Review of 2015 and Considerations for 2016

The below shows self-evaluation of my 2015 “considerations”…but none of the below matters, because I was not up 10x-100x for 2015. Being “right” absent application (i.e. putting $ where mouth is) is little more than mental masturbation. Fortunately, the below roadmap helped me preserve/enhance wealth… a reason to be thankful. 2011 and 2015 were both (rare) years where I could relate both to the “winners” and “losers”.

Considerations for 2015

  • Volatility – YES
  • Us equities market: chop-fest / consolidation – YES
  • The bubble in formation is in bonds, not equities. “first thing I do when i see a bubble is I buy” – the palindrome – YES
  • EURUSD parity is in sight within 24 month – CLOSE ENOUGH
  • Single-name short selling: 2013 was disastrous, 2014 was okay, 2015 okay/meh. The few years after a disastrous year tend to be okay – YES
  • Watching, but not sure what to make of for 2015: (1) Biotech (2) Shareholder activism (3) Mainland China – RIGHT IDEA
  • Gold:2013, Oil:2014, ???:2015

MY BIGGEST MISTAKE FOR 2015 = NOT (FULLY) CAPITALIZING ON THE ABOVE.

Considerations for 2016 (for my own self assessment. may share publicly… tbd)

Having been quite “right” for 2015… I have to assume I may be the perfect contrary signal for 2016. In order to protect myself, therefore, from hostile/nefarious parties who may want to take advantage of me at my own expense, I will keep most of my considerations private. The goal is to be right AND capitalize on being right…ego vindication should be the least of considerations.

  • Key Question for 2016 (across various assets) = Bifurcation

bifurcation

  • Continued cross-asset volatility (I am not implying a specific directional bias)
  • Short Theme X =
  • Short Theme Y =
  • Short Theme Z =
  • Long Theme A =
  • Long Theme B =
  • Long Theme C =
  • Pair Trade A =
  • Pair Trade B =
  • Pair Trade C =
  • Pair Trade D =
  • Special Situation A =

Food For Thought re: 2016

  • Think for yourself
  • Druckenmiller’s comment in that NYTIMES dealbook interview, regarding what will be necessary for survival/excellence in coming years.
  • Why did the SAC/Millennium, and those type of funds/strategies fare well in 2015, both in (debatably) absolute and (unambiguously) relative terms? What does this portend for 2016 (if anything)? Or am I looking for “Moses in the clouds” when there is no such thing?
  • Other than the obvious sector-specific “hedge funds”, why were some US “hedge funds” down 15-30%, in an otherwise flattish (in the indices) year? e.g. Buffett/BRK down -11%? What do these losses portend, if anything?
  • What happened to Passport Capital’s returns in 2015? up 18% through September, and now up 8%?
  • How do momentum and reversion factors play out in 2016 (e.g. oil and gas, gold, etc etc)? Applicable to many disparate situations. Where will momentum persist, versus where will reversion take place?
  • What do the popularity of Bernie Sanders and Donald Trump (and formerly Ben Carson) suggest? Similar question applicable in many other countries.
  • If you’re an active manager, question: in your heart of hearts can you justify your compensation to yourself? Is it possible that as an analyst/portfolio manager/etc… you might actually be pretty useless as an investor/analyst? Worse than useless as an investor/analyst? Why should you get paid 6 figure or more compensation for losing money? Why should you be structured to get paid 2/20 or more for being little more than a closet index guy, or beta monkey?
  • If you’re a passive manager / etf creating machine, question: If your products/services were to disappear tomorrow, would the markets be any worse off?
  • I don’t know what the words inflation/deflation mean anymore. The only phrase that makes sense to me: purchasing power

 

Achieving (or surpassing) the below-like returns, as an investor, matters more than ego vindication:

Michael-Burry-Scion-Capital-Returns

Remember: the above investor is a “one hit wonder”, as believed/preached by the Central Banking apologists.

There’s also the following return profile of a macro investor:

2005: +46.8%

2006: +25.7%

2007: +25.6%

2008: -33% ?

2009: +63%

2010: +22% ?

2011: -31.9%

2012:+0.4%

2013:?

2014:?

2015: +120%

Preliminary Thoughts on Yandex (as a Long)

Yandex NV is Russia’s largest search engine company. Given recent market share losses to Google, as well as it being a Russian stock, it is down -54% in the last 12 months. My preliminary take: the stock’s current price/valuation does not offer sufficient compensation for the risks I see. Specifically:

What I don’t like:

  • The stock is down -55%, yet doesn’t look all that cheap (e.g. compare against Google – YNDX trades at 5.5x revenue versus Google’s 6.2x revenue) given the various risk factors.
  • High risk of being a ‘dead money’ stock, or worse, on its way to becoming a value trap
  • Russia risk – The known unknowns and unknown unknowns – from currency, to confiscation, to who knows what risk?
  • Market share has declined in recent years, even as Google market share has risen.

What I like:

    • Appears to be a dominant search engine, despite recent market share losses
    • The google anti-trust legal situation looks interesting
    • Management appears to be good/excellent
    • The business appears to be good/excellent

Other comments:

Russia is out of favor with investors for a variety of reasons, yet Yandex’s valuation does not reflect that to me… the decline in share price reflects that, but down is not cheap… nor is down equal to a buy. Also, the stock does not seem to be discounting for this google risk (though the legal actions yandex has taken is a bullish upside offset). So you have a company with a very negative macro backdrop and some anti-growth idiosyncratic risk factors… so why pay google-like multiples? Yes, it’s a smaller company, but see google’s recent growth.

The S&P 500 versus China A Shares and the “Mr Pink” of Global Macro

The S&P 500 versus China A Shares

Since 2013 (use ANY POINT within 2013 as your starting point), guess which market has outperformed? The S&P 500, or the Shanghai Composite Index? My guess is that many Americans and Europeans would (incorrectly) guess “S&P 500”:

ycharts sse vs sandp level

ycharts_chart

Questions and Comments:

  • Note how the SSE underperformed the S&P500 for most of the 2013 – Present period… the ‘shift’ / ‘inversion’ from relative underperformance to extreme outperformance occurred fairly recently.
  • There’s only one person I know who was screaming and yelling (and positioning) Long China, Short USA equities since 2013…let’s call him Donald Duck. I think it’s fair to say he’s the “mr pink” of global macro…it may even be appropriate to call Dan Loeb the “Donald Duck” of event-driven investing. Donald Duck has been pounding the table on going short USD over the last 1-2 quarters. That trade has looked ‘stupid’ until recently. Donald Duck has gotten quite a few other major trades / turning points correct (as well as some very wrong). I don’t fully understand the Duck’s “sausage-making” process, but the result seems to be quite tasty.
  • I told Donald Duck back in 2013/2014 that I felt that the better way to express ‘long China” would be to hand-select a basket of US-listed (and potentially other foreign-listed) Chinese stocks, as the A shares, and mainland stocks would be ‘dead money’. That is, to go about “long China” via an Long/Short China approach, or maybe a long-only approach (but with extremely tight due diligence, careful security selection). Donald Duck, however, expressed his preference for the A shares / indices, (I think) given their lack of focus/expertise on individual company analysis/due diligence. Going long select US-listed Chinese stocks looked smarter in 2013 and through most of 2014 (especially if one avoided the NQ Mobile’s of the world, or even went concurrently short them!) versus going long A shares and/or mainland shares…until recently.
  • Why has the SSE outperformed the S&P500 within the last 1-2ish quarters? Why and how long might this trend persist? Why and how might this trade ‘unwind’ ? (I am, as I write this, considering a ‘trade first, analyze later’ approach, i.e. start building a short China, long USA pair trade)
  • What are some fund flow and other considerations between China main-land listed shares, versus China company shares listed elsewhere?
  •  If one doesn’t care about global macro, what might the implications be for single-stock picking, sector investing, etc.?

Longs and Investing from a … Short Seller’s Perspective

I Am a Short Seller

“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.” – Sun Tzu, Art of War

My name is Daniel, and I am a short seller. I became aware of this truth and came to accept it several years ago. I do not think I ‘chose’ to become one, nor did anyone ‘teach’ me to become one*.  In this regard, I agree with Jim Chanos, Marc Cohodes, and others, who believe short sellers are not ‘made’, but rather ‘born’. You are one, or you’re not. Plain and simple. Since then, I’ve fully accepted and embraced the fact I’m a short seller. I’ve experienced my share of losses and victories, but overall, I’ve enjoyed the ride. I still have plenty more to learn about the art of short selling, and am cautiously optimistic I will get better with time. With that said…

*With that said, I am grateful for the on-going mentor-ship and friend-ship that several have provided me. I believe they have played a critical role in my maturation as an analyst, short seller, and overall investor. I also believe they have helped me grow, personally.

 

I Aim to Become an Excellent, Overall Trader and Investor

“The will to win, the desire to succeed, the urge to reach your full potential… these are the keys that will unlock the door to personal excellence.” – Confucius

There are three short sellers – I will refer to them as A, B, and C – who, in their own unique ways, have been encouraging me to strive to be an overall excellent investor (i.e. to learn to go long). Fortunately, this is a desire that I have finally begun to desire for myself. I do not know if I am meant to become competent/excellent at buying stocks, or if I am fated to be a ‘dedicated specialist’ for the rest of my life.

A – I thank A (over a series of conversations) for helping me develop a firm intellectual grasp of the risk/reward characteristics of going long vs. short. For example, the mechanics of a short or long position going against you, risk management, position sizing, scale-ability, the pressures of managing OPM, etc. The reasoning and philosophy underlying selecting longs, shorts, and building portfolios consisting of both. I also thank A for helping me see the need to learn how to buy/long things. A made it clear and convinced me that this is a MUST.

Finally, A made it clear to me that great long-term investing is about finding great businesses (preferably with great management), whereas short selling is about finding terrible people (preferably running terrible businesses).

B – Whereas A really helped me build a solid intellectual foundation , B has helped me primarily “learn by doing”. B has periodically mentioned long ideas that get him really excited (they are not common), and articulated long theses in ways that I can understand and get comfortable. I would say that B is exceptionally good at buying event-driven / special situation longs that have high chance of winning regardless of the overall market environment. I think every single long idea he has mentioned has led to positive P&L (he rarely talks longs). I can’t think of a long idea he has mentioned that has lost money (at least up to the point of the ‘events’ and/or ‘triggers’ he has identified).

I don’t know if B realizes, but in an indirect way, I’ve also learned a lot about longs/investing by B’s comments on short selling. For example, B has often told me “that is not the kind of company you short”, “short sellers do not short ___” (I remember him saying this about Apple, Microsoft, and Tesla) … after observing the times he has said that, I’ve come to realize that these types of names that may seem like good shorts superficially, tend to actually be excellent longs in pullbacks. I don’t think B is saying they can’t work as shorts (from a trading perspective), but at best, they’re singles… not home-runs. So why waste time on them?

C – Like B, C has told me that I must learn to go long. He has warned that otherwise, there’s always the risk of going insane, or encountering financial hardship. Whereas A and B have fully engaged my head (when it comes to buying stocks), C has engaged my heart. I feel inspired to become excellent at picking longs, and therefore, become an excellent overall investor. C started out dedicated to short-selling. Over the course of time, he has proven to be an excellent investor. He is living proof that it can be done, and that inspires me. It can be done! C also told me something I suspected: I must find niches on the long side that I can put my heart into. Like shorts, I need to develop a personal passion for certain kinds of longs, and no one can teach me that. As a matter of practicality, C told me that it is far more desirable to focus on finding great businesses rather than statistically cheap(looking) ones.

Investing Lessons I’ve Learned the HARD WAY

“Insanity: doing the same thing over and over again and expecting different results.” – Albert Einstein

Once we realize that imperfect understanding is the human condition there is no shame in being wrong, only in failing to correct our mistakes.” – George Soros

When it comes to researching longs, I’m probably a C- analyst (currently, speaking). When it comes to trading longs, B- (when it comes to researching and trading shorts, I’ll let others opine). Bear in mind, I was once an F- analyst and F- trader/investor in longs. In fact, most my longs between 2005-2008 were TERRIBLE. If you were short all my longs in that period, you would’ve made 80+% over that period. It took me a long time to realize, accept, and forgive myself of the mistakes I made. In fact, this process of introspection led me to realize I was a short seller.

Here are some of the (painful) lessons I’ve learned, on the long side:

  1. Just because a security/stock is down (significantly), does not mean it is cheap nor even likely to go up.
  2. Cheap doesn’t mean can’t get cheaper.
  3. If a business is experiencing problems (e.g., accounting, ethics, missing earns) you should assume it is worse than it looks.
  4. CEOs lie/cheat/steal. You should not make investment decisions purely because you ‘trust’ management. A lying CEO will say “trust me” without flinching.
  5. Stock fraud, and material misrepresentations, are real.
  6. Don’t create a concentrated or levered portfolio without knowing who the idiot in the room is (and even this is insufficient). Otherwise, it is YOU.
  7. Book value and earnings can go negative… therefore, statistically cheap (looking) may quickly become statistically expensive.
  8. Bad businesses rarely become mediocre ones. They are more likely to go bust or require a ‘restructuring’ (euphemism for, your equity stake getting wiped out).
  9. In market corrections, nearly everything goes down.
  10. “Be greedy when others are fearful” doesn’t guarantee you will make money.
  11. Being contrarian / counter cyclical / against the trend is not insufficient: you must be right.
  12. You should assume that the markets (which is the collection of all interested human beings) know more about a security than you.
  13. High dividend yields are often predictive of a dividend cut
  14. Textbooks, investor quotes, other investors’ opinions, certificates, etc. are no substitutes for direct experience.
  15. Plenty more stocks go to zero than to infinity.

The Present, The Future, and Prospective (Current) Long Opportunities

“The journey of a 1,000 miles begins with a single step.”

If I were to judge/grade my longs between 2010 – Present… NOT BAD. Definitely MUCH BETTER vs. my longs in 2005-2009. My P&L on longs has been positive over that time period. My batting average is way above zero (I think over 50%). My single biggest mistakes I’ve made time and time again on the long side in the last 4 years… not holding positions for sufficient time.

Some areas that interest me on the long side (I may be long or may initiate long positions in the following):

  1. Offshore drilling (e.g. RIG)
  2. Certain UK Grocery retailers
  3. Certain commodities-related businesses
  4. Gold and silver (I think there is a chance of a buying opportunity this quarter… I personally believe odds are better 3-12 months from now).
  5. Special Situation X
  6. Growth Stock Y

I am fully aware that most of the above are down/cheap(looking) for a reason, and face risk of additional impairment (perhaps even permanent impairment). That is why I am cautiously evaluating.

I am also seeking to divert my attention away from statistically depressed/cheap looking stocks, and focus on finding great businesses (and then determining if they are sensibly priced, or wait for opportunities to buy them at sensible prices). Admittedly, I have tended to focus more on whether a security is depressed rather than whether its underlying business is a great one that will remain great or perhaps even become greater, in time.

The impression I get from A, B, and C is that it is a better strategy to find great businesses, and then wait to buy them at sensible prices, vs. any other approach. Practically speaking, I think this will require spending less time observing securities prices, and more time observing the real world, people, and the world of commerce.

Time will tell if I am able to do this, and be able to get passionate about it.

 

In Anticipation of the Next “AOL-Time Warner”

This post was inspired by a @PlanMaestro who wrote: “Prediction: #PullingAnAOL will start trending soon.” I fully agree.

As “everyone” knows:

  • Interest rates remain low (and in many cases, negative)
  • Corporate cash balances remain high (at least in the United States, part of the reason there are inversion/tax related “controversies”)

As some know:

  • Capital/wealth has really nowhere to go other than the private sector, as public sector returns are de minimis. Corporate bonds/equities, hard assets, venture capital and private equity are the only game in town. I believe US is (largely) the only game in town as well.
  • Confidence in the corporate sector (C-level suites) is increasing.
  • Mergers and acquisitions are “back”
  • US Equity valuations are on the higher end historically, but can arguably go much higher given the prevailing low interest rate environment AND due to the pressure capital has to flee public sector and go SOMEWHERE.
  • The relatively high equity valuations have some interesting effects: (1) C-level executives face greater pressure to justify their existence, and so will look for ways to prop/grow EPS. (2) high valuations mean cheap currency, so acquisitions may seem, and may occasionally even be “accretive” (3) High valuations may lead otherwise mediocre/poor managers into thinking they are actually competent, and deserving of their absurdly high compensation packages. This dangerous and misplaced rise in confidence may encourage people to take on risks via M&A they otherwise would not.

All the above conditions lead me to believe we are in ripe territory (said differently, in dangerous territory) for a few eventual AOL-Time Warner debacles… I mean, deals. I’m giving it 5-6 quarters. Personally speaking, I am less interested in identifying potential targets on the long side… I’m not “smart” enough to do that. I’ll leave that to other Long/Short and Event-driven folks (I may change my mind, as I somehow magically transform into a super talented long focused guy with the power to foresee acquisitions). I am much more interested in getting involved ex-post. This leaves me plenty of time to observe the frauds and follies that I believe will come to fruition in the near future. 

 

About AOL-Time Warner

“Every time it [AOL] got to a clean quarter, it would buy something so you never saw internal growth. Total scum.” – Lisa Thompson from http://twitter.com/LTommy256/status/508807681579425792

It is my understanding that the AOL Time Warner deal gloriously harmed quite a few short sellers. Kynikos Associates, Rocker Partners, etc. I believe the list of those who lost money shorting in that situation is a “who’s who” list. I believe losses on shorting AOL were in the order of 10x. Note that time actually vindicated the AOL shorts… but little comfort in being “right” and losing considerable amount of capital.

 

David Rocker, Rocker Partners on AOL:

“Ask what the bull case is, other than bull generally,” demands David Rocker, a New York hedge fund head who says AOL is still one of the market’s most overvalued stocks. 1996

source: http://articles.baltimoresun.com/1996-07-28/business/1996210078_1_aol-america-online-steve-case

In addition, the company used questionable accounting practices for new  subscribers and marketing revenue to improve its short-term financials. These practices  would lead to a $385 million write-off in 1996, and accusations that the company was
“morally bankrupt.” 

Former CEO Kimsey described the accounting issue
as “the big turd” that “sat in the middle of the company and smelled up the place.” Id. at 57. Short-seller Rocker
claimed that for AOL, “every revenue is ordinary, and every expense is extraordinary.

http://blogs.law.uiowa.edu/jcl/wp-content/uploads/2012/01/1-Bodie-FINAL.pdf

A well-known short seller of America Online, meaning he has bet that its stock price will decline, Mr. Rocker said that the company inflated its quarterly results by spreading its high marketing costs over two years. At the same time, it was reporting costs to the Government, reporting a loss to receive tax breaks.

”They have been telling the Government the truth, but they tell investors something else,” he said.

source: http://www.nytimes.com/1996/10/30/business/america-online-announces-a-newer-transformation.html

 

Jim Chanos, Kynikos Associates on AOL:

Q: what was your biggest mistake?
A (Jim Chanos): AOL. It was a short due to accounting, we thought they were masking higher churn then they reported. We thought the value of a subscriber would turn out less than they thought. We started shorting at $2-$4, covered as it went up, and covered the last at $80. We kept it to a 1%-1.5% position. We knew we were in the midst of a bubble, so we kept it small, but it still cost us 10% over 2 years.

source: http://myinvestingnotebook.blogspot.com/2010/05/jim-chanos-power-of-negative-thinking.html

 

Idea Generation: Revisiting Broken Investment Theses (In Celebration of 13Fs)

In 2013, long Yahoo! (“YHOO”) was a big winner for some in the activist/event-oriented world (e.g. Third Point). Yet the long Yahoo! thesis had been around … for quite some time (remember Icahn circa 7 or so years ago?). Recall Greenlight articulated largely the same long Yahoo thesis in 2011…and capitulated in 2011. Long Yahoo! was a broken thesis that transformed into a beautiful thesis.

Microsoft was a perma value play, coming up as a popular long idea in value-oriented conferences, and value circles… but it was ValueAct in 2013 that really got it right.

So perhaps the far more elegant way to use 13Fs are not to follow what other investors have done… but to look for ideas that they give up on, and bet the other way (or examine the merits of doing so). 

Remember Meredith Whitney? Remember all the negative sentiment (rightly so or otherwise) towards her in the last few years, specifically with respect to her munifinance/bond prognostications?

For some reason, this recent @MuniLass* kerfuffle got me thinking that perhaps Whitney’s broken thesis is worth re-examining. From a narrative perspective, it just makes sense –  I’m going to give it 24-36 month to come to fruition, in some form.

 

* Blessed are those who protect the anonymous. I find her outing troubling… that being said, I once followed her briefly years ago, but unfollowed her because I found her unnecessarily nasty towards others. The disrespect and vitriol I sensed in her words (towards those who have variant views) were notable. Short seller regularly receive far worse than I ever saw her receive, but nearly all short sellers simply ignore the threats, false accusations, etc.

::UPDATED on May 16, 2014 8:45 AM EST::

Perhaps a 50% haircut on WWE is reason enough to revisit its long thesis…

PLUG Must Be the Envy of All $500-$1,000 million Market Cap Company CEOs

The trading dynamics of PLUG continues to fascinate me (and fortunately, PLUG has been good to me). Let me pose a simple series of questions/thoughts to illustrate why PLUG continues to fascinate and perplex me:

  • Historically significant news is not being released daily, yet PLUG’s shares trade as if this were the case (recently, PLUG has traded 30-100%+ of its market cap… DAILY).
  • I know many $500-1,000 million market cap stocks that might trade 5-15 million $ daily (i.e. trades 1%-3% of market cap daily).
  • It usually is a highly rare event for a company’s stock to trade over 20-30% of its market cap.
  • It is a very, very, very, very, very rare event for a company’s stock to trade 50-100%+ of its market cap.
  • I’ve never seen a legitimate company’s stock (of material size) trade like this before.
  • If I’m a CEO of a $500-$1,000 million market cap company, I would not understand why another company’s shares trades 30-100+% of its market cap 5-15 trading days consecutively, especially absent commensurate news/developments

Here is how PLUG has traded since I first wrote about it (fyi, I’m following PLUG, and writing about it, largely because I’m quite fascinated by what i see as a obviously anomalous activity… the kind of activity that, if I a regulatory body, I would flag immediately and investigate within 48-72 hours):

PLUG – 30%-100%+ of its Market Cap Traded EVERY DAY recently. Why? NOT due to news.
Date Open High Low Close Volume Adj Close Value Traded
3/28/2014 6.85 7.15 6.68 6.9 26101500 6.9  $        180,100,350
3/27/2014 6.55 7.19 6.21 6.89 45187800 6.89  $        311,343,942
3/26/2014 7.63 7.86 6.26 6.45 1.19E+08 6.45  $        769,179,915
3/25/2014 5.93 8.48 5.8 8.48 1.37E+08 8.48  $    1,161,942,320
3/24/2014 6.1 6.23 5.56 5.69 26559500 5.69  $        151,123,555
3/21/2014 6.09 6.12 5.33 5.94 52721500 5.94  $        313,165,710
3/20/2014 6.1 6.33 5.91 5.97 27852300 5.97  $        166,278,231
3/19/2014 6.19 6.57 5.99 6.21 52422400 6.21  $        325,543,104
3/18/2014 6.49 6.59 5.82 5.96 56945500 5.96  $        339,395,180
3/17/2014 7.18 7.34 6.27 6.51 58073600 6.51  $        378,059,136
3/14/2014 7.48 7.99 6.58 6.71 75379800 6.71  $        505,798,458
3/13/2014 7.58 8.48 6.96 8 1.31E+08 8  $    1,050,784,800
3/12/2014 5.82 7.4 5.32 6.8 1.41E+08 6.8  $        961,299,000
3/11/2014 11.44 11.72 5.95 6.03 2.44E+08 6.03  $    1,473,620,445
3/10/2014 9.23 11.41 8.57 10.31 2.12E+08 10.31  $    2,183,221,887
3/7/2014 6.79 8.35 6.53 8.27 1.26E+08 8.27  $    1,039,927,690
3/6/2014 6.45 6.69 6.02 6.36 47838600 6.36  $        304,253,496
3/5/2014 6.96 7.01 6.45 6.75 56042600 6.75  $        378,287,550
3/4/2014 6.46 7.09 6.24 6.69 1.21E+08 6.69  $        812,396,136
3/3/2014 4.6 5.83 4.5 5.82 84414000 5.82  $        491,289,480
2/28/2014 4.51 4.84 4.45 4.67 37353600 4.67  $        174,441,312
2/27/2014 4.38 4.57 4.25 4.37 21812200 4.37  $          95,319,314
2/26/2014 4.49 4.64 4.25 4.41 52906000 4.41  $        233,315,460