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.

Tesoro (TSO)

Yesterday, I appropriated approximately 20 percent(I like making big concentrated bets) to open a position in Tesoro Corporation. It's ironic that its name means treasure in Spanish, at least I hope not. My price was $21.96. Its market cap is 3 billion dollars and I think its intrinsic value is 80 dollars a share. I know that sounds completely outrageous, but just remember Kirk Kerkorian's Tracinda Corp. offered to take a 16 percent additional stake in TSO for 64 dollars a share back in October. I know that was back in October when oil prices weren't as threatening as it is now, but I guess I'm gambling or taking a calculated risk. With the price of oil this high, independent refineries like Tesoro are suffering because they don't have oil operations and the cost of acquiring their products to refine are expensive. My simple thesis is Tesoro is worth this much because it has refining capacity of 650,000 barrels a day. Recently, Valero is in talks to sell some of its assets for 10,000-15,000 dollars per barrel a day capacity. That alone makes Tesoro worth in the neighborhood of 6.5-10 billion dollars. Kuwait is currently building a refinery that got rebudgeted to 12 billion dollars for a 615,000 barrels a day capacity. I also remember from high school projects that I was astounded by the fact that America hasn't built a new refinery since 1976. NIMBY, and the cost of building a refinery prevents more competition domestically. I'm not sure how expensive it'ld be to transport refined oil, but it has to be cheaper to just refine here. If I recall correctly, Monish Pabrai mentioned in his book, Dhando Investor, of his Tesoro holding back in the day in 2001 for about $4.5 a share though. His thesis was that despite being a commodity business, Tesoro holds its refineries in the lucrative West Coast and western US. Gas prices are insane in California and Tesoro holds 1 of 2 refinery on the island of Hawaii.(I know they had problems with that refinery recently, but it'll probably get fixed, right?) No cash flow models from me because I can't predict the future, but Tesoro has had free cash flow 500, 700, and 600 million dollars in 05, 06, and 07. If oil prices hit the 150-200 dollar a barrel that Goldman Sach envisions, I could lose a lot of money with Tesoro, but I can't predict what will happen. Conflicting report at Lehman's which envisions a 80 dollar oil scenario, with Saudi Arabia pumping more oil. (LOL, anylsts know nothing, oil price models are murky everywhere, just think back 5 years ago, today everybody's saying Goldman Sach was genius in subprime business, maybe they were just lucky seeing how someone has to be right in a derivative trade) All I know is that Tesoro is in the business of refining oil and there will always be a demand for that as long as petroleum is such an important part of life. They have great locations in the West Coast, and the market is panicing right now. Fear is overriding, and how can I sit on the sidelines with this. Hopefully, if it continues falling, I'll be able to raise more capital to purchase more shares. I might be jumping in too early even if I'm right, but I guess the mistake of buying then having a stock drop and selling and then having a stock rise is a common value investing mistake. If one thinks it's a mistake. Good news could happen too, oil price drops because of lowering world demand, raising production from Saudi Arabia, production starts in Brazilian fields, oil sand projects increase, Iraq somehow holds free elections and peace reigns there, Hugo Chavez lowers his anti-Americanism, Iran stops seeking nuclear capabilities, a refinery disaster somewhere boosting the margins of the spread, I just don't know. I don't know anything except for my simple thesis that oil refineries have to be worth some money and are essential to unlocking petroleum for everyday use despite being a seemingly commodity.

1st Post

This blog is to help me grow as an investor by documenting my mistakes and thoughts on how I'm managing my portfolio and my reasoning behind my actions. The blog title should always remind me of how I should be a passive investor. I gamble with many things in life, but I should keep the gambling to a minimum in my portfolio. The more I trade, the richer My Broker gets from the commission. Don't trade to trade, always have a simple thesis.