Gamestop (GME) Summary

games - Copy

Key Statistics

Enterprise Value: $2.206 Billion

Operating Income: $522.80 Million

EV/Op Income = 4.22x

Earnings Yield = 20%

Debt/Equity = 35%

Price/Revenue = .25x

Debt/EBITDA: 1.19x

The Company

Gamestop is a video game retailer. They sell video games and the hardware associated with it. They’re the largest retailer of pre-owned video game products in the world and carry a broad selection of all generations of video game consoles. They have a variety of loyalty programs in an attempt to connect with and keep customers.


With the growth of online gaming and video games increasingly delivered in digital form, sentiment against Gamestop is extremely negative. The perception is that due to Gamestop’s reliance on pre-owned video games and sales of new video games being delivered digitally, it is a diminishing market that is in a state of decline. Year to date the stock is down 35% and the current price of $16.31 is close to its 52-week low of $15.85.

My take

Despite the challenges, Gamestop has continued to deliver strong operating results. While top-line revenues have declined, the company has been able to improve gross profits. They have also been using their revenues from their dying (but highly profitable) business to return capital to shareholders in the form of a large dividend yield and stock buyback. The new video game console (the Nintendo Switch) should help deliver better results this holiday season.

With a P/E of 4.91, the sentiment is extremely negative against Gamestop. This is due to the fears that physical retail of gaming is a business that is destined for death. The low valuation is also due to a double whammy of hatred: they have physical retail stores and they have lots of locations in malls.

Gamestop is fighting the decline by adopting a subscription-based video game rental service for $60/month. Gamers can borrow as many games as they want from the physical store. They’re also using the cash flow from their declining (but highly profitable) used games business to return capital to shareholders. Gamestop is returning capital to shareholders in the form of dividends and buybacks. Common shares have declined by 2.59% in the last year and the dividend yield is currently 9.32%. Gamestop’s low debt/equity and low debt/EBITDA give it the balance sheet strength to pursue a turnaround strategy and continue the large return of capital to shareholders in the form of dividends and buybacks.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Winter is Coming: The December Rebalance


The December Rebalance

December is for the holidays. Warm fires, quality time with family, generosity, cookies, gift giving and . . . Rebalancing my portfolio and buying hated assets!

Why do I want to rebalance in December?

  1. Give cheap stocks a chance – I want to give my investments at least a year to work out.
  2. Time is not on my side – I buy stocks of the “deep value” variety. These are companies that are in trouble. I believe if there is not a problem with a stock, then there can’t really be any value. I think that cheap stocks without any hair on them are about as rare as unicorns. These are not Warren Buffett value stocks that are long-term compounders with a moat and high returns on capital that I can stay invested in for decades. I’m not “picking winners,” I’m buying mispriced stocks and selling when they reach their intrinsic value. As a result, time is not on my side. As Warren Buffett says, time is the friend of the good business and the enemy of the bad business. I have to continuously move into and out of cheap stocks as their valuations change.
  3. Momentum – Once a cheap stock gathers some momentum, I want to ride it as long as it lasts. Quarterly rebalancing can cut off momentum as soon as the situation gets fun. Quarterly rebalancing also increases transaction costs, which I’m trying to minimize as they’re already high.
  4. The December Effect – I am shamelessly taking advantage of what academics call the January effect. Academics notice that stocks tend to do very well in January. They assert that this is due to investors selling their losers in December for tax purposes and then piling back in come January. I prefer to call it the “December Effect” because it is a time of the year that momentum takes over. Cheap stocks get cheaper and hot stocks get more expensive. This creates opportunities for value investors. There is the tax loss effect, but there is more to it than that. In one of Peter Lynch’s books (I don’t have it handy, but I believe it’s in One Up on Wall Street), he explained that December is a time of year that portfolio managers do significant clean up going into year end. A professional portfolio manager doesn’t want to go to his boss, consultants and investors with a bunch of “garbage” in his portfolio (i.e., the kind of stocks that I like to buy). They want to buy cool stuff that will get their superiors and investors excited — i.e., whatever has gone up this year (FANG, Tesla, maybe a dash of cryptocurrency for dramatic effect). This tends to make value stocks even cheaper in December, creating a great opportunity to buy them.
  5. Will this just get arbed away? – The December/January effect will probably get arbitraged away eventually. Then again, it was identified in the 1980s, and it still works to this day. Even if it stops working, I still need to rebalance annually, and I might as well pick the time of the year that has been historically most advantageous to do that. December it is.


Die Hard: The Finest Christmas Movie

The Candidates

With the bull market now raging for nearly a decade, the number of cheap stocks is rapidly decreasing.  Most of the value in this market is concentrated in retail.  While I am okay with taking a huge (i.e., 30-40%) position in one industry that is struggling and hated, I am not going to invest 60-80% of my portfolio in it.  That is far too much for my taste.  If I were to buy all the statistically cheap stocks out there, most of my portfolio would be in the retail sector.

To prevent this, I moved 20% of my portfolio into international indexes at attractive valuations.  The purpose of this was to diminish my concentration in retail stocks and reduce my exposure to a heated US market.  If the US market falls next year and increases the value opportunity, I’ll sell these indexes and buy more US companies at attractive valuations in a diversified group of industries.

Here are the candidates I am considering:

Current positions I will likely keep and expand:

Cooper Tire & Rubber (CTB)

Gamestop (GME)

Foot Locker (FL)

New Retail Positions:

Big 5 Sporting Goods Company (BGFV)

Francesca’s Holding Corp (FRAN)

Hibbett Sports (HIBB)

Dick’s Sporting Goods (DKS)

Chico’s (CHS)

Gap (GPS)

New Insurance Positions:

Genworth Financial (GNW)

American Equity Investment (AEL)

New Assorted Positions:

Interdigital (IDCC) – Tech

United Therapeutics (UTHR) – Biotech

Tredegar (TG) – Chemicals

Reliance Steel & Aluminum (RS) – Materials

Pendrell Corp (PCO) – Sub-liquidation value and net cash

Tennis Shoes


I am considering more concentration into 10-15 stocks instead of 20.

Most people will say this is a terrible idea. Graham recommended 20-30 stocks. That’s also what Greenblatt recommends in The Little Book that Beats the Market. The academics also seem to agree that 20-30 is the ideal portfolio size.

I recently read Concentrated Investinga series of excellent stories about famous investors (Buffett, John Maynard Keynes, Lou Simpson, Charlie Munger) who ran very concentrated portfolios. One funny story from the book involves a conversation with Arthur Ross, who explained the secret to his success as “tennis shoes.” This was a misinterpretation: he actually said “ten issues.” He owned only ten stocks at any given time. Most of the investors featured in the book had great success with this kind of concentration.

Joel Greenblatt was also successful with concentrated investing in the 1980s and 1990s when he maintained a portfolio with as few as 8 names.

Concentration is a great tool to increase returns. Alternatively, it should also increase losses and drawdowns. It increases the volatility of the portfolio. Of course, as a value investor, I don’t consider volatility to be a risk.

In fact, looking at my dismal performance over the last year, I think a lot of it had to do with the fact that I filled my portfolio with additional stocks for the sole reason of hitting a 20-stock goal. The general underperformance of value hurt my performance, but I think that diluting my best ideas also played a big role.

Here is a comparison of my high confidence ideas vs. my low confidence ones:


10 highest confidence ideas:

Kelly Services (KELYA) Up 25.35% YTD

Gamestop (GME) Down 35.43% YTD

United Insurance Holdings (UIHC) Up 3.5%

Cato Corp (CATO) Down 45.64%

First American Financial (FAF) Up 48.68%

Sanderson Farms (SAFM) Up 72.27%

Cooper Tire & Rubber (CTB) Down 1.5%

MSG Networks (MSGN) Down 19.53%

Greenbrier (GBX) Up 13.12%

American Eagle (AEO) Down 1.58%

Net Result = 5.92% Gain


10 Lowest Confidence Ideas:

TopBuild (BLD) Up 79.78%

IDT (IDT) Down 27.78%

Manning and Napier (MN) Down 49.01%

Dillard’s (DDS) Down 11.34%

NHTC (NHTC) Down 25.71%

Steelcase (SCS) Down 19.27%

Supreme Industries (STS) Up 31.38% (bought out)

Federated National Holding (FNHC) Down 26.97%

IESC (IESC) Up 35.35%

Valero (VLO) Up 21.31%

Net Result = .77% Gain


Even with the big assists in my “low confidence” portfolio from TopBuild and Supreme Industries, my best 10 ideas outperformed my worst. This is even with some highly prominent duds in my top 10 stocks, with CATO being the biggest. For this reason, I think it might make sense to concentrate on my top 10 ideas.

My primary concern with a portfolio isn’t volatility, it’s maximum drawdowns. I did a bit of backtesting and research to determine the kind of maximum drawdowns I could expect from a concentrated portfolio.

I performed a backtest on the lowest EV/EBIT names. A portfolio of 10 stocks had a max drawdown of 62.48%. A portfolio of 20 only lowered it slightly to 62.04%. More stocks didn’t bring much to the party.

I also took a look at Validea’s value investment screen.  Their 10-stock screen has delivered a 12.6% rate of return since 2003 with a 2008 drawdown of 27.2%. The 20-stock variation achieved a 9.2% rate of return with a 2008 drawdown of 31.5%. In other words, the portfolio with more stocks decreased returns and increased drawdowns.

The results are similar for their price to sales screen. The 20 stock screen delivered a return of 8.9% with a 2008 drawdown of 39.4%. The 10 stock variation returned 9.8% with a 25.1% drawdown in 2008. Same result: more stocks increased the bear market drawdown and lowered overall returns.

Stockopedia has a handy chart showing the number of stocks and volatility versus the index. Once you get up to 10 stocks, most of the volatility is meaningfully reduced. To get the major benefits of diversification after owning 10 stocks, you have to get up to 50 stocks. At that point – why are you even bothering owning individual stocks? You might as well buy a fund or ETF with a style that you agree with.

I see a similar pattern with Alpha Architect’s backtest of the simple Ben Graham screen (low P/E, low debt/equity, which is very similar to my own strategy). In 2008, the 15 stock portfolio went down 27.78%, 20 stocks went down 29.38%, 25 stocks went down 30.88%. More stocks did nothing to reduce the severity of the drawdown. The results were similar for other big drawdowns in value stocks: 1990, 1998, 1974. All of the portfolios held up roughly the same in each drawdown, with the 15 stock variation usually holding up better.

Theoretically, a bigger portfolio should reduce returns, but also reduce the severity of drawdowns. That doesn’t seem to happen in practice.

A big portfolio does little more than reduce volatility while increasing drawdowns and lowering returns. It’s almost as if more stocks only provides the illusion of safety. The risk that I actually care about, lowering drawdowns, doesn’t seem to be impacted at all by the number of stocks held in a portfolio.

This is a point Greenblatt makes in his earlier book, You Can Be a Stock Market Genius. He points out that most of the benefits of diversification can be achieved by owning only 10 stocks. He makes the following point:

“Statistics say the chance of any year’s return [for the entire market] falling between -8% and +28% are about two out of three . . . these statistics hold for portfolios containing 50 to 500 different companies . . .What do statistics say you can expect, though, if your portfolio is limited to only five securities? The range of expected returns in any one year really must be immense . . . The answer is that there is an approximately two-out-of-three chance that your portfolio will fall in a range of -11 percent to +31 percent. The expected return of the portfolio still remains 10 percent. If there are eight stocks in your portfolio, the range narrows a little further, to -10 percent to +30 percent. Not a significant difference from owning 500 stocks.”

Joel further elaborates:

“The fact that this highly selective process may leave you with only a handful of positions that fit your strict criteria shouldn’t be a problem. The penalty you pay for having a focused portfolio – a slight increase in potential annual volatility – should be far outweighed by your increased long term returns.”

Style Considerations

A concentrated portfolio is unusual for a deep value investor. Graham owned lots of stocks. I believe he held over 100 net-nets at one point. Walter Schloss also owned a high number of stocks.

The investors who ran concentrated portfolios successfully (Buffett, Munger, Lou Simpson) were those who emphasized quality businesses and long-term positions. It’s one thing to put 10% of your portfolio into Coca-Cola. It’s entirely different to do it with a money-losing, terrifying net current asset value stock, for instance.

It’s highly unusual for a deep value investor to take such a focused approach. You’re dealing with businesses going through difficult times, and it can be somewhat frightening to some investors to have a concentrated, often volatile, position in these stocks.

In any case, if I do pursue more concentration, it would be a highly unusual move for someone with my outlook. If I do it, I’m going to have to make sure I do significantly more homework. I’m also going to have to make sure that I am diversified across different industries. I’m not going to buy 10 retail stocks, for instance (as tempting as that is right now).


  • My portfolio will be rebalanced every December. Annual rebalancing is my preference and December is the best time to do that due to tax loss selling and professionals “cleaning up” their portfolio for cosmetic reasons.
  • I noticed that my 10 best ideas outperformed my 10 worst.
  • Due to this, I’m considering concentrating my stock portfolio on only 10-15 stocks.
  • Looking at quant value screens, additional stocks only reduce volatility, but they don’t reduce max drawdowns which is what I actually care about.
  • Concentration is unusual for deep value investors.
  • If I do concentrate on 10 names, I need to make sure that they are diversified across different industries.


To reiterate — I am not a professional. I am just a guy with a brokerage account and a blog. I’m taking risks that many smart people say I shouldn’t be taking.

This blog may go down in internet history as “crazy man proves that you should shut up and give your money to an index fund.”

It would break my heart if someone out there took my stock suggestions and lost money. So, please, do not emulate what I’m doing here. The purpose of this blog is to force me to record what I’m thinking (something that we often forget with the benefit of hindsight), to keep me honest (i.e., I hope you all send me scathing comments and emails if I do something whacky like buy Tesla stock or a cryptocurrency). Do your own homework, do your own analysis, get plenty of advice, and choose an investment approach that’s right for you.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.


The momentum appears to be over in TopBuild (BLD) and the valuation is rich, so I sold today at $61.38. This secures a 61% gain from my purchase price of $37.91.

I also purchased 25 shares of an iShares Israeli ETF, EIS at $48.33.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

International Index Investing: A Metric to Measure Quality

themazeA recap of my thinking

Recapping the last few blog posts: I think valuations are too high in the United States. Choose your poison: CAPE ratios, market cap to GDP, or the average investor allocation to equities. All suggest low returns in the coming decade.

At the same time, I know that attempting to time the US market using valuation is a fruitless effort. Markets can stay expensive for a long time. Since 2000, the US market has only gone to its “average” historical valuation once, in the depths of the 2009 financial crisis. Avoiding the market for a long time in a low return asset like cash or t-bills ultimately hurts future returns. It can even result in negative real returns if inflation picks up. If interest rates stay this low, then the market can certainly remain expensive. The direction of interest rates is the key question when determining future valuations.

For value investors, timing based on the valuation of the broader market is particularly tricky because there is often value in individual securities even if the broader market is overvalued. For instance, in the early 2000s, value stocks had a nice bull market while the broader market melted down. In Japan, while the broader market was crushed, Joel Greenblatt’s magic formula returned an amazing 18% annual rate of return from 1993-2006.

So, I think that a portfolio of 20-30 cheap stocks over the next 10 years will handily beat the S&P 500.

The caveats to this:

(1) Value doesn’t usually experience a bull market while everything else goes down. The only time this happened was the early 2000s. Value stocks normally go down with everything else. I suspect the current disconnect between value and growth stocks will see value triumphant, but we likely won’t see that happen until a decline happens in the broader market.

I suspect the current cycle will be more like the 1970s when value stocks went down with the broader market in 1973 and 1974 and then staged a very nice bull market after ’74.

The current cycle has much more in common with the early ’70s than it does with the late 1990s. The high flying stocks of the early ’70s weren’t crazy speculative companies like they were in the late ’90s. The hot stocks of the ’70s weren’t garbage like, they were quality companies like McDonalds and Xerox. It’s the same thing today. The high valuations aren’t in junky speculative companies, they are in quality names like Facebook and Amazon.

The decline of 1973-74 wasn’t driven by a bubble popping like 2000, it was caused by a macro event (the oil crisis), which brought down the richly valued companies by bigger drawdowns than everything else. I think the same thing will probably happen to the US market this time around. What event will cause this is unpredictable (a war with North Korea, inflation causing a hike in interest rates?), but I think something is likely to come along that will cause a major drawdown.

A smart guy like Nassim Taleb would call this a “black swan” or “tail risk” event. I prefer a simpler way to express this: shit happens.

(2) Trying to time the US market with CAPE ratios is ineffective. The alternatives (cash, T-bills) do not yield enough to justify moving in and out of the US market. Tobias Carlisle did some great research on this here.

(3) Even value stocks are expensive in this market. For instance, a stock screen I like to comb through is the number of stocks trading at an EV/EBIT of less than 5. Out of the entire Russell 3000, I can only find 16 of them outside of the financial sector. Of these, half of them are in the retail sector.

At the beginning of 1999, there were 38 of these opportunities in a diversified group of industries. After the manic tech euphoria of 1999 where money flowed from “boring” stocks into tech, the number grew to 70 at the start of 2000. This group of stocks returned 20% in 2000, while the S&P 500 went down by 10.50%.

Expensive Value Stocks

The value opportunity set in the United States is currently limited.

Much of what fueled the early 2000s bull market in value stocks was the wide availability of cheap stocks in diverse industries. This simply isn’t the case today, as the small number of value opportunities in the U.S. is concentrated in one industry: retail.

I currently have 30% of my portfolio invested in the retail sector, which I’m comfortable with. If I were to buy all the cheap stocks in the United States, over 60% of my portfolio would be invested in retail. While I think retail stocks will ultimately stage a resurgence, I’m not certain of it. A 60-80% concentration in one industry is too risky. The sector could easily be cut in half again. 30% is the maximum extent that I am willing to commit to an individual industry. If retail were cut in half, my potential loss if 15% of my portfolio. If I expanded that to 60% or 80%, I could lose 30-40% of my entire portfolio. That’s a much more difficult event to recover from.

I could achieve more diversification by taking a relative valuation mindset to the current market, but I think this is dangerous. I prefer absolute measures of valuation — like a P/Sales of less than 1, the price is below tangible book, EV/EBIT of less than 5, 66% of net current asset value, earnings yields that double corporate bonds, etc.

A major reason I prefer absolute measures of valuation is that I think high valuation ratios in the cheapest decile of a market is a sign that the valuation metric is losing its effectiveness. A good example of this is price/book.

Price/book worked marvelously prior to the 1990s, but its effectiveness has been dramatically reduced since then. This is because Fama & French identified price/book as the best value factor. This made it respectable to buy low price/book stocks, while previously low price/book investors were regarded as oddballs (rich oddballs who consistently beat the market, like Walter Schloss!). Once Fama & French gave it their blessing, vast amounts of institutional money poured into low price/book strategies. Price/book became synonymous with value and this ruined the effectiveness of the factor.

If too much money chases low P/E, P/Sales, EV/EBIT stocks, then they will suffer the same fate as price/book. They will still work due to human nature (investors will always find ridiculously cheap stocks repulsive), but the effectiveness will be diminished. Institutional big money can ruin the factor. I think a good way to tell that this is happening is to focus on absolute metrics of valuation rather than relative valuation compared to the rest of the market. If too much money chases the value factor, then absolute measures of valuation will rise. By focusing on absolute levels of valuation, I can avoid this.

EV/EBIT is by far the best of all value factors, but if too much money chases it, the effectiveness will be reduced.

This is why I think focusing on absolute valuation is a way to prevent falling into this trap. Think about it through the prism of the real estate bubble: a house cheaper than the rest of the neighborhood was still a bad bet in 2006 because all real estate was in an inflated bubble. A single house might have been a good relative value and suffered less of a price decline than everything else, but it was still expensive. Focusing on an absolute level of valuation would have helped avoid this trap.

Going International

The beauty of the modern world is that I’m not limited to the United States. Previous generations of investors had a handful of options: cash, bonds, US stocks. Fortunately, I don’t have to sit on a pile of cash earning nothing while I wait for US markets to deliver me juicy opportunities, which is a bad strategy that can cause real inflation-adjusted losses the longer that the adjustment takes. I could wind up sitting on cash for a decade, absolutely decimating my real returns.

A great alternative to cash while the US market is expensive is investing internationally. While I don’t trust my ability to research foreign companies, I am comfortable investing in an index of a foreign country. While I think foreign stocks are more prone to fraud, I don’t think the financial results of an entire index can be fraudulent.

A few weeks ago, I did this in a very crude way. I invested 10% of my portfolio into a basket of the 5 cheapest country indexes on Earth.

If I’m going to do this in a bigger way, I need a better quality metric. It seems obvious to me that higher quality countries (like the United States) should command a higher valuation than a low-quality country. The definition of a bargain would also depend on the economic quality of that country. For instance, the US at a CAPE Ratio of 15 (where it was in 2009) is a screaming bargain, while Russia at a CAPE of 15 is probably a bit expensive in comparison to the risk. I’ll invest in a country of any quality – but I should demand a higher margin of safety if it is a low-quality country.

But how does one measure the “quality” of an entire country? This is a tough thing to quantify. Mainstream economists do this by splitting up the “developed” (i.e., already rich) parts of the world from “emerging” (trying to get rich) and “frontier” (poor). This doesn’t make sense to me to use as a quality metric. An emerging or frontier market may have better prospects than a developed, rich country.

What makes a country’s economy “quality”?

One of my favorite books about this subject is P.J. O’Rourke’s “Eat the Rich“.  P.J. has written some of my favorite books of all time (Parliament of Whores in particular).


In the book, P.J. tries to define what makes countries “good” economically. His question is pretty simple: “Why do some places prosper and thrive, while others just suck?”

P.J. explains the conundrum in the following passage:

It’s not a matter of brains. No part of the earth (with the possible exception of Brentwood) is dumber than Beverly Hills, and the residents are wading in gravy. In Russia, meanwhile, where chess is a spectator sport, they’re boiling stones for soup. Nor can education be the reason. Fourth graders in the American school system know what a condom is but aren’t sure about 9 x 7. Natural resources aren’t the answer. Africa has diamonds, gold, uranium, you name it. Scandinavia has little and is frozen besides. Maybe culture is the key, but wealthy regions such as the local mall are famous for lacking it.

Perhaps the good life’s secret lies in civilization. The Chinese had an ancient and sophisticated civilization when my relatives were hunkering naked in trees. (Admittedly that was last week, but they’d been drinking.) In 1000 B.C., when Europeans were barely using metal to hit each other over the head, the Zhou dynasty Chinese were casting ornate wine vessels big enough to take a bath in–something else no contemporary European had done. Yet, today, China stinks.

Government does not cause affluence. Citizens of totalitarian countries have plenty of government and nothing of anything else. And absence of government doesn’t work, either. For a million years mankind had no government at all, and everyone’s relatives were naked in trees. Plain hard work is not the source of plenty. The poorer people are, the plainer and harder is the work that they do. The better-off play golf. And technology provides no guarantee of creature comforts. The most wretched locales in the world are well-supplied with complex and up-to-date technology–in the form of weapons.

You should read the whole book (it’s really funny), but the gist is pretty simple: what causes prosperity is economic freedom. Economic freedom doesn’t just mean “people can do whatever they want”, it is capitalism within a defined rule of law that is enforced.

The magic ingredient that can make a country rich is economic freedom, and it’s what turned the United States from a third world nation of farmers into the richest country on Earth that it is today over a relatively short span of history. The people of the United States weren’t more talented or better than anyone else. We were the first to wholeheartedly embrace capitalism while the rest of the world fiddled around with bad ideas like feudalism, mercantilism, socialism, and communism.

The secret to US success is now out.

Since the fall of the Berlin Wall in 1989, economic freedom has been advancing throughout the world (even though it has retreated in its birthplace, the United States). The worldwide spread of capitalism and economic freedom have been profoundly positive for humanity. In fact, the global rate of poverty has been cut in half since 1990. It’s not a coincidence that this decline began at the exact moment that the Soviet Union collapsed. As the world embraces capitalism, it is growing increasingly prosperous as a result.

If we acknowledge that economic freedom is the best measure of the “quality” of a country, how do we quantify that?

The Index of Economic Freedom

The Heritage Foundation has done the world a service by quantifying economic freedom in their index of economic freedom, which they update annually.

They define economic freedom in four key categories:

  1. Rule of law – property rights, judicial effectiveness, government integrity.
  2. Government size – tax burden, government spending, fiscal health.
  3. Regulatory efficiency – business freedom, labor freedom, monetary freedom.
  4. Market openness – Trade freedom, investment freedom, financial freedom, openness to foreign competition.

Each category is scored and the total is grouped in the following levels:

Free: 100-80 (Australia, Hong Kong, Singapore)

Mostly Free: 79.9-70 (The United States, Ireland, the UK, Sweden)

Moderately Free: 69.9-60 (Israel, Japan, Mexico, Turkey)

Mostly Unfree: 59.5-50 (Russia, Egypt, Iran, China)

Repressed: 49.9-40 (Venezuela, North Korea, Cuba, Afghanistan)

Going forward, I think I will buy “free” and “mostly free” countries (a score of 70-100) if their CAPE Ratio is below 15. By this metric, Singapore is the most attractive market in the world right now, with a CAPE ratio of 12.9 against an economic freedom score of 88.6.

If I’m going to buy countries that are “mostly unfree”, I should demand a higher margin of safety — i.e., it should be a compelling bargain, with a CAPE ratio below 10. Russia would be defined as “mostly unfree” (Russia currently has a score of 57.1). However, at Russia’s current CAPE ratio of 5.6, it would still meet my requirements and provide an adequate margin of safety.

The quick and dirty way I think about P/E ratios or CAPE ratios is in terms of earnings yield. Take the P/E or CAPE ratio and divide it with 1. For instance, Russia’s CAPE is 5.6, so its earnings yield (1/5.6) is an astounding 17.85%, well worth the heightened risk of owning that country’s stocks. The US, with a CAPE ratio of 30, would have an earnings yield of 3.33%. This means US investors can expect a total return of about 34% in the coming decade. In comparison, if Russia delivers a compounded return of 17.85%, it’s a return of 438%.

It’s also important to consider that the returns will be lumpy. Much of the return could be concentrated in a few years and there will likely be a large drawdown at some point. Stocks deliver high returns because of these drawdowns. The high returns of stocks are a compensation for this risk. The US returns aren’t terrible, especially when compared to bonds, but they’re nothing to get excited about.

Among the other two positions I chose, Poland and Turkey, they are in the murkier area of “moderately free”. I think I’ll buy these type of markets when they get below a CAPE ratio of 12.

Here is where my current positions stack up in terms of both CAPE ratio and standings in the index of economic freedom:


Using these guidelines, I made a good choice with both Singapore and Russia, but likely paid too much for Brazil and Poland. As I expand my position in international indexes while the US market is expensive, I will use the index of economic freedom as a rough quality metric when determining the appropriate price to pay for each country.

When I rebalance my portfolio in December, I am going to expand this segment of my portfolio. When the US market suffers a drawdown, I will reduce this segment of my portfolio and purchase more bargain stocks boasting low absolute valuation metrics.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

“There’s Always Something to Do” by Christopher Risso-Gill


I just finished “There’s Always Something To Do” and enjoyed the book. It is a quick read about one of the greatest investors of all time, Peter Cundill. Peter was a fascinating and wise individual. In addition to successfully navigating the markets, Peter also valued fitness and regularly ran marathons in under 3 hours.

Sadly, Peter passed away at the age of 72 after a struggle with a rare neurological disorder, ActiveX.

Peter Cundill’s Epiphany

Peter Cundill was a Canadian investor who began investing in the late 1950s and 1960s. He had value instincts, but never took a true value-oriented approach during that period and was disappointed by his results.

In 1973 at the age of 35, Cundill read “Super Money” by Adam Smith on a plane ride. “Supermoney” took a close look at the insane money culture of the 1960s (not dissimilar from the insane money culture that rears its ugly head during every bull market) and found one group of people who stuck out as different: the disciples of Benjamin Graham. Featured prominently were a young Warren Buffett and Walter Schloss.

Reading the book was an epiphany for Cundill. He absorbed all of Graham and Dodd’s work. Of particular interest to him was Chapter 41 of Security Analysis, “The Asset Value Factor in Common Stock Valuation”. After a careful evaluation of Graham and Dodd’s work, Cundill decided to launch his value-oriented strategy. He explained the shift in strategy in a letter to his investors in which he said:

“The essential concept is to buy under-valued, unrecognized, neglected, out of fashion, or misunderstood situations where inherent value, a margin of safety, and the possibility of sharply changing conditions created new and favorable investment opportunities.”

The Peter Cundill Stock Screen

In addition to explaining the overall strategy, Cundill also set strict quantitative criteria for his fund. The criteria included:

  • The price must be less than book value, preferably less than net working capital.
  • The price must be less than one half of the former high and preferably at or near its all-time low.
  • The price-earnings multiple must be less than 10 or the inverse of the long-term corporate bond rate, whichever is the less.
  • Over the last five years, the company was profitable each year and increased its earnings over the five year period.
  • The company must pay dividends
  • Low levels of long-term debt.

Peter also set sell rules for his fund, agreeing to sell at last half of any given position after its price had doubled. Peter looked throughout the world for bargain stocks. He didn’t restrict himself to North American markets and scoured the world for bargains. Every year, he visited the worst performing market in the world while searching for investment opportunities.

He launched his fund at an opportune moment for value investing in 1974, after the calamitous bear market of 1973-74 when everything was crushed.

To give some perspective on how many bargains were available on the market in 1974, here is a great exchange between Forbes magazine and Warren Buffet. Forbes: “How do you feel?” Buffett: “Like an oversexed guy in a whorehouse. Now is the time to invest and get rich.”

Peter’s first decade of deep value investing was extraordinarily successful: from 1974 to 1984, his fund delivered a 26% rate of return.

International Cigar Butts

Peter pursued investment opportunities of the “cigar butt” variety. He didn’t adhere to the Buffett style of buying wonderful companies and holding for the long term. Cundill bought deeply undervalued securities and sold when they reached fair value.

He also didn’t restrict himself to stocks and he took up large positions in distressed debt.

Peter was called the “Canadian Buffett,” but I think his approach shares more similarities with the investment style of Seth Klarman.

Peter’s Wisdom

The book is a short, quick read and covers Peter’s investment career and his unfortunate illness. I wish the book covered Peter’s personal life a bit more in depth, but it was still a good read and filled with bits of Peter’s wisdom. Some of my favorite Peter Cundill quotes are below:

  • “The most important attribute for success in value investing is patience, patience, and more patience. The majority of investors do not possess this characteristic.”
  • “The value method of investing will tend to give better results in slightly down to indifferent markets and less relatively sparkling results in a raging bull market. What matters, however, is that the method will provide a consistent compound rate of return in the middle teens over very long periods of time.”
  • “I’m buying your stock because it’s cheap and for no other reason.” – Peter’s response to the management of J. Walter Thompson, who didn’t understand why Peter was buying their stock!
  • “I think that the financial community devotes far too much time and mental resource to its constant efforts to predict the economic future and consequent stock market behavior using a disparate, and almost certainly incomplete, set of statistical variables.”
  • Particularly relevant: “Computers actually don’t do much more than making it quicker for investors to react to information. The problem is that having the information in its raw state on a second by second basis is not all the same thing as interpreting and understanding its implications, and this applies in rising markets as well as falling ones. Spur of the moment reactions to partially digested information are, more often than not, disastrous.”
  • “If it is cheap enough, we don’t care what it is.”
  • “Curiosity is the engine of civilization. If I were to elaborate it would be to say read, read, read and don’t forget to talk to people, really talk, listening with attention and having conversations, on whatever topic, that are an exchange of thoughts. Keep the reading broad, beyond just the professional. This helps to develop one’s sense of perspective on all matters.”
  • “I think it is very useful to develop a contrarian cast of mind combined with a keen sense of what I would call “the natural order of things.” If you can cultivate these two attributes you are unlikely to become infected by dogma and you will begin to have a predisposition towards lateral thinking – making important connections intuitively.”

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

“The Fourth Turning” by William Strauss and Neil Howe


A Lucky Trip to the Bookstore

When I was a kid, I went with my family to Wildwood, NJ every summer.

As a geek, instead of spending time in the sun like a normal kid, I was mainly drawn to the shore for the pizza and arcades. I would spend most of my time either in an arcade or reading a book.

I’d also make a habit of taking my lawn mowing earnings and buying a book on the boardwalk that I would read back in the motel.

In the summer of 1998, I came across a book that grabbed my attention. It was called Generations: A History of America’s Future from 1584 to 2069. The book (published in 1991) told the story of America’s history as a series of generational biographies. It also informed me that those born during 1982 and after were part of a new generation, called Millennials. (Yes, they coined the term.)

The authors, William Strauss and Neil Howe, were trying to find out if the generation gap that existed between the baby boomers and the G.I. generation during the 1960s was a unique event. They found out that not only was it not a unique event, but there is a rhythm to history caused by different generations interacting with each other.

I finished Generations in that weekend, and I was transfixed by the story. It was a unique way to look at history. Most history books are simply a recounting of events. It never captured what people actually experienced and thought during those times. I went home to my dial-up internet connection and found that they just came out with another book, The Fourth TurningI found that one at a local bookstore and quickly devoured it.

I then found out that Strauss and Howe were active in an online forum hosted on their website for The Fourth Turning. I signed up for an account and interacted with a brilliant community of people who were quite accepting and tolerant of me, a 16-year-old kid who knew very little about anything. I learned a lot interacting with them.

Eventually, I went with my parents and traveled to Washington, D.C. to meet the authors. They were kind and wonderful people. I was very sad to hear years later that William Strauss passed away after a struggle with pancreatic cancer.

I was very fortunate to meet them and become familiar with their unique ideas.

Strauss & Howe’s Theory

Strauss & Howe noticed a rhythm to history. They discovered that there is a cycle of generations that persists throughout history. The generational cycle fuels a sequence of historical moods, defined below. These 4 distinct moods last for roughly 20 years and form an 80-year sequence.

Cycles of History

High – The most recent high was the “American High” that lasted from the end of World War II through the assassination of John F. Kennedy. A high takes place after a civilization-defining crisis. The last crisis was the Great Depression & World War II. After the Crisis is over, everyone wants to get back to normal. Pragmatic civic solutions are embraced and the culture has a long-term orientation. Think of the Presidency of Dwight Eisenhower: interstate highway systems, the establishment of NASA, reductions in public debt. It is an era of strong public institutions and public cohesiveness. Critics would say that highs are also eras of stifling conformity and a lack of creativity. During a high, the outer world is doing well, while the inner world is neglected.

Awakening – The most recent Awakening was the “Consciousness Revolution”. Young people rebelled against the conformity and strong institutions created during the Crisis and strengthened during the High. This is an era during which the established institutions are criticized. A new generation of young people emerges with their own take on morality and culture. It is an era of the challenge to the status quo and a focus on new ideas about values and morality. Cultural creativity surges. While institutions were strong and conformity was reinforced during the high, during an awakening the emphasis of society begins to shift to individualism and new ideas. An awakening is an era in which culture undergoes a renaissance and is fundamentally changed.

I think that Awakenings are the most enlightening and thought-provoking eras in history.

Unraveling – The most recent Unravelling was defined as the “Culture Wars” by Strauss and Howe. In retrospect, I think “The Great Moderation” (coined by economists) is a tremendous alternative term for it. After society has gone through a consciousness-altering and culture shattering awakening, the values of the Awakening begin to become ingrained in our culture. People want to move on and focus on their own lives. This was very much the attitude of the mid-1980s. After the Generation Gap, Vietnam, Watergate, and cultural upheaval, people wanted to settle down and focus on their own lives. The attitude is “after all that, let’s have a good time.”

The culture becomes fragmented and individualistic, with everyone free to pursue their own interests and passions. From the perspective of some, this is an isolating force. Meanwhile, distrust in institutions is high, and they began to show signs of stress. Problems start to brew but are ignored (slavery before the Civil War, the sovereignty of the colonies before the American Revolution, the lack of an international order due to the decline of the British Empire before World War II).

I think that Unravellings are probably the most fun of all the historical eras. Of course, all of that fun comes at a dire cost.

Crisis – We are currently in a Crisis. When the current crisis began is subject to debate. I would argue that it started on 9/11, while I believe Neil Howe says it started in 2008. I prefer 9/11 . . . because I’m an optimist and I would like the Crisis to be resolved sooner rather than later!

The last Crisis was the Great Depression & World War II. This is when the problems that were brewing during the Unravelling come to a head. The institutions that were weakened during the Unravelling, now fall apart and are replaced.

During a Crisis, problems that were mounting during an Unravelling become too big to ignore any longer. Old institutions are torn down and new ones are created. Unfortunately, this unique mood tends to create wars and financial crises.

On the positive side, while Crises throw everything into turmoil, they make the world a stronger place. They create institutions and leadership that beget a stabler and stronger world.

The cycle of historical moods creates a cycle of generations that are shaped by the events. The generations at different life stages create the unique cultural mood of each turning in the cycle. The two drive each other in a kind of historical ecosystem. The generational cycle is below:

Prophets – These are the children of a High. The current example of this is the baby boom generation. Their parents went through hell in the Crisis, and they are determined to create a good life for their children. They are indulged as children. They are encouraged to be inquisitive and to think about the weightier issues facing their civilization. They grow up with a distinctly ideological, moralistic, crusading attitude that carries them through into adulthood. Growing up in a stifling and conformist world that values the technical over the spiritual, they want to create the opposite of that.

Prophets produce intensely ideological leaders and some of the most creative people in history. There is a reason that this generation produced people like Steve Jobs and Steven Spielberg. Creativity and expression are a part of the baby boomer DNA.

Nomads – Nomads are the children of an Awakening. While adults focus on their inner world and challenge cultural conventions, Nomads are left with a mostly unsupervised childhood in which they are encouraged to find themselves and learn about the world on their own. Their parents, the “artist” archetype, grew up with a stifling and strict childhood during the Crisis. They want to give their children more freedom and less structure. This childhood causes Nomads to get into a lot of trouble, but it also creates a generation of richly individualistic and rugged people. Think about ’80s teen movies. There are no parents in sight and if they are around, they’re clueless about what’s going on. They don’t make movies like that anymore because the dynamic wouldn’t resonate with modern audiences.

Parents in modern movies tend to be deeply involved in their child’s lives (for good or bad) because that’s the current dynamic.

Pathologies increase during Nomad youth (drugs, crime, teen pregnancy, etc.), but so does entrepreneurialism. The current example of this is Generation X. It includes some of the greatest entrepreneurs of all time, people like Jeff Bezos. Before them, the last example was the Lost Generation — veterans of World War I, participants in the roaring 20s, and people like Dwight Eisenhower who led society through the Crisis. Growing up in a world that has its head in the clouds, they want to return the world to pragmatic reality.

Heroes – Heroes are the children of an Unravelling. Their parents are predominantly Prophets who want to instill their ideas and values into their children. They are fiercely devoted to raising their children and maximizing their future. They are nurtured as children but given more structure and attention from society than Nomads. The current example is the Millennial generation.

While Generation X was growing up, for instance, Disney ceased making animated films, and the culture became somewhat indifferent towards young children. All of that changed with the arrival of Millennials, with a society entirely focused on preparing children for the future. Pathologies get better — Millennials actually improved crime rates, SAT scores, and have lower rates of teen pregnancy than their Xer peers. They are conformist and prone to groupthink, far less individualistic than their Xer and Boomer elders. They also tend to be more optimistic than Prophets and Nomads.

The last hero generation was the G.I. Generation, Tom Brokaw’s “Greatest Generation”. This was the generation that was young adults during the Great Depression and World War II, who rose to the occasion and acted as a group to save the country. It’s yet to be seen if Millennials will live up to the last Hero generation. I think they will rise to the occasion if challenged. If they don’t . . . well, then I guess I’ll have to focus more on my low Shiller PE international strategy. (I’m biased.)

Growing up during a complacent Unravelling with weakening institutions, Heroes want to see a world that is the opposite of that. Instead of weak institutions, they want healthy institutions, and they want to see those institutions do big things. Big things can be good or bad – think of the Moon landing and the Vietnam War. They are two sides to the same coin. Instead of rampant individualism, they want to create a cohesive conformist culture.

Hero generations are marked by their positive and optimistic attitude. You can see this in modern Millennials. This is in sharp contrast to the youthful attitudes of the 1980s and 1990s, for instance, when it was “cool” to be cynical. It’s not anymore.

Artists – Artists are the children of a Crisis. They are raised primarily by Nomads. Nomads become strict and structured parents after seeing all the trouble that they got into with free reign in their youth. Artists are raised during a civilization-threatening Crisis and this also impacts their outlook. They grow up to be largely conformist young adults, with a deep yearning to break free of that. Entering midlife during an Awakening, they lead the charge into breaking free of conformity and rules. Think of Martin Luther King Jr.

The last Artist generation is the Silent Generation, born between roughly 1930 and 1945. Growing up with strong conformist institutions, they want to see society break free of that and create a more individualistic world. The most prominent member of the Silent Generation in the investing world is the one and only Warren Buffett.

Side note: I love to think of the dynamic between Benjamin Graham (a Nomad  member of the Lost Generation) and Warren (an Artist member of the Silent Generation). Graham was focused in an almost cynical way on intrinsic value to eliminate losses (i.e., the cigar butt approach) after experiencing the speculative fervor of the Unravelling (the 1920s). Graham’s focus was always on how much he could lose and not how much he could make. Warren, while he internalized Graham’s lessons about margin of safety and intrinsic value, took a much more optimistic view of the world (as Artists tend to do) and instead pursued the purchase of “wonderful companies at good prices” and holding for the long term. That right there shows a dynamic between a Nomad view of the world and an Artist perspective.


On the surface, the theory of generational archetypes coming in sequence and seasons of history sounds a bit new-agey and mystical. It’s really not. Strauss and Howe’s observation is simply that different generations raise their children in unique ways (usually in critical ways that are different from the way they were raised). Those children then grow up and raise their children differently than the way their parents raised them. They think they are doing something “unique,” but most of it was already done before.

The cycle of different generations raising their children in different ways creates unique personalities to generations.

These personalities align at different life stages create unique cultural moods. A society in which Artists are calling the shots (i.e., the ’80s and ’90s) will be uniquely individualistic to a point where younger generations will find it isolating (think Bowling Alone). A society in which Nomads are calling the shots (the late 1940s and 1950s) will be pragmatic to the point where younger people find it soul-deadening (think The Man in the Grey Flannel Suit).  A nation run by Prophets (the 2000s and today) will seem overrun with overblown ideology. A society run by Heroes (the 1960s and 1970s) will seem capable of achieving anything, but spiritually empty.

Another criticism is the claim that the generational theory is a vain attempt to predict events. This is not the case. Good and bad events happen throughout each stage of history. Strauss and Howe are quick to point out that they are not anticipating specific events, they are predicting a general cultural mood that will react to events in unique ways.

A Crisis era generational alignment (Prophets are in power, Nomads are in Midlife, Heroes are young adults) will react to events differently than an Unravelling era generational alignment (Artists are in power, Prophets are in Midlife, Nomads are young adults). In an Unravelling, after a foreign attack, the country will try to find a quick solution. In a Crisis, after a foreign attack, the Prophet instinct will be to use this as an opportunity to enact sweeping changes and mobilize. Think of George W. Bush’s declaration of an “Axis of Evil” after 9/11.

A crisis is merely an era in which institutions are run by Prophets. Prophets tend to have itchy trigger fingers to impose their moral will, and they will have a compliant cohort of young Heroes who can help them make that happen. This doesn’t mean a war must be the way that the crisis is resolved, but the unique assembly of generations at different lifecycles raises the probability of it.

That’s the key to generational theory. It’s not the events themselves that drive history, it is the reaction of civilization to those unique events.

Similarly, an Unravelling is an era in which Artists are running the show and want society to fully embrace individualism. With crumbling institutions and an individualistic entrepreneurial “kill what you eat” young cohort of Nomads, it’s natural for a society to become financially reckless.

Another criticism is that this theory ignores the unique personality of people within a generation, who may not ascribe to these stereotypes. This is valid, but I think it’s hard to deny that each generation has a unique personality. There are people within the generation who defy generational stereotypes, but on the whole, they do have a distinct character, and there are commonalities.

The Bad News & The Good News

The next 10 years will likely see this era resolve itself. 2025 is exactly 80 years after 1945, the year that the last crisis ended. This means that we are entering a dangerous time in history in which we will need to rise to the occasion. We will face a challenge of history on par with the American Revolution, the Civil War, and World War II. New institutions will likely be created, and old ones will be torn down.

I hope this era doesn’t end the United State’s position are the world’s preeminent superpower, but that is indeed a possibility. It might very well set the stage for another country’s emergence as a superpower. It may also result in better global institutions and cooperation.

The excellent news is that regardless of how this crisis shakes out, it’s eventually going to be over and we will enter the First Turning in the next decade. The First Turning will be rigid, conformist and corporatist — but the economy will likely do very well, and I’ll take that over a Crisis.

Investing & Economics

In terms of investing ideas, I was struck by how Strauss and Howe’s ideas align with Ray Dalio’s thoughts about the long-term debt cycle. Dalio identified an 80-year debt cycle (the last one culminated in 2008, the one before that in 1929) that strongly aligns with Strauss and Howe’s theories.

Dalio has a mammoth paper about this, that is well worth your time. He also has an excellent short video explaining this that I’ve mentioned before on this blog.

Another interesting parallel is the work of Hyman Minsky. Minsky described a financial cycle which I think fits into the larger 80-year cycle. Minsky’s idea (similar to Dalio’s) is that debt drives the long-term economic cycle. After a financial crisis (the Great Depression or the 2008 financial crisis), firms avoid debt. This reduces the risks to the financial system. Over time, the reduced financial risk will ultimately spur more lending and borrowing. Increasing debt levels increases the risks to the financial system, which ultimately turn into a Crisis moment. The Crisis moment changes attitudes towards debt, and the cycle repeats.

(Disclaimer: As I wrote earlier, while Macro is a lot of fun to think and theorize about, it is in most investor’s interest to avoid it. Even though I know this, I simply can’t help myself!)


I think you should read this book. This book changed the way I look at the world and I think it will change your perspective, too. You’ll not only gain unique insights into history, you will begin to see people of different generations in a new light. Current events will also make a lot of sense through a generational lens.

Even if you don’t buy into Strauss and Howe’s theory, you will enjoy looking at history through the perspective of culture and people instead of a simple recounting of events.



After deliberating the issue for the last month, I decided to go ahead and deploy my cash balance and place 10% of my portfolio into global indexes boasting a low CAPE ratio. Today I executed the below trades, which places 10% of my portfolio into the five country indexes boasting the lowest CAPE ratios in the world:

Poland – EPOL – 36 Shares @ $27.245

Singapore – EWS – 39 shares @ $25.215

Brazil – EWZ – 23 shares @ $42.625

Russia – ERUS – 29 shares @ $34.0795

Turkey – TUR – 23 shares @ $41.935

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

I am a value investor. My outlook is inspired by the ideas of Benjamin Graham. This site is a real time chronicle of my portfolio and an outlet to share my ideas. I hope you enjoy.