no matter how much research you done regarding a stock you don’t have a contract what the future price should be
with high yield bond there is a contract for a certain price in a future, if you are correct about the calculation, you will be correct about your yield
bargain price: liquidation price 75cents on the dollar buy at 20 cents
when you are not a big established investment firm like Lehmen brothers, you have no franchise to protect. You are free to go the unconventional route for potential outsized returns
great ideas are born bad. Its easy to make your way to a great idea from crazy outrageous ones than cautious and sensible ones. Investment bankers by default filter out the crazy outrageous ones.
Contrarian thinkers need to train themselves to see things via unconventional routes
ways to structure a bond
give money back sooner
give higher interest rates
give more stock
give stocks cheap
It is easier for corporation to pay interest which is tax deductible than dividends which are not
Bonds offer process
first tier high rollers offer liquidity get to buy at cheaper price and exit earlier
second tier payers, with franchise to protect, who want to avoid stigma of being junk bond buyers will come in later at more expensive price and exit later.
Successful leverage buyout scenario: after buy out use cashflow from business to pay off the junk bonds thus deleverage the business
Mutual fund arbitrage: compare value of underlying portfolio and stock price
If you are right about a company being undervalued and it is willing to put itself up for sale, there will be buyers
Poison pill: defense mechanism against corporate take overs. When would be acquirers crosses threshold of ownership, existing shareholders are given extravagant rights rights making it less desirable as take over target
perception versus reality, see what the world could not.
Vision is Strength.
capital is abundant, vision is scarce.
excess capital is not strength but opportunity for weakness
capital put in the hands of someone with vision will result in drastically different results.
return of the owner manager as opposed to the corporate manager
by-pass the China wall principle where companies try to isolate the deal making and arbitrage departments
herd instincts: investors are constrained by appearance. A manager of a respectable financial institution will shun “fallen angels” so as to avoid appearing imprudent to his colleagues
forces wishing to keep a large company afloat are far greater than those that wish to see it perish
credit rating systems are flawed. It focuses on the past instead of the future. Ignore large fortune 500 companies in favor of ones with no credit standings to find a good deal.
The market which may be quick to digest earnings data was grossly inefficient in valuing everything.
Lessons from Solomon brother traders
I don’t pat myself in the back, because the next sensation is a sharp kick lower down
those who say don’t know, those who know don’t say
Despite the valuable lessons history can offer us, its shown that man does not learn any of these valuable lessons.
Benjamin Graham: The more elaborate the mathematics, the more uncertain and speculative the outcome. Avoid substituting experience with theory.
Key historic events:
1933 Glass Steagall act: separation of investment banking and retail banking
July 1944 Bretton wood systems: World currencies agree to a fix exchange rate against the USD, USD agree to fix exchange rate with Gold.
1971 Collapse of the Bretton Wood systems: US, faced with increasing pressure to maintain the USD gold exchange rates as its foreign reserves were depleted by a extended Vietnam war, went off the gold standard to prevent a run.
6th October 1979 The Volcker Act : money supply will be fixed, interest rates would float
12th Nov 1999: repeal of the Glass Steagall act: banks can now take use consumer deposits for investment purposes.
Good news reporting should seeks to inform rather than sensationalize with attention grabbing headlines. Its easy to appear data driven but still be misleading if you do not use the proper frame for understanding the numbers
On investment bank predictions
When on the receiving end of predictions made by external parties it is important to understand the underlying agenda they are trying to achieve. When examined thoroughly, predictions made by investment banks are so bad and contradictory, they should just stop making public declarations.
However if taking into account their objective is not to inform but to incite a trading decision by their clients so as to make a commission or offload losing positions on their trading books, it makes perfect sense.
Liar’s poker: Rising through the wreckage on Wall Street, Micheal Lewis
A company is only likely to go bankrupt if its creditors recalls debts and it is not able to pay back.
In the event of a major wide spread disaster and there is no one around to take advantage of it, it is unlikely the creditors recall debts
creditors of airlines would more likely want to have all their clients continue generating revenue with the planes to pay off debt than to foreclose of them and take back planes which are at that point worthless inventory for them
Labor unions will not want to have all their union members laid off, they will likely go into negotiations to deal with salary issues.
Ships of cruises are likely to deteriorate fast and require Capex to upkeep
Credit lines and payment schedule can always be renegotiated if impact is industry wide
If creditors are not willing to recall debts, then what would be the cause of bankruptcy? Beware of fake news that preach doom and gloom with no underlying basis
If you bought too early into the dip and you are more than half way into the dip might as well hold on for the recovery. Trying to exit too late into the dip will only cause more losses to be unnecessarily incurred.
Oil specialists are either producers or consumers, it is hard to determine the demand unless you are an insider
Wait till all the bad news are out and sentiment has turned before entering into position. Its ok to only go into position after the company share price has advanced 100% from its lowest levels.
A stroll through the peaceful streets of Rome. In contrast, it felt like the end of the world is here if you read news about Italy recently.
The human brain is a remarkable pattern recognition engine. When given incomplete information it will conjure up the “missing” pieces to generate a coherent whole that could be comprehended. More often than not what gets generated is the worst case imaginable scenario. In a normal time and age this is a wonderful function to have running automatically in the background to keep this primate alive.
However, this automatic function becomes problematic as three trends converge.
Trend 1 – big tech like Google and Facebook consolidated advertising revenue putting news entity under increasingly pressure to sustain themselves as their advertising revenue dwindled
Trend 2 – the proliferation of publication medium means anyone can now claim to be a news entity.
Trend 3 – Proliferation of Growth hacking techniques perfected by tech companies like Facebook that hijacks the human brain’s automatic fight or flight to generate user action that gets converted to revenue.
News entity generate revenue with hyper inflated news that drives readership and vitality by tapping into fear and anger. This drives wide spread panic. Corona is perfect catalyst.