Monthly Archives: June 2013

Suntech announces new forbearance agreement

I have been short Suntech since the beginning of this year, but despite the fact that the company is in default on more than $500 million in bonds that were due last March not a whole lot has happened. Some subsidiaries are in bankruptcy proceedings, but the holding company itself has managed to push their debt problems forward by entering in forbearance agreements with the majority of convertible note holders. The second forbearance agreement ended today, and unsurprisingly a new agreement has been made that will expire on August 30, 2013. This time there is more clarity on how the debt problem will be tackled though:

In particular, the new agreement contemplates an equitization of all major debt claims held by the Bondholders. In addition, the Bondholders will nominate two additional members to the Company’s Board of Directors who will provide guidance and assist in the Company’s ongoing restructuring efforts.

It’s taking more time than expected, but the massive dilution to the equity that I’m betting on is getting closer…


Short STP

The differences and parallels between poker and investing

In the investing world people love to draw parallels between poker and investing, and rightly so since there is a strong link between the two activities. For example risk taking, risk management and being process oriented all play a crucial roll in both. But most of the parallels are drawn by investment professionals that try to project wisdom from a field they understand to a game they don’t know a whole lot about. So as a poker professional I thought it would be a nice idea to explain some of the more subtle differences, and tell you some of the lessons that I learned from poker.

Random outcomes and knowledge inequality

I basically know nothing about chess besides the rules of the game, but I think that it isn’t hard for a novice to figure out who’s a good chess player and who isn’t. The amount of luck involved in chess is relative low, and you can simply check ELO-ratings to see how good someone is. I understand that Magnus Carlsen knows what he’s doing. When you add a significant random element to the game the evaluation of skill becomes a lot harder, and it becomes easier for mediocre players to pretend that they are better than they are.

In poker there is a vibrant market place for coaching. Poker is a complicated and evolving game: what you read in books is either outdated, never correct to begin with, or theoretically correct, but very general and not directly usable. Figuring everything out on your own isn’t doable, so hiring someone more knowledgeable to speed up your development as a player makes sense. But this is easier said than done, because how do you find a good coach? There are plenty of mediocre players that aren’t very good at poker, but good at marketing themselves (disclosure: I also offer poker coaching and I like to think I’m bad at marketing and good at poker).

You can’t simply look up an ELO-ranking and determine someones skill level, and if you are not an expert level poker player evaluating how good the advice is that you get isn’t trivial. For those that know something about poker, take for example this spot: you are out of position in early position at a six handed table with ace-queen offsuit and you get re-raised by the button (an expert level player). What should you do? I could easily create a convincing argument for folding, calling and re-raising. You are out of position with a hand that is dominated by ace-king and premium pocket pairs, so fold? It’s one of the better starting hands in your range and you don’t want to be exploited by bluffs, so call? You have blockers in your hand that reduce the probability that your opponent has aces, ace-king or queens,  so re-raise as a bluff? If you are a novice poker player there is absolutely no way that you can pick the right option with the correct argument, but feel free to take a stab at the problem in the comments :).

In the investment world the inequality in knowledge is an even bigger problem. You have a huge number of people that know nothing about investing, don’t want to educate themselves, but they do have money and they do want to do something with it. So you can basically sell them anything if you have the right sales pitch, and it’s even harder to evaluate the skills of an investment manager than the skills of a poker player. If you carefully analyze the last one or two years of someone’s play you can determine with a reasonable narrow confidence interval someone’s winrate. Getting a sufficiently big sample size for an investment manager is a lot more problematic, and once you have a big sample size odds are that the historical sample is not representative anymore for the current situation.

Sad news is that it’s probably a problem that can’t be fixed, but that’s a good thing for active investors. You cannot outperform without someone else under-performing.

Playing tight

Buffett is known for saying that there are no strikes in investing, implying that an investor will do best if he is extremely selective with the stocks he buys. On the surface a similar principle seems to be true for poker since most winning poker players play tight: meaning they are selective with the hands they play as well. Problem is that this is where the comparison breaks down: in poker there are ‘strikes’ for not playing because you are forced to put money in the pot through antes and blinds. You have to be selective with the hands you play, but you can’t wait for a fat pitch.

As a matter of fact, it’s even more extreme. If you don’t want to leave money on the table you should play hands when you expect to make zero profit! The reason for this is that a hand with an expected value of zero on it’s own adds value to the better hands that you play. As an extreme example: if you would play only aces (the best starting hand in holdem) an intelligent opponent wouldn’t give you a lot of action, if any at all. But if you also add some crappy hands to your range that individually don’t make (but also don’t lose) any money he is suddenly forced to give action to your aces because otherwise he could be bluffed all the time by the weak hands. So the expected value of your best hands are improved by adding very marginal hands to your range. I don’t think anyone would advocate investing in stocks when you don’t expect to make money.

Pick your own style

Another difference is that there are probably a lot of things that can work when investing. You can buy NCAV bargains, distressed debt, buy growth at a reasonable price, high quality moat companies and that’s just the tip of the iceberg of potential profitable strategies. Common investment advice is that you should stick to a strategy that you are comfortable with. How good that advice is for investment is another discussion, but it certainly isn’t good poker advice.

In poker there is no big selection of different viable long-term strategies. Against bad players there are a lot of winning strategies, but against each other some strategies are better than others. A strategy in Tic-Tac-Toe that would start at the edge of the playing field would be an example of a dominated strategy, and it wouldn’t be successful unless your opponent is really bad. In poker you also can’t really choose how you want to play if you want to make money because playing a dominated strategy gives your opponents room to exploit you. With knowledge about the game increasing strategies are slowly converging to a game theory optimal solution. People unable or unwilling to adapt ‘their style’ drop out.

Wrapping it up

Enough rambling, time to wrap it up before this post gets even longer. Hopefully you learned something new, and if not: sorry for wasting your time ;).

Awilco Drilling increases backlog

Awilco Drilling released a short press release today announcing that they have signed a letter of intent with Apache and Taqa to rent out the WilPhoenix rig for a 3 year period with options for another 2 years. The contract value is estimated to be approximately 424 million USD which implies a day rate of 387,000 dollar (current rate is $315,000/day). This is good news because the company has now locked-in high day rates for both their rigs for the foreseeable future. The WilHunter is on contract until 15 November 2015 and the WilPhoenix will now be on contract until the second half of 2017. With so much certainty about earnings I don’t think this stock deserves to trade at a 25% dividend yield.


Long Awilco Drilling

Thoughts on Solitron Devices AGM results

Most annual shareholder meetings aren’t very exiting, but the Solitron AGM that was held earlier this week wasn’t routine. It was the first shareholder meeting in literally decades, and the company needed some pushing to hold it in the first place. Unfortunately for me the meeting was held at the other side of the world so I was unable to attend, but multiple bloggers and other shareholders managed to find their way to Miami. Oddball Stocks has a great summary online of the meeting and his thoughts on the event.

From my point of view the meeting seems to have been a reasonable success. The original board of directors has been replaced, and while someone in the comments at Oddball Stocks mentioned that Dr. Davis seems to have been knowledgeable about the business and valuable to the company I don’t think that really matters. His first and foremost responsibility was representing the interests of shareholders.

Looking at the results of the AGM votes is also interesting and shows what the shareholder base is thinking. A potential problem with prodding management into action is that a large part of the shareholder base could be apathetic. Approximately 25% of the outstanding shares showed up as broker non-votes, so Solitron does have it’s share of these lazy shareholders. But with just 457,100 shares voting for Dr. Davis and 865,746 against it’s pretty clear that the company cannot ignore shareholders any longer. Presumably almost half of the for-votes were from the CEO, Shevach Saraf, who owns 218,155 shares. If we exclude him from the results almost 80% of shareholders voted against the incumbent directors.

Hopefully the AGM has been a wake-up call for the company and something positive will happen. If not, I can sleep well at night knowing that my fellow shareholders are willing to take action when needed.


Long Solitron

Exited ALJ Regional Holdings

I started my position in ALJ Regional Holdings (ALJJ) at the end of last year as a tender offer/merger arbitrage play, but when the tender offer was completed I actually bought a few more shares. The company is a cash box with tax assets and was at that point in time trading at a fairly big discount. Between then and now nothing has happened, but the share price is up ~15%. In absolute sense that isn’t a whole lot, but for a cash box it’s a big change. There is no way you could make an argument that the intrinsic value has changed in a similar way. I think that ALJJ is still cheap at todays price since it’s still trading at a discount, but with the amount of cash in my portfolio near zero I wanted to sell something, and ALJJ seemed a good choice.


No position in ALJJ anymore