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EBAY: Quote of the Day

From Larry Robbins’ at Invest for Kids in Chicago: “eBay is like a divorce. One is focused on a lifetime of shopping, the other focused on a lifetime of payments.” We think both will ultimately make attractive partners for potential suitors. As they say, beauty is in the eye of the beholder.


Posted in Quotes, Security Analysis.


I recently had the opportunity to spend some time with Don Yaeger. I’m embarrassed to say that before I did, I had no idea who he was! So for those in the same boat, by way of introduction, Don is a business leadership coach, a New York Times best-selling author and longtime Associate Editor for Sports Illustrated. He has done some fantastic work over the years working with The Great Ones, and made quite an impression. Accordingly, I’ve read more than a few of his books over the past couple weeks.

As a kid growing up watching the 85 Bears, I thought Walter Payton was invincible.  His autobiography offers so many life lessons I can only hope to pass down to our boys.

“Consistency is the most difficult thing to attain in life. Anyone can be good for a day, or a year. But can you be consistently great? That is so much more difficult. It requires a person to continue to work hard even after they have achieved success. It requires sacrifice, even after sacrifice is no longer required. It requires a hunger in a person that is about more than just making it. It is about staying there.”

For investors, Payton exemplified a trait we discussed in our Annual Letter. “The reasonable man adapts himself to the world. The unreasonable one persists in trying to adapt the world to himself.”  Payton was a reasonable man.  He was quick, but not fast.  If he ran conventionally, he may have failed conventionally.  Instead, he developed a stutter step to help him break long runs. Opponents didn’t know what he was going to do. They didn’t know if he was going to go straight, come right at them or stop. “If you break free and are running down the sideline, the defensive guy who has an angle on you is already calculating in his mind where he’s going to hit you. He knows where you are going to be at a certain time because he’s judging your speed.” So that’s when Payton would start his stutter step and change speed. When you do that they have to think and that gives you the edge to go right by him. It is a way of breaking long runs when the other player is faster than you.

The NFL could use more men of this character today. How many professional athletes could express this sentiment from Payton? “They paid me for football.  But I would have played for nothing because I had fun.” Not many, I’m afraid.  That said, we are still having fun at Broyhill, enjoying what we do and the people around us.  Although, perhaps not as much fun as the 85 Bears and The Superbowl Shuffle!

Posted in Letters & Links, Process, Quotes.

Herding: The Asch Experiment

Posted in Process.



Posted in Uncategorized.

The Role of Macro

Many fundamental “bottom-up” investors often denounce macroeconomic forecasts.  What may be less clear, is that this does not imply they are oblivious to macroeconomic developments. Count us in the camp with Third Avenue’s International Team who recently shared some insights regarding the role of macroeconomic information in the investment process:

Macro has two primary roles in our investment process. The first one is as a tool to determine the sensitivity of our investment theses to a variety of macroeconomic environments. This allows us to reject investment opportunities for which our thesis playing out would require a very specific set of conditions.

The second one is as a frequent source of investment opportunities.  Dire economic outlooks have indeed been one of our team’s most fruitful hunting grounds over the years. Troubling macroeconomic situations can easily shake investors (speculators) focused on the near-term outlook and paralyze those who require a high level of confidence in their ability to forecast the macroeconomic future. Truth be told, our habit of seizing opportunity in the face of dire macroeconomic circumstances has occasionally appeared foolhardy in the short-term. Yet, the Fund has made many profitable investments in this way in the past.

We couldn’t have said it better ourselves.  See also LatAm.  See also Scotland.  See also Mel Gibson, Braveheart.



Posted in Macro, Portfolio Strategy.

Chart of the Day: Peak Liquidity?

Source: Bloomberg, SG Cross Asset Research

Posted in Macro, Portfolio Strategy.

True Profits

In a recent presentation, available here, we included a slide displaying the gap between actual and trend earnings per share. We concluded that if you believe today’s historically-high earnings can be sustained then US equities look mildly expensive. But if you think that earnings will mean-revert, AS THEY ALWAYS HAVE, then US equities are nose-bleed expensive.

The chart below, from Andrew Smithers at the FT, would suggest that equity investors should keep a box of tissues next to their Bloomberg.  According to Smithers, the gap between True Profits & Published Profits is the result of the much greater incentives for management to alternately over-and-understate the “true” profits, and the much greater ability to do so.

The massive rise in bonuses paid to managements, which depend on the data the companies publish, has encouraged companies to boost profits in the short-term as bonuses often depend on short-term changes in earnings per share or return on equity. Even when they are more directly related to changes in share prices, these often respond to similar changes in the published data. Parallel with this rise in incentives to misrepresent profits has been an increasing ability to do so, with the change from “marked to cost” to “marked to market” accounting.

NIPA Profits vs EPS

Posted in Letters & Links, Macro, Valuation.

Scottish Independence: Sheep & Threats

Scottish independence has been viewed as a low risk, low probability scenario for some time.  Conventional wisdom hasn’t changed much in this regard despite recent polls which displayed a surge in position for independence.  And because no one expected the vote to be close, there has not been a lot of preparation for this event. As a result, expect a corresponding surge in volatility if the vote on Thursday is even close.

There are broader issues here.  A recent article from Foreign Affairs does a good job outlining Scottish sentiment. History shows that when people are asked, they almost always say yes to independence.

The Guardian looked at about 50 independence votes since 1846, and the vote for independence has averaged 83%, and came out on top in 88% of the votes. The median winning margin across the votes is 93 percentage points.

This is a union that has existed for over 300 years. A very complex sharing of assets and liabilities makes it very unclear how it would split. The linkages between Scottish and British financial institutions raises the risk for financial market instability. The fact that banking assets in Scotland would total 12x national GDP does not help matters.

Needless to say, the break-up of a 300-year union would not bode well for the rest of the Eurozone. We would expect nationalism to intensify across the EU with implications for risk formally knows as the European sovereign debt crisis.

On a somewhat related note, I learned tonight that the Scottish National Animal is actually the Unicorn, which isn’t even a real animal the last time I checked.  Then again, bears are as hard to find as Nessie in this market, so what do I know.  Probably best to just leave this debate to someone closer to home.  The clip below from John Oliver is another must see.  Is there anyone better on late night television today?

Posted in Policy, Portfolio Strategy.

Common Sense

“It wouldn’t be overstating the case to say that investors face a crisis of low returns: less than they want or expect, and less than many of them need. Investors must choose between two alternatives. One is to hold stocks and bonds at the historically high prices that prevail in today’s markets, locking in what would traditionally have been sub-par returns. If prices never drop, causing returns to revert to more normal levels, this will have been the right decision. However, if prices decline, raising prospective returns on securities, investors will experience potentially substantial mark to market losses, thereby faring considerably worse than if they had been more patient.”

“Betting that the markets never revert to historical norms, that we are in a new era of higher securities prices and lower returns, involves the risk of significant capital impairment. Betting that prices will fall at some point involves opportunity cost of uncertain amount. By holding expensive securities with low prospective returns, people choose to risk actual loss. We prefer the risk of lost opportunity to that of lost capital.”

 - Baupost Limited Partnerships’ 2004 Year End Letter

Posted in Letters & Links, Portfolio Strategy.


In Atlanta this week, checking in on a few existing and potential investments.  But couldn’t resist following up on Night Moves with a couple additional data points.

The first comes from David Bianco compliments of Zero Hedge.  This should sound familiar to those who’ve reviewed the previous targets put out by MS.

We still expect a long lasting economic expansion of moderate growth, which should rival the US record of 10 years with S&P EPS growth averaging 6% until the next recession, on 5% sales growth, flat margins, 1% share shrink. Despite entering the latter years of a typical expansion and high margins vs. history, we now think the trailing S&P PE should average 17 vs. 16 until elevated recession risk returns. This is because we now expect long-term real interest rates to stay below normal through 2016 and thus lower our S&P 500 real cost of equity estimate from 6.0% to 5.5%.

The two major threats to the S&P 500 are either a recession or a rapid increase in interest rates. However, assuming that the US avoids a recession – and no other global factor causes a significant decline in S&P EPS – and that US interest rates climb slowly and rise to a level that plateaus below historical norms, then 2500 is within reach for the S&P 500 by 2018.

So in summary – assuming nothing bad happens for the next five years – and assuming we extrapolate the same linear trend for another 4 years, the S&P 500 can rally to 2500 without any meaningful downside risk.

Why not take this logic a step further?  With interest rates at zero for as far as the eye can see, isn’t a 5.5% cost of equity a bit expensive?  We can justify just about any valuation for any asset if we just go ahead and use a zero percent discount rate, can’t we?

Bianco Target

The same day we picked up this DB report, we caught this gem – Morgan Stanley’s chief international economist, Joachim Fels, appears to be fueling the bullish calls from the firm’s strategy group. Per Bloomberg, he sees recovery from the great recession potentially lasting as long as a decade thanks in part to loose money. “While the expansion is already five years old, it could easily extend another five,” Fels wrote.

Never mind that global expansions have historically lasted between four and eight years and six on average. “The glass is half full,” says Fels. It’s certainly hard to argue that the glass is half full today, but shouldn’t we at least consider the risk that investors may look at the glass differently, some time this decade?

Then again, maybe we give the street too much credit.  After reading our last post, a colleague asked, “Does anyone actually believe the stuff these guys are putting out?” Experience would suggest that many unfortunately do.

Believe it or not, it certainly feels like sentiment is reaching an extreme.  According to Investors Intelligence, bears have fallen to the lowest level since 1987.  Last weekend’s Barron’s survey of market strategists highlighted this sentiment. Nobody thinks markets will go down. Maybe it’s time for some of us to take a page out of the average bear’s play book.

Yogi Bear: Hang on Boo Boo!
Boo Boo: What do we do now?
Yogi Bear: Did you check the safety manual?
Boo Boo: It’s just a picture of us screaming!
[Both scream and flail their arms]
Yogi Bear: We have to deject, Boo-Boo!
Boo Boo: Don’t you mean “EJECT”?
Yogi Bear: Eject is up, deject is
[Both fall]
Yogi Bear: doooooooown!


Posted in Portfolio Strategy.

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