This is my first official post of what will hopefully be many here at Grey Trading School. I will be discussing my background and as well as my purpose for writing for Grey Trading School. I have been passionate about investing and health since I was 8 years old. I believe that these are two of the areas that cause the most suffering for people. The reason I am a big believer in education is this is the only way for people to empower themselves with the knowledge and skills to prevent falling victim to what the “financial system” and “health system” are creating due to conflicts of interest. Financial markets are very vast and having delved into many different areas such as fixed income analysis (bonds), equity analysis (stocks), derivatives (options & futures), portfolio analysis (allocation of bonds and equities or other financial instruments), trading technical analysis (short –term), among many others, this blog will be focused on covering individual stocks with accompanying industry outlooks. I will be solely focusing on financial analysis and strategy’s related to longer time horizons 1-3 years, specifically value investing. My value investing strategy is looking at equities that are in “hated” or “distressed” sectors. I state the above as it is key to always know your time horizon and as well as your strategy as the rules to your strategy is vastly different when those things change.
I am a deeply passionate individual that is helping to lead and inspire a new generation of entrepreneurs, investors, business people, and health minded individuals to become empowered and live their best lives without compromising their integrity. I received my MBA from the University of New Mexico with a dual concentration in Finance and Accounting. I have taught finance courses (Financial Markets and Institutions and Commercial Banking) at both the graduate and undergraduate level at the University of New Mexico and have 5 years of experience in the corporate world. I am a self motivated individual who has self studied many different forms of self-development, business, investing, leadership, and integrative medicine from a very young age. I believe the greatest gift we can give others is to become the strongest version of ourselves and teach others how to do the same, while always finding the time to give back to those in need.
The Anderson Business school at UNM offers a unique investment program of which I was fortunate to take part of. Everyone knows that investing and trading without using real money only takes you so far. The program allowed us to manage $5.2 million (comprised of fixed income, equity analysis, and portfolio analysis) during my program of which I did both as an undergraduate and as a graduate. Currently the program is only managing an equity only portfolio of $2 million. This was a unique education opportunity that greatly aided me in learning how to perform very in depth analysis. A couple of my reports are online here on Wells Fargo and JP Morgan. I also created an investment thesis filled with research on Mobility and Cyber Security during my time helping to manage the $5.2 million. I received a dual concentration during my MBA of both finance and accounting as the ability to analyze 10-K, 10-Q’s, 8-K’s, and all other SEC financial filing’s is the only way to be able to analyze companies sufficiently.
I remember picking up my first investment book and forever being captivated not by the money but rather the freedom of what investing early could allow for. Time is essential and a key component which can not be overemphasized. I had always known this from all my reading and studying about investing but when I was watching a special presentation in high school it was the first time it hit me square in the “gut”. I had long remembered the many narratives from the books of nearly every author, “if only I would have known about investing earlier or started younger”. The presentation was accompanied with an informational pamphlet, which gave an example that created a lasting impression. Please see the example here: If I could save $36,000 by the time I was age 30 and never contributed another dime, I would have more money than if I started saving at age 31 and contributed $140,000 (assuming $4,000 a year contributions until age 55). This was why one of the smartest people that ever lived said “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t … pays it.” – Albert Einstein.
Grey Trading School was created to bring top experts from many different areas. The founders have compiled many different experts that have superior expertise and knowledge in the world of technical analysis for short term trading. In a world of traders, I will always recommend allocating a portion of your portfolio towards longer term (1-3 years’ time horizon) as time is one of the biggest advantages in financial markets. I personally allocate 70% of my portfolio towards longer term investments and 30% towards shorter term investments. A key to understand in the world of financial markets and investing, there are no strict hard rules. I mean what is ideal for one individual based on (age, capital, risk tolerance, goals, etc.) will be different for another and thus ‘context’ is key.
During and after the financial crisis I spent endless months analyzing the financial sector and individual banks. I was concurrently teaching classes at the university on Financial Markets and Institutions and Commercial Banking while still helping to manage the $5.2 million Portfolio in our Investment Program. Anyone who understands banks much less the large ones that are really huge financial institutions, understands that this sector regardless of how much you know is probably the most difficult to accurately value. I always state the biggest risk in distressed value investing is information risk. The risk that there is information that “you don’t know you don’t know” which changes all your underlying assumptions in your analysis. Banks are loaded with off balance sheet derivatives that make it nearly impossible to give an accurate valuation. Not to mention the top six banks are so large that they control over 66% of all banking assets in the United States, how’s that for “Too Big to Fail”.
My willingness to continually contribute to these investments during this time allowed for out sized returns that I could have never achieved otherwise, part of the reason I am a big believer in value investing. During this time nearly every analyst had sell ratings on every bank and financial institution I was analyzing. In fact, many of my students thought I was bit insane for investing in all of them. Lots of fear during this time not only paralyzed many but prevented them from taking advantage of what was truly a gift. It wasn’t until much of these banks were trading much higher did I see many analysts come out and put “buy” ratings. Was this really the ideal time to be buying after the companies were up 100’s% from their lows? Yes, maybe an 8% return is great for an individual with a large portfolio but for younger individuals or those who need to have larger returns to have any shot at building a sufficient retirement nest egg it makes little sense. No one is good at picking bottoms thus averaging in or continual contributions (every paycheck is how you get around this). Value investing has the potential to provide outsized returns in ways that other forms of longer term investing have difficulty matching. Some may view this as a “risky” strategy, if you want to know my views on risk please see this paper by Howard Marks here.
I see this same opportunity in the energy sector and why I have been spending endless hours doing research. Over the last 11 months I have been head deep with analysis of many different energy companies (Upstream, Downstream, and Midstream). I have focused mainly on upstream and midstream as they have been beaten up the most and allow for the greatest outsized returns with patience. Some of my favorites are - EXXI, DNR, GTE, MEMP, MCEP, ORIG, BXE, and TGA. Myself and a few people I work with scanned the whole industry based on different metrics to narrow the list then started diving into management, strategy, competitive analysis, etc. Valuation was key but if you look at a name like ORIG its valuation is insanely off (you literally can buy it for forward earnings with a PE of just 1, but the CEO has and will continue to be a sore thumb – more on this in my next post and why I am long now anyway at the $2.00 price). I looked into shale names but really decided to steer clear as I felt there were high quality MLP’s and small to mid cap E&P (non-shale) that didn’t have what I see as a distinct disadvantage of full cost Capex expense headwinds going to hit once things start to turnaround due to heavy decline rates (momentum for shale is what I liken to leveraged finance: it works both ways it just so happens we haven’t lived though the down momentum, yet. it will happen though). A great presentation was done by Einhorn about Shale (tight oil) here, earlier in the year.
Many are familiar with my work with EXXI (Energy XXI) which is more speculative and risky than many of the names listed above. With that said EXXI has what I believe to be a unique opportunity based on my research. They have a world class management team currently in place and a very intriguing set of circumstances. This was not the case before with the prior CFO. I am big on management and aligned incentives as they are the ones steering the wheel and thus directing the company. For those who haven’t had a chance to read my article on the company please see here: Taking A Look At Energy XXI: A Study In Effective Crisis Management.
I want to thank everyone for reading and I look forward to providing you with the best possible analysis here at Grey Trading School. Also, remember you will be able to get your individual questions addressed one on one in on our live interactive platform currently supported by Slack. I plan on sharing books for those interested in learning more about fundamental analysis and value investing in future posts as well. Stay tuned and always remember “the greatest gift we can give others is to become the strongest version of ourselves and teach others how to do the same, while always finding the time to give back to those in need.”
All the Best,
Wesley Kress – 32Prosperity