munger should lead me to becoming more "wise." However, I would want this decision to work out financially as well. I have to remember to look past the short-term, but the leverage does put me in a precarious position to the swings. I am not sure how much more can my portfolio handle with the leverage, but have to risk it for the biscuit.

Resolute Forest Products Inc. (RFP)

My average cost per share is $4.33. I decided to take the gamble on the stock in spite of many of the past lessons that I should have learned that could possibly burn me:

- A deteriorating business (technology will render some former titans of industries valueless such as screens and the necessity of printing on paper)

- A turnaround seldom turns around

-Tailing money managers that you respect and whose philosophy you agree with might not be enough in investing (Francis Chou and Prem Watsa)

-Sometimes an inexpensive stock (such as a low EBITDA/EV) is justified and anchoring is expensive

The five most expensive words in the English dictionary are "this time it is different." I will now try to fade that as I believe that RFP is a good bet. I like that its valuation is compelling in a normal point of a cyclical industry. Its segments of paper pulp, forest products, tissue paper, newsprint, special papers are well managed and one of the biggest in size. (Economy of scale and the industry isn't fragmented leading to pricing power) I hope the death of the newspapers and necessity to print out things on paper is greatly exaggerated. I think the housing market will always be growing with the need for new households each year and wood prices should hold up. I also believe even in a down economy, people will still have to use tissue paper and RFP is about finish with integrating a purchase and a conversion of a mill to produce tissue. At some point, the products that it produces still hold a lot of value and if its valuation remains this low, splitting up the sum of all its parts might be worth more as they're clearly investing a lot in the Calhoun plant and the purchases it has made quickly add up to a vast majority of its market price today.

Only time will tell will I again be burned by mistakes I should have learned from in the past or is it true that "no man truly steps in the same river twice as it's never the same man nor the same river."

Sears Hometown and Outlet Stores (SHOS)

My average cost is 18.09. The entire Sears story is a fiasco and has been a value trap. I'm not sure what Berkowitz and Lampert still possibly see in the story as I should have realized earlier that the short-term is full of the death spirals of retailers. Besides all of us being dead in the long-run, the real estate value is difficult to discern. My original thesis in SHOS was that I felt like it was a cheaper play on the recovery of the Sears brand if it did recover, the cash flow from the earnings would continue to improve in this turn-around, and a spin-off would unlock it from the parent company Sears and improve value as investors realize it operated as a separate entity if Sears failed.

The thesis is failing in all three fronts as Sears is quickly going down in flames, the earnings in SHOS has not improved, and its fate as a separate entity has not segregated it from the sorrows of the parent.

Lessons to take from this for the future:

1) Book value means a lot less if you can't understand where it comes from (a retailer's inventory) or if the fundamentals of the earnings are deteriorating (should have realized that the competition was making headwinds against SHOS and AMZN, BBY, HD,)

2) Turnarounds are very difficult to turn around; blind hope is not a viable strategy

3) What is the exit strategy if things don't turn out the way I think it will and the time-frame for execution

Is it time go get out? It's hard to swallow that pill and take a realized loss of 74.8% on the investment.

Speculation and Investment

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.