December 7, 2017 and BitCoin

On Thursday, the S&P 500 was up 0.3% and Toronto was up 0.7%.

Canadian Western Bank was up 3.3% to $37.12 after releasing a strong earnings report. This stock is now up 22% in 2017. It’s also up just over 50% since hitting lows under $25 in May. There were two full weeks where it could have been bought under $26. But it also remains a bit below its highs of around $42 from July 2014. Its earnings per share are similar to 2014 and book value is higher but its price as a multiple of those fundamentals (and particularly the price to book multiple) is lower than in 2014. CWB shows the book value at $24.82. This puts the price to book value ratio at 1.50. The ROE was 11% in fiscal 2017 and 12% in the last quarter. Paying 1.50 times book value to access a 12% ROE will work out well if that ROE can be maintained or increased. But I would not consider it to be a particularly compelling Buy. It seems unlikely that investors will push the price to book value ratio back up to the 2.0 range anytime soon. But the price to book ratio may increase somewhat and the book value seems reasonably sure to increase over time.

Dollarama was up 5.3% as it partially recovered from a recent little dip.

CRH Medical was up 8.6% in Toronto as it continues a recent modest recovery.

AutoCanada was up 1.9%. Then, after the close it announced some chances affecting nine dealerships that it has had a majority ownership in but where the AutoCanda founder was a part owner and the registered earlier of record. The founder is basically no longer associated with the company. (I am not sure about his ownership of shares as he has ceased to be an insider and but should probably assume that he may have sold). AutoCanada will now control five of the dealerships and the AutoCanada employee who is general manager of each dealership will be required to own a minority interest in the dealership. The percentage size of such ownership was not disclosed and will likely involve AutoCanada loaning these general managers money to make the purchase. The founder of AutoCanada will own four of these dealers through his private company CanadaOne Auto Group. AutoCanda is receiving $23 million as part of this deal.

I don’t know if this new arrangement is positive or negative but I suspect it will be viewed as somewhat positive because it cleans up the way these GM dealerships were held.

I do however view the exit of the founder last May as a negative. It seemed rather odd. The founder had ownership of car dealers both within AutoCanada and outside of it. That was somewhat messy and it may e for that reason that he excited.

BitCoin comment

This mania around BitCoin seems rather crazy. One of the big attractions of BitCoin was the idea that it is decentralized with sort of no one in charge and at least government not in charge. That idea is attractive to at least a fringe group of society. It seems a bit scary to think that view might be mainstream. Most people in the Western world have actually done pretty despite government control over currency and a lot more.

BitCoin and crypto currency is not simple to understand. I suspect that most buyers do not have a good understanding. I’ve spent years trying to understand regular dollar money and its creation and it susceptibility to value loss through inflation. I have gained some knowledge about dollar money but I would not claim to have a full understanding. Most experts and certainly many non-experts were certain that that the FED’s money printing via quantitative easing and the debt of the U.S. treasury was sure to lead to rampant inflation. That did not happen. At least not yet.  Certainly some people think it did already happen in terms of asset price inflation and that the government is hiding the true inflation. But I think the evidence is that inflation measured by the price of a representative basket of goods and services has in fact stayed low. If so many people failed to predict that inflation in dollar terms would remain low, I wonder how they think they can predict the value of a crypto currency.

I understand that Bitcoin’s reported price is determined by the average price across, I believe, five exchanges. There are some 16.5 million coins in existence and each coin or tiny fraction of a coin is owned by someone or other at all times. Lately, the total trading volume has been about 200,000 coins per day across at least 10 exchanges. That is a a dollar volume at $16,000 per coin of $3.2 billion. This means (as I understand it) that on recent days about $3.2 billion worth of bitcoin was purchased through the exchanges and this required $3.2 billion to be sold.

Given its spectacular rise, a lot of people are interested in buying BitCoin. And equally given it’s spectacular rise those who hold BitCoin are somewhat reluctant to sell. Buyers have had to bid the price up in order to pry some loose from those already holding.

Whether or not BitCoin continues to have value and ultimately becomes accepted as a currency remains to seen. For now, it has value because a lot of people want in on the action.

Those suggesting that people stay away from BitCoin have so far looked to be wrong. But truly it is an extremely speculative thing.

There is nothing wrong with risking a few dollars on BitCoin. But I don’t think it should be anymore than a tiny percentage of a portfolio nor anymore than a very modest quantum of dollars.

Personally, I am perfectly happy to sit this one out. In investing there will always be many winning investments that we “miss out” on. Even Warren Buffett, who has taken Berkshire’s per share book value from $19.46 in 1965 to $187,442 and still growing, is said to have “missed out” on a great many obvious investments for Berkshire. And, he admits it is true. But such “missing out” did not prevent his turning each $1,000 of book value into $9.6 million. (And in market value the gain has turned each $1000 of market value into about $20 million). I don’t buy lottery tickets and I won’t be buying BitCoin.

By the way, any claims that the value of a BitCoin should be something like all the wealth in the world divided by 21 million are utter nonsense. That equation also does not apply to dollars.

Laurentian Bank comment
I have never looked closely at Laurentian Bank. But my sense is that the recent dip caused by its disclosure of some falsifications by mortgage borrowers is probably over-done. I suspect every bank would have some mortgages where the borrower has inflated their income or not been truthful about the source of the down payment. It seems a bit much for anyone to be overly surprised about that. I’d be inclined to be a buyer of Laurentian more so than a seller. But I will refrain from buying given I have not done any analysis of the bank.



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