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Saturday, October 08, 2005


[Updates from Dec 8, 2006 are in purple]
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."

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.
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]

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.

What am I doing wrong?
I believe that's an important question to routinely ask yourself. My experience is that it's usually surprisingly easy to find out what you're doing wrong with almost anything. All you have to do is honestly look for the answer. So then what I am doing wrong?

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!].

I think we value investors are likely to make more mistakes of omission than anything else. I know I've been a bit too mesmerized by the Buffett/Munger admonition to concentrate (the 10 hole punch and all that.) I've come to think that's wrong, at least it is for me. As an small time OPMI(to use Marty Whitman's inelegant acronym) I think there are always many things about a company that I can't know. That doesn't mean I should loosen my analytical discipline, only that I must accept that I'll be somewhat wrong sometimes and completely wrong occasionally. But I should also be be reasonably right quite often and very right sometimes. And I'm happy with that sort of outcome. I'm also trying to shed my aversion to timing based on certain macro trends. Not that I think it's possible to time perfectly but I think that a greater appreciation that certain cyclical indicators are roughly right is helpful. I felt better when Peter Bernstein said favorable things about timing a couple of years ago. Nice to get a bit of social proof from an experience genius.
I agree that the 10 or 20 punch card analogy can be bad. Buffett himself has bought and sold a huge number of stocks over time. Yes, it's probably true that 20 of them accounted for most of his wealth, but knowing which 20 can be difficult.

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.
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