Monday, January 5, 2015


2014 looked like this:

I have scaled the numbers to a beginning net asset value of US$100,000 and currency losses are integrated in the outcome of each security. (The sum of net currency losses was in the neighborhood of $4,500 on this scale).

Pretax CAGR since Jan 1 2012 is 43.7%. 

Of note this year:
1)  Average cash balance was a sorry 10.7% and there were long stretches in which the cash balance was zero.

2) Texhong Textiles and Enterprise Group were one night stands that resulted in shotgun weddings:

Note: the entries in blue are open.

3)  Crude was not responsible for the nature of the overall showing:

Over the past year several of you have taken the time to share your ideas, strategies, knowledge and experience with me. I am very grateful.

My decision making was far from exemplary this year and I'll pick apart the why's and wherefores in the very next post before going on to review the state of play with respect to my major positions.

Happy New Year


  1. Great 2014, Alex

  2. Great results. That +170% in HA sure was nice!

    Now, go post some more ideas like that :)

  3. Least read post in the blog's history by quite some distance even as a % of overall contemporaneous traffic and even though it was my largest position by far.

    It had 1/17th the views of the most read post (SCHS convertibles) until after the HA chart went parabolic this year.

  4. Hey Red, great 2014 result esp given what oil has done. I am curious to hear your thesis on AIQ- the valuation/ownership seems extremely compelling, but I have little understanding of their competitive positioning. One can certainly argue at a 20% fcfe yield that a lot can go wrong, but the debt load makes that type of uncertainty quite unattractive IMO.

    Also, have you looked at Intralot ever? It is quite popular amongst value investors on COBF, and somewhat similar to AIQ re equity stub classification and large spread between debt and equity market yields. If you have looked, I would love to hear why you passed.


  5. Red: I was lucky enough to stumble onto your Hawaiian Airlines post about the time you posted it. It remains the most cogent analysis of a business I've ever read. The phrases "competitive advantage" and "moat" get thrown around so often that they're almost meaningless, but you found a company that actually has one. And you were able to articulate exactly what that competitive advantage is and how to evaluate whether management was doing what was necessary to maintain it. I'm glad you and us coattailers were rewarded.

    Your early writeups really focused on identifying a real competitive advantage that couldn't easily be taken away, justifying an expectation of high returns on capital going forward. It seems to me that you've moved away from that and turned to trying to identify companies that appear to be cheap on an earnings basis. But many of these ideas do not appear to have any articulable basis for believing that they will be able to earn high returns on capital in the future (e.g., Macro Enterprises). Is this intentional, the result of trying to bargains after a lengthy bull market or the failure on the part of this reader to understand your thinking (or something else)?

  6. Well, first I'll say that I became interested in AIQ because two investors whom I admire greatly -- Packer16 at CoBF is one -- were invested in it.

    It seemed to me, when I looked at it and still,that what we have here is

    (1) a collection of several dozen businesses, some of which are performing well and some of which aren't;

    (2) a management team that's working hard to close or rightsize the under-perfoming stores and to reallocate machines to the better performing ones;

    (3) a capex cycle that may be a little behind RadNet's, which in turn may account for some of the valuation disparity between the two enterprises;


    (4) maybe some tailwinds from the higher volumes and utilization rates implied by the Affordable Care Act.

    So I think this adds up to higher FCF going forward and gets us close to the point where either (a) the FCF yield is untenable or the business is ready for sale as Apollo seeks to exit their investment in it.

    I think $50 is fair. If the stock wasn't so illiquid Apollo might have been able to receive a higher price for it than that.

    If it all goes tits up, there's a core well-performing set of businesses at its core and the rest can be closed down and the machines sold off. That probably adds up to more than $22 a share or wherever the stock is at now.


    I have promised myself that I'll look into Intralot and also into Rexlot.

    At first glance the former looks more complicated than the latter but since I haven't really looked into them yet I don't have anything useful to say about them. (I'm aware, though, of the buyback activity at Intralot).

    If I end up passing it'll be because I feel like I'm guessing at the outcome or the timing.

  7. Congratulations on your result and having one of the best investing blogs out there. You are slowing down but please don't stop!

  8. Anon -- thank you and you're quite right to notice a shift over time both in the kinds of opportunities that I've written about and in the way that I've written about them.

    I was going to review that very topic in my next post, as it happens, by attempting to place what I'm doing at a security by security level within an overall framework of how I manage my portfolio.

    I'll organize my thoughts and I hope to post them in the next couple of days.

    As for the way in which I've written about them there's no good excuse and I need to fix it.

    One of the challenges of this blog is that I am increasingly aware of the wide range of knowledge/experience among its readership. I think now that maybe the proper way to write up ideas is to assume that the implied reader is me when I first started investing and to therefore revert to the style that I led off with at the blog's inception.



    I HAVE been slowing down though not for the lack of ideas. I will post a lot more in the future. Thanks for reading.

  9. Dear Red,

    I want to thank you for keeping and maintaining this excellent investment journal. You're one of the only two blogs I truly admire and look forward to reading. (The other one is

    A lot of the blogs out there are nothing more than amateurs who like to try out value investing, get fooled by randomness and then go MIA for one reason or another, never to be seen from again.

    Your ability to articulate the nub of the thesis (to separate the facts that MATTER from the noise surrounding it, is probably one of the most important reasons for the supra-normal IRRs). Too, I think your ability to set up trades - not just buy something, forget it for a few months/years and then wake up one day - but ability to jump in and out is pretty interesting to me. Like you did with Enterprise Group Warrants or Hawaiian Group options. A newbie like me would have just bought the common and sat on it for a few years...

    If you're not too busy, I'd love a post from you describing your style of working. How do you spend your day - do you do this full time? How many hours do you spend reading? Looking at markets? Thinking? What makes you a better investor? How many years has it been since you first became a value investor? Are you self-taught?

    As someone who enjoyed the book Free Capital ( I'd love to know more about you!

    Thank you~

  10. Another follower here, glad to hear you'll be posting more. I'm a UK focused investor (I use an ISA for the tax advantages, hence limited in what I can invest in) so hoping you'll turn your attention to a review and repeat of the UK bakeoff posts - but not going to complain if you find other markets more interesting.

  11. Thanks fellas. I have learned a great deal from other bloggers and a select group of participants on message boards like Value Investors Club and also from an even more select group of compadres on twitter -- much more than from books, for example. So the credit belongs to them.


    UK Bake Off - thanks for reminding me. 2014 outcome -- Oof, what a shambles.


    Also, I said Apollo re: AIQ when I meant Oaktree. Senior moment. Apologies.

  12. A pattern I am noticing in a lot of your picks is that you stick with simple stuff, and you focus a lot on the demand side of things. So for example tail winds in NA gas and oil, tailwinds in Macau, possible TPP for textiles (allthough cheapness probably plays a bigger role here).

    Seems interesting, because if you invest when there are large tail winds, things are not as competitive. Like those margins Enterprise has, will they really be able to do that 10 years from? And everyone will be lifted in the rising tide (especially great if your not paying for that possibility).

    Just an obsvervation, looking forward to reading some of your future posts :) . Would love to hear your thoughts on any competitive edge texhong has. When I looked at pacific textiles, it seemed their SG&A costs are much lower then Texhong for example. But their valuation is almost 3x as high with less revenue.

    Also if you are interested in Rexlot, AGtech might also be one to keep an eye on. There are some tailwinds for the chinese lottery industry playing out now.

  13. Enjoy your blog, is there a reason for the multiple ins and outs? Possibly I'm misreading the data, but why enter and exit a position multiple times?
    Have you looked at ONVI at all. Good write up on VIC.

  14. Thanks for reading and for the Qs.

    re: the trades -- I found better ideas and was at the time unwilling to allow my cash position to dip below 20%.

    Then yet other ideas I already owned played out and my cash position improved, I bought back in. When the share prices fell hard, I averaged down.

    I was comfortable with Texhong as a 15% position not a 20% or 25% position so when the price recovered a little, from $4.90 to $6.40 I sold those tranches.

    Doesn't look pretty under any circumstances and looks downright unreasonable absent context, I grant.

    ONVI - interesting idea, for sure, but the wasn't sure what the value add was over and above Commerce Business Daily, for example, or why this isn't something that could be swept away by a potential future initiative by the SBA.

    Combine that with lack of catalysts, lack of FCF, repudiation of buyout attempts, etc and it fell short of being compelling at sub 2x upside.

    I may well be missing something important, however.

  15. Anon -- Even the simplest ideas are very complicated and fraught with risk of misjudgment so the simpler the better, yes.

    And yes, I generally don't like to play games with the revenue (or gross margin) line. The exception is when partial liquidation is a genuine option, as with rental companies. And even in those circumstances one has to make sure that there's a large, liquid market for the equipment that would be liquidated.

    Texhong is king of YARNS. Pacific Textiles is in the fabrics and apparel trade. Different economics.

    Texhong is by far the largest yarn manufacturer in China (and the world) and runs its spindles at 100% capacity all the time. If you're in yarn game there is virtually no way to make more money than Texhong.

    Add to that a competitive environment consisting of SOEs at the point of failure, mom-and-pops, etc and one can understand how/why Texhong has grown to the size that it has and sports the ROICs it does.

    If you had $1 billion to invest one of the very last things you'd want to do is to (1) get into the yarn game in the first place, and (2) go head to head with Texhong.

    GTech SpA? Thanks, I'll look into it.

  16. Damn that no airline rule looks a bit foolish now :)

  17. Red, you mentioned some people on Twitter you respect. Would you mind sharing them with us?

  18. Red, arent you worried by less disciplined US oil fields flooding the market with oil? There is enough oil in the US for 100+ years to keep going at the current pace. This could be bad for a lot of oil sands projects as they are higher cost? So that could be bad for Canadian service firms... But I guess it makes no sense to sell now. Does maek you think about possible upside for MCR and E though.

    Also does not help the gas for nat gas ofcourse. But you probably know this better then I do.

  19. In reponse to ONVI-
    I would think about the business more as a Priceline (with more bells and whistles) for government contractors. It is a small price to pay for a tool that consolidates a masssive amount of information into convenient searches. The proof is in the numbers, the customers sticking around are willing to pay more and more for their services each year and their new customers are paying more than double the price of previous contracts in place. It also seems that the cheaper contracts have been weeded out and the more entrenched customers are left as referenced by the decline in customer losses. The downside seems very very limited and with it being such a minor expense for their customers, there is plenty of room for growth.
    -I'm not too worried about the FCF as they have been reinvesting in the business, which is the exact thing I believe they need to do. The more tools they develop and make available to their customers, the more valuable they will be to them.
    -As they continue to invest the possibility of someone coming along and developing similar tools diminishes and at the moment, one would have to heavily invest to get to their level.

  20. Okay, I'll look at ONVI again. Thanks for taking the time to share these insights.