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Ugo Ume
Ugo Ume
Articles (24)  | Author's Website |

Mazi Value 3rd-Quarter Performance

The Long and Consolidated portfolios rose 6.4% and 4.8%

December 01, 2016 | About:

The Long portfolio rose 0.22% in September while the Consolidated portfolio increased by 0.4 %. The portfolios closed up 6.39% and 4.8% for the quarter.



Gamehost (NASDAQ:GH) was the best performer for the month, rising nearly 5% post-dividend. I sold off Gamehost earlier this month in anticipation of the new ideas in late December/early January. I also sold Flanigan's Enterprises (BDL) before Hurricane Matthew. I'm in the process of getting rid of Advent Wireless (NYSE:AWI) as well.

Avnet (NASDAQ:AVT), Mind C.T.I. (NASDAQ:MNDO) and whatever new positions should be the only two long positions at the end of December. I may end up selling those two as well if I come across better ideas.

Election bonanza and President-elect Trump

Disclosure: I supported Sen. Bernie Sanders during the primaries for noneconomic reasons. I did not vote for either major-party nominee so my goal here is to be as nonpartisan as possible while presenting both my opinion and facts.

President-elect Donald Trump’s message was geared toward those who had lost manufacturing jobs. He forgot to mention, however, that more jobs are being lost to automation than to China. If corporations could produce goods at lower costs via robots, they’d lay off the Chinese workers and employ the robots. The inescapable truth is that technology will always prevail, and you cannot fix the economy by raising the minimum wage as Sanders and Hillary Clinton supported or by placing tariffs on China, Japan and other countries with which we have trade deficits as Trump suggested.

Yes, we do need to restructure our trade deals with these countries, but people need to learn new skills. It is that simple. Tariffs, lower corporate and income taxes as well as restructured trade deals will only create a temporary, albeit much-needed, economic high but will not fix the long-term issues.

I was in Boston last weekend, and the airport prohibits Uber/Lyft so the taxis have succeeded in lobbying, monopolizing and thus slowing down the digital transportation economy. The horse breeders likely protested Henry Ford and Carl Benz but inevitably moved on when the customers chose to drive cars over riding horses. Despite what consumers say, they will always elect for the cheaper and more convenient alternative; they will always choose to pay $4 for a Big Mac meal over $7.

One cannot stop technological advancement, and market forces will inevitably prevail. The taxi drivers will eventually be replaced by Uber drivers, and the Uber drivers will undoubtedly protest and lobby against autonomous cars as well. What we need is a wave of STEM (science, technology, engineering and math) incentives that work. One would benefit from actually learning to maintain or build the robots that are taking the jobs because that will always be in demand. There is also the issue of consumer debt, but that is a topic for another day. A bipartisan approach is required to fix these problems.

The pound sterling, the euro and speculation

With the proceedings of Brexit under way, shorting the pound sterling has been, perhaps, the most effortless trade of the year. I’ll be expanding the portfolio into Britain again (more on new screening process). Some of these stocks have fallen despite the fact that the currency is trading at multidecade lows. We have a scenario in which the currency and some potential stocks both look cheap.

Maximum pessimism and perhaps the best time to buy into Britain will come when the process of invoking Article 50 becomes a reality – when people are entirely convinced that Brexit means Brexit. Brexit was a positive development for the U.K.; a weaker pound and less burdensome regulations should propel exports. The euro as a currency is as suspect as it gets and is frankly unsustainable. The farther other countries can get away from it, the better off they will be.

While most people are betting on a lower pound against the euro, a better bet would be to do the opposite. The anti-establishment trend is in full swing and with elections in Germany, France and the Netherlands and with anti-establishment parties gaining increased support in these countries, what happens to the euro if one is successful? Some are proposing referendums. This is significant because these countries are not only members of the EU; they also use the euro. So [insert prefix here]-exit will also be as unprecedented as Brexit was. The Netherlands is one of the net contributors to the Euro Zone. There is trouble ahead for the euro, but I'm not betting the ranch on it.

A concentrated approach

The portfolio, on average, has held 50% of its assets in cash since inception. This is not something I did intentionally as I don’t believe in market timing. I do like to take advantage of inefficiencies like tax-loss selling, window dressing, etc.

When I started this website, my intention was to hold somewhere between 12 and 18 securities as hedge fund manager Mike Burry did initially. I promptly came across the harsh reality of value and time and found myself taking 12% positions. Finding 12 to 18 undervalued securities is difficult in its own right; also, working a full-time job while being a part-time investor is tough and time consuming. I don’t have enough time to keep track of 12 securities; I can barely keep up with the seven (long and short) or so from last quarter. The goal going forward is to hold somewhere between three and six securities.

I want to run a full portfolio in 2017; if that means running my favorite idea at 40% or 50% of the portfolio, and two more at 30% or 25%, then so be it. I’m compelled by the early Munger days when he ran his fund with "very few securities" or "no more than three" positions. If I find three companies trading at 7x normalized earnings (14.2% earnings yield), why buy a fourth position at 12x (8.3% earnings yield)?

I am weary of currency risks and want to have a portfolio allocation ideally in the U.S., so I will limit the international positions to 50% unless I find something irresistible abroad. I’m well aware that my currency prediction abilities are lacking; I need to figure out a way to hedge or minimize international exposure. I'm also considering eliminating my short portfolio because of time constraints. If I do not come up with any more short ideas, then I'll most likely just let the puts expire.

Fixed-income euphoria

The assets everyone perceives to be safe and of good quality are usually priced as such, which then makes them inherently risky. Take the U.S. Treasurys, for example; the 30-year fixed income bull market in bonds has sedated the amnesiac market participants into believing Treasurys can do no wrong.

We have the most experienced fund managers holding on to the most expensive bond market in history because they fear a market crash. The logic is to sell the stock market short and go long the most expensive bond market in history with zero inflation protection. Fixed-income investors are exposed to currency and interest rate risks which are both unpredictable. Fixed-income investors have gotten a sneak peak of what risk looks like with the postelection rising yields, and the long-term Treasury, European and Japanese bond holders are feeling the heat.

It is important to understand that there is no such thing as risk-free debt. Remember, the government or the bond issuer needn't default for losses to occur; yields just have to rise.

Investors who sought safety in Treasury bonds in the '60s and '70s (last fixed-income bear market) soon found themselves sitting on significant inflation-adjusted losses. You get your principal back 20 years later, but it is worth 25% of what it was when you lent it while the price of goods around you have quadrupled. Today creates the same environment with governments worldwide expanding their balance sheets at an unprecedented pace with growth lagging behind coupled with the lowest yields we’ve seen in the past few centuries. Don't get me wrong; I'm not cheerleading for equities (stocks) here because they, too, are expensive. Equities, however, do offer inflation protection. I am 100% equities at least until bonds become attractive once again.

New screening process and an open watchlist

I have created new screens based on GuruFocus sectors – you can view them here. The list is currently locked, and the new ones are designated by "New"; I will open them up when I am done screening. The screen is broad, and the only requirements are that the companies in question have a market cap > $20 million, exhibit consistent cash flows and be located in either Canada, Australia, the U.K. or the U.S.

I’m going to run through them again once I’m done with the screening process to place a quantitative value on them. The quantitative value will be circa 10x normalized earnings, and my future qualitative analysis will determine what I’ll eventually pay for it. The point of this is to get to know these names over time, better track them and jump in and out of them very quickly when the opportunity presents itself. Another plus to this new process is that I won’t have to screen for probably another few years. It is probably the most mind-numbing process, but it is an investment in my time.

So far, I have gone through over 4,000 stocks and still have about 3,000 to go. I have avoided certain sectors like metals, oil and gas, etc., with which I am not comfortable, and you should expect about 2,000 securities on the final watchlist. I’ll compile them into one spreadsheet and make them available on the website in when it is complete.

The Fed and the intelligent speculator

Speculating on what the Federal Open Market Committee (FOMC) will do each successive meeting is always at the forefront of the financial media. It is a crowded speculative trade, and I do not intend to adjust my portfolio based on the winner of the presidential race or what the Fed chooses to do.

Although people love analyzing this stuff, no one truly knows how, if or when the Fed’s balance sheet will be unwound. Government response to every recession/crisis is inflationary so a fully invested value portfolio should be fit for all seasons over the long run My goal is to remain an investor and not a trader – differentiating between the two is imperative. I have my opinion on all sorts of economic events, I use it to adjust what select potential candidates for the portfolio, but at the end of the day, the portfolio will rely solely on Graham’s margin of safety; it is the only strategy that has been proven to work.


This post was initially supposed to be about the pension crisis, which I will publish later this week or this weekend. I ended up writing about 100 pages of fluff in a word doc from value investing to strategy to Burry to Buffett to the pension crisis. It is one big draft right now so I figured I'd just divvy it up and post them over time. This post was excerpts of the doc. I guess I'll refer to it as the master doc from now on.

Disclosure: I am long Avnet and Mind C.T.I.

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About the author:

Ugo Ume
I run an investing blog at mazivalue.com. Follow me on twitter @maziume

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