How to invest in businesses with dr. Per Jenster

I recently had the privilege to interview dr. Per Jenster. He is a Fullbright scolar, author of many books, former dean of the Kopenhagen Business school, entrepreneur with more than 20 ventures of which many went public for hundreds of millions and he is an investor that has his own hedge fund. A person from whom we can learn very much. Enjoy the interview.

In case you want to reach Prof Jenster or know more about how he invests, please go to … http://nichemastersfund.com

Here is the video and you can find the discussion topics below the video.

0:27 Who is Per Jenster

1:33 What to look when investing in a business

3:59 Fund based on a niche strategy

6:01 Companies we are investing in

8:30 Management

10:00 HIGHER PE for HIGH ROIC

10:44 Index funds

13:10 Trading

14:24 Strategic focus

15:57 Current stock market

18:25 Diversification

20:31 Investing education

21:36 Modern investing

23:32 Learn to be better at investing

 

Nassim Taleb is warnings us – situation worse than in 2007

  • The US government has $21 trillion of debt, but few know and think about the $49 trillion in hidden debt.
  • The global economy is not stable because the core is cracking already, think Italy.
  • Taleb compares this debt environment with a Ponzi or Maddoff scheme.
  • The main message is to be protected (gold, real assets, puts).

In a recent Bloomberg video, Nassim Taleb, the author of Black Swan and probably one of the best estimators of risk, is warning us that the financial situation is worse than it was in 2007.

As Taleb doesn’t share much data in his interview, I have researched each of his statements and attached a few facts to them.

The topics he discusses and I dig deeper into are:

  • (0:00) Introduction
  • (1:23) The bigger debt pile that has just been transferred from housing to governments.
  • (4:16) The hidden debt few are taking into account.
  • (5:48) How the economy is already cracking in some places.
  • (6:32) The high probability of a global currency collapse.
  • (8:01) What will happen and how will it pan out? Inflation.
  • (9:36) 4 ways to protect yourself.

Enjoy the video.

ARE THE STOCK MARKET AND ECONOMY IN A BUBBLE? 7 FACTOR EXPLANATION

I recently summarized Dalio’s last book, Big DEBT CRISES and there he shares his questions, check list, to see whether the stock market or economy is in a bubble or not. In today’s article, in light of the FED’s tightening, we are going to go through his questions, to see whether we are in a bubble or not.

1 bubble questions

Source: Big Debt Crises

Good day fellow investors,

my name is Sven Carlin and I am an independent investor, independent thinker who doesn’t really like to follow the crowd, that has served me well in my life and, I have the feeling it will serve me well in the future too. Let’s go through Dalio’s questions one by one and then conclude with what to do, where Dalio’s option is to have an all-weather portfolio.

We are going to look at whether the US economy and stock market are in a bubble. As for Europe, I’ll make a special article about it due to the many economies.

  1. PRICES ARE HIGH RELATIVE TO TRADITIONAL MEASURES

The US stock market is expensive and prices are much higher than traditional measures.

2 stock market price

Source: Multpl

A look at the cyclically adjusted price to earnings ratio for the S&P 500 that takes into account 10 years of earnings, shows how stock prices were higher only during the dot-com bubble. But, let’s not focus only on stocks, let’s look at housing.

3 house price to income ratio

Source: Longtermtrends

The home price to income ratio is not higher than it was in 2007 but is getting close to it and it is much higher than it was in the past 50 years. Incomes were low in the 1950s so that isn’t really comparable.

To answer question one: yes, prices are high relative to historical measures.

2. PRICES ARE DISCOUNTING FUTURE RAPID PRICE APPRECIATION FROM THESE HIGH LEVELS

If we take a look at the S&P 500 and at S&P 500 forward expected earnings, all we can see is fast growth.

4 price and earnings

Source: FACTSET

So, huge growth is expected, S&P 500 actual earnings are at 116 points while the market expects them to be at 175 points in the next 12 months.

5 s&p 500 actual earnings

Source: Multpl

As for home prices, the huge run up in prices up to 2018 showed bubble characteristics but it has been cooling of as interest rates go up.

6 new home prices in the us

Source: FRED

So, perhaps what we have seen up to December of 2017 will again be called a bubble as higher interest rates inevitably put pressure on asset prices. Not yet on stocks as the sentiment is still strong but you can’t escape when it comes to housing.

ANSWER: YES, prices are discounting fast future price appreciation, certainly in stocks, whereas it might be over for housing.

3. THERE IS BROAD BULLISH SENTIMENT

Let’s see, Kudlow states the US economy is crushing it.

7 kudlow

Source: CNBC

While consumer confidence is close to record highs.

8 consumer confidence

Source: FRED

Answer: YES, sentiment is bullish! Even with stocks, the sentiment has been extremely greedy in 2018.

9 greed

Source: CNN

4. PURCHASES ARE BEING FINANCED BY HIGH LEVERAGE

This is not in a bubble, consumer credit is just 50% higher than where it was in 2008 and is just 10 times higher than where it was in 1980. (allow for some irony here)

10 consumer credit

Source: FRED

As for the stock market, margin debt is at historical highs. Just to mention as a comparative note, margin debt was $263 billion in February of 2010 and $314 billion in July of 2008.

11 margin debt

Source: FINRA

Answer: YES, purchases are increasingly being financed by debt.

5. BUYERS HAVE MADE EXTENDED FORWARD PURCHASES

If we look at the level of business inventories, those are 33% higher than in 2008 and I don’t think the economy grew 33% since 2008.

12 inventories

Source: FRED

Answer: a mild yes in this case.

6. NEW BUYERS HAVE ENTERED THE MARKET

Now, the percentage of Americans owning stocks didn’t really go up that much lately as millennials don’t invest that much in stocks.

13 people invested

Source: Gallup

The middle class left after 2008, typical behaviour, buying high and selling low. If we see another bump like in 2007 where the participation jumped from 61% to 65%, we will know it’s a bubble. Those aged 35 and above are investing a bit but not yet like it had been the case.

14 americans invested

Source: Gallup

However, not investing in stocks but definitely saving for a house. New buyers are rushing into the home market.

15 new mortgages

Source: Bloomberg

Answer: with stocks it is a no but with houses it is a yes. Also, it is important to note the widening wealth gap where those that have invest more and push stocks higher while those that don’t have, simply don’t have to invest.

7. STIMULATIVE MONETARY POLICY THREATENS TO INFLATE THE BUBBLE EVEN MORE (and tight policy to cause its popping)

Interest rates have been already tightening and we can expect more in December.

16 interest rate

Source: FRED

However, just take a look at historical interest rates.

17 historical interest rates

Source: FRED

On top of monetary stimulus, there is huge fiscal stimulus.

18 budged deficit

Source: FRED

On top of the already huge deficit, the deficit is expected to breach $1 trillion in 2019.

So, to summarize on the questions:

19 summary

WHAT TO DO:

Now, that depends on where you are in your life, about to retire or just starting, but in any case, an all-weather portfolio is the key as we are in the late part of the cycle.

debt dalio

Source: Big Debt Crises

We are at bubble top – so a lot of opportunities to diversify by selling what is in a bubble and buying what is in depression. In a global world you can do that today.

If you wish to check how am I building my portfolio as I cashed out of most my long investments during 2015-to 2018, the last being Nevsun – you might want to check my Stock market research platform where I am slowly building my model portfolio that should do very well in this environment.

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Ray Dalio – Big Debt Crises – Summary (video/audio)

Ray Dalio, the legendary hedge fund manager is out with a new book. After the success he achieved with his book on Principles, he has now summarized Bridgewater’s research on debt crises in a new book called Big Debt Crises.

Ray Dalio – Big Debt Crises

The book contains 48 case studies on inflationary and deflationary crises and the first 61 pages summarize the findings. I urge you to read at least the first 61 pages but if you want an intro for it and perhaps prefer listening, here is a summary:

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Mohnish Pabrai – 5 Investing Tips

What I like and admire with Pabrai is his concentrated portfolio. Sometimes, I also have stocks that make more than 50% of my portfolio. So, I always listen when Pabrai speaks. I am connected with him on Linkedin where he shared an article (connect with me if you wish, always nice to meet people) about a recent interview. In this article I’ll go through what he is saying and give my perspective on what we, value investors can learn.

The investing tips discussed are  (5 quotes used too):

  • CONCENTRATED PORTFOLIO AT A PE RATIO OF 1 OR LESS
  • 3 REASONS WHY INVESTMENTS DON’T WORK OUT (CHECK LIST)
  • CLONING STOCK INVESTMENTS
  • DON’T THINK ABOUT MACRO
  • NO INTEREST IN THE US
  • TAKE A NAP

Concentrated portfolio and PE ratios of 1

As I already mentioned, Pabrai has an extremely concentrated portfolio. He buys companies at what he calls PE ratios of 1 or less. He does that by looking at unfavourable industries, like the car industry in 2012, he finds companies that will not go bust and have potential to deliver high earnings in the future. For example, in 2012, he was buying Fiat-Chrysler (FCAU) at an average price of $4. The current EPS is $2.22. If we deduct 40% of the 2012 purchase price as the value gotten from Ferrari, we get to a PE ratio close to 1. Needless to say, FCAU’s stock is now at $17. On top of that, we have to add the Ferrari spinoff that has a market cap almost as big as FCAU. Double the gain there for Pabrai.

FCAU stock price:

FCAU STOCK PRICE

As for finding such stocks, Pabrai tells us how we have to keep our eyes open as such opportunities arise once every few years.

To quote:

What I found over a 19-20 year investing history is that these, what I call the PE of 1s, tend to show up an idea every two or three years.

The last similar opportunity he took advantage off was in Indian real estate in Mumbai. He bought 10% of the company Sunteck.

Pabrai bought Sunteck after the demonetization process hit the Indian economy:

sunteck stock

3 reasons why investments don’t work out for investors?

Pabrai discloses 3 reasons:

The single biggest reason why investments don’t work out for investors is leverage.

This is followed by misunderstanding of the comparative advantage of the moat where investors think there is one but there really isn’t. And the third reason is management. Quality management is what makes the difference between great and mediocre investments.

Cloning stock investments – Portfolio Crown Jewels of other investors

Pabrai discusses how he still hates the auto industry due to high capex, unions and consumer tastes. However, he is humble to say that the only reason he owns Fiat Chrysler is because he studied two investors he admires who had a position in General Motors. As discussed in the video here, Einhorn also opened a position in GM in 2012.

Also, he is so humble to share that he found Rain Industries because someone sent him an extremely well written report:

rain industries

Don’t think about macro

Investors should spend zero time thinking about macro anything. Just completely ignore it because it is hard enough to figure out the future of one business. In almost all cases micro will trump macro in a major way.

Here I must say I agree, the micro will trump the macro in a major way. Over the long term, good businesses will do great and that is what we have to understand. Nobody can time a recession or a bear market. However, Pabrai discloses also how he has lots of cash at the moment. This is probably not due to the macro, but because of the lack of opportunities.

No Interest in the US

The US is becoming harder and harder to invest in.

The number of stocks in the US declined from 8,000 twenty years ago to less than 3,500. Thus, a smaller number of companies and more analysts following those. This makes it difficult to find gems. Up to 5 years ago, 80% to 90% of his portfolio was in the US.

Take an afternoon nap

Usually, I take an afternoon nap on most days.

Pabrai believes you can increase your productivity by taking an afternoon nap and that even Buffett has a nap room in his office.

I always love to learn from the best investors out there, I am not taking naps, I don’t think I need them, but I spend most of my time doing research and looking for undervalued stocks. I am currently looking at the complete list of Chinese stocks traded in the US, trying to find good investments in China, where stocks are still relatively cheap. However, I am intrigued by Pabrai’s less than 1 PE ratio investing which is something possible to do when I think about it. The last time I was buying a stock at a PE ratio of 1 was Cemig (NYSE: CIG) in January of 2016.

If you want to get investing ideas and reports that come from 200 hours per month dedicated on investment research and think that 200 hours of you time is worth more $20 bucks, please check my Stock Market Research Platform. If just one research report leads you to a stock like FCAU or RAIN, you will make one of the best investments in your life. Thus clone yourself as we all have limited time by letting me do some of the work for you.

STOCK VALUATION

Stock valuation – do you need complex math?

The valuation of a stock

The valuation of a stock can be extremely complex or simple. The fight is between two worlds: the academic world and the stock market investing practitioners. 99% of people who invest are academics because that is what you learned at school. Only the 1% are practitioners who have constantly beaten the market over the last 5 decades.

We are going to discuss today:

  • Stock Valuation and input parameters – complex or common sense?
  • Stock Valuation Formulas
  • Methods of Stock Valuation
  • Equity risk premium

How to do stock valuation properly to get good investing returns not academic titles or grades!

To quote Warren Buffett:

“There is so much that’s false and nutty in modern investing practice and modern investment banking, that if you just reduced the nonsense, that’s a goal you should reasonably hope for.”

What is stock valuation?

For example, I recently analyzed Facebook ’stock and my earnings model looks like this:

facebook stock analysis 1

The parameters used are the growth rate and the discount rate that is my required return, a price earnings ratio of 10 for the terminal value which all lead to a present value. All other factors are qualitative and not quantitative, and I don’t believe anyone can put those into numbers. It is funny to compare my model with professor Damodaran’s model from the Stern School of Business at New York University. You can download his model here.

damodaran valuation

This is 50% of the first sheet of the excel file with 8 similar sheets. But let’s just focus on the first steps, the input page.

stock valuation

All normal things like revenue and margins, growth but then we come to the risk free rate and the initial cost of capital.

Munger:

“Some of the worst business decisions I’ve seen came with detailed analysis. The higher math was false precision. They do that in business schools, because they’ve got to do something.”

Stock valuation formulas

Stock valuation formulas can be simple or complex. The initial cost of capital – if you don’t know what is your firms cost of capital, you can compute it in a sheet like the following.

This shows more in detail what is required.

what is cost of capital

So, you are basing your investment decision on the risk free rate, ok, but then also on the beta coefficient, past equity premiums and here is where academics and practitioners strongly disagree.

To quote Munger:

“Using [a stock’s] volatility as a measure of risk is nuts.”

Methods of stock valuation

I always use this example, let’s say you are Luigi and you own a restaurant in Venice. Do you care about the risk free rate, equity premium and the beta coefficient of your business?

Luigi is a smart guy, and he only cares about the number of customers, the price of the ingredients used in the pizza etc. in order to get to the money he will be able to get out of the business in that year. He might reinvest that money somewhere, but then he will again compare what he has to put in, whether it is a good business and what he can get out. Does he care what is the price of his restaurant now or what it was 6 months ago, no, he will never sell it, he is a business owner investor and not a speculator.

Similarly, to quote Munger again:

“In the real world, you uncover an opportunity, and then you compare other opportunities with that. And you only invest in the most attractive opportunities. That’s your opportunity cost. That’s what you learn in freshman economics. The game hasn’t changed at all. That’s why Modern Portfolio Theory is so asinine.”

Buffett, looks at the business he invest in, not about what the market things about the business. That is the difference my friends. If you are studying business valuation and you have paid a lot for your studies, you degree will get you a high paying job and a good return on investment. As for your own investments, they will not benefit from what you are learning in school. All of those things that you learn in school change –  the risk free rate, the equity premium, the beta, everything constantly changes, you have to have a portfolio that embraces those changes.

Yes, academics will be right in their explanations, after the thing has already happened, common sense investing is about investing before the thing gets known to all.

And that is the biggest difference between academics and practitioners. Academics can only look back and estimate what will happen, practitioners can use common sense and street smarts. That is the advantage we independent investors have, 98% of the market is all about academics because you look smart. Those who made constant market beating returns, year after year, decade after decade, don’t use those mumbo jumbo, lollapalooza formulas.

The lollapalooza effect is often discussed by Munger that explains how most people do thing because of social pressure. If you pay $250k for an Ivy League education and all you learn about is the WACC and all of your superiors use the formulas or expect you to use them in you analyses, who are you to do things differently.

Munger: I’ve never heard an intelligent discussion on cost of capital.

BTW, in my Ph.D. all that I did is to compare what Buffett has been saying all his life and what academics. The explanation of stock market price changes from the Beta coefficient came to 5% max, while what Buffett says explained 36% of long term stock price movements.

Equity risk premium

According to academics risk is the standard deviation of a security’s price over a number of periods.

However, others say different things:

Risk is not knowing what you are doing – according to Buffett

Risk is looking for what you don’t know – according to Dalio

Risk is calculating what is the max permanent capital loss – according to Klarman

Risk is not short term volatility – according to Munger

Stock market valuation

Investing is yes about valuation, but not about what the market tells you the value is, it is about what you think the value of the business is and the advantage we have is to buy when the markets backward looking says one thing, but value screams the opposite.

“We don’t give a damn about lumpy results. Everyone else is trying to please Wall Street. This is not a small advantage.” Munger

For example, the recent drop in Facebook’s stock price would have made the stock riskier to academics due to the higher volatility and higher beta, but a real investor would see the stock as cheaper. The more you know about what you are doing, the lower is your risk.

How to do stock valuation

The key things to watch are:

  • Price earnings ratios,
  • Earnings growth
  • Fundamentals – book value
  • Have your own discount rate if you must as it is simply easier to compare
  • Compare investments and invest in the best handful
  • Think what can go wrong
  • KEEP IT SIMPLE

The point is to know the difference between investing success and academic success – academics cannot beat the market when using their formulas and complex analyses, and that is why the continue to discuss the efficient market theory etc. Investment practitioners, those who apply common sense to what is going on, they beat the market over the long term. I have both a Ph.D and I have beaten the market, better to say destroyed the market in the last 16 years just because I applied common investing sense to what I did in the stock market, not academics. So, I can talk about this.

I’ll finish with Munger who is amazing as always:

“I have a name for people who went to the extreme efficient market theory—which is ‘bonkers.’ It was an intellectually consistent theory that enabled them to do pretty mathematics. So I understand its seductiveness to people with large mathematical gifts. It just had a difficulty in that the fundamental assumption did not tie properly to reality.”

If you want to save time by having me do full time stock market research and valuation for you for just $0.68 per day, check my Stock Market Research Platform.

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