Investing in Banks?

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Check out Oddball Stocks for details of a book about investing in banks in the works that Nate Tobik is co-authoring. A sample chapter (about whether bank stocks are risky) is available there for download. I enjoyed it and highlighted the following, which supports a couple of key points the authors make in the chapter about investment opportunities with banks:

In 2012, a rogue trader (nicknamed by the media as the “London Whale”) at JP Morgan caused a loss of $6.2b. JP Morgan was able to absorb this loss and move forward without an impact to their business. Consider that of the 6,279 banks in existence in the US at the end of Q3 2015 only 177 had more than $6b in total assets. The London Whale made three bad trades that in the aggregate lost more money than 97% of the banks in the US hold in assets on their balance sheets.

Separately, the Heard of the Street section of the WSJ is often a good source of interesting statistics and commentary. For example, in the Thursday 3/10 edition, Aaron Back describes how banks have been preparing for higher rates by classifying more and more (debt) securities to “held to maturity” instead of “available for sale.” The so-called big four U.S. banks’ held-to-maturity holdings have increased from under 5% in 2011 to approaching 20% by year end 2015. Interest rates, however, at least presently, have not reciprocated. It sounds like a little FIFO, LIFO shifting. Very interesting to think about the various implications and juxtapositions of capital cushions / distressed debt levels / whether oil and gas companies will further tap credit lines / potential broader slowdown in CRE / health of auto loan and lease payments / student loan repayments and loan securitization/syndication and etc.

There is excess capacity in too many areas (and not just commodities). Reinsurance, for example. Retail real estate spinoff dreams, for another (the Sears and Macy’s locations I’ve seen are fairly typical in their feeling quite dated and needing serious renovations while leaving me scratching my head about who would actually want to lease or own stores other than Amazon). Not to mention consumer electronics, which is one area where it’s easy to understand how Japan (a longtime investment focus of mine) has struggled to remain relevant on a global scale: far too much domestic capacity where intense competition and me-tooism hurts profit margins, not to mention the overall glut when including global capacity from companies in China, South Korea and Taiwan, making meaningful differentiation near impossible and commodifying nearly everything. Perhaps almost the same can be said about investing in Banks in Japan. And even the global investment banks leading up to 2008 and for many the ongoing struggles today.

There’s a sort of natural Batesian mimicry in business and investing with one too many geniuses (and unfocused/undisciplined companies) masquerading as value-creators while in fact serving as a drag, ultimately, on pricing power and profit margins for the industry (and securities markets) at large. In some ways, consumers may benefit (and especially some patient and disciplined value investors) as prices come down, although there is often plenty of collateral damage or negative externalities by association.

Let me end by saying I like Nate’s approach with the smaller banks and oddball companies among which we are more likely to find simplicity (e.g. balance sheets), focus (one core or a limited number of profit drivers) and less competition (e.g. more attractive market valuation at time of purchase or accumulation). I haven’t commented about my newsletter in awhile — suffice it to say the rather obscure Japanese smaller caps are necessitating the aforementioned patience and discipline, which I believe is now essentially a matter of arbitraging time to realize value. I hasten to add however, as a I said recently to a friend, that opportunity cost may prove to be a bitch in some cases!

Uguisu Value to feature net-net in first ed. of 2016

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Update 31 Jan. 2016: The first 2016 edition of Uguisu Value has been published and emailed to subscribers. See latest details in original post below. Note also the new one-time subscription offer for investors that would like to gain access to the current issue featuring a net-net and the three other issues from 2015 (the maiden issue has since been made available as a free sample).

Original post:

2015 proved to be a difficult year for many value investors, Uguisu Value (focused on value investing in Japan) included. While the four best ideas in Uguisu Value all achieved near-term upside, they all managed to end the year below their share prices compared to the time of publishing. At 3 of the 4 companies, their intrinsic value has grown, so the value gap has also widened.

With patience (acknowledging opportunity cost meantime) and an ability to arbitrage time (it would be great, yes, if value is realized in 15 or 18 months rather than 24 months or more), I continue to expect significant upside potential supported by solid assets and ongoing profitability.

For 1 of the 4 companies, its operating environment has intensified drastically. However, it has owner managers, a patient value investor as its largest shareholder and a strong balance sheet (without giving away too much information, it has a real estate development whose value approximates the company’s market capitalization).

For potential subscribers to Uguisu Value, note the following:

  • the first edition of 2016 is scheduled to be published on Sunday, Jan. 31
  • this first edition of ’16 will feature a profitable Japanese company whose cash along with investment securities and investment real estate (minus all liabilities) exceeds its market capitalization; a net-net by this definition (not a 2/3 NCAV, but a massively undervalued co. also on NAV basis)
  • new subscribers get free access to the 4 best ideas from 2015
  • for more background on Uguisu Value see: http://steventowns.com/uguisu-value-newsletter/

Uguisu Value Newsletter Update

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*Update 10/31: The fourth and final 2015 issue of Uguisu Value published for subscribers’ review over the weekend ahead of the market open in Tokyo (on Monday, November 2nd). See most recent update below or click the Uguisu Value Newsletter link here or in the left-menu area for additional details. 

Previously on 10/7 and 10/15:

Many friends, family members and colleagues agree that 2015 has been flying by and somehow mid October is already just around the corner. For the Uguisu Value newsletter, that means the fourth and final issue of the year will be published soon (current target publish date of month’s end). I launched Uguisu Value in January as a means of offering one deep conviction, heavy portfolio concentration write-up for value investors based around the world seeking smaller-cap Japan equity ideas that feature asymmetric reward v. risk: upside of at least 2x and minimal downside due to solid margins of safety and historical/current profitability.

It has been somewhat of a roller coaster ride with interim upside of 30%+ for two of my best ideas. Presently (updated 10/15), however, share prices of all three are down since publishing: by 5% or less in two cases and about 13% in another. Having thoroughly researched these companies, it is now, essentially, a matter of time arbitrage. Founding subscribers as well as subscribers from Q2 and Q3 have been excellent, demonstrating the indispensable value investor virtue of patience and in some cases as I’m aware, taking advantage of Mr. Market.

I am fully invested in my best ideas and in some cases have sizable allocations. My Japan portfolio typically has less than six positions. If I were managing external permanent (or patient) capital or a private equity investment fund, all three best ideas to-date are ideal acquisition candidates of which I would love to own much larger stakes or outright.

  • For my maiden issue (request a sample via email: contact [@] steventowns.com), I maintain my valuation upside of a baseline 200% correspondingly with a solid margin of safety. This company is the epitome of deep value (rich balance sheet assets) opportunities in Japan. Having written-up two higher-ROE companies subsequently, I look forward to sharing another company whose balance sheet assets alone make it investment worthy, not to mention also being attractive with regards to profitability.
  • My Q2 best idea was among those with 30%+ interim gains, but the company’s stock price has undergone a sharp reversal that is excessive considering the company’s earning power (and history of profitability) and strong balance sheet. I maintain my original 100% upside target, but full value realization may naturally take longer due to the lower valuation from which it must increase. I will be watching the company’s execution in its core business segments and management’s capital allocation decisions (i.e. will there be further share repurchases?) in the coming months and next year.
  • My Q3 best idea is a micro-cap that has made significant investments and is poised for top and bottom-line growth that I expect will drive its valuation higher conservatively by 2x. Execution risk is low (e.g. new warehouse construction is complete; deliberately accumulated inventory is quickly ramping up for sale), while monthly sequential and year-over-year revenues have all been increasing. This is another case of time arbitrage. The valuation is extremely attractive and although it could temporarily decrease somewhat due to exogenous factors such as any China news of late and selling induced by broader market selling, the reward v. risk profile leans (heavily) asymmetrically in favor of the former.

I hope this update is helpful both to those who have been considering subscribing and newcomers to my website that learn of Uguisu Value. Given the ongoing availability of excellent valuations in Japan, I fully expect to continue featuring Japanese smaller-cap equity best ideas into 2016. One of my investing circles-of-competence is this very segment of smaller-cap and domestic/consumer-oriented Japanese companies that have a combination of attractive valuations with growth opportunities or other value-unlocking catalysts. Japan clearly lacks the equity culture found in the U.S., however, as much as efficient markets are found to be inefficient in New York (let alone Japan), the candlestick charting momentum proclivities not uncommon in Japan are also to the advantage of value investors. Furthermore, the seemingly innumerable self-proclaimed macro pundits and Japan experts continue to misunderstand Japan and again that is ultimately to value investors’ benefit.

Link for Uguisu Value additional information: http://steventowns.com/uguisu-value-newsletter/

Email for Uguisu Value maiden issue sample: contact@steventowns.com.

Uguisu Value Newsletter Sample Available

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7/23 update: The 3rd issue of Uguisu Value will be published by this Sunday afternoon ahead of the Monday open in Tokyo. See below for other updates.

7/5 update: The 3rd issue of Uguisu Value will be published later this month. I’ve been monitoring valuations and researching a narrowed selection of companies for the 3rd issue’s feature best idea. I’m excited to finalize and publish the 3rd issue. Meantime, I’m equally excited about the first two best ideas from the first and second issues, which are up 20% and 8% respectively since publishing — since I’m targeting 200%+ upside in the first instance and a baseline double in the second. Details of Uguisu Value are available here. After you have had a chance to see details at the aforementioned link, if you’re interested in a free sample of the first issue of Uguisu Value please request via email: contact@steventowns.com.

*** “Safety in Value” on Seeking Alpha has just published an interview with me. He had excellent questions and was very kind to edit and format them. If you’d like to know more about my background and Uguisu Value, you’ll want to read our interview: http://seekingalpha.com/article/3301795-finding-value-in-japanese-stocks-an-interview-with-steven-towns

5/27 update: Patience and discipline. Multi-year highs in Japan. Not as many interesting (valuation) companies, but still plenty for discerning investors. My best ideas published thus far in Uguisu Value and some of my other core positions remain attractive (not only in terms of potential upside but also given their operating businesses, management, and etc.) despite their higher stock prices. I target baseline 2x opportunities and I manage a highly concentrated portfolio.

4/14 update: As of the Tues. 4/14 close in Tokyo, the featured company in the first issue of Uguisu Value is up 28% since publishing in January. See below to request a full sample copy. The second issue’s featured write-up is down approx. 3% since publishing. With the company currently available at less than a 5% premium to the publish date’s price per share, new subscriptions will begin with the Q2 issue.

3/29 update: I published the Q2 issue of Uguisu Value on 3/29 at around 1:30 pm JST, 12:30 am New York. See below re. Q1 sample and for subscriptions. 

3/21: Japanese stocks have done well in this first quarter (the fiscal third quarter for many in Japan) with the closely watched Nikkei 225 up 12% (+16% from its ytd low). I released the first issue of the Uguisu Value newsletter in mid-January. Details of Uguisu Value are available here. In short, the purpose of the letter is to identify and write-up one best idea (selected from within the Japanese micro and smaller-cap universe) each issue. The premise and inspiration: capitalizing on circle-of-competence and portfolio concentration underpinned by a margin of safety (e.g. Berkowitz, Buffett and Soros among others).

After you have had a chance to see details at the above link, if you’re interested in a free sample of the first issue of Uguisu Value please request via email: contact@steventowns.com. Compared to the deep-value style investment in the first issue, the second one will be more in the moat/compounder category (higher ROE; attractive valuation with growth catalysts; solid MOS) and its market cap is between US$500mn-$1bn. Samples will not be made available for the Q2 and future issues.

Uguisu Value Newsletter: micro and small-cap Japanese stocks

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The Uguisu Value newsletter, focused on micro-cap and small-cap Japanese stocks, has launched! The first edition features a micro-cap (>$50M <$300M) with a conservative 200%+ upside; an asymmetrical risk/reward profile with multiple value-unlocking catalysts including potential for the editor and private investor, Steven Towns, to engage management/BoD.  Steven’s portfolio is highly-concentrated in thoroughly researched deep-conviction equities targeting baseline 2x(+) returns. Each quarterly edition of Uguisu Value will feature one in-depth writeup: such focus comes from Buffett’s “20-hole punch card” mindset and the fact that the best investors tend to have concentrated portfolios. Fluent in Japanese and a specialist in smaller-cap, domestic-demand focused Japanese companies, Steven’s research uses original Japanese language sources, often of companies that have little or no analyst coverage and no English (language) securities filings; all newsletters are published in English. Click for additional details and to subscribe. We look forward to welcoming you as a subscriber.

Japan-focused portfolio performance versus select benchmarks:

2013: 34.1% (40.1% in yen-denomination) | TSE-2: 44.2% | Jasdaq: 87.1% | Nikkei 225: 56.7% |
iShares MSIC Japan ETF (EWJ): 24.2% | WisdomTree Japan Hedged (DXJ): 38.1%

2014: 32.6% (49.1% in yen-denomination) | TSE-2: 23.0% | Jasdaq:   1.9% | Nikkei 225:    7.1% |
iShares MSCI Japan ETF (EWJ): -6.4%  | WisdomTree Japan Hedged (DXJ): -1.9%

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The Uguisu Value newsletter has been reviewed and is endorsed by:

John Mihaljevic, CFA, and Oliver Mihaljevic of The Manual of Ideas

Guy Spier, Aquamarine Capital —“Excellent thinking and ideas for investing in Japan.”

Nate Tobik, 
Oddball Stocks —“Steven Towns is an expert on Japanese small caps.  If you want exposure to cheap and safe Japanese stocks with a value-bent then Steven’s letter is the ultimate resource.”

____________

Interested in a free copy of the first edition? Email us your name and affiliation (indiv./private investor or company name) and we’ll email you a copy prior to releasing the second edition scheduled for early April. Email: contact@steventowns.com.

Berkshire Beyond Buffett: Final Chapters

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This is the final post of my live-tweeting and highlighting of professor Larry Cunningham’s book, Berkshire Beyond Buffett. I’ve practically run out of superlatives…. ValueWalk (dot-com) reported Berkshire Beyond Buffett was among the top-10 books purchased in 2014 by its readers. I suspect the momentum will continue this year. If you’ve missed any of the tweets or posts, see them in order here: IIIIII, and IV (and follow on Twitter: @ActiveInvesting).

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Berkshire Beyond Buffett: Modesty and Simplicity

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This is my fourth installment of notes and summary tweets of Larry Cunningham’s perspicacious book, Berkshire Beyond Buffett: The Enduring Value of Values. If you’ve missed any of the tweets or posts, see them in order here: I, II, and III (and follow on Twitter: @ActiveInvesting). I’ve selectively shared nuggets from Larry’s book and I’m finding Twitter’s 140 character limit to be just-right for capturing some of the highlights to share with others that will also spark my memory of the greater detail in the book; this also preserves the bulk of Larry’s hard work.

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Berkshire Beyond Buffett: Values

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Here’s my latest installment of notes I’ve compiled while I continue to read Larry Cunningham’s wonderful book, Berkshire Beyond Buffett: The Enduring Value of Values. Chapter 6 (“Kinship”) is one of my favorites thus far. It seemed to come alive and really epitomize “the enduring value of values.” I will continue to shares notes in this way as it’s much more efficient (posting a summary of my live-tweets) than trying to go back and put my notes into prose. One-third finished reading, I can already say that Berkshire Beyond Buffett is a keeper for me and should be on your reading list if not already. See my earlier posts (I and II).

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Berkshire Beyond Buffett: Insurance Notes

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Berkshire Beyond Buffett - Larry Cunningham (Columbia Business School)Larry Cunningham is one of the most respected authors who has written about Warren Buffett and Berkshire Hathaway. His Berkshire Beyond Buffett: The Enduring Value of Values is proving to be an informative read thus far — last week I posted some notes and takeaways from the first few chapters. This time I’m sharing more of the same from the remainder of chapter 3 as well as chapter 4, which is the first chapter of the second part of the book.

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Susan Decker on the Magic of Berkshire Hathaway’s Returns

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Susan Decker’s recent panel discussion comments pointed out some of the magic behind Berkshire Hathaway’s returns. There is nothing new for Berkshire followers and investors, except the tax-free comment that Decker made got me thinking. Buffett’s baby is simple conceptually (i.e. float-supported — Decker didn’t mention float, by the way — with cash flow rich capital allocation to, and flow back from, operating subsidiaries and portfolio securities) and has performed brilliantly in terms of the annual and cumulative profits/investment returns achieved. See’s Candies is one heck of an example (see the BBB link below).

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