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Why I Don’t Use Guidelines When Investing

As your potential Fund Manager, it is my job to provide you with the best investment decisions that are the most responsible. With that being said, the way I operate at Rockvue Capital is very different than most funds in the sense that I do not cater my investment style to a specific sort of clientele. The way I invest is the way I invest, and if a potential partner understands and agrees with the method and philosophy in which I use on financial markets, that makes a great partnership. I deem this as a much more comfortable way of interacting between Fund Manager, partner, and potential partner. In this way, I will not pressure or corner anyone into joining the Fund. In order to achieve the best results, the Fund and its partners must share the same goals and same mindset. Throughout these weeks, you’ve gotten a glimpse into my investment philosophy with my three part series on the matter, and I would like to take the time now to discuss a much broader, almost personal level to my investment technique and philosophy: Guidelines in Investing.

I don’t like guidelines when it comes to investing. Give me a coloring book and I will more than likely start coloring outside the lines. This is a personality trait that has always been with me, and one that will never leave. I am not one that likes to be told that I have to do something. In elementary school, I never read the books that were assigned, instead I read the books that I chose and wanted to read. In my English classes in high school I would read printed out 10 – K reports from various companies instead of MacBeth or Romeo and Juliet.

There is a tangible struggle between me and authority, which is a predominant reason why I love the idea of having my own fund in which I can make the decisions I think are best. Note, I am not saying that my decisions are the best decisions to be made, rather in having my own Fund I am able to be more confident and free to make the decisions  I think are the right ones. Please understand this difference as it will free you from notions of thinking of me as hubris.

When I found the game of financial speculation at age 13, those same traits and qualities about me translated into this discipline that I love. Although I read everything I could get my hands on on topics such as Warren Buffett, dividend investing, and value investing, a part of me realized that I would never be one to don a cookie cutter ‘style’ about them. I knew I would be a hybrid investor of sorts: One that would take nuggets of information from various investing strategies and trading ideas and boil them down into a personal ethos of investing philosophy. Nine years later, that is exactly what I have done. An investor is always evolving, always learning, and always seeking to become better than they were the day before. Because of this, I never chose to place rules on how I would invest, or how I would trade. My philosophy and mechanisms of investment are built on the years of tinkering and not accepting standard guidelines. But what does this look like ?

For example, I use classical charting principles (think Peter L. Brandt or Edward McGee) mixed in with my deep value Benjamin Graham style of fundamental analysis. Purists of the value investing cult would herald me as a lunatic for using such voodoo work as technical analysis. Likewise, pure chartists would call me crazy for “wasting time” worrying about fundamental data when, according to that crowd, “price is the only thing that matters.” To some, this could be a red flag when it comes to deciding to invest with me. There will be some that think I am dabbling too much into too many fields, and there are certainly people whom might think, “he should stick to one thing and be really good at that.” I hear all of those concerns, but at the end of the day, I have found what works for me. There are many ways to make money in financial markets and there are many ways to lose money in financial markets. By not following guidelines, forging my own path of reason and judgement, I have found a way that a) provides me with the best risk management system, and b) capitalizes on market imperfections and mispricings.

This brings me to the psychology side of my investment decision making process. I have well documented the psychological benefits of my particular way of trading the financial markets, so I will not regurgitate it here. However, I want to stress that it is paramount that a potential partner, whomever they be, have the same psychological logic about the markets as I do. You might be asking yourself, “Why is that? Aren’t I giving you my money so that I don’t have to think about things psychologically about the markets?” To a certain extent yes. But to a much larger extent, it’s more complicated. I will use two theoretical examples to illustrate the importance of psychological symmetry between Manager and Partner.

This first example will deal with an individual security selection that goes wrong. In this example we will also assume the Fund Manager sends out alerts to Partners after each trade made. We will assume I pick a stock in the US market and after going long the stock immediately begins to head towards the stop loss price. Let’s say John Doe receives the alert from me that I have added a long position in the Voyager Fund at $5.00 entry with a stop loss at $2.00. Throughout the week, John is watching my pick go from $5.00 to $4.00 to $3.50. At $3.50 he’s had enough and decides to call me to voice his displeasure seeing the NAV of the Fund and his money decline. After telling John I understand why he is upset, I refer him to the many resources available to read about my investment style, and remind him that my style is set up to lose no more than 1% of capital on each trade. So at worst case, the NAV of the portfolio would decline 1% if the stop loss gets hit. If John still doesn’t understand after explanation, it will only create further strife down the road with each incorrect trade (and remember, I will have more losers than winners).

The second example deals with the amount of cash being held by the Fund Manager at any given point in time. Let’s say the market is reaching all time highs each and every day (sound familiar right?), and the Fund Manager has advised his clients that he is happy with how the portfolio has performed, pleased with the return percentage, and decides to hold a bit more in cash for the foreseeable future, citing lack of pristine investment bargains to be bought. After receiving this email about the plan to hold more cash, one partner, Jane, gets frustrated at the Manager, thinking to herself, “I gave him my money so that he could invest it, not to sit on it and basically bury it in a coffee can.” Jane is right to voice her displeasure only if her Fund Manager wasn’t forward with his views on cash percentages. Jane calls the Manager and proceeds to express her frustrations with him. The Fund Manager lets Jane know he understands, but also lets Jane know that part of his philosophy in the markets is to hold cash when the opportunity cost of a perceived investment is less than the opportunity cost of holding onto cash. If Jane does not understand the logic or if she doesn’t agree with that, Jane might not be the best Partner in the Fund.

The point is to let you, a potential partner, know that I place a tremendous amount of importance on compatibility of ideas and understandings on the markets. I am not one for guidelines, specifics, and certain tinkered portfolio percentages based on what every other institutional investor is doing. If you want to get average results, do what everyone else does. That’s not what I’m about. I believe I can perform better than the averages, so average and ordinary is not what you will get if you invest in Rockvue Capital. It is paramount that you are comfortable with this. As always, I am free to discuss the various aspects of this article, and if you have any personal concerns or questions. I want the Fund to perform to its capabilities. The only way that can happen is to have partners that understand what Rockvue Capital is all about. The Fund is only as good as its Partners, and I truly believe that. I will always strive to be better and to perform better, because like yourself, I am one that loves coloring outside the lines and finding ways to make the standard extraordinary.

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A Word on Bitcoin & Cryptocurrency

A couple of potential investors into the Fund expressed interest to me in Bitcoin, its mechanism as an investment, and my general thoughts on the cryptocurrency space. While I answered those individuals on a one-on-one basis, I wanted to take the time to write out my thoughts on the matter in order to give you insight into the thought processes I have when it comes to this complicated space of Bitcoin and cryptocurrency. I will do my best to separate my thoughts into two categories: Practical​ ​Application​ ​&​ ​Investment​ ​Speculation.​ By keeping these two domains separate, you will gain a more complete understanding on what I think of the topic. Let’s start by diving into Practical​ ​Application.

Practical​ ​Application

I will do my best not to make this part of the piece a political one, but in order to gain a more complete understanding of my thoughts, a small garnish of political theory must be applied. You see, when it comes to a practical application, I am hugely in favor of the power of Bitcoin and cryptocurrency. As a personal belief, I am always intrigued when society can figure out a way to manage and work with one another without the need of government intervention. Do not mistake that last sentence as a small cry for anarchism, but rather my belief that a smaller government, with less frequent interventions in private markets and transactions, eventually leads to exponential breakthroughs in all aspects of industry and technology.

With that being said, I am not naive to the fact that the US Government will absolutely try its hardest to find a way and shackle on regulations in the cryptocurrency space. Although some (albeit small numbers) regulations are good for business and anti-trust beliefs, the government (‘the government’ = US government) tends to be extremely liberal with such regulation applications. The reason behind this is simple: government revenue. The more the government can regulate, the more power it has to enforce various taxes and stipulations regarding production, consumption, and investment. As of right now though, the government hasn’t found a reliable way to regulate this seemingly ‘un-regulatable’ endeavor.

The practical draw of cryptocurrency is the elimination of a middle man or third party when it comes to private transactions. This has huge implications both domestically and globally. If you are familiar with the Silk Road scandal, then you already know the tremendous implications this no-middle-man structure has on private transactions and business. For those not familiar with the Silk Road endeavors, a brief synopsis will do (if you are interested in learning more about it, a quick Google Search will provide you ample resources): The Silk Road was an online marketplace (think of eBay, but for the dark webs) where individuals could buy and sell anything. When I say anything, I mean it. From drugs to prostitutes, to bootlegged DVDs, even hitmen.

The main source of payment for such transactions? Bitcoin. This is an obvious choice for a service like Silk Road because each transaction in Bitcoin in encrypted, which means it cannot be tracked like cash, credit, or debit cards. The only people that see the transaction taking place are the two engaging in the deal, but even then, the two parties do not know the names, usernames, or anything about the opposing party. That’s the practical use. Now obviously I am not saying that I love the application because of what took place on Silk Road, but my views on personal private property and the right to privacy do influence my positive skewed opinion of such matters. This isn’t without its downsides, but I believe the upside to such currency ideas are revolutionary and no doubt tremendously powerful. I will put it this way: The government would not be trying as hard as they are to regulate the cryptocurrency space if they did not see the inherent power it had, and the incredible ability to rid the importance of needless middle-men.

To conclude, practically, I love the idea of cryptocurrency. I like the idea of putting transaction power back into the hands of the individuals, and keeping it out of unnecessary hands (a la the government).

Investment​ ​Speculation

This is where things get interesting for me as your Fund manager. On the topic of investment speculation in cryptocurrency, Bitcoin specifically, I am of the opinion that my opinion is split. That is something I am not scared or worried about, because I am always happy to admit when I do not have a forthright opinion on any matter. When that occurs, I do the following: I research, read, digest, and interpret various opinions from various sources of news and influence. On the one hand, I have my personal opinion on the practical application of cryptocurrency, which one would assume would influence my opinion on investment speculation. This is not the truth, and it will never be the truth for your Fund manager.

My opinion on the practical use of Snapchat versus the investment speculation idea of Snapchat should lead you to that same conclusion. I want to be consistent in my thinking, which is one of the main purposes of these newsletters. One part of my investigation into Bitcoin as an investment lead me to a brief period in time known as the Tulip Mania (or Tulip Fever) in 1637. Unfortunately for some readers, your Fund manager is a history nerd (amongst other nerdy aspects), so digging into this research proved quite fun. For those not familiar with Tulip Mania of 1637, let us take a brief dive into it.

It started in the late 1590s when the tulip was introduced from Turkey to Holland. This tulipomania introduction of a new commodity made it a highly demanded object, but price wasn’t outrageous. Note that the tulip bulbs were considered rare, and they were, being a foreign entity they were not locally grown or produced, and quantity was limited. Shortly after being introduced to Holland, the tulips contracted a strange mutation in their genetic code which led to the pedals of the flowers displaying different colors all across the color spectrum. This only further spurred the rise in demand for tulips. The tulips were already starting to trade at a premium to its underlying value, but this further propelled the demand, causing the first strikes of speculation on the tulip market.

The biggest consequence from this speculation due to genetic mutations was that people began to believe that there was no downside to the tulip market. They believed that people would always want these tulips. They extrapolated their demand in the current situation indefinitely. Now in full bloom (pun intended), the Tulip bubble took the entire nation of Holland by storm. Garden shop owners captured most of the supply, which in turn further drove demand and perceived scarcity higher and higher. The bubble came to a head when people began buying tulips through the credit of their homes, their land, their cattle, anything they thought had value they exchanged for a chance to speculate in the tulip market. You can begin to see where I am going with this.

Like every single bubble throughout history you had people saying, “the market for (insert good) can only go up”, “this time it’s different”, “this time the valuations make sense given the perceived value”. All of these sayings have happened since 1637. When prices soared into supernova territory, buyers at optimal prices did what any diligent speculator would do, he sold his lot and secured his profits in the market. Of course this is a domino effect. When the first wave of sellers locked in their prices, it increased the supply of the tulips, which in turn decreased the price of the tulips. Others in the market saw this decline, panicked, and sold their lots, still for profits. However, as the selling continued, those who bought in late on the fumes of the bubble run began to panic, but, as many speculators tend to do, said to themselves, “I bought because this thing is going straight up, this market cannot go down.” So they held. Yet as they held they saw the price of tulips collapse as supply increased and the perceived value of these flowers became rational.

This eventually led to a complete collapse in the price of tulips as the chart to the right depicts. What can be garnered from this market speculation that took place nearly 400 years ago? For one, many of the assumptions made about the Bitcoin market are echoed in the sentiment of those speculators in the tulip markets from 1637. I have personally heard people tell me, “Brandon, the price of Bitcoin is only going to go up.” The explanation behind such accusations are simple: There is only a fixed amount. So in theory these people should be correct and Bitcoin should be a no-brainer investment? That is not entirely the case.

Take the gold market. There is only a fixed supply of gold in the world, in other words, there is only so much gold that can be mined from the Earth. Using the logic of many Bitcoin speculators, shouldn’t the price of gold be in the millions of dollars by now? Since gold has long been a tradable commodity, one would assume, using the logic set forth earlier, that the price per ounce of gold would be astronomical at this point due to scarcity of the commodity. This is where the logic falls apart for the Bitcoin speculator as well. You see, scarcity only means something if perceived value is realized into actual value. The reason gold isn’t sitting at $1MM per ounce is because there a large enough group of people that believe gold has no actual value besides a perceived safe haven for inflationary periods.

If prices were purely dictated by supply constraints, all commodities would eventually hit astronomical numbers. We know that there will only be 27 million Bitcoins made, and after that, no more will be created for circulation. On this knowledge I have been told that the price of bitcoin will hit $40 million dollars on a conservative estimate. This is naive to me. There are too many unknowns. What if they decide to change the amount of bitcoins created? We don’t know. What if governments can’t find a way to adopt Bitcoin as a nationwide currency that is accepted as frequently as US Dollars or paper currency? What if people just stop buying Bitcoins? The problem I am getting as is this: Currently the value of bitcoin is dictated on the basis that others think its going to be extremely valuable.

There is no backing behind its valuation or its current price, nothing. Now, this could eventually turn into a self-fulfilling prophecy, much like I discuss when it comes to Classical Charting patterns, where if everyone believes the price will go to $40 million, well by damn it certainly might. But all it takes is enough people to start selling, enough people to start realizing their profits. The Bitcoin bubble reminds me too much of the Tulip bubble, and as your Fund manager, I wish not to be named as a speculator that bought in at the height of a bubble.

bubble-phasesI know full well that I could be wrong, and I always accept that notion. I want to direct your attention to the chart on the left. This chart depicts the stages of a bubble. As you can see, the smart money entered on the stealth phase. This is where I as your Fund Manager prefers to enter any position for the Fund. The second phase of buying happens by the institutional investors, who see the smart money moves and are looking to piggyback on them. They also invest here because they want their clients to see that they are doing “what the smart money” is doing. Thirdly, the public gets wind of these investments, and once that happens, it sends prices to the moon.

This​ ​is​ ​the​ ​phase​ ​we​ ​are​ ​in​ ​now​ ​in​ ​Bitcoin.​ ​I will not enter when the public enters. This phase is where I as your Fund Manager would be looking to sell once stop losses are hit. As you can see, the main drivers for price advancement in the public phase of a bubble are enthusiasm, media engagement, greed, and most importantly delusion. The next part of the phase is the Blow – off Phase, which is culminated in the feeling of “This time its different!”, Denial, fear, and capitulation. The bubble takes a brief dip into Despair territory before returning to the mean. Above is a daily chart stretched out from close to the beginning of Bitcoin publicity as a tradable currency. You can use this chart to perfectly superimpose the Bubble Mania explanations. You can see the smart money buyers at those prices, you can see the institutional investors gain wind of it propelling it further, and finally you can see the public hitch on to the idea, sending the price to upwards of $5,500.

I am not against investing in Bitcoin.

I am against entering at levels I deem inappropriate and a substantial risk to your capital as a partner. If you choose to personally speculate in the Bitcoin market, do so cautiously. I sent out a video earlier in the week to a friend in which I told him that once price broke the symmetrical triangle it was forming, that it would be a good time to enter, but be cautious. Since that recommendation, price advanced nearly $1,000. Although classical charting principles remain the same, we are at a point where I am late to the party of investment. As your Fund manager, I do not see an applicable reason to invest in Bitcoin at these prices, and at these technical set-ups. If you have any further questions or concerns, feel free to email me, text, or call. Most of you receiving this newsletter do not read the entire thing, which is okay, but I hope you read enough to gain an understanding of how I think, which in turn leads you to increased confidence in my abilities as your potential Fund manager.

Investment Philosophy Part 3: Disciplined Patience

If the most important part of my trading strategy is capital risk management, patience is a close second. Patience is something that I personally struggle with in almost every aspect of my life besides the markets, which is weird to some degree, but a benefit to those who would one day choose to invest with me. I didn’t use to be that way of course, it took a lot of lessons learned and dollars lost before I understood the true benefits of patience in the markets. Throughout this piece I will highlight three reasons as to why patience is key when dealing in financial markets, and the pitfalls that traders and investors can stumble into if they do not adhere to patience.

Reason 1: Patience Saves Money

Patience in the markets saves the investor countless dollars, most of those dollars saved aren’t even from the potential loss of a rushed investment. The dollars I am talking about are commission dollars forked out with each trade. If one rushes to make trades, not waiting for ideal classical chart setups, the trader ends up in a precarious situation of paying a lot more in commissions at the end of the month than a patient trader.

When one enters a trade (unless using a free brokerage like Robinhood, which I advise against if you are a serious trader), they have to pay to buy (or sell) the stock, and then again once they exit their position. Thus, increased (or rushed) trades leads to increased expenses at the Fund, which in turn would lead to lower net returns for the Fund’s shareholders. It is for this reason that I make it poignant to never rush a trade, and to always be patient. The less commission costs I incur for the Fund, the greater the net returns will be for its shareholders.

Holding all else constant, I want to talk about the realized dollar losses of rushed trades. As an investor, it is my responsibility to enter a trade when and only when the trade has met my criteria for a proper trade. This will look different for every speculator in the markets, but my criteria for a proper trade is well documented within the interwebs of this investment blog. Every trade I make outside of those contingencies is a risky trade, a careless trade, and a trade most likely done on the basis of rushing myself. For this reason I keep a documented journal of all of my trades when I enter a trade, as well as when I exit a trade. I do this so I can judge how I was feeling, why I entered the trade, and what I expected from this trade. In doing so, I create transparency with myself and for anyone who wants to know the motives of my trades I will provide them at once. If you receive my newsletter emails, you already see a taste of this when I enter trades. If you are not on the newsletter, please comment to this post or email me at bbeylo@gmail.com.

2. Patience Saves Psyche

More than dollar capital saved, patience in the financial markets saves mental capital to an exponentially higher degree. I am all for saving and increasing my mental capital. I do this a) because I started this speculating game at a relatively young age of 13, and b) It is the only way I know to keep me level headed when looking at financial markets. Burnout is something that every financial market speculator must come to terms with. Burnout is the Darwinian model that separates the veterans from the newbies that exit the game as quickly as they entered. My goal is to be one of the greatest investors in North America (some of you might be thinking, ‘Why not just say the world?’, and to that I don’t have a credible response). In order to do this, I recognize the need to STAY IN THE GAME. Practicing patience in the financial markets saves my mental capital by allowing me to be on the sidelines if I don’t find anything really worth investing. The problem with a lot of institutional investors, and even novice traders is they think they have to always be in the market, to always be trading. On the institutional side of the coin, investors must show their clients that they are in the markets, even going so far as buying big names just so that their clients recognize names when they open their quarterly letters.

As an investor, I will never do this. I don’t like rules, except for the rules that I make for myself. It sounds very weird saying that, but it is true. I don’t like having investment rules placed on me that I can’t control. I make investment decisions based on what I think is undervalued and a great technical chart set-up, not whether or not Sally or Joe will recognize the names of the companies in the Portfolio. I don’t cater to any particular clients interests except for the interest of maximizing return and minimizing risk.

By being on the sidelines, I don’t have to add that extra stress of feeling like I need to be in the markets 24/7. One of my favorite investors to read and listen to is Seth Klarman. Klarman is one of the greatest deep value investors of all time, and his book on the Margin of Safety can be bought on eBay for $1,500. Seriously. What separates Klarman from the rest of the investors pack? Simply put, Klarman isn’t afraid to hold large cash balances, sometimes in excess of 50% of the total portfolio. That takes discipline and patience.

3. Patience Creates Flexibility

Piggybacking off of the second point, financial flexibility within the Fund is crucial and can only be done if the Investor has patience. If an investor doesn’t have patience, they will likely suffer from having their portfolio overexposed to various markets, very little cash balances, and rushed trades placed at inopportune technical targets. As a patient investor, holding appropriate cash balances when necessary, when an opportunity knocks you have the ability to jump on it fast. Plus, with the increased cash holdings the patient investor doesn’t necessarily need to liquidate any current positions for a foreseen better position.

Conclusion

To conclude, patience is a close second to risk and capital management when it comes to what makes an investor a great investor. Without patience, an investor can have a terrific strategy, a terrific ability to read technical charts, but will have nothing to show for it due to rushed trades and taking profits too quickly. As your fund manager, disciplined patience is what I will always strive for.

The Big Post About Water

Let’s talk about water, good ol’ H2O. Water isn’t a commodity you can physically invest in like gold, silver, or wheat. Because of this, we have to look at ways to invest in water indirectly. What are some of the options? Right off the bat there’s public utility companies such as American WaterWorks; followed by agricultural businesses that produce food; finally you have potash companies that use their recycled water byproduct as a means to sell to other companies that are in need of it.

One of these companies that could expose a portfolio to water is Intrepid Potash Inc (IPI). Intrepid Potash produces and sells potash and potash byproducts in two main product segments: Potash and Trio. The Potash segment produces and sells potash to the agricultural industry as a fertilizer input, the industrial market as a component of oil and gas drilling fluid, and the animal feed market as a nutrient supplement.

The Trio segment produces and sells specialty fertilizer that consists of potassium, sulfate, and magnesium, and is mined from langbeinite ore. The vast majority of revenue is generated in the United States, which is also the location of the firm’s production facilities. Here’s the other cool thing about IPI, it sells water. Taking a look at the third page of their last 10-K it reads, “We also have water rights in New Mexico and Utah under which we sell water primarily for industrial uses such as in the oil and gas services industry”. But it isn’t enough to know that IPI sells water. It isn’t enough to know where they record their water sales on their balance sheets. It’s important to know why water matters, and what could drive its demand.

Why Water Matters

Water is used for almost everything we humans do in the world. Its one of the essential building blocks of life for crying out loud! Now before I get scientists shouting, “the world is 70% water you idiot, how could we run out?!” You’re right. The odds of us running out of water are almost zero. However, the water that humans need is fresh water. Freshwater accounts for around 2.5% of the overall water population. This means we have 8 billion people fighting over 2.5% of a resource.

According to the World Resource Institute, water use is expected to rise by 50% by 2025 in developing countries, and 18% in the developed world. A really cool website I found for those that are nerds like myself, is http://www.worldometers.info/water/. Worldometers.info records in live time the amount of water consumed per year (in millions of liters) along with some statistics. According to Worldometers, “population is rising about 80 million per year, and energy demand is also increasing around the world, with corresponding implications for water demand” (Worldometers.info).

Now that we know how much water humans are working with, it’s important to understand just how we use that water in our society. Going back to our worldometers.info statistics, “agriculture accounts for 70% of all water consumption, compared to 20% for industry and 10% for domestic use” (Worldometers.info). Another cool site to check out if you’re interested in water usage / risk is http://www.wri.org/applications/maps/aqueduct-country-river-basin-rankings/#x=147.30&y=8.70&l=2&v=home&d=bws&f=0&o=171. This website displays what the WRI calls an “Aqueduct Water Risk Map”. This map rates country from 1 – 5 (1 being less at risk, 5 being severely at risk) for water shortages. Along with providing the average score for the country, the map breaks it down into the three major industries: domestic, agricultural, and industrial.

Take a look at the Baseline Water Stress Score, which is the ratio of total annual water withdrawals to total available annual renewable supply. Examining the developed nations we find the following scores (remember, its 1 – 5, with 5 being the worst scenario and 1 being no worries):

North America

  • United States – 2.9 Average (3.5 Agriculture, 2.8 Domestic, and 2.5 Industrial)
  • Canada – 1.2 Average (2.4 Agriculture, 0.9 Domestic, and 1.2 Industrial)

South America

  • Mexico – 3.5 Average (3.7 Agriculture, 2.9 Domestic, and 2.9 Industrial)
  • Brazil – 0.9 Average (0.9 Agriculture, 1.1 Domestic, and 0.9 Industrial)
  • Argentina – 2.5 Average (2.9 Agriculture, 2.2 Domestic, and 1.8 Industrial)

Africa

  • South Africa – 3.2 Average (3.2 Agriculture, 2.7 Domestic, and 3.3 Industrial)

Middle East

  • Every Country Average > 4.0

So now that we have a clearer understanding of the world in terms of water usage, supply, and shortage worries, let’s get more granular and find out just how water is used in the industrial industry, which is where Intrepid Potash is located. The Canadian Society for Unconventional Resources has a great PDF describing the uses of water for the oil and gas industry, an industry IPI sells their water rights and water too. I learned a ton about how water is used in the drilling process, so I’ve pasted a few quotes from the article below.

“During the drilling process water-based fluid (drilling mud) is used in a number of different ways including lubricating the drill bit, circulating the drill cuttings out of the hole, containing formation fluids and facilitating the operation of sophisticated formation evaluation tools.”

“Hydraulic fracturing operations which use water as the primary fracturing fluid can require thousands of cubic metres of water. These large volumes of water are required to stimulate each section of the length of the lateral and to carry the proppant material into the newly created fractures.”

Where Intrepid Potash Fits In

Now we can finally move on to the vehicle for our water investment, IPI. Intrepid Potash is committed to expanding their water sales resources for the year 2017 and beyond. According to their latest 10-K, IPI mentions water in their speciality product sales, saying, “Through our existing operations and assets, we also have the potential to grow our offerings of salt, water, and brine with low capital investments”, and, “In addition to our reserves, we have water rights and access to additional mineralized areas of potash for potential future exploitation” (IPI 2016 10-K). Reading into the balance sheet, I realized that IPI doesn’t explicitly record their water revenue under any particular name, rather they place it under “Other Income” on their books. But before we go into their water sales, it’s important to take a look at the company as a whole.

The Fundamentals

IPI is currently trading at a 22% discount to book value and only 1.1 times sales. Their financial strength isn’t great, which makes it an area of concern for investment. IPI has a Cash to Debt ratio of 0.24, ranking it lower than 62% of the companies in its industry. However, it has an Equity to Asset ratio of 0.76, which is better than 88% of companies in its industry. Looking towards profitability, IPI currently doesn’t make money, but their trends are headed in the right direction. After reporting a Net Income loss of -$524M in 2015, IPI reported their most recent 10-K Net Income at -$61.88M, a tremendous recovery and tilt in the right direction. Free cash flow is slowly but surely making the turn towards positive. After a dismal 2013 FCF reporting of -$185.9M, IPI has grown their FCF to -$29.69M in 2017.

What I like most about IPI’s prospects is their dedication to reducing debt and raising cash levels. In 2014, IPI had $151M in debt compared to $78.02M in cash. Since then, IPI has reduced its debt to $88.02M and grown its cash to $20.7M (compared to the prior year of $4.46M).

So what is the biggest driver of growth for the company? Their ability to sell water. Taking a look at the balance sheets we can find how much of an impact the water sales have had on their bottom-line. Remember IPI reports their water sales as ‘Other Income’. Looking at the 2016 10-K, we see that IPI’s Other Income grew from $575M in 2015 to $1,106M in 2016, close to a 50% growth in income. That’s impressive. My thesis, backed by the research on water, suggests that the demand for IPI’s water rights and water usage will continue to bolster the bottom-line of the company, propelling the company into positive FCF and a greater Cash to Debt Ratio, and it should be then reflected in the price action. Speaking of price action, let’s take a look at the charts to round out this analysis.

Price Action / Chart Analysis

Right now the charts are depicting what could be a bottom in the bearish trend of IPI. If you look closer you can see a wedge forming at the end of this long saucer formation

Price action has already crossed 50 MA in a bullish manner, and I like the increased volume I’m seeing on the charts as well. Anything close to the 3.00 strike range would be a good entry in my books, and I would set the stop below the 50 MA, which if hit, would rebuttal my bullish thesis and get me out safely. Not too sure on how much to risk, but I would be sure to keep it between 0.50% and 1% of capital.

Conclusion

In pure supply and demand terms, the world will eventually need more usable water than it currently has. Whenever an imbalance like that occurs, there is always a time and place to make a profit from it. If water has the likes of Michael Burry digging into it, it should be worth your time to do some digging as well. Below this piece are the websites used to research this piece. I hope this thesis is a good starting point for those that want to dig in further. If you find anything of substance, shoot us an email. Also, if you see anything wrong with this, shoot holes into the thesis so I can see where I could’ve been wrong in my thought process.

Sources For Research

http://www.csur.com/sites/default/files/Water_Consumption_v3_wBleed.pdf

http://www.wri.org/applications/maps/aqueduct-country-river-basin-rankings/#x=-12.30&y=6.85&l=2&v=home&d=bws&f=0&o=86

http://www.worldometers.info/water/

https://www.wri.org/our-work/topics/water

Investment Philosophy Part 2 – Diversification & It’s Shortcomings

I want to discuss part two of my Investment Philosophy series, Portfolio Concentration and Diversification. Although this is not the most important part of my philosophy (that was discussed in part 1), it is still very important for you as a potential investor in the Fund to understand how I think about such matters like diversification and the concentration of my portfolio.

Continue reading “Investment Philosophy Part 2 – Diversification & It’s Shortcomings”

Investment Philosophy Part 1 – A Word on Losses

I want to take the time to discuss my investment philosophy in a bit more detail as I believe it will provide you, a potential partner, more clarity into the mindset of your potential money manager. I will break these investment philosophy pieces up into three different parts, with this first part being about losses.

You might be wondering why I am starting with losses, given the main goal of firms is to maximize profit. That is not the main goal of Rockvue Capital. The main goal is to minimize losses and restrict drawdowns as much as possible. By doing this, I am able to let the profits take care of themselves, while preserving my capital, and your capital. Let’s breakdown how I do this in Rockvue Capital. (The investment philosophy discussed herein these three parts have solely to do with the Voyager Fund. The SteadFast fund is algorithmic and independent of discretionary action from myself).

Using Stop – Losses To Mitigate Risk

The most important factor in mitigating risk and drawdowns in the Fund is through the power of stop – losses. Stop – losses for those that aren’t familiar, are used in trading to set a predetermined price at which one exits a trade. Using an example, let’s say I want to buy stock XYZ on a breakout at $5 on a symmetrical triangle pattern. Now, on this trade, I will place my stop – loss order on a price at which my bet would be wrong. In other words, I would place my stop – loss at a technical point that would signal me to get out. If this still doesn’t make sense, feel free to email me with any personal questions.

Here is the most important part about using stop – losses: I have yet to sustain an individual loss of greater than 1% per trade. This is very important to me, and it should have the utmost meaning to you as a potential partner. Through the power of stop – losses and moving those stop – losses up as soon as I can, I am able to lock in profits as soon as possible, and try to get to breakeven as soon as I can. This is what I am referring to when I talk about minimizing as much risk as possible. Now that you understand a little bit more about how I manage risk technically from stop – loss orders, I would like to take the remaining time of this memo to discuss my views on losing in the markets.

How I (And You) Should Handle Losses

My view on losses may come as surprising to those who haven’t read my work before, or frankly who are reading this memo and haven’t read previous memos. I will make a lot of losses. Statistically my losses will outnumber my wins, the scale of which I do not know specifically. So far, the ratio is close to 45% winning percentage. I am not worried about this. In fact, I would be completely comfortable with a 1% win rate if at the end of the year I am net profitable. I don’t believe this will ever happen, but the point I am making is that I am a firm believer in Pareto’s Principle.

Pareto’s Principle states that 80% of outcomes come from 20% of the inputs. If I can focus on the 20% profitable trades, I can sustain 80% of my success from 20% of those trades. The reason that I am comfortable with this principle is that the losses I sustain are very small compared to the size of the gains I receive on my profitable trades. I hope that you understand this principle as a potential partner in the Fund. If the idea of suffering lots of small losses is something that you are not comfortable with, I completely understand, but I would love to discuss it with you personally before making a decision to either invest or pull capital.

Positive Asymmetry in The Fund

As a caveat for my talk on losses, I want to end the memo with a word on positive asymmetry. The Fund will at all times have a positive asymmetric skew to the profile of its returns. This goes back to the Pareto Principle I discussed earlier. If you look at a Normal Distribution, you will see a symmetrical bell shaped curve along the various probability distributions. This is what the return distribution will probably look like at Rockvue Capital: 

Image result for asymmetric investment return

As you can see, the amount of small losses (as the x axis shifts towards the left) will outnumber my wins, which is what we should expect going forward. however,  the power in asymmetry is that the smaller number of profitable trades will cover for the losses and (hopefully) return a net profit after commissions and expenses.

A Final Word

This first memo got a bit mathematical and technical, so I apologize if some of this material went over some heads, that was not the intention. When dealing with losses, it is important to get granular to understand the reasoning behind my philosophy on losses and the purpose of my stance to the firm.

Once again, all of what I do directly impacts your potential capital investment. For this reason, I want to be as transparent as possible with my philosophy. Stay tuned for Part 2 of the Philosophy Memos where I discuss the criteria on which I invest in equity positions.

A Little Portfolio Hospitality (AHT)

Well I’m finally fully moved into my townhouse, and after finishing some economics homework broke in the new casa by doing some research for any potential plays in the coming weeks. One thing before I get going … I tend to do my best research with the comfort of music in the background. It doesn’t have to be any particular type of music, mainly whatever I’m feeling that moment. For instance, the research I did to find this play came while listening to the Batman & Game of Thrones soundtrack. Not sure if working with music will help, but if you’ve never tried it, give it a test drive and see how it helps (or harms) your productivity. Volume up, let’s get crankin’.

REIT Investment Potential

Like always, the following company description is from Gurufocus.com: Ashford Hospitality Trust (AHT) is a real estate investment trust that invests in full-service upscale and upper-upscale hotel properties in the U.S. The company owns and operates its assets through its operating partnership, Ashford Hospitality Limited Partnership. All of its hotels are located across the U.S. and operate under the Marriott, Hilton, Hyatt, Crowne Plaza, and Sheraton brands. Ashford’s sole segment is Direct Hotel Investments, through which it owns hotels by acquisition or development. Ashford also provides real estate investment services, such as mezzanine financing, first mortgage financing, and sales-leaseback transactions. Its revenue streams include Room revenue, Food and beverage revenue, and Other revenue. Room revenue accounts for the majority of total revenue.

To the standard ‘value investor’, REITs are compelling investment equities given their usually high dividend yield coupled with a normally steady pay-out schedule. Institutional investors and boutique firms alike like to add REITs to clients portfolios as a way of exposing them to the real estate side of investing, without getting their client knee deep in the rabbit hole that is real estate investing. I like to think of REITs as the ETF before the ETF. If you think about it, there are very few differences between REIT equities and a standard ETF. Both claim to offer diversification and predictability, and both offer the investor a way to dip their toes into investment areas they otherwise wouldn’t.

I say that because AHT offers a 7.8% dividend yield, a percentage that is the highest amongst their competition. If you would’ve asked me a year ago what I thought of this company, I would’ve relished in that yield like I relish carbs on my cheat days … But these days not so much. To me, a dividend (if I’m on the long side), is the cherry on top of the trade. Because Rockvue Capital is pinpoint focused on creating positive asymmetry with each and every trade, a dividend for a stock we are long on is basically free money for a trade we would’ve taken otherwise. I hope you can see the difference I am trying to make here. I am not interested in this company because of the dividend, I’m interested in this company notwithstanding the dividend.

The Fundamentals

AHT is trading at a 26% discount to book value, and that is something given the high quality of their brands, and the fact that they are the leader amongst their competition in nearly every major category. With $4.28 cash per share, the current share price of $6.30 isn’t terribly overvalued just on a cash basis alone. Keeping in like with the discounts, AHT is trading a staggering 39% discount to sales, and is trading 3x its operating cash flow. Both of those last two metrics place it better than 99 and 97% of its competitors in its industry.

The Headwinds

AHT isn’t without its flaws, however. Debt levels remain significantly high compared to cash since the start of 2014, net income hasn’t been positive since 2015, and operating loss increased over the last year. Trying to figure out why these numbers are the way they are, I looked to their balance sheets. In terms of operating income losses, AHT didn’t sell as many properties as they did in previous quarters, leaving their Income From Sale of Property much less than when they did. Secondly, AHT reported a loss in their derivatives investments for the most recent quarter of (1,600+) compared to a positive income of near $6,000 (in thousands).

The company is taken measurable efforts in reducing their debt burden, and I’m not worried about the decreased selling of their properties, I’m more concerned with their playing around in derivatives. Although the loss in derivatives was small on the grand scheme of things, I would like to see management more disciplined in how they allocate capital towards derivatives, and save more of that money for the core of their business model.

The Chart

I like the chart set-up for AHT, which made me interested in the fundamentals aspect of the business. On the daily chart, AHT has broken its price resistance from the descending triangle. However, I would like to see price reach around 6.40 before entering on the long side. Let’s take a look at the Weekly Chart:

The weekly chart shows price bouncing off the support end of the descending triangle / wedge.

Entry point will be $6.40 with my stop loss set at $6.10. I would risk between 50 and 75 bps on this trade.

The market seems to be overselling on the decrease in net income, while not looking at the obvious value that is on AHT’s balance sheet, and the value of their properties and their brand. I like how management has handled the company in the past (aggressive buybacks in 08 – 09), and with their determined effort to reduce the overall debt burden, as well as shifting their focus to having their properties be franchise managed instead of individually managed, it creates for a more streamlined, efficient revenue business model.

Will update via email if I have entered into this trade on my paper account. As always, if you are interested in getting my trade alerts, shoot me your email and I will get you signed up.

Two Charts For Next Week Trading

Its been a crazy week with the first full week of classes starting, and yes, it is finally the last year of schooling for me! But with the Labor Day Weekend extending my freedom by another day, it gives me time to send y’all a heads up on what I am thinking about going into next weeks trading. Although I have dozens of companies that are on my “radar”, there are only a select few (if that) each week that could be a potential trade set-up. A lot of the companies on my radar are longer term set – ups, developing set – ups, or companies that I am waiting for a drop in share price. Going into this next week I have two main charts that I am focusing on for potential trades, both of which I will dig into here.

As always, if you have any further questions, or you think my idea is stupid and I am missing something blatant, please email me. I love discussing ideas and bullet – proofing strategies whenever possible.

Chart 1 – Silver

I’m slowly beginning to realize that my writing has developed a quasi fetish towards silver. In all seriousness, silver has been on my radar for months, possibly a full year. I bought physical silver back in 2014 which I keep as a stowaway, but that was before I started getting extremely serious about the markets. Silver futures charts are looking extremely interesting as a bullish set – up. When it comes to charts, I like to follow Peter Brandt’s style (which, why wouldn’t one want to, with his 42% annualized return). Like Brandt, I first look at the weekly charts to see if there is a pattern setting up, from the weeklys, I dive into the dailys for an entry point and to place my stop losses. After recognizing a pattern on the weekly chart, I will use the daily chart to move my stop losses up or down according to which side of the trade I’m on.

Here’s the Weekly Chart for Silver Futures Continuous:

www.tradingview.png

From the charts, you can see the descending wedge pattern forming. What is important to note is that price action already broke the 200 MA, and is at the literal tip top of that resistance line going back into mid 2016. This will be the fourth time silver has tested its descending resistance level, and if it breaks through this time, it could be a powerful move upwards. That’s the beauty of waiting for chart patterns to develop: There is a clear right or wrong when it comes to your trade. If it breaks through that price resistance, I will put an order in and place my stop right below the 200 MA on the daily chart.

I am a bit more confident in the possibility of a breakout in silver this time around because I have a potential double confirmation from both the weekly and the daily charts. Whenever you have two different time charts confirming a pattern, your odds of success increase. That’s what this entire game is about anyways, creating a positive edge in the markets.

Here is a picture of the daily chart for the same Silver Continuous Future:

What’s important to notice is that there is a confirmation of price breaking out of the resistance on the daily chart, and the weekly chart is close to follow. That is why Tuesday’s trading day is so important for silver, and will determine whether or not I place an order.

Now onto the topic of risk capital, I might edge closer to 100bps of risk, just given the increased confidence I have in the charts and in the sentiment around the market (increased volatility). I will confirm on the day of the trade if and when that happens, but for right now I am looking between 75 and 100bps risk.

Chart 2 – Jakks Pacific, Inc. (JAKK)

Most of you reading this have experienced Jakks Pacific merchandize at least some point in your life, most notably during the Holidays. GuruFocus has a great description of Jakks Pacific, saying:

Jakks Pacific Inc is a toy and leisure products manufacturing company. Its products offering include traditional toys and electronics such as action figures, toy vehicles, dolls and accessories, ride-on toys, toys for pets. They also offer role play, novelty and seasonal toys such as dress-up, pretend to play toys, Halloween and everyday costumes, junior sports, and outdoor activity toys. The brands under which these products are sold include Road Champs, Spy Net, Fisher Price, Kawasaki, JAKKS Pets, Disney Frozen, Black & Decker, Spiderman, Toy Story, Sesame Street, among others. Its products are sold to customers in the United States, Europe, Canada, Hong Kong, and Other parts of the world.

In short, they make toys for children (Unless there’s one reader who yells to himself, ‘They’re collectible figurines thank you!’). Unlike their toys, their charts are ugly, and times are tough for the company. Before we dig into the technicals, let’s see why I am evening worrying about JAKK as an investment. Remember, with equities, I always put more emphasis on the narrative around the company before I assess the chart. This is something that I file under the category of ‘Strong Opinions Weakly Held’ because certainly there have been times where I have seen a chart so tantalizing I will, as George Soros says, “Buy First and Investigate Later”.

The first thing that popped up to me with JAKK was their valuation. JAKK is trading for roughly 50% of Book Value. That discount is better than 80% of competitors in its industry. Because of this, it begged the question in my head, ‘How could such a huge, reputable brand like JAKK be trading at such a steep discount?’ The digging led me to their latest quarterly report.

Why The Sell – Off Occured

The biggest reason for the share decline was their drop in sales. JAKK reported a 10% decrease in sales QoQ, due to what they referred to as Sales Comparisons and Timing of Expenses. The decline in sales was linked to the decline in the retail space as a whole, with JAKK forced to suspend the sale of their product in certain stores due to shutdowns. To add to the decrease in sales, JAKK COGS (Cost of Goods Sold) increased 10%, a double whammy negatively affecting bottom line profits and margins.

The other major headwinds for the company that affected the bottom line was the suspension of toys from the new Star Wars movie and Frozen. Frozen provided a healthy dose of sales revenue for the company after that movie rocketed to #1. The good thing about a company like JAKK is that the movie industry isn’t dying. In fact, demand for super hero movies seems to increase. With Marvel and DC virtually dominating the big screen production, one can safely assume that JAKK will have more than enough content to dig from for their toy production. On that note, I want to discuss why I think the market isn’t realizing the importance of the brand name, the demand for products from movies, as well as the increase in free cash flow from the company.

What Wall Street Doesn’t See

Sometimes I think Wall Street gets too wrapped up in sales numbers and forgets other crucial aspects of a business that are not only performing well, but are increasing in their performance. When it comes to JAKK, that increase in performance is from free cash flow. Although sales numbers decreased 10%, JAKK was able to increase their FCF by 101% and their operating cash flow by 122%. The company also is trading for $3.84 per share in cash, which is a $0.40 discount to current price. In other words, Wall Street has beaten down this stock merely off of a missed sales number for one quarter.

JAKK is taking direct effort to fix the problems of the most recent quarter. JAKK is increasing their master global reach of toy licenses in a host of countries, and most recently opened up a branch in London. For the remainder of 2017, JAKK is branching into the sporting / outdoors industry as well as Cosmetics.

The most important aspect of the JAKK business developments come from their online space. I stress this with every company in retail that I investigate … How are they competing online, and how are they making themselves more accessible online? JAKK has expanded and grown its online presence tremendously. Online sales are up 50% YoY for the company, a great sign of mobility.

The Chart

 

Notice anything crazy about this weekly chart? JAKK hasn’t been this low since 1997. To put that in perspective, they haven’t been this low since my 3rd birthday. At these levels, there is price support, its just very far dated. If it can hold this price level though, it would present significant support from it. Moving on to the daily charts we find a similar story.

On the daily charts, JAKK is very close to breaking both price resistance levels going back to the start of 2017, as well as the 50 MA. Whenever I dissect these companies that are trading at a steep discount to book value, and even a discount to cash, it’s extremely important to try to increase the possibility of buying after a bottoming formation. Note: I am not trying to ‘pick’ a bottom in a stock, what I am saying is that its important to buy off of a basing pattern with momentum heading upwards.

When looking to buy JAKK, my entry position would be on the 3.65 – 3.70 price range, and I would put my stop loss around the 3.30 price range, right below the price support on the most recent coiling pattern formation.

Takeaway & Email Notification

These are two of the top charts that I am paying attention to coming into the trading week. If you have any concerns or questions on these two potential trades, shoot me an email or text if you have my number.

One thing that I would like to stress is that this website isn’t the only place that I communicate with potential investors or partners interested in investing with me. I have a list of people whom I email on a semi regular basis where I discuss individual trades and results of my two funds. If you would like to be included on this email list, leave me a comment in the comments section, or shoot me a personal email regarding your inquiry.

Surfing and Trading

So this past week I’ve been relaxing (as best as I can) in Tybee Island, GA. This is supposed to be my last vacation before the school year starts, but I’ve spent most of it getting destroyed by waves, early morning workouts, and studying the markets. I’ve come to the realization that I cannot get away from the markets, mainly because I love them so much. It’s my passion, so I don’t think of it as distracting or “working” while on vacation.

This brings me to the point of this article. I won’t go into any details on specific companies, but rather provide an insight into the methodology and process of my trading. I tried surfing this week and I struggled, a lot. To my defense, the waves were very large and challenging in general. More or less, I’m trying to make excuses for myself. But while I was out in the ocean letting the waves decide where to take me, I thought about markets, investment opportunities, and the waves. It hit me. Along with a wave, a thought hit me that garnered a writing piece. My strategy to the markets is exactly like surfing in 4 major ways. Let’s break it down.

Continue reading “Surfing and Trading”

Portfolio Update & Watch List Wonderings

There are a few companies that I have on my radar that I could potentially pull the trigger on if the price action works in my favor. Oddly enough, all of these positions are on the long side. I say oddly enough, because if you’ve been reading this website for a while, you’ve picked up on my bearish overall macro view of the markets. Yet, like I mentioned, my macro view doesn’t infiltrate into my ability to find value in bullish or bearish situations.

I’ve dug through the fundamentals of each of these companies, and I haven’t necessarily written a post about each of them, because I’m thinking about writing pieces about companies after I’ve bought them. It seems like a weird concept to think about, but I am focused on the long term. If I start to manage money for people, I don’t ever want to feel like I’m front running a trade. This is also the reason I am considering not being specific in the companies that I invest in once I start managing capital. It’s a fine balance between transparency and integrity.

I’ll take y’all through some of the companies on my watch list, as well as my current portfolio as it stands to this day (August, 17th, 2017).

Watch List Wonderings

  1. GameStop (GME)

I wrote a piece on GameStop that you can find here in which I outlined the bullish thesis for the company. For the sake of time, I will not rehash the article. The one thing that kept me from buying into my thesis was the price action. That is close to changing. Let’s take a look at the chart:uq4hxGFi[1].png

You can see the descending wedge chart formation on the daily charts is long in duration. I am looking for price to break that descending resistance level. At first, I thought about entering on that triple bottom price around $20, but that is something I am still internally debating when it comes to entry point. Part of me knows I am missing out on some alpha by waiting for a break in resistance, but at the same time, I know that I increase my odds of being right if I enter on a breakout from resistance levels. I will continue to adapt, hypothesize, and test those strategies until I feel comfortable entering on either one without hesitation. Haven’t bought in yet, still staying patient.

2. XG Technology (XGTI)

I became bullish on XGTI months ago, never got around to writing a piece about it, but it has come up very frequently when Jacob and I discuss potential investments. Since that time, the stock had somewhat of a false breakout and has since retreated below its 50 MA in a bearish manner. However, what is perplexing is that the latest quarterly results were very impressive. Most impressively, the company no longer has to file a “going concern” notice on their SEC filings, indicating sustainable cash flows, profits, and revenues. That is huge. I don’t know why the selling is happening, but I want to get to the bottom of it. If I can’t find a good reason for the selling, I will be patient and wait for the price action to turn so I can hop in. I hope I’m patient enough to wait for the drop to continue down to the 1.60s area, in which the company has support technically.

3. Silver

Ah yes, silver is back on Rockvue Capital’s radar screen. Truth be told, it never left. I wrote a longer piece about a potential breakout formation on silver, but soon after that post, the bullish thesis depleted. I ended up taking the short side of the silver trade and making close to 250bps of profit on the trade. That remains one of my favorite trades simply due to the fact that I wasn’t gun-ho on my thesis, and I was able to change my mind when the narrative and the price action changes. That is something that you as a reader or potential investor will and should know about myself. I make predictions, I make hypotheses about the future based on evidence, research, and macro settings. However, I am very quick to reverse my thesis if news changes, or if price doesn’t react how I thought. I am not in this game for ego’s sake. In fact, if I wanted to bolster my ego, I would stay doing strictly analysis, instead of putting my money where my mouth is. If I pick a loser, I get out quickly. I don’t care about being wrong. I care about making sure I don’t lose money. Period.

After scoring a large profit on the short side, I dismissed any trade in silver for a month or so, however, the price action is looking tantalizing. With the threat of North Korea at all time highs, racial tensions not seeming to improve, the psychology of the investor may want to moveinto something more “stable”, such as precious metals. The charts are looking interesting with silver flirting a break of the 50 and 200 MA. 

This trade won’t happen for a couple of weeks if I go through and decide to pull the trigger. I am looking at the weekly charts to give me the green light, but I want something real, something expansive for me to make my entry. I would more than likely put my stop below the support line drawn there around the 15.85 – 16 region.

4. Russian Ruble vs. US Dollar (RUBUSD)

I’ve written extensively on how bullish I am about Russia, their economy, and the future of their agriculture. I am a huge follower of Jim Rogers and I read his stuff daily. Although the US Government increased their sanctions on the country, I see positive price action in their currency against the dollar. The ruble is close to breaking the 50 and 200 MA on the daily charts, and on the weekly charts, the 50 MA is acting support for price. I am already short the dollar in my portfolio, but I keep this on my watchlist for a longer trend play. 

5. Cotton (in USD on Forex Market)

I went 3/3 on cotton trades so far this year, going long once, and short twice. Cotton is approaching a key support level, so I’m waiting to see what the price action does once it hits that point. It’s had 7 straight red days up until this point. If it breaks down below support, I’ll take the short side of the trade. However, if it bounces, I might take the long, place my stop extremely close to my entry, and play for a bounce back gap up. When it comes to commodities, I am still betting small around 25 – 45 bps per trade. 

6. Ovascience (OVAS)

This net net company peaked my interest a few weeks ago, and I wrote a report on them which you can find here. OVAS is a net cash play, trading less than its net cash value. I love these investments. For the most part, these are the investments I want to comprise most of the portfolio on the equity side, however, I cannot predict with any certainty the type of investments that will compromise the fund except for the fact that the fund will be comprised 100% of investments that are undervalued. OVAS is breaching the 50 MA again, and I am looking for a more solid move upwards on the backs of a healthy quarterly earnings statement. 

Truth be told there are about 20+ companies that are on my radar right now, the price just isn’t right for a buy. If prices fall to where I would like, I would be much more frequent with my analysis and updates on where I am looking. I am steadfast in my patience not to overpay for any company. No company deserves to be bought at a premium. I am content looking for dollars trading at $0.40.

Portfolio Update

Now, onto the current portfolio as of today August 17th, 2017. The portfolio has 13 positions split between currencies and equities. This shouldn’t come as a total surprise if you’re a frequent reader of my blog, but I will continue to stress: My general thesis of the market in no way, shape, or form influences my individual investment selections. I am still finding value in US Equities. Even amongst these insanely high multiples there is value to be found and extracted, to say otherwise is naive and shortsighted. Not all of my equity positions are long, however. I am short two.

Currency Positions

  1. Short USD (DXY) – Risk: -30bps ($233 gain)

I’ve been on the bearish side of the dollar trade for a while now, even getting out too early on the short before getting back in to ride the trend I am currently on. The dollar is at a precarious point in price action, with any break below support being the windfall of the collapse of the dollar (boy that sounded all doom and gloom, I must be reading too much Jim Rogers). I still think we will see a bump in the dollar as people chase into it when equities and global economies collapse, seeing the dollar as the worlds save haven currency. Of course, the dollar as a save haven is the equivalent to a water fall mirage in the desert … It’s not really real, and it’s not really there. I’m debating on whether to move my stops closer, or farther back to play a potential retrace from the 50 MA. Will keep y’all updated. 

2. Short British Pound (GBP) – Risk: 42 bps ($322.49)

The pound broke its 50 MA in a bearish manner and I took the short side of the trade risking 42 bps. If you remember, I played the pound on the long side and made a handsome profit, so I’m taking my chances on the short side. 

Equity Positions

  1. Valeant Pharmaceuticals (VRX)

Yep, the company that famous hedge fund manager Bill Ackman bought in the near $200s and sold in the $8 – $9 is the same company I am going long on. It’s completely unfair to use VRX as a pedestal for my investment decisions compared to Ackman because every investor makes mistakes, the best of them. What I hope to do and continue to do is learn from the bests’ mistakes, that way I do not repeat them with your or my own money. All that I will say on the matter of this company with regards to Ackman. Ackman let his ego get in the way of him cutting losses and moving on. That, I can assure you, will never happen at Rockvue Capital.

Anyways, Valent is an interesting play in terms of their debt restructuring. They still have a very long way to go, but their price action on the weekly charts indicated a buy signal, and I am risking not too much on this trade (24 bps as of today). 

2. Mechel Pao (MTL) – Risk: 23 bps ($174.8)

MTL is a Russian oil company that is trading around 3 times earnings, and about 1.05 times free cash flow. Russia’s VEB also just approved of MTL’s debt restructuring program, so it will enable MTL to start reducing its debt rather quickly, while at the same time keeping its most valuable assets under house. I like the play because there is a population boom in Russia as I’m typing this. MTL is the leader in oil and gas distribution within Moscow and the surrounding areas. 

3. Michael Kors (KORS) – Risk: – 79 bps ($604.89)

Jacob brought this company to me a few weeks ago and I really liked it from the fundamental standpoint, it was the price action that I wasn’t thrilled about. However, after a stellar earnings report, absolutely crushing Wall Street estimates (much to the estimation of both Jacob and myself), the stock exposed itself to a tremendous buying opportunity. I will not go in depth on the fundamentals, earnings, or outlook of the company for the sake of length in this post. Needless to say, KORS could potentially be one of our biggest trade winners of the year. My entry point to this trade was right as price moved above 50 MA on heavy buying volume (technically always a nice sign to see when fundamentals match the technically bullish thesis). From that point I held on for the ride and was extremely lucky to catch the major gap up movement in price seen in the chart below. 

Right now the trade is sitting at a worst case scenario 80 bps profit. If KORS can break through its next resistance level, we could see it really start to take off. This is a trade where I will let run as long as possible, moving my stops up like a sniper. KORS has the fundamentals to run.

4. Intrepid Potash (IPI) – Risk: 26 bps ($197.87)

I wrote a large piece on water and how IPI works into that dealing for the guys over at Macro Ops. I do work for them as well since I expressed interest in joining their group as a volunteer intern gig. Any chance I get to surround myself with those that know more than me is a win for me, and this was huge. Alex and the guys at Macro Ops are some of the sharpest people I’ve personally come to know in the investment space. It’s been a pleasure working with them for a few months now, and I am very optimistic about our future relationship. Nevertheless, IPI came out with great earnings, beating analyst expectations, and the price action presented a buy signal. I like IPI for the water rights they own, as water will become scarce the greater the population increase.

I entered right as price action broke resistance, and as a perfectionist, I missed the best timing by a day, but I’m still in the black on this trade so I can’t nitpick too much. 

5. Urban Outfitters (URBN) – Risk: 59 bps ($453.12)

I don’t know what it is with Jacob and teenage retail clothing stores, but he sent me URBN along with AEO and the like, and even wrote an excellent piece on L Brands, the parent company of Victoria’s Secret … I might have to have a talk with him about that. Humor aside, URBN crushed earnings and the stock catapulted 17%, I bought on that rally as price action broke key resistance levels. It has since then retreated, and I am moving my stop loss up right below the 50 MA. If the stop loss gets hit, I’ll know it was a false breakout. However, if it bounces from the 50 MA it could merely be a patented bullish retracement. 

6. Streamline Health Solutions (STRM) – Risk: 40 bps ($307.80)

STRM came across my radar after breaching the 50 MA in a bullish manner. There is good reason for their shares to be reaching new highs. In late June the company recorded record revenues and net income. Revenues jumped 26% and Net Income increased 79%. Those are good numbers. The company is currently trading at a 20% discount to its sales, and it is trading slightly above book value. Not a deep value play, but a value momentum play nonetheless.

7. Rubicon Technology (RBCN) – Risk: 50 bps ($385.73)

Rubicon Technology Inc is an electronic materials provider that develops, manufactures and sells monocrystalline sapphire and other crystalline products for LEDs, RFICs, blue laser diodes, optoelectronics and other optical applications. This is a NCAV play. RBCN trades at a 43% discount to NCAV, which is an extremely comfortable margin of safety (focusing on minimizing the losses). Their most recent earnings report reaffirmed my beliefs that the company can turn it around. The company is reducing their general expenses, cutting staff where it can, and slowing the overall cash burn of the company. 

8. PDL Biopharma (PDLI) – Risk: 18 bps ($135.47)

Good ol’ PDLI. This is a stock that Jacob and I have watched since the very first thoughts about Rockvue Capital came into our heads. I wrote an overview about them, which you can find here. In it I expressed my impression of the company’s CFO Jeff Garcia, as well as my confidence in its cash and balance sheets to ride out the turbulent times of healthcare limbo. 

I will be transparent and say that although I am long term bullish on this company, I did short it after it first failed to break resistance. I walked away with a small, scratch profit. I do not know if that is something I will do into the future as a defacto put option, per say. However, I took the long side on the weekly charts as it broke price resistance as well as 50 MA. It is also important to note that when both daily and weekly charts are offering a buy signal, it is usually a higher probability of being a true breakout (notice I didn’t say sure bet, there is no such thing).

9. Short Netflix (NFLX) – Risk: 27 bps ($206.32)

I have wanted to short NFLX for the longest time, not because I hate the company (I love Stranger Things, Sherlock, and being able to watch The Big Short almost monthly), but because I hate how the company is run. Much like TSLA, NFLX funds its content through mountains and mountains of debt. At some point investors should realize that this isn’t a sustainable way to fund a business, no matter how many people enjoy using the service (a la SNAP, APRN, etc.). At the end of the day, when I delve through the pages of the Intelligent Investor, I’m reminded that no company is too big or too different to be withheld from the same analytical integrity as the rest. 

10. MannKind Corporation (MNKD) – Risk: 43 bps ($332.80)

MNKD is a developmental biotechnology company that specializes in diabetes and cancer drugs. MNKD is also a discounted cash flow play, with their DCF intrinsic value weighing in around $14 per share, so the current share price of 1.43 is trading at a hefty discount. I really liked the price action in the stock, and I am interested to see how far it will run. Not a true net net stock, not the deepest of value, but there is still momentum from solid earnings. 

11. Short High Yield Bond ETF (JNK): Risk – 17 bps ($131.89)

This trade was something that I have been trying to figure out the best way to do, and I still don’t think its the best way in terms of overall net profit, but its the best way given what I can do right now on the paper account. There is a bubble in the bond market and the first place I am looking to short that bubble is the high yield market, which is overvalued more-so than the rest. As interest rates continue to rise, it will make lending more expensive, which in turn will make investing less appetizing. The price action confirmed my bearish narrative as it broke key support levels both in price and in 50 MA. 

Now I just need to really see if price can fall below 200 MA. If that happens, it could be a much larger winner than I had thought.

Concluding Remarks

If you would like further explanation on the positions in the portfolio, or if you are interested in some of the companies that are on my watchlist, please don’t hesitate to drop me an email. I would love to take the time to explain it in further detail if you express the desire.