Author: Petros

Jeet kune do investing II: Toyota RAV4

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I consider a car a consumable not an investment.  Yet as an investor who strives to have “no style” –like Bruce Lee’s Jeet Kune Do, a style which is no style–today I signed a deal to buy a second RAV4 in two years.  This is not a necessity.  We do have the flimsy excuse that my assistant’s car has given up the ghost and he can now purchase my 2001 Pontiac Montana which probably has at least three years of life to go.  I could have driven it for a lot longer.  But here is why I’ve decided to buy the RAV4 now instead of waiting:

The price was identical to last year’s purchase, though the financing was a little different.  Toyota was under a lot of pressure last year because of all the negative publicity and Congressional scrutiny.  I chalked up this political harassment to Toyota’s main competitor being the US government itself, seeing as Obama had just bought two car companies, GM and Chrysler with taxpayers’ money.  So I felt that the bad publicity and the political harassment was unfair, and that Toyota was like a value stock, and besides, C.J. (my wife) needed a car.  You buy a value stock when you know the fundamentals are sound, but the market has abandoned it.  Toyota, which had become the number one car manufacturer in the world, had never offered 0 % financing until last year, when we bought C.J.’s RAV4 with 48 months 0 %; and this year’s RAV4 I’m getting at for 36 months 0 %.

Once I drive that car off the lot next week, Toyota Credit will have floated us over CDN $70,000 at 0 % (my RAV4 and the remaining debt on C.J.’s).  Why is that a jeet kune do move?  Because in times of inflation or hyperinflation, debt is the best hedge.  I am anticipating that cars are going to go up in price in the next few months because of commodity inflation, and 0 % financing will be an historic anomaly because credit will become increasingly expensive–to be honest I was surprised that anyone would still offer 0% today.  I expect the US dollar to experience hyperinflation in the near future.  The Canadian loonie will likewise experience high inflation, though not hyperinflation, as the Bank of Canada seeks desperately and unsuccessfully to keep the loonie at par with the greenback.  My gut feeling is that inflation will pay for all of the depreciation on both of these vehicles, and three years hence we will have become the clear winners, for we will have paid Toyota back in devalued currency.   If not, well, we will have paid no interest on the loans, so no big deal.

Finally, when hyperinflation hits the world and believe me, I think it is already well under way, people will be desperate to get their hands on real goods, for their currency will be increasingly worthless–and the bottom may fall out of the real estate market too.  As for cars, they are a real good.  Consider this anecdote from the colorful South American hyperinflationista, Gonzalo Lira:

A true story: In ’73, at the height of the Allende-created hyperinflation, an uncle of mine, who was then a college student, was offered an apartment in exchange for his car. That’s right—an apartment. He owned a crappy little Fiat 147—a POS if ever there was such a thing—but cars in Chile in the middle of that hyperinflation were so scarce, and considered so valuable, that he was offered an apartment in exchange. To this day, my uncle still tells the story—with deep regret, because he didn’t follow through on the offer: “That Fiat was in the junkyard by ’78, but that apartment still stands! And today it’s worth nearly a half a million dollars!” Actually, I think it’s worth a bit more than that.

In the style that is no style, the jeet kune do investor must be able to anticipate the future.  The best way to do that is to study the past.

A note of caution:  this is not a recommendation to the esteemed readers of this blog to go out and buy a car.  It relates to our personal circumstances and investment style–or no style (see Jeet kune do investing I).

Jeet kune do investing I: the case of Canadian junior oil and gas

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I have great admiration for Beating the Index.  The website provides very valuable analysis of the Canadian junior oil and gas sector, the major plays (esp. Bakken and Cardium), and the macro issue of why the price of oil will likely rise in the long term investment horizon.  In addition, Mich, the website’s sole proprietor, reveals to us a part of his self-managed portfolio, what moves he makes as he beats the index.  His style is his own, adapted to suit his particular portfolio.  For example, because he is using leverage, he has to cash in on his winners–sometimes he also drops losers and holdings which remain  static.  In one post, his commentors on his blog praise him for being willing to take losses and move on, saying that this is the mark of great trader.

But then one has to wonder, if an analyst has done his due diligence and decided that a company is a good buy, and then the market decides to dump the stock, whether that stock just became a better deal.  So in my trading, I very rarely dump losers, though I have sometimes done so to realize a tax loss or to implement a change of strategy.  Rather, I’ve averaged down on losers, and most of the time it works, as I shared in a post critiquing Dennis Gartman’s first rule of trading, “Never, under any circumstance add to a losing position…. ever!”  Gartman says to add to winning positions rather than to losing positions.  Generally speaking, I ride the winners, but I don’t often add to my positions.  Gartman’s rigid style seems to be flawed, and his own HAG fund is still going nowhere.

Now Keith Schaeffer, one of the leading independent analysts of the Canadian junior and intermediate oil sector, provides a compelling argument why it is better to add to the companies with momentum:

When it comes to the junior and intermediate North American oil and gas plays, I want to buy expensive stocks. I rarely buy cheap stocks. That sounds counter-intuitive, but it makes sense.

When a company trades at a high valuation it can raise money with less dilution, and can use its stock as currency to take over other companies. They can grow more quickly and more efficiently than companies with low valuations.

“Dilution” is one of the terms that junior oil and gas investors seem to fear.  Indeed, share price usually seems to drop after a public offering.  Crocotta Energy’s recent share offering is a great example:

CTA share price fell on Feb 3 after announcing a $25 million bought deal

One day on an airplane on the way to Barbados, I met A. Zoic, an experienced entrepreneur, who explained “dilution” to me:  He said, “The number of shares are increased, but the size of the company also increases.  So you have smaller percentage of the whole, but the company is much larger.” Zoic’s words came back to me, the inexperienced investor, time and time again as I watched Midway Energy, my largest holding, take on more and more new shares; and Zoic’s advice helped me over the last couple of years to understand that when a junior oil raises money in a public offering that that is a really good thing because it increases the overall size of the company.  This has the added benefit of increasing the average volume of shares traded which in turn makes all shares more liquid.  A great CEO with an established reputation, like Midway Energy’s Scott Ratushny, has been able to raise the investment dollars to create the momentum that makes a good value into a great investment.

In the end, the best strategy for trading junior and intermediate oil and gas is neither the value nor the momentum strategy alone.  Rather, in my view, the two strategies should be implemented together in an artful Jeet Kune Do of  (1) Momentum–buy winners:  I keep adding to my position of CPG; (2) Averaging down seeking value:  I kept buying MEL (when it was still TFL) as it plummeted in price; (3) Buy and hold:  I watched MEL go from 0.39, my lowest price, to $5.19 (and am still holding).   Junior oils are too volatile to cut losses early, and I’ve found for the last four years as a junior oil investor, that my overall gains far outweigh my losses.

What works depends as much on the investor, his liquidity, credit limit, available margin, size of portfolio, as it does on the style of investing.  I rarely cut my losses.  I don’t see that ability as the mark of good investor.  The mark of good investor is perhaps better described as an even keel temperament to do the right thing without allowing the market to determine his next trade for him.  According to the legendary martial artist, Bruce Lee, the best style is no style–consider how these words fit investing:

Too much horsing around with unrealistic stances and classic forms and rituals is just too artificial and mechanical, and doesn’t really prepare the student for actual combat. A guy could get clobbered while getting into this classical mess. Classical methods like these, which I consider a form of paralysis, only solidify and constrain what was once fluid. Their practitioners are merely blindly rehearsing routines and stunts that will lead nowhere.

I believe that the only way to teach anyone proper self-defence is to approach each individual personally. Each one of us is different and each one of us should be taught the correct form. By correct form I mean the most useful techniques the person is inclined toward. Find his ability and then develop these techniques. I don’t think it is important whether a side kick is performed with the heel higher than the toes, as long as the fundamental principle is not violated. Most classical martial arts training is a mere imitative repetition – a product – and individuality is lost.

When one has reached maturity in the art, one will have a formless form. It is like ice dissolving in water. When one has no form, one can be all forms; when one has no style, he can fit in with any style.

Education bubble XII: Hiring policy, nothing to do with your merit

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I was once interviewed for a job in Georgia.  It was a no brainer.  It was a small pentecostal college that had am academic dean with a master’s degree–it paid probably 30k, and so the money wasn’t anything special.  I waited weeks afterward and only to find out that they gave the job to a guy studying at an American seminary who ABD–nobody bothered to inform me.  The academic game had surprised me.  In today’s analogy, I was Lebron–I studied at prestigious university, my PhD was all but in hand, and to top it off, I could speak three modern languages, and had proficiency in Greek, Hebrew and Coptic.  It was a no brainer.  But in the end, the other guy received the call, and I was still out of job.  How could this happen?  I did everything right and I was ready to step into a job, and they give the job to some guy still working on his PhD!  Well, in the end, I determined that merit often has little to do with who gets a job in academics.  Here are the real criteria:

(1) Ethos:  Who fits into the reigning ethos of the school?  A recent graduate from an expensive school is not likely to fit in well at a small school in Georgia that puts no priority on research or writing.  Such a person has to be used to deprivation and self-sacrifice and must be satisfied with the small wage the school has to offer.

(2) Politics:  a recent informal survey of social psychologists at an academic conference showed that their profession is dominated by those on the Left side of the political spectrum. Only an extremely minute number were self-identified conservatives.  This sort of difference can only happen when the admission policies to graduate programs and the hiring policies intentionally weed out those of conservative persuasion, since the conservatives in the American general population greatly out number liberals.

(3) Diversity (=Affirmative Action):  Michael, who reneged on his obligation to return to Africa, was one of 160 candidates for a job at a Christian University.  When I pointed out that the reason he received the job offer was that the school was implementing a policy of diversity, he was offended, but I was able to point out the page on their website that showed that they were trying very hard and had even offered a job to Botswanan the year before.  Adjuncts who had been working their butts off at one seminary I taught at were passed over as white males to hire full-time females; the next three biblical studies appointments were women.  This wasn’t about their relative merit as professors but about increasing the number of women in the faculty.

(4) Old boys’ school:  J. F. K.’s essay explaining why he wanted to go to Harvard was lamentably lame, but he happened to mention that his father was a Harvard man, and he would like very much to study there too. [BTW, old boys could now be a bunch of liberal woman for all I know–I don’t belong to the club–in fact, I’ve never seen the inside of the club either].

Ok.  So lets consider this question from the standpoint of how good the education is, given that merit is not usually the reason why people get hired.  The Chronicle of Higher Education reviews a recent book by researchers of the products of university education in America:

Growing numbers of students are sent to college at increasingly higher costs, but for a large proportion of them the gains in critical thinking, complex reasoning, and written communication are either exceedingly small or empirically nonexistent. At least 45 percent of students in our sample did not demonstrate any statistically significant improvement in Collegiate Learning Assessment [CLA] performance during the first two years of college. [Further study has indicated that 36 percent of students did not show any significant improvement over four years.] While these students may have developed subject-specific skills that were not tested for by the CLA, in terms of general analytical competencies assessed, large numbers of U.S. college students can be accurately described as academically adrift. They might graduate, but they are failing to develop the higher-order cognitive skills that it is widely assumed college students should master. These findings are sobering and should be a cause for concern.

A cause for concern indeed!  You mean you can send  18-22 year-olds to school and they aren’t one wit smarter after four years of partying and learning about diversity and multiculturalism?  Wow! Who woodda thunk?

I have heard the dogma that if schools become indoctrinators instead of educators, strongholds of political correctness and diversity, that that makes them better places, richer and superior to the monolithic schools (read: professors are all white males) that prioritize academic achievement.  Yet after 30 or so years of this crap, we now have schools where large swaths of kids come out no smarter than they were before they entered.  So what does a BA mean today?  It means a huge debt without necessarily any usable or productive skills.  It means that a university education for something like a third of graduates is a waste of time and money.

Headlines that make laugh

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Journalists who make up the financial news are basically clueless.  There is a saying about teachers:  If you can’t do, teach.  In the case of journalists, it should probably be:  “If you can’t trade, become a financial journalist.”  I would like to say to them, “Let me see your portfolio; how well are you doing?  Not so good?  Then, stop making up stuff that you don’t know what the heck you are talking about.”

Here is an example:

Every day similar headlines are posted at Yahoo Finance and other financial news sites.  But you know, markets fluctuate; they may react to news and they may not.  Maybe one day the market goes down just because traders are taking profits or some other thing.  But most of the time I just shake my head when journalists say that there is a cause and effect relationship between events of the day and minor day to day gains or losses in the market.  The equation is never that simple.  Why wasn’t it yesterday’s news that the Chinese are buying $5.4 billion in Canadian natural gas interests?  I can say for sure that that news is far more monumental to me as trader than the news that maybe Mubarek might resign in the next few months, maybe he won’t.  How the heck does that effect me as a trader any way?  Now the Chinese spending another $5.4 billion on Canadian natural gas, that affects me, and it should also have a detrimental effect on the bond market, and a lowering of confidence in the US dollar because the Chinese have made yet another decision not to buy US treasuries.  Perhaps US investors see that bonds are a bad investment and have decided today to tip the balance towards stocks, in aggregate.  But last I checked, the markets were down anyway, and so easing of pressure due to news of Mubarek didn’t last very long.  Oh well.

Canada’s currency manipulation: the inmates are in charge of the loonie bin (update 2)

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UPDATE 2:  I asked Denis, my economist friend, how much of the US treasuries is owned by the Canadian government and how much would be owned by the private sector, and he suggest consulting the Bank of Canada balance sheet.  It is clear that the total assets on the balance sheet are 60.8 billion, which means that there is no way that the government of Canada could have lent $134 billion to the US, and that most of the ownership of these US securities must be in the Canadian private sector and can be explained by covered interest arbitrage.  Nevertheless, the reason why this arbitrage happens is because the Bank of Canada has kept the interest rates at low levels and is therefore to blame if the loonie is inflating like crazy.  Denis provided me with the following chart of interest rates:

UPDATE:  Thanks to the comment by blogger 101 Centavos, I finally asked my local Canadian economist if he could tell me what the number $134 billion means.  He says it is not the Canadian government alone that holds this debt, but all Canadian holders both sovereign and private.  I am going to try to reach him by telephone for clarification.  Meanwhile, in the words of the ever opinionated Emily Latella of Saturday Night fame, “Never mind”.

[Please note: the updates above are intended to substantially correct  what follows, which is the original post]

I am thinking about writing a blog for the American Thinker about the announcement that China would spend another 5.4 billion in the Canadian resource sector, this time to buy 5.4 billion of Encana’s natural gas holdings.  My view is that China’s purchases of Canadian resources is more about diversifying themselves out of US treasuries.  But  I found a table updated in November 2010, which shows that the Chinese have actually increased their US treasuries by $265.3 billion since November of 2009 (the chart only goes back that far).  Meanwhile, one stat jumped off the page.  In that same period, Canada has increased its holdings of US debt by $84 billion! I am shocked.

Canadians greatly fear the death of the manufacturing sector.  So now they will tolerate this.  But I am dismayed and shocked that our government is manipulating the Canadian dollar so that it will not rise against the US.  The immorality and the bad management of this situation is beyond words.

A couple years ago, I thought that given the bad fiscal policy of the US government would lead to the loonie soaring against the US dollar.  But now I see that rather than allow that to happen, the Canadian government is subsidizing the American lifestyle and the American bubble.  So that finally explains to me why the loonie remains at par and why price inflation is slow to happen in the US–why price inflation is happening in Canada the same as elsewhere in the world.