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The Berkshire Hathaway Annual Meeting 2020?

Value Investing as Oil Gets Cheaper

As Oil Gets Cheaper – What Would Ben Graham Do?

By Vitaliy Katsenelson CFA

In terms of excitement, investing usually rivals watching paint dry. This has not been the case lately.

LINKOil Gets Cheaper – What Would Ben Graham Do?

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

 

 

The Impact of Coronavirus [Covid-19]

People, Economy and Your Portfolio

By Vitaliy Katsenelson CFA

The Coronavirus

I cannot tell you how much displeasure I have experienced from what I am about to say. I’ll be throwing around statistics of people dying as if I am talking not about people but widgets. My six-year-old daughter Mia Sarah had a garden-variety virus a few weeks ago. When my wife told me – a few minutes after I had been reading about coronavirus –for a second my heart sank, as virus to me meant coronavirus.

Even if Mia Sarah had coronavirus, the chances of survival were greatly in her favor. (Coronavirus, like the flu, is exponentially deadlier to older folks than younger ones). However, when it comes to your loved ones, statistics lose their meaning, and you start magnifying tiny probabilities into high-probability outcomes. The coronavirus statistics represent people’s loved ones, but I don’t know how else to write what I am about to write.

I am going to divide this letter into three sections: health and human impact (sometimes a tragic one), economic impact, and investment strategy.

***

LINK:

https://contrarianedge.com/the-impact-of-coronavirus-people-economy-your-portfolio/?utm_source=IMA++-+Main+Articles&utm_campaign=9bd771e575-CORONAVIRUS&utm_medium=email&utm_term=0_f1c90406d1-9bd771e575-55139025

Assessment: Your thoughts are appreciated.

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

Market Risk & The All-Terrain Portfolio

Interview by RealVision (In case you missed it)
By Vitaliy Katsenelson CFA
***
DEAR ANN AND ME-P READERS: I wanted to share with you a recent interview I did with RealVision TV.
***
If you haven’t heard of them, RealVision is an internet-based video platform that features serious, long-form interviews with leading financial thinkers – think of it as “CNBC for grown-ups.” I’ve personally watched a bunch of their interviews, and always find them challenging and enjoyable.
***
When I was recently in New York, I sat down with Tony Greer of TG Macro to discuss IMA’s All-Terrain Portfolio, Tesla, Bitcoin, oil, the dollar, value investing, and more – all the usual suspects.
******
LINK:
If you’re interested, you can check out the interview above or read a transcript of it here.
***
Assessment: Your thoughts are appreciated.
***
BUSINESS, FINANCE, INVESTING AND INSURANCE TEXTS FOR DOCTORS:
THANK YOU
***
Product DetailsProduct Details

 

2020: Stock Markets Party Like It’s 1999?

2020: Party Like It’s 1999?

By Vitaliy Katsenelson CFA

The stock market marched higher for the year even though US companies as a whole did not become more valuable, just more expensive, as earnings failed to grow from 2018 to 2019. Earnings are estimated to be up about 5% for 2020 (though these estimates are usually revised down as the year progresses).

If you look at the quality of this non-growth, then the rose-tinted glasses of the average stock market investor quickly prove inadequate. Corporate debt is up 5% in 2019, and a good chunk of the increase went into stock buybacks. As stocks become  expensive their benefit from earnings per share growth diminishes.

LINK: https://contrarianedge.com/2020-party-like-its-1999/?utm_source=IMA++-+Main+Articles&utm_campaign=ef3ee0520d-2020_PARTY_1999&utm_medium=email&utm_term=0_f1c90406d1-ef3ee0520d-55139025

Assessment: Your thoughts are appreciated.

BUSINESS, FINANCE, INVESTING AND INSURANCE TEXTS FOR DOCTORS:

1 – https://lnkd.in/ebWtzGg

2 – https://lnkd.in/ezkQMfR

3 – https://lnkd.in/ewJPTJs

THANK YOU

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

My Interview with Danielle Town

My Interview with Danielle Town

By Vitaliy Katsenelson, CFA

Today I’d like to share with you an interview I did with my friend Danielle Town. Danielle is coauthor of Invested and runs the Rule #1 Finance blog with her father, Phil Town.

Danielle put me on the proverbial podcast couch; and though originally we were going to talk about investing, well, we talked about everything but investing. We ended up delving into many personal topics I rarely discuss. I went down memory lane about growing up in Soviet Russia, my family’s immigration to the US in 1991 and our first years in the US, my parents’ attitude towards money, budgeting, creativity, sleep, writing, a book I am working on, and more.

This interview ran so long it was broken up into two parts (Listen to Part 1 here and Part 2 here). I don’t think I could have done this interview talking to a stranger. It turned into a conversation between friends.

We decided that we are going to go back and talk about investing next time. Maybe we’ll do another interview when I see her in Switzerland in January, where we’ll both attend VALUEx Klosters.

Assessment: Your thoughts are appreciated.

BUSINESS, FINANCE, INVESTING AND INSURANCE TEXTS FOR DOCTORS:

1 – https://lnkd.in/ebWtzGg

2 – https://lnkd.in/ezkQMfR

3 – https://lnkd.in/ewJPTJs

THANK YOU

Financial Planning Advice that Changed My Life

A PODCAST

By Vitaliy Katsenelson CFA

One of the best wedding gifts I received was lunch with my friend, Mark. Here, I reflect on the financial advice Mark gave me then, and how it could help young people like my son Jonah settle into adulthood with a lot more forward-thinking.

***

You can read this article online at:

 https://contrarianedge.com/personal-finance-advice-that-changed-my-life/

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

Should You Invest in Marijuana Stocks?

POT -or- NOT?

By Vitaliy Katsenelson CFA

Should You Invest in Marijuana Stocks?

***

***

Assessment: Your thoughts are appreciated.

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

Is Value Investing Dead?

 

Vitaliy Katsenelson CFA

Is Value Investing Dead?

***

MORE: http://www.msn.com/en-us/money/topstocks/value-stocks-are-trading-at-the-steepest-discount-in-history/ar-AACuYES?li=BBnbfcN

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

Mature Company Stocks Are Not Bonds

Dividends bring tangible and intangible benefits

vitaly

By Vitaliy Katsenelson CFA

 

You can also listen to the article here, or by clicking on the buttons below:

Like many professional investors, I love companies that pay dividends. Dividends bring tangible and intangible benefits: Over the last hundred years, half of total stock returns came from dividends.

In a world where earnings often represent the creative output of CFOs’ imaginations, dividends are paid out of cash flows, and thus are proof that a company’s earnings are real.

Finally, a company that pays out a significant dividend has to have much greater discipline in managing the business, because a significant dividend creates another cash cost, so management has less cash to burn in empire-building acquisitions.

Mature Company Stocks Are Not Bonds

***

[PHYSICIAN FOCUSED FINANCIAL PLANNING AND RISK MANAGEMENT COMPANION TEXTBOOK SET]

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

Fifty Shades of Warren Buffet -OR- New Year in Omaha

A POD-Cast

By Vitaliy Katsenelson CFA

50 Shades of Warren Buffet or Next Year In Omaha

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

 

On Stock Investing Fear!

vitaly

By Vitaliy Katsenelson CFA

Stock Investors: You Have Nothing to Fear but Fear Itself

    

This article is Part 1 of a 3-part series discussing how investors can avoid acting irrationally. Read Part 2 and Part 3.

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

The Real Secret About Why Corporate Mergers Fail

AN AUDIO PRESENTATION

 

By Vitaliy Katsenelson CFA

***

Corporate acquisitions often fail for one simple reason: the buyer pays too much. An old Wall Street adage comes to mind: Price is what you pay, value is what you get.

It all starts with a control premium

When we purchase shares of a stock, we pay a price that is within pennies of the last trade. When a company is acquired, the purchase price is negotiated during long dinners at fine restaurants and comes with a control premium that is higher than the latest stock quotation.

How much above?

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

 

Resetting our Defaults for 2019

Random Drivel?

[By Vitaly Katsenelson CFA]

What I am about to share with you is somewhat random drivel about a topic that has been very important to me in 2018 – time.

I am anything but an expert on it; and in fact, as you’ll see, this is something I fail in and am trying to fail less.

 ***

Resetting Defaults 

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements.

Book Marcinko: https://medicalexecutivepost.com/dr-david-marcinkos-bookings/

Subscribe: MEDICAL EXECUTIVE POST for curated news, essays, opinions and analysis from the public health, economics, finance, marketing, IT, business and policy management ecosystem.

DOCTORS:

“Insurance & Risk Management Strategies for Doctors” https://tinyurl.com/ydx9kd93

“Fiduciary Financial Planning for Physicians” https://tinyurl.com/y7f5pnox

“Business of Medical Practice 2.0” https://tinyurl.com/yb3x6wr8

HOSPITALS:

“Financial Management Strategies for Hospitals” https://tinyurl.com/yagu567d

“Operational Strategies for Clinics and Hospitals” https://tinyurl.com/y9avbrq5

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

About the Opioid Crisis

And, Drug Distributors

[By Vitaliy Katsenelson CFA]

I don’t know anyone personally who has been affected by the opioid epidemic in the US. And I truly hope I never will. I don’t know if I would be able to maintain objectivity in my analysis of drug distributors and their involvement in this epidemic if I had experienced getting a call at night informing me that my loved one had died from a drug overdose. Drug overdoses killed 70,237 Americans in 2017. Of these deaths, 47,600 (67.8%) involved opioids and 17,000 involved prescription opioids (24% of total overdose deaths). Legally prescribed opioids are killing 47 of us every day.

How did we get here?

According to the National Institute on Drug Abuse: “In the late 1990s, pharmaceutical companies reassured the medical community that patients would not become addicted to prescription opioid pain relievers, and healthcare providers began to prescribe them at greater rates. This subsequently led to widespread diversion and misuse of these medications before it became clear that these medications could indeed be highly addictive.”

Today pharma distributors are used as scapegoats for the opioid epidemic – not because they are guilty but because they have money and they are “drug distributors.” They are dragged through the same mud as the tobacco companies and British Petroleum (after it spilled millions of gallons of oil in the Gulf of Mexico). Despite negative headlines, we own drug distributors.

Here is why:

They distribute legally prescribed medicine to pharmacies that are approved by several government agencies, including the DEA. Doctors write scripts; pharma distributors order medicine from pharma manufacturers and deliver them to pharmacies. The sad truth about the opioid epidemic is that 21-29% of patients who were prescribed them for chronic pain misused them, and 8-12% of those who received an opioid prescription developed an opioid use disorder.
However, just as truck drivers cannot be held liable for delivering cigarettes to convenience stores, pharma distributors are not manufacturers of drugs and cannot be held liable for the addictive properties of the drugs they distribute or the fact that doctors overprescribe them and patients misuse them.
Also, the DEA should be responsible for limiting the illegal use of opioids. That is its job – DEA stands for Drug Enforcement Agency. It has legal and enforcement resources that distributors lack. And it has a lot more data and tools. Drug distributors do their part and provide data to the ARCOS database that DEA manages.
***
drugs
***
However, each individual distributor has data only for the drugs it distributes, while DEA has data (which it doesn’t share with distributors) for all opioid sales to pharmacies. The DEA is in a much better position to spot suspicious activity in orders than distributors. The DEA controls how much legal opioid is manufactured in the US every year and has been increasing quotas of opioids produced.
Opioids constitute only a very small percentage of the $450 billion in drugs distributed in the US, and thus incentives for distributors to overdistribute opioids are very limited. Though lawyers and the media keep saying that distributors are some of the largest companies in the S&P 500 by sales, they forget to mention that distributors operate on razor thin margins of less than 2%. Comparing the distributors (not even the makers) of legal medicine, that helps millions of people cope with excruciating pain, to cigarette companies that have a 40% pretax profit margin on a product that doesn’t have a societal benefit, and is almost guaranteed to cause cancer if you use it long enough, creates awesome headlines but has little substance.
  • What if DEA was the one distributing all the opioid drugs to pharmacies instead of McKesson, Cardinal Health, and Amerisource Bergen?
  • Would fewer people get addicted to opioids?
  • Would opioids be less accessible? Remember, DEA sets the production targets every year.
Maybe DEA would catch a few bad actors sooner – it has more data than distributors and a specific skillset and mindset aimed at catching criminals.
But in the big scheme of things, even if DEA distributed opioids nothing would really change. Doctors would still prescribe them; some patients would still get addicted to them … and so on. Distributors will likely settle lawsuits for two reasons:
First, McKesson already settled with the FDA for $150 million for “failure to report suspicious orders of pharmaceutical drugs.”
***
Second, McKesson and other drug distributors don’t want to be involved in costly and protracted litigation. We don’t know how much the settlement will be, but it is very unlikely to be in the hundreds of billions of dollars and likely (see reasons above) to be hundreds of millions or a few billion dollars.
***
Assessment
Today McKessonʻs market capitalization is $25 billion. We think the company is worth at least $50 billion (at 15 times earnings), thus there is a $25 billion of margin of safety. If the lawsuit costs the company less than $25 billion, McKesson will be a profitable investment; if not, then the market is right and we are wrong.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements.

Book Marcinko: https://medicalexecutivepost.com/dr-david-marcinkos-bookings/

Subscribe: MEDICAL EXECUTIVE POST for curated news, essays, opinions and analysis from the public health, economics, finance, marketing, IT, business and policy management ecosystem.

DOCTORS:

“Insurance & Risk Management Strategies for Doctors” https://tinyurl.com/ydx9kd93

“Fiduciary Financial Planning for Physicians” https://tinyurl.com/y7f5pnox

“Business of Medical Practice 2.0” https://tinyurl.com/yb3x6wr8

HOSPITALS:

“Financial Management Strategies for Hospitals” https://tinyurl.com/yagu567d

“Operational Strategies for Clinics and Hospitals” https://tinyurl.com/y9avbrq5

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

Some Value-Focused Investing Interviews and Podcasts

By Vitaliy Katsenelson CFA

Dear ME-P Readers,

You might want to listen to some great interviews by Roben on investment topics (his shows cover a wide variety of themes).

  1. An interview with an acquaintance of mine, Saurabh Madaan, who went from working for Google to Markel (which is often called the “Baby Berkshire Hathaway”).
  2. Speaking of Markel, here Roben interviews Tom Gayner, Markel’s CIO. I have had the privilege of sharing a stage with Tom once a year for the last seven years in Omaha at the YPO event.
  3. Here Roben interviews my friend Jim Chanos –brilliant short seller and incredible human being. 

I am just scratching the surface here. You can listen to hundreds of other shows with Roben here, or look for Full Disclosure with Roben Farzad on your podcast app – just be careful, they are very addicting. 

stocks

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Subscribe: MEDICAL EXECUTIVE POST for curated news, essays, opinions and analysis from the public health, economics, finance, marketing, IT, business and policy management ecosystem.

DOCTORS:

“Insurance & Risk Management Strategies for Doctors” https://tinyurl.com/ydx9kd93

“Fiduciary Financial Planning for Physicians” https://tinyurl.com/y7f5pnox

“Business of Medical Practice 2.0” https://tinyurl.com/yb3x6wr8

HOSPITALS:

“Financial Management Strategies for Hospitals” https://tinyurl.com/yagu567d

“Operational Strategies for Clinics and Hospitals” https://tinyurl.com/y9avbrq5

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

Stansberry Investor Hour Interview

Stansberry Investor Hour Interview

By Vitaliy Katsenelson CFA

***

I was interviewed by my friend Dan Ferris on the Stansberry Investor Hour show. My segment of the interview starts at the 22:22 mark (click here to listen).

If you’d like to dig deeper into some of the concepts I discussed, you can read the following articles:

1 – What quality means to us.
2 – Why we sold of ETFs and bought Treasuries
3 – How and why we are hedging our portfolios with options
4 – Why Amazon will not run McKesson out of business and why we like the stock and here is one more.

***

***

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements.

Book Marcinko: https://medicalexecutivepost.com/dr-david-marcinkos-bookings/

Subscribe: MEDICAL EXECUTIVE POST for curated news, essays, opinions and analysis from the public health, economics, finance, marketing, IT, business and policy management ecosystem.

DOCTORS:

“Insurance & Risk Management Strategies for Doctors” https://tinyurl.com/ydx9kd93

“Fiduciary Financial Planning for Physicians” https://tinyurl.com/y7f5pnox

“Business of Medical Practice 2.0” https://tinyurl.com/yb3x6wr8

HOSPITALS:

“Financial Management Strategies for Hospitals” https://tinyurl.com/yagu567d

“Operational Strategies for Clinics and Hospitals” https://tinyurl.com/y9avbrq5

***Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

The Average Stock Is Overvalued

 

The Average Stock Is Overvalued Somewhere Between Tremendously And Enormously

Vitaliy Katsenelson CFA

imba

BUSINESS EDUCATION, RISK MANAGEMENT & INVESTING FOR DOCTORS:
“Insurance & Risk Management Strategies for Doctors” https://tinyurl.com/ydx9kd93
“Fiduciary Financial Planning for Physicians” https://tinyurl.com/y7f5pnox
“Business of Medical Practice 2.0” https://tinyurl.com/yb3x6wr8

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

How A Stock Market Turns Investors Into Gamblers

How A Stock Market Turns Investors Into Gamblers

By Vitaliy Katsenelson CFA

***

Today I am going to share with you an article I wrote after the January 2018 stock market volatility index run-up. It’s as relevant today as it was then.

***

https://contrarianedge.com/how-a-volatile-stock-market-turns-investors-into-gamblers/

***

Conclusion

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How To Invest In A Stock Market That’s Due For A Hard Landing

On Fundamentals of the Global Economy

By Vitaliy Katsenelson CFA

***

How To Invest In A Stock Market That’s Due For A Hard Landing

I simply don’t trust the fundamentals of the global economy right now. The system is built on quicksand.

Debt is growing globally and governments are running huge deficits while interest rates are still incredibly low. Looking at almost any metric, stock markets have been more expensive once in the last 100 years — just before the dot-com bubble burst.

There is also another risk in a category of its own: China.

***

world map

***

Assessment

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***

For Investors, Discovering Truth Takes Time

 

For Investors, Discovering Truth Takes Time

 CFA

 

The Roman philosopher, playwright, statesman and occasional satirist Lucius Annaeus Seneca wasn’t talking about the stock market when he wrote that “time discovers truth,” but he could have been. In the long run a stock price will reflect a company’s (true) intrinsic value. In the short run the pricing is basically random.

Here are two real-life examples:

Let’s say you had the smarts to buy Microsoft in November 1992. It would have been a brilliant decision in the long run — the software giant’s stock has gone up manyfold since. But nine months later, in August 1993, that call did not look so brilliant: Microsoft shares had declined 25 percent in less than a year. In fact, it would have taken you 18 months, until May 1994, for this purchase to break even. Eighteen months of dumbness?

In the early ’90s the PC industry was still in its infancy. Microsoft’s DOS and Windows operating systems were de facto standards. Outside of Macs and a tiny fraction of IBM computers, every computer came preinstalled with DOS and Windows. Microsoft had a pristine balance sheet and a brilliant co-founder and CEO who would turn mountains upside down to make sure the company succeeded. The above sentence is infested with hindsight — after all, that was almost 30 years ago. But Microsoft clearly had an incredible moat, which became wider with every new PC sold and every new software program written to run on Windows.

Here is another example. GoPro is a maker of video cameras used by surfers, skiers and other extreme sports enthusiasts. If you had bought the stock soon after it went public, in 2014, you would have paid $40 a share for a $5.5 billion–market-cap company earning about $100 million a year — a price-earnings ratio of about 55. Your impatience would, however, have been rewarded: The stock more than doubled in just a few short months, hitting $90.

Would it have been a good decision to buy GoPro? The company makes a great product — I own one. But GoPro has no moat. None. Most components that go into its cameras are commodities. There are no barriers to entry into the specialized video camera segment. Most important, there are no switching costs for consumers. Investors who bought GoPro after its IPO paid a huge premium for the promise of much higher earnings from a company that might or might not be around five years later.

***

What is even more interesting is that some of those buyers were then selling to even bigger fools who bought at double the price a few months later. GoPro was a momentum stock that was riding a wave about to break. Fast-forward a year and GoPro sales are collapsing, so now the stock is trading in the low teens ($11.65 as of this writing).

These two examples bring us to the nontrivial topics of complex systems and nonlinearity. My favorite thinker, Nassim Taleb, wrote the following in his book Antifragile: Things That Gain from Disorder: “Complex systems are full of interdependencies — hard to detect — and nonlinear responses. ‘Nonlinear’ means that when you double the dose of, say, a medication, or when you double the number of employees in a factory, you don’t get twice the initial effect, but rather a lot more or a lot less.”

The stock market is a complex system where in the short term there are few if any interdependencies between decisions and outcomes. In the short run stock prices are driven by thousands of random variables. Stock market participants have different risk tolerances and emotional aptitudes, and diverse time horizons ranging from milliseconds (for high-speed traders) to years (for long-term investors).

Assessment

In other words, predicting where a stock price will be in a day, a month or even a year is not much different from prognosticating whether the ball on a roulette wheel will land on red or black. In the longer run, however, good decisions should pay off because fundamentals will shine through — just as was the case with buying Microsoft in 1992 and not buying GoPro in 2014. But in the short run there is no correlation between good decisions and results. None!

Whenever you look at your portfolio, think of the Microsoft and GoPro examples above. The performance of your stocks in the short run tells you absolutely nothing about what you own or about the quality of your decisions. You may own a portfolio of Microsofts, and its value is still going down because at this juncture the market doesn’t care about Microsofts. Or maybe you stuffed your retirement fund with overpriced fads that may not be around a year from now. But in the longer run, which always lies out there past the short run, time discovers truth, as Seneca said.

Conclusion

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***

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Investors Have Misdiagnosed Amazon’s Push Into The Pharmacy Business

Investors Have Misdiagnosed Amazon’s Push Into The Pharmacy Business

By Vitaliy Katsenelson CFA

***

Companies everywhere, in every business, are paranoid about Amazon.com. This sort of paranoia is healthy for the long-term well-being of our investment portfolio, as it is creating interesting buying opportunities.

A case in point: My firm spent a lot of time thinking about pharmacies when we were analyzing investments in McKesson and other drug distributors. We struggled with a question: How will the retail pharmaceutical industry look in the future? Or more precisely, how will Amazon’s entrance into the retail pharmacy business change this industry?

Our inability to answer this question kept us away from retail pharmacies. Then we had a small but important insight that shifted our thinking on Walgreens Boots Alliance. The preponderance of drugs in the U.S. is consumed by an older population, whose habits change slowly or not at all. Accordingly, it’s likely that Amazon’s online pharmacy will not significantly impact the existing drug industry.

Here’s why: Americans currently spend $450 billion a year on drugs. Walmart is the fourth-largest pharmacy in the U.S., with sales of $21 billion, or 4.6% of the company’s total sales. Let’s say that over the next five years Amazon gets to Walmart’s sales level of $21 billion. If the U.S. pharmaceutical industry grows 2% a year over that time, total drug sales will have increased by $45 billion, or the equivalent of two Walmarts (we are ignoring compounding here), to $495 billion. Walgreens, with its pharmacy selling about $70 billion a year, would barely notice Amazon’s presence.

I’ve made this point before, but it is important to repeat: 10 years ago Amazon was not taken too seriously. Giants like Google, now Alphabet, and Microsoft ignored Amazon’s entry into cloud hosting, thinking “What does a bookseller know about the cloud?” They have regretted it ever since.

Nowadays everyone is taking Amazon too seriously, bestowing CEO Jeff Bezos with walk-on-water-like superpowers. Boardrooms today are filled to overflowing with chatter about Amazon. There‘s admittedly a lot Corporate America can learn from Bezos (for instance, about ignoring short-term results), but Bezos is not superhuman and Amazon cannot bend the laws of economic gravity.

Walgreens’ U.S. business, which is about 75% of its total sales, is impressive. A single stand-alone store produces revenues of about $10 million a year — $7 million in the pharmacy and $3 million in front-end sales (milk, candy bars, T-shirts, etc.) A single store fills about 121,000 scripts a year (up from 97,000 four years ago). Walgreens has one of the highest sales-per-square-foot numbers in the retail industry, at around $1,000 per-square-foot (compared to Walmart’s $450, Kroger’s $550, and Target’s $300). (Note that Tesco’s U.K. stores have sales per square foot of $1,100 — this is why we like the U.K. grocery business more than ones in the US).

Walgreens also has an underutilized asset: the front end of the store. Think about it: The pharmacy takes up 20% of the floor space but generates 70% of revenue. In other words 80% of the store (the front end) brings in only 30% of revenue. Walgreens is experimenting with different ways to optimize this underutilized asset — it’s opening medical clinics and bringing LabCorp into its stores, for instance.

In 2018 Walgreens bought 1,900 stores from Rite Aid, bringing its total U.S. store count up to around 10,000. Store-count growth days are behind Walgreens, but the scripts-per-store-growth will continue, since baby boomers are not getting any younger. Accordingly, total sales growth will continue at a level of at least 2%-3% a year. When retailers mature and cannot open new stores, their free cash flows explode. Which begs the question, what will Walgreens do with its cash?

Already Walgreens is taking a quite different approach than its largest counterpart, CVS Health Corp. CVS owns one of the largest pharmacy benefit management (PBM) companies (a business that has a lot of political risk, as it’s ridden with conflicts of interest), and CVS is doubling down on complexity and buying Aetna , a health insurance company. CVS is trying to become an integrated healthcare provider. We don’t know if CVS will be successful in this endeavor, but the historical odds of success with acquisitions of this complexity clearly do not favor CVS.

Walgreens is run by Stefano Pessina, who owns 13% of the company; and thus 13 cents of every dollar spent is his. Walgreens has therefore been deleveraging its business, buying back stock, and paying a dividend. Walgreens is expected to earn $6 a share in 2018. My estimate is that earnings, helped by the Rite Aid acquisition, same-store sales growth, and share buybacks (WBA repurchased 8% of its shares in 2018 and has an authorization to buy another 13%), will exceed $8 per share in 2021.

***

drugs

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Assessment

If Walgreens shares trade at 13 times its $8 earnings per share in three years, then the upside from here is about 70%; if it trades at 15 times then it’s a double (Walmart trades currently at 18 times estimated 2018 earnings, while Target is at 15 times). We bought Walgreens at a little over 10 times estimated 2018 earnings in July 2018. Walgreens is a better business than Target and at least as good a business as Walmart. At this valuation, heads we win, tails we win — the only question is by how much.

Conclusion

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***

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On Being a Father [A Post Labor Day Weekend Thought]

Being A Father

vitaly

By Vataliy Katsenelson, CFA

Conclusion

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***

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Questions I’d be Asking If I Owned Tesla Stock

Questions I’d be Asking If I Owned Tesla Stock

By Vitaliy Katsenelson CFA

 What happened to 345,000 reservations?

When Tesla’s Model 3 was released, it was supposed to be a $35,000 car. Four hundred thousand people, including yours truly, put down a $1,000 deposit to reserve their spots in line so they could get their hands on that marvel as soon as it became available. It was a brilliant move by Tesla, as it provided the company $400 million of interest-free financing — the biggest crowdfunding project ever.

Today, after some delays, the Model 3 is being produced. However, $35,000 seems to have been a fiction of CEO Elon Musk’s imagination. Though the car is getting great reviews from auto critics, the price for a bare-bones Model 3 starts at $49,000, and the tax incentives are fading away.

But something interesting happened recently. I received an email from Tesla that said: Model 3 is available to order, and no reservation is required in the U.S. We’re now offering all our best options — including our Long Range and Performance configurations with dual motor all-wheel drive. You can design and order yours today for delivery in approximately 2–4 months.

On the surface this sounds like great news, except that it begs a question: What happened to 345,000 orders? Let me explain. According to Bloomberg, which has been tracking Tesla’s production, to date (as of July 28, 2018) Tesla has produced 55,000 Model 3 cars. Since a $1,000 deposit was supposed to secure buyers a place in line, any car ordered today will only be delivered after orders that were placed years ago are fulfilled — after all, 400,000 people paid Tesla $1,000 to hold their places.

Thus there are only three possible explanations for the email I received. One is that Model 3 production is expected to accelerate at an exponential rate to 40,000 cars a week, starting now. However, Bloomberg estimates that Tesla’s normal production cadence of the Model 3 is closer to 2,825 cars a week, so this is a highly unlikely scenario.

Or two, maybe Tesla has been extremely liberal with its statement of a two-to-four month delivery schedule because it still has 345,000 cars to produce before it can start fulfilling new orders, and the company is using that email to raise additional funds from new customers making deposits. (The required deposit is now $2,500.)

There is a third explanation: The bulk of the original 400,000 orders were for a $35,000 car. When it came time to actually buy the car, consumers may have realized that the out-of-pocket expense was much more than expected and simply canceled their orders, draining Tesla’s balance sheet of $345 million.

How sound is Tesla’s balance sheet?

What Musk has achieved with Tesla and SpaceX is truly astounding. I have incredible respect for him, but he is also a magician playing a confidence game. If Musk can continue to convince the market that Tesla has a bright future, then the market will continue to finance Tesla’s losses, and maybe Musk will figure out how to produce the Model 3 more cheaply and then Tesla will sell hundreds of thousands of Model 3s and the future will be as bright as Musk paints it.

For that to happen, Tesla needs to maintain its high stock price, and investors have to believe that Musk is the Iron Man. Investors have to suspend belief, ignore current problems, and focus on the future. However, if the market loses confidence in Tesla and Musk, Tesla is done. This company is losing billions of dollars a year; it has an over-levered balance sheet. This is where Musk’s confidence game comes in.

If you believe in magic stop reading right now. Okay, you’ve been warned.

There is no magic. Magic is just the art of misdirection. The magician gets you to focus on the shiny object he holds in his left hand and you don’t see what he is doing with his right hand.

Musk has been showing us a lot of shiny objects. Some are real, like the success of SpaceX; some are superfluous, like sending a Tesla Roadster into space, and some are future promises on which Musk may or may not be able to deliver, like his futuristic underground railroad for cars (the hyperloop) and the Tesla truck, which is unlikely to be produced on time and at the promised price. The list is long in this category and never-ending; Musk’s futuristic thinking knows no bounds.

But importantly, these promises are the shiny objects that keep Tesla’s stock price high.

If I was a Tesla investor I’d be seriously worried about the company’s balance sheet. There are some ominous signs that Tesla’s financial situation is deteriorating rapidly. Tesla reportedly recently sent an email to its suppliers asking them to give some money back to help the company with its profitability.

Such requests are made by companies looking for Hail Mary solutions to significant financial problems. If suppliers start questioning Tesla’s financial viability, they’ll start shortening their accounts receivables periods and start requesting letters of credit. This would escalate the company’s problems. Hail Marys are acts of desperation. Putting this in the context of the likely Model 3 cancellations, — Tesla’s cash burn has likely gotten a lot worse.

 How effective is Musk at running Tesla?

Tesla is Elon Musk. He has achieved more than many of us will achieve in a thousand lifetimes. But today Musk is running half a dozen companies (Tesla, SpaceX, Solar City, Boring, OpenAI, Hyperloop). To make matters worse, he is also an incredible micromanager. I read that he interviews (or at least used to) every new employee who joins Tesla and SpaceX.

It is clear that Musk is quite exhausted, and his behavior is becoming more erratic. In a conference call snafu in April, he called the British diver who saved the Thai cave kids a “pedo” on Twitter. This sort of thing undermines Musk’s Iron Man image — if he loses that, the confidence game is lost and Tesla is done.

Another red flag went up recently: Musk started to attack short sellers. A short seller who went under the name of Montana Sceptic posted negative research on Tesla on Twitter and SeekingAlpha. Elon Musk personally called the man’s employer and threatened a lawsuit if the employer didn’t silence Montana Sceptic. Historically, companies that have gone after short sellers have had something to hide or were playing a confidence game. (The short sellers were interfering with the misdirection to shiny objects.)

Assessment

Tesla investors are still fascinated by the shiny objects, but I note that CDS insurance on Tesla’s bonds prices in a 24% risk of default by 2025. I am not long or short the stock. But if I were long Tesla’s shares I’d be asking myself these questions. After all, you’re paying $50 billion for a company that trades completely on the spoils of future dreams.

 Conclusion

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***

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Crossing Warren Buffett, Richard Branson and Steve Jobs?

What would you get if you crossed Warren Buffett, Richard Branson and Steve Jobs?

By Vitaliy Katsenelson CFA

Introduction

Masayoshi Son, the Korean-Japanese, University of California, Berkeley-educated founder of one of Japan’s most successful companies, SoftBank Group.

Like Buffett, Son is a tremendous capital allocator with a highly impressive record: Over the past nine and a half years, SoftBank’s investments have delivered a 45% annualized rate of return. A big chunk of this success can be attributed to one stock: Chinese e-commerce giant Alibaba, a $100 million investment SoftBank made in 2001 that is worth about $80 billion today.

Though you may put Alibaba in the (positive) black swan column, Son’s success as an investor goes well beyond it — the list of his investments that have brought multibagger returns is long. The 57-year-old Son is Japan’s richest person, and SoftBank, which he started in 1981 and owns 19% of, has a market capitalization of $72 billion.

Like Apple co-founder Jobs, Son is blessed with clairvoyance. He saw the internet as an transformative force well before that fact became common knowledge. In 1995 he invested in a then-tiny company, Yahoo!, earning six times his investment. But he didn’t stop there; he created a joint venture with Yahoo! by forming Yahoo! Japan, putting about $70 million into a company that today is worth around $8 billion. (Yahoo! Japan is a publicly traded company listed in Japan.)

What is shocking is that Son saw that the iPhone would revolutionize the telecom industry before Apple announced it or even invented it. See for yourself in this excerpt from an interview with Charlie Rose, where Son describes his conversation with Jobs in 2005 — two years before the iPhone was introduced:

“I brought my little drawing of [an] iPod with mobile capabilities. I gave [Jobs] my drawing, and Steve says, “Masa, you don’t give me your drawing. I have my own.” I said, “Well, I don’t need to give you my dirty paper, but once you have your product, give me for Japan.” He said, “Well, Masa, you are crazy. We have not talked to anybody, but you came to see me as the first guy. I give to you.”

Like Virgin Group founder Branson, who created Virgin Atlantic Airways in the U.K. to compete against the state-owned behemoth British Airways, Son started two telecom businesses in Japan — one fixed-line and one wireless — with which he challenged the state-owned NTT monopoly. In 2001, disgusted with Japan’s horrible broadband speeds, he convinced the government to deregulate the telecom industry. When no other companies emerged to rival NTT, Son took it upon himself to start a fixed-line competitor, Yahoo! BB (broadband). Thanks to him, now Japan enjoys one of the highest broadband speeds in the world and Yahoo! BB is a leading fixed-line telecom.

It took Son four years to bring his broadband business to profitability. This is how the Wall Street Journal described that period in 2012: “The problems at the broadband unit contributed to losses for the entire company for four consecutive years. Mr. Son set up an office in a meeting room 13 floors below his executive suite to be closer to the problem unit. He slept in the office at times and routinely summoned executives and partners for meetings late at night. . . . He worked out of the meeting room for 18 months, until the broadband unit had cut enough costs and moved enough customers to more lucrative plans.”

stock-exchange-

A normal person might have taken a break and enjoyed the fruits of his labor at that point, but not Son. Just as his broadband business went into the black, Son executed on his vision for the internet and bought Vodafone K.K., a struggling, poorly run wireless telecom in Japan. SoftBank paid about $15 billion, borrowing $10 billion.

Fast-forward eight years, and SoftBank Mobile is a success. It is one of the largest mobile companies in Japan, even faster-growing than DoCoMo (a subsidiary of almighty NTT). Today it spits out about $5 billion in operating profits annually — not bad for a $5 billion equity investment.

Son has a highly ambitious goal for SoftBank: He wants it to become one of the largest companies in the world. Unlike the average Wall Street CEO, whose time horizon has shrunk to quarters, Son thinks in centuries: He has a 300-year vision for SoftBank. Practically speaking, 300 years is a bit challenging even for long-term investors, but at the core of his vision Son is building a company that he wants to last forever (or 300 years, whichever comes first).

Son views SoftBank as an internet company and is committed to investing in internet companies in China and India. He believes that as these countries develop, their GDPs will eclipse those of the U.S. and Europe.

Jobs, Branson, Buffett — it is rare for somebody to embody strengths of each of these business giants. None of them has the qualities of the other two. Buffett is a business builder but does not run the companies in his portfolio. Branson is not a visionary — in his book Losing My Virginity he admits to not seeing analog music (CDs) being destroyed by digital music (iTunes) and demolishing his music store business. Jobs probably came the closest, as both a visionary and a business builder, but he was not known for his investing acumen.

Valuation (updated)

You’d think SoftBank would be priced to reflect Son’s premium. Instead, its stock currently trades at around a 50% discount to the fair value of its known assets (SoftBank has about 1,300 investments, many of them not consolidated on its financials).

The gap between what SoftBank is worth (its fair value) and its stock price has widened substantially over the last few years despite the stock’s appreciation. Our fair-value estimate of SoftBank shares is about $80.

Frustrated with SoftBank’s valuation, Son has begun to make strategic moves to deleverage SoftBank. Last February, SoftBank announced it may take its Japanese telecom business public. SoftBank is expected to sell about 30% of its stake and should raise about $20 billion.

SoftBank owns a large chuck of Didi, the largest Chinese ride-hailing company, a Chinese version of Uber, which in fact bought Uber’s assets in China. Didi is a privately held company. Recently SoftBank announced that it is going to sell its shares of Didi to Vision Fund for $20 billion. Vision Fund is a $100-billion private equity-like investment vehicle created by Son. SoftBank owns one-third of Vision fund and has an even larger economic interest in it.

And then there is Sprint — SoftBank owns 82% of its publicly listed shares. After dating T-Mobile for almost a year, Sprint and T-Mobile finally decided to merge. There is a chance that the government might not approve this merger, but we think the probability of approval is high. The telecom industry requires scale: the cost of a network (cell towers, equipment, and spectrum) is mostly fixed, and profitability of a carrier is for the most part determined by the number of users.

T-Mobile and Sprint are each half the size of giant incumbents Verizon Communications and AT&T, which achieved their size through dozens of acquisitions. The combination of Sprint and T-Mobile would reduce competition in the short run, but in the long run it would create a strong and viable competitor and thus stable prices for consumers. T-Mobile and (especially) Sprint on their own would eventually get marginalized into irrelevance by AT&T and Verizon by the large cost of 5G rollout.

If the merger goes through it would improve the optics of SoftBank’s balance sheet. SoftBank owns 82% of Sprint and thus has to consolidate Sprint’s $30 billion of debt on its balance sheet. Despite SoftBank’s control of Sprint, in the event of bankruptcy SoftBank is not liable for Sprint’s debt. After the merger SoftBank will own around 27% of the combined entity and thus, magically, the debt of the new company will migrate from SoftBank’s balance sheet to the balance sheet of Deutsche Telecom — the majority owner of T-Mobile.

Between the sale of Didi, the Japanese telecom IPO, and the Sprint/T-Mobile merger, SoftBank should see its debt drop by about $70 billion. The current discount between the fair value of SoftBank’s assets and its stock price is caused by the perception of enormous leverage, and as the leverage gets cured so will the perception.

Conclusion

There are many ways to look at SoftBank. You can think of it as buying a stock at a roughly 50% discount to the market value of its assets or as a way to buy Alibaba at less than half its current price. Alibaba is a great play on the Chinese consumer who is spending more and more money shopping online. Alibaba is synonymous with Chinese online shopping, whose growth may accelerate with higher smartphone penetration and, just as important, the ongoing rollout of a fast wireless LTE network.

You can also look at SoftBank as a vehicle through which to invest in emerging markets — not just China but India as well. It is almost like hiring the combination of Buffett, Branson and Jobs to go to work for you investing in markets whose economies in a few decades will surpass that of the U.S., while also investing in a segment of the economy — the internet — that is growing at a much faster rate than the overall economy. And, of course, you have Masayoshi Son, the Buffett-Branson-Jobs fusion, making these investments for you. With SoftBank at this valuation, you can ditch your emerging-markets mutual fund.

stock market

Additional thoughts

Some additional thoughts. I don’t expect every bet Mr. Son makes in Vision Fund to work out. Not at all. I look at Vision Fund as a portfolio of bets. For instance, his investment in WeWork and WeWork’s valuation make me cringe. I am also concerned that he feels the need to spend $100 billion all at once. There will be a time when this money will buy a lot more than it does today.

I feel uneasy that the $100 billion will be like a pig going through the python of Silicon Valley, inflating the prices of technology companies. But a few things let me sleep well owning Softbank: First, Mr. Son owns 20% of the company – every dollar Softbank spends, 20 cents are his. As Nassim Taleb would put it, Mr. Son has skin in the game. Second, the discount of Softbank stock to the fair value of its assets is so huge that it could absorb the blow-up of Vision Fund. And finally, I remind myself that I’d probably have had a similar feeling of uneasiness about Mr. Son’s decisions at any time in his 30-plus-year career (PCs in the ’80s, Internet in the ’90s, telecom Japan and internet in China in the ’00s). And this is when I remember Einstein’s quotes.

P.S.
To understand Mr. Son’s thinking, read my article on exponential growth. To understand the structure of Vision Fund, read this article.

Conclusion

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Options, Hurricanes and Hedging

Options, Hurricanes and Hedging

By Vitaliy Katsenelson CFA

We always look at our investment process and ask ourselves, “What can we do better?” How can we increase returns and lower risk? We think we have found a new, sensible way to do both.

We can hedge a portion of our market exposure with put options. Put options are contracts that trade on an exchange that give buyer (us) a right, not an obligation, to sell stock (or in our case Exchanged Traded Fund, ETF that mimics a market index) at a specific price for a certain period of time. Put options are cash settled, so when we exercise it or it expires we get cash in lieu of its value. Buying put options is very similar to buying hurricane insurance. We pay a premium, and that is the only cost we bear. Let’s restate this: The only risk we take is that the hurricane doesn’t hit or, in our case, that the stock market doesn’t decline, in which case our premium was “wasted.”

When you buy hurricane insurance you don’t suddenly start wishing for a hurricane, but you do get peace of mind from knowing that if Richard or Betty (we name hurricane like we name pets – makes TV watching so much more exciting, especially if your name is Richard or Betty) pays you a visit, the insurance company will restore your house to its original state.

We look at options “insurance” the same way we look at any asset: It can make sense at one price but make no sense at another. As you will see, at today’s price they make a lot of sense.

For the sake of simplicity let’s make a few assumptions: First, your portfolio is 100% correlated to the stock market. Second, your portfolio is 100% invested. And finally, let’s assume we’d be buying put options to insure your whole portfolio. These assumptions will simplify our example – we’ll modify them later.

Based on our assumptions, we’d buy put options on ETFs that track a particular stock market index – let’s say the S&P 500. As of January 2018, if we were to buy options on the S&P 500 ETF, SPY, that expire in one year and that are 5% out of the money (they don’t start paying us until the S&P declines 5% or more – think of this 5% as our deductible), the cost of insuring the entire portfolio would be about 4% of its total value. For a $1 million portfolio it would be $40,000.

If the stock market decline is greater than 5%, the insurance kicks in. After a 5% decline the value of our stock options starts going up proportionally to the decline in the portfolio. If stock market falls 20%, the $1 million portfolio declines to $800,000, but this $200,000 loss is offset by the appreciation of our put options, which go up by roughly $150,000. Thus the value of the portfolio is now $950,000 (remember our 5% deductible). Actually that number will most likely be less – somewhere between $910,000 and $950,000, because we paid $40,000 for the put options.

Without getting too deep into the weeds, the price of an option is driven by two additional factors: time (options are not good wine; they get cheaper with age) and expected volatility, which we’ll discuss next.

Let’s say you are insuring a home somewhere on the Florida coast. The general formula to calculate the cost of insurance is probability of loss times severity of loss. According to a study by Colorado State University, the climatological probability that the coast of Florida will get hit by a major hurricane in any particular year is 21%, so once every five years or so.

A 21% probability doesn’t mean that a hurricane will pay a visit every fifth year; no, it actually means that over a 100-year period there will on average be 20 hurricanes hitting the Florida coast. Hurricanes may, however, decide to pay a visit two or three years in a row and then take eight or ten years off.

21% is the number an insurance company uses to figure out the intrinsic cost of the insurance. But this is where we have to draw a distinction between climatological probability of loss (intrinsic or true cost) and expected probability of loss.

There are other factors that go into the total cost of the insurance contract, including the size of the policy, its duration, and the deductible. But if you hold all these factors constant, the only number that fluctuates due to supply and demand in insurance market is the expected probability of loss.

A year after a hurricane, homeowners are still licking their wounds from last year’s Richard or Betty. The pain is so recent that those who were hit expect that hurricanes will happen a lot more often and thus the expected probability (in the eyes of these consumers) rises to … pick a number; let’s say 50% (a hurricane every two years). (The insurance industry may have had its capital depleted by recent hurricanes, which will also drive prices higher, but we’ll ignore this factor in our discussion.)

However, if there is no hurricane for a while, let’s say for eight years, the memory and the pain of the last hurricane fade away. A new wave of homeowners moves in, who have seen hurricanes only from the comfort of their leather couches on the Weather Channel. Now the expectation of another hurricane drops to, let’s say, 10% (a storm every ten years).

Thus, though expected probability and thus insurance cost has fluctuated dramatically from 50% to 10%, intrinsic value has not changed; it is still 21%. This example is extremely oversimplified, but the key point is still the same: A rational homeowner would want to buy insurance when no one expected a hurricane to visit Florida and lock in that price for as long as possible. If you are an insurance company you want to write as much insurance as you can when hurricanes are priced at 50% expected probability, and you want to be out of the market when they are priced at a 10% probability.

In the options market, expected probability of loss is expressed in terms of the volatility that is priced into options. Ten years of bull market have eroded even the most unpleasant memories of the 2008 decline. Fear has been replaced by euphoria that has been further amplified by the steady daily appreciation of stocks. The mindset that markets will never decline ever again has gradually seeped into the collective stock market psyche. This is why volatility is cheap! How cheap? Average volatility priced into options since 2004 was about 18%; today it is at 10%. In 2008 it reached 80%, and it has reached 40% a few times since 2008.

Volatility is quickly becoming one of the most interesting assets in the otherwise not very interesting stock market. But the situation in the stock market is even more interesting than in the hurricane insurance market.

Stock markets are fueled by two often contradictory forces: human emotions and movement towards fair value. Human emotions may divorce stocks from their fair value for a considerable period of time, but movement towards fair value can only be postponed but not suspended. During bull markets greed begets greed and stock market valuations go from cheap to average to high to super-high to extra-super-high – we are running out of superlatives, but we hope you get the point: Valuations march ever higher … until the music stops.

It is hard to know what will trigger the “stops” part, but in the late stage of the bull market, stock market behavior is driven less and less by fundamental factors and more and more resembles a Ponzi scheme (though market commentators come up with plenty of rational explanations to wrap around their “this time is different” narrative).

Stocks march higher until the market runs out of buyers and collapses under its own weight. This is how movement towards fair value takes place – except that, historically, markets have rarely stopped at fair value; they have fallen to levels well below fair value. (Vitaliy wrote two books on this subject – we’d be happy to send you copies.)

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We are not meteorologists, but we believe there is an important difference between hurricanes and stocks. Just as when you flip a coin each flip is an independent event and completely unconnected to the previous flip, hurricanes are independent events – just because Richard paid a visit to Florida last year does not change the probability of Betty’s appearance next year. Betty is not aware of Richard’s past misdeeds.

In contrast, the probability of a significant market decline is not constant; it is dependent on past movements of stocks. As markets stretch higher and higher, bulk of the appreciation was driven by expansion of price to earnings. Market valuation which was already high went higher. The gap between the price and intrinsic value creates a rubber band-like tension. The wider the gap the greater the tension and risk of eventually embarking on the return trip towards fair value.

Thus, in the case of the hurricane the climatological probability of 21% of loss remains constant no matter whether Richard or Betty appears, but in the stock market the probability of a sharp decline (an equities hurricane) increases as the gap between price and fair value widens.

In other words, today the value of volatility has increased while its price is making new lows. This is why we believe volatility is one of the most interesting assets we see now.

We are not market timers. We have no idea what the stock market will do in 2018, but we look at buying put options as an opportunity to hedge our portfolios with what we believe is significantly undervalued insurance.

Let’s delve into the practicality of our hedging strategy and modify some assumptions we made in the oversimplified example above. First, our portfolios are not 100% correlated to market indices. Considering that we own high-quality companies that are significantly undervalued, we believe our stocks will (temporarily) decline less than the market if there is a significant correction. Second, we have a lot of cash, which doesn’t require hedging.

Let’s say your account is 60% invested. We only need to worry about hedging that 60%. And considering that our stocks will decline less than the market, we need to buy puts to protect less than 60%. How much less? Historically our stocks have declined a lot less than the market during significant sell-offs. Our average portfolio was down 17-18% in 2008 when markets were down 35-45%. Our guestimate, therefore, is that we need to hedge about half of 60% or 30% of the total portfolio. So the total cost of insuring the portfolio against a decline of 5% or greater for a year would be 1.2% (4% – the cost of “insuring” the total portfolio – times 30%).

You can see how this strategy can reduce risk, but can it increase returns? The answer is a bit more complex and has two parts: First, if the market takes a deep dive, our appreciated put options together with cash will have increased buying power, since everything around us will be cheaper. And second, depending of when it happens – how much time value is left in the option – the value of the option may jump dramatically, as the market will be pricing in not 10% volatility but a much higher number – 30%, 40%? – your guess is as good as ours.

IMA’s ultimate goal is produce good risk-adjusted returns while keeping volatility of our clients’ blood pressure level to a minimum. We try to achieve this through our conservative stock selection, our transparent (sometimes overly long) communication, and now through buying inexpensive insurance on the portion of your portfolio.

Assessment

Our view on what true risk is has not changed. To value investors, true risk is not volatility (a stock temporarily declining in price), but a permanent loss of capital (the stock price decline is permanent). Our hedging strategy goal is to take advantage of an undervalued asset – volatility – and to decrease your (future) blood pressure just a little.

Conclusion

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How Amazon could lose its health-care bid

 While drug distributor stocks win

By Vitaliy Katsenelson CFA

Amazon.com has been one of the most innovative and disruptive companies of this century, with incredible success in areas that lie outside of what has been historically perceived as its core business (book selling).

Thus every announcement or speculation that Amazon will enter into a particular industry sends stocks of that industry into a tailspin. Investors sell first and ask questions later. When Amazon announced its purchase of Whole Foods, grocery stores declined as much as 30%. Even Tesco separated by an ocean from Whole Foods, was down on that news.

A big part of Amazon’s success has come from not being taken seriously by its competition. Amazon was able to create a huge lead in AWS (Amazon Web Services) because the competition (Alphabet and Microsoft did not give Amazon enough respect. Competitors thought, “what does a book seller know about the cloud?” Well, according to Amazon CEO Jeff Bezos, such thinking gave Amazon a much bigger lead over its rivals. Today, everyone takes Amazon seriously. Indeed, fear of Amazon is reaching paranoia levels.

McKesson

McKesson shares, for example, took a 20% dive during the fourth quarter of 2017 on speculation that Amazon would start distributing pharmaceuticals in the U.S. As McKesson shareholders, my firm took this speculation seriously, but upon further investigation, it became evident that such concerns were overblown. After the market cooled off from fourth-quarter worry about Amazon, McKesson shares recovered.

Then in late January, news that Amazon, JPMorgan Chase, and Berkshire Hathaway will join forces to drive down U.S. health-care costs hit health-care sector stocks, including McKesson.

How big of a punch could this be? McKesson is the largest distributor of pharmaceuticals in the U.S. Its 2018 sales are on track to exceed $210 billion. It is important to point out that McKesson is not a retailer but a distributor. It is one of three railroads for drugs in the U.S. McKesson distributes drugs to thousands of independent pharmacies, as well as giants like CVS Health, Rite Aid and Walmart McKesson operates two distinct distribution businesses: branded and generics. Though these businesses may look similar on the surface, the economic models of branded and generic businesses are quite different.

In the distribution of branded drugs (about 70% of McKesson’s revenue and 30% of profits) McKesson has a fee-for-service model. Pharmaceutical companies want to be involved in high-value activities: chiefly, inventing and manufacturing drugs. Getting drugs to thousands of pharmacies on a timely basis and collecting accounts receivable is not the business they want to be in. They don’t have the scale and distribution know-how of McKesson, Cardinal Health, and AmerisourceBergen — that collectively control 90% of drug distribution in the U.S. Thus the likes Pfizer and Bristol-Meyers Squibb pay drug distributors a small “fee for service,” and pharmaceutical companies (not distributors) negotiate prices with pharmacies.

More than 90% of McKesson’s profit in this segment is driven by volume, while just 10% is linked to changes in drug prices. Pfizer, for instance, despite its might, would still have higher distribution costs than McKesson because it doesn’t have McKesson’s scale and focus on distribution efficiency. So Pfizer is happy to pay McKesson this service fee and not think about drug distribution.

In its generic drug distribution business (about 30% of sales, 70% of earnings), McKesson uses its enormous buying power to buy drugs at low prices from generics manufacturers and sell at higher prices to pharmacies. Since it can source the same drug from various manufacturers, it leverages better prices from the likes of Mylan and Teva Pharmaceuticals Industries. Drug distributors are a significant deflationary force in generic pricing — good for consumers, not great for Teva or Mylan.

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Moats

So McKesson has a wide protective moat, which includes the distinct possibility that Amazon’s adventure into drug distribution could lead to miserable failure. Here’s why:

1. Amazon cannot match McKesson’s buying power or negotiating power when it comes to generics. Current Amazon sales of pharmaceuticals are somewhere between zero and slightly above zero. McKesson’s sales are pushing $210 billion, about $65 billion of which comes from generics. Walmart is the fourth-largest pharmacy in the U.S., with sales of $20 billion. It had distributed drugs, but in 2016 it signed a distribution deal with McKesson. Walmart realized it could get better prices for generics through McKesson. Amazon, with near-zero sales, doesn’t stand a chance.

2. Amazon has no structural advantage. In the fight against Barnes & Noble and Best Buy, Amazon could charge lower prices than brick-and-mortar retailers because it had a structural advantage — it did not own stores and have all the extra costs associated with them. On one of his conference calls, McKesson CEO John Hammergren said his company was Amazon before Amazon was Amazon. Indeed. McKesson has highly specialized warehouses designed to distribute drugs. It can get any drug to any pharmacy in the U.S. within hours.

3. McKesson’s pretax margins are just 1.7%. If Amazon is looking to cut fat in the pharmaceutical industry, this is not where the fat is.

4. Distributing and selling drugs is not like selling or distributing most anything else. First, some drugs require refrigeration and others are controlled substances. Distributing them puts an extra regulatory (and self-policing) burden on distributors. McKesson has paid fines and recently received plenty of negative publicity from “60 Minutes” for distributing opioid pain medications to legal pharmacies who illegally sold the medicine on the black market.

Next, unlike in almost any other industry, pharma consumers are price-insensitive. If you are on Medicare, Medicaid, or a copay/low-deductible private insurance plan, you really don’t care if you are paying the lowest price because you don’t see the price (other than for copay). For this group of drug consumers, which constitutes the bulk of the U.S. population, lower drug prices are not an incentive to switch.

Moreover, let’s say Amazon starts an online pharmacy and self-distributes. Internet-savvy millennials are not the ones consuming most of the drugs in the U.S. Their parents and grandparents are. This demographic still has brick-and-mortar habits that are less likely to be broken anytime soon. Also, major pharmacies already have mail-order operations. It would be logical for Amazon to try to get into the almost-trillion-dollar pharma business, but its success here will be limited, and it will take decades to gain a meaningful market share

5. Suppose Amazon opens an online pharmacy and succeeds. It would probably take five to 10 years to reach sales of, let’s say, $10 billion (half of Walmart’s current drug sales). Let’s assume that Amazon self-distributes and will not use McKesson, or that it decides to employ the services of Cardinal Health. This would steal less than a year of current growth from McKesson, in five to 10 years.

Put simply, the laws of economics still apply — even to Amazon. Drug distributors are strong financially and have great scale and a tremendous purchasing-power advantage. Distributors’ stocks may take a dive but their business will be fine in the long run. The only competitive advantage Amazon has against drug distributors is that Wall Street completely ignores its profitability and focuses only on revenue growth.
McKesson is one of the U.S. stock market’s most interesting investments. Its business is future-proof. The demand for its product is not cyclical and is likely to continue to grow as the U.S. population ages. Higher or lower interest rates, recession or no recession, inflation or deflation, McKesson’s earnings power will continue to march ahead for a long time.

McKesson has a conservative balance sheet; it can pay off its debt in less than two years. McKesson pays a lower dividend than its competitors, but it has purchased a third of its shares over the last decade. Expected earnings of about $13 a share this year could grow to $15 in 2019. At a conservative 15 times earnings, McKesson is worth about $225 a share.

Assessment

However, McKesson has spun off its technology business into Change Healthcare, which could go public in 2019. McKesson owns 70% of Change Healthcare, and my firm estimates McKesson’s interest is worth about $25-$30 a share. Thus, a conservative estimate of McKesson’s value is about $250.

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements.

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Bitcoin – “Millennials Fake Gold”

Bitcoin – The  Digital Generation’s Gold Surrogate

By Vitaliy Katsenelson CFA

I’ve been asked about Bitcoin a lot lately. I’ haven’t written anything about it because I find myself in an uncomfortable place in agreeing with the mainstream media: It’s a bubble.

Bitcoin started out as what I’d call “millennial gold” – the young (digital) generation looked at it as their gold substitute.

http://contrarianedge.com/2017/12/01/bitcoin-millennials-fake-gold/

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Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements.

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APPLE and the iPhone X

Now Apple must show what’s next after iPhone X

By  Vitaliy Katsenelson CFA

The iPhone X is likely to be a phenomenal success for Apple. But its success will not be driven by anything new that the new phone packs inside. Instead, its success will be based on the phone’s screen size. Essentially, iPhone X provides the same screen real-estate as an iPhone Plus, but with the sleeker form factor of the iPhone 7 or 8.

Apple has done a great job at changing the paradigm of our thinking about the iPhone. If you only care about making phone calls, then an iPhone 4 is good enough. Why pay for more? You probably don’t even need to upgrade your phone for years, as long as the battery keeps holding its charge. However, for most, the actual “phone” function is the least important of the iPhone.

Earnings

From an earnings perspective, iPhone X will be a tremendous boost. It will increase the average selling price per unit by a few hundred dollars, which should help not just sales, but profit margins as well. This is actually healthy for both Apple and the entire iPhone ecosystem (including DRAM and solid state drive makers — for example, we still have a large position in Micron Technology). People were also postponing buying new iPhones while waiting for the iPhone X; thus, the number of units sold will probably exceed most optimistic expectations.

What is next?

Then the question becomes, What is next? Higher-priced iPhones will also change the dynamics of the upgrade cycle. Apple is going to have a harder time convincing iFanatics to shell out $1,000-$1,200 every year (or even every two years). The upgrade cycle will likely be elongating to three or four years.

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Thus, any blow-out success of iPhone X in 2017 and early 2018 will be coming at the expense of future years. Even if you are a loyal Apple shareholder, you have to be prepared for this.

Assessment

Absent a new category of products, Apple is turning into a fully ripe stock. Yes, it will look statistically cheap based on 2018 earnings, but that will not be the case if you look at 2019 or 2020 earnings.

As all the excitement subsides, Apple stock will have to answer an extremely important question: What is next? After all, the value of any business is a lot more than the earnings generated next year, but far beyond that.

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements.

Contact: MarcinkoAdvisors@msn.com

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How to Invest the Dale Carnegie Way

How to Invest the Dale Carnegie Way

By Vitaliy Katsenelson, CFA
The first time I read Dale Carnegie’s How to Win Friends and Influence People was in 1990. I was living in Russia; the Cold War had just ended.

Capitalist American books suddenly became very popular. Carnegie’s was one of the first to be translated into Russian and was “the book to read.” Everyone wanted to be a capitalist, and this book was supposed to make me a better one.

I decided, however, that it was stuffed with disingenuous fluff — that it taught the reader how to not be authentic; it turned you into a fake.

 

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: marcinkoadvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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An Investor’s Guide to Better Writing

An Investor’s Guide to Better Writing — Seriously

By Vitaliy Katsenelson CFA / Institutional Investor Magazine

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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The Warren Buffett & Charlie Munger Show

More on Value Investing

By Vitaliy Katsenelson CFA

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The Warren Buffett & Charlie Munger Show

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Pharmaceutical Stocks in the Post-Trump Era?

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By Vitaliy Katsenelson CFA

vitaly

Trumps Hates Them – We Love Them

 Originally written for Institutional Investor Magazine
 A few weeks after Donald Trump was elected president of the United States, he was asked about pharmaceuticals prices. With typical rhetorical gusto, he declared, “Pharmaceutical companies are getting away with murder.” Well, my firm has been increasing our allocation to those “murderers,” and despite Mr. Trump’s comments, we are very comfortable with our positions in the long run (which lies beyond what may end up being a very volatile short run).

Big Pharma

Pharmaceuticals companies check off a lot of boxes in our quality and growth dimensions. They are usually monopolies or oligopolies when it comes to their specific drugs; they have high recurrence of revenue; their business is not cyclic and thus marches to its own drummer; they have strong balance sheets and a high return on capital, and generate a lot of cash flow; they benefit from a significant growth tailwind as the global population ages (I aged just while writing this); and they enjoy pricing power (more on that later). Yet the pharmaceuticals sector as a whole has been decimated over the past eight months due to perceived political risk — first by pharma pricing critic Hillary Clinton’s “It’s in the bag” expectation of victory and then by Trump’s “They get away with murder” comments. We view the carnage created by the political risk as an opportunity to increase our exposure to this sector. Here is why.

President Trump mentioned that he wants the U.S. government — mainly, its Medicare program — to negotiate directly with drug-makers on price. His remark may create the impression that pharmaceuticals companies today charge the government whatever prices they want. That is not the case. Medicare covers prescription drug costs through a program known as Medicare Part D. Medicare basically outsources the negotiation of drug prices to pharmacy benefit management (PBM) companies such as CVS, Express Scripts, and UnitedHealth Group (a health insurance company that owns its own PBM). In fact, less than a handful of PBMs control this market and so exercise tremendous pricing power; thus the government is already negotiating with pharmaceuticals companies.

The Stats

Here are some useful stats about this market: As of the end of 2015, 290 million Americans had health insurance. Among them, 214 million had private insurance and 52 million were insured by Medicare. Medicare insures a lot of people; however, UnitedHealth — a company whose business model relies on paying as little as possible for prescriptions — insures 70 million Americans and thus already has greater bargaining power than Medicare.

But let’s say President Trump gets his wish, the law is changed, and the government bypasses PBMs and starts bargaining with Gilead Sciences, Amgen, and Allergan directly — the Trump take-no-prisoners approach. Let’s even assume that President Trump’s ingenious negotiating techniques result in a 20 percent concession on price. Since Medicare represents only 18 percent of the total insured population, the net impact on pharmaceuticals companies’ revenue would be 3.6 percent. That’s a small pimple that they’d be able to cover up by raising prices 4 percent on the remaining 82 percent of payers.

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drugs

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Europeans and Canadians

The reality is that the reason Europeans and Canadians are paying much lower prices for their prescriptions is that they have a single-payer system, and thus pharmaceuticals companies are bargaining not with four or five entities but with one: the government. At this stage, however, it is very unlikely that a Republican president and Republican-controlled Congress will move this country to a single-payer system.

If the U.S. starts allowing re-importation of pharmaceuticals from Canada and Europe — another threat made by our president — then American companies will simply start raising prices outside of the United States.

Finally, let’s remember an important but often forgotten fact: Donald Trump is the president of the U.S.; he is not its king and doesn’t have the powers of one. Although we expect his tweets and other remarks to create additional volatility, they will not necessarily have a symmetrical impact on pharmaceuticals companies or whatever other businesses he tweets about.

Assessment

We have taken advantage of price weakness and added to our positions in Amgen (analysis here), Allergan (analysis here), and Gilead (analysis here). We also bought some new positions. Stay tuned for next week, when I’ll reveal those names.

Conclusion

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Good Companies Don’t Always Make Good Stocks

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By Vitaliy Katsenelson CFA

 Institutional Investor

 

Good Companies Don’t Always Make Good Stocks

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Gilead Sciences’ Miracle Drug Combination

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More on Gilead Sciences

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By Vitaliy Katsenelson CFA

It is easy, exciting and uplifting to talk about how Gilead has saved millions of lives. But I have to admit I found myself to be slightly conflicted as a capitalist investor and human being when it came to analyzing the company.

So, here is my take on Gilead Sciences in essay form 

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drugs

Gilead Sciences’ Miracle Drug Combination

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Front Matter with Foreword by Jason Dyken MD MBA

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Are We Still in a Sideways Stock Market?”

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Are we there YET!

vitaly[By Vitaliy Katsenelson CFA]

In 1976 the Eagles came out with their most successful album, Hotel California, featuring the eponymous single. That song became their claim to fame. Over the next almost four decades the Eagles performed thousands of concerts and they wrote a lot of new songs, but you can’t see yourself going to an Eagle’s concert and not hearing “Hotel California.”  They performed “Hotel California” at every concert and maybe more than once at some. I don’t have the fame the Eagles do, nor do I entertain for a living (unless you call this entertainment).

But, I do feel a little bit like the Eagles when I talk about sideways markets. Let me explain.  I wrote Active Value Investing in 2007, and I followed up with a simplified version, The Little Book Of Sideways Markets, in 2010. Since the books came out, I have given hundreds of interviews and presentations all over the world on the subject.  And just as the Eagles grew sick of playing “Hotel California,” I am sick of sideways markets. When I do interviews now, I politely ask the interviewer to stay away from the topic of sideways markets, as it really bores me.

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Bull markets

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Now, recently I’ve received emails form loyal readers and reporters asking“I am attaching an article I wrote for Institutional Investor magazine in April 2013 that answers this question.  And if you want to peer deep into the entrails of sideways markets, read this very lengthy article I wrote for John Mauldin’s (must-read) Outside the Box newsletter.  IMAGE Very little has changed since I wrote this article (or the books).

Okay, the Donald and a Democratic Socialist are the lead contenders for the presidency of the US, but otherwise the framework I discussed in the article is much the same.  I could have written the article today, since the data points I used haven’t fundamentally changed – they’ve only gotten more extreme (despite the recent sell-off). The law of mean reversion (i.e., high valuations lead to lower valuations and high profit margins lead to lower profit margins) is still intact.

P.S. Lately I’ve been travelling more than usual.  I just came back from a two-day trip to San Diego, where I attended the Qualcomm analyst investor day.  I could have watched it online (I usually do), but Qualcomm is one of our largest positions and I wanted to be physically present to get a visceral feel for the management.  I’m glad I went.  I will be spending this week in Miami, attending one of my favorite investment conferences (and this time I have a hotel reservation).

Assessment

In late February a small group of my very close value investor friends is getting together in Denver.  First we’ll visit a few companies, then we’ll ski a few days in Vail and, most importantly, share and debate investment ideas until the wee hours.  We had a similar gathering in Atlanta a few months ago – it was absolutely amazing.

Conclusion

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How to Invest the Dale Carnegie Way

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How to Win Friends and Influence People

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By Vitaliy Katsenelson CFA

My History

The first time I read Dale Carnegie’s How to Win Friends and Influence People was in 1990. I was living in Russia; the Cold War had just ended. Capitalist American books suddenly became very popular. Carnegie’s was one of the first to be translated into Russian and was “the book to read.” Everyone wanted to be a capitalist, and this book was supposed to make me a better one. I decided, however, that it was stuffed with disingenuous fluff — that it taught the reader how to not be authentic; it turned you into a fake.

Thinking back, at the time I read it, that book had no chance of getting through to me. I was a product of the Soviet system. We were Seinfeld’s Soup Nazi “No soup for you” nation. Teachers who were kind and inspired students were considered weak. I remember two teachers in my school who were considered virtuosos. Neither one smiled. They rarely praised and were never afraid to insult their students for getting an answer wrong. But they were highly regarded because they knew their subjects well and thoroughly subjugated their students.

Here is how Carnegie puts it:

“When dealing with people, let us remember we are not dealing with creatures of logic. We are dealing with creatures of emotion, creatures bristling with prejudices and motivated by pride and vanity.”

If we were computers and had no emotions, then my Soviet teachers would have been right that knowledge is the only thing that matters. Then teaching (communicating) would be just data transfer from teacher to student.

But, if you have something you think is worth uploading to others, they have to be willing to download it. This is where the wisdom of Carnegie comes in. If we were computers, the way data was packaged would be irrelevant — the content would be all that mattered. However, because we are human, the way we package our content is paramount if the other side is to be willing to receive it.

Criticism is futile because it puts a person on the defensive and usually makes him strive to justify himself. Criticism is dangerous because it wounds a person’s precious pride, hurts his sense of importance and arouses resentment.

There is a person I work with (she is probably reading this, so I have to tread lightly). She has a task she does for me on a regular basis. She is a very diligent and hardworking person, but occasionally she makes a mistake. Pre–Dale Carnegie, I would criticize her. Not anymore. Now I start with praise — how she does a great job, how sometimes I wish I could match her attention to detail — and only then do I lightly mention her mistake. Everything I say about her work is absolutely true — she’d detect a lie. The data upload is the same — she made a mistake — but I package it differently. The result is that she has been making a lot fewer mistakes and the quality of our working environment has improved.

As an investor, I am constantly involved in arguing and debating with others. I debate ideas with my partner, Mike, and with my value investor friends. Mike and I often disagree — which is awesome, because if we always agreed, one of us would be extraneous. But this quote from Carnegie’s book changed how I debate: “You can’t win an argument. You can’t because if you lose it, you lose it; and if you win it, you lose it. Why? Well, suppose you triumph over the other man and shoot his argument full of holes and prove that he is non compos mentis. Then what? You will feel fine. But what about him? You have made him feel inferior. You have hurt his pride. He will resent your triumph.”

Carnegie provides this advice: “Our first natural reaction in a disagreeable situation is to be defensive. Be careful. Keep calm and watch out for your first reaction. It may be you at your worst, not your best. Control your temper. Remember, you can measure the size of a person by what makes him or her angry. Listen first. Give your opponents a chance to talk… Look for areas of agreement. When you have heard your opponents out, dwell first on the points and areas on which you agree.”

I used to feel I had to win every argument. I patted myself on the back when I did. Now I wish I hadn’t.

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df6e2218796363_562d230ca763b

[Influence Meter]

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Twenty-five years later I wish I could turn to my 17-year-old self and say, “Read this book slowly; pay attention; this is the most important thing you’ll ever read. It will change your life if you let it.” Unfortunately, due to the lack of a time machine, I can’t do that, but I can encourage everyone around me, including my kids, to read this very important book.

Carnegie’s book will turn anyone into a better businessperson or capitalist because it will help you to understand other people better. But more important, this book will make you a better spouse and a better parent.

P.S. I wish I’d reread Dale Carnegie’s book before my oldest child was born. I would have made fewer mistakes as a parent. I’ve been very good at trying not to criticize him and emphasizing his achievements. But I have not been careful enough in selecting his teachers. When Jonah was younger he liked to play chess, and we played together at least once a day. We got him a bona fide Russian chess teacher. He was a 70-something-year-old engineer, a brilliant chess player, Moscow champion. But he was tough. Rarely smiled. Emphasized the negatives (when Jonah made a wrong move) and underemphasized the positives (when Jonah made the right move). He was actually a genuinely good person, and he probably would be a good teacher for an adult – like me. But Jonah required a teacher that inspired, that poured water on the small seed of interest he had in chess. Instead, after a year, Jonah lost interest and quit playing chess.

Here is another example

My daughter Hannah had a Russian language teacher (the wife of Jonah’s chess teacher). The wife was not much different from the husband – emotionless and tough. Hannah studied Russian for a year and made little progress. She was scared, intimidated. Dissatisfied with her lack of progress, we changed teachers. Hannah’s new teacher is a beam of light and excitement. When she comes to our house she brings joy (and candy). After every lesson Hannah gets candy. Hannah’s Russian leaped forward. She got to the point where she started to read and memorize poems in Russian. She participated in her first “Russian poetry jam.” She looks forward to every lesson, not just because of the candy but because her new Russian teacher figured out a way to make Hannah feel good about herself when studies Russian – that is Dale Carnegie 101 

Conclusion

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Investment Lessons Learned from the Poker Table

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“I don’t know”

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               By Vitaliy Katsenelson CFA                   

These three words don’t inspire a lot of confidence in the messenger and probably will not get me invited onto CNBC, but that is exactly what I think about the topic I am about to discuss. I received a few e-mails from people who had a problem with a phrase in one of my blog posts this fall.

In that article I examined various risks that other investors and I are concerned about. The phrase was “the prospect of higher, maybe even much higher, interest rates.” These readers were convinced that higher interest rates and inflation are not a risk because we are not going to have them for a long, long time, that we are heading into deflation. These readers basically told me that I should worry about the things that will come next, not things that may or may not happen years and years down the road. I am pretty sure that if that phrase had addressed the risk of deflation and lower interest rates ahead, I’d have gotten as many e-mails arguing that I was wrong — that we’ll soon have inflation and skyrocketing interest rates, and deflation is not going to happen. I don’t know whether we are going to have inflation or deflation in the near future.

More important, I’d be very careful about trusting my money to anyone holding very strong convictions on this topic and positioning my portfolio on the basis of them. Any poker player knows that the worst thing that can happen is to have the second-best hand. If you have a weak hand, you are going to play defensively or fold (unless you are bluffing) and likely won’t lose much.

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md-defeated-

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But, if you’re pretty confident in your hand, you may bet aggressively (god forbid you go all-in) — after all, you could easily have the winning cards. Four of a kind is a great poker hand unless your opponent has a straight flush. Generally, the more confident you are in an investment, the larger portion of your portfolio will be placed in that position.

Therefore superconvinced inflationists will load up on gold, and superconvinced deflationists will be swimming in long-term bonds. If their predictions are right, they’ll make a boatload of money. If they’re wrong, however, they will have the second-best-hand problem — and lose a lot of money. The complexity of the global economy has been increased by monetary and fiscal government interventions everywhere. There is no historical example to which you can point and say, “That is what happened in the past, and this time looks just like that.” When was the last time every major global economy was this overlevered and overstimulated? I think never. (Okay almost never, but you have to go back to World War II.) What is going to happen when the Fed unwinds its $4 trillion balance sheet? I don’t know.

Also the transmission mechanism of problems in our new global economy is so much more dynamic now than it was even a decade ago. Just think about the importance of China to the global economy today versus 2004. That year U.S. imports from China stood at $196 billion. Just in the first eight months of 2014, they were $293 billion. China was single-handedly responsible for the appreciation of hard commodities (oil, iron ore, steel) over the past decade as it gobbled up the bulk of incremental demand.

Now, I don’t want to sink to the level of the one-armed economist — but conversation about inflation and deflation is just that, an “on one hand . . . but on the other hand” discussion. Just like in poker, second-best hands may be tolerable if, when you went all-in, you did not leverage your house, empty your kid’s college fund or pawn your mother-in-law’s cat. Even if you lost your money, you will live to play another hand — maybe just not today.

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th

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In the “I don’t know” world, second-best hands when you bet on inflation or deflation are acceptable on an individual position level (you can survive them) but are extremely dangerous, maybe fatal, on an overall portfolio level.

Investing in the current environment requires a lot of humility and an acceptance of the fact that we know very little of what the future holds. I’d want the person who manages my money to have some discomfort with his or her economic crystal ball and to construct my portfolio for the “I don’t know” world.

Assessment

As a writer, you know you are in trouble when you have to quote both Albert Einstein and Mahatma Gandhi in the same paragraph, but when I ask readers to do something as difficult as I am in this column, I need all the help I can get. “It is unwise to be too sure of one’s own wisdom,” Gandhi said. “It is healthy to be reminded that the strongest might weaken and the wisest might err.” Einstein took the idea a step further: “A true genius admits that he/she knows nothing.” Smarter and humbler people than me were willing to say, “I don’t know,” and it is okay for us mortals to say it too.

Repeat after me . . . 

Conclusion

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A Few Simple Rules For Money Managers

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A Few Simple Rules For Money Managers

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[By Vitaliy Katsenelson CFA]

One of the biggest hazards of being a professional money manager is that you are expected to behave in a certain way: You have to come to the office every day, work long hours, slog through countless e-mails, be on top of your portfolio (that is, check performance of your securities minute by minute), watch business TV and consume news continuously, and dress well and conservatively, wearing a rope around the only part of your body that lets air get to your brain. Our colleagues judge us on how early we arrive at work and how late we stay. We do these things because society expects us to, not because they make us better investors or do any good for our clients.

Somehow we let the mindless, Henry Ford–assembly-line, 8:00 a.m. to 5:00 p.m., widgets-per-hour mentality dictate how we conduct our business thinking. Though car production benefits from rigid rules, uniforms, automation and strict working hours, in investing — the business of thinking — the assembly-line culture is counterproductive. Our clients and employers would be better off if we designed our workdays to let us perform our best.

Investing

Investing is not an idea-­per-hour profession; it more likely results in a few ideas per year. A traditional, structured working environment creates pressure to produce an output — an idea, even a forced idea. Warren Buffett once said at a Berkshire Hathaway annual meeting: “We don’t get paid for activity; we get paid for being right. As to how long we’ll wait, we’ll wait indefinitely.”

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stock-exchange

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How you get ideas is up to you. I am not a professional writer, but as a professional money manager, I learn and think best through writing. I put on my headphones, turn on opera and stare at my computer screen for hours, pecking away at the keyboard — that is how I think. You may do better by walking in the park or sitting with your legs up on the desk, staring at the ceiling.

I do my best thinking in the morning. At 3:00 in the afternoon, my brain shuts off; that is when I read my e-mails. We are all different. My best friend is a brunch person; he needs to consume six cups of coffee in the morning just to get his brain going. To be most productive, he shouldn’t go to work before 11:00 a.m.

And then there’s the business news. Serious business news that lacked sensationalism, and thus ratings, has been replaced by a new genre: business entertainment (of course, investors did not get the memo). These shows do a terrific job of filling our need to have explanations for everything, even random events that require no explanation (like daily stock movements). Most information on the business entertainment channels — Bloomberg Television, CNBC, Fox Business — has as much value for investors as daily weather forecasts have for travelers who don’t intend to go anywhere for a year. Yet many managers have CNBC, Fox or Bloomberg on while they work.

Filters

You may think you’re able to filter the noise. You cannot; it overwhelms you. So don’t fight the noise — block it. Leave the television off while the markets are open, and at the end of the day, check the business channel websites to see if there were interviews or news events that are worth watching.

Don’t check your stock quotes continuously; doing so shrinks your time horizon. As a long-term investor, you analyze a company and value the business over the next decade, but daily stock volatility will negate all that and turn you into a trader. There is nothing wrong with trading, but investors are rarely good traders.

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idea

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Numerous studies have found that humans are terrible at multitasking. We have a hard time ignoring irrelevant information and are too sensitive to new information. Focus is the antithesis of multitasking. I find that I’m most productive on an airplane. I put on my headphones and focus on reading or writing. There are no distractions — no e-mails, no Twitter, no Facebook, no instant messages, no phone calls. I get more done in the course of a four-hour flight than in two days at the office. But you don’t need to rack up frequent-flier miles to focus; just go into “off mode” a few hours a day: Kill your Internet, turn off your phone, and do what you need to do.

I bet if most of us really focused, we could cut down our workweek from five days to two. Performance would improve, our personal lives would get better, and those eventual heart attacks would be pushed back a decade or two.

Assessment

Take the rope off your neck and wear comfortable clothes to work (I often opt for jeans and a “Life is good” T-shirt). Pause and ask yourself a question: If I was not bound by the obsolete routines of the dinosaur age of assembly-line manufacturing, how would I structure my work to be the best investor I could be? Print this article, take it to your boss and tell him or her, “This is what I need to do to be the most productive 

ABOUT

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of Active Value Investing (Wiley 2007) and The Little Book of Sideways Markets (Wiley, 2010).  His books have been translated into eight languages.  Forbes called him – the new Benjamin Graham.

Conclusion

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Let’s start 2016 with beautiful music!

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Vitaliy Katsenelson CFA
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Downhill Racing Meets Value Investing

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More on Value Investing

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By Vitaliy Katsenelson CFA

I wrote this article in May. Every time it was destined to be published in the pages of Institutional Investor, it got bumped by another, more timely one I had written. Finally, when a space opened in September, the market had taken a major dive, and what was supposed to be an “evergreen” article was suddenly out of touch with reality.

Here is the irony: This piece addresses complacency, but its author was complacent too. The X-mass market has recouped its summer losses, and this article is relevant again.

The Skier

I am a skier. When someone says this, you assume he or she is good. Well, I thought I was good. I was not Lindsey Vonn, but I had the technique down. I’d be the fastest person going down the mountain, always waiting for my friends at the bottom. Then, at the beginning of last season, I went skiing with my kids at Vail. It had snowed nonstop for a few days. Vail is a very large resort, and the mountain crew could not keep up with the snow, so I found myself skiing on unusually ungroomed slopes in powder more than knee-deep. Suddenly, something changed. I could not ski. I could barely make turns. I was falling multiple times per run. My kids, including my nine-year-old daughter, Hannah, were now waiting for me as I dug myself out of pile after pile of snow. My technique — along with my confidence — was gone. The discomfort froms constant falling turned into fear. I was ready to go back to the hotel after only two hours on the slopes. I was devastated. It was as if I had never skied.

The Ski Instructor

So I talked to a ski instructor about this incident. He told me that I’m a “good skier” on groomed slopes because they allow me to go fast without trying hard. Speed covers up a lot of mistakes and lack of skill. Skiing in powder requires different skis — not the skis I had — but more importantly, it slows you down and makes you rely on skills that I thought I had but didn’t.

The FED

During the past six years, the Federal Reserve neatly groomed, manicured and then finely polished investment slopes for all asset classes by lowering interest rates to unprecedented levels — providing a substantial accelerant that indiscriminately drove valuations of all assets higher. But ubiquitously rising valuations cover up a lot of mistakes and often a lack of skill. Whether you had a rigorous investment process or were throwing darts, over the past six years it hardly mattered — you made money. Bull markets don’t last forever, and this one is not an exception. Stock valuations (price-to-earnings) are just like a pendulum, swinging from one extreme to another.

Modernity

Today the stocks in the S&P 500 index trade at about 50 percent above their average valuation (if you adjust earnings down for very high corporate margins). Historically, above-average valuations have always been followed by below-average ones — taking away the riches that the previous years provided.

In other words, at some point it is going to snow and snow hard. Just as I, the great skier, found myself overconfident and unable to deal with the new terrain, investors will find themselves doing face-plants when the stock market turns from bull to bear. But here is great news:

Now the stock slopes are still finely groomed with stocks near all-time highs, and we all are given a unique opportunity to make adjustments to our portfolios and investment process. You should start by carefully analyzing each stock position in your portfolio. No drooling over how each of them did for you in the past. Drawing straight lines from the past into the future is very dangerous.

The Future

Instead, focus on the future — a future in which average stock valuations will likely be lower. Returns for a stock are driven by three variables: earnings growth, change in P/E and dividend yield. You should impartially examine each variable to determine if a stock deserves to be in your portfolio.

Then make one of three decisions: buy (more), hold or sell. Just remember, hold is a decision. If you choose not to sell an overvalued stock, one that has low or negative expected returns in the long run, that is a decision. We must all reexamine and future-proof our investment process. Six years of rewards and no risk will loosen the process of even the most disciplined investor.

Finally, if you are feeling very confident about your investment prowess today, take a moment to relive that gut-wrenching feeling you had the last time the stock market took a 20 percent dive. This will reset your confidence to the appropriate level and help you to avoid the mistakes that come from focusing too much on reward and too little on risk.

***

penn station

***

P.S. I took the kids skiing at Beaver Creek a week ago, for the first time this season. My daughter Hannah, who will be ten in a few weeks, has magically improved over the summer. However, Jonah, who is an amazing skier, has completely lost his form. He grew five or six inches since last spring — he’s 14 and pushing 6 feet now. His center of gravity has shifted, and he is still adjusting his technique to his new, oversized body.

Assessment

As a father, I smile when I see Hannah beating Jonah down the slope. Jonah, like any teenager, needs to be humbled. My skiing? The slopes were perfectly groomed. I was awesome! I just hope it doesn’t snow.

***

ABOUT

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of Active Value Investing (Wiley 2007) and The Little Book of Sideways Markets (Wiley, 2010).

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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[PHYSICIAN FOCUSED FINANCIAL PLANNING AND RISK MANAGEMENT COMPANION TEXTBOOK SET]

   Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™ Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

[Dr. Cappiello PhD MBA] *** [Foreword Dr. Krieger MD MBA]

***

Do RetroSpective Thoughts on Apple Inc Hint of the ProSpective Future after the “Crash” Today?

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PART I.

Understanding Apple Requires an Analysis of Fundamentals and Psychology

vitalyBy Vitaliy Katsenelson CFA

So many articles have been written recently about Apple — defending it or explaining why this glorious fruit will turn into a shriveling pumpkin by midnight (with Samsung’s help) — that I really haven’t felt the need to contribute to the unending debate.

But, when Apple’s stock crashed to $450 back in January 2013, we bought a little for our clients. After receiving an outraged e-mail from one of them calling the purchase “irresponsible” and proclaiming that everyone (including his neighbor) knows that Apple is going down to $300, I decided it was time to join the discourse. Clients rarely (almost never) contact us about stocks we own in their accounts. More important, this is far from the most “radioactive” stock we own or have owned.

So, here is a column on Apple, I wrote back then.  I have no intention of defending or prosecuting the company, but I would like to share some thoughts about it that many pundits have either overlooked or ignored.

***

Logo of Apple Inc. to be used on a custom landing page/brand page about Apple products on the website of Shopping.com.

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The Psychlogy

What makes Apple stock difficult to own is psychology. The company’s success since 2000 is a black swan. We tend to think of Nassim Nicholas Taleb’s black swans as significant random negative events, but Apple is a positive one. When co-founder Steve Jobs came back to the company in the late ’90s, Apple was about to take its last breath. Jobs pulled off a miracle. He revived the company’s computer product line, making Macs exciting again, and then came out with three revolutionary “i” products in a row: the iPod, iPhone and iPad. You could argue that the success of each “i” product in itself was a black swan, exceeding all rational expectations and revolutionizing, transforming and in some cases creating new categories of merchandise that had never existed before.

Revenue and Market Capitalization

Apple’s revenue and market capitalization deservedly surpassed those of almighty Microsoft Corp. — the hairy monster with stinky breath that performed CPR on dying Apple in the late ’90s by injecting liquidity into the company by buying its preferred stock. We have a hard time processing this highly improbable success and an even harder time imagining that there is another black swan about to take flight from the Apple labs, especially with no Steve Jobs around to sit on the egg.

Black swans come out of nowhere, unannounced, but their impact may be long-lasting. The wildly successful “i” gadgets dug a formidable moat around Apple. They created the most valuable and still most inspirational brand in the world, funded an enormous research and development effort, enabled huge buying power (Apple locks up supply and pays much lower prices than many of its competitors for parts), filled out a mature product ecosystem and stuffed Apple’s debt-free balance sheet with $137 billion — half the market capitalization of Microsoft. The moat is wide, deep and unlikely to be breached any time soon.

***

Ex-Cathedra black swan

***

High Price

One reason the psychology of owning Apple stock is so difficult: it’s high price. (Note: I am talking not about its valuation but purely about its price.) Apple has had only one stock split since the late ’90s, when it was trading in double digits, and it now changes hands at about $450 (down from $700 just a few months ago). Stock splits create zero economic value in the long run — absolutely none. Apple could split its stock ten to one and you’d have ten $45 shares, and nothing about the company or its business would change. But, I’d argue that a 3 percent “slide” of $1.35 would grab fewer headlines than a $13.50 “drop” — there is a media magnification factor that is hard to ignore.

Hardware versus Software

Is Apple a hardware or a software company? This is a very important question because Apple’s net margins of 25 percent are dangerously higher than those of Microsoft, a software monopoly that, with the minor exception of the Xbox and its new venture into tablets, sells only software, which has a 100 percent incremental margin.

Apple is either a smart hardware company or a software maker dressed in hardware company clothes. Take a look at the PC businesses of traditional “dumb” hardware companies like Dell and Hewlett-Packard Co. (I am not insulting these companies, I am just highlighting their lack of PC-directed R&D.) They buy hard drives from Western Digital Corp., graphic cards from Nvidia Corp., processors from Intel Corp. and an operating system from Microsoft, then they have contract manufacturers put together these parts in Asia and ship PCs all over the world. Dell and HP engineers design the PCs but contribute minimal R&D to their boxes; most of the R&D is done by the suppliers. Dell and HP are really asset-lite marketing and logistics companies — this explains their razor-thin margins. (Side note: Because of a lack of fixed costs, Dell and HP can remain profitable despite the ongoing decline in PC sales.)

Same Surface

On the surface, Apple’s personal computer business is not that much different from Dell’s or HP’s: It uses the same highly commoditized hardware and it also outsources manufacturing, but Apple spends much more on the R&D of its own operating system and creates distinctive, innovative products. Apple gets to keep a slice of revenue that would otherwise go to Microsoft for the operating system. Also, Apple is able to charge a premium (usually a few hundred dollars per PC) for the aesthetic appeal and perceived ease of use of its products.

However, when it comes to the “i” devices, Apple is a much smarter hardware company; its value added goes further than just basic design and software. Though there is a lot of commoditized hardware that goes into an iPhone or iPad, Apple’s skill at fitting an ever-growing number of components into ever-shrinking devices constantly increases. Add world-class touch and feel, superior battery life and durability, and you have a package that turns what would otherwise be commodity items into highly differentiated, and undeniably sexy, products. Apple has even gone a step further and is designing its own microprocessors.

But — and this is a very important “but” — as phones and tablets mature, processor speed, battery life and weight will tend to become uniform across all devices. It is arguable that the competition has already caught up with Apple in the hardware race. As the hardware premium goes away, there will be only two premiums left: Apple’s brand and its ecosystem. (I will go into detail about the “i” ecosystem and what it means for Apple’s margins and profitability in my second essay posted below).

Note that I did not mention the software premium. Unlike Microsoft, which charges for the Windows operating system installed on PCs, Google gives away Android to anyone who dares to make a phone or a tablet. Unless Apple can maintain the operating system lead against Android, that premium will go away.

Assessment

Recently, I spent a few days playing with Nexus 7, Google’s Android-powered 7-inch tablet, which retails for $200 ($130 cheaper than Apple’s iPad mini). Nexus 7 is a good product, but I kept remembering that humans and monkeys share 98 percent of their DNA, and the Android operating system is missing the 2 percent that makes Apple iOS so special.

*** 

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PART II.

How Much Would You Pay for the Apple Ecosystem?

Apple’s ecosystem is an important and durable competitive advantage; it creates a tangible switching cost (or, an inconvenience) after Apple has locked you into the i-ecosystem. It takes time to build an ecosystem that consists of speakers and accessories that will connect only via Apple systems: Apple TV, which easily recreates an iPhone or iPad screen on a TV set; the music collection on iTunes (competition from Spotify and Google Play lessens this advantage); a multitude of great apps (in all honesty, gaming apps have a half-life of only a few weeks, but productivity apps and my $60 TomTom GPS have a much longer half-life); and, last, the underrated Photo Stream, a feature in iOS 6 that allows you to share photos with your close friends and relatives with incredible ease. My family and friends share pictures from our daily lives (kids growing up, ski trips, get-togethers), but that, of course, only works when we’re all on Apple products. (This is why Facebook bought Instagram for $1 billion. Photo Stream is a real competitive threat to Facebook, especially if you want to share pictures with a limited group of close friends.)

The i-ecosystem makes switching from the iPhone to a competitor’s device an unpleasant undertaking, something you won’t do unless you are really significantly dissatisfied with your i-device (or you are simply very bored). How much extra are you willing to pay for your Apple goodies? Brand is more than just prestige; it is the amalgamation of intangible things like perceptions and tangible things like getting incredible phone and e-mail customer service (I’ve been blown away by how great it is!) or having your problems resolved by a genius at the Apple store.

Of course, as the phone and tablet categories mature, Apple’s hardware premium will deflate and its margins will decline. The only question is, by how much?

Let me try to answer

From 2003 to 2012, Apple’s net margins rose from 1.1 percent to 25 percent. In 2003 they were too low; today they are too high. Let’s look at why the margins went up. Gross margins increased from 27.5 percent to 44 percent: Apple is making 16.5 cents more for every dollar of product sold today than it did in 2001. Looking back at Nokia Corp. in its heyday, in 2003 the Finnish cell phone maker was able to command a 41.5 percent margin, which has gradually drifted down to 28 percent.

Today, Nokia is Microsoft’s bitch, completely dependent on the success of the Windows operating system, which is far from certain. Nokia is a sorry shell of what used to be a great company, while Apple, despite its universal hatred by growth managers, is still, well, Apple. Its gross margins will decline, but they won’t approach those of 2003 or Nokia’s current level.

For Apple to conquer emerging markets and keep what it has already won there, it will need to lower prices. The company is not doing horribly in China — its sales are running at $25 billion a year and were up 67 percent in the past quarter.

However, a significant number of the iPhones sold in China (Apple doesn’t disclose the figure) are not $650 iPhone 5’s but the cheaper 4 and 4s models. (Also, on a recent conference call, Verizon Communications mentioned that half of the iPhones it has sold were the 4 and 4s models.) Apple’s price premium over its Android brethren is not as high as everyone thinks.

What is truly astonishing is that Apple’s spending on R&D and selling, general and administrative (SG&A) expenses has fallen from 7.6 percent and 19.5 percent, respectively, in 2003 to a meager 2.2 percent and 6.4 percent today. R&D and SG&A expenses actually increased almost eightfold, but they didn’t grow nearly as fast as sales. Apple spends $3.4 billion on R&D today, compared with $471 million in 2001. This is operational leverage at its best. As long as Apple can grow sales, and R&D and SG&A increase at the same rate as sales or slower, Apple should keep its 18.5 percentage points gain in net margins through operational leverage.

***

***

Growth of sales is an assumption in itself. Apple’s annual sales are approaching $180 billion, and it is only a question of when they will run into the wall of large numbers. At this point, 20 percent-a-year growth means Apple has to sell as many i-thingies as it sold last year plus an additional $36 billion worth. Of course, this argument could have been made $100 billion ago, and the company did report 18 percent revenue growth for the past quarter, but Apple is in the last few innings of this high-growth game; otherwise its sales will exceed the GDP of some large European countries.

If you treat Apple as a pure hardware company, you’ll miss a very important element of its business model: recurrence of revenues through planned obsolescence. Apple releases a new device and a new operating system version every year. Its operating system only supports the past three or four generations of devices and limits functionality on some older devices. If you own an iPhone 3G, iOS 6 will not run on it, and thus a lot of apps will not work on it, so you will most likely be buying a new iPhone soon. In addition — and not unlike in the PC world — newer software usually requires more powerful hardware; the new software just doesn’t run fast enough on old phones. My son got a hand-me-down iPhone 3G but gave it to his cousin a few days later — it could barely run the new software.

As I wrote above, Apple’s success over the past decade is a black swan, an improbable but significant event, thanks in large part to the genius of Steve Jobs. Today investors are worried because Jobs is not there to create another revolutionary product, and they are right to be concerned. Jobs was more important to Apple’s success than Warren Buffett is to Berkshire Hathaway’s today. (Berkshire doesn’t need to innovate; it is a collection of dozens of autonomous companies run by competent managers.) Apple will be dead without continued innovation.

Jobs was the ultimate benevolent dictator, and he was the definition of a micro-manager. In his book Steve Jobs, Walter Isaacson describes how Jobs picked shades of white for Apple Store bathroom tiles and worked on the design of the iPhone box. He had to sign off on every product Apple made, down to and including the iPhone charger. His employees feared, loved and worshiped him, and they followed him into the fire. Jobs could change the direction of the company on a dime — that was what it took to deliver black i-swans. Jobs is gone, so the probability of another product achieving the success of the iPhone or iPad has declined exponentially.

***

Steve Jobs RIP

***

What is really amazing about Apple is how underwhelming its valuation is today — it doesn’t require new black swans.

In an analysis we tried very hard to kill the company. We tanked its gross margins to a Nokia-like 28 percent and still got $30 of earnings per share (the Street’s estimate for 2013 is $45), which puts its valuation, excluding $145 a share in cash, at 10 times earnings. We killed its sales growth to 2 percent a year for ten years, discounted its cash flows and still got a $500 stock.

There is a lot of value in Apple’s enormous ability to generate cash. The company is sitting on an ever-growing pile of it — $137 billion, about one third of its market cap. Over the past 12 months, despite spending $10 billion on capital expenditures, Apple still generated $46 billion of free cash flows. If it continues to generate free cash flows at a similar rate (I am assuming no growth), by the end of 2015 it will have stockpiled $300 of cash per share. At today’s price [2013] it will be commanding a price-earnings ratio (if you exclude cash) of 4.

Of course, the market is not giving Apple credit for its cash, but I think the market is wrong. Unlike Microsoft, which does something dumber than dumb with its cash every other year, Apple has a pristine capital allocation track record. It has not made any foolish acquisitions — or, indeed, any acquisitions of size. Other than buying an Eastern European country and renaming it i-Country, Apple will not be able to acquire a technologically related company of size, nor will it want or need to. The cash it accumulates will end up in shareholders’ hands, either through dividends or share buybacks.

What is Apple worth?

After the financial acrobatics I’ve done trying to murder the valuation of Apple, it is easier to say that it is worth more than $450 than to pinpoint a price target. When I use a significantly decelerating sales growth rate and normalize margins (reducing them, but not as low as Nokia’s current margins), I get a price of about $600 to $800 a share.

Growth managers don’t want Apple to pay a large dividend, as though that would somehow transform this growing teenager into a mature adult. But I have news for them: Apple already is a mature adult. Second, when your return on capital is pushing infinity (as Apple’s is), you don’t need to retain much cash to grow. Two thirds of Apple’s cash is offshore, but that doesn’t make it worthless; it just makes it worth less — only $65 billion, maybe, not $97 billion, once the company pays its tax bill to Uncle Sam.

***

ImageProxy

***

Assessment

In the short term none of the things I am writing about here will matter. Remember, “Everyone knows Apple is going to $300,” as a client recently e-mailed me, as everyone knew it was going to a $1,000 a few months ago when Apple’s stock was trading at $700. The company’s stock will trade on emotion, fundamentals will not matter, and growth managers will likely rotate out of Apple, because once the stock declined from $700 to $450, the label on it changed from “growth” to “value.”

But ultimately, fundamentals will prevail. Like the laws of physics, they can only be suspended for so long. And so, do these retrospective thoughts on Apple hint of future prospects?

More: Should You Buy Apple Stock Ahead of Its September Event

ABOUT

Vitaliy N. Katsenelson CFA is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of Active Value Investing (Wiley 2007) and The Little Book of Sideways Markets (Wiley, 2010).  His books were translated into eight languages.  Forbes Magazine called him “The new Benjamin Graham”.  

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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Front Matter with Foreword by Jason Dyken MD MBA

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“BY DOCTORS – FOR DOCTORS – PEER REVIEWED – FIDUCIARY FOCUSED”

 ***

How Emotional Intelligence Can Make You a Better Investor

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IQ versus EQ

vitaly

By Vitaliy Katsenelson CFA

Your knee hurts, so you pay a visit to your favorite orthopedist. He smiles, maybe even gives you a hug, and then tells you: “I feel your pain. Really, I do. But I don’t treat left knees, only right ones. I find I am so much better with the right ones. Last time I worked on a left knee, I didn’t do so well.”

Though many professionals — doctors as well as lawyers, architects and engineers — get to choose their specializations, they rarely get to choose the problems they solve. Problems choose them. Investors enjoy the unique luxury of choosing problems that let them maximize the use of not just their IQ but also their EQ — emotional intelligence.

Let’s start with IQ

Our intellectual capacity to analyze problems will vary with the problem in front of us. Just as we breezed through some subjects in college and struggled with others, our ability to understand the current and future dynamics of various companies and industries will fluctuate as well. This is why we buy stocks that fall within our sphere of competence. We tend to stick with ones where our IQ is the highest.

Though we usually think about our capacity to analyze problems as being dependable and stable over time, it isn’t. It might be if we were characters from Star Trek, with complete control over our emotions, like Mr. Spock, or who lacked emotions, like Lieutenant Commander Data. This is where our EQ comes in.

I am not a licensed psychologist, but I have huge experience treating a very difficult patient: me. And what I have found is that emotions have two troublesome effects on me.

First, they distort probabilities; so even if my intellectual capacity to analyze a problem is not impacted, my brain may be solving a distorted problem.

Second, my IQ is not constant, and my ability to process information effectively declines under stress. I either lose the big picture or overlook important details. This dilemma is not unique to me; I’m sure it affects all of us to various degrees.

The higher my EQ with regard to a particular company, the more likely that my IQ will not degrade when things go wrong (or even when they go right). There is a good reason why doctors don’t treat their own children: Their ability to be rational (properly weighing probabilities) may be severely compromised by their emotions.

Example:

A friend of mine who is a terrific investor, and who will remain nameless though his name is George, once told me that he never invests in grocery store stocks because he can’t be rational when he holds them. If we spent some Freudian time with him, we’d probably discover that he had a traumatic childhood event at the grocery store (he may have been caught shoplifting a candy bar when he was eight), or he may have had a bad experience with a grocery stock early in his career. The reason for his problem is irrelevant; what is important is that he has realized that his high IQ will be impaired by his low EQ if he owns grocery stocks.

There is no cure for emotions, but we can dramatically minimize the impact they have on us as investors by adjusting our investment process. First and foremost, investors have the incredible advantage of picking domains where they can remain rational.

For instance, I would not be able to keep a cool head if I owned gold. I can recite the arguments for and against gold (lately, with negative interest rates in certain European countries, the “for” arguments have started to make even more sense). But, intellectually, I cannot reconcile the fact that gold is an asset that generates no cash flows, and thus to me it has no financial center of gravity. I have no idea what it is worth. The very idea of owning gold bothers me, and therefore I know that if I did own it, my EQ would be low. I’d be buying high and selling low.

Now, as a value investor, when I buy a stock and it declines 30 percent, I want to buy more of it (assuming its business has not changed). I wouldn’t trust that I could do this in the gold market.

To be a successful investor, you don’t need Albert Einstein’s IQ (though sometimes I wish I had Spock’s EQ). Warren Buffett undoubtedly has a very high IQ, but even the Oracle of Omaha chooses carefully his battles; for instance, he doesn’t invest in technology stocks.

***

masks

Our Luxury

Investors have the luxury of investing only in stocks for which both their IQ and EQ are maximized, because there are tens of thousands of stocks out there to choose from, and they need just a few dozen.

Assessment

Meanwhile, I hope when I go see the doctor, he will tell me, “I don’t do left knees,” because the best result will come from a doctor who while treating me will utilize both IQ and EQ.

ABOUT

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Written by doctors and healthcare professionals, this textbook should be mandatory reading for all medical school students—highly recommended for both young and veteran physicians—and an eliminating factor for any financial advisor who has not read it.

The book uses jargon like ‘innovative,’ ‘transformational,’ and ‘disruptive’—all rightly so!

It is the type of definitive financial lifestyle planning book we often seek, but seldom find.

LeRoy Howard MA CMPTM [Candidate and Financial Advisor, Fayetteville, North Carolina]

http://www.CertifiedMedicalPlanner.org

Finding Value in an Overpriced Stock Market

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Behind the Ugly Red Door

vitalyBy Vitaliy Katsenelson CFA

I am about to write a quarterly letter to clients, telling them that despite all the giddiness in the stock market, we are in Value Investor Second Hell. This is not the first hell; that one is reserved for value traps — stocks that look cheap based on past earnings but whose earnings are about to disappear, whereupon the stocks will permanently decline.

***

The second hell is when you cannot find value. I recently read a study that said the difference in valuation between the cheapest stocks (the lowest 10 percent of the market) and the rest of the market is the smallest it has been in more than 20 years. Of course, the market overall is very pricey; finding undervalued stocks in this environment has become increasingly difficult.

***

To adapt, you need to understand that there are two types of value stocks. The first are statistically cheap — their cheapness stares you in the face. This breed is quickly becoming scarce; even Hewlett-Packard Co. and Xerox Corp. are now found in growth investors’ portfolios. But before I talk about the second type of value stocks, let me tell you how my wife and I bought our house.

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statistics

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It was 2005. The housing market in Denver, just as in the rest of the U.S., was getting bubbly. Our family was about to grow, though we did not know it yet. We had sold our condo and were renting month to month and thus were under no pressure to buy a house, but we were keeping our eyes peeled for the right one at the right price. It was a nine-month journey. We even made some offers (usually below the asking price), which the sellers laughed at. They were right; their houses sold above the asking prices in just a few days.

***

I vividly remember how we finally found our house — and I have to admit it was entirely my wife’s doing. We were flipping through photos of house listings that met our criteria. We stumbled on a picture of an ugly green house with a bright red garage door, which had been on the market for six months. I made a snarky comment that this house would be on the market for another six months and was about to click to the next, but my supersmart wife said, “Wait.” She skipped all the pictures of the ugly outside and zeroed in on the photos of the interior of the house.

***

To my great surprise, this ugly duckling was ugly only on the exterior and had been completely redesigned inside. It was a perfect house for us. Since it had been on the market for a long time, the seller was willing to accept our low offer. I, like everyone else who did not buy this house for six months, was turned off by an ugly outside (which could be easily corrected with some paint) and failed to look deeper.

***

Back to the stock market. The other breed of value stocks are the ones with “ugly green paint jobs and bright red garage doors,” the ones that look unappealing from the outside and aren’t even cheap, at least not according to the statistics at everyone’s fingertips. Often, backward-looking statistics don’t capture such companies’ true earnings power, as it has yet to show itself. These are the stocks you should patiently seek out, especially in today’s value-deprived environment.

***

circuit

***

A stock that comes to mind is Micron Technology, a maker of memory chips. Micron has destroyed more capital over the years than Communism and Socialism combined. To be fair, it was not Micron’s fault: Its profitability — or lack thereof — was determined by its industry. Micron was a large player in a very fragmented business that Asian governments thought was strategic to the development of their countries, and so they subsidized their local companies. The memory industry was ridden with overcapacity. But nothing transforms an industry better than a financial crisis. The 2008–’09 global recession weeded out the weak players, and Micron bought the last one, Elpida Memory, in 2013 on the cheap, almost doubling its revenues.

***

Now the DRAM industry has only three players: Micron, Samsung and SK Hynix (a South Korean version of Micron). NAND memory (used in flash and solid-state drives) has the same competitors plus SanDisk Corp. Barriers to entry are enormous — a new entrant would have to spend billions of dollars on R&D and then tens of billions on factories. Therefore this cozy, oligopolylike industry structure is unlikely to change. Samsung, the largest player in the space, has an extra incentive to keep chip prices high because they give it a competitive advantage against Apple and, more important, against low-end Chinese smartphone makers that have to buy memory at market prices.

***

Gross margins of all memory companies have been gradually rising and still have significant room to grow. If Micron achieves its target margin level, in the mid to high 40s, its earnings will hit $4 to $6 per share in a few years, giving it a modest price-earnings ratio of 4 to 5 times. This is one cheap “ugly green paint job, bright red garage door” stock.

***

ABOUT
Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo.
 

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

I have read these texts and used consulting services from the Institute of Medical Business of Advisors, Inc., on several occasions. 

MARSHA LEE; DO [Radiologist, Norcross, GA]

Why I Love Amazon.com but Won’t Buy Its Stock

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By Vitaliy Katsenelson CFA

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You should look at your portfolio and want to throw up a little — this is how one value manager described what a true, die-hard value investor’s portfolio should look like. The two stocks I wrote about in my latest article — American Eagle and Aéropostale — have a tendency to elicit that unpleasant reflex in many investors today.I’m not writing this article as a pitch for those stocks (though, to be clear, my firm does own them) but to reinforce the lesson I have learned from past indecisions. If you want to buy a retailer selling clothes and shoes — items that are subject to fashion and weather risks — you want to buy them when they have missed their latest trend, when their financials look ugly and when the risks have already played out. One thing I like about these apparel retailers is that teens will shop there for just a few years. If a retailer screws up with one crop of kids, they get a second chance, because there is another crop coming right along. (The JCPenney crowd is not as forgiving. See “What I Learned from the JC Penney Fiasco .”)Also, unlike for the Best Buys and RadioShacks of the world, the Internet is not a significant threat to teen clothing retailers. Parents get sick of their kids driving them crazy at home on weekends — plus, let’s be honest, when your kids get to be teenagers, you are definitely not cool anymore. There is, however, an amicable solution: Drop the kids off at the shopping mall — a large, relatively secure enclosed space with video cameras and security personnel, with a movie theater, inexpensive fast food and a lot of retailers.

As I am writing this, I’m realizing that this is a quintessentially American phenomenon. The public transportation system is not really well developed in the U.S., and distances are large. Dropping off your kids at the mall pretty much ensures that they’ll still be there when you come back for them. And before the movie but after they have filled their bellies with French fries … you guessed it, the kids go to Aéropostale or American Eagle. Kids go there to kill time.

stock-exchange-

Growing up in Russia, which in many respects was a lot like Europe, we walked (there were wide sidewalks along the streets) and took public transportation. These were the times before the nightly news was allowed to talk about real local crime, and my parents were not really worried about safety on the streets, though if I was really, really late coming home, my mom still called the hospitals. I don’t know if Russian parents still feel the same way about letting their kids roam the streets today.

On a separate but related topic, for the past year, since we got Amazon Prime, I’ve been hooked on shopping on Amazon.com . I have bought things there that I never thought I would. We just bought a bunk bed for the kids. I read all the positive and, most important, the negative reviews. The bed was delivered to my door, and I did not have to pay for shipping. If I had bought it at Ikea, I would have had to either pay for delivery or load and unload boxes into and out of our minivan. But what is amazing about Amazon is how easy it is to deal with them and return things that don’t work out.

A few weeks ago we bought a foam mattress. It was vacuum-sealed, so when we opened it and removed the plastic it expanded to double the size of the original packaging. However, the mattress had an unpleasant smell that had not gone away after a week of airing. So I had a mattress that I couldn’t stuff back in the original box to return. I went on Amazon’s website — I didn’t even bother calling them but hit the “chat” button. Ten minutes later my problem was solved. A service truck (not UPS or FedEx) would pick up my mattress as is, without the original packaging, and it would not cost me a dime.

My wife was not very happy with me for buying this mattress and having to return it. But I reminded her to just imagine how much money and time we’d have wasted if we’d bought at a traditional retailer — we would have had to pay for delivery (a cost we wouldn’t recoup) and then pay again for delivery back to the store.

Amazon Prime is an ingenious idea. For a bit less than $100 a year, I receive free shipping on any item — no limits or constraints. This also buys my loyalty to Amazon. (Yes, my loyalty is that cheap!) I don’t even think about checking prices with other retailers — I know that with them I won’t get free shipping (both ways), incredible selection, the reviews of other buyers, absolutely pain-free customer service and competitive prices. Also, Amazon already has my work and home addresses and my credit card information. So Amazon Prime has done something that you wouldn’t think is possible: It has created online loyalty.

This new loyalty presents me, as an investor, with an interesting dilemma: What do I do about Amazon’s stock? Answer: absolutely nothing. It is incredibly difficult to value Amazon shares. Today they trade at 90 times next year’s earnings. I can definitely see how Amazon’s sales will grow over time, but because the company is not focused on making money, I have no idea whether that bright future is already priced in or not. Investors are forgiving Amazon for not making money today because at some point it will start to. It will stop investing in new product categories, it will raise its prices, and customers will be forgiving. So they may have a workable strategy.

But here is what I have learned over the years. You don’t have to own all the great companies. You can just enjoy their products and services until they stumble. They always do. Wall Street love affairs are like Hollywood marriages; they’re not forever. Look at Apple . I have always loved their products (I have owned every single iPhone), but I waited until I could buy the stock on my own terms, when I could value it and have a margin of safety. The same applies to electric car–maker Tesla Motors. My next car will probably come from them, but I’ll wait patiently for Tesla’s stock to become reacquainted with the concept of gravity.

ABOUT

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo.
 

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners(TM)

BOOK REVIEW

This is an excellent book. It is all inclusive yet easy to read with current citations, references and much frightening information. I highly recommend this text. It is a fine educational and risk management tool for all doctors and medical professionals.

DR. DAVID B. LUMSDEN; MD, MS, MA

[Orthopedic Surgeon-Baltimore, Maryland]

About Moritz Moszkowski

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And …. the Black Swans

[By Vitaliy Katsenelson  CFA] write-us@imausa.com 

Today I wanted to share with you undeservedly underrated and underrecorded composer that in my not so humble opinion deserve to be over-rated and over-recorded.

He lived in the golden age of the late romantic, early modern period of classical music, that is, the late 19th to early 20th century.

Lifestyle

I want to share with you the Piano Concerto in E minor by Moritz Moszkowski (part 1part 2 and part 3), German-Jewish composer born in Breslau, Prussia (now Poland).

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mm

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According to that most trusted source, Wikipedia, he was very popular in his day but died in poverty, “sold all his copyrights and invested the whole lot in German, Polish and Russian bonds and securities, which were rendered worthless on the outbreak of the war.”

Assessment

Now, I am not trying to draw parallels between the early 20th century and today, but when he poured his life savings into German government bonds, he probably could not imagine that they would be wiped out – there is a black swan for you!

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Ex-Cathedra black swan

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Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

 

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