Saturday, October 08, 2005
Reading an editorial in the Wall Street Journal about Taiwan convinced me that I'm clearly doing the right thing with this blog.
Borrowing a page from George Orwell, the U.N. also celebrated its anniversary with a poster in the lobby of its famous but decrepit headquarters, on which it advertised a display of "Original Signatories of the U.N. charter." Except they weren't. The original signatory for China of the U.N. charter was the Republic of China [Taiwan]. In the 2005 U.N. version, the signatory listed was "China, People's Republic of." Informed of this Turtle Bay twisting of history, Mr. Hsia wrote to U.N. Undersecretary-General Shashi Tharoor, noting, "It is hard to imagine how the U.N., perhaps the world's most important international organization and one which is widely counted on to preserve the truth [don't make me laugh], could allow itself to blatantly deviate from history and misinform the world about something so fundamental to its history."Even with a blog, it's very tempting to make your mistakes simply vanish. Having a blog is like having an outsider parrot back to you everything you said. Allowing those mistakes to remain is a good idea. It points out inconsistencies that should be fixed and/or acknowledged rather than covered up. [inconsistencies are fine and worrying about them often causes mistakes]
The U.N. did not write back, says Mr. Hsia, nor did the U.N. correct the mistake. Instead, in the finest tradition of Orwell's memory hole--the poster simply vanished.
I haven't noticed any unusually large mistakes lately, although I probably will in the future and I have in the past. The temptation is enormous to simply make them disappear. [I've noticed over time that allowing them to stand makes it easier to recognize and admit future mistakes] Minor errors generally do disappear down the memory hole. I generally don't emphasize larger errors. I believe buying shares of Bank of the James and SCCB were mistakes [BOJF definitely wasn't a mistake and I don't think SCCB was, either]. I dumped them and quietly removed them from the blogroll a while back.
I've been able to see characteristics that I wouldn't have noticed without an explicit blog. A lot of the variation in detail is on purpose, but some of it is pure laziness.
Outsourcing the mundane work was an excellent idea and I plan to continue outsourcing (hopefully at higher levels). But I think parsing the financial statements can never be outsourced. I pick up a great deal of information from unexpected details: how they explain the business, what words they use in the notes, the structure of the documents.
Am I not throwing enough money at obviously good investments? I don't think so. [agreed]
Have I picked a really bad investment and overlooked important red flags? I think EDAC probably shouldn't have been an investment [that's right], although it wasn't a terrible choice. I also think Strathmore wasn't a well grounded investment [unlike LVLT which is still unresolved after 4 years, Strathmore, and uranium, was correct] although with the price of uranium up to $32 now and the stock price down, I believe it's worth holding onto [yes!]. But history shows us that supply and demand equations can be totally upset by unexpected efficiencies in resource usage [I now worry about Russian HEU flooding the market]. Take garbage dumps. Many of us believed that garbage dumps were filling up and that we would face a real problem with waste disposal. Hardly. The technology of garbage handling has actually caused capacity to increase over time, while the number of active dumps declines.
So I should never again make an investment based on a supply/demand imbalance again [wrong] (although I probably will, but at least I should set the bar very high [correct]). I see that other uranium mining companies are boasting about their greatly improved methodologies. That doesn't bode so well for Stathmore. Am I making a mistake by continuing to hold the stock? That's worth pondering, but the imbalance is enormous [yes, and things go wrong, like Cigar Lake] and the entry of Uranium Participation showed that the supply isn't as exhaustive as it might have seemed. The U3O8 prices are still going up [they'll double in a bit more than a year].
What else am I doing wrong? I worry that I could end up over-investing in China [I still worry about that]. I have another Chinese company in the works that I'm picking apart (actually I'm done but I haven't made a final decision yet). [I think I was talking about CXTI, which turned out to be essentially a 4+ bagger, although technically I made a huge mistake in buying it without fully grasping the toxic convertible issue] Am I focusing too much on pink sheets and OTC BB stocks? I don't think so. [I agree]
The Fannie Mae put option seems like it was correct [even though it flopped, it was the correct thing to do]. I hope it was also correct not to buy the 2007 put option because it was too expensive [almost certainly correct]. Opportunities can be lost. I didn't buy the Level 3 bonds in 2002 yielding 30% when I knew they would last at least 3 years. I didn't buy NOOF at $1 a share. I bailed out of VCLK even though I had every reason to believe it would continue going up above $4.40 [and it's still going up!]... impatience? yeah some of that... social proof issues? maybe some of that... it was a loss of confidence more than anything else. [I'm still hanging onto my CXTI stock at the end of 2006 and probably well beyond because of this recognition]
Which leads to ACLN. In hindsight, I probably lost more money in missed opportunities from a loss of confidence by making a mistake in ACLN than the money I actually lost in ACLN [I believe this even more today]. And I think that's a more important lesson [yep]. It was easy to learn how to avoid another ACLN. It was much harder to avoid seeing ACLNs everywhere I looked. As someone said about Barrons (Bearons): the bearish case always looks more intelligent and more responsible.
If there's anything for certain, I'll continue to make mistakes [you're about to make another huge one in less than a month, but it works out ok]. If Buffett keeps making mistakes even lately, what chance do I have? I believe the answer is to apply the methodology and rely on experience and do whatever is possible to have a higher batting average.
UPDATE: And sure enough, Bubby points out a mistake I made with EDAC in only backing out benefits from taxes rather than going further and adding typical taxes in, considering NOLs are running out. Not only that, but I said on TMF that you'd never read "I'll be selling..." on the blog, but then again.... The only good thing is that I had already scaled it back quite a bit.
So I think a double-check of the the basics is in order for the remaining investments. I believe that I've focused too much on looking for obscure problems and not enough on checking for garden variety errors.
UPDATE: I'm now out of EDAC and my portfolio took a permanent realized 1.8% loss thanks to a dumb mistake on my part, but a genuine thanks to Bubby for pointing it out rather than leaving me invested in something at full value with no apparent margin of safety. 1.8% is pretty much down in the noise considering the ranges of values of some of my investments and the volatility of some of these stocks (20% in a single day is ordinary).
UPDATE Nov 11, 2005 (Armistice Day): Constantly asking the question "What am I doing wrong?" is clearly a good idea. CXTI shows that doing a few things right can overcome a lot of mistakes [hehe] as long as I'm catching those mistakes early [yes!]. Is LVWD a mistake? I don't entirely think so, but I believe they're really eating into the margin of safety [agreed]. Strathmore? No [correct], the spot price of uranium continues to slowly climb as expected. With Level 3, I was betting on an eventual imbalance of supply and demand. With Strathmore, that imbalance is here now [exactly!].
Having unknowns and uncertainties about a company is inevitable. I believe that's where the margin of safety comes in. Buying a stock really cheap, you could overestimate the value of the business by a factor of 2 or 3 or sometimes 4 and still not be overpaying.