Monthly Archives: January 2015

Book review: “The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters ” – Gregory Zuckerman

“The Frackers” is the story about a bunch of crazy US “wildcatters” who managed to find a way to extract enormous amounts of oil and natural gas from rock formations which were thought (by conventional wisdom) as not to be worth drilling.

They way they achieved it was actually not to invent anything new, but to combine and refine existing technologies (horizontal drilling and fracking) which allowed them to produce oil and gas at competitive costs.

For potential investors there is a lot to learn in the book, among other stuff:

1. Being too early is the same as being wrong. It took a long time to make it work and those who started early often did not have the means to pull through.

2. One of the key innovations was to use less chemicals than before in the fracking fluids. One more example that innovation often means less and not more

3. The guy who had the breakthrough idea with adding less chemicals to the fracking fluid did actually not profit much from his invention

4. Established companies like Exxon, Chevron etc. mostly missed the opportunity because they relied on “conventional wisdom” which said that shale is not relevant. Funny enough, one of the best shale regions (Barnett) lies literally below Exxon’s headquarters. They were sitting directly on top of a big energy source but ignored it and went to Indonesia, Nigeria etc.

5. The most aggresive and fastest growing “frackers” did not produce the best long term returns for shareholders. If you compare for instance the two companies of the main characters, Aubrey McLendon’s highly leveraged Chesapeake Energy against Harold Hamm’s conservatively run, 70% CEO owned Continental Resources, it is not difficult to see which is the better long term concept for shareholders:

For non-US readers like myself it was also interesting to see how the dynamics between wildcatters and land owners play out. Without landowners having a profit stake in the production, getting permission for fracking would be much more difficult. This is maybe the reason why fracking in Europe will never get done as the government has the monopoly on natural resources.

Another thought: I think in the current discussion of how the oil price impacts the US economy, it is not enough to look just at the direct jobs created by the E&P companies. If you assume that in total, the shale boom increased daily US oil production by 5 mn barrels, at an oil price of 80 USD per barrel, around 150 bn USD have flown back into the US economy annually instead of going to OPEC countries or other non-US oil producing countries. I guess fracking had a much bigger impact on the US economy’s revival since the financial crisis than the Fed.

Finally, there is a fascinating side story about the guy who is running Cheniere Energy, Charif Souki. His great idea was to import natural gas into the US and he raised several billion USD to build a huge gasification plant on the gulf coast. He clearly did not see fracking coming and his investment was worthless. Nevertheless, he was able to raise another few billion bucks and retool the facility in order to export natural gas.

This “double or nothing” gamble seems to have paid off. Seth Klarmann by the way, has just doubled its stake in Cheniere, making it their biggest public listed position at around 1,7 bn USD.

Overall, I found the book very interesting and I would say that it is a MUST READ for anyone interested in the oil industry. It is well written and entertaining as well as informative. Highly recommended !!!

When dividends matter (Hint: Mostly not at all)

Today I read an article in one of the major German Newspapers, Frankfurter Allgemeine, about the merits of investing in stocks.

I know that the year is still young, but this article (in German) might be easily the worst article of the year on stock investing.

They offer 3 “compelling” reasons why stocks are attractive:

– dividends are increasing
– stocks are still below all time high if you look at a pure price index (the old FAZ index)
– the dividend yield according to them is 2,9% and higher than 10 year Bunds (0,5%) or BBB bonds (1,5%)

They even recommend to buy stocks just before the dividend payment to collect the dividend and then sell. They finally show a calendar with all dividend dates of the major German stocks in order for the readers to be prepared.


For some reason, the author doesn’t seem to know the existence of an “Ex-dividend” adjustment for stocks. I guess this guy also buys bonds the day before they pay the coupon or so. Including taxes and execution costs, I am pretty sure this kind of “dividend hopping” has negative expected value.

Anchoring bias

Secondly, it is interesting that you see such a nice example of an “anchoring bias” in a major newspaper. For investing in stocks it doesn’t matter if the stocks trade at an all time high or all time low. All that matters is if stocks are valued adequately in relation to their intrinsic value which in turn is determined by future profits and cash flows. With a “strategy” like that one mentioned, you will miss most bull markets and happily buy into bear markets. Congratulations !!!

Where is the problem with dividend yields ?

Well, before I further insult the writer of this article, the problem is that many people seem starting to think that somehow dividends are like “coupons”. This is clearly the side effect of the current low-interest rate environment.

There are also many statistics which point out that over a very long period of time, dividends have been a significant part of stock market returns.

However just buying stocks with high dividend yields is actually a loosing strategy as Dreman, O’Shaugnessey and others have shown. For me, the problem is two fold:

1. High current dividend yield stocks are often value traps

When companies get in fundamental trouble, they often try to preserve their “sacred” dividend until the bitter end. For some reason, canceling a dividend is been seen as the ultimate ratio before the real troubles begin. So it is quite common, especially in capital-intensive industries that struggling companies keep up their dividend despite an eroding business, as it could be seen with E.on, RWE or the banks. Sometimes you even see companies paying dividends and issuing dilutive shares at the same time just to keep up the illusion of a constant, “coupon like” dividend like Santander just recently.

Those long term returns mentioned above are actually much more the result of high growth, low dividend yield stocks which over a long-term grow so much that after 20 years or more, the dividend in relation to the original purchase price is then huge.

Especially these days, dividend yield is a very imperfect measure for shareholder returns anyway. Including share buy backs and looking at total shareholder return is the much superior strategy as for instance Mebane Faber has shown in his book.

2. Psychology: Yield hogs get slaughtered

A “yield hog” is someone who only looks at coupons or yields and not on total returns. If you buy a bond and the issuer does not go bankrupt, you get the coupon and the principal back. If you buy a stock, you might get your dividends (or not), but you never get your principal back. In contrast to a bond, you have to sell the stock to someone else in order to get your principal back. However there is clearly no guarantee that you will your principal back as “mr. market” might disagree on the value he wants to give you.

Psychologically, “Yield hogs” often cannot stand draw downs on the stock price and then get “slaughtered” when the panic sell in a bear market (often after doubling up on the way down). In some areas like insurance or pension funds, where you need to show a current yield, this “yield hog mentality” is basically baked into the business model and can be observed cycle by cycle.

So when do dividends add or indicate value ?

In my opinion, the only case where dividend yields are important if you invest in “deep value” cheap non-growing companies with a lot of cash flow and questionable capital allocation skills or dangerous environments. In such cases, having a paybacks via high dividends lowers the “risk duration” of an investment significantly.

In my portfolio for instance, Installux, Romgaz and Electrica are such candidates where I would not invest if they would just accumulate earnings. but be careful: i ti snot the dividend which makes them good investment but the undervalued nature of the stock. Admiral for instance, a company I really admire, would do much better fo its shareholders if they would buy back stock instead of paying 6-7% dividends. The long term compounded return would be much better without the tax on the dividend income.

As always, Warren Buffett has summarized it nicely several times why dividends are actually stupid for good companies.

Quick summary:

Investing in stocks because of the dividend yield is an extremely stupid way to invest. Either you will end up holding a lot of value traps and/or you will lose your nerves in the inevitable downturns.

Dividends should only been considered in context with the underlying business model and in combination with the capital allocation (reinvestment, share buy backs, debt levels), but never ever as a stand-alone investment criteria.

Dividends ARE NOT COUPONS and stocks are not “yield replacements” for bonds !!

Some links

If you’ve got 2 hours time this week, don’t miss Barry Ritholz talking to Bond legend Bill Gross (Part 1, Part 2). HIGHLY RECOMMENDED !!!

The guy who blew up AIG’s sec lending is back as a hedge fund manager

Punchcardblog likes subprime retailer Conn’s

Nate from Oddballl finally goes activist on a small net-net company

Bill Gates released his personal annual report

Greenlight’s Q4 2014 letter including a comment on Citizen’s Financial

Target is another proof that retailers often work not well across borders

Updates: Energiedienst (CH0039651184) & Vossloh (DE0007667107) voluntary tender offer


My first transaction this year was to sell my shares in Energiedienst.

Looking at the Swiss Francs chart, where Energiedienst has its primary listing, this looks like genius timing:

However in Euro, it looks pretty stupid:

In Euro, the shares jumped from around 25,20 EUR to around 27 EUR at the time of writing, a upmove of around 7% against a loss in Swiss Francs of around -10%.

So what happened ? Well in case you were not on a Moon mission last week you might have heard about that Swiss Franc “thing”. The Swiss Franc increased around 17% against the Euro within a very short time frame. What we can see above is relatively easy: The stock price in Swiss Franc fell, but not enough to off set the CHF/EUR movement. This is very strange, especially in the case of Energiedienst.

Energiedienst operates (based on sales) around 85% of its business in Germany and only 15% in Switzerland. So even if we assume that the business in Switzerland is not negatively affected, the increase in EUR should have been theoretically only 0,15*17%= 2,6% in EUR and not +7%.

If we look at Swiss Power prices however, we see something interesting: With the exception of the one day, they directly adjusted in EUR terms as we can see here for instance in the Swiss 1 year forward electricity prices:

swiss power EUR

So in this case, electricity prices seem to be more efficient than stock prices, as there seems to be a very quick and liquid market to arbitrage away those currency differences quickly. Nevertheless I lost money by selling to early but in this case it was not my fault.


Back in September, I presented Vossloh as a potential fallen angel with activist involvement. This is what I wrote back then:

Based on today’s price of ~49 EUR this would mean a potential upside of 35-68%. However one should assume that this turn-around needs at least 3 years. For a turn around, I personally would require a higher return than for a normal “boring” value stock as there is clearly a risk that the turnaround does not work out as planned.

If I assume a target return of 20% p.a., i would need to be sure that the price of Vossloh is in 3 years at around 85 EUR. This is clearly at the very upper end of my target range. So I would either need to have more aggressive assumptions or I would need a lower entry price. As a value investor, I would not want to bet on growth or on a shorter time frame for the turn around, so the only alternative is to wait for a lower entry price.

Taking the midpoint of my range from above at 74, I would be a buyer at ~42 EUR per share but not before.

On November 7th, Vossloh actually hit the 42 EUR threshold but somehow I was not quick enough and passed to buy some shares. Since then the shares recovered nicely to around 54 EUR when yesterday, the following news hit the wires:

On 20 January 2015, KB Holding GmbH decided to make a voluntary public takeover offer to the shareholders of Vossloh Aktiengesellschaft, Vosslohstraße 4, 58791 Werdohl, Germany, for the acquisition of all ordinary bearer shares with no par value, each share representing a proportionate amount of EUR 2.84 in the share capital (the ‘Vossloh-Shares’).

KB Holding GmbH intends to offer the payment of a cash consideration per Vossloh-Share in the amount of the weighted average domestic stock exchange price during the last three months before the publication of this
announcement according to Sec. 10 para. 1 sent. 1 WpÜG pursuant to Sec. 5 para. 1 and 3 of the Regulation on the Content of the Offer Document, Consideration for Takeover Offers and Mandatory Offers and the Release from
the Obligation to Publish and Issue an Offer (WpÜG-Angebotsverordnung), as determined by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin). This consideration is expected to be in a range between EUR 48 and 49 per Vossloh-Share and will be published immediately after being notified by BaFin.

KB Holding GmbH currently holds 29.99 percent of the shares in Vossloh Aktiengesellschaft.

The stock managed to gain some more and closed at around 56 EUR per share:

So the first question is: Why does he offer 49 EUR per share if the shares are trading already at 55 EUR ?

This one is pretty easy: Thiele was already owning 29,99%. In Germany, once you cross 30%, you have to make a mandatory offer at the trailing 90 “VWAP” stock price. My guess is that Thiele clearly wants to take control, but maybe not now and not at 55 EUR. So he used the occasion to come out with this lowball offer, because this releases him from any further mandatory offers and he is not forced to take more shares than he actually wants.

After the offer has expired and Thiele has crossed 30%, he only needs to disclose purchase once he crosses 50% and even then he does not need to make a mandatory offer as the voluntary offer releases him from making any subsequent offers.

Is the stock still attractive at that level ?

Well, we know now that Thiele clearly wants to take control. But we also know that he is a very shrewed operator with little interest in minority share holders. He controls the management of the company already (he actually hired the new CEO) as he ist already the strongest shareholder.

For anyone who followed the blog and the German Corporate law discussion, the biggest issue is the following: Under current law, Thiele could decide (or his CEO) to delist from the stock exchange. This is now possible in Germany without even getting any kind of shareholder approval. This would force many funds out of the stock as normally unlisted stocks are not permitted under most fund regulations. Even for hardcore hold outs this would mean low or no transparency etc. etc.

I have seen a recent study (Solventis, “Endspiele”) that since the change in law (or the change in interpretation), on average stocks lost around -25% following the announcement of a delisting.

Overall, at the current price the risk/reward ratio is in my opinion neutral. There is some room left with regard to a fair value and mean reversion, on the other hand one should be careful with regard to any minority unfriendly actions from Thiele & Co.

As a learning experience, I should maybe watch my watchlist a little bit closer in order not to miss such opportunities as in November.

Why buy and hold is great – if you are already an investment genius

When I did my 2014 review a few days ago I observed the following:

Interesting for me is the fact that 4 of the 5 top losers were new positions whereas only 2 of the 5 best stocks (Koc, Citizens) were bought in 2014.

This leads of course to the question if any of what I have done here over the past 4 years has added any value. The good thing is: It is relatively easy to test the hypothesis. I just took the old starting portfolio and calculated roughly what the return would have been with a simple buy and hold. Let’s have a look at the numbers:

Read more

Book review: “Private Empire: ExxonMobil and American Power” – Steve Coll

In my quest to learn more about the oil industry, I came across this book. It is a quite long book with about 700 pages and is covering basically the time between the Exxon Valdez accident in 1989 until around the time the book was written in 2012.

The chapters are to a certain extent random, jumping between how Exxon influenced politics to problems they encountered in various countries, among others Indonesia, Nigeria, French Guinea and Iraq.

The book itself has a rather critical tone, for instance they make a pretty good point that Exxon denied global warming for a long time, even when evidence and opinion even within the company pointed to the opposite. The ties from Exxon especially to the Bush administration are critically commented. The author claims that Exxon to a certain extent was (or still is) a kind of state within a state and using the US Government facilities only when it fits them.

Most interesting for me were the chapters about Exxon itself and its corporate culture, as well as the merger with Mobil and the later acquisition of fracker XTO.

Overall one gets the impression, that Exxon, especially before the Mobil merger was a true “outsider company”, doing business very differently than other oil companies.

Under the old CEO Lee Raymond for instance, Exxon abandoned any oil price forecasts for its planning starting in 2004 as the CEO judged all efforts to do so completely worthless. The book even quotes Exxon that they couldn’t figure out why oil prices went up so much in 2008 despite putting a lot of effort in to do so. This might be a very important message from the book: Do you still believe in all those incredibly sexy conspiracy theories about oil price manipulation if even the largest private oil company in the world cannot predict the oil price ?

Other examples of “outsider behaviour” are:

– military like control style with regard to safety, expenses and purchasing
– purely engineering driven culture, no “swashbuckling” oil wildcatters
– total discipline in allocating capital to projects

This was especially true under the old CEO, Lee Raymond.

But less so under the current CEO who, among other spent 41 bn on XTO and had to admit later that the deal was not a very good one.

Another interesting aspect was the continuous struggle of Exxon to be able to book new reserves. For a time they used a different reserve definition to the one allowed by the SEC, similar what frackers seem to do now.

All in all, despite the length of the book, I found it very interesting. To me, it offered new insides into an Oil giant like Exxon and the oil industry in general. Although it does not offer any “actionable investment advice”, the book is a good read for anyone interested in the Oil industry and Exxon.

FBD Holdings (ISIN IE0003290289) – A local Irish Insurance champion for sale ?

Again this turned out to be a quite long post as I am digging a little bit deeper into the balance sheet. Therefore a quick summary:

Although FBD Holdings, the Irish P&C company looks interesting, I will not invest. The company has a very impressive track record, but in my opinion the business model is not scalable as it doesn’t have any structural competitive advantages besides a loyal client base. Additionally, the company severely screwed up their asset allocation and will be faced with ultra low investment returns going forward unless they are increasing their investment risk significantly.

At current stock prices, the company is in my opinion pretty well priced, with only a relatively small upside in a good case and equally large downside in a more negative case.

Read more

Some links

A great (long) article on Shell, drilling in the Arctic, proven oil reserves and some more.

The WertArt blog likes Italien closed end real estate funds

A few nice graphs on oil demand.Hint:It is lower than expected.

An interesting essay about the “out-of-control” art market

On the advantages of bottom up stock picking against top down market timing

Eddie Lampert (Sears) explains the trial and error nature of retail.

Nate from Oddball with a great post on he advantages of a consistent (and boring) style of investment

And then there were 26 – Sold Energiedienst

A few days ago, I published my 28 stocks for 2015. Pretty soon after that, I already sold Sberbank.

Now I sold another stock, Energiedienst, the German/Swiss Hydro Power generator which I bought only last year.

The investment case for Energiedienst was pretty simple: Energiedienst as a hydro power generator is an “electricity price pure play” with a solid balance sheet. My expectation was that Energiedienst could profit in the mid-term if the conventional utility companies take capacity off the market, as running gas and coal powered power plants were loss making for E.On and RWE.

Read more

« Older Entries