OVTI Strong buy

Today's news is HUGE.


As an investor this is a strong buy, as a trader, you may want to confirm it after May 31st ER.

NYTimes article on Seth Klarman

This article is really interesting to read.

He is a very famous deep value investor. Very famous for his risk and asset management.

The most interesting part is:

"...then went on to Harvard Business School, where he graduated with an M.B.A. in 1982. Immediately afterward, four wealthy families, including those of two Harvard professors, put up $27 million for Mr. Klarman to manage..." (when he was 25)

Superb

Wisdom from Rogers and Livermore

So far the two most insightful quotes about investing and trading I have seen:

"I just wait until there is money lying on the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime." --- Jim Rogers

After I claimed that what Rogers said is the key to the success in the market, I got a lot of doubts: How can you know it is sure money? There is no sure money, everything has a probability. If there are, other people already picked it up long before your do? Market is efficient. Why do you think you have an edge, blah blah. Sounds reasonable, however they only discovered one side of the market, they only see the chaos, the unpredictibility, the change and move on the surface, what they fail to see is the the other side of the market perfectly described in Jesse Livermore's word:

"Wall street never changes, the pockets change, the stocks change, but Wall Street never changes, because human nature never changes" -- Jesse Livermore

Human nature never changes, that is the sure thing, that is the ultimate source of sure money Rogers talked about, and it happens every minute every day in the market. The only difference is someone can see more of them, at the earlier stage than the other market participants. When the majority see it, sure money turns into crap shot, since starting from that moment market debut on the stage to shows its overrated, overclaimed efficiency.

谁会是成功者，谁会最成功

这个市场上有两类可能成功player，

一种是做功课的人(FA派)
一种是会看图的人(TA派)

第三类又不看图又不做功课的人还是别来炒股的好，菜板上的肉而已

会做功课的牛人能从其他各种信息渠道了解分析出自己应该干什么获利可能大，他们的行为反应在股市买卖中就是看图派的最初的input.

会看图的牛人能从图上看出市场主流在想干什么（其实想干什么都太复杂，就是二元选择，涨还是跌)，看图派的行动常常是一个自刺激的feedback control system，因为它们本身参与市场博弈的过程也是改变市场态势的核心力量

会看图而不精的弱人，正确率不高，看不清主流，容易迷失在各种指标中，输多赢少

做功课但是听信谣言，抓不住重点的弱人，很容易buy-and-hope,最后死抱垃圾水下争扎

所以真正最赚钱的是在大多数做功课的FA派place了他们的bet, 大多数看图的TA派开始步调一致自刺激的早中期发现这个态势，ride the trend，怎么找到这样的pick和timing就是成功的核心关键，大道理就这点。实际有效的操作方法远远不止一种。我都说到这个地步了，我想你应该能有所悟了。

最后归根到底就是一个sure money in front of you. 你要能看到，怎么捡就是小问题了

Tessera Technology (TSRA) , OVTI and MU

At this point, my only concern about OVTI's future is this company, I have been following it since before last ER, and made nice profit after ER.
After listening today's shareholder conference, I would suggest any serious OVTI investors to have a close look at this company, and our main focus is not MU, Samsung or Toshiba. It is Tessera.

I have explained OVTI's turning around will be depending on TSRA's technology. So far I have been focusing on the manufacturing yield benefit from TSRA's WLCSP techonology

Let's take a further look into future. We all know that TrueFocus is going to be a blockbuster for OVTI's business in 2008 and beyond. What does this have anything to do with TSRA?

TrueFocus is a camera system, OVTI has the expertises to design (and already did)two of the three components: the image sensor, and the image processor(DSP), so what is the missing part? It is easy to find out.
The optical part, the counterpart to the traditional lens. Why is this an issue?
The point is you want to make it cheap,really really cheap, make it small, and really really small and slim. So It needs TSRA's wafer level optical(WLO).

That is why OVTI needs TSRA, the reasons above arenot very obvious, however very important. In my mind, TSRA and TSMC are the two legs of OVTI, without any of them.it cannot walk and run let along flying high.

So far in this analysis, TSRA is OVTI's friend. and OVTI will be the first in the industry to enjoy the full benefit of TSRA's so called Wafer Level Camera Ecosystem.

However it is not that simple, since TSRA actually wants a piece of pie in the market OVTI, MU are fiercely fighting now by acquiring a small company called EyeSquad who develops software autofocus and zoom similar as TrueFocus. By doing so, TSRA has got all the important pieces to compete in the incoming market.

My educated impression is EyeSquad is not as good as WFC(TrueFocus), their technology is based on Fresnel lens, image quality compromise will be the #1 concern , and they don't really have the track record as OVTI in image sensor business, the best they can show now is a VGA module, and at that resolution you don't really need digital autofocus.

I have seen signs of benign relationship between OVTI and TSRA, especially in the process of adapting TSRA's WLCSP and WLO. However we really cannot overlook the issue of EyeSquad. TSRA is strong in the system to module level know-how in every aspect of this type of camera, once EyeSquad makes good progress to catch up, Tessera will be a formidable player in this field, and certainly a potential threats to OVTI.

What does this mean to our OVTI investors holding strong belief of the booming market? I would say sparing 20%-30% of funds you would like to pour in OVTI to get some TSRA shares. I believe both of them will do great in 2007. However it is just a matter of time for us to know who will be the final winner. If they can merge together, that will be THE company I feel comfortable putting 100% of my fund investing, however the world is not ideal. I cannot always get what I want.

BTW forget about MU in this market, up to date, they have no progress at all for digital autofocus to respond Truefocus, and they are not interested in adapting WLCSP and WLO to boost yield while getting smaller and slimmer camera modules, since doing that means more capital expenditure on their depreciated old Fabs, why would they do that if utilizing old Fabs is the sole reason for them to entering this market in the first place. To make things worse their chips are not selling well.

In MU's most recent CC in April, the recorded transcript reads:

"CMOS image sensors sales are down due to market share loss, shift to low-end phones in the market and pricing pressure. Image sensor market will remain challenging with current sensor inventory at MU over one quarter and it will take until the end of the fiscal year to work off."

So MU is not going to be the winner in the foreseeable future, simply because they don't have the right business model for the competition here in CIS market.

Update:

More info about where did WLO come from.

And very insightful comment from a forum post

My two sets of long term holding portfolio

Set 1 (OVTI, HNR, URGI,USG), I call it Guru-Following Portfolio.

Actually I found three of them first and then found gurus which I can follow to confirm my investing thesis(other than USG, I knew Buffett holding it first)

OVTI: I lost quite a lot of money on its Nov2006 ER, then I did very thorough researches on it. Is it possible I have been totally wrong on this one, it is possible, however fortunately, Ken Fisher stepped up to support my investing ideas on OVTI by loading up his truck. Which is nice to know.

Since you already know I love his book, and I actually directly applied his theory to reconcile the thinking behind picking OVTI. I am wondering if he did the same thinking process.

HNR: I found this pick first, then I got to know Pabrai. I read his book, I know for sure if he is buying at current price, he must be thinking it is way undervalued. It is so nice to get a confirmation in recent Barron's article.

USG: enough has being said by Warren Buffett, I don't need to repeat. He is still controlling 40% of USG shares, which is a lot. I have faith in his decision on USG.

URGI: I haven't found the Guru to follow and confirm my thesis until today. , Now it is all complete.

The second set of holder portfolio is still under constrcution. I may call it Rule-Breaker portfolio, since I would like to do things differently here. Instead of looking for Guru's confirmation, I would like to really test my security analytical ability and stock picking potential. So I selected ACUS, SIGA, and JMBAW out, and would like to load ASPV later when I know for sure the incoming Phase III trial result is positive.

I am having fun doing all the research and hopefully both of them are going to make me nice monetary return over time.

URGI, Eric Rosenfeld, LTCM, and risk control

URGI's news presented me an interesting name Eric Rosenfeld, the same way HNR found me Mohnish Pabrai and his wonderful book.

Google and Wikipedia are always your best friends, if you want to know more information. This Rosenfeld is a big name on the street.

In the reference list, there is a very interesting read on Long-Term Capital Management where Rosenfeld was core member.

The story of LTCM is nothing ordinary comparing with famous stories on Amanrath and Julian Robertson's legendary tiger fund.

What did we know from those three stories? Risk control. I will stop here to not bore your guys, and continue later in a separate article.

Interesting Forbes Article

12-buyout-target

Today I just pumped two names out of 12 in the list above: RAIL and OVTI

The truth is when you see value, other people see it too, when you see value stock getting cheaper, other people see it as well, eventually those value-cheap-losers will be in a lot of ppl's watchlist and become highly controversial losers, our main target in this blog. Once the trend reversed either natually (value driven like PLXS) or suddenly (news driven like MCZ), you have great opportunities to play.

There are many good stocks out there, I am not saying HCL is the only way to go, I am saying it might be the most efficient and systematical way to go to find highly profitable picks for trading and investing.

In a nutshell, it combines the momentum(DTer's favorite), sustainability of trends(Swinger's love) the value (Investor's holy grail).

If you come from value investor side, all you need to do is a little bit more patience (which I assume you already have, since without patience, you are not going to perform as a value investor). What to wait for? wait for bargain deals become sweeter, wait for the sign of end of downtrend and start of uptrend.

If you come from the trader side, first of all please drop your assumption of efficient market theory, it is not true. Keep your eyes and mind open, take advantage of amature "value investors" who think they are following Buffett, but they are really not. Buy-and-hope is primarily what they are doing. However they cannot always be wrong, once their hopes are actually realized (the probability is usually fairly low, especially those Buy-out rumors floating around), join their party. Once their hope turned out to be disappointment, beat the dead horse immediately without hesitation, I don't even care about if it is the very horse in investor me's own barn. I short ASPV after ER, I put OVTI after EK conference call, that's trader's best show time.

Quick comparison of OVTI and CRM

as I am typing
OVTI $14.48
CRM $42.63

You would expect CRM to be much more profitable than OVTI and have much better business future, as the pps suggested, should be a triple. however the truth is:

for OVTI
ER date Apr-06 Jul-06 Oct-06 Jan-07
EPS 0.39 0.39 0.28 0.20

for CRM
ER date Apr-06 Jul-06 Oct-06 Jan-07 Apr-07
EPS 0.04 0.06 0.06 0.07 0.01

and both expect the next earning to be about break even.

Sure you can argue that OVTI is in earning downtrend, however the company officially declared the turning around in current quarter, let along the new products such as truefocus in the pipeline for the future. I am still not seeing the rosey future CRM CEO painted, given the fact MSFT and ORCL are coming to eat its market.

Cash position:
OVTI has about $6.5 cash and short term investment per share, which is almost half of the pps, and virtually no debt.
CRM has about $2.5 cash per share, which is barely enough for working capital.

Anyway you already know that I long OVTI and short CRM

HNR analysis in Value Investor Club

In the previous post I mentioned Mohnish Pabrai, just got more information in the recent Barron article (which I don't have subscription, however got to know from VIC)

"In an interview with Barron's Online, Mohnish Pabrai declined to comment about Harvest's specific outlook as a matter of policy, but said the company "is our only and best bet in energy" with an intrinsic value significantly higher than the current stock price. "I'm pretty comfortable if it takes two or three years to get to its intrinsic value."

A long analysis on HNR is also available for 45 days delayed guest access in VIC, I would suggest all HNR holders check it out.

Another Buy-holder portfolio with super high volatility

I am going to generate another portfolio with high volatility, not for the faint heart.

Like the previous one, I am going to hold 4 in this holder portfolio.
for now I will keep 1/4 in cash and wait ASPV's phase III trial result. (if that fails, I will be interested in EICU, NBIX or JRCC depends on the price and situation.

the already decided 3 are

ACUS,
SIGA,
JMBAW

Will use today's open to track the performance.

Update:
Got all the inital prices:
ACUS: 2.53
SIGA: 3.84
JMBAW: 3.41
SP500: 1500.75

I am not saying you should buy at that price, since this is a holder portfolio, don't want to do any market timing at all.

What is the risk of holding a stock?

Short term price volatility? nope

market meltdown? sounds plausible, actually it is the market risk, not risk tied to the specific stock(s) you are holding.

Geographical/political risk? for example, if Hugo Chavez is areally a maniac guy, HNR is a very risky investment. If military conflicts outbreak in taiwan straight, I will dump OVTI immediately.

However those are things we cannot control, let's just focus on what we can control. When I claimed that ASPV, SIGA are low risk holders, people may not agree with me. However the truth is the shares you are holding are the certificates of partial ownership of the company. If the company's business has very low downside risk, then your partial ownership has very little downside. Also your price paid to get that partial ownership really matters, leave enough margin of safety to yourself.

When I am trying to find such buy-holders, the downside risk of the business is really all I care about.

Conversation Between Buffett and Munger

read it somewhere, sorry no link. Personally I really agree with what he said.

"On the housing market woes, Buffett noted how Berskshire’s housing-related businesses are getting hit. Unlike many overeager investors today, who feel compelled to run into burning buildings by buying flaming housing-related stocks on the theory that the worst is over, Buffett offered a contrary view: “My guess is that it continues for quite a while.”

No elaboration on how long is “quite a while.” But these guys think in glacial terms. Long-term is a lifetime. Therefore, “quite awhile” could mean at least “years.”

On the private equity bubble - which involves so-called private equity firms raising huge pools of money and then borrowing a lot more to buy whole companies - Buffett noted a great flaw in the scheme. Private equity firms have a “great compulsion to invest quickly.” That way, they can go out and raise another fund and keep the fees coming in. Basically, private equity firms are paid for activity, not results. And the nature of the business means that we won’t know who is successful until many years have passed.

Buffett said the “score card is lacking.”

On management compensation schemes, Buffett put the issue in perspective: “There are more problems from having the wrong management than having the wrong compensation structure. It’s more important to have the right people.”

On the record level of corporate profits in America, Buffett acknowledged the all-time high. He noted it is a weird world we live in where companies are getting 20% returns on tangible capital in a world where the long-dated T bond is yielding 4.75%. “At the moment, Corporate America is living in the best of all worlds.” History shows that these episodes don’t last.

Munger added that much of the record profit growth stems from the massive financial center, a fact that “has no precedent.”

On the best way to become a better investor, Buffett advised: “Read everything you can… after that, you have to jump in the water.” He said the difference between investing with play money and investing with real money is like the difference between reading a romance novel and doing something else.

On the health care mess, Munger said: “It’s too tough.” Buffett added: “We look for easy problems.” That may sound like a cop-out to some, but it is the core of a brilliant idea about the nature of good investing. Buffett commented how their success is not because their winners were any bigger than anyone else’s. It’s that they managed to avoid big setbacks. He mentioned a guy who was smart 99 times out of 100, but that 100th time did him in. Gotta avoid that.

On derivatives, Buffett noted how derivatives increase leverage - a “largely invisible leverage.” That could make a crash or downturn even worse, like adding gasoline to a fire. This is one of the big risks in the market today - the heavy derivative use by many firms. These instruments are untested in a crisis. We really don’t know how they will act or what they will cause people to do.

Buffett invoked the ‘87 crash as an act of forced selling. “We may not know where the danger begins or ends” with regard to derivatives. Munger added that the accounting for these instruments was deficient. People are getting paid for profits in which they are taking huge risks, like the proverbial picking up pennies in front of a steamroller"

Disciplined Investor in HNR

Mohnish Pabrai bought HNR shares again, and he really bought a lot recently.

Both of us knew the recent ER was fantastic. However I couldn't hide my exhilaration and rushed to load @10. This guru investor is just so disciplined to only load it below his preset threshold which we all know now it is $10. I like his coolness.

How did he come up with the preset threshold in the first place? From reading his book, I knew his strategy. He must have done very thorough due dilligence and come up with a intrinsic value for a business, and load it when it is on fire sale, the discount rates (margin of safety) for his previous investments have been 25%-40%. So in his mind, HNR's intrinsic value is about in the range of 25-40. I certainly don't disagree with him.

Anyway it is very nice to have this guy with us in HNR.

Buy when blood is running on the street

John Davison Rockefeller once said: "The way to make money is to buy when blood is running in the streets."

When you saw DNDN trading @ 4.9, you knew that is blood on the street.
When you saw FFHL trading @ 7.1, you knew that is blood on the street.

Does that mean you have to buy it when people are selling panically? and catch the falling knife? heck no

keep your dry powder, wait until the panic sale is done, buy in the uptrend not the downtrend.

So trading idea for monday is actually FFHL bottom momentum.

Investors' Best Friend

who are investors' best friends?

Impatience of traders(no matter professional or retail) and fear of other amateur investors.

There are more and more traders on the market compared to 30 years ago. The key developments during those years to make this happen have been:

1. Personal computers and internet make "home trading" possible. You are spared of the hassle of calling a broker to place orders. This means a huge barrier has been removed.

2. Discounted online brokers such as Scottrade and Interactive Broker provide another incentive for frequent traders. Fee per trade seems low, but it quickly adds up if you trade frequently.

3. Hedge funds targeting absolute return have mushroomed. Most of them engage in high frequency machine trading with up to 200x margin leverage.

More and more traders are on the street, sitting at home, or trading during their work hours.

What does this mean? It means Mr. Market can be much more irrational, and the extreme can be pushed even further. There are bigger fools everywhere.

For real investor, today's opportunities are much better than 30 years ago.

Buffett started to buy his USG at $18, and later it dropped to single digits. Still some hedge funds offered to pay interest to borrow his shares to short at unbelievable $4.

So if you are a real value investor, just be more patient. Never catch falling knife. Extremely good bargain can become even sweeter, since you have more and more best friends out there.

The Top Secret Of Highly Controversial Loser(HCL) (1): Value Investing Gurus and Followers

When world-class value investors such as Warren Buffett and Mohnish Pabrai are looking for their next Geico or Frontline(FRO), they screen the whole universe of public traded companies following certain criteria. From those candidates , they pick the businesses they fully understand and whose intrinsic value they have a thorough understanding of. They know they are getting a bargain because of market's irrational valuation on those distressed business, most of which are big losers on one year graph.

But, how come only a small number of people become world-class and make themselves a fortune doing so, while most other people following the same strategy have failed and get trapped in "value lemon"?

Despite the fact that they all claim they are following the same value- investing approach, why are the the results so drastically different ?

The answer to this question can be very complex, to name a few reasons: availability of information, analytical reasoning ability, knowledge of finance, accounting, tax and bankruptcy law and etc.

We have to admit that those gurus are true professionals and they do tremendous amount of research to have an upper hand on their odds. Besides, they are extremely smart and some are born with investing instincts. What can we say, not everyone is born equal.

Does that mean we retails don't stand a chance to do long-term investing following the proven approach?

The answer is "No". Everyone has his/her own edge in particular areas and can discover leads to successful picks. (I am going to discuss this in a future post)

To be continued.

Trader or Investor

I would like to be both, since I find both sides equally interesting.

Being a trader, one really gets an edge if he/she understands what the majority investors on this stock think about it, and vise versa.

It is so interesting and nice to play both sides. However, I will only take
one side on each position. Don't ever doubt this. If you open a position thinking like an investor(or trader) then stick with your original plan, don't switch sides once the position has been initialized.

However, you can take both investor (value hunting) and trader(speculative) positions at the same time on the same stock, and can be on opposite positions, which technically is a hedge. Note that it is not for the purpose of a hedge, which is minimizing the risk. It is for the purpose of making money on both positions with different exit strategies and timing.

This is what I did with DT shorting ASPV after ER while holding ASPV July calls, and putting OVTI in amid of a totally fake EK buyout rumor (well I didn't actually do it, I called and I should have done so) while holding OVTI Jan08/Jan09 leap calls.

How to find the key focus to value a business?

Is P/E ratio really as important as people usually think?

For simple businesses, (little changes, the type Buffett plays)
P/E is important to value the business.

But for fast changing businesses, high growth, cyclic, turnaround, asset play,you should downplay the importance of P/E (a lot).

Let's take a look at cyclic businesses. You actually look for high(comparing with its historical data) TTM P/E business especially at the end of the down cycle and the start of the new up cycle.

For high growth businesses, you need to focus on its growth story's sustainability. check my post on JMBA and URGI.

For fast changing ones, you don't do it all together. Or if you still think you have edges because of your education/job/experience/insider connection, you have to make yourself an expert on all the issues related to those possible changes regarding future business outlooks and its competitor landscape. OVTI for me is a good example, I probably cannot call myself an expert, however I do have access to information not widely known.

For Asset play, it is actually not bad to value it, check the oil/coal reserve(HNR/JRCC), and check the future discounted cash flow (ASPV)

For turnaround business, you really need to focus on its balance sheet to evaluate the credit risk. With two turning around companies with similar background and future outlook, I will surely pick the one with more cash /less debt or better debt structure even if its products are less revolutionary.

I got all the above knowledge from reading Peter Lynch.

Update:

If a business switches from one category to another, the valuation focus will also shift. Theoretically this will create huge momentum.

For example, ASPV is now an asset player, the valuation is purely on cash+DCF or future earning with very good certainty. So if it can announce a new partnership, it will be placed in high-growth or at least fast changing category, the upside price movement will be huge.

HNR, on the other hand, is a distressed turnaround play discounted by the political risk and uncertainty, if it gets approved, it is now asset play to be valued by its reserve.

OVTI is fast changing and distressed technology company in an earning downtrend. If it can prove its future earning ability, it will be first placed in turnaround play(which I believe), and then high growth(which I hope). Therefore it will have great upside room when those changes happen.

However, you don't have to bet those key developments beforehand. You pick the sure money once it is announced and do it quickly before the majority think about it and react, because you already have this knowledge and insight from here and are fully prepared.

Bigger Fool Theory And Value Investing

According to this wiki

"The opposite of the bigger fool theory is value investing"

Even though I call my blog "bigger fool trading", I almost always take the "value investing fundamental analysis" approach.

Momentum day trading and long term value investing are just two sides of the coin. They don't have any conflicts in my system.

Insight of causality derived from due diligence is the magic glue that sticks both sides together, and makes both methods viable through a unified methodology.