Long or Short Capital

Recently, recruiters at top universities and college administrators alike have recognized a growing trend in the student job market, namely the adoption of “adjusted” GPA figures. It appears that students have realized what investment bankers have known for years: if you don’t like a number, you can change it.

Say you are an investment banker at a large Wall Street Firm, like Silverman Sachs or Layman Brothers, and you are trying to syndicate Theoretical FCF Corp’s bonds. The problem is that Theoretical FCF Corp seems to lack any actual cash flow and will almost certainly never actually pay down any debt. What do you do? Just pro forma their EBITDA to what their cash flow would be if they actually generated cash flow, as you kinda expect they may sometime in the future. And if that doesn’t get your bond customers to a number that makes them want to write big tickets, adjust that number for “one-time” expenses like “bad debt”, “restructuring charges” or the vague but powerful “fees”. This is how you get it done when syndicating debt or selling IPOs.

Now for a student, their GPA is basically the equivalent of a firm’s 4 year trailing cash flows. The number itself carries huge weight in job interviews, yet for decades students have reported GPA exactly as it appears on their transcript. While entirely accurate, this is a huge mistake. Job applicants are now realizing that adjusting their GPAs can give a more accurate misrepresentation of their performance and expected future production.

Why should an employer hire an average of you over the last four years, when what they should be interested is a real misrepresentation of what you could be now if not for certain events? Here are some ways students are making themselves look better on paper:

1. Add-Backs for non-recurring GPA deductions, such as getting drunk at a final, or anything that happened freshman year
2. Pro forma GPA for dating someone smart or at least someone who wears glasses in the morning.
3. Projected GPA levels for future years using the same class load. Surely a student would be more efficient in those classes if the student took them again. Thus the student should adjust their GPA to better match their future production.
4. And the most common move, arbitrarily making their GPA a 3.6 – good enough to get by, but not good enough to raise suspicion.

Recommendation: If you are serious about a job in finance, it’s important to signal that “you get it” before you even arrive. We heartily endorse the use of adjusted and PF GPAs for this reason. Remember, it’s not what you did or will do, but what you can convince people you did or will do.

When it comes to meeting young ladies out at the bars
I won’t lie, I get a nice amount of love

…

So when I do hit the club I ain’t hard to catch
On the dancefloor, spilling my drink, throwing bows
Doing old school dances like the Smurf and Cabbage patch
One shot, Two shot, Three shot, Four
Somebody shoulda stopped me from drinking any more
When I was sober that broad looked like Al Gore
Now she look alot more like Demi Moore

I’m just a regular dude
I do my thang a lil bit, nothin major
I’m not makin excuses
But when it gets like that
You gotta blame it on the Jager.

-From the Soul Position song “Blame it on the Jager”

Past Quotes Entirely Relevant to Investing

A lot of people think “being intelligent” is about having a powerful brain, being creative or being able to understand things. This, like a lot of things a lot of people believe, is false. Being intelligent is about one thing and one thing alone — making other people BELIEVE you are intelligent. That is how you become intelligent. “Being intelligent” is something that anyone can manage their ways into.

1) Do not actively think.

If your opponent says something, it is incumbent upon you not to answer them but instead to position your response in such a way that you maximize the opponent’s ability to interpret what you say as “smart.”

Example:

Opponent: I think Google is gonna break $600 by April 2007.
You: I do not disagree.

In this example, “You” has positioned his answer in such a way that he can never be wrong. If Google does hit $600 in April, he can point to the fact that “he did not disagree” with the assertion and thus it can be interpreted that he believed it to be true. If Google does not hit $600 in April, he can point to the fact that “he did not disagree” with the assertion and thus he explicitly did not agree and thus it can be interpreted that he believed it not to be true that Google would hit $600. “You” put himself in the catbird seat without actively thinking anything on his own.

A lot of people, the same lot from above, think that “having an opinion” or “standing for something” are ways for your peers or superiors to think that you are a man or woman of intelligence. This is a common pitfall of people seeking to be intelligent and it is absurd. “Having an opinion” is just a way to demonstrate to those people how foolish you are for leaving yourself exposed to judgment and to make you an object of ridicule for their merriment or a tool for their advancement. Avoid this mistake by becoming a blank slate.

Most firms produce an object or service which they sell. This is normal “business.” But with margins where they are, is this type of business the best way to do business?

Why sell something which costs something, when you can sell nothing which costs nothing? The margins on selling nothing are 100%, a fact which Rambus (NASDAQ: RMBS) has known for years. Now nothing production has come to the mobile market with silent ringtones:

[Conceptual] artist Jonathon Keats has digitally generated a span of silence, four minutes and thirty-three seconds in length, portable enough to be carried on a cellphone. His silent ringtone… is expected to bring quiet to the lives of millions of cellphone users, as well as those close to them.

Recommendation: We are bullish on firms which embrace this contagion and switch from selling something to selling nothing. The margin improvements are completely post-modern.

Corporate speak:

“I have a fiduciary duty to defend the company. These manipulative activities have caused tremendous damage to Overstock. I believe that this conduct is harming our company and our shareholders deeply, and that investors have been failed by those who have a duty protect them. The best way to address and solve the problem is to get it in front of a jury of 12 Californians.”
-Patrick Byrne, CEO of Overstock.om (NASDAQ: OSTK) in a February 5th 2007 press release announcing a $3.5bn suit by OSTK against Wall Street itself more or less.

Translation:

I am obsfucating my fiduciary responsibility to produce anything but disappointing results from Overstock.com’s operations. The best way to do this is to get worked up about something (naked shorting and related conspiratorial behavior) which would likely have a very marginal impact on any long term long position in OSTK stock. Please ignore the fact that companies are supposed to produce money not lawsuits.

Corporate speak:

“The fourth quarter was a difficult end to a tough rebuilding year. While there are plenty of negatives to report, I believe the company has fixed the problems that began in Q4 2005, and we are entering 2007 with a fresh start….The company is healthier as a result [of actions taken in Q4].”
–Patrick Byrne in his February 5th 2007 letter to OSTK shareholders

Translation:

The company has improved its health from not healthy to unhealthy.

Corporate speak:

“Based on our preliminary January numbers and our internal 2007 plan, I expect our 2007 results to improve. Specifically, we should:

• Achieve immediate and substantial gross margin improvements;
• Reduce sales and marketing as a percentage of revenue;
• and Reduce technology and G&A expenses from 2006 levels.”

-Patrick Byrne in the same letter

Translation:

After spending Christmas studying with Yoda on Degoba, I can channel the force to see the future like a powerful Jedi. We should:

• Achieve an immediate reduction in gross margins;
• Spend more on marketing as a % of revenue
• Have one time increases in technology and G&A expenses which I will describe as mud pies in some future shareholder letter;
• Claim in next quarter’s letter that after a disappointing quarter (which relative to now would be “next quarter”) that next quarter (which relative to now would be “next next quarter”) will be the quarter we finally turn it around.

In closing, having seen the future, I can assure our investors that Overstock.com will never ever turn the corner.

(Pointer by Gary-Weiss.com)

Amaranth once sent chess sets as year-end gifts, inscribed with a quotation from the late grandmaster Alexander Kotov: “It often happens that a player carries out a deep and complicated calculation, but fails to spot something elementary right at the first move.”

-From an WSJ article

Past Quotes Entirely Relevant to Investing

Seriously it’s getting ridiculous. Valentine’s Day is less than two weeks away. Do you want to die alone? No? Then hedge your flower exposure immediately.

If you fail to get these flowers, and your gf breaks up with you, you can no longer cheat on her with your mistress. And if your girlfriend AND your mistress dump you, you won’t be able to cheat on them with the eastern european escorts your firm supplies you with. Think about that. Get it done.

Long or Short Capital’s second quarter of fiscal year 2007 closed on January 31st, 2007. After reviewing our financials, we have determined that the quarterly dividend will be the ceiling level of $1.50 per a subscriberholder as of 1/31/2007. To qualify, all you need to be is a subscriber, either by XML or E-mail, as of 1/31/2007. If you were not, you will not be eligible.

For more information on how to collect your cash or cash equivalent dividend for Q2, please refer to our Dividend Policy. Given our float of 508 subscriberstakes (as of 1/31/2007), a 5% growth assumption and our trailing twelve months total of dividends of $3.17 per subscriber, our current capitalization is $56,362 using a dividend discount model. Our market cap has grown 28.3% sequentially.

Ben Graham usually gets credit for being the inventor of value investing. Recently, we sat down with Jacob who says he perfected the art about 4,000 years before Mr. Graham came along:

LoS: Hi Jacob

Jacob: Shalom

LoS: How did you get into value investing?

Jacob: Well I have to say it started at birth. Actually that’s wrong, it started at my twin brother Esau’s birth. You see he was born first and by his birthright had claim to my father’s estate. He was stronger than I was so I knew even in my mother’s womb that he would probably push his way out before me. Right from the start I realized I wouldn’t be handed anything in life and would have to make my own way. I saw value investing as the best way to do that. I think recognizing my value bias while still in the womb has been key to my success.

LoS: Tell us about your first deep value pick

Jacob: My early career was unique in that I really only monitored one asset: my brother’s inheritence (NYSE: MBI). Having watched it my whole career I was well prepared when MBI fell out of favor with the street, at the time I thought the market in general was over-valued so I was holding a large portion of my assets in the “cash” of the day which was actually just soup. The largest holder of MBI, my brother Esau, always had a Food-At-a-Reasonable-Price bias (FARP). He was tired of waiting for the intrinsic value of MBI to be realized by the market, and he was hungry and wanted some soup. I saw an opportunity to buy MBI at 0.003% of intrinsic value so I sold my soup “and the rest is Old Testament” as they say.

LoS: That’s impressive, what are your best ideas now?

Jacob: Sorry but I never discuss my current portfolio, you never know when someone might dress up in wool and trick you into bequeathing your fortune to him. Or dress his ugly daughter up to look like his hot daughter and have you end up marrying the wrong one. I do have some advice for young investors though: Don’t live until you’re 180. It’s much easier to have lifetime 20% returns if you die at 75.

LoS: Great point Jacob – thanks for your time. Next week Noah tells us how one contrarian bet on weather futures changed his life forever.

Well, Ash Wednesday is coming up so I’m thinking about how some day I’m going to die, and so are you. I thought I should look into some posthumous procedures in order to make sure that I leave this world the same way I’ve lived in it: as a mini-baller. You can imagine my excitement when I found Celestis. Celestis will burn your flesh and bones into a dusty paste and then put it in a vial, tape you to the side of a rocket and shoot you into deep space.

You might think it’s pricey, but you’re wrong. The cost is only $495. Now naturally as a mini-baller I was hoping to pay more and luckily, there’s a premium product. For an extra $800, Celestis will actually put you in orbit around the earth for eternity. Better, closer, warmer. . . but still on the cheap side for my last huzzah. After some reflection I decided I would prefer that the earth orbit me. I sent them an email for an estimate and will report back.

Side-Note: Through a proprietary and patented process we call due-dili, Long or Short has discovered the reason that NASA has a $17bn budget, a staff full of “rocket scientists” and still can’t make a plane that won’t shed ‘suitcase sized debris’ every time it takes off. It’s all a scam. That’s not debris, it’s the dead, and NASA is KILLING IT by taking them to space, or sometimes just really high off the ground.

Situation: The City of New York wants to upgrade its police radio system so that officers can maintain radio contact in New York’s extensive subway system.

Homework: Calculate the City of New York’s ROI subway infrastructure investment based on the following facts.

• Original project budget was for $115mm and completion in 2003.
• $140mm has been spent so far.
• The system does not work. The police currently refuse to use it.
• Making the system work will probably require at least one more year and a total cost of $210mm.
• Even if the system does work at that point, the fire department still won’t be able to use it due to compatibility issues between the two department’s radio systems.

Enjoy your tax dollars at work.

Recommendation: Long or Short Capital recommends a simple, strict rule of investing in governments. Only go long a government (or government-related entity) if clear catalysts are in sight; at all other times, short governments…in size. For example, if you happen to know that Hugo Chavez is about to nationalize all the productive private assets in Venezuela, you may take a very short-term long position as long as you remember to realize your gains immediately. However, in general and at all other times, you should be actively shorting all governments.

Our Four Simple Steps to Becoming a Billionaire guide was met with great enthusiasm. For those who wish to start with smaller goals and then build from there, we now offer our Four Simple Steps to Becoming a Thousandaire.

1. Go to college. Or not.
2. Work a max of 40 hrs per week. Do not break this rule under any circumstances.
3. Have kids with many women. Paying child support is fun.
4. Treat yourself to a car you can’t afford. Gas inefficiency is a plus.
5. Remember that money which you save will probably be stolen by those crooks at the bank. Spend all your money now to avoid future losses.

“Capitalist” is a loaded word.

Some people think a “capitalist” is a pig. Some think a “capitalist” is someone who takes advantage of others and exploits any resource he can to get wealthy. Some people think a “capitalist” is someone who believes in hard smart work. Some people conflate it with entrepeneur. Some people think it can be a woman. Still others think “capitalist” defines a type of person who sees fit to crush the weak. The glorious thing about being “capitalists” such as ourselves, is that ALL these things are true. Except the ridiculous part about being a woman; a woman cannot be a capitalist. We looked it up.

This week, we exploit the position as host of the Carnival of the Capitalists to give you the 15 best submissions (of 56 non-spam entries) related to capitalism. These are the best and in a competition with all the other articles, these are the winners. That is not to say the people whose articles did not get posted are losers, but in this case, they did in fact lose and are in fact losers. These are facts. We looked it up.

In no order here are the entries of this week’s “Carnival of the Capitalists”:

Tomorrow’s News Today provided by Avant News: Ford Motor Company Preemptively Recalls 6.1 Million 2011 Models.

“As part of our continuing Way Forward policy,” the spokesman, Philip Vaughn, said, “which encapsulates our commitment to economy, responsibility and quality assurance, Ford Motor Company will preemptively recall every vehicle we plan to produce in the next year. By holding the recall before a single consumer ever gets behind the wheel of one of our cars, Ford is proving its commitment to these important values.”

Charles Green speaks to how American Idol is empowering incompetents:

One contestant, asked why he believed his (miserable) performance rated a “yes,” replied, “because I love it [the song].” If I believe, it will happen.

It’s the same in business. Empowerment is great—to unleash organizational talent. But empowering incompetents is absurd—an attempt to defy reality….

The “just believe” message is ubiquitous: in self-help books, sports (“I guess the other guys wanted it more than we did”), movies (“if you build it, they will come”), fuzzy-think gurus (“start believing and acting like you’re already a millionaire, and you will get there!”).

Axed Idol contestants blame the judges, anyone but themselves. The reality-distortion field is huge.

James Hamilton of the excellent Econbrowser asks What would Milton do?, especially appropriate on Milton Friedman Day.

And what about right at the moment? Friedman was concerned not just that excessively rapid money growth would cause inflation, but also that decreases in the money supply were often the cause of an economic recession. By that standard, if M2 had been growing less than 1 or 2% over the last year, the Friedman perspective would lead me to have additional concerns that the Fed had gone to far in the recent tightening episode.

SoxFirst puts forth that maybe companies going private or out of business as a result of Sarbanes-Oxley isn’t a net positive for the public.

The disturbing part about that trend is that it undermines one of the great strengths of the markets in the US, Canada, Europe and Great Britain and Australia with the rise of the citizen investor.

The Big Picture gives a real life example of a tax credit that could be straight out of Catch 22:

It is ironic – and patently unfair – that a technology could be denied credit precisely because the company has the ability to pull it off.

Photon Courier points to evidence of an ultracap capacitor energy solution coming to market:

EESTOR’s system claims an energy storage capacity of 280 watt-hours per kilogram: this compares with 120 for lithium-ion and only 32 for lead-acid gel batteries. It is, however, still far below the energy storage per kilogram achieved by gasoline, even when the poor conversion efficiency of the engine is taken into account. Still, if these numbers–cost as well as energy density–can really be achieved, then the implications for transportation and for other energy-related fields could be pretty profound.

The Digerati Life examines their own investment portfolio, which looks a lot like LoS’s portfolio but with substantially less returns and substantially higher risk:

Interestingly, the growth of this portfolio — the total increase being 40% in the last 20 months — is attributed mainly to two reasons: stock market gains and stock option sales which we were forced to apply when my spouse resigned from his corporate job to strike it out on his own.

Lip-sticking provides some commentary on how to market to women, but oddly not one mention of the Pink Dollar:

Do you talk to the women you want to sell to? No, I mean really. Not just announcing new products or writing sales copy or mouthing off in your blog. Do you talk to your female customers on a regular basis? Do you have monthly events to which you invite customers – giving away ‘free’ stuff, including spa coupons, or dinner coupons, or mall coupons – and then create a conversation around a topic that is important to them? Do you do this? Or, do you read blogs and newspapers and magazines and think you have us figured out?

SportsBiz undertakes the implications of DirecTV’s pan-sport exclusivity with MLB soon to be undertheir belt:

All signs now point to Major League Baseball following the path first laid out by the NFL and moving its Extra Innings package of virtually unlimited games broadcast with local announcers exclusively to Direct TV, in return for a mere $700 million.

Overseas Property points to budding enthusiasm for Brazilian real estate:

Budding property hotspots continue to garner international investor interest with up and coming locations such as Morocco and Turkey making their presence felt in the survey. Brazil property however has risen from obscurity to second place behind Bulgarian property to overtake property in Dubai, whose marketing overdrive has assured its potential overseas property all-star status.

InsureBlog gives a point by point commentary on the healthcare portion of this week’s State of the Union:

But many Americans cannot afford a health insurance policy.

Actually, most CAN afford health insurance. They just need to be reasonable in the way they approach managing their money and risk.

Moneyandfinance talks about the Social Security tax in the context of tax brackets:

By looking at hard numbers we can try to remove politics from it and see its effect on people and society. Increasing the social security tax rates will burden even more our lower income people and will create an ever flatter curve. Not doing something to fix social security now will create bigger issues to solve that will make society do hard decisions: like increasing retirement age or increasing social security tax, burdening people even more.

Searchlight Crusade gives an example of what happens to your home equity during a foreclosure which given the current real estate climate is worth knowing:

So if you cannot afford your payments, and you’re looking down the road at a trustee’s sale, it is usually in your best interests to get the property sold before that happens.

Small Business Trends shines the light on pet industry trends for 2007 — expect strong growth as baby boomers continue their self-indulgence using their pets as a proxy.

3. Growing interest in pet health care.

This includes non-invasive surgeries, human medical devices and services being applied to pets, super-premium foods aimed at specific ailments, and alternative therapies, such as acupuncture, massage, and behavioral therapies. High end diagnostics, such as MRIs, will become more widely available for pets, with the price dropping accordingly. Online veterinary pharmaceuticals will become more main stream. Pet lovers want, and are demanding, the same treatment options for their pets as they can get for themselves.

Last but not least, Innovation Zen points to a lead indicator as to who will win the format war between HD-DVD and Blu-Ray — Can Porn Affect Innovation:

The question then becomes: will the adult movie industry play an equally important role on the format war between Sony’s Blu-Ray and Toshiba’s HD-DVD?

It is not clear yet, but should the answer turn out to be “Yes” Sony will need a lot of lucky to avoid losing again. Most of pornographic movie producers, in fact, are going with the Toshiba HD-DVD format after Sony refused to give Blu-Ray licenses to porn movies.

Colonel Korn was the lawyer, and if Colonel Korn assured him that fraud, extortion, currency manipulation, embezzlement, income tax evasion and black-market speculations were legal, Colonel Cathcart was in no position to disagree with him.

–Catch 22 (page 211)

Past Quotes Entirely Relevant to Investing