Analysis Of Berkshire Hathaway's Equity Holdings

On December 20, 2017 we gave the subscribers to our Seeking Alpha Marketplace offering an early Christmas present, and that was our new Friedrich Portfolio Analyzer. The analyzer takes our Friedrich Algorithm, which can by itself only analyze one company at a time and incorporated it into a new analyzer format, using Google Sheets. By introducing this new functionality, the combined union can now analyze up to 500 stocks at a time. Once we successfully added this new ability, the next logical step was to have it analyze entire stock portfolios, ETFs or Mutual Funds.

In this article, I plan to introduce the Portfolio Analyzer to the Seeking Alpha Community and show how any subscriber can simply type in the following for each holding will, in minutes, have one’s entire stock portfolio analyzed.

  1. Ticker
  2. Shares Owned
  3. Cost per share

After doing so, the subscriber can then get a more complete picture of where one’s portfolio stands in real time. Since many in the Seeking Alpha community are big fans of Warren Buffett and Berkshire Hathaway, I thought I would demonstrate the power of our algorithm and Portfolio Analyzer tool by analyzing Berkshire Hathaway’s most recent holdings, that you can find below:

Berkshire Hathaway Holdings

This list comes from the Form 13-F filed each quarter with the SEC (Securities and Exchange Commission).

Explaining the Algorithm

But before doing so I first need to give everyone a small introduction in how our system works by explaining what our algorithm does and what its key output, the “Main Street” price means. Friedrich is the name given to our algorithm for analyzing companies that trade on the global stock markets. In creating it, we concentrated on analyzing each company’s Main Street operations through various established ratios, along with our own unique ratios that we developed over the last 30 years. What we came up with is a final “Main Street” price per share based on Generally Accepted Accounting Principles (GAAP) financial results, which is a framework of accounting standards, rules and procedures defined by the professional accounting industry adopted by publicly traded U.S. companies. We feel that our Main Street price result is a valuation at which each company would be attractive to a businessperson on Main Street looking to buy the entire company at a bargain.

Since the only constant in the universe is change, the results for each company fluctuate by varying degrees. No company is an island unto itself, but each operates in a world of constant change and at times in areas where Chaos is the norm. By analyzing a company’s Main Street operations over time, Friedrich is able to give our subscribers a decade long analysis (opinion) as well as offering a TTM (Trailing Twelve Month) analysis, as well. Therefore, our subscribers will not only get as close to a real-time view of operations on Main Street as is possible, but then can measure the consistency of the company’s operations over time to determine if s/he should invest or not.

Through our algorithm we can analyze ten years of Balance Sheet, Income and Cash Flow Statement data for each company (five years for international stocks) and then generate one final result (Main Street Price) in seconds. Our Algorithm uses quantitative and qualitative analysis in doing so (using our unique ratios) to find elite companies on Main Street. It is our belief that if one can successfully find such elite companies on Main Street that Wall Street will eventually notice and not be far behind in rewarding our efforts.

Each Datafile and Quantitative Chart we produce also acts as a backtest of our system. Here is an example of both for Apple (AAPL), which Berkshire Hathaway itself owns 134,092,782 according to its most recent 13-F filing.

The multi-colored example above we call our “Datafile” and the chart below it is not a technical chart, but is a Qualitative Analysis chart using fundamental analysis instead of just pricing data. After Berkshire Hathaway (BRK.A) (BRK.B) released its 13-F SEC filing of its most holdings and we analyzed each using our Quantitative Charts and later using our Datafiles. From those articles realized the we needed to come up with a way to analyze the whole portfolio at one time as clearly doing it one stock at a time did not give us a complete picture. With the Analyzer we were able to get not only a clear picture that allowed us to generate results for each stock but also allowed us to come up with a result for the whole portfolio at once and track it in real time throughout the market day.

Berkshire Hathaway Top 30 Holdings Analyzed

The following is what anyone tracking Berkshire Hathaway’s holdings would see anytime they wanted to by simply accessing their Google My Drive (where all portfolios created are stored and where subscribers to our system can create unlimited portfolio analyzers).

PART #1

Google sheets does not allow sheets to be copied in their entirety so here are the top 30 or so holdings in the Berkshire Hathaway equity portfolio. The cost basis was not available in the 13-F filing with the SEC, so we left that blank, but our analyzer allows our subscribers the ability to constantly track such data continuously when ever they want in their own portfolios.

PART #2

This part gives our subscribers an instant view of what the Total Market Capitalization is for each company The standard PE Ratio, our Algorithm’s Bargain Price for each company, how much the total portfolio is over or under the bargain price (bargain price is 33% below the Main Street price), our Algorithm’s Main Street Price for each company, how much the total portfolio is over or under the Main Street Price, our Algorithm’s Sell Price for each company, how much the total portfolio is over or under the sell price (sell price is 66% above the Main Street price), the Super Six Score for each stock, the weighted portfolio average score. The Super Six Score consists of the score for the Six most powerful ratio’s in our system and ranks each from 6 being the best to SHORT being the worst. The Friedrich Final Four Score is included for each stock as well as the weighted portfolio average score. To achieve the ideal Final Four Score a company must achieve the following: company must have a Super Six score of six, must have a Price to Bernhard Buffett Free Cash Flow Score of less than 15, must have a Price to Mycroft Free Cash Flow Score of less than 15, and must have a Mycroft Yield of greater than 9%

FRIEDRICH SUPER SIX CRITERIA FOR PURCHASE

1) Sell below its bargain price

2) FROIC ratio greater than 20%

FROIC = Free Cash Flow Return on Invested Capital

3) CAPFLOW less than 33%

CAPFLOW = Capital Expenditures/Cash Flow

CAPFLOW is a Management Effectiveness ratio that tells us how much cash flow is spent by management, in the form of capital expenditures, in order to run its company. A result of 33% or less is ideal and means that management has a great deal of money left over to buy back shares, invest in other firms and grow the company.

4) Badwill to Price less than 33%

BADWILL = Is a way in which Friedrich catches manipulators. When companies do a lot of Mergers and Acquisitions they tend to book a lot of Goodwill.

BADWILL = (Goodwill + Intangible Assets)/ Diluted Shares Outstanding.

When the Badwill to Price is 33% or greater than the stocks market price then the algorithm considers it is a bad thing.

5) Friedrich Cash Machine greater than 20%

FRIEDRICH CASH MACHINE = ( (MYCROFT MICHAELIS FREE CASH FLOW + BERNHARD FREE CASH FLOW)/2)/REVENUE) .

This tells us how much Free Cash flow is generated for every dollar of revenue. A company that generates 15% or more for this ratio is a CASH MACHINE.

6) Friedrich Equalizer greater than or equal to the Friedrich Cash Machine

FRIEDRICH EQUALIZER = FRIEDRICH CASH MACHINE + REVENUE GROWTH RATE . If the result is greater than or equal to the result for the FRIEDRICH CASH MACHINE then that is a good thing. Two years in a row where the result is below signals an automatic sell. Here is a perfect example of company with great numbers, but is actually a sell as its FRIEDRICH EQUALIZER is lower than its FRIEDRICH CASH MACHINE for two years in a row.

In IBM’s case it is even worse (5 years) and you would have gotten an automatic sell signal in 2013 @ $187.57 despite the strong fundamentals. This is because you never want to own anything with declining revenues. This example also clearly explains the mystery as to why Mr. Buffett’s investment in IBM did not work out so well and forced him to recently liquidate a large percentage of his original investment in the company.

PART #3

This segment of the analyzer gives us the total market value of each holding as well as the total portfolio value, the total bargain value of each holding, the total portfolio bargain value, the total Main Street value for each holding, the total Main Street portfolio value, the total sell price value for each holding and the total sell price for the portfolio.

The cumulative change is the potential profit per holding and for the total portfolio but since we were not supplied with a cost basis by Berkshire Hathaway. the analyzer simply gives us a total of zero cost.

PART #4

This final section gives us:

1) Percentage needed to reach each stocks Bargain Price or how much a stock must fall or rise in order to achieve it.

2) Percentage needed to reach each stocks Main Street Price or how much a stock must fall or rise in order to achieve it.

3) And probably the most important indicator that the Analyzer generates is the percentage upside potential that a subscriber can hope for in the future for each holding. As you can see from this final table, that the split is basically 50-50 for both positive vs. negative potential upside for the holdings listed.

Going forward you will notice that Mr. Buffett rarely sells once he buys a stock for his Berkshire Hathaway and that these days most of his portfolio is in its five top core holdings.

Kraft Heinz (KHC)

Wells Fargo (WFC)

Apple (AAPL)

Coca-Cola (KO)

Bank of America (BAC)

So how those five companies will perform in the future will determine how Berkshire Hathaway’s equity portfolio will perform.

Berkshire Hathaway itself is overbought but Friedrich is not able to incorporate the Buffett and Munger premium, which has always been there with the Woodstock for Capitalists. But when the great majority of Berkshire Hathaway’s holdings are overbought, it is easy to understand why Friedrich comes up with this result for (BRK.A).

Obviously, there is a premium incorporated in the stock that Friedrich cannot quantify as the stock has many permanent generational holders who are not going anywhere.

Schwab US Dividend Equity EFT Top Holdings

In Conclusion our Friedrich Portfolio Analyzer allows our subscribers to take apart the current holdings of any Portfolio, ETF or Mutual Fund and analyze each as a whole portfolio as well as analyze the individual holdings. Another example of the power of our algorithm/analyzer is a brief analysis for the top 20 holdings of the Schwab US Dividend Equity ETF (SCHD)

As you can see the Dividend ETF has a lot more percentage upside potential than the holdings of Berkshire Hathaway do.

Friedrich Model Dividend Portfolio

We do not just provide research for our subscribers, but also create Model Portfolios. For those who love investing in dividend stocks we have recently launched our Friedrich Dividend Portfolio and below is that portfolio’s performance vs. the Schwab Dividend ETF since the inception of our portfolio. We are the red line.

The reason that we have been able to outperform the Schwab ETF is because we have created our Dividend Portfolio based on Main Street analysis and have filled it will strong dividend payers that also have strong percentage upside potential. In the end all that matters is Main Street and how each company is performing there.

Conclusion

If you can find elite companies with elite management at the helm on Main Street, that can also be picked up at fair valuations, then eventually Wall Street will notice and reward you. Being able to sift through the thousands of stocks in minutes like our algorithm allows us to do each month helps us save time while missing fewer bargains and avoiding stocks that are overvalued. This is basically what Warren Buffett has done his entire career and why we have modeled our Algorithm on his successful approach.

If you have any questions, please feel free to ask them in the comment section below and don’t forget to hit the “Follow” button next to my name at the top of this article.

Want to know more about why we changed our tune from cautious to raging bulls? Check out this other recent article that explains why we believe the Dow could hit 50,000 in the next 6-7 years. The article includes highlights from our year-end subscriber letter.

Disclosure: I am/we are long AAPL, V, MA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: DISCLAIMER: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from our research. Factual material is obtained from sources believed to be reliable, but the poster is not responsible for any errors or omissions, or for the results of actions taken based on information contained herein. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.

Value Investing: Tools And Techniques For Intelligent Investment

When teaching graduate courses in investments, I always try to integrate books written by practitioners to provide a more pragmatic perspective on investments. One book I’ve used is James Montier’s Value Investing: Tools and Techniques for Intelligent Investment. My review of the book is provided below.

James Montier’s book is a solid read for individual and institutional investors alike. Montier is currently a member of the asset allocation team at GMO, a Boston-based investment manager co-founded by Jeremy Grantham. The book is a collection of articles Montier wrote for institutional investors while serving as Global Strategist for Dresdner Kleinwort and Société Générale.

In the book, Montier discusses some of the problems of classical finance theory and offers insights derived from behavioral finance and value investing. In Part 1 (Why Everything You Learned in Business School Is Wrong), he describes the flaws inherent in the Efficient Market Hypothesis, Capital Asset Pricing Model (CAPM), and Discounted Cash Flow (DCF) models. With chapter titles like CAPM is Crap, Pseudoscience and Finance: The Tyranny of numbers and the Fallacy of Safety, and The Dangers of DCF, James makes no attempt to hide his disdain for the financial theories espoused at most B schools. While not new, his discussion of the pitfalls of the terminal value calculation – specifically, the interaction between the growth rate and cost of capital – is very well written in my opinion. As part of the discussion (some might say assault), he provides the following example: “If the perpetual growth rate is 5% and the future cost of capital is 9%, then the terminal value multiple is 25x. If the estimates are off by only 1% in either direction for the cost of capital, the growth rate, or both, the terminal value multiple can range from 16x to 50x. Given that the terminal value is often the biggest contributor to the DCF valuation, these issues are non-negligible.” Examples like this resonated with me and underscored the importance of triangulating on valuation using multiple methods.

In Part 2 (The Behavioral Foundations of Value Investing), Montier outlines the institutional structures and behavioral traps that derail so many investors and offers suggestions of how best to avoid these in an attempt to think and act differently from the herd. In his discussion of behavioral stumbling blocks, he notes that “investing is probabilistic, so losses will occur. However, given our tendency to be loss averse, strategies that sometimes see short-term losses will be shunned.” While subtle, I think this is an important point: While value investing will result in losses – absolute and relative – from time to time, no other strategy provides better results over time. This sentiment is echoed by Robert Olstein in The Art of Value Investing, who notes “Changing investment styles to the latest fad produces the same results as changing lanes during rush-hour traffic jams. You increase the risk of an accident with little chance of achieving better results.” Montier also notes that “the stories associated with value stocks are generally going to be poor,” which makes owning them a tough to buy. As value investors, however, our focus shouldn’t be on whether the story is good or poor, but whether the bad news is already reflected in the stock price (perhaps overly so). He uses a lot of great analogies throughout the book. When discussing investors’ – particularly growth investors’ – bullish bias, Montier notes that “if we jump on the scales in the morning and they give us a reading that we don’t like, we tend to get off and have another go – just to make sure we weren’t standing in an odd manner. However, if the scales have delivered a number under our expectations, we hop off the scales into the shower, feeling very good about life.” This is a classic example of motivated reasoning, and underscores the point that “we are very good at accepting information that agrees with us and questioning any information that disagrees with us.” Montier argues that the best way to address motivated reasoning is to deploy what he calls empirical skepticism; that is to say, “if you believe something is true, then test those beliefs against wide-ranging empirical data (i.e., try to prove it’s false using whatever data you can get your hands on).”

Parts 3 (The Philosophy of Value Investing) and 4 (Empirical Evidence) aren’t to be skipped. Here, Montier describes the importance of: 1) a sound investment process, 2) focusing on the key drivers of a stock, and 3) being contrarian. When discussing a sound process, he uses the casino analogy; that is “all casino games have a winning process – the odds are stacked in the favor of the house. That doesn’t mean they win every single hand or every roll of the dice, but they do win more often than not. In investments, we have no control over the outcomes. The only thing we can control is the process, so it makes sense to concentrate on that.” When scrutinizing your process, Montier argues that “too much time is spent trying to find out more and more about less and less…, but the simple truth is that our brains aren’t supercomputers with limitless computational power. So, rather than collecting endless amounts of information, we should spend more time working out what is actually important, and focusing on that.” Stated differently, we should focus on the 2-3 key drivers of stock performance over the intermediate-to-long-term. Everything else is largely noise.

Contrary to comments from other readers, I thought Value Investing: Tools and Techniques for Intelligent Investment did offer solid tools to improve investment performance. For instance, Part 5 (The ‘Dark Side’ of Value Investing), includes Joining the Dark Side: Pirates, Spies, and Short Sellers, which is the subject of a second post on the book. In this chapter, he offers a 3-factor model for identifying short candidates by isolating on expensive stocks with deteriorating fundamentals and poor capital discipline. Montier provides the logic of combining the three factors in a screen and also back-tests the performance of screen over multi-year periods to demonstrate the efficacy of the screen in identifying short candidates in different markets. He uses a similar approach in the follow-on chapter, Cooking the Books, to support his “C Score,” a metric that can be used to evaluate a firm’s potential earnings manipulation.

As a collection of articles written for institutional investors, the book lacks sufficient structure for the average retail investor. In fact, it reads more like a compendium of articles used in a graduate investments course. That said, I found Value Investing: Tools and Techniques for Intelligent Investment to be insightful and thought-provoking and would recommend it to institutional investors interested in refining their investment process.

South Korea students dive into virtual coins, evens as regulators crack down

SEOUL (Reuters) – Hackers have stolen millions, lawmakers are pushing for new taxes and regulations, and a leading financial official has called them a “Ponzi scheme”.

But that hasn’t cooled a frenzy for bitcoin and other virtual currencies that is gripping young investors in South Korea.

On a recent weeknight at Sungkyunkwan University in Seoul, more than a dozen students crammed into a classroom to share tips on investing in so-called cryptocurrencies, which have driven tales of fantastic returns for savvy investors.

The group sat in rapt silence – broken only by a sudden shout of “there was just a big jump!” from someone monitoring his virtual currencies – as one student gave a presentation on how to read financial data and predict future trends.

“I no longer want to become a math teacher,” said 23-year-old Eoh Kyong-hoon, who founded the club, Cryptofactor. “I’ve studied this industry for more than 10 hours a day over months, and I became pretty sure that this is my future.”

Driven in part by a dismal economic outlook – including an unemployment rate almost three times the national average – young South Koreans are flocking to virtual currencies despite the risks and warnings from officials, analysts say.

It’s a trend that has caught the eye of South Korean leaders and regulators, who announced new measures this week to regulate speculation in cryptocurrency trading within the country.

Concerns about security and thefts of cryptocurrencies by hackers have also been rising. A South Korean cryptocurrency exchange recently shut down and filed for bankruptcy after being hacked for the second time this year.

“Young people and students are rushing into virtual currency trading to earn huge profits in just a short period of time,” Prime Minister Lee Nak-yeon said in November. “It is time for the government to take action as it could lead to serious pathological phenomena if left unchecked.”

UNCHECKED ENTHUSIASM

Eoh said the talk of more regulation had not dented his plans, especially after making what he said was a 20-fold gain on his investments over the past six months.

He said that many students were bringing laptops to class to track the movements of their investments and participate in actual trading. “Even when professors are giving lectures right in front of them,” he said.

Younger investors have especially gravitated toward so-called “altcoins”, or virtual currencies other than bitcoin, which often trade at much lower values, analysts say.

“Since young people are more mobile-friendly, they can actually make more out of altcoin investments as long as they are able to discriminate gems from pebbles,” said Kim Jin-hwa, one of the leaders of the Korea Blockchain Industry Association, an association of 14 virtual currency exchanges.

Iota, one of the fast-gaining altcoins, was traded at $0.82 in late November, but now stands at $3.89, a gain of 374.4 percent, according to Coinmarketcap.com. Energo (TSL), another type of altcoin, gained 400 percent during the same period.

Eoh Kyung-hoon, leader of a club studying cryptocurrencies, attends a meeting at a university in Seoul, South Korea, December 20, 2017. Picture taken December 20, 2017. REUTERS/Kim Hong-Ji

Some young investors say they don’t sleep until after 2 a.m., when there is a lull in the cryptocurrency markets as investors in places like South Korea and Japan log off.

Members of the club say they call each other to make important decisions together, and see information sharing as key to navigating the volatile cryptocurrency markets.

“I literally knew nothing about cryptocurrencies or the economy,” said Lee Ji-woo, a 22-year-old sports industry major. “Everyone here has taught me a lot.”

It’s now emboldened her to dream of a different future.

“I can have two jobs maybe, one as an athlete and another as an investor,” she said.

Slideshow (4 Images)

ECONOMIC DRIVERS

Intense competition for jobs in South Korea is likely helping to drive interest in virtual currencies among young South Koreans, especially as they see others reaping big gains, said Shin Dong-hwa, head of the Korea Blockchain Exchange.

“Whenever they go onto social network services, they are easily exposed to so many examples of young people around their age earning huge money,” he said.

But some in South Korea’s financial establishment say those hopes may be unfounded.

Kim Yong-beom, vice chairman of the Financial Services Commission, said Monday that the only reason prices were going up was because each investor expected the next buyer down the line to pay a higher price. “That really is a Ponzi scheme,” he said.

Others say students seem more focused on ways to get rich quick rather than on the underlying financial or technological values of digital currency.

“There’s no way to measure their true value yet but students are just going for them, believing that they can earn a big fortune in just a snap,” said Yun Chang-hyun, economics professor at the University of Seoul.

Members of Cryptofactor, however, say they founded the club because of a lack of dedicated cryptocurrency classes on campus and see their efforts as a way to move beyond speculation to informed investing.

“I realised that I was actually speculating rather than investing before I came to this club,” said Kim Myung-jae, a 19-year-old fine arts student, adding that she was especially attracted to altcoins.

“Now that I fully discuss which one to invest in with the members, I‘m actually looking at the true value.”

Additional reporting by Yuna Park, Cynthia Kim; Writing by Josh Smith; Editing by Philip McClellan

South Korea students dive into virtual coins, even as regulators crack down

SEOUL (Reuters) – Hackers have stolen millions, lawmakers are pushing for new taxes and regulations, and a leading financial official has called them a “Ponzi scheme”.

But that hasn’t cooled a frenzy for bitcoin and other virtual currencies that is gripping young investors in South Korea.

On a recent weeknight at Sungkyunkwan University in Seoul, more than a dozen students crammed into a classroom to share tips on investing in so-called cryptocurrencies, which have driven tales of fantastic returns for savvy investors.

The group sat in rapt silence – broken only by a sudden shout of “there was just a big jump!” from someone monitoring his virtual currencies – as one student gave a presentation on how to read financial data and predict future trends.

“I no longer want to become a math teacher,” said 23-year-old Eoh Kyong-hoon, who founded the club, Cryptofactor. “I’ve studied this industry for more than 10 hours a day over months, and I became pretty sure that this is my future.”

Driven in part by a dismal economic outlook – including an unemployment rate almost three times the national average – young South Koreans are flocking to virtual currencies despite the risks and warnings from officials, analysts say.

It’s a trend that has caught the eye of South Korean leaders and regulators, who announced new measures this week to regulate speculation in cryptocurrency trading within the country.

Concerns about security and thefts of cryptocurrencies by hackers have also been rising. A South Korean cryptocurrency exchange recently shut down and filed for bankruptcy after being hacked for the second time this year.

“Young people and students are rushing into virtual currency trading to earn huge profits in just a short period of time,” Prime Minister Lee Nak-yeon said in November. “It is time for the government to take action as it could lead to serious pathological phenomena if left unchecked.”

UNCHECKED ENTHUSIASM

Eoh said the talk of more regulation had not dented his plans, especially after making what he said was a 20-fold gain on his investments over the past six months.

He said that many students were bringing laptops to class to track the movements of their investments and participate in actual trading. “Even when professors are giving lectures right in front of them,” he said.

Younger investors have especially gravitated toward so-called “altcoins”, or virtual currencies other than bitcoin, which often trade at much lower values, analysts say.

“Since young people are more mobile-friendly, they can actually make more out of altcoin investments as long as they are able to discriminate gems from pebbles,” said Kim Jin-hwa, one of the leaders of the Korea Blockchain Industry Association, an association of 14 virtual currency exchanges.

Iota, one of the fast-gaining altcoins, was traded at $0.82 in late November, but now stands at $3.89, a gain of 374.4 percent, according to Coinmarketcap.com. Energo (TSL), another type of altcoin, gained 400 percent during the same period.

Eoh Kyung-hoon, leader of a club studying cryptocurrencies, attends a meeting at a university in Seoul, South Korea, December 20, 2017. Picture taken December 20, 2017. REUTERS/Kim Hong-Ji

Some young investors say they don’t sleep until after 2 a.m., when there is a lull in the cryptocurrency markets as investors in places like South Korea and Japan log off.

Members of the club say they call each other to make important decisions together, and see information sharing as key to navigating the volatile cryptocurrency markets.

“I literally knew nothing about cryptocurrencies or the economy,” said Lee Ji-woo, a 22-year-old sports industry major. “Everyone here has taught me a lot.”

It’s now emboldened her to dream of a different future.

“I can have two jobs maybe, one as an athlete and another as an investor,” she said.

Slideshow (4 Images)

ECONOMIC DRIVERS

Intense competition for jobs in South Korea is likely helping to drive interest in virtual currencies among young South Koreans, especially as they see others reaping big gains, said Shin Dong-hwa, head of the Korea Blockchain Exchange.

“Whenever they go onto social network services, they are easily exposed to so many examples of young people around their age earning huge money,” he said.

But some in South Korea’s financial establishment say those hopes may be unfounded.

Kim Yong-beom, vice chairman of the Financial Services Commission, said Monday that the only reason prices were going up was because each investor expected the next buyer down the line to pay a higher price. “That really is a Ponzi scheme,” he said.

Others say students seem more focused on ways to get rich quick rather than on the underlying financial or technological values of digital currency.

“There’s no way to measure their true value yet but students are just going for them, believing that they can earn a big fortune in just a snap,” said Yun Chang-hyun, economics professor at the University of Seoul.

Members of Cryptofactor, however, say they founded the club because of a lack of dedicated cryptocurrency classes on campus and see their efforts as a way to move beyond speculation to informed investing.

“I realised that I was actually speculating rather than investing before I came to this club,” said Kim Myung-jae, a 19-year-old fine arts student, adding that she was especially attracted to altcoins.

“Now that I fully discuss which one to invest in with the members, I‘m actually looking at the true value.”

Additional reporting by Yuna Park, Cynthia Kim; Writing by Josh Smith; Editing by Philip McClellan

BlackBerry Is Betwixt And Between

I have been a BlackBerry (BB) bull for a while due to the security of its handsets. The company has fully made the transition to a software and securities firm. Though I now find the company and the stock less interesting.

Betwixt And Between

BlackBerry’s top line growth remains in free fall, down 22% Y/Y for FQ3 2018.. SAF and handset revenue are now a combined 16% of total revenue. That is a good thing because their decline will have less impact going forward. With only $9 million in handset revenue BlackBerry is officially out of the hardware business, to my dismay. The bright side is that its core business – software and services – is 84% of total revenue. This revenue stream was up 19% Y/Y which means BlackBerry is winning in its core business. I was concerned CEO John Chen would not be able to pull it off, but he delivered in spades.

Enterprise software revenue was up 11% on the strength of sales to government agencies like the U.S. Department of Defense, House of Representatives, U.S. Senate, the Dutch government, et. al. While the consumer market did not place much value on BlackBerry’s best-in-class security features, institutions appear to have. As more sensitive information is placed online there is a higher probability it could be hacked into or manipulated by outside parties. I was previously long BB due to its expertise in security, but it had so much of its revenue and cost structure tied to a declining handset franchise that it kept losing money and the stock suffered.

BTS revenue was derived from the company’s QNX CAR Platform, Neutrino Operating System, Radar tracking solution, and Certicom cryptography and key management products. At $43 million this revenue stream was flat Y/Y. Licensing, IP and other consists of revenue from mobility licensing software, including licensed hardware sales and intellectual property. BlackBerry is now licensing its cryptography to other hardware companies, which is a good thing. Given diminimilicensing is the one play BlackBerry has left.

What gives me pause is that the company’s core revenue is only $190 million per quarter – an annual run-rate of less than $800 million. Outside of enterprise software I do not believe the company has the scale to matter in the segments where it operates. First of all its margins are paltry. Its adjusted EBITDA of $35 million on adjusted revenue of $235 million equates to a 15% EBITDA margin. SAF revenue has an operating income margin of over 90%, and it will continue to fall.

Secondly, I believe it can win in enterprise mobility with its focus on security. However, its QNX and licensing revenue streams might to be exposed to the vagaries of the U.S. economy. I do not believe President Trump’s tax cuts will generate economic growth long term and the Fed’s rate hikes and balance sheet unwind could mute some of the tax cut’s impact. I believe at BlackBerry’s size it is vulnerable to a slowing global economy and potential competition in some of its key product lines.

Liquidity

Over the years the company has not had much liquidity and had to manage costs and working capital to stay afloat. BlackBerry recently won a $940 million arbitration award from Qualcomm (QCOM) for certain royalties, interest and fees. The company now has cash and equivalents of $2.4 billion. It can tread water for several quarters regardless of what the business does. That is a sea change from the year earlier period when the company’s future was still in doubt. Through the first nine months of the fiscal year BlackBerry generated cash flow from operations of $866 million versus a cash out flow of $242 million in the year earlier period.

BlackBerry will survive and that is a good thing as importantly the company has dry powder for acquisitions. Other than the gift from Qualcomm the other game-changing event was BlackBerry’s acquisition of Good Technologies. The deal added scale to the enterprise mobility management segment. It also removed a competitor and likely helped pricing in the space. The play for BlackBerry is to add more scale via acquisitions; financial markets appear to be out of control, making it difficult to find deals that make financial sense. In the near term I believe the best case scenario is that BlackBerry will tread water, and margins could stall. The one catalyst – an accretive deal – will likely not happen any time soon.

Conclusion

BlackBerry’s growth prospects do not justify its 16x earnings multiple. Sell BB.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

How to Launch a Successful Content Marketing Campaign

There’s no denying that content is truly the king today. Gone are the days when consumers would actually consider buying from your based on your advertising. With the amount of information that’s available at their fingertips today, they rarely fall for flashy ads.

So the only way in which you can truly draw them towards you is by providing value. This is where I’ve found that content marketing is beneficial. It can actually help you deliver value to your target audiences by providing information they need. Not only does it help to build your credibility but also boosts customer loyalty.

But what are the exact ingredients of a successful content marketing campaign? Let’s take a look at what they are and how you can launch a killer content marketing campaign.

1. Pick quality over quantity.

In a survey by Content Marketing Institute, 85 percent of B2B marketers attributed their content marketing success to quality content creation. 77 percent of B2C marketers too, attributed their content marketing success to the same factor. These statistics clearly emphasize the importance of quality in your content marketing campaign.

Make sure that your content is appealing to your audiences and delivers value. It should include information that your audiences are likely to find valuable.

Visuals are a great way of making your content appealing. So make sure to include high-quality images or infographics. Data and statistics add credibility to your claims so don’t forget to include them too. Also, ensure that the content is free from any spelling or grammatical mistakes.

2. Work on a content strategy.

A clearly documented content strategy is essential for the likelihood of your content marketing campaign success. 72 percent of B2B marketers and 71 percent of B2C marketers attribute their content marketing success to a well-crafted strategy.

Your content strategy should cover things such as:

  • The type of content – You can use a variety of content types such as blogs, newsletters, videos, podcasts, webinars, or even events. Much of the type of content you decide to use will be dependent on your budget. It should also be based on insights from your previous campaigns showing what was most effective. 79 percent of B2B marketers and 78 percent of B2C marketers use analytics tools for content creation.

  • The frequency of posting – You need to decide on how often your content will be posted. You also need to consider the days and times when posting is likely to be most effective. You can use the insights from some of your previous campaigns to decide, or use industry benchmarks.

  • Channels of distribution – The distribution channels you select should be the ones where you are most likely to find your audience. Most B2C marketers find email and Facebook to be most effective. While most B2B marketers find blogs and emails to be the most effective channels of content distribution.

3. Track your progress.

91 percent of the most successful B2C content marketers measure their campaign ROI. The same is done by 88 percent of the most successful B2B content marketers.

It is essential to measure the results of your content marketing campaign. When you compare them to your campaign goals, you will have a clear idea of how successful it is. Not only will this help you determine ROI but also help you make any adjustments for improvement if needed. You can also use insights from your campaign to plan your next content marketing campaign more efficiently.

Final Thoughts

As with any marketing campaign, proper planning is the key to ensuring the success of your content marketing campaign. By investing considerable time in planning before the start of your campaign, you actually set it up for success. Being unsure about your objectives, or your audiences is a recipe for disaster.

So spend time in audience research so that you can craft a compelling content strategy that’s bound to be successful. What other steps do you generally take to ensure the success of your content marketing campaign? Let me know in the comments below.

Bitcoin Valuation: $4 Million

I was recently asked about the value of bitcoin.

“What is it backed by,” he asked. To which I replied,

“Currency. Your dollar.”

“So how can I buy shares,” he asked.

“You can just buy bitcoin. You invest by buying and using it.”

“But what is it backed by,” he asked again.

I wasn’t getting through. This post is my attempt at a better argument.

Bitcoin’s Value

Bitcoin can’t be valued by traditional valuation methods like cash flow or P/E (I’ll be publishing an article comparing bitcoin P/E to other cryptos shortly). Bitcoin has a unique business model. There is no CGS, SG&A, EBIT or EPS. There is no bottom line. The work has been fully automated and the process of creating these automated digital systems is done by the “bitcoin miners”.

So what makes the value of bitcoin go up? What drives the value of bitcoin? When people use their local fiat currency to purchase bitcoin the value of bitcoin goes up. The more people that buy and use it, the more the value goes up, which means bitcoin’s value is directly connected to its utility over fiat currency.

Bitcoin: The Value Proposition

Bitcoin’s value proposition depends on the person. I see it as a way to improve the flow of resources around the world. I think of my investments in bitcoin as an investment in the front-runner of an emergent technology. For me, bitcoin is revolutionary and invaluable.

I have heard bitcoin described in many ways. It is many things to many people. For some, it is a global, decentralized banking system. It has no borders or nationality. It serves as a store of value, a digital currency, an off-shore banking account, a peer-to-peer payment system and a payment processor (back- and front-end). To investors, it is the world’s fastest growing asset class. It also serves as a natural hedge against almost all other assets and is available, like gold, in limited supply.

Let’s discuss how the sum of bitcoin’s parts adds up.

Value Proposition #1: Global, Decentralized Banking System, Peer-to-Peer Payment System and Processor

When you swipe your Visa card or iPhone, the data in the magnetic strip is sent to a “front-end processor” (intermediary/checkpoint #1). The front-end processor forwards your information to the “card association” like Mastercard (MA), Visa (NYSE:V) or American Express (NYSE:AXP) (intermediary/checkpoint #2). Your information is sent to the “issuing bank” to verify the balance (intermediary/checkpoint #3). Approval is issued and that approval flows back to the front-end processor as a confirmation. Each intermediary or broker gets a cut. Bitcoin, by contrast, is a transaction from A to B, which greatly reduces the cost of the transaction.

The reduction of costs is a very powerful value proposition. That and ease of use are the hallmarks of disruptive automation technology and it’s about time this kind of technology entered our system of payments. Bitcoin has automated the payments process, from one end of the globe to the other. All you need is a cell phone.

What is this worth? People often compare Visa to bitcoin, suggesting that bitcoin should have the same value. This is like comparing Netflix (NFLX) to Amazon (AMZN). Netflix is a digital powerhouse, but digital content is just one source of revenue for Amazon.

Translation: Bitcoin is a dynamic peer-to-peer payment system, but this is only one piece of the bitcoin value pie.

How do we go about valuing the entire pie? Before I get to that, let’s look at a few other drivers.

Value Proposition #2: Limited Supply

When you increase the supply of an asset with a strong value proposition, the demand goes down, along with price.

When you decrease or limit the supply of an asset with a strong value proposition, the demand goes up, along with price.

You don’t need a degree in economics to understand this relationship. The amount of currency on the market today is not in limited supply – it is created out of thin air when banks make loans. With $2 trillion in excess reserves (courtesy of quantitative easing), banks no longer have to worry about capital requirements.

Unlike our dollars, the supply of bitcoin is limited. The creator of bitcoin placed a cap on the number of bitcoin that can be created at 21 million and we are fast approaching that number. The current number of bitcoin stands at 16.7 million. What happens when we reach 21 million?

Translation: When bitcoin reaches its upper limit, the value will spike.

Limited supply is a powerful value proposition in a market economy.

Chart
BRK.A data by YCharts

Value Proposition #3: Currency & Store of Value (Bitcoin is Better Than Gold)

Technically, nations are supposed to pay all debts in gold (GLD). Thanks to the Bretton Woods agreement, dollars (^DXY) became the medium of exchange used to settle debts between nations, which strengthened this relationship and increased the dollar’s supply around the world. The system was only made possible because of a guarantee by the US Treasury to redeem all dollars for gold. If foreign nations wanted to exchange dollars for gold, they could do so through the US Treasury. When this arrangement became inconvenient, the government reneged on its promise and the dollar crashed.

In August of 1971, with dwindled gold reserves, and a long line of budget deficits, President Richard Nixon terminated the convertibility of gold which turned the dollar into a fiat currency. Foreigners held nearly three times as many dollars as the US could redeem and were demanding gold because of lack of confidence in the US economy. The result, foreigners had to sell dollars in money markets at a discount.

When this happened, the US budget deficit was $11.6 billion. Nixon was worried the deficit would climb to $23 billion by year’s end and he felt the need for drastic measures. Today, by comparison, the current budget deficit is $666 billion. The Trump Administration just passed tax cuts that will decrease revenues and push the deficit up even higher.

What we are about to experience is part of an inevitable cycle. This time instead of hoarding gold, people will buy bitcoin as both a store of value and a form of currency. It shares a few attributes with gold in that it is rare and available in limited supply. It is also highly useful in many different applications and you can find a market for it almost anywhere in the world. Unlike bitcoin, gold is heavy and requires a physical custodian so the cost of storage is high. It also doesn’t come with its own payment system.

Translation: Bitcoin is superior to gold and the dollar in many ways which is why bitcoin topped the price of gold per ounce in March of 2017, closing at $1,268.

Chart
^NYB data by YCharts

Value Proposition #4: Natural Hedge Against Inflated Assets & Off-Shore Banking Services

As bitcoin gains in popularity, especially as a “first-to-market” technology, banks will lose customers. Bank profitability will decline as the world “unbanks” by switching to a faster, cheaper, autonomous, automated, peer-to-peer payment system. Investors and hedge fund managers are already looking for other places to invest because everything is overvalued. Hedge funds would rather pour billions into bitcoin than over-leveraged, inflated assets. Here’s a video of one hedge fund manager explaining how he values bitcoin:

Perhaps the most salient point to his argument is that institutional buying has just begun. I disagree with him on one point, however. Endowments and pensions are only about six months out from investing heavily in bitcoin, not 18 – a qualified custodian of bitcoin will likely emerge in this space by the end of March 2018.

Translation: Not only is the value of bitcoin going up around the world, but the value of the dollar (and all assets pegged to it) is going down. Investing in bitcoin poses little risk when used as a hedge in a portfolio full of assets that are highly correlated and overvalued.

Bitcoin’s Potential Value: $4 Million/coin

The value proposition is clear and strong, but what is that value? Can we put a number to it?

Imagine we’re sitting in a room together. On my laptop, I pull up the following chart (please go here to view the chart). This is the best illustration of asset values on the web. More specifically, it helps to put bitcoin and the entire crypto-universe into perspective against the world’s assets.

Start at the top with Silver and Cryptocurrency, then work your way down to Derivatives. If that doesn’t make you put bitcoin’s potential value into perspective, I don’t know what will.

How can you quantify this potential?

Bitcoin could take value away from silver and gold valued at $17 billion and $7.7 trillion, respectively. It may take value away from the global stock market (banks in particular) which has a market capitalization of $72 trillion. It may suck up all the world’s currency (coin and bank notes) valued at $7.6 trillion, but this is only 8% of the world’s total money supply. The true money supply, referred to as ‘broad money’, includes coins, bank notes, money market accounts, savings, checking and time deposits. It’s all the money we “think” we have access to. The total amount of broad money in the world is $90 trillion.

It’s hard to say which asset class bitcoin will impact the most. I think the drain will be felt by all, but the global money supply is the most vulnerable. In order to use bitcoin’s other features, you need to convert your local currency, whatever it is, to bitcoin.

In addition to being a store of value, bitcoin also represents a way for people to hide money and protect it against asset seizure. Today, it is estimated that roughly $21 trillion sits in off-shore accounts.

Translation: Bitcoin has a value potential of at least $90 trillion, which we’ll assume includes $21 trillion sitting in off-shore accounts.

We also know that the maximum number of bitcoin available is 21 million, which allows us to calculate the potential value of 1 bitcoin by dividing the total amount of broad money by the total number of bitcoin.

The calculation is $90 trillion divided by 21 million, which is approximately $4.3 million per bitcoin.

After you stop laughing I’ll explain why I think this is an ultra-conservative estimate.

  1. All the money in the world does not capture the value of total assets.
  2. While bitcoin’s volume is capped, the value is unlimited. The more it grows, the more money central banks will print fiat currency, which will be used to buy bitcoin.
  3. Bitcoin production is capped at 21 million, but studies show that 4 million have been lost forever so the true base may be closer to 17 million.

Final Thoughts

One thing is clear, if the rise of bitcoin can tell us anything, it is that people are losing trust in fiat money and other traditional measures of wealth. This is the mark of inflation.

We aren’t seeing a rise in inflation with inflation statistics due to the rise in income disparity. As a result, there are two economies – one is hyper-inflated, the other is stagnant. Stagnant wages guarantees low inflation statistics even in a time when all assets are clearly inflated. It may not be that bitcoin is going up, but that all other assets are locked in an inflationary collapse and bitcoin is capturing that value. Meanwhile, the smartest minds in the world are on board Train Bitcoin. They’re doing everything they can to make this open-sourced technology work. And, it’s working.

Disclosure: I am/we are long BTC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Siemens to Invest in Blockchain-Based Smart Grid Builder LO3

Technology conglomerate Siemens has announced it will invest in LO3 Energy, a startup focused on building blockchain-backed “smart grids” for local energy trading. The amount of the investment, and LO3’s implied valuation, were not disclosed.

LO3 has had a relationship with Siemens since late 2016, when the companies teamed up to build a local smart grid in Brooklyn. LO3’s system is intended to let “prosumers” buy and sell energy — such as that generated from rooftop solar panels — with their neighbors.

LO3 users install a high-resolution meter, which can do neat things like track energy usage at specific times of day, or by specific appliances. They also get an app that lets them set buy and sell requests for specific kinds of electricity, such as solar or wind. LO3 gets revenue from the resulting transactions, and also wants to leverage all that rich user data, potentially by connecting its microgrids to major utility operations.

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LO3 wants to use blockchain to make its system work. Specifically, the smart contracts at the heart of second-gen blockchains like Ethereum should make it possible to automate real-time, granular, peer-to-peer energy transactions. It’s an application where blockchain’s decentralization is particularly important, which LO3 CEO Lawrence Orsini highlights by pointing to Enron’s infamous manipulation of California energy markets circa 2000.

In the midst of a crypto-gold rush that has bred widespread scams, wild overvaluations, and sketchy vaporware, LO3’s blockchain application is one that, at least in theory, makes sense both technically and philosophically. But unlike so many companies touting their blockchain applications, LO3 isn’t pumping up an initial coin offering, and Orsini has downplayed the idea that LO3’s blockchain would rely on cryptographic tokens that themselves had market value. Subtracting that element from the blockchain equation might be tricky, though, since financial incentives are key to motivating distributed servers to host blockchain software.

Another potential roadblock, of course, is getting utility companies to play along — they’ve relentlessly pursued a legislative agenda that removes incentives to integrate rooftop solar into the grid, particularly buybacks for excess electricity. LO3’s system could help consumers take back some control, which might be all the excuse legacy providers need to resist it.

UPS Office Staff Called Up to Deliver Packages In Last-Minute Christmas Rush

Faced with unexpected holiday volume in some areas, UPS this year had to draft hundreds of office workers to deliver packages at the last minute.

According to the Wall Street Journal, the staffers included accountants and marketers, who suddenly found themselves hefting boxes. Such switches aren’t uncommon during the company’s hectic holiday season, but they’re usually voluntary and coordinated well in advance.

A UPS spokesman confirmed to the Journal that several hundred office employees have been called on to deliver packages. Some of them reportedly used personal vehicles. Most of the reassignments, according to the spokesman, are now wrapped up.

At least part of the problem was the tight labor market across the U.S., which made it harder for UPS to hire its usual bevy of seasonal workers. Another factor is online shopping, which has grown every year for more than a decade, and peaks sharply in the days before Christmas. This year, in certain locations, the number of packages exceeded even UPS’s projections.

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The unpredictability of that volume has been a challenge for UPS and other delivery services for years, and they’ve experimented with various solutions. Temporary staffing can increase throughout, but expensive overexpansion during the 2014 holiday season highlighted its downside risk.

On the other side of the equation, UPS has floated various approaches to raising prices during the holidays, in part to encourage customers to send packages earlier and spread out demand. This year, the shipper added peak surcharges, mostly under a dollar per package.

Those modest surcharges don’t appear to have done much to encourage customers to plan ahead this year. UPS could make them higher, but then the problem becomes competition — FedEx didn’t implement a holiday surcharge for most packages this year.

That leaves a nearly insoluble problem, as the delivery industry searches for ways to scale massively for a short period every year. Calling up the accountants doesn’t seem like a very sustainable solution.

Space Photos of the Week: When Billions of Worlds Collide

This is what it looks like when two galaxies collide. Those colorful bands of debris are gases being flung out into space as a result of this violent cosmic dance. Galaxy NGC 5256 contains both merging galaxies. Each contains its own galactic nucleus and in between the two is a supermassive black hole that’s quickly sucking up material from the impact.

This bright red star is called ?1 Gruis and its bluish partner to the left is ?2 Gruis. The European Southern Observatory’s Digitized Sky Survey snapped this photo of the space surrounding these stars. To the right, in bright blue, you can see the spiral galaxy IC 5201.

This photo might look a little more familiar—that’s Earth! Little Rock, Memphis, Jackson, New Orleans, Birmingham, and Miami to be exact. This illuminating photo was taken from the International Space Station by current crewmember Mark Vande Hei.

This glowing purple and blue image of a galaxy cluster called Perseus might help scientists solve one of the biggest mysteries in science: dark matter. To understand dark matter, scientists are trying to interpret new x-ray data from the cluster, one the largest objects in the known universe. The sudden jolts of intensity they’re observing might provide answers..

Hubble does it again! This photo is of galaxy cluster Abell 2163. One of the largest galaxy clusters on record, containing around 4,000 galaxies, Abell 2163 is also the hottest ever found. Scientists are studying the material jutting out from inside the cluster to better understand dark matter and phenomena like gravitational lensing.

A peep at our home galaxy is always heartwarming. In this dazzling image, the Milky Way arches over the Very Large Telescope. See those two bright smudges at the bottom? Those are the Large and Small Magallenic Clouds.