Sunday, May 24, 2015

High Plateau Drifter: "Portrait of a baby boom mania"

Price of an XF 1873 Carson City $5 gold piece in year 1974: $200 (Handbook of United States Coins with Premium List, 1974, R.S. Yeoman)

High Plateau Drifter sale of an XF 1873 Carson City $5 gold piece: $21,000.00 in 2014.

A 105 bagger in 40 years!!
That is 12.3% compound rate of return for 40 years.

Over the same period, the S&P 500 did 11.2% compounded, assuming reinvestment of dividends (which would have actually been taxed). That ends up being a 68 bagger.

However, people are paying 10x the value of the gold content of these coins. It's a bad bet. They would make a great short, because the coins obviously do not generate any income, hence no negative carry.

Baby boomers are hoarders. Their formative experiences must have involved scarcity of material goods, which are now ubiquitous. See Paul Graham's essay on Stuff. Also, rising asset prices have conditioned them to hoard things that they think are investments - houses and cars - but are really consumables. Reviews of Working at Molycorp

Speaking of sleuthing, here are highlights from some of the reviews of Molycorp on

  • "Long drive, bad executive decisions (both locally and corporate), mismanagement of construction resulting in costly delays, overages, bad engineering, and poor QA/QC of construction."
  • "they reward there shifters and bosses according to amount produced , so if something breaks or if a product goes out of spec , instead of fixing the problem or adjusting procedure to get it back in spec. they just run full speed or duct tape the problem so they can get there numbers out and leave the real problem for some one on the other shift , and of course the other shift runs the same way so it never gets fixed or corrected until millions of dollars are spent reworking product hat could have been fixed from the beginning"
  • "Basically everything about the place. Horrible management. My boss was not even my technical boss, was not qualified to manage or run a laboratory and made it a nightmare. The laboratory was whofully understaffed and needs a management structure and more people for the amount of work the facility expects. Coworkers who drag their feet and expect you to pick up the slack or do their duties. Take a look at the other reviews. A laughable operation going on. I hope it doesn't fold in the way many predict, for the sake of the men and women who work up there."
  • "The most technically incompetent and unethical organization under the sun. Spent $1.5B+ to build Project Phoenix , misrepresented to investors that they knew what they were doing technically, but eliminated the technical staff. Fired the entire mining department when the drilling program didn't produce the desired expanded resource results. Operations is a bunch of clueless mining folks with chemistry or metallurgy degrees that don't understand the process and lie to Sr. management about everything and blame everyone but themselves. Stock is down 70+% in a year and they have no idea how to identify or prioritize the projects necessary to succeed. Anyone decent that can escape already has. This will go down as Enron II after bankruptcy."
  • "From a safety perspective this place is the worst... people by pass safety interlocks and other safety devices and cause spills of hazardous chemical with no consequences, where any other company has zero tolerance. No wonder this place was shut down by the EPA in the late 1990's."
Doesn't sound good. People are always going to complain about their job, but the Glassdoor reviews at a successful company look very different.

Saturday, May 23, 2015

Molycorp Mountain Pass

Nate Tobik Discusses Banking at the Fairfax Shareholder Dinner

Latest: Credit Bubble Stocks Book Reviews!

Up to 93 reviews now so I'm breaking out three new categories.

5/5 - "Hall of Fame" - timeless

5/5 - These are just "Must Read"

Review of The Sleuth Investor: Uncover the Best Stocks Before They Make Their Move by Avner Mandelman

On my second read of The Sleuth Investor, I realize that this is more than a how-to, it has something profound to say about epistemology of investing. The thesis, as he puts it, is:

To make money in the stock market, it's not enough to rely on public information. You have to act like a sleuth. You must probe behind the printed surface of SEC files, annual reports, and press releases, and sleuth for those concrete facts that reveal the truth about a company's real value - and its future.
The book emphasizes the how-to of sleuthing, but he has some very profound philosophical thoughts about investing:
"Most investors... think of stocks as mere symbols and data, and invest in them based only on second- and thirdhand information, which they then manipulate by spreadsheets and computer models and logic and theory.

Most hedge funds invest solely based on secondhand symbolic information...

All these money managers see the same secondhand data that everyone else sees.

The edge in investing is not in manipulating data better, but in getting exclusive data."
His method of obtaining exclusive data is - perfectly legal - "sleuthing". This is something that John Hempton does too, whether he is visiting an Herbalife "nutrition club" or visiting Chinese companies to check whether they even conduct business. Reading Hampton's Herbalife posts makes me wonder what Bill Ackman could possibly be thinking.

Sleuth Investor contrasts sleuthing with conventional financial analysts who are "taught to think about symbols and relationships among symbols" and advises investors to "go to the physical reality behind all of these representations" of the type that people are reading on their terminals.

In The Small Cap Advantage, Brian Bares puts it another way:
"The key determinants for predicting the future earning power of a company are actually qualitative. Factors like competitive positioning, industry growth, and the capital allocation ability of management are not adequately captured by simple ratios."
No evergreen investment strategies. Superior returns come from being on the cutting edge, or in areas that investors are ignoring for some other reason. We can classify some of the strategies that still work in 2015:
  • Nate's Oddball Stocks can work because they are so small and illiquid that no one is paying attention to them. Similarly, Sleuth Investor likes stocks selling below the minimum market capitalization of small cap funds.
  • Sleuthing. Sleuth Investor concedes that these opportunities will tend to be small, because only at a small company is it possible to make a physical observation that has real bearing on the value of the company. But I can think of exceptions, like Hempton's visits to Herbalife clubs. Another one that should have been sleuthed is Molycorp. What would someone find out on a visit to isolated Mountain Pass, CA?
  • Equity yield curve or "time arbitrage" which is what Horizon Kinetics practices. I think it is going to take a long, long time for purchases made in a mania to pay off though.
  • Going to cash during manias. We've had three in fewer than 20 years, so you would think people would start to catch on. Look at Hussman's charts showing cumulative total return when market conditions and valuations are less favorable. 
  • Market anomalies that are not yet being systematically exploited. Volatility. Net stock and debt issuance versus repurchases
You can think of sleuthing as a chapter in a book on systematized exploitation of market inefficiencies.


Monday, May 18, 2015

Review of Enriching the Earth: Fritz Haber, Carl Bosch, and the Transformation of World Food Production by Vaclav Smil

Very typical of Vaclav Smil, we have Enriching the Earth, about the Haber-Bosch invention of synthetic nitrogen fertilizer, which was once the "holy grail of synthetic inorganic chemistry." He calls it the most important invention ever because the fixation of nonreactive, atmospheric, molecular nitrogen into usable form is alone what has allowed the world to swell to seven billion people.

Leibig's law of the minimum says that plant growth is limited by whatever substance is present in the soil in the least adequate amount. Many times, this is nitrogen, which is why most of the world's civilizations independently discovered intercropping of legumes in order to add nitrogen to soil, as early as 12,000 years ago.

Liebeg described agriculture's principle objective as "the production of digestible nitrogen," and as a 19th century chemist noted, "every vital phenomenon is due to some change in a nitrogen compound and indeed in the nitrogen atom of that compound".

But nitrogen was very scarce for humanity, because plants cannot use atmospheric nitrogen, and the only technology for increasing soil nitrogen was the symbiotic nitrogen fixing bacteria associated with legumes. The result was that the nitrogen cycle had to be kept very tight, with nitrogen wastes being returned to the soil, and even going so far as to harvest nitrogen-rich seabird guano from islands off the coasts of South America. There was federal legislation enacted in 1856, the Guano Islands Act:

"Whenever any citizen of the United States discovers a deposit of guano on any island, rock, or key, not within the lawful jurisdiction of any other Government, and not occupied by the citizens of any other Government, and takes peaceable possession thereof, and occupies the same, such island, rock, or key may, at the discretion of the President, be considered as appertaining to the United States."
In 1910, Fritz Haber developed a process for making ammonia (which can be used for fertilizer, or to make explosives) that would scale. The reaction N2 + 3 H2 → 2 NH3 uses an iron-based catalyst and extremely high temperature and pressure, which together overcome the strong triple bond holding the molecular nitrogen together.

The hydrogen for the reaction generally comes from natural gas, although if you have surplus electricity from wind or hydro or solar, you could make it by electrolysis of water. But apparently less than 5% of world natural gas production is used to make fertilizer, so there is no immediate need to worry about alternate supplies.

Depending on your theory of simultaneous invention, many people may owe their existence to Norman Borlaug and to Fritz Haber.

Another funny thing to think about is that given the ubiquity of nitrogen fertilizer in agriculture, and that the human body is 3% nitrogen by mass, everyone is carrying around a hefty slug of nitrogen atoms that came out of a natural gas well and streamed over a catalyst at an ammonia plant!


Some other Vaclav Smil books look interesting.
Prime Movers of Globalization: The History and Impact of Diesel Engines and Gas Turbines
Energy Transitions: History, Requirements, Prospects
Energy in Nature and Society: General Energetics of Complex Systems