I’ve sold out of Pinetree at 45 cents/share and above. While it still trades at a discount to the market value of its assets, Pinetree’s management is truly awful as discussed in my previous post on the company.
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rants
Mistakes that institutional investors should have avoided
Here are two: RX Gold and Veris Gold
For-profit dialysis: an unethical industry / DaVita (DVA)
I’ve been researching the dialysis industry because Berkshire Hathaway owns DaVita (DVA), one of the largest dialysis providers in the US. However, I’m not quite sure why Berkshire Hathaway owns this stock. The for-profits are rarely rewarded for creating value while there are large financial rewards for unethical behaviour. Buffett has been vocal about not owning Lorillard (a tobacco company) so I don’t see why he would be ok with owning DaVita. It is possible that Buffett hasn’t researched the company much as Ted Weschler (probably) made the decision to buy it.
Historically, DaVita has been very rewarding for shareholders ever since Kent Thiry saved it from bankruptcy and turned it around. However, his integrity strikes me as questionable and I’m of the opinion that entrusting your money with unethical people is not a good idea.
Market makers, exchanges, and brokerages (KCG, IBKR, etc.)
Here’s how the market making business generally works:
Market makers pay exchanges money in return of special trading advantages over everybody else. Then they use these special advantages to fleece the exchange’s other customers (mostly institutional clients).
Retail brokerages can route their clients’ orders to an exchange, to an off-market venue, or to their own market making division. Retail investors still get fleeced… just not on an exchange. Knight Capital Group (KCG) was one of the pioneers in fleecing retail investors. They would buy order flow from companies such as Etrade and use the information to gain an edge.
Issues with mining stocks
I think that institutional investors generally don’t know what they’re doing when it comes to mining stocks. If they were smarter, many problems with mining stocks wouldn’t be so widespread.
Mining: what companies are actually saying
#1- Our gold production is going to go up over the next few years
Translation: We are going to waste money on dumb projects and we still won’t be able to increase production.
The conventional wisdom is that miners have to re-invest their capital to maintain or increase production. This is idiotic. If you will get poor returns on new mines, then don’t build them. There is no rule in capitalism that says that you have to throw away money.
What happened in the gold industry is that the seniors chased dumb projects and didn’t make as much money as they should have in a bull market. And because the economics of the new mines were bad, they didn’t even manage to increase ounces produced per share. In hindsight, gold miners should have returned capital to shareholders and let production drop instead of chasing dumb projects.
#2- We have initiatives underway that will decrease production costs
Technology trends (many of which are overrated)
Many media articles constantly talk about how smartphones and tablets will eclipse the desktop PC and that everything will move to the cloud. I believe that these beliefs are erroneous.
