Value Investing Fund, INC 1st Annual Letter 2019-2020
Value Investment Fund, INC. annual Letter[1]
Quito, Ecuador.
To the friends and investors of Value Investing Fund, INC.:
In our first year, ending September
1st, 2020, the fund has generated 86.48% in profits.
Ney Torres,
Portfolio Manager
Value Investing
Fund, INC.
Attachments
Here
is more information that some may find important:
Attachment
A - What you should know about the fund
Attachment
B - Statistical detail of last year
Attachment
C - Description of positions
Attachment
D - Thoughts on various issues
Attachment
E - Others
Attachment A
What you should
know about the fund
In
each annual letter, I will try to honestly assess the fund's performance,
reiterate my core investment philosophy, and share my thoughts on various
issues.
I
share some of the fund's holdings this year and explain what I think behind
each one. This way you can get a better idea of where we invest and why I
invest, how I invest, and why I am very confident about the prospects of the
fund. However, there will be times where I do not mention some positions. When
more people find these, mostly small, companies the price of the stock can move
abruptly. Nor do I mention the size of
the position.
To
entertain/educate friends, family, and investors, I have created a podcast and
a blog which you can find at neytorres.com. I hope you like it.
Performance
targets
My main objective is to obtain a compound annual
return of 10% to 15%[2],
measured in a horizon of one to three years.
It is worth mentioning two landmarks that describe the
environment today:
1. The average rate in US savings is 0.39% per year.[3]
2. “The US Stock Market Based on Historical Evidence. It
is positioned to deliver an average annualized return of -2.5%”.[4]
There will be good
years and open bad years
“In due course, great long-term performing managers
will fall to the bottom half of peer groups over multiple three- and five-year
periods. In order to generate strong long-term results, investors must stay
invested through the lulls. Moving to a passively managed strategy during
difficult periods often does not work either and switching between the two
based on trailing returns can be counterproductive. No matter what path an
investor takes, patience continues to be a prerequisite for success” -https://www.dimeoschneider.com/media/The-Next-Chapter-in-the-Active-vs-Passive-Debate.pdf
“…you
know I had spectacular returns, but I couldn’t raise any money. Because every
time I would go out and talk to people, people basically said “what the hell
are you talking about? I want a monthly, I want a two weekly; I want a weekly
return. I want you to go up in a down market. That is what I want. I want to be
the bank except that I want you to yield better… Is not how much money I lost,
is how much money I ‘forgot’” - Greenwald Li Lu CBS 2006, reflecting on
mistakes of omission because he missed big winners trying to please investors
that were asking for this.
This fund focuses on long term absolute returns. In my
opinion, it makes it less risky even if in the future it turns out to be more
volatile.
Most of the
results of any fund come from a few decisions [5]
Winners tend to keep
winning, Google is successful in part because it has cheap capital, and it has
cheap capital because it is successful, it attracts the best talent, etc.
In capitalism and life
in general, wealth, power, fame accumulates only for a few. The same happens in
investments.
One conclusion from
that is that not all our ideas will work and at any given time our gains or
losses will surely depend on a few positions, while most do not have much
movement.
We will not be
oblivious to dips of 30% to 50% at times. Nor any other fund either. It is the
nature of the stock market.
“ Even those long-term shareholders
who were rewarded with the greatest cumulative returns endured large price
declines over shorter intervals. I study shareholder wealth creation for all
publicly-listed U.S. common stocks during each of the seven decades since 1950.
Focusing on the 100 most successful stock/decades in terms of shareholder
wealth creation, I document even within the highly successful decade,
shareholders experienced draw-downs that lasted an average of 10 months and
involved an average loss of 32.5%. During the immediately preceding decade, draw-downs for these
highly successful stocks lasted an average of 22 months and involved an average
cumulative loss of 51.6%.” - https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3657604
“…I guess no one will be too surprised
that even the big winners deliver something of a bumpy ride – what surprised me
was the extent. Apple has delivered drawdowns over 70% three separate
times! Even if one today purchased a stock that will turn out to be the
big winner over the next decade or two, most likely there would be periods
where the value drops 50% or more. And, as the fourth report in the series
shows, it is very hard to
identify tomorrow's winners based on characteristics that are objectively
observable today.”
What does the fund do?
We value public companies around the world to buy
their shares, and when we are convinced that we have found something at a
discount, we invest.
Business valuation methods can be classified into six
groups:
MAIN VALUATION
METHODS [6]
My beliefs about the fund and investing:
·
Price is what you pay, and Value is what you get. They are not the same.
If you think about it, the market is a place where there is a discrepancy in
valuation, but a price agreement.
·
The valuation depends on many factors, perspective, time and opportunity
cost (discount rate), but in general, a company or any financial asset is worth
the money it produces and will produce in the future (cash flow discounted to
present value).
·
The market is extremely efficient, so it takes a different perspective
than most to have an advantage. Ours is patience, everyone wants to get rich
quick. Our variant perspective is to go against what human nature dictates.
Contrarian investors.
·
“Successful investing is about managing risk, not avoiding it.” —
Benjamin Graham
·
Risk is not volatility, we like volatility. Risk is the permanent loss
of capital by not knowing what you are doing.
·
There is no single strategy or valuation method. Which one the fund uses
depends a lot on recognizing the market we are in. However, most of the time, I
hope we will invest in things that we are happy to have positions in for three
to ten years.
·
The size of the position is a determining factor in both trading and
long-term investments. The more conviction you have, the more we should focus.
·
If we lose money going through the vicissitudes of life, do not doubt
that it is 100% my responsibility. And that most of my assets are in the fund,
so is within my best interest to avoid this at all cost. The further we
advance, the more zeros our errors will have.
·
In the stock market, I do not compete against others, rather than
compete with myself and my belief system.
·
My motivation to run the fund is to be able to serve those who entrust
their savings to me, including family and friends.
Attachment B
Statistical
details of last year
Attachment C
Description of positions
Below, I show some of our positions and their
investment thesis. I want to clarify that these are summaries. Generally, an
investment thesis is anything but easy, but I can try to simplify them here.
Context
regarding investments in gold and silver
The
first time I started thinking about gold and silver as an investment was
probably in 2006 when I read a book by Mike Maloney which became a best-selling
book on how to invest in gold and silver worldwide to this day. As you can see,
I have spent some time thinking about this. As a value investor, I have
resisted investing in gold and silver for the simple fact that there is no
clear way to value precious metals. How do you value something that produces
nothing?
A
more rudimentary way is to look at trends and compare the purchasing power of
gold and silver with other things. We stop measuring one oz of gold against
dollars and compare it to cows, barrels of oil, etc. However, I do not know any
way to anticipate trends, when they start, when they end.
I had
to think long and hard before investing part of the fund in metal-related
stocks. By the way, we have an interview with Mike Maloney and mining experts on
the Financially Free Podcast at FinanciallyFreePodcast.com. Mike came to
Ecuador to an event that I organized with more than 700 people, and he did it
without charging a single cent. Without a doubt one of the best people I know.
If you want to understand more about gold and silver, do not hesitate to visit
their page GoldSilver.com and please see all their videos on Youtube.com
What
is the problem with investing in gold and silver?
Bottom
line: That you can go decades without a satisfactory return.
However,
what I can tell you is this:
"You don’t need to know a man’s weight to know that he’s fat” - Benjamín Graham
Note: This is a graph comparing dollar production versus
gold and silver production. But this is just US dollar printing versus GLOBAL
gold and silver production.
The premise for those who invest in gold, silver (and
even Bitcoin) is simple; we have a limited quantity, and other people will want
it in the future.
Investing in gold and silver is insurance against the
eminent fall in the purchasing power of the dollar or world currencies. They
are designed that way, an extended explanation in the next Attachment. The
image you are seeing above is a comparison between the "production"
of gold and silver versus the "production" of dollars. Every month 120
billion dollars are printed, and we only refine the equivalent of $13.6 billion
in gold and $1.27 billion in silver. We can conclude that there will be more
and more dollars fighting for a limited amount of gold and silver.
When we decide to exit our positions, depends
fundamentally on the opportunity cost of some other investment available at
that time.
Would you rather invest in a business that can grow 2,
10 or 100 times? Of course, we all know the answer to that. The economy is down
globally and as businesses crash everywhere, we can sleep like babies knowing
that our positions in these metals are probably farther from Covid-19 consequences
than most businesses. The dollar is losing its value, unlike gold and silver. Many
will think that this is true of anything that is measured against US dollars,
and they are right. But gold and silver are what people historically run to when
they are afraid.
Could the price of gold and silver drop with the Covid-19
vaccine? Yes, but only momentarily.
Source: https://goldprice.com/gold-silver-ratio/#:~:text=What%20is%20the%20Gold%2FSilver,buy%20one%20ounce%20of%20gold.
Here we can see a metric when we divide the price of
gold and silver, we can see that the result is 81. For 1 oz of gold, you can
buy 81 oz of silver. Historically this should reach 17.5. Which means one of two
things, silver is going to go up a lot, or gold is going to fall.
Our analysis indicates that silver is going to go up a
lot. We consume silver in electronic systems, cell phones, computers, etc.
People who invest in gold and silver generally point
to the monetary history of mankind. There is a predictable pattern. Governments
started with gold and silver as money, later they started creating paper notes,
trust is lost when the economy is down. These notes turn to gold and silver
once again. There has been fiat[7]
currency many times in history, they never last for long.
What is the problem?
The problem is that this is exactly the argument that
Warren Buffett's father made perhaps 80 years ago[8].
I think he was right. I think many will die being right, without seeing the
price of gold skyrocket or an economic catastrophe of such magnitude that the
dollar is destroyed or returns to the gold standard. But if Buffett had taken
the $100,000 from his initial partnership in 1956, he could have bought 2,858 oz
of gold. With an approximate current value of $5.5 million instead of his current
net worth estimated at $80.5 billion, of which he has donated the majority to
charities.
Gold is not a bad investment, particularly at the
moment, but we are not investing only in metals. We are investing in special
situations where we are going to make money if the price of gold is stable,
rises or even falls a little.
GoldX Mining
Corp (GLDX)
- Mines are the worst
business in the world, so pay attention as this fall into the category of
"special situation".
- Why are we seeing
this opportunity? Because it is small, but I hope not for long.
- Investors tend to
hate mining stocks. The value is not obvious unless you develop knowledge in a
niche.
- They have
approximately 10 million oz of gold, with a net present value of a billion US
dollars.
- This is not an
exploration mine, here the reserves are confirmed.
- "... Again,
there is a level of risk you have to take here, but the real bank for your
money is investing in a developer that hasn't gone into production yet because
you will get a reassessment when it goes into production, and also they want to
choose a developer who has the opportunity to increase their resource ounces. ”[9]-
Frank Giustra (A billionaire who made his fortune in mining and leads this
project)
Gran Colombia Gold Q1 2020
Results Webcast
In this graph, you can see that with an average
revaluation GoldX will probably see a rise of 300% to 600% of its current stock
price and this is if the price of gold doesn’t continue to rise. It may take a
few years, but there is no rush we can wait. In fact, that is our only
advantage, we are willing to have a long-term perspective.
Gran
Colombia GOLD (GCM:TSX)
Capitalization is $432 million of which 50% in cash and produces $149 million
a year. All this if the price of gold does not rise.
Freddie MAC (FMCC) and FANNIE MAE (FNMA)
These
are two banks who were affected greatly by the 2008 recession. The
simplification of the investment thesis is; that the banks have already paid
all its debts to the government. Politicians do not want to return the banks to
its shareholders, in effect nationalizing both which isn’t legal. Trump gave
hints of ending this, which may have revalued his shares by 1000%. We lost 30%
on these positions when we sold them. I believe the chance of the Democrats
winning the 2020 election is present. Therefore,
there would not be so much political force willing to fight for the
shareholders of Freddie and Fannie. Although they may surprise us any day.
Lumber Liquidators (LL)
Before the pandemic, we had a good
percentage dedicated to LL that fluctuated around $10. We sold these positions
at a small profit, as my impression of management began to deteriorate.
There were a couple of offers for the
company around $10.
Covid-19 happened, and we bought at
exactly $4. In a matter of weeks, it reached the previous price of $10. The
reason for selling was that their official reports mentioned great online
sales. When I tried to visit their website it was down for several days. I did
not think twice about selling the stock. And what happened next? The price raised
to over $28… Your humble servant did it again!
Many people argue that LL is going to
fail, for various reasons, but it certainly has the potential to be a great
company in a very fragmented and competitive market, as it once was. This
company goes to the “too hard” drawer in the world of Covid-19.
Wells Fargo (WFC)
It has been called the most hated company on Wall
Street, it has had several scandals in the last 5 years, but they are all
manageable in my opinion. The best metric for a bank is its price compared to
its tangible book value. Historically, WFC has traded at 1.4 times. In 2015 it
traded at 2 times tangible book value, more than JPMorgan, Citigroup, and Bank
of America.
Now it is trading at 0.6 times its tangible value. If
you see the projected cash flow, the price today should be $85 per share, not
$23. Wells Fargo has a lot of problems that they still need to solve such as
pushing its sales team to the point where they were opening fraudulent accounts
for their customers, very high operating expenses, low margins versus the
competition and exposure to commercial loans. Do not forget the avalanche of
mortgage defaults that are coming soon.
WFC has capitalized quite well for what is to come.
Banks make money from their deposits, and with all
these problems not only have deposits remained, but they have grown. Today WFC
has 1.4 trillion US dollars in deposits.
And while our investments in precious metals benefit
from a low-interest-rate environment, the bank does not. When interest rates
start to rise in years to come, banks will begin to expand.
Tankers
This industry is
incredibly hated and for good reason, it has been a lousy business for a
decade.
They are
beginning to enter a cycle where their earnings can go up substantially, with
some trading at 33% of their tangible book value. That is if they close doors
today and sell everything, our return would be 300%. I think that the tanker
sector, hated today and at a price that reflects it, is going to give us good
surprises in the next 2 years.
Others
Other stocks are
not of significance now and have been ‘frozen’ with no profit or loss. The
closed ones are; 869 Playmates toys limited, TLFA,
PSH, LFE and LPG. In general, we closed these positions to focus on others with
greater profit potential, considering new information. In none of them, we made
or lost substantial amounts.
Vertu Motors PLC (VTU)
Vertu Motors PLC
is a car retailer in the UK. A business with stable margins. About 75% of the
company's profits come from recurring service revenue and used car sales
combined.
It allows us to
have exposure to the British pound (GBP). It has more than 100 concessionaires
and owns half of the properties.
With a return of
11.73% on tangible equity in the last decade, buying those £44 of tangible book
value per share at just £26 is a 40% discount. Our long-term return would go
from 11.73% to 16.42% annually.
In the long term,
we expect to see a return on investment of 16.42% annualized for having these shares,
and they can double in the not so distant future.
There is a stock
that is responsible for 27.4% of this year's earnings and that I expect to go
up 500% more. However, it is so small that the price can move easily, so we
will keep it hidden until we sell it.
ProShares Ultra
Pro S&P 500 ETF (UPRO) and Direxion Daily S&P 500 Bull 3x Shares ETF
(SPXL)
We
took positions in these funds when the market fell. A lot of this year's
returns come from these two funds, and options we invested in.
More
about these two positions in the Financially Free Podcast, episode 31:
https://www.youtube.com/watch?v=4TZHlCyAuvw
or
https://financiallyfreepodcast.libsyn.com/31-50-a-year-guarantee-buffett-challenge-with-ney-torres
Initially, the positions in UPRO and SPXL grew
to represent more than 40% of the portfolio. They were positions we took when
the market crashed and the central bank declared that it was going to enter the
markets (manipulate them). Even if they had to buy the stocks and bonds
themselves.
I hypothesised that they were going to do
their best to reach levels from before the US elections and that is exactly
what happened. About 25% of the return this year was thanks to these positions.
While the implied volatility of the
options of these two funds stabilized (this means that they were very expensive
before) we changed our positions to two-year options (also called “leaps”) this
way we lowered our exposure to only 10% of the fund. These options were up
180%, representing about another 14% of our return of 84% this year.
We sold these “Leaps” because I believe the markets
are expensive right now and it can
take a long time to get your money back if you happen to invest on the top of a
cycle. Here is the Nasdaq, it took about 14 years to recover. This is not
market timing we just simply have better ideas.
Source:
https://www.macrotrends.net/1320/nasdaq-historical-chart
How do we know if the market is overvalued?
I do not know. But let me repeat:
"You don’t need to know a man’s weight to know that he’s fat” - Benjamín Graham
The metric that I like to use to
evaluate the market, in general, is price/sales. The Economist John Hussman has
shown that this metric is the one with the highest negative correlation with
respect to the returns of the market for the next 10 years.
That simply means that when price/sales are
high, the returns for the next 10 years are low, and vice versa.
A similar metric to the
one stated above replaces "price" with "market
capitalization" and "sales" with "GDP" how much a
country produces in a year.
This “Market Cap / GDP”
metric is also known as the “Buffett indicator” because Warren Buffett mentioned
that it is the best rule of thumb to assess whether a market is overvalued or
not.
“As of 2020-09-26
03:05:05 PM CDT (daily updates):
The stock market is
significantly overvalued. Based on the historical ratio of total market capitalization
to GDP (currently 173.5%), it is likely that you will get a return of -2.5% per
year from this valuation level, including dividends.” - https://www.gurufocus.com/stock-market-valuations.php
"2021 to detonate an avalanche of business insolvency"
The year 2021 is coming
and it is going to be anything but boring.
Attachment D
Thoughts on various matters
This
section is written to explain some important concepts.
Every
year I hope to write and explain a different topic.
I
saw this headline a week before writing this report:
“$92,033 - The average salary for a
Harvard University graduate 10 years after graduation. Harvard ranked at the
top of the Wall Street Journal's annual list of college rankings.” - Wall
Street Journal
Congratulations! You
just graduated from Harvard, it is a big 4-year endeavor and costs between
$47,000 to $78,000 annually[10]. You are certainly a lucky person, there are only 371,000[11] graduate students from the best university in the world. On a planet of
almost 8 billion people[12], where 50% is estimated to live on less than $5.50 a day (in 2018) and
10% lives on less than $1.90 a day[13].
Now you work 5 days a
week from 9 am to 5 pm, and probably more, to earn $92,033 annually. After
taxes you take home $56,267.76, assuming you do not pay any state or city
taxes. If your partner earned the same, you both would be among the top 5 to 10%
of the highest income in the USA, the richest country in the world. If your job
is in California or New York, for example, you would have to pay more than 50%
in taxes. In theory, all the money you earned from January to June went
directly to the government. Did I mention that your rent is more than $3000 for
a normal apartment? ... But in this example let us forget about all this. I am
going to let Harvard graduates take the lead, forget about the high rents and state
or city taxes. Let us imagine that they live with the same salary in another
country, doing remote work on the beach perhaps?
Now, what would have
happened if that student had invested the average annual cost of attending
Harvard ($62,500) and had invested it at 17.41% annually? You guessed it! A
$56,267.76 yield in the fifth year, as seen in the table below. The same amount
as you would have taken home in the form of a check, and with fewer taxes
because earned income is taxed quite different than investment income.
So by investing, after
four years you would make the equivalent of an average Harvard graduate with a full-time
job who also paid a fortune on tuition and spend four years of their life at
the best university in the world (assuming you don't pay state and other taxes
that are automatically deducted from your salary).
But unlike the
university graduate, the investor doubles his capital every 4 years.
This is not a criticism
towards Harvard students a quality education fulfils many more goals in life
than simply making more money. But this is the financial reality that I was
faced to see a couple of years ago when I was applying to Stanford in
California (I'm not saying they would have accepted me by the way).
I do this simple
exercise to highlight the power of compound interest and the advantages of
independent thinking. That is what this fund is trying to do for its investors
and me.
It has taken me 15
years to start this small fund and 15 years to understand how to compete
against Wall Street and the secret is... patience.
Why 15 years? Because I was trying to create enough capital to start, but life goes up and down, turns and gives you surprises. Now I understand that I should have just started 15 years ago and focused even with $10,000.The problem is that we are always in negotiation with ourselves, waiting for something important to happen; "if I only sell this property", "if I get this credit", "if they accept this offer", "after the next raise", "if I liquidate inventory ”… then I can be calm and invest. Next thing you know,15 years have passed. This is the catch; investing is more like a dropper than the allocation of big chunks of capital. If in those 15 years anyone that had saved $ 326.15 per month and invested at the same rate as our imaginary Harvard student, they could have achieved the same result.
If for a moment you
thought this exercise did not apply to you because you did not have rich
parents to pay for Harvard, you do not have an excuse either. You just had to
start investing small amounts earlier.
Plus “Harvard
University” is a metaphor that represents any financial goal you have like retirement
or legacy.
I want to use these
annual letters to explain what has taken me so long to learn. Hopefully, I can
make it easy and entertaining. If you can sit down and read the following pages
you will understand the world and the future a little better. Enjoy!
Ok, let’s make money
investing! For that we first need to understand:
How does the economy work?
(An easy explanation)
Every time you buy or
sell something, you have just made a transaction "the economy",
"the market", is the sum of all these transactions.
Each transaction is the
exchange of money or credit for goods, services or financial assets.
If we add all the
credit that we use plus the money that is spent, we have the total
expense.
Money + credit = Total Expense (the sum of goods, services, or financial
assets)
So far nothing
difficult to understand. Right?
Total spending is what drives
the economy (at least in economic theory):
Total
expenditure / total quantity (of goods, services, financial assets) = Price
or
Total
Expense / Things we want = Price
That is a transaction,
so far, I have not described anything new, only described what seems obvious.
But! If you can
understand how transactions work, you can understand the economy and where it
is going (you can see the future!)
What is a “market”?[14]
A series of transactions
of some kind.
Example: car
transactions. We call this the “Car Market”. Transactions in sugar, the “Sugar
Market”. Etc.
Today we will focus on
the Stock Market.
Who is the
biggest buyer and seller in a market?
The Government! In the
US[15] and many other countries this government consists of two main parts:
1.
The “Central Government” who is responsible for spending
the money and
2.
The “Central Bank” that controls the flow of money,
important to control the economy and does it in two ways:
1) raise and lower
interest rates
2) print money
The
least understood part of the economy is CREDIT
Do you want something
you cannot afford? A good, a service or a financial asset? To start a business
or buy a house you need credit!
If credit is cheap,
more people get into debt.
Whoever lends has just
created an asset and receives interest, and whoever receives the money now has
a debt and pays that interest.
Note: Credit can be
created by two ordinary people out of thin air! As you surely understand,
everything depends on trust, when trust between humans disappears, the system
begins to break down.
When debt is spent it
becomes someone else's income, and this, ladies and gentlemen, is what drives
the economy.
It is much easier to go
into debt for 100,000, 1 million, 2 million, 100 million dollars than to earn
it by selling something. That is why it is so important to understand credit!
What do you need to
access credits?
1) Being able to pay it
2) A guarantee
Why does the
market go up and down so abruptly?
The higher your income,
the greater your ability to pay a debt. The more debt, the more spending, the
more income for someone else, this effect is multiplied through society and the
economy begins to produce more things, more goods, more services and more
financial assets.
We call this productivity,
and it is easy to predict in the long term.
Productivity:
Source: https://www.researchgate.net/figure/Real-US-GDP-per-capita-1870-2006_fig1_46457345
When investing we try
to forget about the short-term fluctuations, as much as possible and focus on
what is predictable and knowledgeable. You guessed it! Productivity.
What is this
“productivity”?
Productivity is that we
get better at creating things with time (the knowledge and things that help us
to produce these goods and services is also called technology).
Technology helps us make life more pleasant and bearable. Now you have more things
to improve your standard of living than 200 years ago. Only 20 years ago the
best way to communicate with my parents from another continent was a “long
distant call” (expensive) or letter (slow). Today I can have video
conversations through a cellphone with anyone on the planet basically for free.
We can access the
brightest minds and ideas on the planet from any cellphone or computer. (Now
...if most people prefer to be distracted by watching Netflix instead of
improving their productivity, there is not much you and I can do about it, I
guess our job gets easier for lack of competition).
Those who work hard and
improve their productivity every day increase their standard of living faster
than those who indulge easily.
When someone becomes
innovative, they can create something better or cheaper. This creates
inequality. If you ever think that life is unfair, I hope you know that it is
true, but that the best way out of it is to innovate. That is the time that you
want to create something new or different that others appreciate.
But not everything is as
obvious as trying harder, doing more and doing better! Long-term productivity
is easy to determine, but there is a trap that allows people and governments to
steal from the future to feel rich today and produce more… momentarily: DEBT!
Why debt is
stealing yourself from the future?
Because debt is a
promise to take my productivity (from the future) to pay interest ... in the
future.
What creates abrupt
rises and falls in any market is debt and this exists in two large cycles, one
of 5 to 8 years, and another of 75 to 100 years.
Below you will find a
graph of gross domestic product growth (all the things a country produces in a
year) versus time. It is a very rudimentary way of measuring the average
standard of living of human beings. Assuming that the more variety of things we
create or produce, the better the standard of living[16]. Do you have a rare disease? The more specialized and productive
society is, the greater the possibility that you can get cured, and the cheaper
it is.
Source:
https://getmoneyrich.com/economy-and-short-term-debt-cycles/
Now that you understand
this:
•
You know that every decade, the world “breaks” for some reason at least
once every seven to ten years because of the “short debt cycle”.
•
When there are problems, everything that was built in decades falls out
the window in a period of two to three years into a "Depression", but
productivity continues its slow path, which leads us to have a better standard
of living in the future (that's why I'm optimistic but only in the long term).
•
In those couple of years (depression) it is the best time to buy at a
discount, this includes financial assets. It is precisely when there is greater
uncertainty that you must invest. When most people say, "let's wait to see
what happens" (example political elections). Uncertainty is and will
always be our ally.
•
The general problem is having cash or credit at the moment when
everything is at a discount. When you have done your previous work well and
have this cash or credit the decisions are obvious.
•
This cycle is predictable
•
What you must do throughout your life is specialize, be more productive
in something that others want or need despite short term fluctuations.
•
Stop watching so much Netflix / TV!
Credit
versus Money
Credit is about 15
times bigger than cash (in US dollars).
Money is the only thing
that consolidates or pays a debt.
Therefore, the system
is made to constantly generate more debt (due to interest). If we tried to pay
all debt the system would "break", it would stop working. The name of
the game, therefore, is "good debt".
Debt is good if it is
invested efficiently.
Debt is bad if it is
spent or inefficiently placed on non-productive things. The wealth you have
saved in the past (savings) or “stolen” from the future (debt) is destroyed.
Placing money
efficiently is what an investor does! That is what I do and what I specialized
in for 15 years! It is what makes me productive in this society
Note: The best two
hours invested in your financial life is probably watching the series created
by Mike Maloney on his YouTube channel called "Hidden Secrets of Money”.
Here Mike takes an extremely complicated topic like the history of money and shows
how it works in easy to understand videos with animations. Like a short documentary.
Why
do you have to work?
The question seems silly. The answer? Because you have
expenses!
Next question: What is the biggest expense in your
life?
This answer is not so easy because it varies depending
on your level of productivity.
Some may think “food $ ____, mortgage / rent $ ___,
insurance $ _____etc.”
But the more productive you are, the clearer the tax
issue becomes.
Imagine you made $1 million this year. The median tax
rate for taxpayers making more than $1,000,000 is 33.1%... That is $331,000
Let's exaggerate, imagine you made $10 Million this
year. There is no way you can spend 33.1%[17] of that on food,
education, etc.
But there is a tax that you are paying right now, in
the same proportion as the millionaires and the poor. It is an invisible tax…
and there is nothing you can do to avoid it except invest. This ‘invisible tax’
is called inflation!
Inflation
What this chart shows
is that, depending on how you measure it, you lose between 4% to 6%[18] value on your money annually. You can buy 4-6% less with the same
amount of money. How much did your bank pay you this year? Ha!
If 4% per year does not
scare you, it is because you have not thought about the long-term compounding
effect that this has on your savings and your income:
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Year 6 |
Year 7 |
Year 8 |
Year 9 |
Year 10 |
|
$10.000 |
$9.600 |
$9.216 |
$8.847 |
$8.493 |
$8.153 |
$7.827 |
$7.514 |
$7.213 |
$6.925 |
An inflation of 4% is
like having a compound annual expense of 4%. This includes your salary, rent,
savings etc.
I am not going to make
a graph with 6% real inflation, so you don’t stress out.
Inflation forces you to
work and invest. If you don’t your savings will be worth even less and less and
your income too! That is why every time you must work harder, be more
productive or be innovative.
Inflation passes wealth
from your pocket to the central government, magically.
In our system, the
politician the most popular politicians win elections. To be popular they
usually promise more things. The government makes more promises and prints more
money to pay for all these promises. The value of the money that politicians
use comes at a cost, collection of taxes and the devaluation of your savings.
Every time there is a war, you pay, every time the market crashes and the
government jump’s in to save the companies that are “too big to fail”, you pay!
You just do not realize it immediately. Unfair? Completely. But the question is:
what are you going to do?
In 1960 the average
salary in the USA was enough for a person with a normal job to have a house, a
car and be able to support his partner and children without any problem. Today two
middle-class jobs hardly allow you to survive. Sadly, if you do not invest, you
will not get ahead, plain and simple.
Deflation
Deflation is the
opposite of inflation. The price of things begin to fall, therefore, your money
can buy you more!
Economists avoid
deflation in all possible ways, because when the price of things fall: There
are no longer profits, there are layoffs, companies begin to fail, and the
system begins to fall under its weight. Eventually, there are mass
demonstrations and the most radical candidate who promises to solve everything
is generally elected, for example, Hitler!
The objective of a
central bank is generally to have low inflation. This is easier said than done.
When there is a lot of
debt the government tries to stop inflation by raising interest rates. For them,
it is like applying a brake. By the way, the brake is quite effective.
When they want the economy
to accelerate, they lower interest rates (this is like pressing the gas), so
that people get into debt and there are more transactions, and the economy is
activated.
The market is very
intelligent, so economists know that if they want to have a noticeable impact,
they must surprise the public. That is why generally when interest rates rise
it is done suddenly, but they can’t alert anyone if the markets expect a rise
in these rates, prices are quickly rectified. Many times, government
authorities bluff to obtain their objectives, sometimes that is all it takes,
they do not even have to raise or lower rates, only to suggest that they could
do it can move the market.
Market participants,
millions of people, adapt and anticipate any stimulus.
Therefore, the monetary
policy game is so difficult and not just a mathematical formula. I do not know
anyone who can predict interest rates to consistently make money.
"We've long felt that the only value of stock
forecasters is to make fortune tellers look good.". - Warren Buffett
Politicians,
they don't know what they are doing!
Ha! I always hear this.
Those who say it do not understand that even the politician’s hands are tied,
they are part of a much larger, predictable machine.
If you understand this,
you will be able to see the future much better than the average person, so pay
attention!
When an economy gets
into trouble there are only 4 things you can do:
1.
Cut expenses (business and government)
2.
Reduce debt (forgive or restructure)
3.
Redistribute wealth from the rich to the poor (do you want more taxes?)
4.
Print money (Countries like Ecuador do not have this option because at
some point in their history they did it so much that their currency was
destroyed and started using the US dollar)
Cutting expenses, reducing
debt and redistributing wealth through taxes create more depression.
Whereas printing money
is easy and creates inflation (and a false sense of progress at first).
If governments can
balance their inflationary efforts with deflationary ones, that is, if all
their efforts to activate the economy equal all the force that is destroying
the economy, a recession is quite bearable. Since inflation would not be a
problem, there is real economic growth and debts decrease with respect to
income, all good, even though we are on the decline. But wealth will pass from
one part of the population to another. Which side are you on?
A final
note, given the business closures and the difficulties we are going through.
Without a doubt, as an
entrepreneur I understand very well what it feels like to go bankrupt. To close
a business, lay-off staff and have debts. It has happened to me a couple of
times in my life. Capitalism and life can be brutal. When you read that a
company goes bankrupt, remember what it means is that the company now has new
owners. What technology, pandemics and recessions do is to reorganize us as
humans into new perspectives, new projects, new professions.
“History
doesn’t often repeat itself, but it often rhymes” - Mark Twain
Last century humanity
went through 10 pandemics[19], the worst was in 1918 with the Spanish flu that killed 3-5% of the
world's population. Humanity went through many wars of which two world wars[20]. In 13 occasions there was almost a nuclear attack and yet the world
production went from $3.42 trillion in 1900 to $60 trillion in 1999. In one
lifetime humanity prospered 20 times more despite all these difficulties.
Although "life
does not wait for anyone", you shouldn’t doubt that the best is yet to
come. "Waiting for things to settle down" (whatever that means) is an
awfully bad idea. The future is always uncertain. The most recent events tend
to occupy more relevance in our mind and it always seems that “now is
different”.
In the stock market,
you must invest especially when there is uncertainty because when there is no
uncertainty there is optimism. That optimism drives up the stock price, and the
more you pay for a stock, the lower your return.
“Buy when
there's blood in the streets, even if the blood is your own.” - Baron
Rothschild[21]
This
last sentence shows that when investing, IQ doesn’t matter as much as the
temperament and character.
“Investing is not a game where
the guy with the 160 IQ beats the guy with the 130
IQ. Once you have ordinary intelligence, what you need is the temperament
to control the urges that get other people into trouble in
investing.”. – Warren Buffet[22]
Covid-19
I think we all know
people who are no longer with us because of Covid-19, if you are reading this,
you are among the lucky ones. I want to end this year with condolences to those
who have lost a loved one in this pandemic.
Attachment E
Other notes
FinanciallyFreePodcast.com
Episode 31) 50% a year
guarantee Buffett challenge with Ney Torres
From
the famous quote:
“If I was running $1
million today, or $10 million for that matter, I’d be fully invested. Anyone
who says that size does not hurt investment performance is selling. The highest
rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You
ought to see the numbers. But I was investing peanuts then. It’s a huge
structural advantage not to have a lot of money. I think I could make you 50% a
year on $1 million. No, I know I could. I guarantee that.”- Warren Buffett
A year ago, I
got interviewed and I said that we could do this. We opened a real money
account and 9 months later we reached our goal. In this episode, Veerle van den
Berg interviews me on how it was done.
Episode 21) Mary Buffett:
Value investing and stories about Warren Buffett.
In this episode we talk
with the charming Mary Buffett on her stories on value investing, and how she
found out that her father-in-law was becoming the best investor in history. She
is so kind, really an outstanding person.
Episode 10) The Best Trading
Coach in the World - Van Tharp
An interview with who I
consider the best trading coach in the world because he has focused more than
anyone on psychology in trading for decades. An incredible career, one of the
best minds on trading in the world.
Episode 29) Brad Sugars
on Financial freedom, buying businesses without your own money
Don’t miss our talk with
business coach Brad Sugars. He is the pioneer in the business coaching industry,
he created the first successful business coaching company “Action Coach” with
over 1000 offices around the world.
Chuck Norris wishes Ney Torres a happy 37th
birthday! (Special
episode October 11th,2020)
Special thanks
to:
Doctor Veerle Van den Berg, for helping me edit the English
report for hours and hours, obviously my native language is Spanish. She has a
sharp mind, never stops to amaze me how smart she is.
Legal
information and disclosures
This
letter does not constitute, and should not be construed as, an offer of
advisory services, securities or other financial instruments, a solicitation of
an offer to buy any security or other financial instrument, or a recommendation
to buy, hold or sell a security or other financial instruments in any
jurisdiction.
The
provision of information in this letter does not constitute the provision of
investment, consulting, legal, accounting, tax or other advice.
The
information presented in this letter reflects the current views of the author
as of the date of the letter. As facts and circumstances change, the views of
the author may also change. This letter may include forward-looking statements.
These forward-looking statements involve known and unknown risks,
uncertainties, assumptions, and other factors that may cause actual results,
performance or achievements to be materially different from the future results,
performance or achievements expressed or implied in such forward-looking
statements. Also, new risks and uncertainties may arise from time to time.
Accordingly, all forward-looking statements should be evaluated with their
inherent uncertainty in mind. The Fund does not undertake any obligation to
update this letter.
PAST
PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS, WHICH MAY VARY.
Certain
information contained in this letter, such as market and economic information,
is obtained from third party sources and may not be updated until the date of
the letter. While such Sources are believed to be reliable, the Fund assumes no
responsibility for the accuracy or completeness of such information.
[1] Value
Investing Fund, INC is a corporation incorporated under the laws of Florida, on
September 1, 2019. I do the closing date, but I hope to publish the report
until October 11 of each year.
[2] It may not look like much but a 15% compounded
interest rate would growth your capital 400% in 10 years
[4] Gurufocus - https://www.gurufocus.com/stock-market-valuations.php “Los mercados no prometen
ganancias pronto. Con base en la relación histórica de capitalización de
mercado total sobre el PIB (actualmente en 173,5%), es probable que obtenga un
rendimiento de -2,5% anual incluidos los dividendos” Gurufocus - https://www.gurufocus.com/stock-market-valuations.php
[5] https://www.jpmorgan.com/cm/BlobServer/Eye_on_the_Market_September_2014_-_Executive_Summary.pdf?blobkey=id&blobwhere=1320684901654&blobheader=application/pdf&blobheadername1=Cache-Control&blobheadervalue1=private&blobcol=urldata&blobtable=MungoBlobs
[6] https://poseidon01.ssrn.com/delivery.php?ID=440117105065027124110114085116122122061052048060033049127111011125116107064019025074050061056028053034110065023010064127027124098041043075040104065104073095066009034071111004002078095031125119020118011126025126086007026000007115071126021093018094&EXT=pdf
[7] Fiat money is
government-issued currency that is not backed by a physical
commodity, such as gold or silver, but rather by the government that issued it.
- investopidia
[8] The Snowball: Warren Buffett and the Business of Life Book by Alice Schroeder
[9] Get Gold as Cash and Bonds Will
Be Destroyed Warns Billionaire Frank Giustra - Stansberry Research
[10] https://www.cnbc.com/2019/04/05/it-costs-78200-to-go-to-harvardheres-what-students-actually-pay.html
[11] https://www.harvard.edu/media-relations/quick-facts#:~:text=Alumni,in%20some%20202%20other%20countries.
[12] https://www.worldometers.info/world-population/
[13] Lakner,
Mahler, Negre, Prydz, 2020. PovcalNet, Global Economic Prospects via World Bank
[15] Nota: I generally describe the US market,
because that is where we invest most of the fund, but this letter is addressed
to people in North America, Latin America, Europe. The markets work similarly
in capitalist countries
[16] Note: Many people will argue that measuring gross
domestic product is a wrong way to measure humanity's progress since material
things do not represent well-being, and it is true. But assuming that the goal
of the person's well-being is peace or happiness, the only objective way to measure
well-being is through measuring the number and type of synapses in your brain,
which is impossible now. Until then this is the best we have, and we use this
graph. If you did not understand this note read "Homo Deus by Yuval Noah
Harari"
[17] https://taxfoundation.org/how-much-do-people-pay-taxes/
[18] politicians
always try to change this to look good, they use the red line, I use the blue
line for reference
[20] https://www.iwm.org.uk/history/timeline-of-20th-and-21st-century-wars
[21]
https://www.investopedia.com/articles/financial-theory/08/contrarian-investing.asp#:~:text=Baron%20Rothschild%2C%20an%2018th%2Dcentury,streets.%22%20He%20should%20know.&text=The%20original%20quote%20is%20believed,the%20blood%20is%20your%20own.%22
[22]
https://fs.blog/2011/10/warren-buffett-on-temperament/#:~:text=%E2%80%9CInvesting%20is%20not%20a%20game,people%20into%20trouble%20in%20investing.%E2%80%9D
