Frank Curzio's WALL STREET UNPLUGGED Podcast

What you really need to be a good investor

I often talk about the art and science of investing. After all, a lot goes into analyzing companies, industries, and the markets.

The good news is you don’t have to be an MBA or CFA to be a good investor! You just need to be curious… put in the time… and have a strong grasp of fourth grade math.

But where do you begin?

I share some of my favorite investing books to inspire you and point you in the right direction… And you don’t want to miss my Big Salad experience in the opening sequence.


The Mike Alkin Show | 56

What you really need to be a good investor

Announcer: 00:00:00 Free and clear of the chatter from Wall Street, you’re listening to Talking Stocks Over a Beer, hosted by hedge fund veteran and newsletter writer, Mike Alkin, who helps ordinary investors level the playing field against the pros by bringing you market insights and interviews with corporate executives and institutional investors. Mike’s sifts through all the noise of mainstream financial media and Wall Street to help you focus on what really matters in the markets. And now, here is your host, Mike Alkin.

Mike Alkin: 00:00:40 Welcome. It is Monday, April 8, 2019. Hope you had a good weekend. Here in New York area, beautiful weather. Starting to feel like it’s springtime, although I will say it’s been kind of a mild winter. The polar vortex was blasting the Midwest and people are getting hammered in the cold. A friend of mine, Brent in Minneapolis, was sending me his weather app showing me when it was -50 below, you know, a few months ago. We didn’t get anywhere near that here in this area, in the northeast. But I don’t think I took my snowblower out one time this season. I mean we had four, five, six inches, just some minor stuff. For that I’ll get out and I’ll use the snow shovel. So, pretty mild, really nice weather over the weekend.

Mike Alkin: 00:01:48 I’m starting to get in the, when do I put the summer furniture out phase, because we have a lot of stuff in our back yard, and I put everything away. And it starts to stack up, and over the years you know you start to accumulate, and I’ve got a ton of sports equipment in the garage. So space gets a little bit tight. I’m always anxious to get it out, and my wife’s always saying, “Wait, you never know, April can be weird.” And I’m like who cares. So she said, “Well if it snows, you don’t want the outdoor furniture to get ruined.” And I think well, in the summertime when it rains it’s fine, who cares right? It’s water. But she has a different view of snow, so I’m not gonna go there.

Mike Alkin: 00:02:40 And after 25 years, you realize happy wife, happy life, so you just say okay we’ll go with that. And so, I keep it there. But what happens over the winter is, my son and his cavemen friends, my son being a caveman included, they are always finding their way into the garage, and no matter how much I organize it, no matter how much I try and keep it structured, it’s just a calamity at the end of every weekend. Now they’re 13, and it was worse when they were 10, but still I mean, they pull everything out. I try to get them to put it away. I go outside when they’re all outside, and I’m like, “Listen guys, you gotta keep this somewhat organized.” “Yeah Mr. Alkin, you got it.” Now Big Mike, or Uncle Mike, they’ll call me anything. He’s got some real characters as friends.

Mike Alkin: 00:03:40 But anyway, this weekend I was trying to get the pre-clearing out of the garage organization. And you know how you know yourself? And you know your hot buttons? Well, even after all these years of doing this, I still know the reaction that doing this is going to elicit, but I can’t help myself. Because I’m in there, and I open it up and I’m like, “Oh my god, how did this just happen? I just organized it?” And I go in, and as I start moving things around and start to put stuff away, invariably I trip on something or I’ll hit my head on something, and I start ranting and raving. It just goes on and on, and it just keeps going. So that was kind of this weekend.

Mike Alkin: 00:04:36 As I’m doing that, we have a big Golden Retriever, Annie, Annie May we call her, and she is even now. We take her out, we get her walks. And every once in a while for whatever reason if we’re just tied up, we can’t get her out, we’ll put her back out and she’ll go to the back of the property and she might poop and it’s in the back under the bushes or whatever. And then we will go out and clean it up. I keep on the side of the garage a little metal trash can with a bag in it. And we take the poop, put it in the bag, put in there and then just throw it out.

Mike Alkin: 00:05:16 So my son, when his buddies are over, we’ll say, “Hey, listen, just go out and clean up in case there was that week we didn’t get a chance to walk her and she was out there for a couple of poops out there. So I tell them, just pick the little tool and put it in the bag. Well I sent just to go, I figured I haven’t checked on it in a while and sure enough, I open it up and my son doesn’t use anything it turns out. He doesn’t put it in the bag, he just throws it in the trash can. I can’t even begin to tell you how bothered I was.

Mike Alkin: 00:05:58 So that turned out to be a couple hour project for me to organize, structure the garage and then deal with that mess. So that was part of the weekend. And then the usual shuffling around of the kids going here, there and everywhere. Which I love, right? Because how long are we gonna get to do that? Where it’s a Saturday night, take my daughter and her friends and they go somewhere for dinner. I pick them up and then I’ll go get my son. I’ll drop him and his buddies off somewhere. And like I said, I think I complained a few weeks ago, maybe a little bit longer, that it would be nice occasionally if someone else’s parents would do it. And some do, but a lot don’t. But I love the fact that I know my kids can call anytime and they know I’ll be there, or my wife will be there in two seconds and we were happy to do it. So that was nice.

Mike Alkin: 00:06:56 I don’t know how many fans there are of Seinfeld listening, but Seinfeld to me is an institution, as it is to many people, and I don’t know if it’s a New York humor. I think when it was on in the 90s, it took a little while I think for it to find its groove, because it really is very New York centric. I know when I lived in Dallas for a while in the early 2000s, people would be like, “What?” Like that’s bizarre. And then you know, it started just to gain in popularity. But, it really is New York centric, and a lot of it can be obnoxious humor.

Mike Alkin: 00:07:34 But one of the characters obviously is George Costanza. Just always doing the wrong thing, saying the wrong thing, but just lovably funny, obnoxious, stupid guy. Lovably I shouldn’t say, but just an oddly endearing character. One of the scenes is a scene where George and Elaine, and Jerry you’re going somewhere. And they’re picking up salads on the way to bring. And they walk into the store and they order all the salads, they were big salads. And George pays for the salads. And so he buys it all, and as they leave and they go to wherever they’re going, and Elaine says, “Oh, I’ll take it.”

Mike Alkin: 00:08:23 So, Elaine walks into this gathering with all the big salads and everyone is saying, “Oh, thank you Elaine, it’s so nice, we love it, it’s so nice.” And Elaine doesn’t say, “Well, George bought the salads.” So I think the title of that episode was: “The Big Salad”. So, the next day comes and George, it’s bothering him, it’s sitting in his gall, it’s really in his craw. And the next day he says, “I can’t believe Elaine that you took credit for the big salad! I paid for it, but no, you take credit for the big salad”

Mike Alkin: 00:09:03 So, as years go on, whenever there’s a big salad moment in someone’s life … and that’s the thing about Seinfeld, every episode you say, “Oh, my god, that happened to me.” And I think that was the show about nothing that had this comedic genius.

Mike Alkin: 00:09:20 Well, we’ve had a few episodes. My daughter had some girlfriends over, and they were watching a movie, and my daughter said, “Hey dad, would you …”, and they were in a different part of the house, so she texted me, which drives me nuts by the way. My kids have a penchant for texting or calling from inside the house, and it’s a pet peeve of mine. If you’re in the house, either get up, don’t yell, just get up walk and say what you need. But my daughter texted me, she said, “Dad, would you make us all popcorn and drinks and stuff like that?” And I said, “Sure.”

Mike Alkin: 00:10:03 So, I make snacks, not just popcorn, I make them a bunch of snacks, I make them drinks, and you know, probably took me 20, 25 minutes, I don’t know. I’m popping seven or eight bags of popcorn, I’m putting all the other like snacks … and if it was my son friends, I just throw a bunch of chips in a bowl and thrown it out there, because like I said, they’re caveman. But for the girls, I try to make it nice and organized. I made a couple of trays that I was putting it on. And so my wife was puttering around the house or doing whatever.

Mike Alkin: 00:10:36 So here I am, I have both trays ready to go with all the snacks, and they’re all nice. And my wife comes in, she was puttering around the house, and she comes in and she says, “Oh, what are you doing?” And I said, “Oh, I made the girls a snack.” And she goes, “Oh, I haven’t seen them.” She was busy on a project. She was, “Oh, I’ll bring it to them.” So she takes the tray, she says, “I’ll bring it don’t worry about it.” And I said, “What are you doing?” And she said, “What do you mean?” I said, “That’s the big salad.” She said, “What are you talking about?” I said, “I just spent 25 minutes making this and putting everything together, and it’s all nice and girlie. And you’re taking in the big salad?”

Mike Alkin: 00:11:24 Well, we had such a laugh, because she said, “You know what? You’re right, it’s the big salad.” So it was a big salad moment. So that’s Saturday. Yesterday, my daughter decides that she wants pesto sauce and pasta, and some chicken and she could cut it into it and everything. And I said, okay. And again, my wife she’s getting her second master’s degree. She’s a CPA and she has a master’s degree, and she’s getting another one, because why not. Somebody’s got to be smart in the family, so it’s her. So she was busy just writing something. The program’s almost over, she’s done in a few weeks. So I ran to the grocery store, I bought all this stuff. I come back and I was making chicken, my daughter likes chicken cutlets. But making the pesto sauce. You gotta get the processor out and you gotta do all that stuff. It’s easy, but it’s a little messy, and then making the salad and then the chicken cutlets. It takes a little while. So I got the kitchen going, I’ve got everything down.

Mike Alkin: 00:12:36 So probably, I don’t know, that takes me 45 minutes to an hour. And I set the table. Sunday dinner we always sit down, what’s your plans for the week, we talk about what’s going on, because you know, the week gets hectic sometimes. And while we have dinner most nights together if my son’s got a game or practice, or my daughter’s got something you know, sometimes it’s ships sailing by in the night. So we do that, and one of her best friend’s comes over, and she says, “Big Mike, I heard you made pesto sauce.” I said yeah. So she comes over and she was eating dinner at her house, but she wanted to come and just try it beforehand. She liked it, got the seal of approval. But my daughter wasn’t home at the time. So again, here it comes. My wife didn’t mean it at all. So here I am, everything’s getting ready for dinner and everyone’s started to descend upon the kitchen. But before they did, here comes my wife into the kitchen and she’s just puttering, for the last couple of seconds, and here she comes.

Mike Alkin: 00:13:58 My daughter comes in and she’s so excited, and she said, “Oh god, it looks so great, you know mom …” and referencing that mom was doing a lot of it. And so my wife looked at me and she’s like, “The big salad?” I said, “The big salad.” So, if you have big salad moments, just stop and reflect, watch the Seinfeld episode for laughs, and you’ll get a kick out of it.

Mike Alkin: 00:14:24 So, anyway. I [inaudible 00:14:27] the playoffs, Wednesday night 7:30 PM Eastern. I don’t know what you’re doing, but I can’t think of anything more important that you could be doing than sitting down in front of the TV watching the Islanders play the Penguins. And I have my pass, so I’ll be watching that, and going back and forth. I mean the next two months are just out of control, right, NHL playoffs. There is no sporting event like this. These kids play hard every day for 82 games. They then take it to a level, there’s nothing like playoff hockey. The level of intensity, the speed, the hitting, it’s out of control, exciting. Now, so obviously I’m an Islanders fan, they’re playing the Penguins, it’s going to be a tough grind. I don’t expect them to get past Pittsburgh, only because the experience the Penguins have, the Islanders are a chip and chase type of team.

Mike Alkin: 00:15:20 What I mean by that is they don’t have any real superstars, they don’t have great offensive talent, but they play great defensive hockey, they’re grinders, they’re hard workers. But the Penguins still have Syd and Evgeni Malkin, and Phil Kessel, and Kris Letang. And these guys are just tremendous. And I’m missing a couple but they are just outstanding.

Mike Alkin: 00:15:44 But it’s going to be a great series, but then all right, 7:30, games end at 9:30, 10:00, and then you got the west coast game starting. I mean it just doesn’t get better than that. I don’t know what it is about watching games in the NHL, like I know every arena. And I know which one has great lighting, which one has great camera angles. There’s a few where you’re just thinking, oh god the camera angle sucks, it’s a little dark, I don’t like it. But for some reason when you’re watching games from Calgary and Winnipeg, it’s just fantastic and you feel like you’re on top of it. So it’s like my god! So that’s the next couple of, at least six weeks or so. So I’m excited for that, that starts.

Mike Alkin: 00:16:28 Baseball season just started. I won’t even talk about it. Last year I was here gloating about the 11-O New York Mets and then went on to lose like 28 of their next 35 games, well I thought that was probably generous, they probably lost 30 of the next 35 or something like that. But they get off to a decent start. But forget it, we’re in playoff hockey mode right now. So anyway that’s that. If you’re not a hockey fan, just give it a shot.

Mike Alkin: 00:16:54 So I got a text, not a text, what’s it called, a direct message on Twitter from someone. And it says, “Huge fan of your podcast, it’s given me a new perspective, yada, yada, yada.” It says, “I’ve been listening to your podcast for a couple of months now, and I found you on YouTube about uranium …”, and so on and so forth. It says, “You have a propensity to tell it like it is, I was hoping that you could do a podcast on the formation of your world view …”, and blah, blah, blah. And then it goes on, I don’t mean blah, blah, blah dismissively, I’m just not going to read you the whole thing. But really, he says, “You often state we need to put in the work, something which I pride myself on. Yet without the correct tools and references, we may be doing the wrong work. What authors and titles should we be utilizing in order to understand financial statements, enabling us to do those deep dives you talk so much about?” It’s a good question, and it goes on and on. And it was a nice direct message.

Mike Alkin: 00:18:02 You know, I get asked a lot, and I say that a lot, you have to do your own work. And look, I understand most of you listening are not financial analysts. But you are listening to a financial podcast, so you clearly have an interest, because like I said, my wife and kids in the car, if I were listening the eyes roll over. But seriously, and a lot of my friends, my peers that are not in this business, have no interest, so I applaud everyone who’s listening and trying to learn. I wish there was, you know, that I could sit there and say, “Okay, let me share with you over 20 years of every day’s lessons that I learned.”, but that’s not practical. You know, maybe one day when I’m, well I’m already gray, but one day when I’m old, well I’m almost, almost old, but one day I’ll teach somewhere.

Mike Alkin: 00:19:08 But in the interim, it is just time limitations. So I can’t sit there and say, “Okay here’s how every scenario should be, and here’s how you analyze an income statement, a balance sheet, a cash flow statement. But I could point you in the right direction. And I think so much of this business, so much of investing is art and science. I don’t come from a pedigreed background, I graduated college when I was older. I wasn’t a great student in high school. I was a three sport athlete with no familial direction, and just kind of got by in high school. And then went to college, and didn’t do well the first time. And then I went back later on when I was in early and mid-twenties. So for me, it was a very circuitous path.

Mike Alkin: 00:20:07 In high school I did really well in the classes that I liked, and if you bored me, I had no interest and I didn’t do well. One of the things, and I didn’t know it at the time where it would lead me, but I’m very good with numbers in my head, and I’m good with pattern recognition. So I could see trends, I could see patterns, and I could do basic math really quickly in my head. Now that doesn’t mean anything, but it helps for doing this. I say in my head. When I build a model it’s on a spreadsheet, but I can hear things and see things, and read things and quickly surmise price volume, what does that mean to the margin, it just works for me.

Mike Alkin: 00:20:56 But that being said, when I came into the business, I had no pedigree. And I was in a world of pedigree. And so I worked hard to get into it, but once I was there, I was against guys who really were the creme de la crème from top business schools. And that was intimidating for a while. It took me in my first year, you know it’s a whirlwind the first 18 months, maybe in the first two years, you’re just grinding and trying to do your analysis, and hope you’re not wrong. The investment world doesn’t come together for you, it doesn’t piece together. You have a little snippet of the world, your assignment, look at these companies and analyze the cash flow statement, income statement, balance sheet. Go do primary work, go talk to customers, go talk to suppliers, go talk to former employees, go out in the field and observe, right.

Mike Alkin: 00:21:58 But there’s all this mosaic and these snippets of information you’re gathering. But for me, when I was first doing it, it didn’t tell me anything, I mean it told me about those specific pieces, but I didn’t know how to put that together into an investment thesis yet. And then as time goes on, you observe. Y you observe your portfolio managers, you observe the guys who are more experienced than you. And you go to conferences, and you sit around and listen to people and you learn about what’s important and what’s not important. The best examples are when you make mistakes, and you start to develop a checklist and you start to develop things to look out for, and a memory bank. And it just goes on, and on, and on.

Mike Alkin: 00:22:47 And then, over time it starts to piece together, and you could reference points in time. I can tell you where I was and what I was doing on certain things in life, right. When The Challenger crashed, and 911, the birth of my children. And then after that … or when the Islanders won the Cups in ’80 and ’83, a long time ago. And the Mets in ’86. But then after that, for me, the world is in terms of when I … my memory is obviously of my childhood, and memories of my children as they’re growing up. But other than that, it’s oh yeah in ’03 this happened, and in ’06 … it’s always reference to a company or an industry that I was looking at. I was building off of what I learned then, if I wish I knew then what I know now that type of stuff. But you develop that over time.

Mike Alkin: 00:23:49 But I think for me early on, and I didn’t realize it, one of the very best books I ever read, I had the good fortune early in my career, my second job in my career … My first job was a very small shop. I had done very well calling a short on the for-profit education space. When I say called a short, it was a couple year’s worth of a project. And I was the analyst, and the portfolio manager was the one sizing the positions, but I was doing the field work. And that worked out very well, and it caught the attention of a few notable people in the industry, and I wound up at a firm called Zweig-DiMenna. It was run by Marty Zweig and Joe DiMenna.

Mike Alkin: 00:24:43 At the time, it was one of the biggest hedge funds out there. And it was around since the early 80s, or I’m sorry, since yeah, I believe the late 80s, or something like that. And when I got there, it was a multibillion dollar fund. It was Marty Zweig, rest in peace, he passed away a few years ago. But Marty Zweig was a high profile guy. He was on Louis Rukeyser’s Wall Street Week every week. He was an economist, PhD, and just a high profile Wall Street guy. And Joe DiMenna, who ran the portfolio. Marty was the macro guy, and Joe was the stock picker. And Joe to this day is the greatest pure stock picker I’ve ever seen.

Mike Alkin: 00:25:41 But Marty, when you got there, they had a few books that were required reading. One of them that was required reading was a book called Reminiscences of a Stock Operator, written by Edwin Lefèvre. And it chronicled the life of the famous Jesse Livermore in the early 1900s, late 1800s, but early 1900s. About a speculator. And he was a trader, and he would sit at trading houses around the country, a very different business back then. But really, I didn’t know it at the time, but it was about Edwin Lefèvre spent a few weeks with Jesse Livermore, who was one of the greatest speculators of the day. And it was about the lessons he had learned, about doing it. And again, a very different time, but so much of it applied when I was reading the book, over 20 years ago, and today it is.

Mike Alkin: 00:26:54 And the reason I thought of this was, my friend Angus Reid out in Vancouver who was on the podcast recently, a former CFL 13-year veteran and successful speaker and businessman, now in his after football life, asked me the other the day, he’s like, “What book should I read on investing? What would you recommend?” And I was looking up at my bookshelf … When I read, I need the hard copy. If you look at any book I have, everything is highlighted, I write in the margins. It’s just the way I learn. It might be download stuff too, my iPad Kindle. And I never wind up getting through it, so I always wind up ordering the book too, because I wind up reading the hard copy, it’s just how I learn.

Mike Alkin: 00:27:52 So, I was looking up and I hadn’t looked at Reminiscences in a while, but I probably read it three or four times over the 20 years. I said you know, Reminiscences Of A Stock Operator and just, it’s not gonna teach you financial analysis, but it’s going to teach you how to think about the market. Because like I said, part of the market is science, right. That’s the analysis which I’ll get to in a minute, or more than a minute.

Mike Alkin: 00:28:23 But so much of investing is the art. You can’t have one without the other. I believe you need to blend the two. I’m going to go through and just read some of this. I can’t recommend this book enough. I’ll just read you some excerpts, some of the stuff I’ve highlighted. I’m not gonna get too deep into it, but some of the things that stood out to me. This was highlighted over 20 years ago, and it’s true today. Another lesson I learned early is that there is nothing new in Wall Street. There can’t be, because speculation is as old as the hills. Whatever happens in the stock market today, has happened before and will happen again.

Mike Alkin: 00:29:09 And I think so much of that is because you’re dealing with human behavior, you’re dealing with psychology. Now yes, there are quantitative investments, there are passive investments that have played a major role. But even the quants or layering on behavioral psychology right now. You know, a lot of the industries that I like to look at, I like deeply cyclical industries. For me, deeply cyclical industries, this so applies, speculation is as old as the hills, whatever has happened in the stock market day to day has happened before and will happen again.

Mike Alkin: 00:29:48 Well if you think about the boom and bust of natural resource cycles, right. You have industries that are on death’s door because there’s too much capacity in an industry. The old saying, the cure for low prices is low prices. What that means is, when prices are so low, all of that, well not all, but that capacity that is in excess needs to come out of the market, so that there could be a pendulum swing for the prices to go higher. When there’s less of something prices will gravitate up, supply demand, right. It’s basic stuff. And if you know that you would think that it’s so basic, it’s so easy to see, that you wouldn’t have these booms and busts. But you do. Why? Because recency biases.

Mike Alkin: 00:30:47 When people are analyzing something, they tend to look at what recently happened. And then extrapolate into the future. So if you can get your head around that, and it took me a long time early on in my career, saying wait a second, that’s so obvious. I mean how is that possible? Boom, bust, why? If you just step back and say, okay what about moderation? It just doesn’t happen in cyclical industries.

Mike Alkin: 00:31:17 I’ll talk a little bit one. It happens there are deeply cyclical industries, it just doesn’t have to be natural resources, tire manufacturing, milk processing, whatever it is, wherever there’s cycles, you see this. So it is understanding thinking about what those cycles are and learning, and paying attention to what cycles are and how they’ve played in the past. You know, what happens in the market day to day has happened before, it’s so important to understand the history of that industry that you’re looking at. How does it normally behave? What has caused peaks and valleys? What has caused troughs? What has caused peaks? What was going on the last few times that happened?

Mike Alkin: 00:32:10 You need to understand that because you need to understand what to look for now and how to think about that. They say there are two sides to everything, but there’s only one side to the stock market. It’s not the bull side or the bear side, but it’s the right side.

Mike Alkin: 00:32:28 Nobody can make big money on what someone else tells him to do. I know from experience that nobody can give me a tip or a series of tips that will make more money for me than my own judgment. That’s probably the hardest thing that was for me to learn. And that only comes with experience. It depends, right, if you’re a growth momentum investor you’re going with the crowd. And that’s fine, people make money that way, and if they know when to get out that’s great. In my style of investing, which on the short side, as I grew up in the industry as a short seller, you are by definition betting against the consensus and you’re a contrarian. So, you really need to rely on your own judgment.

Mike Alkin: 00:33:24 On the long side, I’m a deep value out of favor investor, some call it contrarian investing. Someone commented somewhere, I don’t know if it was on Twitter or something, a year ago, I want to drop the gloves, maybe it was my pet comment, “Stop calling yourself a contrarian investor, you’re deep value …”, whatever it was, it was like shut up. It’s called contrarian you idiot. If you’re a contrarian you’re a contrarian. So I don’t read these reviews. I occasionally do, but more like YouTube comments, because I’d spend all my time going back at them.

Mike Alkin: 00:34:07 But nobody [inaudible 00:34:09] or series of tips have [inaudible 00:34:10] than your own judgment. You own judgment, it’s your own work. I hate the word tips too, because people who don’t know anything about stocks say, you got a tip? Okay, you’re an idiot, you don’t know what you’re talking about. It’s not the tip, there’s no such thing as a tip. If anyone gives you a tip on a stock, run away. So there are no such things as tips, I got a stock tip, I hate the terminology. But, your own work, your own analysis. If you are in an industry and you’re not a professional investor, and you are observing things, or you’re endeavoring to study an industry and you’re making observations that feel natural and right to you, and you’re seeing someone else is telling you something different, it doesn’t mean they’re right. Use your own judgment on that, right. There’s so much to be said for that.

Mike Alkin: 00:34:58 And again, you have to have the tools to know if you’re right or not, and I’m gonna try and hopefully point you in the right direction for some of this stuff here. And hopefully just if you listen to the podcast, just through osmosis you could pick up some of the things I talk about.

Mike Alkin: 00:35:15 Okay, we’re gonna go on. This is one of the best. When I think I should sell I sell, when I think I stocks will go up I buy. My adherence to that principal of speculation has saved me. I can’t tell you how it came to take me so many years to learn that, instead of placing hiking bets on what the next few quotations were going to be, my game was to anticipate what was going to happen in a big way. If you pay any attention to any of the work I’ve done on uranium, you’ve seen me, maybe a YouTube video, where I’ve presented at a conference and I’ve put a picture of Wayne Gretzky up there. And Wayne Gretzky’s famous quote is “I wasn’t the biggest, I wasn’t the fastest, I was not the best shot.” And he goes on to day, people said how did you become the great one? And it’s, “Because everyone skates to where the puck is, and I’m skating to where the puck is going to be.”, right.

Mike Alkin: 00:36:26 So we all hope to be, in whatever we do, the Wayne Gretzky of whatever it is, but every few of us ever achieve that. But it’s a good way to think about it. You know, we’ll use uranium as an example, when I first started thinking about the uranium investment, and peeling the onion back and looking at reactors and mines, and prospective mines and all of the stuff that goes into trying to formulate a view. The one thing that was clear to me before it happened was, there is no choice, these publicly traded uranium miners will have to cut production. And this was, I think I first spoke about it in early ’17, it’s not an if, it’s a win, right, it’s a win. They have no choice. They will all go out of business because they’re on the road to nowhere by producing, and you will not get the market back in balance if you don’t do that. And so, that’s just anticipating.

Mike Alkin: 00:37:37 Now, when I’m anticipating that, my question I have is, I have to ask myself is what’s the risk reward of that? In other words, and what’s the opportunity cost? So when I’m thinking about an investment, I’m thinking about okay, now I don’t know when they’re going to cut production, I know they have to, I know they need to go to the public markets, I know they need to stop advancing these potential projects, I know they need to stop drilling and exploring because they all have financing needs. When you’ve diluted investors to Kingdom Come, it gets harder and harder to raise capital. So consequently, they’re going to have to react. Now, that’s fine, but that could go on for a while.

Mike Alkin: 00:38:31 So then you have to ask yourself, well, can they produce more? No, unlikely. Is there any rational reason for them to do that? No. Is it likely they’re going to get the capital to keep exploring like crazy so the bears can keep saying, “But look at all these projects in the pipeline?” No. Can the bears look to these prospective projects and say, yeah but you know what, the price of uranium is $20, and at $25 they’re all going to come online. No. Where does the price of uranium need to get for any of these projects with the exception of one tiny, a small one that’s a little bit lower? But meaningful projects, not little ones right. Yeah, there are small ones around the world that could come on for less money.

Mike Alkin: 00:39:16 And that’s the thing, by the way, when you say things publicly or you put a presentation up, people look at every slide and say, “Well yeah, but you didn’t put that one.”, those are points of references. I’m talking about meaningful projects. Where’s it have to get to? Fifty bucks. Price is in the 20s now? Okay, well that’s pretty good. So the price of a commodity for all this stuff to have to happen, for a new supply to come online, when these mines close or go on care and maintenance, where are they gonna have to get, where’s the price of a commodity gonna have to get for them to come back online? 50$? 45$. 55$? Okay, so that means price has to double from here, okay. So could make a bear case, right?

Mike Alkin: 00:40:02 So I’m looking at what could be the bear case in this. Gosh, nuclear power is dying? No, not true. Wind and solar are going to [inaudible 00:40:14]? No, not true. There’s way too much inventory around the world? Nope, not true. You gotta analyze that and go through it all and say, okay, well so what’s the surprise that’s going to take these stocks down from here? It’s really something, right, another nuclear meltdown, another … something, right. There’s exogenous events, but that you can really get your head around, like geez, okay. So the stocks are kind of muddled here, you’re just gonna see more companies go out of business if things don’t improve. Is there a reason the commodity … is there more supply coming online than the market anticipates? No. So the commodity should kind of settle in here, probably.

Mike Alkin: 00:41:00 So I look at that, at the time I’m say, okay well geez, where are valuations on these things? Let’s look at them, very few were generating cash flow. So what’s the metric that I think is kind of a bullshit metric, but at the time, you know, because I say you’d be per pound in the ground and a price value per pound, of uranium in the ground, why is it a bullshit metric? Because bullshit companies go out and buy bullshit projects to jack up the amount of pounds in the ground they have. And it’s a game they play.

Mike Alkin: 00:41:30 But they could have a lot of pounds, but a lot of these projects could be meaningless and uneconomical, but most people don’t look at that. But investors will look at, oh geez, look it’s really cheap, because on an EV per pound in the ground is trading it here. And there’s other valuation metrics.

Mike Alkin: 00:41:47 But when you get comfortable that there’s limited downside, and you say okay, well geez, what if the bears are wrong and I think they are, what’s the upside? And then you look to see where does the price of uranium have to get? What are all these products that are in the pipeline when they come online, to meet demand they need to come online. Price needs to get here. Okay, what’s the cash flow of each individual company? What’s the valuation on a prospective basis today when those projects come online? Holy cow, that’s cheap, right. And you start doing that math, and you start to look and see, okay so my downside is I don’t think there’s gonna be more supply coming online, the price could drift down a little bit, and you get comfortable in your head. I don’t know is my downside 30%, and is my upside what? Depending on what companies, you’re looking at how you put a portfolio together, but many, many multiples of that.

Mike Alkin: 00:42:51 Well geez, so many, many multiples versus a little bit of downside? When I say a multiple, one multiple right, you get 100%, 200%, 300%, 400%, that’s asymmetry. But I don’t know when, but I’m willing to wait it out, right, at the time. And I’m thinking about that. And I’m going back to what he’s saying here, you need to anticipate, right. You need to anticipate what’s going to happen. Because if you anticipate and you have a really good risk reward, then who cares? I mean, it doesn’t matter. You can wait a little bit. Don’t worry about missing out on something. The fight and grind for what the market’s doing?

Mike Alkin: 00:43:38 And that’s how I view the world. I’m gonna bet on 10%, 20%, 30% moves and try and grind it out on certain names? Anticipate, study, anticipate and know the industry. This is such a good book, I could be reading the whole book to you here. Gosh, it’s great to re-read this thing. He really meant to tell them that the big money was not in the individual fluctuations, but in the big movements, the main movements. That is not in reading the tape, but in sizing up the entire market and its trend.

Mike Alkin: 00:44:16 And right here, let me say one thing. After spending many years in Wall Street, and after making and losing millions of dollars, this is him speaking. This is talking about Jesse Livermore, and losing millions of dollars. “I want to tell you this, it never was my thinking that made the big money for me, it was always my sitting, got that? My sitting tight. It is no trick at all to be right on the market. You always find lots early bulls in bull markets, and early bears in bear markets. I’ve known many men who were right at exactly the right time and began buying or selling stocks when prices were at their very level, which should show the greatest profit. And they’re experience [inaudible 00:44:53], that is they made no real money out of it. Men who can both be right and sit tight are uncommon.

Mike Alkin: 00:45:01 I found it one of the hardest things to learn, but only after stock operator has firmly grasped this, that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade, than hundreds did in the days of his ignorance. The reason is that a man may see straight and clearly, and yet become impatient or doubtful when the market takes its time, about doing as he figured it must do. That is why so many men in Wall Street who are not at all in the sucker class, not even in the third grade, nevertheless, lose money. The market does not beat them, they beat themselves. Because though they have the brains, they cannot sit tight. This regarding a big swing in trying to jump in and out was fatal. Nobody can catch all the fluctuations.”

Mike Alkin: 00:45:55 I want to read that again, “The market does not beat them, they beat themselves because, though they have the brains, they cannot sit tight.”

Mike Alkin: 00:46:03 You know, I’m on my Twitter, Footnotes first, and I joined ’09, but I didn’t really start it, I was just observing, I don’t think I Tweeted until like 2017. And there’s a reasonable amount of people who follow me. Mostly people want to talk about uranium. We have a wonderful uranium community on Twitter, some really, really smart investors. Really, really impressive group of people who take the time to understand the industry. And then you have new comers to it, who are sensing, or they’re hearing or there’s stuff. Over a couple of years now, I’ve had the experience of having a lot of people come at me because I am rather public on my uranium view. Even those who are bullish, sometimes a few of them have come and said, “Well, I’m getting frustrated, why doesn’t it work?” I don’t know. Well let’s see, the commodity is moving higher, the prices haven’t moved that much. Some of the stocks have gone up, some have gone down, but there’s been a decoupling from the equities and the commodity. The commodities moved higher, and there’s a reason for it. Section 232, which is coming rapidly over the next few months, over the next week we’ll learn something and then Trump will make a decision. I won’t get into all the details, but 2019 will be an interesting year.

Mike Alkin: 00:47:46 I go back to one of the things that I like about Twitter. I’ve met some very, very nice people on there. I’ve enjoyed the conversations back and forth on Twitter, and some of the direct messages. But for the most part, some really bright people. But you also get to see, it’s a marketplace of people, it’s a platform of a lot of people. And you get to see the impatience of some. I could observe it. And that’s the struggle I have with Twitter is, there’s so much information that comes to you. Information is great, but there’s so many people involved in dialogue, and there’s so many personalities and so many styles. And a lot of people aren’t trained investors, and bringing their own anxieties to it. And some people Tweet incessantly, right, and it just becomes noise.

Mike Alkin: 00:48:45 So, while it’s been a nice tool for me to interact with people, and there’s some really smart people I learn from on there, I have developed a way for myself just to disconnect from it at times. Because I don’t want to be dragged into their noise. Their noise is their noise. Their insecurities are there insecurities. I was zero interest. So if I get those questions about time, and this, and I can tell that they really don’t know the industry, that’s noise to me.

Mike Alkin: 00:49:19 And you know, one of the really fascinating things that I find always interesting is, when you’re betting against consensus, it takes balls, right? I mean you gotta be right, but it takes courage. And there’s a fine line between having the courage of your conviction and being stubborn, or being intellectually dishonest. You always have to remain intellectually honest. And what I mean by intellectually honest, meaning you are prone to biases, we all are. I am, everyone is.

Mike Alkin: 00:49:55 So, somebody had posted something and I’m gonna look for it now. Oh god, it was Socrates or somebody, over the weekend I read it. I think I thought I saved it, but I probably didn’t on Twitter. And it was a reference to, do you … and just stay with me here for a second, because I’m gonna find it if I can. Something about, when do you listen to other people. And somebody was implying to someone that they sure were very convicted in their ideas. Yeah, here it is: “Smart people learn from everything and anyone, normal people from their experiences, and stupid people already have all the answers. – Socrates.”

Mike Alkin: 00:50:59 And it’s interesting because, when you are making a big bet and you have a really strong conviction on a sector, if you think you have all the answers, that’s stupid. If you think you have a really good thesis, but are constantly stress testing that thesis and constantly being open to potentially being wrong, that’s really important. Now, it gets tricky, right. Because if you’re on Twitter or if you’ve really done a deep dive on something, and you really know it, and you have people coming at you who are misinformed, quasi-informed, biased, and you tell them that … it’s interesting, because you really need to have that conviction to know that if it’s based on your work, and it’s based on let’s say the math, the math never lies. So when you’re looking at supply-demand industries, it’s supply and demand. Not anecdotal.

Mike Alkin: 00:52:19 So when people come at you with anecdotal arguments, or parts of an argument, that may not be anecdotal, they may actually be quantified, but it’s only part of it. You always hear me say, “What’s your model say?” And you can’t just, stick your head in the model and really only on it, but it’s supply and demand, it’s surplus and deficits. This is Page 60 of Reminiscences. He said, “The only thing that didn’t lie because it simply couldn’t, was mathematics. An then all a man needs to know to make money is to appraise the conditions sentiment.” That’s page 61.

Mike Alkin: 00:53:10 I mean, I can’t think of anything more than that, right. So yeah, you’ve got to have conviction, you gotta do the work, understand human psychology, understand behavior. The question that I got was about financial statements. But before I leave there, read Reminiscences Of A Stock Operator, by Edwin LeFevre, L-E-F-E with a squiggly line V-R-E, it’s a French name I guess. I will pronounce it wrong.

Mike Alkin: 00:53:43 I’ll tell you a funny little story on my annunciations. I was in London a number of years ago meeting with … I was there all the time for investing, and I was in Europe a lot. The only improvement I’ve had in my language skills that I went from speaking with a New York accent to just speaking English with an American accent. That’s been my great leap forward. My grandparents, who raised me were Italian. They spoke English and Italian, and I didn’t understand anything. So I’m not great with languages, I wish I was, but it’s just not a thing for me. I even struggle with English. So here I am trying to say Edwin LeFevre.

Mike Alkin: 00:54:38 I was in London and I’m meeting with some CEOs. And I met with one and the person I was had something to do and they said, “You go up to the meeting and I’ll just stay here at this coffee shop.” So, I had a meeting with a very distinguished British CEO, very polished. And I’ve known him for years. And we were sitting and he said, “Where is so and so?” And I said, “Oh, was busy, couldn’t make it, went to go have coffee at Pret A Manger.” And he said, “Where?” And I said, “Pret A Manger.” And he said, “Mate, what are you talking about? I don’t know what Pret A Manger.” I said, “P-R-E-T A M-A-N-G-E-R, they’re all over the city.” And he said, “Pret A Manger?” I said, “Oh, that’s what you call it.” He said, “You call it Pret A Manger?” I said, “Well yeah, that’s how it’s spelled.” He said, “My god, you’re such an ignorant American.” And you know, we were laughing. So I hope Edwin LeFevre, Reminiscences Of A Stock Operator, for the art of investing. I highly recommend it, I recommended it to my buddy Angus, he’s reading it now, I recommend it to you guys.

Mike Alkin: 00:56:01 Now if I were to talk about financial statement analysis, I promise you you’d fall asleep. But my god, it’s so great. One of the books I’m going to recommend that I really always found really helpful, when I first started in the business, the first firm I was at, was using one of the external sources of research that they subscribe to, was from an accountant named Howard Schilit, S-C-H-I-L-I-T. And Howard had a business, really smart guy. And Howard would look for accounting anomalies. And they would run screens, look for accounting anomalies, and then they would do writeups on the companies and sell that research to hedge funds for shorts. And really, really insightful stuff. And he went on to have a really big business. He wound up selling it, and took some time off, and now he his business again. I’ve known Howard for years, haven’t seen him in a few years, but really, really, smart, smart guy.

Mike Alkin: 00:57:15 And he wrote a book called: Financial Shenanigans. How To Detect Accounting Gimmicks and Fraud in Financial Reports. I had the luxury of being … our firm received this research, I got to see it real time, and then when you saw the book written, it was really, really cool. But, you don’t have to just look for accounting fraud, it lays out a lot of stuff for establishing a foundation. How to look at things that companies do. And again, by looking at things that companies doing incorrectly, he’s teaching you how things can be done correctly, how they should be done. And he talks about the different earnings manipulation shenanigans. Talks about shenanigan number one, recording revenue too soon. And he gives examples. Shenanigan two, recording bogus revenue. Shenanigan three, boosting incoming using one time or unsustainable activities. Number four, and this brings back so many memories reading that. I’ve read this book and I just had the benefit of knowing Howard and being a client of theirs, and once you get some ideas and you find this in other companies. It’s pretty cool. Employing other techniques to hide expenses or losses. Shifting current income to a later period. Shifting future expenses to an earlier period.

Mike Alkin: 00:58:49 So these are key things that companies do to manipulate earnings. Again, they may not do it, and then you give it a clean bill of health, but these are things to look for. And in here, he talks about examples, real life examples, where you find these things in the financial statements. There’s a reason my Twitter handle is footnotes first, because above the footnotes is where all the fluffy stuff is, in the footnotes is where all the cool stuff is, it’s where the cool kids hang out, where you’re gonna go find the real good stuff. And not a lot of people hang out in the footnotes.

Mike Alkin: 00:59:26 Cash flow shenanigans, shifting financing cash flows into the operating section, shifting normal operating cash flows to the investing section. Inflating operating cash flows using acquisitions or disposals. Boosting operating cash flows using unsustainable activities. Showcasing misleading metrics that overstate performance. Distorting balance sheet metrics to avoid showing deterioration.

Mike Alkin: 00:59:59 Funny, remember we were talking about Reminiscences of a Stock Operator, saying there was nothing new one Wall Street. In the preface of Howard’s book he starts out with: “What has been will be again, what has been done will be done again. There is nothing new under the sun. Ecclesiastes, 1 verse Chapter 9. Ecclesiastes. There you go, you got my pronunciation.

Mike Alkin: 01:00:34 But this book is what, 300 and something pages. It’s been around a while. Financial Shenanigans. I would highly recommend it. Because it will give you a good guide on how to think about … now again, you don’t need to be a CPA, right, you just need to know what to look for. Another book that I read and have bookmarks everywhere and highlights, written by Charles Mulford and Comiskey, called “The Financial Numbers Game. Detecting Creative Accounting Practices. This is another gem of a book. A lot of checklists in here too. So if I were a young person or a middle aged person, or an older person, whatever age you are and you’re trying to learn about financial statement analysis, this goes deep into how the game is played.

Mike Alkin: 01:01:35 Accounting policy choice. Clarifying terminology, fraudulent financial reporting. A real close look into what is earnings management. Incentives and conditions for earnings management. I mean you can’t beat this stuff, my god, it’s like financial porn, it’s so good, my god. Incentives and conditions for earnings management. Geez, incentives drive everything, right. How did the board structure the compensation package for management. Is it based on sales, is it based on EBITDA, what’s it based on? Because that’s what these guys and ladies are gonna go focusing on. And are those bullshit bogeys? And how can they get there? So important to know that. Earnings management techniques, evidence of earnings management. Recognizing premature or fictitious revenue. When should revenue be recognized? Detecting premature nature of it, and a checklist to detect it. Aggressive capitalization and extended amortization policies, capitalizing cost, amortizing them, detecting extended amortization periods.

Mike Alkin: 01:03:08 How often, you know, how that gets under the radar. You’re depreciating or your amortizing a building. Let’s say on the depreciation expense, you were depreciating a building over X number of years. Well that hits the expense line, right. You capitalize the building and then you take a portion of it as you’re depreciating it each year. Does the life of that go from 10 years to 20 years? 10 years to 15, 10 to 30, did it stay the same? Because if you extended it and there was no rationale for extending it, but you just happened to do it because you came up with some bogus reason, that could help your earnings. And I can promise you, in the press release it’s not gonna say … and the third quarter report was this, and oh by the way, just a flag for you, we did extend the depreciation period. It’s what they don’t say.

Mike Alkin: 01:04:00 Getting creative with income statement, classification and disclosure, what are they disclosing? Proforma measures, proforma made up. We are excluding this, that and the other, they’ll tell you, and it’s the very bottom in the footnotes, are proforma numbers. We are excluding this, that, and the other thing. Now there’s certain things that normal companies … so you’ll see a lot inquisitive companies, they’ll acquire something. Now a company might acquire something and they’ll back out from normal [inaudible 01:04:41] earnings. The expenses to do it, the integration costs and all this other stuff, and on a proforma bases, it looks this, because had we not done this we wouldn’t have incurred these expenses. So on a apples to apples basis, X that noise, this is what it is. Well that’s fine, okay maybe. But if a company is a serial acquirer and it’s a cost of doing business, and the legal and accounting fees, there every year, year and year again, it’s normal cost of doing business, not a one time.

Mike Alkin: 01:05:15 Problems with cash flow reporting. Checklist for using operating cash flow. Remember, cash is king, right. So you can manipulate earnings, it’s hard to manipulate cash. It can be done, but it’s hard.

Mike Alkin: 01:05:28 Another book. So name of the book: The Financial Numbers Game. Detecting Creative Accounting Practices. Charles Mulford and Eugene Comiskey. So, to answer that question, Reminiscences Of A Stock Operator, is gonna teach you about the art of investing, some of it, right. And Financial Shenanigans In The Financial Numbers Game, will give you some insights on what to look for when you read financial statements.

Mike Alkin: 01:06:00 So I hope that was helpful. I’m not gonna have a guest this weekend, I got that direct message, and I said, you know, let me do that. If you’re interested, you go out and get those books, as I think they’re pretty interesting. And I will endeavor to try and find Howard. I haven’t spoken to him, like I said, in a handful of years, but I’ll see what he’s up to and see if I can get him on here. I don’t know Charles Mulford or Eugene Comiskey, but Howard I do, so I’ll try and find him and see what he’s up to. He’s an interesting, smart guy.

Mike Alkin: 01:06:32 So anyway, hope you have a good week, and I’ll talk to you next week. Thanks.

Announcer: 01:06:41 The information presented on Talking Stocks Over Beer, is the opinion of its host and guests. You should not base your investment decisions solely on this broadcast. Remember, it’s your money and your responsibility.



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