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A few links

May 20, 2012

Great video on learning with the Feynman technique

I wonder at what age do we accept the social norm of taking explanations at face value, through rote memorization, and not really asking and thus understanding why? how do magnets work?

Also, an interesting piece of accounting history on inventory writedowns and its butterfly effect on the publishing industry.  Apparently, companies were permitted to write down inventory simply because they couldn’t sell them 30+ years ago.

Buffett, Munger and Gates on Fox here – always pretty interesting to hear them speak

Interesting recent article on CEOs and margin calls


Where is the Goodwill?

February 17, 2012

Xchanging (XCH) – Where is the Goodwill?

I. Summary

Xchanging is a BPO and technology company operating in localized oligopolies with very high barriers to entry.  As a result of a bad acquisition in 2009, it wrote off £100M in goodwill and its stock price plummeted.  While poor acquisitions inarguably destroy shareholder wealth, I believe Mr. Market is confusing accounting goodwill with economic goodwill here and at a market cap of £180M, Xchanging is misunderstood and undervalued.

II. Background

Xchanging was founded by David Andrews, one of the original outsourcing experts from Accenture, in 1999 and basically provides outsourcing services to corporations around the world, with a predominant focus in the UK.  They do this in two ways: standard outsourcing contracts and enterprise partnerships (EPs).  The revolutionary EP model solves for the BPO industry’s constant headaches of lack of partnership, sustainability, and fit by aligning incentives, snowballing relevant processes and technology, building social capital, and turning cost centers into revenue generators.

Read more…

How much would you pay?

February 5, 2012

All you have to do is, from time to time – in spite of everything, just try to examine a problem in a novel way.  You won’t “stifle the creative process” if you remember to think from time to time.  Don’t you have time to think?

Richard P. Feynman


The answer is perfectly clear at first sight.  The trouble was, some guy would think it was perfectly clear one way, and another guy would think it was perfectly clear the other way.


Here is some food for thought…consider this theoretical company:

Read more…

How do you detect fraud?

February 3, 2012

Everyone has shunned Chinese stocks because of accounting frauds.  Some funds make a successful living from just shorting Chinese companies.

However, this obviously has to be overdone as not every Chinese company can be a fraud.  The reality in my opinion is that we have suffered from some sort of availability heuristic and have twisted the maxim “there’s never just one cockroach in the kitchen” to “there are always cockroaches in Chinese kitchens”.

To be fair, I understand that sometimes it’s safer to just avoid the whole group.  Nevertheless, the pricing of these Chinese companies are very paradoxical to me.  If they are frauds, then they are worth less than what they’re trading for now and if they are not, then they are worth much more.  Either way the current valuations must be off.  I imagine there must be a sound and consistent way to test whether these companies are reporting real numbers.  I have a few thoughts and I’m very curious to know what you think.

How would you decide whether a Chinese company is a fraud or not?

Read more…

Dry Bulk Update

February 3, 2012

I’ve kept my eye on the dry bulk industry since posting about Diana Shipping and conditions have recently deteriorated as expected.  However, prices of some shippers have also been pummeled.  One that caught my eye in particular is Paragon Shipping (PRGN).

It’s currently priced for bankruptcy, so if it doesn’t go bankrupt it will do well.  Here are a few things it has going for it: Read more…

Groupon – working together towards a loss

November 23, 2011

Groupon is perhaps the only 10B+ publicly traded company that provides its partners the opportunity to work hard towards a guaranteed loss.

Short of a takeover, I feel this business is destined to fail.  Has anyone traded long-term options (a year to two years out)?  I’m wondering if it makes sense to sell January 2013 GRPN 20 calls at $3.50.

Sorry I have not been writing much, will try to write more.  It’s so much easier to read than to write – hats off to all the bloggers that maintain.

Happy Thanksgiving everyone!

Dry Humor

September 13, 2011

Disclosure – I have a long position in Diana Shipping Inc. (DSX)

So lately I’ve been looking at the Dry Bulk Shipping industry based on some simple valuation metrics that screamed “Cheap!” and discovered a much more complex situation than I had originally anticipated.

On the surface, most of these shippers are selling for well below their tangible book.  After a little digging, however, it became obvious that most of them are value traps.  The ship values recorded on their books are well above market prices, they borrowed a ton of money at high interest rates to finance these purchases during boom times, and by the time they received these ships (it takes about 2 years to build one), charter rates have tanked so they had no choice but to lock in terrible rates.  To add to this miserable situation, some of these companies try to make themselves look better by paying out unsustainable large dividends and using unnaturally high scarp prices (which means high salvage values and thus low depreciation) or long useful lives for their ships.  Therefore, while many of these companies are still showing a profit and a very solid balance sheet, they are in reality empty shells. Read more…