Stand Fast — The near-final chapter of the saga of MER Telemanagement SolutionsPosted: March 19, 2013
As it is the case for all postings in this blog, my standard disclaimers apply for this posting. However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice. Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.
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Warren Buffett and Michael Burry
Well, I am just going to come out and say it…. I don’t like Mr. Warren Buffett.
There it is…. Fire away!
Yes, for sure, you can’t argue with Mr. Buffett’s long term results, although I am pretty sure that, with the extra-ordinary complexity of his business structures in, say, the first 20 years, there has to be a crime in there somewhere.
Results aside, however, there are lots of things that I find objectionable or questionable about the man and his business, least of which is his alleged common sense, easily replicale, contrarian approach, which, when all is said and done, may not be so contrarian after all and certainly is not common sense or replicable unless you happen to have a couple of billion dollars in cash and were able to magically whisk yourself back to the late 1940ies.
Consider, for instance, the odds of an institution such as Goldman Sachs coming to you and offering you preferred shares with a 10% dividend yield plus a mountain of warrants in return for a simple and rather safe investment. The odds are zero… Simply put, it just ain’t going to happen, since this type of transaction is in an exclusive domain where, frankly, retail investors are not welcome.
Oh, and just to be clear, I don’t buy the Santa Claus image at all. In fact, I think that Mr. Buffet is more akin to the very first Batman villain, patient zero of the Batman legacy, if you will, than to good old Mr. Jolly. Or, as James Altucher put it in a posting on his blog where he argued that you should not attempt to compete with professional money managers:
Your competition wants to slit your throat in a dark alley. You know how Batman’s dad got killed? He’s walking in the street with his beautiful bejeweled wife and his innocent little son, Bruce. Then this guy comes up to them and says, “give me your wallet and your jewels”. So Dr. Wayne (somehow he made billions being a doctor but thats another story) hands over his wallet and his wife’s jewels. Bruce, the son, is scared to death. Then you know what happens?
The thief shoots the father and mother in the head and runs away. He ALREADY had the money and he still shot them in the head and killed them when they had nothing left. Little Bruce watches and screams while blood streams out of his both his parents. Hopefully they died instantly.
I happen to know who that thief is. Warren Buffett. And you are Bruce Wayne’s dad. Warren Buffett, Stevie Cohen, all the great investors go outside every day and they want to take your wallet, steal your diamonds, maybe rape you, and then after they’ve gotten everything they can get from you, they are going to shoot you in the head in front of your child and run off into the dark of the night.
The only thing that Mr. Altucher misses here is the fact that Mr. Buffett is also the folksy, salt-of-the-earth granddad that encourages you to take the shortcut through the alley, assuring you that it is perfectly safe because he goes through it every day, and then follow you down there with his revolver drawn.
As much as I dislike Mr. Buffett, I like Mr. Michael Burry, and if you want to make money, you should like him too. First, because he is the quintessential outsider (he is a medical doctor by training (a neuro-surgeon, no less) and, no, he does not work or live in Manhattan) and contrarian, second, because he works alone and works analytically without the muss and fuss and grandstanding that characterize, say, Mr. Carl Icahn, Mr. William Ackman, Mr. Daniel S. Loeb, Mr. George Soros, and — yes — Mr. Buffet.
In case you don’t know who Mr. Burry is, he is a hedge fund manager made famous for his bet against sub-prime mortgages, where his analysis of the weaknesses in the collateralized debt obligations market led him to effectively short the entire market through credit default swaps. In fact, he had to invest the market, convincing Goldman Sachs, Deutsche Bank, and Bank of America to create the swaps and allow him to buy them.
Ultimately, this bet paid off handsomely, allowing his hedge-fund to record returns of almost 500% (net of fees and expenses, of course) between November of 2000 and June of 2008 — or 725% before fees and expenses. In comparison, the S&P 500 returned under five percent during the same period. It is estimated that his credit default swap bet alone yielded his investors $725 million in profit (again, net of fees and expenses) and himself $100 million.
Before he was able to cash in for himself and his investors, however, he had to withstand a barrage of external criticism, much of which originated with institutions or individuals who had never properly analyzed the very instruments that they were attacking him for having a contrarian position on. Moreover, and probably more damaging, he was criticized internally by investors in his funds who, ultimately, expressed their criticism in the most direct form possible, namely through redemption claims against the fund — the most dangerous thing a fund can be exposed to when it has committed itself to a substantial bet. As it happens, these redemptions, rather than Mr. Burry’s talent, would ultimately become the true limiter on exactly how much profit Mr. Burry’s hedge fund would make.
For the true connoisseurs it is worth reading the position paper that Mr. Burry wrote in the the midst of the investor revolt. In this paper he succinctly lays out his position, including the most important point of all: That he knows that something is going to happen, but does not know when (strongly similar to my own investment thesis, which is predicated on a potentially infinite time-horizon.) You can find the document here.
Mr. Burry’s position, standing fast against a market onslaught is admirable — particularly since it is lonely and exhausting. Mostly it is exhausting because it is not fighting against knowledge or facts, but rather irrational and unsubstantiated exuberance. Kudos to Mr. Burry for seeing it through.
I ain’t no Michael Burry, but I do strive to share some of his qualities, including tenacity, an analytic approach, and immense skepticism when faced with sentiments and opinions that are as unrelated to analysis and thought as were the Dark Ages of the 5th to 15th centuries to the the Age of Reason of the 17th and 18th centuries.
Vindication at last — a bittersweet victory
In several postings on this board and on the Yahoo Finance Message Board, I have advocated caution with respect to MTSL, the equity of MER Telemanagement Solutions, an Israel headquartered company that provides Telecommunications Expense Management (TEM) solutions to enterprises and Mobile Virtual Network Operator (MVNO) solutions to communications service providers.
My weariness of MTSL was not based on any suspicions of management shenanigans, such as revenue manipulation, or earnings manipulation. Rather it was based on my perception that the company could — and probably would — lose it single largest customer, accounting for 25% of the company’s revenues and an unknown, but probably substantial, share of the company’s earnings (in fact, I suspected, that without the contract with the customer, Simple Mobile, an annually renewable managed services contract, MER Telemanagement Solutions would not be profitable at all,) supplemented with my concern that the company would be hit with a tax penalty and, once profitable, would have to content with almost $10 million in liabilities related to grants from the Office of the Chief Scientist in Israel.
My beacon of caution caused much negative feedback, including some particularly vicious feedback from Varmajava, a frequent Yahoo poster, which I wrote about here. Moreover, in spite of the tax penalty concerns actually evolving from a potential to a reality, the per share price of MTSL rose to a 52 week high of $5.49, up from $1.50 or so, at the time when I started being concerned.
Most of the per share price increase was based on classic speculation (something that you can read more about in a one of my previous postings, here,) with the available float being sold many, many times over the last months, and to the masses I looked like just another fool.
Today, however, at 8 a.m., EST, exactly, the world changed.
In its quarterly and year-end earnings announcement, recording record operating income, MER Telemanagement Solutions announced that the Simple Mobile contract, responsible for several million dollars worth of revenues in 2012, would in all probability not be renewed for 2014:
As previously announced in October 2012, we entered into a one-year renewal of our agreement with Simple Mobile, now part of TracFone, to provide hosted billing services for minimum monthly payments of $300,000 during the year ending December 31, 2013. Recently, we were advised that TracFone intends to migrate the hosted billing services into their own platform. It is unlikely that we will receive significant revenues from TracFone in 2014.
This, of course, is a devastating blow for the company, effectively making the record results for 2012 nearly irrelevant.
In an attempt to soften the blow, the company referenced two other deals, one of which was similar in structure to the deal with Simple Mobile and had been the subject of much excitement in MTSL speculator circles. Unfortunately, however, the company also, for the first time, I believe, disclosed the actual monetary value of the deal, which, at guaranteed revenues of $500,000 over three years, was rather paltry when compared with that of the Simple Mobile contract.
The market reacted immediately and violently, with an opening price of $3.46, down 31% from the previous day’s closing price of $5.03. And it got worse from there, with the equity hitting a low of $3.07 in morning trading on approximately half a million shares traded, a decline of 40% from previous days opening price and a decline of 44% from the 52 week high price.
Bear in mind that this development occurred at warp speed, the growth from sub-$2 to almost $5.50 in per share price occurring in a mere seven months, or so, and the tear-down occurring in essentially zero-time, during mere minutes.
I like being right, of course…. Who doesn’t? But I am not feeling triumphant. Rather, I am feeling deeply saddened and disappointed. While the speculators who poured into MTSL are, in my view, mostly ignorant and unqualified, representing, of course, the losing side of the zero-sum game that, at its very roots, a capital market is, and, amazingly, incredibly aggressive against any view that differs from the commonly accepted one, I still pity them and the loss that they took this morning.
Today a lot of people lost money. I suspect that many of them are simply individual investors who thought that they had found an easy way to make a quick buck and who, frankly, are not qualified to move money around in the capital market.
It is worth noting that available professional and institutional research coverage failed entirely to identify the very real danger to MER Telemanagement Solutions revenues and earnings that, as of this morning, has lead to a substantial drop in the company’s capitalization.
For instance, The Street Ratings, in its quantitative report published yesterday, on March 17th, 2013, issued a Buy rating on MTSL (B-), citing a target per share price of $6.65. In arriving at this conclusion, The Street Ratings applied what appear to be robo-analysis and robo-writing, evaluating MER Telemanagement Solutions’ equity and valuation on six and eight quantitative factors, respectively, none of which could mimic the a human being sitting down and actually reading the company’s filings and relevant industry news and background information with an eye on determining how sustainable the company’s revenues and earnings were.
In fact, to the careful reader the apparently robo-written The Street Ratings report probably appear to be a shamble, from the sloppiness in the minutia with a copyright statement that goes from 2006 through 2012 and an obscure XML code snippet that appears in the report; over a bizarre comment that the company’s earnings per share have stagnated, when, in fact, it had grown a full 25% in the 12 month period preceding the report (a number that would grow to 30% with the company’s twelve months reporting today); and culminating in the near-total absence of any meaningful analysis of the company’s business or its prospects.
Prognosticating a near-term 25% growth to a per share price of $6.65 the day before a per share price tanks 40% is bad. Doing so when the tanking was entirely predictable is worse.
On a side-note, it is peculiar to me that there appear to be no sustainable business for real human financial analysis (humint, if you will,) dedicating time and energy to truly understanding the state of a business given that the robo-reporting is as weak as it is. With today’s significant drop in market capitalization, I have to assume that the average investor lost $1,000, and, so, surely investing something like $100 in a report that could help an investor avoid such loss would be worth it.
Please join me in a moment of contemplation for those poor souls whose sole mistake was to rely on other people’s opinions rather than trawling through the data.
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