YouSaid · the spoken record

Eric Cinnamond

lines on the record: 46
first: 2017-09-16
most recent: 2017-09-16
sittings or episodes: 1
sources: podcast

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“My emails on my website feel free to email me one of the great things about the blog is the amount of people I've met so far, like-minded investors. When I recommended sending the capital back, I felt like I was the only absolute return investor remaining in the world, but that's not the case. There's a lot of us out there. It almost feels like the silent majority. There's so many that think like absolute return investors, but they're forced to invest in the relative world. And I think that's interesting. Please email me. Also, I make available the quarterly management commentary for my small cap companies. I get a lot of emails requesting for that, so I'm always happy to send those out.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“But in the crisis, you know, I did buy a banker too, but they were triggering at discounts to book. So I think if you think of a financial business perspective, that's a little easier to think about than an energy company or a precious metal miner.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“That is very similar to what I do. However, I do adjust the book, so it's sort of an adjusted book. You can have, say, for a Pan America Silver, El Colorado mine. I'm proud of mispronouncing that apologies. That mine was built in the mid-90s. So the cost basis on that mine, I think last time I looked, maybe $800 million, there's no way you could replace that mine for that type of price because it's on historical cost. You know, I value that mine closer to $600 million based on their current reserves and their current production. And you could go the other way too, where you could reduce the value of the mine or the reserves. A really simple way to think about it is I apply this to financial companies as well where I'm buying the balance sheet. I do not use a discounted cash flow for financial companies. I rarely own banks because they usually trade at two times books, small cap banks. They don't make a lot of sense to me. Why would I want to buy a book of mortgages at twice the value?”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“They're the market leading energy service company with vessels out the oil rigs. They would have had $50 book value, a share, and they went bankrupt. I mean, a tremendous assets, over 200, almost new vessels, but it didn't matter because they didn't have the necessary liquidity in the debt companies kicked in. It went to bankruptcy.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Maybe a little less net of cash. Once we rivers complete, and then you can come up with what that balance sheet is worth on a replacement cost. You do the same thing with energy companies. Energy companies, you'll have proven developed reserves, and those, you know what it costs to buy the land, you know what it costs to drill, you know the finding development expenses. Again, if I can buy oil in the ground that's already developed for $10 a barrel and it costs me $20 a barrel if I were to do it myself with a rig and buying the land, well, I'd much rather buy the stock. But they have to have good balance sheets. So this is the key. And this is what helped me survive the bear market in commodity stocks in 14 and 15. You need a runway and you need to determine what is an appropriate runway. It doesn't matter if you're buying a 50 cent dollar if the company doesn't survive. You look at tidewater. It's a good example.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Well, let's think about a minor. A new gold mine, you know, and I'm probably going to turn off half your listeners talking about a minor apologies. So their new aftermind is a very profitable mind, very nice mine, and would it cost to replace that to buy the land and to build a mine would probably be around a billion dollars. And they have a rainy river mine that's almost complete now. What would it cost? You know what they paid for the land. They bought it actually when the prices were a little lower. That would be probably 1.3, 1.4 billion dollars to replace that money. And that's a new mine. So you can get a very accurate valuation on the replacement cost. They have a mine in the US. They have a mine in Australia, and they have the Blackwater. property in Canada and they've done a feasibility study there where you could get a range for”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“What it would cost to replace them. And that has worked very well for me over time. If I could buy when no one wants them. You know, commodity stocks are usually, and this applies to cyclicals as well, they're usually extremely overvalued or extremely undervalued. Rarely are they right in the middle. Rarely are they fairly valued? People want them or they hate them. And I think now energy is starting to get a little more interesting. And the precious metal miners have had quite a run since their trough in early 2016, but I think a couple of those are also interesting as well. So I'm focusing more now on asset heavy companies where I'm buying discounts on their balance sheets versus discounts on a free cash flow perpetual bond valuation because those remain very expensive with rates so low, right? Because you're buying those as perpetual bonds and people are using these extraordinarily low discount rates to value those businesses.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Are found tremendous value in was commodities. But a lot of high quality value investors, they just won't even consider commodity companies because we're taught in school and all the great books that they're bad businesses. But if I can buy MCF and natural gas in the ground for a dollar and it costs $2 to find and develop that, or if I can buy an ounce of gold in the ground fully developed for $150 an ounce and it costs $300 an ounce to find and develop that. You know, those are things I'm interested in. You know, I view Kamani businesses more from valuing a balance sheet. You know, most we talked about earlier about normalizing cash flows and most of my valuations are perpetual bond valuations. But how I value commodity or asset heavy companies is very different where I want to buy their balance sheets at a discount. I want to buy the natural gas reserve, the oil reserve, the gold reserves at a discount.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Cannot comment on the automobile industry. I'm sorry. You know, I do follow a few suppliers and they're not seeing trough results yet. They are seeing declines, but they're low single digits. Nothing like you've seen in a recession. They would not know as soon as an actual manufacturer. But just to touch on the cyclicals, I find tremendous value in cyclicals because there isn't a home for them for a lot of investment portfolios. You know, growth portfolios don't like them. Actually, growth portfolios like them when they are generating cyclically peak or anything. A lot of them value investors don't like them because they're just, they're ugly, you know, and they get a lot of difficult questions in consulting meetings. I can't tell you how much consultant meetings impact how portfolio managers run money. It's almost like, what's the consultant going to think if I buy an auto manufacturer or an energy company? I found at least over the 18 years I ran the absolute return strategy one of the areas.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Nor are the important information. The 10Ks are so thick now because of regulation, but a lot of the requirements are now to put in information that probably isn't beneficial in helping you value a business. But I like to go the description is very important. The beginning is very important. And then I like to go to the financial statements and the footnotes. The financial statements are invaluable. That's why you need more than 110k. You need a whole cycle of 10Ks. You don't have to print every year, but every three years, and that can give you a profit cycle if you read those 10Ks and help you get through a profit cycle, you should be able to come up with a rough valuation just on a 10K. One of the things that I always stress for investors that are, you know, I get asked a lot, what's your favorite investment book? Which one was most valuable for you? And it was the analysis and use of financial statements. And that was something I read in the early 90s when I took the CFA program.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“I did read the reports and the conference calls. So the calls I can get through pretty quick. You can't listen to them, all of them. It's impossible. It would take too long. I've learned how to read these very quickly and find out what's important. Some of the questions, you know, analysts are often very predictable. A lot of the cell site analysts, you sort of ask some of the same questions. And you can often breeze through some of those. If there's something that's not important to you. So I have sort of worked on that. It's not speed reading, but it's weaning through what's important and what is just standard. And analysts asking a question to help them fill out their model, right?”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“You've got to throw in a scenario of a recession, not just Amazon. Right now, everyone's focused on Amazon, and they're not really thinking about the next recession, which I think will have a greater consequence to margins.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“I think it's difficult to determine right now because we haven't seen a recession in so long. Everyone is so focused on Amazon. But if you go back to the last cycle, if you go to 2008, 2009, and you look at retailers or suppliers of retailers and you look at their margins and what happened, there's a tremendous amount of operating leverage when sales decline for retailers and their suppliers. I remember when Haines Brands was, they were in low single digit stock. They had some debt. And if an underwear company can lose considerable sales in a recession, a lot of different shoes, you name it, that are more discretionary can see declines as well. So right now, I don't own retailers. They're becoming interesting. But, you know, I view retailers as cyclicals. We talked a lot about cyclicals today, so I think that's really interesting. But now we're talking about retailers. But if you view them as cyclicals and then you take in consideration those margin ranges again, I think that will help you do.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Some of these things, I think that's sometimes you can find tremendous value just sort of role playing as if you're a relative return manager.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“With a really big house, country club membership, big cars, a yacht, and running a billion plus on relative return money. And then I think to myself, all right, I've got 10 very large consultant meetings next week. What do I not want to talk about? Right there, that is usually one of the best ways to be a contrarian and come up with contrarian ideas. And right now, where would you look? I would think you're approaching that sort of end of the year where there's that performance anxiety that you're in performance panic. I think you might want to start looking at energy and retail. I think those might be the two most embarrassing sectors in the market right now to own for professional managers. And when professional managers, you know, they have this, I call perception risk. When they feel that they may lose assets for just talking about maybe owning.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“pay off their debt with cash flow if needed versus depending on a fickle banker or a moody credit market. So after that debt screen, then I have, believe it or not, about 500 names in about half of those already on my buy list, right? So I'm so familiar with many of these. And then I sort through the remainder and there's probably a hundred or so that I've worked on and will not own for one reason or another. It could be management, capital allocation strategy as many reasons. And then, you know, maybe once every month I get probably even one or two names a month. So it's not as much as you think. And those replace many of the companies that were either acquired or may have violated my bidiscipline for one reason or another. Another way I screened for stocks is I do role playing where I'm trying to pretend I'm a relative return man.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“But there's so many opportunities in cyclical businesses if you can get over the fact that their operating results are just naturally volatile. There's nothing wrong with that if you can normalize in their profitable throughout a cycle and they have good balance sheets. That sometimes turns off a lot of investors, which I think creates opportunity. So I try to avoid screening by PE. So I just want to minimum that they can make money. It's a very low rate. So I have that market cap, profitability hurry. But then I apply a leverage filter and I want these companies to have less than three to five times debt to discretionary cash flow. And my reasoning for that for small cash, you know, small caps aren't like mega caps that can borrow for 30 to 40 years. If you look at most small cap debt, it's more the maturity wall is 2020. It's more like four to six years max. So I want to make sure that they can.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“I have a formal screening process and it starts with market cap. It's $100 million to $5 billion. And then I put a profitability hurdle on that. And it's 1% ROE. And you're like, well, that can't be hard to exceed that hurdle rate. But you'd be surprised with small caps. Again, we talked about this earlier, depending on where you're in the market cycle. A third to a half of small caps don't make money. So that eliminates about half. One thing I don't like using earnings like a PE and even Enterprise Vita, but I do like enterprise value even better than PE for many reasons. But I want to be careful not to weed out cyclical companies that are generating trough operating results. So there's a lot of high quality cyclical companies. I wrote a post called Grey Coupon Investing and I kind of poke fun at maybe value investors that are, their opportunity set is so narrow because they only buy a certain type of company.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“That's right. So these again are very mature companies that have been through many cycles and that allows you as an analyst to analyze how the business will respond to many different environments. And that goes back to normalizing cash flows, determining sort of that margin range, very important. And history is one of the best ways to do this.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Now, you could even focus on closely held businesses. Closely held businesses, you know, people often put discounts on those. But I disagree. If you have a closely held business that's being run properly, they don't tend to financial engineer as much because why fool yourself? You're the majority of shareholder. There's no reason to participate in financial engineering. But you're right. It does happen in small caps, but I would argue it happens as much or even more in the larger cap names. I think small cap companies often learn from the bigger market caps what's acceptable, what isn't. And a lot of them will imitate that. I remember in early my career, we didn't have these non-gaps where you have 20 foot notes after the press release. That might be one or two footnotes, but now it's half the press release is footnotes. on how to explain their non-gaps. So it's definitely gotten out of hand for sure.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“I think if you follow more mature companies, less exciting companies, I'm always looking for that sort of perpetual bond type of business. And they're not really trying to impress you. They're just trying to go three to five percent a year kind of having that sort of high single digit, maybe 10% return on capital. You're not exciting companies. And that's what I want because my whole absolute return process revolves around limiting mistakes. And I focus on those companies that are more mature, less likely to surprise me on the upside or downside, you know, both ways. So I think that is helpful focusing on companies with long operating histories. And over time, if you follow the same names for, say, 20 years, you get to know the companies that are promotional. You know, you kind of get to know the managers that are sort of the Eddie Haskells of the world versus the street shooters. So that takes time. You know, another thing that I was just thinking about.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“That's right. If your position, if you're fully invested right now, which mutual fund cash levels are 3%, Frank Martin did a great bog last week about this. He's talked about how cash levels are 3% on average for equity mutual funds. Meanwhile, there was a survey that showed portfolio managers 80% plus the portfolio managers believe stocks are currently, I think it was as expensive as 2000, year 2000. So you have a huge conflict here. On one hand, the professionals are fully invested. On the other, they think stocks are overvalued. So if they think stocks are overvalued and they start losing 10 to 20, 30 percent of their clients' capital, I don't know how they're going to respond. I think because they know stocks are expensive, I think they might be a little quicker to sell than if they firmly believe there was value, if they had margins of safety. But they don't, and I think they know that. I mean, the survey.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Know with small caps, if you're running a billion dollars in small cap money and the bell rings and the Russell 2000 drops 30%, I have news for you. You're not getting out. You're not going to be the first order. It's not possible. You're going to write it down.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“It's been so long since we've had panic. I think once it happens, it's going to be so new to so many people and even people that are experienced, they haven't seen it in so long. I mean, when you're losing 10, 20, 30 percent of your money or your clients' money, that's frightening. I don't think people are even considering this. But when you look at valuations, why shouldn't you be considering it? History suggests you shouldn't even just be considering it. You should be counting on it. And this is very normal for bear markets, right? And the amount of money that's indexed now and how price-insensitive many of these assets are for us, for disciplined value investors, I think the end of this cycle is going to be extremely profitable. If you have liquidity, you're going to be able to take advantage of it. But if you don't, how are you going to allocate capital you don't have to allocate? It's already invested. And it's tough. You know, everyone thinks they'll be the first one out when a cycle ends. When you ring the bell.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“It's interesting a lot of investors now running billions and billions, maybe trillions of dollars, they're in the same position I was in back in the 90s when I thought I could do no wrong and I was bulletproof. And that's kind of scary. And good thing I wasn't running a billion dollars back then. I could have hurt somebody. In fact, in 99, I did lose 8%, but that kind of loss you can recover from, and I did. But the losses that could occur in this cycle with where valuations are, you know, these are types of losses, especially if one of the reasons the market goes down is loss of confidence in central banks, because then who's going to bail out the next cycle? But if you just revert to normal valuations, you could lose in small caps.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Still, I was talking about 99. I'm most proud of that year because I lost 8%. I don't know if you tried, if you could lose 8% 99, but somehow I did it because I voided tech and bought some more caffeine. But Bill Miller is right in that, you know, Jim Rogers as well, where you start can influence how you perceive yourself and how others perceive yourself. And you think about the average age of an analyst and manager now, I would guess it's eight to ten years, maybe, you know. And what's the cycle length of the cycle? About nine, right?”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“No question. I mean, that is a great point. 93 to 2000 for most of that cycle, everything I touch turned to gold. It was unbelievable. 93 and really 98. I mean, I just graduated from college. I was running trust money like 300 million. I couldn't believe they had given me all this money to run. It was incredible. And I was doing well. And then in 96, I joined Evergreen Funds as a small cap value manager. And the trend continued. Everything I bought went up, not everything, but almost it felt like everything would work out. But it was, you know, I talked about this with Jesse. It was the profit cycle. But I had no idea. It was my first cycle, right? I mean, I was this young analyst and I thought it was a genius and it was great. But then, you know, of course, the tech bubble hit and that, wow, that was humbling experience where I went from the genius to the idiot. And that was a very, very difficult cycle.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Extrapolation with credit profits, price, the environment. Next year will be different than this year, but we price securities often as it will be the same indefinitely, right? Not just for next few quarters, but for many, many years. If you look at the value of a stock, most of the value of the stock is many, many years away, right? If you value a long-term bond back when we had interest rates, most of the value was 10, 20, 30 years if you bought a 30-year bond, most of the value is many, many years away.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Happens is asset allocators often look backwards at what is generated and they use these historical returns and they plug them in their models and then the models spit out what they should own. But yeah, if you use the last five, ten years of small cap returns and you plug them in your model, of course they're going to look good. But how they act in the future, that's a whole nother story.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“They're immature industries, and there's many market leaders in small caps. So I think that's kind of a misperception by a lot of people. Another thing with small caps, I think a mistake people make is they feel maybe asset allocators more so than retail investors, but they feel they need a small cap allocation. They must own some small caps. Why? You don't have to always own something. You don't have to always own an asset class if the Russell 2000 trough in 2009 at 350 small caps are extremely inexpensive then. That was the last time I was very aggressive, aggressively positioned. But now you're at $1,400. The enterprise value EBITDA, the Russell 2000s, like 22 times. I mean, that's twice a normal takeover valuation. Why do I want to own any fund or index fund or ETF as small caps? It's not necessary. You don't have to own small caps. I think it's a huge mistake.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“You know, I think one thing is the growth rate. I think the perception is small caps are always these high-growing companies. But the ones I focus on actually are slow growers. One of the mistakes I try to limit is using growth rates that are just unachievable to aggressive, I think, growth rates are one of the areas you can make a lot of mistakes because a small cap company in its earlier stages of its life, say a restaurant does an IPO and they come out with 100 million in sales and they have 100 million in cash. Well, you can grow that pretty quickly by just opening new units and using that cash. But at some point, you're going to mature. You can run out of cash and that growth rate is going to go from 15 to 20% to zero to 5%. And that's when the growth investors kick the stock out of portfolio and the value investors come in. So this is that kind of growth and value transition. But not all small caps are biotech companies. There's so many mature small caps.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“It's funny. I bumped into Jesse's blog and I started reading it and I actually emailed him right away. We eventually spoke on the phone and we think alike. So that's a compliment saying that we're looking at the same thing.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“You know, I'm not the only one that views this valuation metric, but I always have priced the sales. It weeds out so much of the noise and the manipulation and earnings or the financial engineering. I always found it to be very good indicator. The one thing I learned in the tech bubble is valuations can go to such extremes beyond belief. You know, on the upside and downside. Small cap value stocks were extremely inexpensive in 99, 2000. I didn't think they could get any cheaper than they did. And then tech stocks were outrageous. They couldn't get any more expensive. And they did. So you have to always be careful with these valuation metrics. They don't really help you with timing, but they help you tremendously with monitoring risk and potential return.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“That's right. The cycles vary between industries and businesses. So you got to be careful not to just use a standard five, 10 year, seven-year, you know, whatever your number is. When you think about the shower PE, and I actually talked about this recently with a friend and fellow absent return investor, we talked about this, how the shiller PE is 10 years. Well, 10 years, it could include two upcycles and one down cycle, right? So now you're not really normalizing or it could include two down and one up. I like to customize my normalization in my period and customize it to the particular business or industry. And usually it's obviously industry related.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“week really poor comps and it's amazing what happens to retailers margins when comps go from plus two plus three to minus five minus six as a tremendous amount of operating overs there you know the earnings expectations fell significantly gross margins were down 300 400 basis points so i've owned for the locker before but i owned them when the margins were operating margins were 1 percent and most recent year they were 13 right so i want to know everything about the business that influences margins to where i can determine that normalized margins which eventually determines your normalized free cash flow”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Most definitely. So I remember the mortgage credit boom. I think 2003 to 2008, that's when I really became interested in credit and the credit cycle and how that impacts the profit cycle. So when I value a business, I'm trying to normalize earnings. And I need to know where we are in that earnings cycle to get an accurate valuation. And the credit cycle is so important to that because the credit cycle influences profits tremendously. If you look at the stock market, especially small caps, and you overlay that with the profit cycle, you know, one of the reasons here on financial television, I try not to wash much. When I do, you know, one of the main reasons buy stocks is profits are high. But if you look historically, that's usually one of the main reasons you want to sell stocks because people are extrapolating record margins and record profits. But you go back to margins, why margins are so important. Again, I normalize. You know, we just saw footlocker announce last year.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“No question. Yeah, the small caps have been indexed just as much as the large cap and mid caps. It's kind of concerning. You think about this perception that indexing is safer. I don't think a lot of investors open the hood of some of these ETFs and index funds. Small cap stocks, just say the Russell 2000. When I screened for a small cap stock, depending on where we are in the profit cycle, half to a third of these small caps don't make money. If you buy an index fund, you don't know this, you're buying companies that are losing money. I mean, you wouldn't want to do that, right? With your money. I mean, but when you index, you're actually doing that. And people get this comfort of diversification that it's lowering your risk. I actually think it's increasing your risk by owning thousands of small caps. Many of them may not be viable businesses in the next few years or the next recession.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“I mean, you know, back then, the largest holders of these small cap stocks were traditional small cap value companies or managers like the Royce funds, Heartland, Ubelli. Those were larger holders. And when prices got out of whack, they were there to police the market, you know, almost like a market maker. All right, now I have an overvalued small-talue stock. We'll sell it. But now when I look at the top holders, I see Vanguard dimensional funds, BlackRock. And these are just, they're much more, I mean, they are. They're price-in-sensitive investors. So flip-flop from when I started, you know, I know I mentioned this before, but I still think this is what is going to be a significant contributor to small capital opportunity in the future is the absence of the small cap police.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Concentration in sales. You know, there's a little more risk concentration risk I found with small caps as well. So there's a reason small caps should demand a higher required rate of return for small caps than the mega caps and the mid-caps. And I would say one of the things I love about small caps is I feel like there's more straight shooters. You know, when I listen to a mega cap conference call, I almost feel like after an hour, I just listen to an infomercial. It's so promotional. But some of the small caps, you know, they did crack jokes. It's more personal. They tell stories about their business. I just enjoy it more. It's less scripted.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“I mean, obviously, there's a lot of differences between large cap and small caps. There's so many more small caps. If you look at large caps, there's a few hundred. There's a few hundred mid caps. Well, there's thousands of small caps. So I find that just so much more interesting area to work in where you can find new ideas, maybe things you haven't worked on before. And I just think there's more opportunity in small caps. I think there's bigger dislocations between price and value. And a lot of that revolves around liquidity. Less liquid stocks are going to move more violently than very liquid stocks where the bid and ask is, you know,”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Trying to allocate capital to the best of their abilities to find those discounts and put money where it should be placed most efficiently. And that whole process is artificial now. Everyone calls it malinvestment. Call it what you want. But it's not natural. I miss a good old-fashioned bubble. I mean, give me the tech bubble. I can understand that one. I was pure greed. This one is almost forced on you. Either you play along or you don't.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Hope central banks are unable to suppress interest rates indefinitely. I mean, to me, though, this would be sad, you know, to where investing as we know it, free markets as we know it, capitalism as we know it is gone. I mean, it's very, very sad circumstances. So I hope, I'm very optimistic that the markets eventually overwhelm the central bankers and take back their rights. investors can investigate. I don't know what to call this environment, but I don't call it investing. It's too controlled where you have these central bankers controlling the interest rates where they are. I mean, it doesn't make a lot of sense to me that it could last forever. But if it does, you know, that's when I have to find another line of work because it's not real. It's not what we all study to do. Here you have an industry with thousands of extremely smart people, this human capital.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“I think it is around a 3% free cash flow yield for most of the small caps I follow. You know, my opportunity sets trading around 30 times earnings. And I know where we are in the cycle right now. I normalize earnings. So if you think margins are above average, which I mean, you don't have to think that they are. But if you normalize those margins, you could argue that the price to earnings on a normalized basis is even higher. I know the Schiller PEs around 30 as well, which would give you a shiller earnings yield of around 3% as well. And if you use the 10 years history of rates and use these artificially low rates, well, that's enhanced earnings above where they would be if rates were normal or real rates were two to three percent instead of zero to one percent, right? So I did the math there, I kind of backed into that and came up with a short P, that's closer to 40 times. So I think you could argue if you normalize earnings and use normalized interest rates, you could actually get to an earnings yield that's a little less than.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“We're now close to my fair value. And it wasn't really performance related. We're having a pretty good 2016 because of the equity returns on the miners. But once I started selling those, I started to get to 90% cash. So now I'm at 90% cash and the 10% equity I had left in the portfolio were invested in equities that were close to fair value. But the future returns, the absolute future returns, which I expected were not so great to where I could not achieve that 10 to 15 percent on even the remaining equities. And at that time, in May of 2016, that's when I recommended returning capital.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, that's a great question. First, why return the money? You know, an absolute return investing, if you're not getting paid to take risks, you know, I just don't do that. But absolute return invest for me, I actually have a specific hurdle rate, and that's 10 to 15 percent on my equities. And if I can't achieve that, that's my objective. I'm unable to achieve that hold cash. Well, what happened to me in 2016 is I had a high level of cash at that time. I had about 80% cash. And I was also in a very contrary position, the precious metal miners. And I mean, imagine that holding 10 to 15% in miners and 80% cash and somehow still maintaining enough assets to make a living. So those were good times. But the miners actually worked out and reached my valuations for the most part. And I began to sell those. This was in the spring of 2016. That's when it struck me. The main area where I was finding value, those 50 cent dollars.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Thanks a lot, Rustin, and thanks Dick for having me. And, of course, thank you, Jesse, for recommending me. I appreciate that.”
2017-09-16 · We Study Billionaires · TIP156: Small Cap Investing w/ Eric Cinnamond (Investing Podcast) · IDENTIFIED FROM THE TRANSCRIPT