Communications about Charter

Given the recent swoon in Charter Communications (CHTR) and Comcast (CMCSA), they both appear attractive. The economics of the cable business are predictable and compelling.

If you suspect that the market has over-reacted to the loss of (lower-margin) video-subscribers, and that these cable companies will adapt and position themselves as the dominant arteries for the flow of data(i.e. 5G etc. will be a complement, not a substitute), then now appears to be a fantastic time to take a substantial position in these companies.

I’ve taken a nearly 4% position in CHTR, and have significant exposure to CMCSA through options. If prices stabilize or go down further over the next couple of weeks, I plan on making a 10% allocation to cable.

Here are some useful links in chronological order:

  • June 2015: Oracle of Omaha after the announced merger with Time-Warner Cable when CHTR was trading around $170/share
  • September 2015: Punchcard Research did his characteristic deep dive
  • Andrew Walker continues to offer informed commentary on CHTR. He looked at it in June and October 2017.
  • There are numerous writeups on VIC. Here is a recent one (November 2017) by MarAzul.
  • Value Seeker did a deep dive in December 2017. He looked at the cable industry in general and both CMCSA and CHTR in particular.

 

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Monte Carlo and Us

This, by Corey  Hoffstein, is the most insightful thing I read yesterday.

You are not a Monte Carlo Simulation” (click title for link)

It presents a simple but profound idea. It helped me pull together and contextualize several “gut feelings”.

  • The average experience of a population (ensemble average) can be very different from the experience of the average person (median)
  • This is especially true when the lower bound is zero and the upper bound is infinity. Income is a classic example
  • It helps understand why we are risk averse: why we feel the loss of $1 to be twice as painful as the gain of $1. The log-scale provides an appropriate measuring tape
  • Our lives are a single replica multi-period game, not multiple replicas of a single game

Check it out!

 

Thoughts on BRK and GOOG

Berkshire Hathaway

  • Semper Augustus 2017 Client letter (link) continues a annual tradition by taking a deep dive. They figure BRKB is worth somewhere around $250/share.
  • Whitney Tilson (presentation) updates his valuation to $230/share, probably rising to $250 by the end of the year.

Either way, BRK looks about 20% undervalued at current prices near $200.

Google

This is not a stock I own, but one I have looked at many times over the past 5 years hoping for a pull back. Here are two different takes:

  • Whitney Tilson (presentation) argues that we aren’t paying much of a premium over the market to own a high-class business (PE ~ 21x 2018). If we consider the optionality of YouTube and “Other Bets” then one can argue that its valuation is very reasonable.
  • Geoff Gannon, on the other hand (link), does a back of the envelope calculation on the limits to the advertizing spend. Google and Facebook capture a large (and rapidly increasing fraction) of a slowly growing pie, and will have to contend with slower growth in the future. This will result in lower multiples, and hence unspectacular returns.

 

Switch to Interactive Brokers

One year ago I did a major housekeeping change.

I finally opened an Interactive Brokers account  (I still have accounts with TDAmeritrade and OptionsHouse – now ETrade).

I don’t particularly like IB’s web interface or the desktop GUI. But one year in, it bothers me far less than it used to. I love the speed and the quality of execution. My other brokerage accounts, while offering better UIs, force me to bid in increments of 5c, and often take forever to fill comparable orders.

The big factor, of course, is cost. Instead of shelling $5+, most of my options cost me $1 or less. IB often gets me a price better than my limit price. I understand that it could pocket the difference, and I would never know. Actions like these build trust (Costco/Amazon playbook). In 2017, almost 90% of my trades were executed on IB.

It also pays me meaningful interest on my cash balance (0.92% currently for cash balances above $10k). This is higher than the interest at my bank.

As my portfolio moved from 16% cash at the start of 2017 to nearly 35% currently, the interest I earn underwrites all my commissions and then some.

Interesting Thread on Edge

Recently, I read two superb takes on whether retail investors have any meaningful edge.

Nate Tobik did a “Drake equation” to estimate that there are about 1000 pairs of eyes following listed stocks in the US. So really, our edge is nonexistent or smaller than we think.

Geoff Gannon generalized the discussion with a broader notion of “edge”.

He argues that unlike a casino, the stock market inherently has a positive edge. If you spend infinite time in a casino, you will go bankrupt. If you spend infinite time in the stock market, you will end up extremely wealthy.

So at the base level everyone in the market has an edge over those on the outside. This is a generic edge.

Then, there is the special edge.

Since buying certain kinds of stocks (high quality businesses, cheap stocks, and stocks rising in price) works better than buying other kinds of stocks (low quality businesses, expensive stocks, and stocks falling in price) an investor who systematically bets in order to maximize certain factors (like high quality, good value, and positive momentum) has an edge over both operators who systematically bet in order to maximize other factors (low quality, poor value, and negative momentum) and operators who don’t bet systematically.

And finally there is the stock-pickers edge, which Nate talks about.

Learning the Wrong Lessons

2017 was my first full year of “mindful investing”. As expected, I made many mistakes. These can be classified into two buckets.

Selling Winners Early

I sold WTW around $18. It soared to nearly $50 over the next few months.

I sold AAPL at an average price ~$130-140. It kept rising to $175.

Peter Lynch said, “Selling your winners and holding your losers is like cutting the flowers and watering the weeds.”

I should hold my winners longer.

Historically my worst mistakes have been “successful investments”.

I sold MSFT and EBIX for 80% and 300% gains, only to see both stocks double from there. And don’t even get me started about Priceline. I sold it only because I had made 10x on the stock. There was no fundamental reason for selling. It was agonizing to watch it soar 10x from that point, over the past 7-8 years.

Sucking my Thumb too Long

I dabbled with a few stocks, hoping to buy them at more attractive prices, only to watch them fly away. I watched FSLR go from $25 to $60, MSM from $70 to $95, FAST from $40 to $55, VFC from $50 to $75, WFC and NKE from $50 to $60+, and on and on.

So perhaps, the lesson is don’t be too picky. But is that the right lesson to draw?

I began the year with a certain view of the overall market: I expected it to return somewhere between -25% to +15%.

One can ask two questions: (i)  was the view correct, and (ii) was the strategy (of being patient with buying) correct, given the view?

In retrospect, the S&P clearly overshot the optimistic end of my expected range. The pendulum had swung more than I thought. My view was wrong.

However, given a view that is negatively biased, the strategy of waiting for more attractive prices was not necessarily wrong. Or at least, a single year (esp. one like 2017) may not be sufficient to draw that conclusion.

 

Oaktree Update

I looked at OAK over a year ago. At that time, I thought OAK was worth at least $38, and more likely close to $54 based on normalized earnings.

I added to the position earlier this year, when the price dipped to $40.

Over the past week or so it dipped back to the low $40s, after spending much of the year in the mid to upper 40s.

The overall narrative remains unchanged. It is a high-quality asset manager, focused on debt securities, which seeks to earn money the right way – by making outsized returns for its clients. With the stock market getting somewhat frothy, it remains poised to capitalize on any significant downturn or crash.

Valuation

I used the same template as the previous valuation. I used updated numbers from their Q3-2017 report for balance sheet items. For earnings, I used TTM numbers.

Screenshot from 2017-11-10 20-39-19

The year-to-year performance of OAK is quite lumpy. The IV increased from $38 to $66 based on TTM numbers. I believe that the average numbers are probably more reliable. They suggest that the IV remained roughly unchanged (increase from $54 to $57).

Based on these numbers, OAK is looking attractive at these levels.