Eurobank addendum: Merger with Grivalia

The very next day after the publication of my recent piece on Eurobank, the company announced a merger with Greek real estate investment company Grivalia. The merger will be destructive to Eurobank's per share value long term (by about 30% in my assessment), but the deal does have some benefits, including reducing downside tail risks (regulators forcing another recapitalisation). This arguably makes a larger position now more feasible, as the level of upside is still material. The stock has so far rallied about 10% to €0.50.

Stories, Greek myths, and Eurobank

Human beings love to tell stories. It is thought by anthropologists that throughout much of human evolutionary history, large amounts of time were spent sitting around the camp fire in the evenings relaying stories to one another (there wasn't much else to do). To this day, social gatherings amongst human beings are replete with stories, which are not just pleasant to relate, but are also a form of status competition, as humans compete to one-up each other with better and more interesting stories.

Pessimism on global growth reaches November 2008 levels; is it justified?

The WSJ reported this morning that, quoting BoAML data, "fund managers are the most pessimistic they have been on global growth since November 2008".

Now I find this very interesting. Global markets were a day ago down more than 6% MTD, and outside of the US, markets have been pummelled this year across EM (emerging markets) and Europe. Investors have been gripped by trade war fears, rising short and long rates in the US alongside tightening Fed policy, a rallying USD (harming EM, and creating fears around USD-denominated indebtedness in some of these nations), as well as rising nationalist politics in countries such as Italy. This has created a pervasive sense of malaise, and sent markets into a tailspin.

Activist excess, incentives, and the undersupply of grievance

In recent times in the West, we have seen a trend towards outraged activism being taken to sometimes absurd extremes. Furthermore, we have seen unprecedented steps taken to silence dissenting voices pushing back against these excesses, from the de-platforming (sometimes violently) of speakers in universities; silencing of the media; contrary voices on social media being blocked; and academic research - including in the hard sciences/maths departments - being quashed on account of its non-politically-correct conclusions.* Record numbers of people are also being publicly called out and shamed for apparent racism/sexism where no evidence of it exists. This 'culture of outrage' and PC authoritarianism has seemed impervious to the forces of reason, and the institution of free speech has also come to be seen as subordinate to the primacy of sparing people from offense or discomfort.

When reason fails: Mitchell's damning report; media bias; and disillusionment

I really hate to write another piece on the Kavanaugh saga, as I really do not wish to unduly politicise this blog. However, this is entirely a non-partisan issue for me (I don't even particularly like Kavanaugh - he is too conservative for my tastes), and the situation is simply so important, and so instructive about so many things, that I have been unable to contain a minor obsession with the issue over the past several days, and believe some of these insights need to be shared. And it's not really a story about Kavanaugh, Ford, and #metoo. It is instead fundamentally a story about the failure of both human reason, as well as our media institutions/journalistic traditions, which we rely on to sustain the health of our democracy.

The Venezuelan economic policy manual (satire)

For the good governance and prosperity of the Venezuelan people, we recommend policymakers adhere to the following policy framework:

Kavanaugh-gate and human irrationality

I'm going to wade - perhaps unwisely - into some fraught and controversial territory with this post, but I can't help myself because I think there are so many interesting things to be learned from the ongoing Kavanaugh saga with respect to the psychological fallibility of humankind. And, believe it or not, it does have investment implications.

The Australian housing bust: Why this time is different

In recent months, media articles have begun to surface highlighting the fact that Australian property prices have started to fall, and indeed in some suburbs of Sydney, have already fallen about 5-10% from their peaks. The response from the establishment has been predictable - there is no need to worry; prices will moderate somewhat, but a crash is far fetched. We have heard all this doom-mongering before, they argue, and the doubters have always been proven wrong. This time will be the same.

On China's (putative) real estate construction bubble... facts vs narratives

The consensus opinion in many parts of global financial markets is that China's economy is little more a giant leveraged real estate and infrastructure construction site at present, coupled with an export manufacturing sector that is soon to have its competitiveness undercut by US tariffs. Most value managers will not touch iron ore stocks, for instance, despite low valuations, believing that it is only a matter of time before steel and iron ore demand collapses as an unsustainable pace of Chinese debt-fueled real estate and infrastructure construction comes to an inevitable end.

The correct way to think about risk

In my opinion, most stock market investors fundamentally misunderstand risk and think about it in the wrong way. Most investors abhor risk and see it as their goal to minimise their exposure to it, to the maximum extent possible. They try to pick companies to invest in which have the most assuredly positive and low risk outlooks. They want strong businesses, and stable earnings/cash flows/dividends, and so abhor cyclicals. They want good management and pristine corporate governance. They want strong balance sheets, and they don't want any sort of uncertainty about the company's future, including risks from new competition or technological change. And they want to invest in countries where the macroeconomic and political outlook appears strong and stable. They want all these things because they want to avoid risk, because the absence of any of these factors does, in fact, increase the chance of subsequent investment losses. They don't mind paying a higher price, because it's all about investing with (seeming) assurance of a decent outcome.

The ethics of ethical investing

In recent years, there has been a trend towards the launch and promotion of 'ethical' funds, that forbid investment in companies engaging in various activities considered unethical. Common exclusions include 'sin' stocks involved in industries such as gambling, tobacco, and alcohol, and companies considered to be occasioning harm to the environment (such as coal miners). In addition, even outside of 'ethical' funds, it is sometimes argued that it ought to be incumbent on investment managers to take into account the ethics of the activities undertaken by the companies they invest in, and avoid companies engaged in 'unethical' activities.

Is Elon Musk's attempted Tesla privatisation a covert bail-out?

I've been a long time follower and admirer of Elon Musk. I've listened to all his interviews, watched many of his presentations, and read the excellent biography written by Ashlee Vance. The serial entrepreneur has achieved feats of growth and innovation over the past 15 years that ex anti most (myself included) would have considered impossible.

A capitulation point in Turkey?

If the media and financial market consensus is to be believed, Turkey is currently in the midst of a veritable financial crisis. Yet in truth, there is no such crisis at present - at least not yet - and although one is certainly possible, that outcome is far from assured. What we actually have at the moment is merely a crisis of confidence (and, perhaps, in domestic civil/political liberties), and for the former, is one that may already be close to peaking. While it is impossible to definitively call any sort of capitulation point, the below chart of the USD/TRY certainly appears to indicate to me that we are either at or very close to the proverbial capitulation point.

The (real) cautionary tale of David Einhorn

Greenlight Capital's David Einhorn was recently the subject of a widely-circulated hit piece by the Wall Street Journal, which came a few weeks in advance of Einhorn reporting a truly disastrous 18% loss in the first half of 2018 (in rising US markets). This result capped a abysmal 30 month stretch of performance, which has seen the former star's cumulative losses mount to some 30% (during a bull market) - a fall from grace that has attracted considerable media attention.

Trade wars, economic ideology, and why Trump has a point

Trade has become a hot-button issue this year, with Trump having already implemented several rounds of tariffs targeted (primarily) at China, and threatened to continue ratcheting up measures should China follow through with retaliatory measures. The policies have created fears of a brewing trade war, and Trump's bluster has bewildered and dismayed many observers. However, the issues are in my opinion poorly understood and almost never properly articulated.

New valuation metrics for tech companies, and Spotify

There is a very old saying in markets - that the four most dangerous words in the English language are 'this time is different', and that is particularly true when the bulls start advocating for the use of new valuation metrics over tried and tested favourates, as prices outrun anything remotely resembling what can be justified by the old. This sort of soothsaying is long discredited for good reason - is has often accompanied major market tops, and been revealed to have been folly in the cold, sober light of the ensuing bust.

Why value investing works and will continue to work

I am often asked why I expect value investing (traditionally defined as focusing on buying sectors of the market trading at relatively low multiples of earnings, assets/book value, and cash flows*) to continue to 'work' in the manner it has historically, given that we now live in an age of advanced computing power and widespread information dissemination. Surely, it should be a simple matter these days for algorithms to screen for quantitatively cheap stocks and buy them up, quickly arbitraging away any excess profit opportunity. Low multiple stocks must now all be ones fully deserving of such a low rating, and the opportunity which existed in the past in Ben Graham's day was a function of highly inefficient and unsophisticated markets, and is thus no longer relevant.

Gold's hidden risk

Gold has been a longtime investment favourate of many investors, despite its lackluster long term track record,* and not just for perpetual merchants of doom, who view the shiny metal as an attractive call option on financial disaster. Joining their ranks are a number of 'value' investors that have promoted and owned gold in the post-GFC era, with the bull case usually centering around the metal being a hedge against hyperinflation or other unintended consequences emanating from experimental central banking policies seen in the post-GFC period. Reference is also often made to the significant underperformance of gold over the past decade vis-a-vis central bank monetary base expansion.

Motivated reasoning and the root cause of intellectual intolerance

To anyone who has been paying attention to issues of free speech and radical liberalism in places such as the US (and increasingly in most Western countries) - particularly on US college campuses - an intriguing and troubling trend has become increasingly evident in recent years, to an extent I have hitherto struggled to fully understand. Acrimonious and often violent opposition (particularly at the hands of the ironically-named ANTIFA - an 'anti-fascist' activist group happy to use fascist means to support their cause) to many conservative viewpoints seeking to counter the liberal consensus, has found expression, with speakers often being forcibly de-platformed.

Samsung, and how to make money without a crystal ball

It is popular in markets to make definitive predictions about the future, and then position one's portfolio to benefit should those predictions come to fruition. Superficially, this approach seems to make sense - after all, future outcomes will be dictated by future events, and so surely you should try to predict what is going to happen, because what happens will drive future outcomes.

Why Russia public display of nuclear strength is paradoxically comforting

In his recent state-of-the-nation address, Russian president Vladimir Putin demonstrated new nuclear capabilities the nation has been developing, including a fleet of missiles capable of evading the US's anti-ballistic-missile defenses. This is not brinkmanship of the reckless North Korean variety, but is nonetheless a public display of nuclear force and ambition that has alarmed many observers. Some have concluded that that the world might be quickly heading towards a nuclear confrontation.

Favouring the specific over the general; Tinkoff and Washington Prime Group

In markets, there is a frequent biasing of the general over the specific, and it is a recurring source of opportunity for investors that are prepared to set aside preconceived notions; dig a little deeper; and favour the specific over the general in their investment process.

Does money make you happy?

It's an age-old question, and is one that is usually answered a lot less well than it should be. As is usually the case for questions like this, the truth is much more complicated than a simple yes or no answer, and I hope to shed a little bit of light on the issue below.

Expedia and dodgy accounting

I took a quick look at Expedia (EXPE US) last night (yes, this is indeed how I like to spend many of my Saturday evenings). Expedia is one of the world's largest online travel agents (OTAs), and owns a bunch of lodging platform websites you've probably heard of/used - both its namesake expedia.com, as well as hotels.com, Travelocity, Orbitz, Wotif, and HomeAway, as well as air ticket, rental car, and cruise ticket booking operations, and travel media site Trivago. The company's primary competitor is Priceline (owner of booking.com and various other sites), as well as - to a lesser extent - AirBnB and TripAdvisor.

Life expectancy and the cost of capital

It is popular in many financial circles to compare the level of asset prices (which is the inverse of the cost of capital) to 100-year market valuation averages (or sometimes even longer - I heard some hyperbole the other day that asset prices were at '2,000 year highs').

Bargain stocks in HK/China; no-brainer investing; and Dongfeng Motor

Despite the putative universal overvaluation of global equity markets at present (although the current correction, which Jim Grant would describe as the 'value restoration project', is starting to mitigate that), there are still in fact a large number of extraordinary bargains to be had for the industrious stock-picker. One just has to be prepared to look a little harder for them, in unusual and out-of-favour corners of the market. Obvious bargains have disappeared; non-obvious bargains have not.

Some thought's on the market's recent volatility

It's been a eventful week for markets. After a long period of subdued volatility and steady (and accelerating) gains, global markets suffered a pronounced setback, led by the S&P, which fell 7% in two trading days. Global markets followed, as did oil and commodity prices, while emerging market currencies fell and safe-haven currencies such as the Yen and USD rallied. The selling was indiscriminate, with everything dropping in unison, with few places (on the long side) to hide. What is going on, and how should investors be responding to it?

Market efficiency and Telecom Italia Savings Shares

The market is supposed to be efficient. There are a lot of smart and hungry investors out there competing vigorously with one another to feast over whatever bargains the market happens to be offering up, if any. These efforts are supposed to neutralise each other, and drive a high level of market efficiency. And yet, in practice, I continue to be confronted on an almost daily basis with the most bizarrely obvious mispricings, and sometimes to a degree I can scarcely believe.

Bitcoin holder alert: financial libertarians beware

A few days ago, news emerged that Japanese cryptocurrency exchange Coincheck had been hacked, with more than US$500m worth of digital tokens reported to have been stolen. This is just the latest in a string of cryptocurrency exchange hacks. Back in 2014, for instance, Mt Gox - then the largest Bitcoin trading exchange in the world, handling an estimated 70% of all global Bitcoin trading - reported that 850k Bitcoin had been stolen (about 4% of the total amount of Bitcoin that will one day be on issue, and 'worth' some US$9.0bn at today's prices). If you were one of the unlucky customers that held Bitcoin or other affected crypto custodised by these exchanges, then tough luck. Your money is gone, and you have no recourse.

Which job offer would you prefer? A value vs. growth allegory

Suppose I was to offer you two job opportunities. For one, I would pay you a flat US$500k a year, in perpetuity (the value option). For the other, I would pay you US$100k a year to start, but would increase that by 20% per annum thereafter (the growth option). Which one would you prefer?

Bill Miller & the coming equity bubble

There is currently a generally held view that one of the biggest risks global equity markets face at present is that interest rates rise more rapidly than expected (perhaps triggered by inflation stirring). I have, to some extent, shared that view. However, Bill Miller - an investor I rate very highly* - has just posted his 4Q letter to investors, and in it, he weighed in on this issue with an interesting perspective:

Finding investment ideas, Brighthouse Financial; Dignity plc; and favouring breadth over depth

I am often asked how I source my ideas - particularly operating as a one-man band running a global equity fund. I currently have approximately 150 stocks in my portfolio across more than a dozen countries, and typically generate about 4-5 new ideas a month. This month has been particularly productive - I have unearthed 10 ideas, or nearly 1 every 2 calendar days, and if I work in a focused manner, I am sometimes able to go at a rate of 1 a day (so much for global markets being devoid of value opportunities).

Why US drug prices have been rising, not falling

The US pharmaceutical industry is fundamentally broken. As has now been widely publicised, drug prices have been rapidly rising for several decades now, and the pace of increase has accelerated in recent years, with the price of a number of low-volume highly-specialised drugs in many cases increasing by several hundred percent. Valeant Pharmaceuticals and Martin Shkreli have been obvious offenders, but the practices have been systemic right across the industry (Shkreli's main mistake was putting up prices a lot in one go instead of steadily over a decade, and doing so with such repulsive smugness).

Exit humility; enter mental flexiblity

It is often said that successful investors require a paradoxical blend of confidence and humility. Confidence, it is argued, is essential so that an investor is able to maintain the courage of their convictions, and have the fortitude to go against the crowd when necessary. Humility, though, is said to also be an important counterweight, because a willingness to change ones views and admit that they are wrong is also absolutely essential. It is argued that too much unchecked confidence can lead to disastrous outcomes - too much risk taking, and an inability to correct mistakes.

Why is society becoming so polarised?

We are currently living in an era of increasing societal polarisation, in which the level of popular angst, outrage, and disagreement over various social issues has reached fever pitch proportions. As has now been widely publicised, in the putative Land Of The Free, free speech has been under assault on college campuses for some time, attracting often violent opposition to guests speakers (Ben Shapiro recently required US$600k of security to be able to speak at Berkeley). Defenders of those speakers argue that freedom of speech is an essential institution that needs to be defended (and if not on college campuses, then where?), and that in many cases those speakers have valuable contributions to offer. Meanwhile, opponents claim that these speakers are actually just smuggling in racist, sexist, or otherwise objectionable views and hate speech under the guise of 'free speech'. What on earth is going on?

Multi-disciplinary thinking; the gender wage gap; and amoral markets

I am a big fan of multi-disciplinary thinking. I think it leads to vastly superior judgement, and in the field of investing, superior judgement is the cornerstone of generating superior returns. Investing is a competitive pursuit that requires one to have superior insights to one's competitors in the market, and multi-disciplinary thinking - because it is so rare and difficult - can act as an important competitive advantage in this regard. It is also important in the field of policy analysis and in many other fields where complex judgement is required (but unfortunately, is too frequently lacking).

The real (and misunderstood) economics of disruption

We are currently living in an era of putative radical disruption. New players such as Elon Musk's Tesla Motors are - it is argued - disrupting the automotive industry; online e-commerce is disrupting bricks and mortar retail - some would argue mortally; solar is disrupting the conventional power generation industry (so it is argued); Netflix is disrupting the media distribution and content industries; and WeWork the office space industry. I could go on. It is now reported that hundreds of privately-funded 'Unicorns' with mark-to-capital-raising valuations in excess of US$1bn now exist, all promising to uproot formerly incumbent and highly profitable established 'old world' businesses.