Boston Omaha (BOMN) is a young holding company with about 50% of its capital invested in the static billboard industry. The company seems to have created some interest among retail investors due to the co-CEO’s familial relation to a certain famous investor from Omaha, and on the surface BOMN’s letters are similar in style and format to those of the early Berkshire. The combination of these elements creates an interesting story and a stock valuation that applies a fair amount of belief as well as a willingness to look beyond the basic economics of their primary operating business.
Despite its numerous practical flaws and the many examples which any investor could bring up to contradict its basic tenets, the CAPM model and the fundamental idea that risk and return are perfectly correlated dominates current investment theory. As a result, it also is what the vast majority of financial advisors/professionals across the country explain to their clientele as they advocate portfolios and investments which they believe to be somewhere along the supposed risk/return frontier.
Since 2009 there has been proliferation of VC-funded unicorns in a variety of tech sectors, and the bubble has been blown on the hopes of finding the quintessential dual-sided platform which will monopolize either the search for or distribution of a certain product (or both). As public investors are learning from the recent offering of Uber however, not all “tech” companies and platforms are created equal.
I don’t want to give the impression that investing has much in common with gambling, but the nature of competition and the distribution of profits between players in the two fields have a lot in common. A parimutuel betting market such as horse-racing or sports-betting would be a much closer analogy, but I don’t think that’s as interesting as going with poker.
There was much discussion in 2018 on a temporary inversion of the two and ten year treasury yields, and it almost certainly contributed to some panic as investors widely view inversions in the yield curve as leading indicators of recession. Surprisingly for those who take the position that market timing isn’t possible (it probably is to some extent, but it would likely be difficult and unprofitable to act upon), investors have good reason to believe yield inversions are meaningful, as they have preceded all nine U.S. recessions in the past 60 years with recessions on average occurring 18 months later, with a high level of predictive power according to the San Francisco Fed.
When selling short equities, the investor has pretty much everything working against them. I’ll shortly run through the technical issues before moving on to the more interesting stuff- you can find them on many other websites so I don’t think I’ll need to elaborate much.
There are far worse offenders than TransCanada, but value destruction by management is rampant in many cyclical and/or commodity industries, and natural gas is one which has a particularly high rate of occurrence. There are many natural gas firms, particularly those that focus on upstream operations, which compensate officers at least partially on the growth of both production and reserves as opposed to value creation.
Within financial academia, there are three main groups of thinking regarding public equity pricing, all of which stem from the efficient-market hypothesis and depend on it to varying degrees. The strong form of market efficiency thinkers believe stock prices reflect all information that can be known about any business, including insider information, and that stock prices are wholly unexploitable for above-average risk-adjusted returns.
I don’t know how productive this will be to anyone’s understanding of investment, but I personally found the following to be a very simple and helpful thought experiment. Generally speaking, I believe most investors would benefit dramatically from viewing their investments in the belief that their ownership is completely illiquid and that the only source of returns will be dividends.
A few years ago I had a blog in which I used to post about the details of deep value investing and some of the methods by which an investor could go about exploiting market inefficiencies. Those posts weren't ever brought over to this site and it dawns on me that despite explaining some theoretical concepts, I've never explained much of anything about how I have been generating our performance over the past few years in basic, practical terms for anyone interested in hearing about it.
In the game of Monopoly, all players start out with a modest amount of play money from which they can begin to invest and build their property empire. As players move around the board over and over again, they buy properties, collect cash, and increase their wealth.
This is by far the most important thing I will ever write about investing and it is essentially mandatory reading for anyone looking to become a client and partner of this firm. If you're not with me on this you likely won't be a good fit for us (or for proper investing in general). What I will explain is extremely simple and in my opinion the most important thing to understand and follow in order to achieve excess returns but for whatever reason, it is difficult for most investors to implement in their practice.
This should be a short piece, but I wanted to use a few examples to describe the assumptions inherent in stock prices and why investors need to think through stock valuations. Given that price is a major factor in predicting future returns, investors should of course be unwilling to pay anything greater than the present value of all future free cash flows, discounted at an appropriate rate for any investment.
Before I start this piece on valuation, I just want to say that nothing in business or finance is as complicated as it looks, and nearly all of it is much simpler than you think. I’m going to get a bit wonky in explaining some terms here but what’s important is that the concepts are understood.
In 2013, Eugene Fama, Lars Hansen, and Robert Shiller won the Nobel Prize in Economics. It was an odd trio, given that Fama is one of the fathers of the efficient markets theory and Shiller wrote a book titled 'Irrational Exuberance' in which he discussed the irrationally high stock prices shortly before the crash of 1999.
“I’d be a bum on the street with a tin cup if the markets were always efficient.” - Warren Buffett
“It is hard for me to see how anyone can consider the stock market efficient.” - Phil Fisher
I'm going to take a step back here and talk a bit about macro-economics. Macro-economics shouldn't be relevant to a value-investor's decision making process, but it is fascinating and interesting to study and speculate on.
In this post I would like to summarize my thoughts on how one goes about analyzing an investment. I will focus on the situation where one is analyzing a potential 'good business' which is expected to compound value over time and which you can hold for the long run.
In any lecture or interview about investing, Warren Buffett often says that you should buy great businesses at fair prices. The idea being that as long as you purchase a great business at a reasonable price, the firm will generate higher earnings in the future than it does now, increasing potential future dividends while using retained earnings to increase the asset base and further improve earnings.
In my last post, I discussed the basics of what gives companies competitive advantage and what makes good businesses. In this post, I want to move from the analysis of a business towards the analysis of an investment. The difference between the two? The price one pays to become an owner of the business.