Feb

16

 My brother collected stamps when we were young but I thought philately will get you nowhere and became a numismatist instead. It was from the 6th to 8th grade when I would spend all free hours and all free cash flow investing in rare coins. It was my first obsession with trading, because I did it for the joy of making money one day, not to have one of every coin.

All my coins were housed neatly in books with a ledger for each item’s cost, condition, where found, and value. Each quarter the revised published values would come out and I would update the ledger with new values, unrealized gains and losses, and foot and cross foot the big book to get my profit. It was strictly a buy and hold strategy with dollar cost averaging thrown in — each week’s allowance and odd job money was invested. It was a contest with my best friend at the time; to see who had the best value change from period to period, but he would often in bad quarters fudge the grades a bit higher for marketing purposes. I never did that — he probably runs a hedge fund now.

There was a kind older gentleman who ran the coin shop in Springfield, Virginia where we would stop after school to gaze the coins and plan our purchases. He took a kindness to us and offered us tips and favors when trading, waiving part of the regular vig, to entice us. Maybe it was an angle too, like buying drugs, he was often referred to as the “coin dealer.” There was an auction board on the wall where people could put up their coins for sale each week with penciled in bids to close Wednesday nights at 6PM. It was eBay before Bill Gates dropped out of Harvard.

I learned the hard way about the dangers early on when I went a little crazy sensing some extraordinary “values”– someone put a bunch of stuff on the wall at a 30% discount to the book listed value. In no time I had accumulated $136 of winning bids and got the first margin call of my life. While than may not seem a large sum right now, getting a substantial margin call 6th grade early 1970’s for the son of a working military man, it was all the money in the world. I had until close of business Friday to pay. The only way to pay was to borrow, or sell assets. Unable to admit this stupidity to my parents I was forced to sell assets. And the only buyer in town was the coin dealer. And the only value he paid was 50% of book. So I sold $250 worth of my collection to add $200 in “value,” it was the worst quarter of my young trading career, and a devastating but valuable lesson.

After that I bought strategically, and sold even more strategically, and never with borrowed funds. The collection was worth $650 in 1977 as compiled from “Handbook of United States Coins-With Premium List” (1977 thirty-fourth edition by RS Yeoman), the last time I paid much attention to it. It sits untouched in a box in my closet that hasn’t been opened in 32 years and seven relocations — for security purposes it’s taped shut and marketed in big red letters “baby toys.” As for returns, I checked one coin, my favorite, a nearly uncirculated (let’s call it AU-50) 1909 S V.D.B.. At the time it was worth $112.50 according to the book, and now is worth $660.00 according to coincollecting.com. That’s 5.7% return for 32 years. Not bad.

Steve Leslie writes:

I met Bruce McNall in the late 1980s when he put together limited partnerships of rare coins with Merrill Lynch. He is a short stubby character who gained fame via sports team ownerships and celebrity status, associating with the likes of John Candy and Wayne Gretzky. He was responsible for bringing Gretzky to LA and owned some assets with him. One in particular was the most famous baseball card in history, the Honus Wagner. He began his career as curator for Getty Museum and went on ultimately to Federal prison after coins began disappearing from the partnership. He was considered the ultimate authority on rare, ancient coins. A tragic story but one that is becoming all to familiar.

Jan

13

Canterbury downsContrarian investing is sometimes seen as “picking the losers.” As Kim puts it, don't pick what the consensus thinks is beauty because that's priced in. But it’s not really, it’s about seeing what others do not, or not seeing what others do.

When I was younger I went to the horse races often, and found it especially important to be a contrarian when placing bets on horses. Since the stock market is the biggest pari-mutuel pool in the world, there is a parallel. All the money gets tossed into one big pot, then after the track takes their cut (commissions, spread, vig) the rest is divided among the winners. The amount that’s divided depends on what is bet for or against the winners; the more or less bet, the lower or higher the payoff. That’s easy enough.

At the track, as in the market, the key is to spot pricing anomalies where the true odds are different from the odds on the tote board. The racing junkies were scouring the daily racing form to find the winner as if all those stats could mathematically estimate the behavior of an animal on any given day-the quant’s would go crazy at the track. But I used the form to estimate the 3 or 4 horses most likely to win, and then just followed the tote board calculating payoffs for various combinations. The key is finding that 3 to 1 horse going off at 7 to 1.

Some fun rules I learned from my old friend Greg at Canterbury Downs:

1. Never bet on a white horse. It may be a great horse on paper, but all the little old ladies bet on the white horses because they like to watch them run, and it’s the only one they can see. It destroys the true odds.

2. Never bet on a horse with a stupid name. Lot of people don’t read the form, or look at the tote board, they just throw their money on a whim as silly as the name. It destroys the true odds.

3. Never bet on the favorite, the favorite wins less than half the time. Lots of people like to just bet the favorite to proudly proclaim they are the winner, and it’s true the favorite wins more often than any of the rest of the field. But the true odds are skewed by those who bet simply because it’s the favorite and in reality over the long run you will have a greater payoff betting identical amounts on the second favorite.

4. Never do an exacta box with the favorite on top, wheel the field over the favorite since the favorite is just as likely to come in second as first, but the payoffs are larger. This worked for me once at Aksarben-a complete stranger I struck up a conversation with was doing an exact box on the top 3. I told him for the same price he could wheel the field over the favorite for a better payoff and sure enough on that race the favorite came in second to a long shot and he won hundreds where he would have had zero.

5. Never bet less than 2 to 1, in addition to the house edge, the breakage is an obscene level of vig (breakage is rounding DOWN the odds to the nearest tenth of a % doubled because it’s a $2 bet). That is, commissions and spread are proportionately larger on low value trades.

6. Never bet on a horse with a skinny jockey. Do you really think an extra 4 pounds on a 1,200 pound animal makes a big difference? Many at the track do, and skew the true odds from the heavier jockey’s, who, because they are heavier really have to know how to win.

7. Never bet on a horse with “new” blinkers or a “new” jockey. If the horse was a pig before, it’s still a pig just with a new rider and clothes.

8. Never bet just to bet. If you don’t see the favorable combination, there is always tomorrow. The tendency to not want to go home a loser at the end of the day is big leading to good money flowing to bad.

9. Never bet on a horse that takes a dump before the race. This really had no logic; we just thought it was really funny.

Jan

7

 Not long ago with 10 years just a shade over 3% and 30 years a shade under 4%, I calculated that with taxes and inflation factored, you are pretty much guaranteed to lose money. My father the Colonel conceded “some of us prefer to lose our money safely.”

I liken it to the bathtub game my young daughter likes to play. Rocking her body she sends walls of water sloshing back and forth, seeking it’s own level. Most investors seem to prefer buying in the deep end of the tub, chasing the water instead of dipping into the shallow end. Treasuries are like that, and gold.

One thing that has always served my allocation is yield, and I currently find a good bit of it in Canroys. Terribly out of favor these days, many of these are yielding better than 10%. With a universe of more than 30 to choose from, there are several gems which are not over levered, have a low operating cost, and pump enormous amounts of black gold year in and year out.

People fled because the Canadian government in their infinite wisdom decided penalizing this major industry with punitive taxes starting in 2011 would be a good idea. Then, oil fell. And credit dried up. And many cut their dividends in favor of reducing leverage. But throughout the oil and cash continued to flow, and the good news side of the story is that exploration and lifting costs are falling with suppliers stacking drilling rigs and crews right and left.

Even with oil half where it was a year and a half ago, many are doing quite well, and there is something to be said for the comfort of that monthly dividend check (and still for at least the time being a qualified dividend).

My other big yield play the last 18 months was cemeteries. As morbid as it sounds, the business is recession proof, and at the peak of the crisis I doubled down positions in two smaller cemetery companies (not the big one you are thinking of) when their dividend yield both exceeded 30%. I will clip that coupon the rest of my life, and that coupon will go up in the next 30 years as it has for both of these companies for the last 30 years. The coupon on that 30 year treasury will always be the same.

It may come as a surprise to some of the big brain quants and hedgies out there that something as quaint at the Gordon Growth Model can be useful. In case you don’t remember it, published in 1959, the model determines the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption that the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends. Stock value (P) = D/k-G Where:
D = Expected dividend per share one year from now
k = Required rate of return for equity investor
G = Growth rate in dividends (in perpetuity)

Not wanting to date myself too much I will admit that, yes, I studied this in school and remember vividly calculating this for all 30 of the Dow by hand in the days before excel. It has been in my valuation arsenal ever since as a supplement to other measures and proves that there is nothing new under the sun, King Solomon himself probably used this formula.

Nick Pribus, a US citizen, has been actively involved investing in the Former Soviet Union since 1992 when he first traveled to Moscow supporting Honeywell's newly formed affiliate operation. In the following years Mr. Pribus was Controller of Eastern Europe for Honeywell responsible for accounting and development activities in Honeywell's newly formed affiliate operations in Warsaw, Prague, Budapest, Sophia, Kiev, St. Petersburg, and Moscow. Starting in 1998, Mr. Pribus was Investment Officer and Chief Financial Officer of the $100 million OPIC supported fund Agribusiness Partners International. That fund had control investments in eight leading companies in the FSU including the number one or two positions in poultry, glass container production, flexographic and offset printing, juice, water bottling, cheese, sparkling wine, ice cream, and dairy. Following the successful sale of fund portfolio companies in 2007, Mr. Pribus joined a private Kazakhstan company developing real estate, exploring in minerals, and continuing in agricultural activities. He continues to consult international investor groups interested in the Central Asia region using his extensive experience and deep contacts in the region, and is currently developing a $300 million private equity fund to focus on Kazakhstan and Central Asia. Mr. Pribus graduated with High Distinction from the Carlson School of Management at the University of Minnesota.

Dec

10

Handed out as prizes for drama or athletic competitions in Ancient Greece1. Gold has little value outside building monuments to human vanity — 80% of use is jewelry, 10% speculation, and 10% industrial.

2. Gold is the ultimate recyclable. While one may throw away the occasional aluminum can or copper pipe, gold will generally always be recycled.

3. The marginal production cost in today’s world is about $400 per ounce. There are plenty of producers well below that number, the low cost producers sitting on high grade deposits, the high cost producers on lower grade deposits.

4. There is plenty of gold in the world, in lower grade undeveloped deposits. They sit undeveloped because it seems nobody wants to buy a long term gold future, just a short term spec.

5. I know of at least 10 different undeveloped gold deposits in the former Soviet Union where the all in cost of production is $500 an ounce or less. It will take $50-100 million of investment and three to four years until first pour, but it really will be $500 an ounce gold.

6. People will buy gold today for $1,130 an ounce, but will not buy future delivery in four years at $500. That must be because they perceive operational risk substantially higher than they perceive commodity price fluctuation risk. Which is wrong, the operational risks are under your control governed by physical properties you can manage.

7. Those $1,130 gold buyers at the margin are retail specs who could no longer make money at condoflip.com, and instead heeded the eight-times-hourly talk radio spots hawking gold investment — “Get your free gold investor kit today [a $40 value!] by calling 1-800”.

8. Producers and investors will dig more gold as they become more comfortable that the long term price will continue to exceed the marginal production cost. Just as they stopped digging new mines for a decade while gold price was less than the marginal cost, more and more new digs come on-stream every month the price is above $1,000.

9. Gold at current prices is simply overvalued.

Rocky Humbert replies:

A H i t G w a L a t TIn the 1973 movie “Dirty Harry,” Clint Eastwood famously says, “A man’s got to know his limitations.” I know my limitations, and that means that I don’t know whether gold is “simply overvalued” as Mr. Pribus alleges.

Nonetheless, I do understand the history of “money,” and gold has been a store of wealth (one definition of money) for thousands of years. Since I’m a long-term trendfollower, I’ll extrapolate this trend, and gladly sell a $1,130-strike European-style Put on gold which expires in the year 3009.

More seriously, it is important to discern between “A Hole In the Ground with a Liar on Top,” (to quote Mark Twain’s description of gold mine promoters) and “money in one’s pocket.”

As any investor in Bre-X knows, there are important differences between the gold bars in your vault as a “store of wealth,” and paper shares of a “proven” mine as an investment/speculation. At its peak in 1997, Bre-X had a $6 Billion market cap, but was subsequently discovered to be a complete fraud.

Let’s assume that Mr. Pribus’s analysis of Russian gold deposits is correct. Nonetheless the recent history of Russian politics and gold mining in general quite sensibly demand a massive “arbitrage” discount. I wish him godspeed in trying to monetize those reserves — assuming he’s risking his own capital. Again, “a man’s got to know his limitations,” and my ignorance of geology and geopgraphy means I’ll sadly miss Mr. Pribus’s riskless arbitrage.

Interested readers might want to consult the book “A Hole in the Ground with a Liar at the Top: Fraud and Deceit in the Golden Age of American Mining”.

Russell Sears remarks:

ProspectorIn Alaska I met an old gold miner turned tour bus operator who pointed out all the closed down gold mines in the town on the Inner Passage. He also pointed to the large steep hill/mountain in front of the cruiseship port and said that hill alone has seven million ounces of known gold, but the government would never allow it to be mined as they use to. He also claimed the Inner Passage is littered with hills just like that one, that could now be mined very cheaply if permits could be granted. I have no idea if he was exaggerating or not, but clearly by the shut-up mines at one time there were people making money. If the mineral rights are privately owned, it is clear that the government will regulate you out of business. An if it's owned by the government, if they trully wanted the gold they can get it. But why? If this happens in USA, imagine what the rules of the game are in Russia.

Nov

25

 I had an old friend try to convince me to buy in on an investment in a $12 million mansion in the Outer Banks: "You know, they ain't making anymore of this beachfront property." I told him Mother Nature is regularly resettling the beaches with tough storms adding and removing 100's of meters of coastline on a regular basis. That's no investment, that's a hobby for rich people.  I told him for that money he could by a few thousand acres of good Iowa farmland,  they certainly aren't making any more of that either, and when push comes to shove I still eat but I haven't made my annual journey to the Outer Banks since this recession started. Or for $12 million you can buy a few hundred thousand acres in a place like Kazakhstan where I just traveled a couple weeks looking for a good farm to buy.  The land is not as good as that lush Iowa dirt, and you may only net $10 an acre instead of the net a dozen times or more than that in Iowa. 

On the other hand,  that Iowa productivity bounces up against the law of diminishing returns, it will take a lot longer to up the yields on Iowa acreage whereas,  tripling the yields on unprofessionally or unscientifically farmed Kazakh steppe can be done by just picking the low hanging fruit, so to speak, and pardon the pun.  Isn't that what investment is all about, profit per unit divided by investment per unit times utilization. Moreover, in the last decade, farmland no longer produces solely food energy.  The landscape of agriculture has changed forever only recently as farmland is now an industrial commodity capable of producing energy in the form of ethanol and biodiesel, a new flexibility and opportunity for diversification and profit.  A farmer may now convert his corn into fuel for his tractor, or into tasty cornbread, but no matter how hard he tries, a wildcatter can't make oil into a sandwich.

Being the 9th largest country in the world with a population of just 15 million, Kazakhstan ranks consistently number 2 in arable land per capita, and much of that land is not even cultivated in these tough economic times, and what is under plow is cultivated primitively.  (Australia, the Saudi Arabia of farm land bank significantly leads the pack-I hate leaving those obvious next questions unanswered).  Kazakhstan's next door neighbor China has 20 individual cities with more people than the whole of Kazakhstan, but 1/20th the arable land per capita.  Sure China has that unparalleled secular growth story, but it's fiercely competitive unprofitable growth.  And sure China has those enormous currency reserves,  but on a per capita basis not as much as cash as Kazakhstan,  nor as much oil, gold, zinc, copper, uranium, gas, nickel, titanium, niobium… ;no need to list the whole of Mendleev's table, but it all applies.  And farmland. Not bad for such a huge country nobody ever heard of, and most can scarcely find it on a map but while the hot money chases deals in China I keep wandering the endless steppe just a bit further west.

Anatoly Veltman adds:

I had the distinct honor of participating in the Kazakhstan Economic Forum just ended at the Harvard Club of New York. I was extremely impressed by the government officials and roster of entrepreneurs in working sessions, as well as networking. Nick Pribus was one I distinctly remembered, and we continued brainstorming over lunch — as our initial introduction during a Carnegie Hall intermission the night before was neither the time nor the place (Kazakh concert, by the way, was truly divine). Nick's decade of experience in the region makes him a leader in the field, at least among the Americans in the space. I hope he finds time for more Russian tutoring, and I hope his quest to raise $300 million of seed capital (pun intended) finds the resource. The natural stats are very compelling, and I really see in the Kazakh steppe a future picture of Omaha steaks!

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