Farnham’s Freehold – Robert A. Heinlein

Heinlein - Farnham's Freehold
I finally read a novel by Robert A. Heinlein (1907-1988). Mr. Heinlein was one of the first science fiction writers and he’s referred as the “dean of science fiction writers”. He’s a multiple winner of the Hugo award (best science fiction) He wrote sci-fi before sci-fi was about little green men and space craft. He certainly has interesting ideas and political views. I won’t get into that but it definitely plays a part in his body of work.

The first Robert Heinlein book I read is Farnham’s Freehold only because it’s the first Heinlein book I got my hands on. The book was published in 1964, during the height of the cold war to give you an idea of the setting. The back cover mentions that the main character, Hugh Farnham was a practical self-made man, and when he saw the clouds of nuclear war gathering, he built a bomb shelter under his house, hoping for peace and preparing for war. Hugh and his family survived a nuke blast, wakes up in the post-apocalyptic future where white people are the slaves of cannibalistic black rulers. As you guessed race, among other theme, is one of the main themes of the book.

This book is a favorite among the preppers. Practical man Hugh Farnham, yes he was. There’s interesting stuff in there about survivalist and preparing yourself for anything. He built a nuclear shelter, so there’s something to learn here. Now I’m sure 100% sure of this, but apparently Heinlein has built his own shelter during the cold war and has rely on his experience to write the book. There’s a lot of reference to Egyptian and Roman engineering.

It’s an interesting book to read, but not in the sense that it’s a happy fun book. Farnham’s Freehold is difficult, controversial and disgusting at parts. Some parts are hard to digest. There’s talk about incest, cannibalism, abortion, slavery, religion, killing his son, and white female are called sluts. No wonder its written “Science Fiction’s Most Controversial Novel” on the cover. That’s not a marketing trick, it really resonates once more you read the whole book.

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Target Canada Totally Missed the Target

target canada

Targetpic1After a two year tryout, Target has decided to pull the plug on its $7-billion Canadian operation. That’s not shocking considering they racked up $1.6 billion in losses to date instead of the 2013 profit their financial model predicted. What is shocking is that Sears Canada is still around. Now their “recalibrated” financial model could not find a realistic scenario by which it would be profitable until at least 2021, that’s another six years in the red under what I would assume a best case scenario. The old CEO got axed because of the botched expansion and the new CEO took note and wants to keep his job for more than six years. Now that Target announced its abandoning its Canadian operations, the stock (TGT) was up 8% in pre-market with market capitalization gain of $3 billion. Since a higher stock price is the good news, the terrible news is 17,600 employees losing their jobs. I expect to see that number being reflected in Canada’s monthly job report (To give you an idea, there was a loss of 4,300 jobs in December 2014, so negative 17,600 jobs is a big number in Canada). Target was supposed to bring hope to the people who lost their jobs with the closure of Zellers (Target bought some of the bankrupt Zellers locations.)

Target’s botched expansion in Canada certainly makes an interesting business school case study. How does such a successful retailer flop so badly? There are a lot of lessons to be learned. I love Target USA and every time me and my wife are in the U.S. me we make a habit to stock up before crossing the border. The goods are cheap and the experience is superior than going to Wal-Mart.

The main lesson here is first impressions. Target Canada got off to a disastrous start that stayed engraved in people’s mind. My wife is the real barometer for a store’s success. I remember how exited she was at the announcement of Target entering Canada. Canadians that were familiar with Target USA were thrilled and the folks that never been to a Target store couldn’t wait to find out what the buzz was about. This was a situation where people were camping out the night before the grand opening. Unfortunately you only get a chance to impress once. After months of making noises Target finally had their grand opening and to put it lightly my wife was ‘’severely disappointed’’. Her experience wasn’t isolated. A lot of people of the Target cheerleaders were totally deflated. While getting a haircut the stranger in the seat next to me was on a rant against Target. He couldn’t understand what the excitement was all about and what’s so great about Target after a lackluster shopping experience.

My wife first she said that prices were much higher. Obviously prices are a huge factor when making decisions. Generally Canadians expect higher prices than U.S. stores, which have been the norm since forever (lower currency, more expensive labor etc…) but in this case prices were higher than other local retailers. My wife’s exercise pants are $10 cheaper at Wal-Mart than Target. Same brand, same good, same color, same everything. Now Target pissed off my wife and the Target “goodwill” took a plunge. Other notable problems are empty shelves due to inventory and operational issues. The empty shelves pictures floating on social media became the unofficial symbol of Target Canada. I never really understood the empty shelves problem that has been plaguing Target since the beginning. It’s terrible for your image. Imagine if you went to a dealership and the cars weren’t painted. Or your hamburger is served with half a bun. It’s not just that it doesn’t feel right, it’s just not right. Is this some kind of catch 22 where Target says “Why stock up the shelves? There’s nobody here.” and the customers says “I’m not going, there’s nothing on the shelves.” Since Target bought some of the old Zellers locations, they inherited some of the bad locations Zellers had like the ones in rundown shopping centers. That part of town where nobody goes.

First impressions are very important (not just in retailing of course). Target Canada did slightly improve after its opening but never enough to recapture the heart of the consumer, or more importantly their wallet. A while back I read a headline that said something along the lines “Canada is not as welcoming” regarding Target’s terrible opening. That headline couldn’t have been any more wrong. It wasn’t like Target was entering a hostile environment. Canadians were hungry for Target’s products. When you compare the situation to Wal-Mart, Target had everything to gain. When a Wal-Mart opens in your town, there’s a protest blocking street and organized groups trying to get it closed. It’s a heated issue. Some people are so anti-Walmart that’s they couldn’t wait for Target to muscle them out. Target was entering a friendly environment with a fan base that was waiting to spend their money but had nothing to spend their money on. Before the expansion, everybody was talking about Target; “Target is great, Target is cheaper, Target is so fun to shop at”. It’s not like Target had to gain their trust and convince customers, they were camping out the night before the opening. When you have a lineup outside before opening, you have achieved the the Pax Romana of retailing. The share of the pie was there for them to grab and Target blew it. Maybe the executives were too arrogant, thinking they could just walk into Canada and have immediate success by taking advantage of their fan club. Consumers have a limited amount of money to spend and there’s plenty of competition for our wallet. Basically Target Canada ended up not being great, wasn’t cheaper, and wasn’t fun to shop at. Now there’s a movement to bring back Zellers.

*Disclosure: I’m not long or short Target (TGT) and I don’t plan on taking a position.

Have a good weekend,

Brian

Target

Targetpic2

Group Jean Coutu – There’s A Price Correction

Reposted from Seeking Alpha
By Brian Langis

Note: Dollar amounts are in Canadian $ unless mentioned otherwise. USD-CAD 1.1839 Price of 1 USD in CAD

This is my third article on Group Jean-Coutu (OTCPK:JCOUF) (PJC.A on Toronto exchange). Take note that I will be referring to Group Jean-Coutu by its main sticker, PJC, the one that trades on the TSX. On October 24, 2013, I recommended buying PJC at $18.40. The original article, Group Jean Coutu – An Opportunity For The Patient Investor, lays out my investment thesis. A year later, in Group Jean Coutu: An Update, I reviewed my position a year after a 42.2% gain, including dividends. I stated that I couldn’t give you a reason for PJC to deliver another 40% and that I believed PJC traded in the upper range of its valuation band. Well just about 70 days later PJC still managed to gain 12.3% to reach a 52-week high of $28.95 on January 5, 2015. That was until Q3 results were released on Thursday January 8, 2015. It appears that there’s currently a correction in motion the shares closed Wednesday at $27.38, prior to the earnings announcement. When I started writing this article earlier this week PJC was trading near $28. At the moment of writing these lines the stock is down to approximately ~$25. So a portion of the readers are probably also wondering “what’s going on?” The results missed analysts’ estimates and the stock has been falling from its high.

The objective of this article is to provide you with an update on PJC and its valuation. The high share price of PJC forced me to review its valuation and my position, and as a result I exited my position in PJC earlier this week. A capital gain is nice but now I have the tax consequence to deal with. I couldn’t figure out any tangible explanation for the exploding rise the share price since the fall. There hasn’t been meaningful news to justify such a rapid rise in its price. There’s always speculation of a takeover (maybe by Metro Inc.) but that rumor has been circulating for years. That’s the market for you. Sometimes higher prices is the reason for higher prices.

In 2014 PJC delivered a solid 53.7% gain. Apart from respectable financial results, the gain is probably the result from investors exiting energy stocks seeking refuge. I can see PJC being a refuge value during times of high volatility. It’s a great brand with an excellent balance sheet. Management is conservative, the company is profitable and stable, reliable dividend payer, and pharmacies are essentials. Basically, boom or recession, PJC is not going away. Group Jean-Coutu is also the only pure play pharmacy stock left in Canada after the acquisition of Shoppers Drug Mart by Loblaws. So if you want to buy a pharmacy in Canada, you have to buy PJC. Otherwise you have to buy supermarket Metro Inc. (MTRAF) which owns Brunet pharmacies or Loblaws.

Below is the table of PJC’s 2014 returns:

Jean Coutu Returns PJC JCOUF

PJC.A 1 Year Price Returns (Daily) data by YCharts

2014 Returns

PJC.A: 53.78%

JCOUF: 39.49%

iShares S&P/TSX Capped Consumer Staples Index ETF (XST): 45.16%

S&P/TSX Composite: 7.42%

If you held the Canadian version of Jean-Coutu, you have been very well rewarded by crushing the S&P/TSX by 46.36%. PJC also crushed my initial valuation target. If you held the American version, JCOUF, unfortunately your good returns were penalized by the 9.41% drop of the Canadian dollar in 2014. PJC also did better than its main benchmark index, the TSX Capped Consumer Staples Index. The returns above do not include dividends. PJC has a dividend yield of about ~1.4%.

Full Article @ Seeking Alpha.

Walter Schloss Value Investing Principles

I found this awesome nugget of rich investment advice written by Walter Schloss (1916-2012). Walter Schloss was one of the greatest investor and is a pure product of the Benjamin Graham School of value investing. The file below resumes in point form his approach to investing. It’s simple, clean, and straight forward. Follow these rules and your returns should be fine. Or at least you will minimize the chance of losing money since its focus on already highly depressed stocks.

Warren Buffett, friend of Mr. Schloss, had this to say about him:

He knows how to identify securities that sell at considerably less than their value to a private owner: And that’s all he does… He owns many more stocks than I do and is far less interested in the underlying nature of the business; I don’t seem to have very much influence on Walter. That is one of his strengths; no one has much influence on him. Source: The Superinvestors of Graham-and-Doddsville.

Buffett also said this in Adam Smith’s book Supermoney:

“He has no connections or access to useful information. Practically no one in Wall Street knows him and he is not fed any ideas. He looks up the numbers in the manuals and sends for the annual reports, and that’s about it.In introducing me to (Schloss) Warren had also, to my mind, described himself. ‘He never forgets that he is handling other people’s money, and this reinforces his normal strong aversion to loss.’ He has total integrity and a realistic picture of himself. Money is real to him and stocks are real – and from this flows an attraction to the ‘margin of safety’ principle.”

Again, it’s one of these things that are simple and easy to understand but extremely hard to do because of psychology and emotions. Walter bought some of the most hated and ugliest companies. You need some solid guts to make these decisions. If it was this easy, everybody would be making money. I will eventually have to write and expand on that one day.

Walter Schloss Investing Principles

Bulletproof Boozing

A good friend of mine sent me this drinking chart made by Dave Asprey. It ranks different types of alcohol and its effect on your body from best to worst, or in Dave’s words: bulletproof to toxic. The chart is interesting on an informational level. It’s good for anyone that takes their health seriously. There’s a good description of each type of alcohol and its apparent negative effects. I’m surprised to see that red wine is the 2nd most toxic alcohol, especially when its health benefits are touted by the scientific community. Dave’s measuring stick was how much the alcohol was filtered. Therefore under this measuring stick vodka definitely wins and beer loses. It’s not the most scientific method but I guess it’s a good rule of thumb. But again common sense should prevail. The chart suggests that I should drink a sugary dirty Smirnoff Ice before a beer or a good glass of red wine. That will never happen. I have a hard time believe that drinking 12 Smirnoff Ice will make me feel better than drinking twelve beers. But I guess I will never find out because there’s never going to be an oz of Smirnoff Ice.

Bulletproof Alcohol Infographic

I’m sure a lot of people are shocked with tequila getting third place. Tequila has a terrible reputation. Tequila, like any other alcohol, is terrible for you when you drink massive amount of it. Everyone has a story. Tequila is easily linked to that 3 am shooter your “friend” called that made you puke all night. However, tequila the alcohol is not the issue; it’s how we drink it that’s the cause behind the bad reputation and the puking. I love tequila but I don’t drink it in shooter form anymore. In Latin America, tequila is savor after dinner. There’s no salt shaker, no lemon, and loud banging on the table. It’s not a macho man drink, but simply a nice drink to enjoy. The American culture is responsible for that tradition. I’m not sure why we linked lemon and salt to tequila but not to other shooters. Do this: Buy a high quality bottle of 100% blue agave tequila. It should be clear, not golden (caramel looking color is added to make it look more prestigious). Approach high-end tequila like you would treat a nice single-malt scotch. Have a nice tequila drink in a relax state and your perception will change.

First, I appreciate Dave for trying to make everyone healthier, if that’s his real honest motive. Second, I would take everything he said with a grain of salt. He has been debunked many times and has been labeled a modern day snake oil salesman. He’s not a scientist or a doctor. Certain claims about specific products have not been evaluated. He’s known for the moldy coffee claim that caught fire on the Internet and his answer with the bulletproof coffee. I like bulletproof coffee and I make my own, but there’s no mold on my coffee. I don’t think his a bad guy. He’s right on certain subject, and wrong on others. But at the end of the day, keep in mind that he’s pushing his products and looking after his own self-interest. I will let you simply google him to let you form your own conclusion.

In his post he mentions five steps to hack your hangover. Again it’s one of those things that falls under the “bro science” category. There’s some true to his claim but it’s not the golden ticket as he seem to suggest. Regarding hangovers, we all heard the stories about drinking plenty of water, the electrolytes, the vitamin C or B and other stuff. The true is that there’s no secret formula to cure hangovers. There’s none. Scientists have hardly scratched the surface on how the brain works. So far they have linked alcohol to causing symptoms behind a small migraine. A migraine is an inflammation of the tissue surrounding the brain. And one of the best way to attack the side effects of a migraine such as headache and nausea among others, is to take ibuprofen (Advil). Disappointingly, ibuprofen and plenty of water is the best cure to fight a hangover. (I also heard that ibuprofen cause increase the risk of stomach bleeding, so what do I know.) Dave’s cocktail of vitamins and steps is a rehash of old ideas.

Paul Singer Presentation

The name Paul Singer might not be familiar to many people, but you probably heard of Argentina defaulting (again) somewhere in the news in 2014. Paul Singer is a founder and president of Elliott Management Corporation and has been managing money for 38 years. Paul Singer is one the bond holdout that refused a new deal when Argentina defaulted for almost $100 million in 2002. He bought the bonds when they were really cheap in 2008 and the face value of those bonds has exploded since. Him and a few others demand repayment in full, and held out for full repayment, eventually winning their case. But Argentina still refuses to pay him. He has seized an Argentinian vessel and attempted to seize the presidential plane. It’s a fascinating story to read and there’s a lot to learn about sovereign bonds and default.

I don’t think he does a lot of public speaking since he’s known for being extremely private, that’s why it’s also to hear his take on the economy and his point of view on investing in defaulted Argentinian bonds. He thought that the original restructuring offer was a terrible offer and he’s fighting for a fair deal. This was published by the
New-York Times on December 12, 2014.
Looking Ahead to 2015 and Risks to the World Economy

2014 year-end data for all North American stocks and indexes (Best and Worst)

The indexes are provided by the Globe and Mail. It even includes currencies and commodities.

I took the time to filter through them and made a table of the worst and best performing indexes. The point of the exercise is to find potential opportunities in the trash. Very often an index/asset/stock has been beat down too much. There’s likely a good valid reason why they are down but the key is to find the ones (assets) that are mispriced by the market. An asset can be mispriced for many reasons such as over-negative sentiments, temporary problems, misunderstood story, lack of attention etc… And within the trash some companies will disappear while others that are high quality with a solid balance sheet should weather the storm and bounce back. The key is to focus on the later ones. This requires plenty of research and patience.

Below are the data table provided by the Globe. Morningstar also provides up-to-date index performance over many years, included foreign indexes.

Here is the list of the top five and worst indexes of 2014.
Toronto Stock Exchange
TSX Venture Exchange
American Stock Exchange
Nasdaq Stock Market
New York Stock Exchange
Indexes

Top Performing Indexes 2014

Worst Performing Indexes 2014