Below are the 10 most recent journal entries recorded in ezrastiles' LiveJournal:

Thursday, January 22nd, 2009
10:12 am	My new blog... is at rationaldegen.com (1 Comment |Comment on this)
Tuesday, May 6th, 2008
1:10 pm	Yahoo vs. Microsoft, battle of the incompetents? It's interesting that few public commentators have figured out who the big loser was in the failed Yahoo/Microsoft merger. It's pretty clear if you think about the facts. Microsoft was offering close to 70x earnings for Yahoo, a business that has had profits decline for three straight years and had revenue growth decline to under 10% last year. It did so because it's own internet business is a disaster that lost $700M last year. Yang was the biggest loser, because it's very unlikely that Yahoo will be worth anything approaching $34 a share for many years to come. Yahoo appears to have about 50 cents per year in earning power, with the hopes of a turnaround that would boost margins so that it might be able to earn over $1 per year. I'd have to be very convinced that a substantial margin improvement was real and achievable to pay even $10 a share for Yahoo right now, so needless to say Ballmer was overpaying by an incredible margin. Yang's decision immediately hurt his own shareholders and his own net worth. Why would Ballmer pay so much? Well his problem is his own internet business, and by combining it with Yahoo, through "synergies" and reduction of overlap and losses in the MSFT unit, maybe he could find those margin improvements, even though the combined company would still be running behind Google. Even if it earned MSFT a couple billion a year (more than double Yahoo's current rate) on an investment of $50B+, that's a far from robust return of 4%. It's all part of a pattern that Ballmer has repeated continuously since he became CEO, that he flunks the most important CEO job, efficient capital allocation. Ballmer has flushed $10B down the XBox toilet since 1999 or so, with little chance of ever earning that money back. The XBox is finally profitable today as it hits the peak of it's cycle, but when the current console starts to age Microsoft will again have to lose billions subsidizing another new console just to keep up with Sony and Nintendo. And surely shareholders will eventually rue another four letter word, Zune, as much as XBox. Instead of spending $50B to try to bail out a failed strategy, why not just shut down the internet division and increase earnings at last 5% in one fell swoop? Why not focus on core competencies in operating systems and Office, and return all excess cash to shareholders so they can actually invest that cash to earn positive returns? Even if Windows/Office eventually go away, shareholders will likely be far better off without the side business distractions. For example, foregoing market returns means that the Xbox investment has cost Microsoft shareholders at least $20B in value in the last decade. Another decade of "investment" and the shareholder loss will easily compound past $40B. So it's a tie. Two incompetent CEOs, both equally deserving being near the top of the "worst CEOs" list. But sadly, given public perception, only Yang will end up with the title he deserves. (1 Comment |Comment on this)
Wednesday, March 26th, 2008
4:16 pm	Buffett, Seer of the Future Warren Buffett's stock market predictions from 1999 This is interview with Warren Buffett took place in mid November 1999. It's interesting for several reasons. First, he explains how you should think about how interest rates drive investment (not just stock market) valuations. Second, he talks about how average investors lose so much to transaction costs. But most importantly he makes the following prediction. Let me summarize what I've been saying about the stock market: I think it's very hard to come up with a persuasive case that equities will over the next 17 years perform anything like--anything like--they've performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate--repeat, aggregate--would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%. The S&P 500 was about 1422 the day before this was published. It's 1341 right now. Add in about 2% per year for compounded dividends would add another 280 to the index, about a 1.5% annualized return. Now Buffett's prediction hasn't been spot on for this 9 year period, but that's probably good news. It means that we are likely to see much better returns for the next 8 years of his 17 year period. And 17 years might not be enough to get back to 6%. When Buffett made his prediction note the yield on the S&P 500, all of it's after tax profits divided by the prices investors were paying for it, was only 3%, one of the lowest yields in it's history, so it was clear the market was due for a big correction. Today our yield is over 6.5%. Which is close to the median yield in it's history, and predicts that investors today will get something near it's median historical returns in the future, 8-9%. Remember when Buffett made these predictions he was mostly ignored, or ridiculed (old man is out of touch with the "new market"). Investors were beginning to think that even 10% returns for losers, they were extrapolating recent history into the far future. Today, staring fixedly back at the road they just traveled, most investors have rosy expectations. A Paine Webber and Gallup Organization survey released in July shows that the least experienced investors--those who have invested for less than five years--expect annual returns over the next ten years of 22.6%. Even those who have invested for more than 20 years are expecting 12.9%. Lastly the article contains one classic quote. I like to think that if I'd been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public-spirited enough--I owed this to future capitalists--to shoot him down. I mean, Karl Marx couldn't have done as much damage to capitalists as Orville did. (Comment on this)
10:25 am	Business scam #3 - The freecreditreport Bait And Switch So I'm about to refinance my home, and decided to use FreeCreditReport.com (an Experian company) to check my credit. They ask for a credit card but lead you to believe it won't be charged (though they mightily try to upgrade you). A month passes. My wife checks our credit card statement for fraudulant charges, and finds one. She also finds a curious charge that isn't clearly identified (CIC). I call the number and find out that since I didn't call them to cancel my "membership" they are now billing me about $12 a month. I tell her to reverse it and she tells me that I "agreed" to it and it's a "valid" charge. We'll see what my credit card company says about that. But in the mean-time, I find it curious that Experian, a large multinational credit rating business, runs a scam operation. How many people are getting billed every month not knowing that Experian is ripping them off this way? I thought it was the province of small time hustlers to put hidden charges on your credit card. But Experian shows that sometimes, even a very large corporation is run with very little ethics. (1 Comment |Comment on this)
Tuesday, March 25th, 2008
9:24 am	Wall Street Ethical Lapse of The Day VaxGen (VXGN) really wants it's shareholders to approve a merger with Raven. VaxGen is one of those walking dead biotech company failures whose remaining value is a big pile of cash. Raven is one of those cash burning biotech ideas, so on the surface they make a nice couple, like pairing a vampire with a hemopheliac. But one of VXGN's shareholders is trying to convince others to vote down the merger, thinking that a liquidation that returns most of that big pile of cash directly to shareholders is the better idea. I won't bore anyone with specifics of whether a liquidation actually makes sense here, but I will point out an interesting tack VXGN has taken. Obviously VXGN management and board has strong emotional reasons to effect a merger, and even if Raven's chance of success were remote, they'd probably still recommend a merger. To operating executives a liquidation would appear to be a failure on their resumes, while a merger would look like a triumph. Even if Raven burns the remaining cash and dies a few years later, who really checks on those things? And all these guys (I can use that term since I didn't see one woman in upper management or on the board) are from the Biotech world, where burning massive amounts of shareholder cash is just standard operating procedure. Right now they are heavily incented to put it all on a single roulette number and spin the wheel, in the unlikely event a financial success is created they can bask in the triumph, if it fails, well most new drugs do, and no one in the business will hold that against them. So today they put out a press release attacking their pro-liquidation shareholder. They reference a report issued by Sharon Seiler, Ph.D., the Senior Biotechnology Analyst at Punk Ziegel and Co. She subtitled her report "We endorse the merger and remain cautiously optimistic regarding the vote" and in it states: "We think a shareholder vote to reject the merger with Raven would represent a fairly disastrous outcome for VaxGen and would view it as a clear signal to sell VaxGen shares." Punk Ziegel already assisted VaxGen with getting their OTCBB listing. Dr. Seiler isn't a dispassionate analyst of their prospects, since clearly Punk Ziegel wants as much VaxGen business as possible. And she's a biotech analyst, and probably wouldn't understand a liquidation process if were explained to her in very simple powerpoint slides. Why should she? She's a PHD in biology who only exists in the investment banking world to analyse new drug discoveries and try to determine what the next great drug is. But you can bet that your superiors let her know what she should think about it. Punk Ziegel has a terrible conflict, and can't be trusted to say anything about this merger or VXGN's prospects honestly. There is a less conflicted organization that has already weighed in. ISS, while not perfect, at least isn't running after investment banking business. And it's already recommended a vote against the merger. (Comment on this)
Monday, March 17th, 2008
9:49 am	S&P price getting interesting? If I calculated it right (SP500 $1271, 2007 EPS $87.51), the S&P 500 earnings yield is 6.8% on trailing earnings right now (a 14.5 trailing PE). That's one of the highest yields since 1989. Dividend yields are over 2% for the first time since 96, probably about 2.2% at today's prices. Normally I'd say that's a very good buy sign for passive investors looking to buy the index. But there are a couple disturbing things about it. First, that $87.51 earnings in 2007 is up from $44 in 2001, about 12% per year. That's a pretty hefty growth rate, even if it comes off a trough year. So you should wonder if last years earnings are a little puffed up. But more importantly we appear to be entering a recession. Expectations are likely that those earnings will come down. So if 2008 S&P earnings are $75, you are still paying a 17 PE. Probably not horrible, but not great either. The historical rule of thumb is that PE ratios should be around 15. You can argue they should be higher now due to better tax treatment of capital gains/dividends, so investors should pay more. Maybe 17/18 is reasonable then. But in the 1973 the S&P earnings yield reached 13.64% (a 7.3 PE with a 5%+ dividend rate). I doubt we'll see that ever again, simply due to the tax changes. But given oil prices, commodity prices, the dollar collapse, and our deficits (and the fact that deficit reduction is around #100 on the priority list of our remaining presidential candidates), it certainly feels like the seventies again. Maybe a lower PE is on the horizon. I doubt anyone will who buys the S&P 500 today at $1271 will be in a losing position five years from now, and in ten years they'll have a decent return. Anyone who bought the S&P at it's peak in 1972 was nominally underwater until 1980, but that doesn't count the 4% per year dividends they were earning. Todays price is a much better value than 1972s was, so I think it's indisputable that it's a good price to buy for long term holders. The only question is whether you'll get a much better price in the next few years, say $1100 or even $1000. If the economic news worsens, corporate earnings decline, you almost certainly will. (Comment on this)
Saturday, March 8th, 2008
11:23 am	What is speculation? I found the following post on the motley fool berkshire forum very interesting, in a discussion about what value investing is and what Warren Buffett (and his partner Charlie Munger) actually practised. From Charlie Munger (in his Almanac) we have: We look for a horse with one chance in two of winning and which pays you three to one. You're looking for a mispriced gamble. That's what investing is. And you have to know enough to know whether the gamble is mispriced. That's value investing. It would appear that Charlie Munger thinks investing IS Gambling. I think the apparent conundrum is to view all gambling as speculating. In the world of gambling, I don't think there is a term for value investing, but there is a term called a 'sharp gambler'. "The sharp gambler stay way from bets that are for suckers. He or she is only concerned with getting good value" "There are three main factors that make up every successful gambler: money management, value and knowledge" http://knowhow-now.com/index.php?page=article&article_id=27650 Essentially, a true professional gambler is not much different than a value investor. His or her goal is to only bet when they get "the best of it", as in Munger's example. There are professionals such as Doyle Brunson, the late Chip Reese, etc, who built very successful careers gambling in the few areas where the gambler can have a positive expectation (poker, sports, props), and finding ways to intelligently maximize their expectation. Another example would be the MIT blackjack teams who pursued an activity (blackjack) that overall has a negative expectation but with a strategy that gave them a long term positive expectation. So I think when we use the term gambling we refer to a whole range of activities, most of which are just speculations with negative expectation, much like investing refers to a whole range of strategies, few of which actually offer market beating returns. Successful long term gamblers follow value investor like strategies. They manage their bankroll (portfolio) carefully, never risking too much on a single gamble (investment), and are selective, putting their money at risk only when they have factual evidence the odds are in their favor (buying at a discount to value). So what's the difference between speculation and investing? In graham's definition required thorough analysis, safety of principle and adequate return (and no margin). Remember that he wrote those words during his most conservative period, after getting crushed in the  great crash. That description favors bond investing and almost precludes stock investing. That's just too tight a definition if taken literally, remember Buffett has used margin before, in his arbitrage operations, so is he a speculator? Wikipedia gives a broader definition of speculation, "to profit from fluctuations in its price as opposed to buying it for use or for income via methods such as dividends or interest". And that's closer to one I agree with, and I think Buffett would as well, my only quibble would be to change "use or income" to the broader term, "value". Essentially, a value investment isn't speculation because of the intrinsic  value of the investment, as based on it's income/assets. It may trade higher or lower over the near future and we shan't care much, because our margin of safety is provided by that essential IV. Eventually the price will move to reflect that value, or management will take actions to force it to (buybacks, dividends, merger, sale). What Munger is saying, that even in value investing there is uncertainties. You may encounter a company that you are sure is worth $10 per share if it doesn't go bankrupt. You are also very sure that the chances of bankruptcy is at most, 50%. The stock is trading at $3.33. IV if no bankruptcy $10, IV if bankruptcy zero. It's the exact same situation, you are getting a three to one payout on a one in two opportunity. That's a value investment, albeit one with high risk, or as a gambler would say "variance". (Comment on this)
Tuesday, December 5th, 2006
11:40 am	Paul Phillip's recent post on his trouble writing a novel got me thinking. I have many of the same motivational problems, for similar reasons. Unfortunately I'm not as wealthy as Paul, just barely well off enough to have similar problems. Right now I'm off to start a new business, which leaves me the problem of my last unfinished script. Do I just abandon it to die in infancy, unknown, unwanted? Or do I release it to the world and hope it finds a home that will nurture it and allow it to achieve it's destiny as a major hollywood blockbuster? I'm choosing the latter, partially out of hope, partially to satiate my own ego. So to this end, I'm going to provide a brief outline of the story and donate to the creative world. If you like it, go ahead, take the idea and do what you want with it. If you want my assistance, just drop me a note here and I'll be happy to provide you the unfinished script and further ideas. I ask no financial compensation, just that if you do write and sell the script, that you try to list me in the "story by" credit section. If union rules prevent giving me credit without compensation, just can send me a letter thanking me so I can frame it for my office. FADE IN: The story starts in the air traffic control center at LAX, Los Angeles International Airport. It is early evening, and the controllers are in the middle of their shift change. But one of the new controllers quickly notices something is amiss. A large international flight that had departed less than an hour previously, bound for Sydney, Australia, has dropped off the rader. It's transponder has suddenly stopped broadcasting. Strategic Air command is notified. Their sensitive radar quickly reports the plane is still in the air, but is backtracking at a much lower altitude, returning to Los Angeles. All attempts to contact the pilots fail. Fighter planes are scrambled out of San Diego and cleared for supersonic intercept. The general in charge of air defense notifies the white house. A 747 loaded with fuel, twice the size of the planes that brought down the World Trade Center, is silently headed directly for greater Los Angeles. Fifty thousand baseball fans are in Dodger Stadium for a night game, and a large street festival is being held downtown. Gridlock means there is no possibility of evacuation in the minutes remaining. The general urgently requests the president informed, before he's forced to make a decision to shoot down a plane with 400 innocent passengers, or stand by and do nothing as as potentially a terrible terrorist attack devastates greater Los Angeles. The fighters intercept the 747 at low altitude in the darkness. It's navigation lights are off, and as it cuts through heavy clouds, can barely be seen as a monstrous presence coursing towards the rapidly approaching city. LAX air traffic control tries everything to get in contact with the plane. The controllers know the crew. They argue with Strategic Air Command over whether it could be a mechanical emergency, and beg for more time. But there isn't any more time. The plane is getting too near. The lead fighter takes up kill position trailing directly behind the dark jumbo jet. The general makes on last call to the white house, but the president still cannot be located. Finally, before it's too late, the general does his duty. He gives the command to bring her down. The fighter pilot unlocks his firing controls. CUT TO: Two weeks earlier. Okay, that's enough to see if I can pique anyones interest. The remaining script is a series of overlapping stories, bouncing between the story of how we got to here, and the investigation afterwards. It's a fast paced, action oriented story against the backdrop of the "war on terror", exploring the questions around what we are doing to defend our country. It's story of emigrants who love this country, and are hated by it. It's a love story with a strange twist. It's a political story about leaders who demand the authority to protect the country, but duck out when it comes to making tough decisions. All these stories converge until we find out what really happened that night. Drop me a comment if you like it. Or if you hate it. Either way I'd like your comments. (Comment on this)
Sunday, June 4th, 2006
12:06 pm	Vonage, hot stock of the day? I was breezing through Barrons this weekend when I came across the analyst recommendations section, and for some reason one recommendation caught my eye. Before I start, please don't think me an idiot. I know that analyst recommendations are typically worthless. Analysts are much like teachers. Those who can't invest, instead write mind-numbingly long "analysis" pieces on investments. Kind of like I'm er, doing here now. Except my analysis will be short, sweet and hopefully entertaining. The only reason this recommendation caught my eye was that I had just looked at Vonage's IPO prospectus for a very silly reason (since I know full well IPO's are rarely the place to find great investments). Vonage was in the news because they were gracious enough to "allow" their customers to buy shares in the offering, shares that promptly plummeted. But Vonage's underwriters were smart enough to make Vonage guarantee payment on this "special offer", so Vonage customers were figuring out they didn't have to actually pay for their shares. I.e. the underwriters weren't going to come after them, and Vonage couldn't either since it probably didn't have the legal right, and if it did it would be too expensive and embarrassing. So the question came up on 2+2, now that Vonage has dropped to $12 (from the $17 offer) is it a buy? I took a quick look at the prospectus, which was quite amusing. In the first three months of 2006, Vonage took in $118M in revenue, and spent $201M, for a loss of "only" $85M. Yea I can't figure out where they lost the extra $3M either. They spent about $98M to add 328k customers, or a cost of about $300 per new subscriber. Their net margin for each customer is about 19% (including SG&A costs). Assuming the average customer pays $25 per month, that $5 per month in net profit will break even in only 5 years. Of course, Vonage is losing 28% of their customers a year, so it's extremely unlikely the average customer will be around more than two years. How does a business like that scale? My guess is very badly, losing more money the more subscribers they add. Of course, I'm including SG&A (sales, general and admin) costs as part of their service costs. In reality it should decline as a percentage of sales as they grow (and it has). But for Vonage to break even it has to decline from 45% of sales to roughly 25%. Or customer turnover has to shrink. Or revenues per customer need to grow. Any way you look at it, profitability is far off in the future. And I can't figure out Vonage's competitive advantage or what makes it a good business model. It sells a cheap service to cheap people who regularly dump it. It's competitors are the cable companies that already have these people as customers and have already sold them cable and high speed internet. So it's trivial for their competitors to add customers much more cheaply than Vonage. And I wonder if my calculation of customer acquisition costs is even accurate. It would be easy for Vonage to hide some of those costs in other categories, but of course that would be very unethical. Which leads me to the prospectus's description of Vonage's founder. "During a portion of the time Mr. Citron was associated with Datek Securities, the SEC alleged that Datek Securities, Mr. Citron and other individuals participated in an extensive fraudulent scheme involving improper use of the Nasdaq Stock Market's Small Order Execution System, or SOES. Datek Securities (through its successor iCapital Markets LLC), Mr. Citron and other individuals entered into settlements with the SEC in 2002 and 2003, which resulted in extensive fines, bans from future association with securities brokers or dealers and enjoinments against future violations of certain U.S. securities laws. The NASD previously had imposed disciplinary action against Datek Securities, Mr. Citron and other individuals in connection with alleged violations of the rules and regulations regarding the SOES" So Vonage is a very speculative investment run by a very sketchy individual, burning cash much like the great internet stocks of yore. It needs more cash to stay alive (the $175M as of March 31 is barely two quarters burn). Essentially it's still a VC stage investment. Except it appears the VC's refused to invest any more. So the Wall Street Journal reports that Vonage put itself up for sale, asking $2B. No takers, much laughter. The end result was that Vonage found the least sophisticated money possible, IPO investors. And now, even after the big drop, VG's market cap is $1.9B. That's still a valuation far higher than they could get from any sophisticated private buyer. If I believed in shorting stocks, this would be a great candidate. I'm shocked that underwriters would take out a company in such horrible shape. Odds of a bankruptcy seem very high. But according to the research outfit "American Technology Research", I'm wrong. Barrons quotes them rating VG a buy at $13. They said "VG has 25%-50% of the U.S. market and is expanding internationally. Customers are on a one-year contract with a low breakage percentage, thus any customer base collapse seems remote for at least six to 12 months... When one looks at lifetime revenues vs. acquisition costs, VG is one fo the top subscriber models..." In the old days, I'd just laugh and say it's just another ludicrous research report issued by someone trying get in good with VG, with an eye towards getting some investment banking business. But given the disclosures on their web site, it appears ATR has no investment bank, and hence no "conflicts". So I'm not sure if they actually believe what they wrote or if it's an elaborate practical joke. Hmmm... 1) They aren't sure how much of the market their recommendation has, 25-50% being a huge range. 2) They think VG expanding internationally is a positive. Based on U.S. expansion does this mean they'll lose gobs more money? 3) They think customers have a low "breakage" percentage. How is losing 28% a year, low? 4) But if that's one of the best subscriber models, it makes one wonder what a bad subscriber model looks like! Lastly they also refer to "enterprise value", ignoring the fact that that big pile of cash from the IPO is going to be burned faster than a baggy of marijuana at a Grateful Dead concert. As I write this a class action lawsuit has been announced over the IPO, claiming it was unsuitable for the customers risk tolerance. I think the cash burn just went a little higher. (3 Comments |Comment on this)
Tuesday, January 24th, 2006
1:56 pm	Who am I? I live in Scottsdale Arizona with my wife, and two young daughters. I am a self employed "Value Investor", and make my living by finding undervalued securities. This of course means I'm a big Warren Buffett nut, since he's basically helped establish the central tenets of value investing. Previously I helped start several software companies and one internet company, all in Portland, Oregon. I also worked for at Apple Computer for a few years. My interests include film and screenwriting. The greatest joy in my life I derive from my wife and my daughter. I know this is a cliche, but that's me, a proudly boring cliche. (Comment on this)