Value investments, and other random lucubrations

Ryan O’Connor, peeved, responds to my Templeton post

I once wrote a post in which I expressed bafflement at how someone as eminently rational as Sir John Templeton could be religiously credulous. Recently, Ryan O’Connor, twitted a Templeton phrase: “If we become increasingly humble about how little we know, we may be more eager to search”. I tweeted back, saying that, unfortunately, Sir John did had not applied that dictum to the “Big Questions”, and linking to my post.

Ryan then wrote back. I was a bit surprised by the number of ad hominems in his reply and its condescending tone, but I won’t dwell on that because it’s always nice to find people who are interested in the same things one is, and who make their case powerfully without worrying about hurt feelings.

So, I thank Ryan for taking the trouble to write, and, as he requested, I’ll address his points:

Once again I’m amused that you fail to see the irony of your implied statement. But I’ll be somewhat charitable because I have no desire, nor the time to get into a flame war atm. Of course Twitter is the worst medium on the planet to do this even if I did but I digress.

I agree that Twitter wouldn’t be ideal; hence this post.

I’ll just say that I disagree with your premise concerning both your definition of knowledge and the query on your post, which is in my experience hilariously off base. I’d guess it’s probably something closer 70/30 with 90% of the 70% being Orthodox Jews/Catholics and the rest agnostic or atheistic. Just my 2 cents.

Here Ryan is referring to my guess that the majority of elite value investors are not religious. It was only a guess, and Ryan’s numbers might well be more accurate. Like I said in my post, it would be nice to see a poll.

Then Ryan asks this double question, and this is where the real fun beings:

Anyhow, answer me this, if the claim that the only things that can be known are those “proven” by math or the scientific method, do you find it the least bit funny/ironic that the claim is itself unscientific and hence self-refuting?

Well, I don’t think science is in the business of “proving” things, but rather of producing, based on the available evidence, the best tentative, incomplete, and provisional models of how the world works.

But, let’s leave that quibble aside and answer the first part of the question: yes, I think that reliable conclusions about how the world works require a combination of rational thinking, observation, and testing, which is science broadly construed. If Ryan thinks otherwise, let him answer my earlier challenge, now reworded: please name one demonstrably true fact we have learned through theology by any other means.

Science, as defined above, is practiced by chemists, but also by detectives, doctors, historians, value investors, and all of us in our daily lives when we want to distinguish false from true, because it’s the only reliable way of doing it.

To those of us who’ve debated “sophisticated” religious people, the second part of Ryan’s question give us a hint of what might come next: a tu quoque attempting to equate confidence in science to religious faith, accusations of scientism, the dissing of science because it’s epistemologically bankrupt, the idea that we could be brains in vats, the presentation of “other ways of knowing” (i.e. religion) as methods that are just as legitimate as science, and a final attempt to connect that to Jesus/Krishna/Allah.

And Ryan doesn’t disappoint, although he stops short of mentioning Jesus (but we might still get there if he’s kind enough to answer the two questions I ask him at the end.)

This is all, of course, an exercise in distracting us from the real issue, one that doesn’t require a philosophy degree to recognize: it’s good to have reasons for what one believes, and the religious don’t have any.

But let’s address Ryan’s points. First comes that silly old argument:

In other words, the claim itself cannot be tested by either one – so on “scientific” grounds, your claim is unprovable and hence an article of faith by definition. Which, for those of us trained in logic, is what’s known as a non-contradiction.

Meaning it by definition can’t be true by the rules of logic. Hence the irony of your silly, absurd dogma.

Which just goes to show the truth of Chesterton’s dictum that there are only two types of people in this world – those that believe in dogma and know it, and those that believe it and don’t know it. You my friend are clearly in the latter camp. So now you know, and as G.I. Joe would say, knowing is half the battle.

In sum, we can clearly see the falsehood of this by looking at the nature of science itself (properly understood), as it’s a practice that rests on underlying presumptions, such as a world outside our minds, the regularity of universal laws, and the ability of the human mind to discover those laws. Given science rests on those assumptions, it cannot prove them without assuming what it sets out to prove — in other words, arguing in a circle.

All right, science can’t be justified from first principles. So what? As Stephen Hawing put it, “science wins because it works”. Or, in the words of Ben Graham, “we think that the strongest logic is that of experience” (who knew Ben Graham could be invoked in epistemological disputes!).

Ryan’s point is just philosophical obfuscation, and, even if he pretends not to, he agrees with me: that’s why he doesn’t worry about the unjustifiable premises of science when he prefers to fly on airplanes over levitating, or when he takes antibiotics over faith-healing, or when he chooses value investing instead of astrology investing. When you need to decide on your next investment, Ryan, will you assume “the regularity of the universal laws” and use the methods of science, or, since you think it will require just as much faith, are you as likely to consult a medium?

Ryan is wrong: we don’t need a philosophical justification to show science beats faith at producing knowledge; we just need to show that one works and the other doesn’t, and that’s easy. Spend your life looking for a philosophical justification if you want – in the meantime, I’ll be making investments by relying on reason and evidence, and scientists will be discovering new cures, while those not relying on reason and evidence will make bad investments and no cures. Ye shall know them by their fruits.

Ryan next hits us with this other bit of wisdom, as if he had never heard a good counterargument:

Truly intelligent minds with razor sharp reasoning capabilities understand this. Which explains why the vast majority of the greatest scientists in human history (throughout the ages), indeed the fathers of every scientific discipline known to man, have been overwhelmingly devoutly religious – most of them where priests.

As a student of logic, Ryan surely knows why arguments from authority, like this one, don’t fly. That’s probably why he wasn’t convinced when I mentioned that today’s elite scientists, who know a lot more than Newton and Kepler, are overwhelmingly unbelievers.

If you doubt that, please, only say the word and I’ll flood you with a list so deep that the twitterverse will know beyond a shadow of a doubt who’s swimming without clothes (read; who knows their scientific history and who reads hack propaganda that no serious scholar believes to be true anymore).

(Cue some howler on Galileo)

Yes, until a few hundred years ago, almost everybody was religious, and yes, some scientists worked ad maiorem Dei gloriam. They also used to believe a lot of other stuff we now consider to be patently false. Today many scientists aren’t religious, because we now know better. Unlike theology, science progresses.

And the scientific method has nothing to do with the idea of God, and scientific progress has come from individual scientists saying, with Laplace, je n’avais pas besoin de cette hypothèse-là“.

Ryan continues:

So to revert back to Chesterton, wise men with superior intellects realize that reason itself is a matter of faith, as it’s an act of faith to assert that our thoughts have any relation to reality at all.

I already answered this: confidence in science is provisional, and justified by experience, unlike religious faith.

Now before you respond, read all of the above twice and then two times more for good measure. I promise it will do you a world of good.

I did as instructed, and the promised “world of good” hasn’t materialized. Maybe I should read it again, but now with an open heart?

Of course make sure to address these exact arguments if you do, otherwise I won’t waste my time responding.)

I think I did.

Then comes the inevitable accusation hurled by “sophisticated” believers:

Bottom line is that I think you’d think/reason much better if you’d dampen your fundamentalist zeal vis a vi preaching the gospel of Scientism, which so clearly blinds you to obvious truths that any logic 101 course would slap right out of you. If only because like with most half baked, suffocatingly narrow ideologies that turn people’s minds to cabbage, it poisons your ability to be TRULY rational and is nothing but an Achilles heal.

I accept the charge of scientism if by it Ryan means that I think the only way to know how the world works is trough reason and observation. But I’d be happy to be shown why that’s silly (it’s easy, just answer my earlier challenge by providing one example of something we’ve learned through other means).

Last but not least, please stop trolling my tweets as if your some courageous, truth telling happy warrior standing athwart the legions of superstitious hordes in the name of Truth. It’s unbecoming and once again deliciously ironic. After all, I’m glad to discuss this stuff offline but it irks me to no end the way you link your second rate sophistry to attack a man far more intelligent, and more importantly, wiser, than you will ever be.

I’ve replied to exactly two of Ryan’s tweets, with a 10 months hiatus between the two. On both occasions he answered back, and because of that, so did I. Most people wouldn’t call that trolling.

But I understand why he’s irked –  it’s a common reaction to criticisms of people we admire and, especially, of our religious beliefs – and am glad that he’s finally dropped the pretense of feeling amusement and hilarity.

I agree with him that Sir John was a far better man than me. But surely he doesn’t mean to say that one should only criticize one’s inferiors?

So as Burry say’s, check your premises! .

P.S. Funny too that you espouse a dogmatic investment philosophy that takes on faith hidden laws that can’t be proven by the scientific method yet are nonetheless obvious truths, you know, such as those superstitious, loony toons ideas like the fact that price and value will always converge given enough time.

Which brings up the question, do you believe in the dogma of reversion to the mean?

If so, based on what?


Same reason: it works.

I’ll be popping some popcorn in the meantime. Your explanations should be entertaining to say the least.

Class closed.

I hope Ryan reopens it, and, now that I’ve answered his questions, allows me two of my own:

  1. Do you, Ryan, believe in the miracle of the resurrection, or in any other miracle? If not, do you have any religious beliefs?
  2. Do you have any evidence for them? Or do you think that you can get away believing stuff without evidence just by questioning the epistemology of science?

More on the mischief caused by Templeton money

I received a hilariously angry email in response to yesterday’s post, and also an email linking to this 2008 article by Dan Gardner in the Ottawa Citizen that does a much better job than me at describing the corrupting influence of the Templeton foundation. 

Here I reproduce some bits, with comment:

But John Templeton’s fundamental belief in the harmonization of science and religion still guides the foundation’s philanthropy, with occasionally dubious results. This includes the foundation’s funding of what Richard Sloan, a professor of behavioural medicine at Columbia University Medical Centre, called “garbage research” into the healing power of prayer. Sloan was so annoyed he wrote the book Blind Faith: The Unholy Alliance of Religion and Medicine in response.

I think when Gardner says “occasionally dubious results” he’s being too nice. I mentioned the $5 million afterlife study yesterday, and if you want another example of a Templeton funded study that is almost certain to deliver very little of value, look at this $2.7 million Philosophy and Theology of Intellectual Humility project. Gardner continues:

The Templeton Foundation is controversial in scientific circles. And yet, its influence grows. How could it not? Scientists and universities find it hard to say no to free money [itwillfluctuate: probably not as hard as I do, so I don’t blame them]. “Largely as a result of Templeton grants,” wrote science journalist John Horgan in The Chronicle of Higher Education, “some 90 American medical schools now offer courses on links between health and spirituality.”

Horgan himself was the beneficiary of a Templeton-funded fellowship for science journalists to attend Cambridge University — a fellowship he accepted reluctantly because, he wrote, “I had misgivings about the foundation’s agenda of reconciling religion and science.” The program of study provided by the fellowship was excellent, Horgan reported, but he was struck by the comments of a Templeton executive who told the journalists “the meeting cost more than $1 million, and in return the foundation wanted us to publish articles touching on science and religion.”

In conversation, Horgan told the official he felt humanity would be better off if, one day, it simply outgrew religion. “She replied that she didn’t think someone with those views should have accepted a fellowship. So much for an open exchange of views.”

Exactly. The foundation is out to promote the idea that science and religion can be BFF, however much it might want to pretend to be a “catalyst for discoveries”. Gardner again:

The Templeton Foundation is no disinterested benefactor. The Templeton Prize is no Nobel. Treating them as if they were is to accept and honour the crude force of money.

And that is an unfortunate legacy for a man devoted to higher things.

Yes, it is unfortunate. And it is an especially sad spectacle for value investors like me who admire Sir John for his investment skills and who hate to see money being wasted.

John Templeton’s unfortunate legacy

There’s a new film out called Contrarian about John M. Templeton, who many of us admire for his investment skill, and who seems to have been a very nice man.

Unfortunately, as the film shows, Sir John put much of the money he accumulated during his investing life into the Templeton Foundation, with what I think have been tragic results.

The foundation’s aim is to help bring about discoveries relating to the “Big Questions” and to “encourage civil, informed dialogue among scientists, philosophers, and theologians“. What that really means is that it tries to make religion respectable by pretending its methods for producing knowledge are just as valid as those of science.

The foundation gives an annual £1 million prize that has often gone to the most prominent scientist it can find who is willing to say that science and religion can be pals, and the “research” it funds includes stuff like this $5 million study of immortality, that gets scientists and theologians to convivially study things together.

The trouble, of course, is that theologians don’t do research and they don’t try to falsify claims, but instead make things up – that’s why centuries of theological work haven’t gotten any questions answered, let alone the “big” ones (if you disagree, please name one demonstrably true fact we have learned through theology).

I think it’s a tragedy that so much money, amassed over a lifetime by a decent, smart, and generous man who wanted it to be used for the good of society, has been spent trying to undermine rationality.

The reason it happened is obvious: as the film makes clear, Sir John was a very religious man. And that’s what baffles me: how can some of us be very objective and rational in one field and at the same time very irrational in another?

John Templeton was a good investor because he could look dispassionately at a security to determine its value. Doing that well requires independent thinking, while religious faith requires believing things on other people’s say so. Good investors bet only when the evidence is clearly on their side, while faith means reaching conclusions on insufficient evidence.

Sir John is not alone, of course. For instance, Donald Yacktman appears to take his Mormon faith very seriously, to the point of having once been a bishop. And bear in mind that Mormons believe some particularly improbable things, consisting of Christianity plus a bunch of other odd ideas.

Templeton and Yacktman are two more names in a long list of people who are very rational in some fields, and also religious believers. But my guess is that, just as religious believers are a small minority among elite scientists, they also are a minority among elite value investors.

Buffett has publicly said he’s agnostic, and although I don’t think Munger has spoken publicly of his beliefs, I’d bet a large amount he doesn’t think Jesus actually resurrected.

Maybe Pabrai believes in reincarnation and Eveillard prays to baby Jesus, but I doubt it.

I’d love to see a poll done.

Jewett-Cameron is doing well, and is still cheap.

Jewett-Cameron’s annual report just came out.

The company did well: book value increased by 18% to $20.6m, despite the idle cash pile, which throughout the year probably averaged something like $7m. That’s pretty good, and Mr. Boone (the CEO) should be congratulated.

Is the company cheap?  This is why I thought the company was cheap back in May:

So, today the whole company sells for $26m ($30m mkt cap + $0 debt – $4m cash), or about 6x the $4.5m TTM pre-tax earnings, which have been growing, and might possibly grow a lot more if their wood distribution business eventually improves. This is in a company managed by a CEO (Donald Boone) who owns over 30% of the shares but pays himself only $40k, who has done a great job of containing the costs of the business that is suffering while growing the business that is thriving, and who repurchases shares like a madman when they’re cheap. Can you ask for better management?

Today, I think Jewett is still cheap, and for the same reasons: even though its market cap has gone up, it still sells for about $26m once you subtract the $8.3m in cash. And it sells at less than 6 times the (growing) operating earnings. And one still gets the great management.

Additionally, since practically all the earnings come from one division (lawn, gardening and pet), at today’s price the other three divisions are thrown in for free. One of them used to make $1.7m in operating income a few years back, and it’s resuscitation, however remote, is at least possible.

One thing I would have liked to see is a lot more buybacks, of which Jewett had previously been doing quite a bit.


Nam Lee is cheap $G0I

It would be silly to write at length about a stock when someone else has summarized the investment case in a tweet.

Floris Oliemans tweeted this some weeks ago:

Nam lee pressed metals trading at 4 x ex cash pe, 40pct mgmt ownership, no loss over the past 10 years, 0.85 x net net value, 12pct roic.

There’s not much more to say.

Long $G0I

Winland’s swan song?

I’ve been buying Winland Electronics (WELX), a tiny company that’s been loosing money for many years, because it sells for 84% of NCAV (the last 10-Q shows current assets of $3.26m, 60% of which are cash, minus total liabilities of $572k), and has two activists on the board who will try a turnaround, and maybe a sale.

Winland might well perish soon, in which case the turnaround effort will prove to have been the company’s swan song. But the risk/reward is attractive.

I stole the idea from Whooper.


The best use of your money, and a conundrum

If you haven’t watched this TED talk by Peter Singer, please do so:

In summary, your money is better employed saving lives than buying stuff you don’t need. And if you want to give money away, you should find the most effective charity.

There is another reason, not mentioned in the talk, to give your money away: Doing so makes you happy.

But for people who, like me, are in the profession of making money grow, a conundrum arises: Should we give a little now, or a lot in the future?

Take the extreme example – Buffett. If he had lived every year on $30k and given away everything else each year, he would have ended up giving away a lot less.

On the other hand, there are good reasons for giving now: If people were dying in my garage instead of miles away, I wouldn’t postpone helping them. And as Singer notes, a few miles don’t alter the ethical case.

Also, if a good friend or a family member, even if geographically far away, needed a bit of money today to stay alive, you and I would give it to them. Why should it be different when talking about people we’re not related to?

Indeed, some value investors have decided to start giving early, like Jae Jun, who writes Old School Value.

So, what’s the right thing to do? I’m baffled.

Jewett-Cameron: quick update

Jewett reported financial results today. Things look good to me:

Book value increased by 5.5% in the three months from February to May.

Cost of sales as a percent of sales went down “largely due to a more favorable product mix in the current quarter, and an increasing shift towards e-commerce sales of our metal products through our customer’s online websites”, which sounds auspicious.

Net income was about a million.

So, there’s really not much to say. And “that’s good, not bad”.


The terror of the lone $LAKE

But when the Night had thrown her pall
Upon that spot, as upon all,
And the mystic wind went by
Murmuring in melody-
Then-ah then I would awake
To the terror of the lone lake.
– Edgar Allan Poe, “The Lake

I have looked at Lakeland Industries with interest several times in the past, and recently three of my favorite bloggers, Saj Karsan, Whooper, and Nate Tobik, have written about it favorably (the first two at a much lower price than today’s, so they’re likely sitting on a nice profit). I don’t have much to add to what they wrote, and agree that, at this price, the odds favor the investor.

But I haven’t invested, because of the debt. There’s some chance, and not a negligible one, that the debt sends Lakeland into bankruptcy, and then into liquidation. How much would the receivables and inventories be worth then? I don’t know, but since those two assets make 80% of the company’s total current assets, any haircut there would hit NCAV very badly.

I’ve made some of my biggest investment mistakes in companies with substantial debt, wrongly assuming that, as usual, it was enough to make sure that value exceeded price by a nice margin. It turns out that debt can distort that calculation (one obvious way is by forcing a sale at a discount), and that’s why I’d rather invest in net-nets that don’t have much debt, like Automodular, which has been discussed here, or Solitron, or Aadvantage Technologies. After all, investing is not “all about what you give versus what you get“. It is about that, but also about what you could get elsewhere.

If Lakeland finds new loans to replace those of TD Bank (and in the unlikely case that the price of its shares don’t go up a lot immediately after the event), I might reconsider.

Long everything mentioned above, except LAKE.

Automodular liquidation calculation

An alert reader just informed me that the spreadsheet link in my June 5th article on Automodular does not work anymore. That was the crucial bit of the thesis, so now that it’s gone I’ll write my own calculation here.

Based on the March 31 financials we get NCAV, which is likely a good proxy for liquidation value, of $33.2m (27.7m cash+12.5m receivables-total liabilities of 7m. Ignore PPE of 8.8m).

From NCAV, we’ll deduct $6m of termination costs (management’s estimate), and the recently paid dividend of $1.2m.

So if the business had closed its doors on March 31 and liquidated, we might get something around $26m (33.2m of NCAV – 6m of closing costs – 1.2m dividend paid on June 6th).

But Automodular will keep working for Ford until the end of 2014, so we need to add the money it will make until then. Here things get a bit more speculative:

In 2011 and 2012 quarterly after-tax profit averaged $3.6m (that average includes some one-time windmill related work, but that’s not been part of the earnings of the past few quarters, which have still come at $3.6m), capex averaged less than $0.6m, and depreciation about $1.6m. So we get average quarterly owner earnings of $4.6m.

Between March 2013 to year end 2014, when the Ford contract expires, there are 7 quarters: if the company were to make the same $4.6m per quarter in that period, they would end with an additional $32m. Is that a reasonable estimate? I don’t know. Maybe we should assume a straight line earnings decline, and we’d get $15m less. Maybe my capex is too high, since there’ll be no need to keep the plant fit for future years anymore. Who knows? (actually, management probably has some idea, so I will try to ask them – expect an update soon).

Even if that last part of the analysis is speculative, the investment is not. Ben Graham used to say that you don’t need to know the exact IQ of your nephew to know he’s a complete idiot, or something like that.

All you need to justify the gap between the current $33m market cap and the liquidation value of $26m that we came up with above is $7m more of FCF. That looks easy: from March 31 to today, the company has probably already made more than half that amount.

All the extra earnings, and the money that would come from other more far-fetched but still possible outcomes, are pure profit to the investor.

It seems there’s little to loose here, and much to gain.

Long AM.

Disclaimer: Don’t take anything on this website as investment advice.