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Sunday, February 26, 2006

What's Next?

So after an 8 month mad dash to go through about 7,000 stocks it's time to pick a direction to go next. I stumbled into a Motley Fool area with actual job offers. It seems like just yesterday when they were shedding people as fast as possible after the bubble burst. For a moment I thought about the idea of focusing on educating other investors and learning at the same time in a more formal environment. I think Motley Fool should consider itself as the modern day university (maybe they do, I don't know). For one thing, the real universities are almost all a joke at this point. But I find the idea intriguing: do everything possible to advance* the field of capital allocation in a manner that can be packaged up and taught as a field of study and in such a direction that maximizes the value of the parent organization. It's like a big move on the Go board that advances the battles on all four corners of the board.

What Would Darwin Do?
Our Voyage having come to an end, I will take a short retrospect of the advantages and disadvantages, the pains and pleasures, of our circumnavigation of the world. If a person asked my advice, before undertaking a long voyage, my answer would depend upon his possessing a decided taste for some branch of knowledge, which could by this means be advanced. No doubt it is a high satisfaction to behold various countries and the many races of mankind, but the pleasures gained at the time do not counterbalance the evils. It is necessary to look forward to a harvest, however distant that may be, when some fruit will be reaped, some good effected.

Many of the losses which must be experienced are obvious.... Other losses, although not at first felt, tell heavily after a period: these are the want of room, of seclusion, of rest; the jading feeling of constant hurry; the privation of small luxuries, the loss of domestic society and even of music and the other pleasures of imagination....
Well, I think for now the best course of action is to...

Hit the reset button!
Fire up the semi-automated scripts!
Load up another huge batch of companies!
...and do it all again!

I expect to have about 1,800 more companies/stocks/ADRs/warrants to look at. Since I'm already fully invested, I don't see a need to expidite the process and hire child laborers again. Things will probably go more slowly. And I might decide to change direction in the middle of it all. Who knows where it all leads?

* I honestly chose the word "advance" and even used it twice before I went to fetch the Darwin quote which happened to use the same word.

UPDATE later that day: Well, things are progressing very well. I haven't been banned from any websites this time. Everything should be finished overnight. Here's a sample.

ISCR, type, INSTACARE CORP., website, sec, yahoo, pink

ISEC, type, ISECURETRAC CORP., website, sec, yahoo, pink
Don't even try to click on the first two links. They won't work.

How did you define your universe to review? Enjoy your postings.
The first set of companies was all the non-ADR common stocks listed on the pink sheets and/or OTC BB. This next set consists of 1) companies that are new to these exchanges in the past year or for whatever reason, companies that I didn't have on my list in the previous round, 2) it includes ADRs, 3) it includes warrants and any other sort of non-common-stock security. Doing valuations on warrants are like backing up a truck with a trailer attached: much more difficult.
What typically are you looking for in a stock? From a cursory glance at the 5 investments you display, I have a hard time finding a pattern. Some appear to be obviously underpriced, others rely on Uranium price growth + atomic energy development; others still are just a growth play... Are you just not looking at anything in particular?
What I'm looking for in a stock is having the present value of my estimate of all future free cash flows being much higher than the price I can buy the stock. That's a classic "Warren Buffett" style answer, but it's really true. I tend to show shortcuts when looking at operating businesses such as looking forward to some future time when the business is in equalibrium and then slapping a P/E of 15 onto it and mentally discounting it to the present (but that's usually down in the noise compared to other factors). For Strathmore, I'm looking at the value of the uranium in the ground after subtracting off all the expected costs of mining it (and other overhead).

In the future, I'll be looking at warrants and probably other securities that aren't common stock. In every case, I'll be trying to estimate the value of that security using rational methods and then comparing it to the price.

I do take into consideration single common factors that can affect multiple securities that I own. For instance, I have two stocks where the value is entirely in China. If there was some revolution that caused a loss of property rights in China, it would affect both investments. But I tend to agree with what someone said (I don't recall who), that when it comes to property rights, they'd rather start a business in China than in Vermont.
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