Blessed by the Potato

Out on the Island there’s a minor fad in putting giant decorative stars on the sides of houses, and more recently butterflies/dragonflies. We asked around to try to see if there was a reason why people had these stars on their houses here, if it was some kind of local tradition, superstition, or signifier. It’s apparently a common question from tourists, and there’s no real answer. The stars don’t signify anything in particular (though one person suggested it may have started as an Acadian thing), they’re simply decorative. It’s just a fad that happens to have caught hold here, but not back in Ontario.

The vacation was very much needed. Very much. I didn’t take my full vacation in 2010, and the week I took off I didn’t go anywhere, so it was good to just get out and sit by the ocean and read some books completely for pleasure, as well as play through some video games and watch the Game of Thrones mini-series. I can’t say that I’m fully, completely de-stressed from the thesis/future career uncertainty stress, but I no longer find my heart seizes and jumps 3 inches higher in my chest every time my email goes “boo-woop.”

Even on my vacation I had a to-do list. Some of it was merely playful: the top few books/games I wanted to read/play through (Girl with the Dragon Tattoo, Leviathan/Behemoth, Portal 2, Assassin’s Creed), some of it was things to do out east (garlic fingers, biking, visiting relatives, and garlic fingers), and some was to be somewhat productive in a non-thesis related way (enter a short story competition, draft a few posts to have a backlog for when my time is precious for the thesis, write some cover letters). While I got through most of the reading/playing list (didn’t get to a few books or Assassin’s Creed), I didn’t even touch the writing part of the to-do list.

I’ve already burned through many of my reserve drafts, and that was with a nearly complete shut-down of posting while I was gone. I expect then that I’ll only post once or twice a week at most for the rest of the summer, unless someone says or does something stupid that I can’t resist commenting on. Oh please say something stupid! Anyway, this post will have to last you a while. Fortunately, it’s long. Also, the comments have been re-enabled now that I have a stable internet connection to clear out the spam folder every day or two.

Speaking of internet connection, tethering to my BlackBerry was reasonably useful. For most of the trip I could access the internet, and it was reasonably fast to load (often a long latency time before it started, then the page would snap in pretty quickly). But as the trip went on, it got more and more screwy: taking longer and longer to resolve DNS requests, and often failing at that. It would give me a message about a hardware error in the modem and disconnect (i.e.: lost connection between PC and BB). Then one night the internet just went dead completely, even on the handset itself, though the signal meter still showed one bar (down from 3/4). Then, mysteriously, my BB displayed the red message light on solidly and shut itself off. I thought it was dead, but it came back to life not too much afterwards and I could connect again with the handset, but with less luck on the PC. So except for those last few days, it did work quite well. Haven’t received the bill yet to say how much Bell ended up deciding to charge me for the tethering.

Book mini-reviews:

Spoiler warning start!

A Game of Thrones: A Song of Ice and Fire: Book One: A fantasy book, with undead creatures and dragons present in the universe, but not making much of an appearance, so mostly court intrigue and betrayal. Knights and war and honour and blood. A very large set of characters seemed really well laid out, with depth to every one. In particular though, George R. R. Martin has no qualms about who lives or dies, or where the plot may take us. He is ruthless, and I have to say I was genuinely surprised at the plot twists (last chance before spoiler-ville!): for most of the book he seemed to be building up the Dothraki threat, even giving Drogo a good reason to get good and mad and charge across the narrow sea. I was so sure that that was what the book was building towards… when all of a sudden he’s felled by a common infection. The HBO min-series was also great: very true to the book, and in the few places where it wasn’t, I thought the show offered some improvements. For example, Catelyn Stark wasn’t as mean to Jon Snow in the show, which made her more likeable off the bat, and I much preferred “white walkers” to “the Others”. Who uses such a vague term as “the others” for a menace? I hated it in Lost, too. Very well-cast all around, too.

If you’re a fan of fantasy, or even just fictional political intrigue (and can at least tolerate swords and a fictional medieval setting), then I recommend it. And I’m highly looking forward to finishing the rest of the series.

End of spoiler warning section!

Girl with the Dragon Tattoo: This has been a pretty popular book, with two movies made of it now (a Swedish-language one, and a Hollywood version). It’s a murder mystery thriller, and it was pretty good, though I’m not sure I’d have even bothered to write about it if it weren’t already popular (and perhaps sadly, it’s popularity means my opinion matters even less). There are definitely some points in the book where you can tell it’s a translation. My favourite was the “and he was up for the Big Journalism Prize” — presumably translated from a named Swedish prize that English readers wouldn’t recognize. But it does read well. I liked the main characters, and the suspense built, making it a real page-turner. However, it’s not for the faint of heart: the crimes involved are vicious and graphic. The sex scenes are plentiful, and the morals are loose. Indeed, if it weren’t for the fact that it was already an international bestseller with lots of publicity, I wouldn’t feel comfortable recommending it: though it was a good murder-mystery novel, it wasn’t spectacular enough for me to want to come out and recommend it in light of the subject matter. If you have a sensitive personality, you may want to give this one a pass, despite the hype.

[Note, the above links are to my affiliate link at Amazon, and at the moment, Game of Thrones is on a pretty good sale. I do get a small kick-back if you buy via that link, but it doesn’t affect my enthusiasm for the books.]

A site I hadn’t seen before, Metal Augmentor put up a thorough look into some of the background issues with Sino-Forest, including the confusing terminology. Indeed, quite aside from any fraud issues, MA points out that I made one of the mistakes mentioned, over-counting the amount of owned plantations (where seedlings are planted and money is made by patience and silviculture) based on the company’s confusing use of terminology.

I was just having an off-line discussion about the Sino-Forest issue, and how the MW report had at least a few mistakes, while the company’s response was lacklustre, so it was hard to say what the truth of the matter was. Though I had a passing interest in the many hunters of Chinese frauds, and had heard of MW before the scandal broke, MW wasn’t one of my most esteemed detectives. The person I was talking to was interested in making a small bet on SF, and I said that if one were in a gambling mood, perhaps this could be the one sketchy-looking company that was indeed real. But, I warned, while I might bet on MW getting this one wrong, I wouldn’t bet against Hempton. Wouldn’t you know it, the next bloody day Bronte Capital has weighed in on the side of shenanigans in a series of posts. John says:

“As for analysis of the accounts – the Sino Forest accounts contain enough red-flags to make any eagle-eyed observer cautious. I am sympathetic to making an investment without looking at the accounts at all because limited time and shortcuts often make that an efficient way of behaving. […] But if some analyst really did a detailed look at the accounts and did not spot the red-flags then they are incompetent. For that I have no sympathy at all.”

Well, I guess I have to publicly admit I’m incompetent. I’m an amateur and lack experience, granted. But before I bought I was looking (albeit with a much more limited time budget than a full-time professional fund manager) specifically for signs of fraud. I’ve been up on my game enough in the past to avoid a few doozies (though never gone short), and to follow along with the analysis of some other alleged frauds, but totally missed this one. Indeed, I still can’t see it as clearly in TRE as these guys allege. I’m merely confused, as I was before, which is how I ended up making an investment based on a weak heuristic.

This post also happens to come at basically the half-way point of the year, so I figure I’d update my spreadsheets and see how I was doing. I thought it would be absolutely dismal: I took a bath on Sino-Forest, and lost nearly as much on TEPCO. I’ve been holding Yellow Media since 2008, and it’s had yet another bad year — down some 60% (not including dividend). Was it really just a few months ago (when it was trading around $4.50) that I said you couldn’t get much more contrarian sentiment? Yikes. Though I mercifully kept my positions in TRE and TEPCO small, I can’t say the same for YLO, so I figured that those three big losers would pretty much sink me here.

Indeed, I did underperform my personal benchmark (50/50 TSX/S&P500) by a noticeable margin, but not as badly as I feared. I was saved by a few good moves: Canadian Helicopters was up ~50%, TD was up 10% YTD, and up 16% at one point (where I sold half so locked in some profit). A few other positions had modest returns, in particular Canexus and Veresen — though the moves weren’t big, the positions were (and I’ve since trimmed them both down, trying to not let any one position get over 10% of the portfolio). My Freddie Mac preferred shares are up nearly four-fold in the last six months, but since it began as a small position and was down 65% in the first place, that big percentage gain was small in absolute terms, and just barely balances one of the TRE/TEPCO losses. Overall I’m down less than 1%, compared to the TSX up about 1%, and the S&P500 up about 5% in CAD (I’ve estimated the dividend yield since I don’t know of a good site for total returns stats, though in the past I took the time to create a model portfolio with XIC & XSP). So a miss of about 3.5%. Not terrible for having made some truly godawful investment decisions recently, but not the kind of performance I can keep up if I’m going to continue attempting active management. Unfortunately I don’t see any catalysts for outperformance through the rest of the year, so I don’t think I’ll be making it up this year.

One thing I did do right was my rabbit analogy for the way the TFSA works. Someone even called it “perfect” in a recent CMF thread, which is a nice ego boost :)

Oh, and finally: I have a defense date! Just another month and a half, and I get to run the Gauntlet of Science and prove myself a true doctor. Or you know, fail miserably or whatever. Either way, it’ll be done before the end of August!

I didn’t think I’d have any internet access out here: my new computer doesn’t even have a dial-up modem, and this part of PEI has traditionally been a black hole for cell phone service (when we could pick up a signal, it was often from a New Brunswick tower across the water on a clear day). They seem to have put in a new tower because I’m getting pretty decent access via my blackberry, at least right now tonight. I tried checking this afternoon and it would work in fits and starts and many addresses wouldn’t resolve (but that may have been an unrelated problem as there was a service notice on my mail provider’s page).

The weather is still unseasonably cold, but at least it was somewhat sunny today. I finally put the bike back together and went for a little ride down the highway. I only did 10 km round-trip, but I was pretty tired at the end. Not only am I out of shape after the last few weeks of being chained to my desk, but PEI is much hillier than London, and the wind was just killer. The headwind on my way back was severe enough that I couldn’t hear cars coming up from behind at all, and at one point going uphill I swear a gust stopped me dead in my tracks for a moment despite heavy pedalling.

The colours seem impossibly vivid today. I don’t know if it’s just the late spring, or the contrast from the first sunny day after over a week of grey skies, but the soil is really red, the fields are popping green, and the sky was bright blue. Wayfare remarked that she thought it might be an anneurism, but we both thought it looked like that today. As a testament to the accumulated stretch of wet weather, when I rode my bike across the lawn to get to the laneway the ground went “splurt sploosh” underneath me, and the trench my tires pressed into the ground could still be seen at the end of the day — I think it may be permanent.

I’ve been trying to relax, play some games, enjoy the outdoors, read some books, and sleep in… but I can’t help but check my email before going to bed. It never seems to have good news these days. On the markets, I saw tonight that my Capital Power is going to be acquired at a non-existent premium ($19.40 when it was $21 just a few months ago), which I guess isn’t terrible news since I was looking for something to sell anyway (still no jobs lined up), though I really thought it was worth more than that. Also, I just got the news that Paulson has sold all his Sino-Forest, which, rightly or wrongly, is probably going to close the book on that story. Though I’ve taken my all-too-painful lumps on that one, I know at least one person took a small speculative position after the MW story broke, in part on my “analysis” of the situation.

On the science side, I just got an email that my paper was rejected. Again. I don’t know what I’m doing wrong with this paper. Well, I do know: I have a whole list of things from the reviewers. But I don’t know why they’re flat-out rejecting it based on that list, when all kinds of other crap gets published. Nothing there seemed like it couldn’t be fixed in revisions. Ugh.

Still no date set for my exam, either.

Anyway, I installed Portal 2 on my laptop a fair while back, and hadn’t had a chance to play it at all. Finally on vacation, I burned through it over the last two days. Good fun: the writers for that one are top-notch. There were one or two points in the gameplay where I started to get really frustrated by how particular the portal gun was about which surfaces were suitable for creating portals — and one or two where the lack of portal-able surfaces made a puzzle perhaps easier than it should have been (“well, I guess I have to put a portal there since it’s the only damned spot on that whole side of the room that’ll take a portal”).

I also brought Assassin’s Creed and Fable 2 with me, but I think the next few days will be spent with books since we brought about two dozen of those with us, and because Wayfare wants silence, and unlike my laptop, the TV doesn’t have a headphone jack. Speaking of headphones, I borrowed Wayfare’s Sony earbud ones and was really impressed with how ergonomic they were. The little straight bit sticking out of the buds for the wires is asymmetric and fits perfectly into the little gap between that little bit to the front of the ear (I keep trying to call it the preauricular point, but that’s at the base of that little projection) and the rest of the outer ear. I don’t wear headphones that often: I have the earbuds that came with my blackberry just in case I do want them at some point, but none of the 3 sizes of earbud insert stays in my ear very well, and then I also have a large set of noise-cancelling headphones that I remember to pack for plane trips, but not road trips. I may have to invest in a good set of earbuds.

And remember: while I’m gone comments are disabled. Feel free to email me though!

What makes a good investment? I would say we can all agree on a definition along the lines of something that will be worth more in the future, finding some balance between maximizing return while minimizing the risk of loss.

There’s lots of room for discussion about which asset classes best meet those definitions, how to go about finding them, and how to balance the potential returns with the risks.

But, is the ability to touch an investment a quality that makes for a good investment? I’ve heard many times about how real estate is an attractive investment because it’s tangible. Yet I’m left wondering, how does being able to touch it make it improve my future returns? Maybe it can be seen to reduce the risk of loss since it’s unlikely to be worth nothing in the future (313 excepted), but a liberal sprinkling of leverage eliminates that benefit.

And of course the grand counter-example: was real estate in the US in 2006 a good investment (hint: the answer is no). Was it any less tangible though?

I’ve heard that about gold now, too. I’ve got a 1-oz silver coin here. There, I just touched it. I don’t think that helped the value any. Indeed, I also have some cash, and having it here in my wallet so I can touch it makes it a worse investment than making it intangible in a HISA.

Tangibility can play into the importance of understanding an investment, but really comes down to satisfying an emotional need. Being able to touch your investment, to sit under its roof, to improve it with your own hands, or to clutch it tight and whisper “my precious” can make you feel better, but it doesn’t make it a better investment. And as we’ve learned so many times already, emotions are best left at the door in investing.

Arrived in Halifax in record time. That was due in part to traffic being good, with hardly any construction along the way (Montreal, of course, being the permanent exception). But it was mostly because we hardly stopped. Normally I stop about every hour for a pee and strech break on a long trip, and one or two longer breaks through the day to take my eyes off the road. But this time I just powered right through. It’s especially surprising that I made it that long without needing the washroom breaks — that never happens. I think I must have been severely dehydrated, indeed, on Friday I was so dehydrated I stopped sweating. I don’t know why, it wasn’t like I ran a marathon or anything. Just weird, but I’ll reap the benefits.

The weather here has been pretty dreadful — rainy, cold, windy. The conference has been pretty good though. The social event featured a lobster supper, and I always find that weird. When else do you get into fancy clothes just to put on a plastic bib for dinner? I always figured we somehow tricked mainlanders into eating lobster as a way to take care of our beach pest problem.

I can’t really think of any other stories to share, so here’s a little mini link round-up:

Housing bubble linked to restrictive development rules. Yes, over the last 8 years when I drove into Toronto and saw the massive developments of condos in downtown and North York, the unending and constantly expanding sea of McMansions along the 401, 403, and 400, I thought “wow, Toronto has some really restrictive development rules.”

Another article on just how crazy Vancouver’s valuation is: Vancouver primed for housing correction: BMO.

A MacLeans’ piece on the Vancouver housing market gets it right: “In short, Vancouver is increasingly being seen as a no-go zone for top talent. This is very bad. Worse arguably than if house prices crashed. As Vancouver develops a reputation as a place where only the uber-rich can afford to buy property, it could seriously undermine the economy.” So many stories suggest that a crash is a bad thing. For sure, it’s painful for the unprepared who get caught up in it, but the problem is not the crash, but the bubbly high prices in the first place. Downturns are also called “corrections” for good reason: lower house prices will mean fewer talented young people being driven away by the costs of living, fewer house poor people, fewer household balance sheet dangerously levered to the 5-year interest rate, and less rampant speculation on concrete and granite, and more investment capital for everything else that makes the world turn.

The market’s been pretty nasty, beyond Sino-Forest. Kind of glad I don’t have the time to worry about it.

And speaking of not having time, the spam levels have increased of late to the point where it’s almost 100 spam comments per day. I don’t and won’t have the time to figure out a captcha or better spam filter, and while I was home it wasn’t a big deal to clear out (most of the messages are so blatantly unreal that a quick skim is usually all it takes to find the real messages and let them through — though there have been a few false positives lost in the sweep). But now that I’m off on conference and then vacation and internet access is becoming spotty, I’m just going to turn commenting off so I don’t come home to a spam filter filled with 10,000 spam comments and 2 real ones (and that’s about the ratio). I do still welcome comments, so if you have one feel free to email me (address in the sidebar) and I’ll add your comment manually.

I keep following it thinking I’ll dive back in, but I haven’t yet, and likely won’t until after the results are released next week at the earliest.

I liken it to when you’re afraid there might be a spider in the shower: before you get in you shake the towel and have a scan around, and it looks clear, so you get in. Once in, I might have ignored banging at the door or the water turning cold, since I wasn’t afraid of the Psycho or broken hot water tank scenario, but if I so much as see a black hair that might resemble a spider leg poking out of the drain, I’m running out of there screaming.

So before I bought Sino-Forest, fraud was my biggest fear, and I didn’t allay it by obtaining first-hand concrete knowledge, which would have given me the confidence to see something like this as a buying opportunity. Instead, I relied on weak heuristics and an analyst report that claimed the governance was good.

Then the MW report hit, alleging fraud, and it all fell apart: exactly what I was afraid of. MW had a good hit rate (~3 for 4) with these Chinese RTOs, and I had heard of them before this broke, so I wasn’t about to just dismiss them as a short-seller with dreams of market manipulation.

On the other hand, MW is the noisy kid brother of the cottage industry that is exposing RTO frauds. I don’t want to just attack the source, since that’s not a strong foundation for investing, but he strikes me as someone more interested in market manipulation than justice. His reports haven’t seemed as thorough or solid as say John Hempton’s*, and so far the frauds have been low-hanging fruit. Sino-Forest, if it is a fraud, is a step up. His best part of the analysis (both playing to his strengths and making SF look bad) was the one about how impossible it was to harvest all those trees Sino-Forest sold… but that was smacked down with the first release that said it was a sale of standing timber. I’m not sure tracing related party transactions and capital flows into and out of the country is really his forte. Then the paper reports that he spouts off about having all this other evidence on the analysts’ conference call he hosted, yet he hasn’t released it. Maybe waiting for another Chinese holiday for maximum impact.

I still don’t know what to think. The company has released some documents (though it took a few days). The bank statements look real enough, complete with hand-written notations (presumably linking transactions to entries in the ledger/accounting system). But we’ve learned with other frauds that the companies can and do fake bank statements: you have to get an auditor to go down to the bank and confirm with the bank that the money is there as specified.

Various analysts have said they’ve physically gone over to view the operations, but Poyry might have had the same problem: they can say there are trees there, but who owns them? Plus other, much smaller, less well-executed [alleged] frauds have put up the potemkin factories for analyst visits before, only for private investigators to find the sites empty or idle weeks later.

Fraud is insidious. It’s quite difficult to prove something isn’t a fraud, particularly when there is so much suspicion after all the recent cases, and from halfway around the world with a massive language and cultural barrier. You can’t believe anything the company says without 3rd party verification, and the balance sheets become useless — if it was a matter of pine beetles or wildfires, banks not lending or demand drying up that hammered the share price to a third of book value, I’d probably be buying like crazy. But book value is unreliable if there’s a chance it’s all a lie anyway.

I forget his name, but one talking head on BNN put it [approximately] thusly: “What else were they going to say? It’s like they went to I’ve been targetted by a short seller dot com and printed off the fill-in-the-blanks press release.” The company’s been doing the dance, and releasing some of the documents is a bit better than par, but it’s still not fundamentally different than the dance that an actual fraud would do. That’s partly because there isn’t much more for them to do. Offering the analyst tour in July and specifying that the analysts could pick the locations was a good step at helping to remove the potemkin element. The Dundee analysts’ comments after the close today were also heartening.

So I’m not buying yet, but I keep turning it over in my head, and think I might if there was some good 3rd party evidence of authenticity: an auditor in a bank branch verifying cash, or signing off on the annual report, or maybe a supplier of eucalyptus seeds/seedlings confirming that SF is indeed buying sufficient quantities to do the planting they claim they are. I feel close to having the confidence to buy in again.

Plus I have to bear in mind that my bias is to want to believe. After all, I bought in and lost money, so deep down inside, I want to be vindicated on that prior decision and have this one come out fine in the end. That forces the rational part of me to be extra careful before buying back in.

* – Though John did say that he “was in awe” of MW’s report, but that may just be because of the size. And he hasn’t commented at all since Sino-Forest started posting responses. With MW I read and I think and wonder if he’s wrong. If it was John Hempton alleging fraud, I would be out and gone and never look back: his track record at research and alleging fraud is too good to bother trying to second guess to find value.