Long or Short Capital

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.