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Newsletter - February 11th, 2023

Updated: Mar 24, 2023

Dear Reader,

Attached is our latest list of apparently cheap stocks generated from basic value screens (low p/e, ev/ebitda, debt/equity, etc.), which don’t meet our investment standards - and our reasoning.

This may help you avoid a few ‘value traps’ or stocks that aren’t sufficiently attractive compared to the opportunities available today.

For reports of stock ideas that pass our quantitative and qualitative standards, join at the link below:


Notes from the past week below including Semiconductor Chip Choke Points, Americanas' Accounting Scandal, and more:

Contentment is Key

Contentment is the foundation for success. It puts you in the best frame of mind to enjoy life, grow consistently, and avoid unnecessary risks. We believe this really is the key to Buffett's low-risk, sensible approach to investing and life - the most beautiful character trait investors can develop.


If Farmlands Can Go Crazy ...

Here, Buffett recalls when farmland was subject to a crazy bull market in the late 70s/early 80s. The prevailing mantra was 'Cash is trash' during a period of high inflation.

After the crash he purchased farmland at $600/acre, which was selling for $2,000/acre a few years earlier.

The human psyche seems geared towards manias and crashes in the economic world.

If people can do crazy things in a generally stable asset like farmland, imagine the opportunities available in stocks. Emotional stability is likely to be amply rewarded.


And Bond Market Opportunities (Against Smart Money)

Here Buffett points out bond market inefficiencies pre-2003 including: yield discrepancies between on-the-run and off-the-run treasuries; and the yields on offer when Oaktree (run by Howard Marks) purchased junk bonds in the crash of 2002 vs. yields when they sold 14 months later.

At times, especially during normal markets, it's hard to imagine that investors can ever have big opportunities against seemingly smart money.

It's always worth remembering that there will be times of mass paralysis; and that's when you must strike - remember that low-risk/high-uncertainty is your friend.


Bill Gates' Money Manager

We've rarely seen coverage of Michael Larson's investment approach - so the following video seemed interesting.

We haven't corroborated this information but his objective was to generate uncorrelated returns with Microsoft stock (naturally) and the general stock market; with a bond-heavy allocation (~70%) and diversified private equity investments (~30%) - later moving into value stocks (including Berkshire Hathaway itself).

His success reiterates the importance of a low-risk, bond-like approach with the appreciation potential of stocks - something we strive to obtain with our stock selections.


Americanas' Accounting Scandal

Americanas is a Brazilian retail chain in the midst of an accounting scandal. Interestingly it has Jorge Paul Lehmann (of 3G Capital) on its shareholder roster and PriceWaterhouse Coopers as its auditor.

The accounting issue appears to be that banks were paying the retailers' suppliers in advance but the resulting interest-bearing loans weren't disclosed as such on the balance sheet.

Such arrangements are relatively common in business but the accounting standards are fairly clear.

A simple way investors can ensure they aren't hoodwinked is to insist that the working capital position is strong - though it's not unusual for large entities to operate with negative working capital. A careful reading of the footnotes is necessary - even so, negligence by high-profile companies, auditors, and investors cannot be ruled out.

Relevant section highlighted in the print article below:

Download PDF • 145KB


Semiconductor Choke Points

The following video gives a good summary of the semiconductor choke points in the world economy today.

It's effectively China vs. USA (with Taiwan, Japan, South Korea, and Netherlands in their corner).

This is likely to be a fiercely contested battle for technology that's going to determine dominant power status - and affects a large number of industries.

Our bet is on the US Military (for now), and it's likely investors are going to have to choose a side even if they don't want to.


Until next time, Have a great week!


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