An update on my largest positions

Published on:
February 23, 2019
Last Update:

Frontier Communications

I bought the stock of Frontier in March of last year. In that article, I smugly wrote that, "sometimes, all we really need is one good investment idea."

But a year passed and I am not as confident. When I bought the stock, Frontier's valuation was low, I thought, compared to prior years. But I did not study the telecommunication industry enough to understand what an appropriate valuation would be.

I own 8,000 shares in Frontier and my cost basis is about $5 per share. The stock now trades at $2.55, which results in a 50% loss in market value or $20,000.

Orchid Paper Company

When I bought the stock of Orchid I overlooked important information. One example is that Orchid had only four customers. More so, Benjamin Graham would find it disgraceful that I utterly ignored the right side of Orchid’s balance sheet.

I did learn about securities lending by investing in Orchid. A few months after I had purchased the stock, a Charles Schwab representative called and inquired whether I would lend my Orchid shares to short sellers at a rate of over 52%. Sure, I replied, and you can read about it in “The Time Charles Schwab Asked for a Loan From Me”.

I own 10,000 shares in Orchid; my cost basis is about $3 and the stock trades at $1, an $18,000 paper loss and almost a 40% loss in market value.  

Lifeway Food

Lifeway's management is highly invested in the company, the company carries little debt obligations, generates ample after-tax cash flow and I consume their product on a weekly basis.

In August of last year I described the normalized earnings for the business - my opinion of the company did not change.

I own 10,000 shares in Lifeway, which I bought for $3 a share; the stock trades for $2.36, a $6,300 or 21% paper loss.

Tupperware Brands  

I learned about Tupperware from Guy Spier who described his purchase of the company in The Education of a Value Investor. But what Spier hated about Tupperware when the stock traded at $45, I did not mind as much as when it was trading at $36.

So, I bought 600 shares in August of last year and comically wrote to Tupperware's management about its ill use of leverage.

My cost basis is $36 and the stock trades at $31, a 14% paper loss or $3,024.  

Diversified Restaurant

I bought 17,000 shares of Diversified at a cost of $1.25. I estimated the value of the stock to be roughly $2 per share. In A Senseless Market Capitalization I explained my investment thesis; mainly, that the cost of buying shares in SAUC was much less than developing similar restaurants. And that I was confident that Paul Brown, who had revamped Arby's, is an excellent manager. The stock price is $0.93 which results in a paper loss of $4,446 and the stock is down 25% from my cost basis.  

L Brands

Not the lure of attractive women walking down an aisle while wearing laundry convinced me of buying shares in the L Brands - it was the accounting profession. In September of last year,  I wrote about the deficit in the equity account that was related to the company buying its own shares.

I had bought 1,000 shares, at $30 per share, and the stock trades for $27, a paper loss of $2,921 or 10% per share.  

The remaining companies

I have a paper gain on the remaining 6 stocks. I will write more on each stock when I sell them. Purchased in May of last year, Patterson Companies, which I wrote about in One Advantage of Short Term Thinking? A Cheap Stock Price is worth slightly more than when I bought it.

Stericycle, which I bought last month, is trading at roughly the same price and so is the common stock of Voxx International, which I wrote about in January of this year

I purchased in that month, too, the stock of Carriage Services which is up 19% and so is the stock of Seritage Growth Properties, which is up 10% and ARC Documents Solutions, which is up 15%.

It is not by accident that I write about my paper loss and hardly mention the stocks with a paper gain. The reason for the disproportionate attention is that there is nothing to be learned when a stock is purchased less than year ago and is now randomly trading at a higher price. To hold such positions does not take any mental energy.

But that it is different when positions are trading at 50% - and even 60% - below the cost basis. Such paper loss forces me to reflect on why I had bought the stock in the first place; to observe why the stock market is bearish on the future of the company, and to assess whether I was wrong in buying the shares in the first place. 

Most of all: a paper loss requires the attributes of patience and conviction. The last two are not easily attained.

The Most Useful Articles

Published on:
December 28, 2018
Last Update:

This is the time of year in which most media websites share with readers the most popular articles. If I was to use the same definition of popularity as the New Yorker - which is time spent on the article - the list below would be completely different. Instead, I highlighted the articles that readers had mentioned were either useful or simply enjoyable to read.    

First article

5 Myths About Stock Investing: How to Avoid Faulty Assumptions About the Stock Market

In February 16 I wrote about four stock myths. The first myth is the association of risk and return. To achieve a higher return you need to research stocks and to understand business models. The second myth is the definition of risk, which should be the probability of losing money and not whether a stock price is up or down. The third myth is that a financial advisor will change your financial destiny. I argue instead for self-ownership and accountability in financial decisions. Finally, I explain why you should care little whether the stock market is up or down. I argue for a yearly plan of stock investing and sticking to it.  

Second article

Written in March 2, Treasury Stock: If the Return on Equity Is Too Good to Be True, was an unpopular, barely read article. But it is one of my most important essays of 2018. In this somewhat technical article, I describe the adjustment of treasury stock and how the reported financials hide an economic truth. The point of the article is to remind you that reported financials are the starting point to understanding a company's economic reality.    

Third article

Written in March 23, in Frontier Communications: Where the Financials Statement Reveals Little Economic Reality, I described why I bought the common stock of Frontier Communications. This article serves as a reminder that I need to spend more time reading financial footnotes. While in the article I focused on the goodwill impairment charge and the change in dividend policy, I hardly looked at Frontier's right side of the balance sheet. I was eager to buy the stock and this was a mistake that cost me a lot on paper. My cost basis is about $6 a share and the stock is now trading for $2.50. Ouch.

Fourth article

If I was told that I could take only one profitability ratio to a remote island, it would be the return on invested capital ratio. Written in May 25, in Return on Invested Capital: An Incredible Ratio to Examine Profitability and Performance I show how companies that demonstrate a consistent positive return result in an uptick in the stock price, and that the inverse is true as well. When companies return on invested capital ratio is poor, their stock price is penalized.

Fifth article

Who would have thought that buying stocks would make me more health conscientious? Written in August, In Lifeway Foods: Why I Am Long Probiotics, I mentioned the purchase of LWAY simply because I loved the product and because LWAY stock was listed in the 52-week low list, just as I was reading about the benefits of Microbiomes. Lifeway is run by honest management that is heavily invested in the company and carries little leverage, and I could not be happier about the purchase. Even though I noticed the other day that Trader Joe is now selling its own brand of Kefir milk.

Sixth article

Make Equity Great Again: The Case of L Brands is one of my favorite reads of 2018 because, in the 1,000 or so words, I incorporated most of my investing philosophy. In the article I describe why I think that reported financials hide an economic truth and how adjusting the intangible assets we still get a conservatively leveraged company. The article includes topics such as return on invested capital and treasury stocks, topics that I discussed in more depth in other articles.

Seventh article

Readers of Pen & Paper know that if there is one advice I have for students who are interested in the investment management profession, it is to register for the CFA program. It is a three-year rigorous study plan that will forever change how you manage time and how you understand and advise on investments. In this talk to the new CFA charterholders of San Diego from November 16, titled Watch Your Step! My Thoughts for New CFA Charterholders, I discuss what I learned about investing from the CFA program and how it changed my life.  

Eighth article

It is one of my guilty pleasures to read self-help books. The typical flow is that I read the advice the author is encouraging the reader to follow; I get excited about how it may change the way I think, feel and act in the world and the guilt parts comes in - when I realize that few weeks have passed and nothing has been done on my part. But Cal Newport's book, Deep Work, is different. Written in December 1, in Begin with the End In Mind: How to Use Deep Work in Stock Research, I assure the reader that I will follow through. That it's been weeks since I read the book and have yet to execute on a single action item is a different story.

Defining popularity by time spent reading

Finally, for the curious reader, if I was to sort the list by popularity as defined by the time spent on each article, the following list would arise:

Tupperware Company: A quality product. But shareholders should be wary of the debt level

Adaptive Markets: A new theory to replace the efficient market theory

General Electric Company: GE's world is a fairy tale story that will not end well  

Free Cash Flow: Revenue is vanity. Profit is sanity. And cash is reality

Return On Invested Capital: An incredible ratio to examine profitability and performance

5 answers to the most common questions: This article is about why I am doing

Vanguard 500 Index Fund investor shares: Why I bought one share

Seritage Growth Properties: Financials metrics are worth more than a thousand words

A Few Red Flags You Should Know About

Published on:
October 28, 2018
Last Update:

Gordon Gekko could be easily identified. He combed his slick dark hair back; wore white
shiny suspenders; and certainly had an evil and malicious look. But to identify such sleazy characters in real life is not as simple.

I came across financial advisors, charged indicted and by the SEC, with crimes that ranged from insider trading to the creation of fraudulent financial statements, and some of them were the nicest looking people. 

 We need more than Hollywood characters to know which stock products or services to avoid.  BrokerCheck, by Finra is a website aimed to help you make informed choices about brokers and brokerage firms. But I doubt how many investors actually know of its existence and use it regularly to check on their financial advisors. 

The psychologist Jordan Peterson observed that most people take care of their dogs better than they take care of themselves; that most investors rarely investigate enough the custodians is an example of how little we take care of ourselves.

This meditation describes a few warning signals of bad financial advice.   

 Red Flag #1: Quick and Effective Cure-All

Just as there are no shortcuts to a happy life, there are no shortcuts to stock investing. To become successful at stock investing, you need to exhibit a stoic patience and to develop a long-term perspective. By definition, these qualities require time. 

And there is no single investing formula that will work in all economic cycles. What works when the markets are down will not necessarily be logical to follow when the markets are rising. How how you should invest in stocks in your twenties is not the same as how you should invest in your sixties. And if you are planning to sell your stock portfolio in three years or thirty years makes a big difference.  

 Red Flag # 2: A One-Size-Fits-All Formulas and Miraculous Breakthroughs

Except for the adage "Live within your owns," there are no axioms when it comes to stock investing. One investor may be comfortable in placing big bets on the direction of a foreign currency (imagine a George Soros) while another investor, who is just as skilled and smart, may be appalled by that investing strategy. Instead, that investor may focus solely on commodities such as gold (think James Grant).

 Not only is there no single formula for stock investing, logic dictates that if there was one, no rational person would share that information with you. When a business hires a consultant, he or she is expected to provide research. But it would be outlandish to think that the consultant is expected to explain to the business owner how to make a profit. 

Red Flag #3: Act Now!

"Necessity never made a good bargain,” said our founding father, Benjamin Franklin. And what was true over two centuries ago is relevant today. A wise investor compares among brokerage companies, assesses the possible outcome of a stock purchase and carefully analyzes the companies prior to investing in their stock. 

When a speaker for a commercial advertisement explicitly implores you to make a decision now, the speaker implicitly suggests that you should not think at all. And an omission of thought is one of the leading causes of accidents. The linguist Steven Pinker notes that "accidents are the fourth leading cause of death in the Unites States, after heart disease, cancer and respiratory diseases."  

 Red Flag #4: "Sophisticated" and Greek-Laden Language

Delta measures the degree to which a stock option is exposed to shifts in the price of the underlying asset. Gamma is the rate of change in an options delta per one point move in the underlying asset's price. And beta is a measure of a stock's volatility in relation to the market. And while these are interesting terms to explore if you pursue a doctoral thesis in finance, the prudent investor is better off to leave these terms to academia.

One of my pet peeves is the term "risk adjusted return," often found in a prospectus. What the authors of the prospectus mean to say is that they feel the expected return is adequate for the given amount of risk that they take. But an adequate return should be defined by the investor, not by the manager of a fund.

And so too should be the definition of risk. The American food author Michael Pollan suggested that we should not eat food that our grandmother would not recognize as food. His rule of thumb applies to stocking investing, too.  

Red Flag #5: A Claim of a Risk Free Investment

Marrying another person requires a leap of faith. Going through a medical procedure may have unwanted results. And when you invest in stocks, you may lose money. The term "risk free" is as real as the character Tyler Durden.

Instead of focusing on the sisyphean task of eliminating risk completely, what the investor should ask is what are the benefits compared to costs, and how the two weigh against each other. I argue that risk free investments are fairly tales. But the advisors who offer that schemes do exist in real life.


"Please let there be no strife between me and you, and between my herdsmen and your herdsmen," Said Abraham to Lot. "For we are kinsmen. Is not all the land before you? Please separate from me: if you go left, then I will go right, and if you go right, then I will go left."  

If you come across a financial advisor who claims any of the above mentioned red flags, my suggestion is to turn the other way and to follow Abraham's words.

There are plenty of myths on Wall Street

Published on:
August 24, 2018
Last Update:

1. Risk and Return

Common convention is that to earn a reasonable return in the stock market you need to take risk. This belief results in investors purchasing stocks that operate industries they know little of; hoping that this assumption of the relationship between risk and return will prevail as a given law.

Wall Street prefers to see risk as the relationship of a stock price to
the overall price of the stock market. Known as beta, the idea goes as follows: if a certain stock goes up in price while the overall stock market increases then Beta is positive. If the price of the stock declines as the price of the overall stock market increases then Beta is negative.

With this naive definition of risk in mind, your stock advisor may suggest that if the price of the overall stock market is going up, then you will be better off purchasing high beta stocks.

But risk should be defined as a level of uncertainty. And the more uncertain you are about what you invest in, the more risk that you take. For example it is risky to marry someone that you know little about. And so to successfully achieve a reasonable return in the stock market, you should be aware of what you do not know.

Risk is dependent on uncertainty. Not unlike the choice to whom you marry.

A suggestion: One of the ways to become knowledgeable about a publicly-traded company is to read its public filings. Visit the investor relations section of their website to read more about the company’s strategy, competition and past operating results.

2. Relative Versus Absolute Comparison

Value in the stock market is measured both by relative and by absolute comparison. An example of a relative valuation is to compare the current price of a stock with the overall price of the stock market. An absolute valuation is when a stock investor buys a stock only if the current earnings multiple is no greater than 10 times the prior year's earnings.

Today the discussion around the purchase of a stock only evolves around relative valuation. How did Samsung perform when compared to Apple. And whether Apple's earnings this year were higher compared to last year. 

Yet the weakness to relative valuation is that there is no maximum price that an investor will pay for a stock. The second concern is that a constant comparison to others promotes short term thinking. One day you feel great because the quoted price of a stock is up. On other days you feel glum because the quoted price is lower. Mood swings do not promote rationale thinking.

A suggestion: Delete from your phone any applications that track on a daily basis the price of your stocks.

3. Money Managers

The story why you would want someone else to manage your money goes like this: You are busy; with so much to do and so little time. And since stock investing requires knowledge, expertise, technical skills and evidently time, you are to trust a mutual fund manager to do the work for you.

But your interest and your manager's interest are not always aligned. Most managers strive to augment the size of their assets they manage. This is because the greater the size of the mutual fund the greater the management fees. But the more capital a mutual fund has, the more the likely it is that its performance will be penalized. Warren Buffet commented on this phenomenon. In his words: 

Our equity capital is more than twenty times what it was only ten years ago. And an iron law of business is what it growth eventually dampens exceptional economics. Just look at the records of high-return companies once they have amassed even $1 billion of equity capital. None that I know of has managed subsequently, over a ten-year period, to keep on earning 20% or more on equity while reinvesting all or substantially all of its earnings.

A suggestion: Refrain from investing in mutual funds where managers have little of their own money invested in the fund. And avoid any manager that charges a management fee higher than 1.0%. You will be better off with a passive investing strategy such as purchasing an exchange traded fund.

4. Speculation Versus Investment

"Investments throw off cash flow for the benefit of the owners," wrote Seth Klarman. "Speculations do not. The return to the owners of speculations depends exclusively on the vagaries of the resale market."

What Klarman suggested is that there are two types of assets: an investment and a speculation. An investment is an asset that yields cash flow (think rental income generated from renting a condo). And speculation is simply any other asset that does not meet the definition. Accordingly, Bitcoin and gold are speculative assets. This implies that when you save for retirement, or for the education of your children, you must buy investments - and not speculate.

Investment is an asset that yields cash flow; Any asset that does not meet this definition is speculative.

A suggestion: How and whether a business generates cash flow should be the first question you ask prior to buying the stock. 

5. The Nature of the Brokerage Business

Just as you would be skeptical of an advice about how to gamble given by a poker table dealer, you should refrain from taking advice from
financial brokers.

The nature of these financial intermediaries is that they are hungry to earn commissions. Read: most brokers prefer a frantic, stock trading behavior than a lethargic one. 

In addition the broker does not know you. Each investor has a specific time horizon, tax situation, risk and return objectives and unique financial circumstances that must be considered prior to making an investing decision. 

A recently-wed couple for example, who would like to purchase their first home in nine months, has a different time line than an individual who would like to invest in the stock market and is not planning to use the funds prior to retirement.   

A suggestion: Stop listening to advice about the investments from people that don't know you.

How to Avoid Faulty Assumptions About the Stock Market

Published on:
February 23, 2018
Last Update:

Myth #1: The greater the risk, the higher the return. 

 “No pain, no gain,” said Jane Fonda in one of her workout exercise videos. Somehow, the investment world has followed Jane’s advice. Today, the “obvious” relationship between risk and reward is hardly even worth the mention.

But the focus should be on the relationship between effort and return. That is, the more effort you put into analyzing companies and understanding their financial statements, the more likely that your see a higher return.

Let me restate the above paragraph in its negative form. The less effort you put into understanding the stocks you invest in, the more likely it is that you will lose money. Unfortunately, I learned this lesson the hard way. As I wrote in The Lessons Learned in Investing in Bon Ton Storesand in How Rait Financial Taught Me A Lesson, there is a price to be paid when financial information is overlooked or when notes to the financial statement are not read carefully. (You should read management's notes and disclosurelike you would read a lover letter: where you never want to miss a word).       

Myth correction: There is a relationship between how much effort you put into stock research and your investment results.

Myth #2: Risk is the change in a stock’s market value. 

Ask any MBA graduate how they were taught to understand risk and they will tell you that risk is the change in the quoted market price of a stock. For example, if the market price of stock A ranged between $17 and $20 while the market value of stock B ranged between $20 to $10, then stock B is riskier than stock A. But I propose to view risk as simply the likelihood of losing money.

Here is a thought-game to illustrate the idea. Meet George, who recently purchased a home. George is likely to sell his home in two years due to a job relocation. Now meet Benjamin, the proud owner of a home nearby. But, as opposed to George’s situation, Benjamin owns a dentistry practice near his home. And Benjamin intends to live in that home for at least another decade. It should be obvious to you that George has taken a substantially greater risk and is exposed to changes in the real estate market.  

Myth correction: The definition of risk is how likely it is that you will lose money.

Myth #3: Future growth is more important than current price.

 Investment advisors (spoiler alert: the topic of the next myth) often reason a hefty premium on earnings, say, anything above 25 times last year’s earnings per share, with the rationale that future growth in earnings will justify the current premium paid. And the great investing gurus have often stuck to that logic which further supports the myth. But for many of us it is the short term that dictates our investing behavior.   

Take Goodyear Tire & Rubber Company as an example. Let us say that you had bought the stock in 2007 and had paid as low as $21 or as high as $37. Prior to your purchase, the company had shown earnings in five of the seven prior years. But the largest U.S. manufacturer of tires reported losses in both 2008, 2009 and 2010. And if you were to sell your position in 2011, you would receive as low as $8 and as high as $18. Very few of us would be able to hold the position for another decade.

In the Intelligent Investor, Benjamin Graham described the investor and his “short-termism:”

“His frame of mind, his hopes and apprehensions, his satisfactions or discontent with what he has done, above all his decision what to do next, are all determined not in the retrospect of a lifetime of investment but rather by his experience from year to year." 

Myth correction: current price is more important than future growth.

Myth #4: You will profit by listening to investment advisors. 

Walk down Main Street in any town in America and you will not find a single store that sells profitable business ideas. And if an entrepreneur reads this and decides to venture out and to establish such an enterprise, common sense would dictate that if the entrepreneur truly knows how to earn a profit, would he or she not attempt to profit for him or herself?

But this common sense convention - that truly profitable ideas are rarely shared - is hidden by the naiveté of investors who rely on investment advisors to help them choose stocks that will (hopefully) increase their fortunes.

(To be clear: this is not a rant against investment advisors. Many of them are professionals who assist clients in retirement planning and by preventing their clients from making dire mistakes in the stock market. That is a praiseworthy work).

Myth correction: the role of a financial adviser should be to supply information and offer suggestions. 

Myth #5: A hot stock market signals that you should sell stocks.

I will make the argument that to ignore short term market movement is one of the best decisions you will make as an investor.  As I wrote earlier this year in Why I am Doing This, my plan for 2018 is to allocate $20,000 to the U.S stock market (effectively all my expected savings). I plan to allocate $5,000 each quarter and to find one stock to invest in about once a month. For most of us, it is very difficult to be oblivious to a declining stock market, so forming habits and goals (such as investing in stocks, regardless of where the market is) is one way to handle our investing nature that often acts against us. In the words of an ancient poet, “Habit’s but long practice, and this becomes men’s nature in the end.”

Myth correction: make a yearly plan of stock investing and stick to it.

Congratulations to New CFA Charterholders

Published on:
October 15, 2017
Last Update:
September 21, 2019

Background on CFA Society of San Diego

Founded in 1962, the CFA Society of San Diego includes about 500 investment management professionals. A third of the society members are portfolio managers; another third are chief-level executives and research analysts; and the remaining third are consultants and traders. The largest local employers are Brandes Investment Partners and Meketa Investment Group.

I joined the board of CFA Society of San Diego as treasurer in 2016. I now serve as member relations. Visit the CFA Society of San Diego website to read our newsletters.

As you will soon read, my talk’s two main themes were that (1) the CFA Institute provides a roadmap of the “right things to do” as investment professionals and (2) that passing the CFA program should be viewed as an opportunity, not an award.

My talk to CFASSD

I want to thank Rafi for his speech. I would also like to thank Michelle and Stacy, our board's managing directors, for planning and organizing this wonderful event and for allowing me to speak for a few brief moments. 

It was only two years ago that I sat where you now sit. And so I can’t reflect on a career as a CFA charterholder and I didn’t earn the right to offer you an advice on your future career. Instead, I will share with you my personal story, since the time I earned the charter.

For me, it started when Vanessa, our society's current president, asked if I would be interested in applying for a board position. I knew very little about volunteering for a non-profit and did not know what to expect.

Frankly, when she said “board position,” I initially thought she was asking a surfing-related question. Yet within a few months, I would represent our society in a regional conference and I would also fly to Philadelphia to attend the Annual CFA Investment Conference.

When Vanessa suggested that I join the board, I thought she was talking about surfing.

If it wasn’t for Vanessa, I probably would not have met, in person, Robert Shiller and John Bogle, nor would I have the chance to speak with you tonight.

Congradulating new CFA Society San Diego Charterholders
Photo taken by Kelsey Smith.

Now, let’s talk in terms of employment. A few months after I earned the charter, my employer inquired whether I’d be interested in a client-facing position. Soon enough, I turned from a back-of-the-room junior-analyst to a client-facing banker, where I now directly interact with other banks, institutional clients and REITS.

I don’t think I would have gotten the opportunity to work with these clients, nor would I know how to interact with them, unless I had the knowledge and confidence I gained through the CFA program.

So, I hope my short story illustrates that today, you are really not given an award, but an opportunity. You did great by passing all levels of the CFA exam. But now is the beginning of even harder work. It is harder work because you now have to define for yourself what kind of an investment professional you would like to be. Here’s an illustration.


How will you measure your life isn't about the money you make. It's about achieving goals and building the kind of life you want. The cognitive psychologist Daniel Kahneman calls this life satisfaction.

But you will need financial success to achieve life satisfaction. And financial success isn't how much money you make (or the kind of car you drive) - it's how much money you keep. That's a function of how well you're able to save money, protect it, and invest it over the long term.  

Join the waitlist to learn more.


The CFA Institute is the roadmap

If any one of the new charterholders was walking down the street and saw a person drop a hundred dollar bill, they would immediately return the bill to its owner, right? And if I would ask any one of them why they did not keep the bill for themselves, they would probably answer, 'it was the right thing to do.'

Well, if we stop and think about it for a moment, there is nothing natural about this answer. In fact, it would be much more natural to take what you can. And to rationalize the decision with “well, it’s not illegal.” As a matter of fact, it takes many years of practice before we define for ourselves “the right thing to do. 

Similarly, the CFA Institute has provided new and current charterholders with a roadmap of “the right thing to do” as investment professionals. And instead of “learning on the fly,” you were given a roadmap of lessons learned so that you don’t have to experience them for yourselves. And, if you use it correctly, you will see that this roadmap is of much greater value than a hundred dollar.

The CFA Institute provided us with a roadmap of the right things to do as investment professionals.

Finally, an award is given for something you have done in the past. An opportunity is a set of circumstances that makes it possible to do something in the future. And that's where I hope you will set your attention from now on: on your future as a chartered financial analyst. 

Thank you.