Here are some thoughts that didn’t make it into our January Strategy Letter but that I wanted to clean off the plate for the New Year:
- Becoming a celebrity investor as a result of being a serial presenter on the investment conference trail is clearly a cool thing for the investor. Whether the clients benefit commensurately from that point onward is an entirely different question. Sub-text: there is no correlation between the length of a power-point presentation and the likelihood of investment success.
- Buy the drug war, sell the flamboyant billionaire. Betting on Mexico has been a better investment than wagering on Brazil over the past five years. You would never know it by the financial press.
- Bitcoin and public entities associated with Elon Musk are likely to experience a number of eventual disasters. Even if you can’t “value” gold, it at least has been around for 5000 years and still brings smiles when offered in a small blue box with a ribbon. Bitcoin is simply another spelling for tulip and represents a neat fulfillment of a libertarian instinct. The fact remains that betting on the end of the world as we mostly know it has generally proven to be unrewarding (at least as of this writing). Additionally, even if you are right, collecting is likely to prove problematic.
As cool as the Tesla S may be—and as much as you have to love an American visionary—the valuation of the company is absurd in relation to anything but complete global auto domination. I see a magnificent but declining financial arbitrage of what could very well be temporary regulatory policies that do not justify a rapid buildup of fixed costs. In addition, Mr. Musk has committed what seems to be to be the cardinal error: guaranteeing the residual value of three year leases—on a product for which the battery cost represents a huge and utterly unguessable value given the money being presently spent on developing a better mousetrap. I am only glad I do not run a short fund where I would inevitably be tempted to be terribly early.
- When your work speaks for itself, don’t interrupt.
- The way to come to terms with economic inequality is to recognize that the market system is not something that governments either create or effectively manipulate. Markets revolve around sets of unplanned, spontaneous exchanges and thus nobody scripted in inequality and no one is responsible for it. It is simply the price we pay for a general level of prosperity that is unimaginable in any other economic system.
- People are buying not what is cheap but what is “working,” a sad fact that means equities are in weaker hands and thus are likely to be more volatile. The same risks are always there but currently more people—en masse—are choosing to underweight/ignore them.
CLICK HERE to download Cove Street Capital’s January 2014 Strategy Letter, Number 15, “The Fear Pendulum: From End of the World to Market Melt-Up?”
Every December, the Cove Street Capital team spends both time and money on behalf of a charity. This year we spent an afternoon at the Alexandria House, a transitional residence providing safe and supportive housing for women and children in the process of moving from an emergency shelter to permanent housing. We helped them prepare for an onslaught of 1,000 kids coming for Mrs. Claus and her gifts and were awed by the staff and its founding director, Judy Vaughan.
There are immense and truly difficult problems that perpetuate a vicious cycle for the many people who are less fortunate. These are day-to-day issues, far from celebrity pleas and fancy dinners. You should give large and give often: http://www.alexandriahouse.org/.
“Be the change you wish to see in the world.” Mahatma Gandhi
CLICK HERE to download Cove Street Capital’s October 2013 Strategy Letter, Number 14, “Steve Jobs Didn’t Give a *!@% About the Debt Ceiling”
CLICK HERE to download Cove Street Capital’s August 2013 Strategy Letter, Number 13, “Who Are You Going to Believe—These Non-GAAP Numbers or Your Lying Eyes?”
(Reprint) RICHMOND, Va., June 6, 2013 /PRNewswire/ — Media General, Inc. (NYSE: MEG) and privately held New Young Broadcasting Holding Co., Inc., both local broadcast television and digital media companies, today announced a definitive agreement to combine the two companies in an all-stock merger transaction. The new company will retain the Media General name and will remain headquartered in Richmond, VA.
Media General owns 18 network-affiliated stations, and Young owns or operates 12 network-affiliated stations. The combination will create a company with 30 stations operating in 27 markets, reaching 16.5 million, or 14%, of U.S. TV households. On a pro forma basis, 2012 revenues were $605 million, including approximately $115 million of political revenues.
The new company will have a strong balance sheet, including significant tax carryover net operating losses that will survive the merger, and an enhanced credit profile, creating opportunities to refinance existing debt at a significantly lower cost of capital. The merger will be accretive to free cash flow in the first full year. The companies have identified $25-30 million of operating and financing synergies.
The balance of network affiliations will include CBS (11), NBC (9), ABC (7) Fox (1), CW (1) and MNT (1). Sixteen of the 30 stations are located in the Top 75 DMAs. The new company will be more geographically diverse and will have a presence in more markets that generate strong political revenues. Its increased size will enhance its ability to participate in retransmission revenue growth, share growth of national and digital advertising, and syndicated programming purchasing.
CLICK HERE to download Cove Street Capital’s May 2013 Strategy Letter, Number 12, “Harleys and Leather Jackets”
by Eugene Robin | Research Analyst, Cove Street Capital
I’d like to share with you a great book on the basic mathematics of the stock market written by John Allen Paulos that has a section on the efficient market. Briefly, if investors believe in the Efficient Market Hypothesis (EMT) then they believe that the market efficiently incorporates all old and new pieces of information and thus the quest to beat the market is a losing proposition and thus everyone should just buy index funds. But, if enough people believe that the market is efficient then no one will engage in active management, thereby decreasing the overall efficacy of the now not-so-efficient market by slowing the diffusion of information into market prices. Therefore, if enough people actually believe that the market is efficient then that belief actually ensures the falsity of the theory itself, ergo, a paradox forms.
Why am I mentioning this? After recently watching a PBS documentary where Vanguard’s John Bogle espoused the glories of the ETF revolution, I began to think about the actual effects of ETFs on active managers. It’s hard to argue that Bogle is entirely wrong in his assault against the traditional active management industry. read more…
This past weekend’s trek to Omaha for the Berkshire Hathaway annual meeting represented the fifth consecutive time I have ventured to see the Oracle of Omaha and the man they call Charlie share their wisdom. Sorry folks, I didn’t take notes from the meeting this year. I have decided to pass that torch along to the next generation of note takers. However, the upshot of not taking notes is that I was able to absorb more of what was said in real time. I am sure that a comprehensive set of notes will show up on the internet in no time but in the meantime I wanted to share a few of my takeaways:
- While the idea of having a short seller ask questions was certainly compelling, the execution was lackluster. Unfortunately, it felt as though Doug Kass was far more concerned with promoting his own firm than asking tough questions. At one point Munger even joked that he could make a certain short point better than Kass was. Accordingly, my personal preference for subsequent years would be to have someone who knew the company really well and who owned the stock play the devil’s advocate. read more…