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You CAN Teach an Old Dog New Tricks



February 23, 2012 – Comments (7) | RELATED TICKERS: MIC


As I have mentioned in previous blog posts, I have been doing a lot of studying of psychology lately.  One might initially say that psychology has nothing to do with investing, but on the countrary I believe that it has everything to do with it.  It is very difficult to be a successful investor if one can't keep their emotions in check and avoid selling in a panic or conversely holding onto a stock for too long out of greed.  Being a disciplined investor definitely requires a certain mentality.

Today I came across an interesting review of a book called Guitar Zero by Gary Marcus in the Wall Street Journal.  While the title doesn't sound like a book on psychology or the mind, that's exactly what this book is about.  In the work, Mr. Marcus tells about an eighteen month sabatical that he took from work (where does this guy work anyhow, and are they hiring) to test the theory of neuroplasticity.

Neuroplasticity is a relatively new theory in the world of science that says that the brain and in turn the mind never stop changing throughout one's life, no matter how old they are.  This new theory is in stark contrast to older theories that one could only learn something new in their youth, or as the old adage goes "You can't teach an old dog new tricks."  I would argue that the saying "A zebra can't change its stripes." applies here as well.

Here's what the WSJ article has to say on the subject:

Neuroscience is in the process of reinventing itself. For 400 years, the brain was seen as a machine with parts, each performing a single mental function in a single brain location. Eventually the brain was seen as a computer with hard-wired circuits, all formed and finalized in childhood. It was believed that the brain's circuitry was only alterable in certain "critical periods," or brief windows of extreme plasticity; these were thought to occur in childhood, when experience helped to form the brain's circuitry. The conventional wisdom was that certain skills must be learned early on; it was generally "too late" for adults to pick up a new language or musical skill. Plasticity was for kids.

But in the past few decades mainstream neuroscience has reversed itself, demonstrating that the brain is "neuroplastic" from cradle to grave. Neuroplasticity is the property of the brain that allows it to change its structure and function through mental experience. This discovery has led to new treatments for learning disabilities and for strokes (so that adults can at times, through brain exercises, develop new circuitry and cure themselves). A host of neurological and psychiatric problems and injuries can now be addressed through mind-based interventions.

Never Too Late to Learn

This is absolutely fascinating stuff, to me at least.  So how does neuroplasticity relate to investing?  One way is that it appears as though it is never too late in life to learn a new skill.  Even if you are middle-aged and have never invested a single cent of your own money before you can learn how to do so successfully.  Places like The Motley Fool, whose motto is "To Educate, Amuse & Enrich" is a great place to start to learning about how to invest.  There's tons of articles here and the forums, both subscriber-only, free, and here at CAPS are full of fantastic, helpful community members who are always eager to help eath other out and answer questions.

Similarly, one can also alter their temperament towards investing and money.  Back when I first started investing in my early 20s, it was all about wanting to get rich.  I'm not really like that any more.  Do I like money?  Of course, who doesn't?  Having said that, it is not the driving force in my life that it once was.  Today I am much more concerned about taking care of my family and having a sense of inner peace than I am about squeezing every single dollar out of my existence. 

I almost treat my bank accounts as a scorecard, like the one here in CAPS, rather than real dollars and cents.  Doing so helps me to keep the emotion out of the game of investing...or at least try to.  I still get a little annoyed with myself for keeping a losing stock or selling / not buying a winner (see my real-life sale of RRMS out of fear of a softening of storage rates for oil at Cushing) , but my annoyed state doesn't seem to be as powerful or long-lasting as it would have been years ago.

Of course, I have done fairly well in life and am quite comfortable so I suppose that it is easy for me to say this to some degree, but I have put my money where my mouth is so to speak by turning down a number of overtures from a major corporation that I would have given anything to work for in the past.  The new positions that I was offered, they tried more than once, would have given me a significantly higher salary...but at the expense of time with my family and probably my peace of mind as well.  I would have increased my daily commute from a half hour each way to well over an hour and added a decent amount of travel to the mix, not to mention extra hours and pressure.  The younger version of myself would have thought the new me was nuts for turning down this job, but at this point in my life I would rather spend time with my kids and wife and be fairly relaxed than work my fingers to the bone and never see my loved ones.

This brings me to a discussion that I had with someone in the comments section of one of my posts earlier this month.  This individual disagreed with a statement that I made about one's career having an impact upon their health.  The debate was fairly pointless at the time because neither of us had any facts to back up out sides of the argument, just opinions.  Well, I recently came across an interesting study on the subject from someone at USC:

Investment banking can be dangerous for health, study shows

A University of Southern California researcher found insomnia, alcoholism, heart palpitations, eating disorders and an explosive temper in some of the roughly two dozen entry-level investment bankers she shadowed fresh out of business school.

Every individual she observed over a decade developed a stress-related physical or emotional ailment within several years on the job, she says in a study to be published this month...

The USC study began a decade ago at two Wall Street banks that granted access on the condition they remain anonymous. The study will be published in the next issue of the Administrative Science Quarterly, due out later this month.

During their first two years, the bankers worked on average 80 to 120 hours a week, but remained eager and energetic, she says. They typically arrived at 6:00am and left around midnight.

By the fourth year, however, many bankers were a mess, according to the study. Some were sleep-deprived, blaming their bodies for preventing them from finishing their work. Others developed allergies and substance addictions. Still others were diagnosed with long-term health conditions such as Crohn's disease, psoriasis, rheumatoid arthritis and thyroid disorders.

Anyhow I hope that I didn't come across as sounding preachy, because that certainly was not my intention.  I just think that it is important to share some of the latest research on psychology and how one can improve themselves and their lives, regardless of their age with everyone.

To bring things full-circle and discuss an actual investment idea, a stock that I wrote about earlier MIC absolutely crushed it with its earnings today (isn't earning season wonderful?).  Here's what I had to say about the company at the end of January:

"Hey guys. Just a heads up about two potential catalysts that have the potential to significantly move a stock that I follow (and own) in the coming months.

The company is called Macquarie Infrastructure (MIC). It is basically a holding company for a diverse set of assets, a utility, storage terminal tanks, aviation services, all infrastructure related. The company currently pays out a 2.9% dividend. But the two catalysts that are outlined in the following press release, the resolution of a dispute about how large a dividend should be paid with its 50% partner in the terminals and the reinstitution of a dividend from its aviation services division now that its debt has been paid down some have the potential to double the company's dividend over the next couple of months. If that does indeed happen, I suspect that the stock will see significant appreciation in its share price as well.

This is one of those classic early Buffett investments where he used to buy into companies before significant increases in their dividend that the general public might not know about.

Macquarie Infrastructure Company Update

Here's ny original thoughts on the company from last June for anyone who's interested:

"I came across an interesting stock idea in this week's issue of Barron's, which contained its always interesting Investment Roundtable. This one was brought to us by Meryl Witmer, who by far had the most SPOPY stock ideas in the last Roundtable issue. Her idea this time was to go long Macquarie Infrastructure [MIC]. I actually wrote something on this trade several months ago. Here it is for anyone who's interested, followed by a portion of the write-up from this weeb's Barron's:

"A new type of special situation, Invest in companies before they significantly increase their dividend

I am constantly reading anything that I can about investing in "special situations." I recently came across a great quoted on one variety of special situation that comes from many people's favorite value investor, Warren Buffett:

The buying opportunity that Warren exploits is this: after the company announces that it is going to convert into either a royalty trust or a master limited partnership, which means that its future dividend payout will increase after the conversion, the stock market won't recognize the increase until the conversion is completed and the dividend is actually increased and paid out. This creates a short period of time, between the announced reorganization and the actual date of the conversion, in which the company's shares are undervalued in relation to their future increase in value, due to the increase in the dividend payout that occurs after the conversion.

Why does this window of market inefficiency exist? These companies, because of their small market cap, are usually not well followed by Wall Street or the general public. Also, investors have a preference for valuing an interest-bearing security on the basis of what it is paying today, not what it might be paying tomorrow.

The popular members-only investment idea website, SumZero, recently published a write-up on a company that fits this description in the "free" section of its site for the unwashed masses of non-members like myself.

MIC ($21/shr) >> Big Upside, Limited Downside, and a Near-term Catalyst

The company that was discussed is called Macquarie Infrastructure Company (MIC). Macquarie is an infrastructure company that ran into trouble at the height of the Great Recession when one of its subsidiaries was forced to file for bankruptcy and it had to eliminate its dividend. To compare it to a company that Fooldom is familiar with, think of MIC as a mini Brookfield Infrastructure Partners (BIP).

Macquarie owns things like bulk liquid storage tanks, a Hawaiian natural gas utility, a company that services private jets, and a water utility.

To make a long story short, you can read the great write-up for the details, the author not only believes that MIC is undervalued on a sum-of-the-parts basis but that the company's stock price will surge once it reinstates its dividend, which MIC has mentioned will happen some time in early 2011. They peg MIC's fair value at around $36/share, approximately 50% higher than its price today and that the catalysts in place will enable the company to reach that target level within the next six months.

Like many of these ideas, the time to buy this stock was several months ago, it has rallied 75% since late last year, but I'll take a 50% gain on a company that may begin to pay a substantial dividend in the near future. I have not bought MIC in real-life, but I did add it to my CAPS portfolio at $24.05/share.

Is anyone out there familiar with this company? I'd love to hear your thoughts."

Here's what Ms. Witmer had to say about the company:

We have been buying Macquarie Infrastructure [MIC], an infrastructure fund with ownership interests in four businesses: International-Matex Tank Terminals, Atlantic Aviation, the Gas Company and District Energy. International-Matex, or IMTT, is the most exceptional. It is one of the largest bulk-liquid storage-terminal businesses in the U.S. Macquarie owns half.

What makes it so exceptional?

The company can store more than 43 million barrels. They store petroleum, vegetable oil and commodity and specialty chemicals. The main storage facilities are in Bayonne, N.J., and St. Rose, La. Storage contracts last from three to five years, so the business isn't particularly sensitive to the economy. The Bayonne facility is strategically placed on the Kill Van Kull, a tidal strait near New York Harbor. The facility is able to load and unload ships quickly due to the depth of the water in front of its docks. Competitors' docks can't handle large ships; products have to be transferred to barges before docking. That increases costs. IMTT's advantage will increase because the Port Authority of New York and New Jersey is dredging the Kill Van Kull even deeper so New York Harbor can be accessed by larger ships being built to take advantage of the widening of the Panama Canal.

We estimate IMTT will contribute about $1.50 of after-tax free cash flow in 2012 to Macquarie. The division deserves to trade at about 15 times free cash, which makes it worth 22 a share. Macquarie is trading for 24.75.

So you're getting the rest of the company for less than $3?

Correct. The next-largest asset, Atlantic Aviation, operates gas stations and terminals for private planes. It suffered during the financial crisis, but has been cutting costs and the business is improving. Last year it contributed about $1.20 per share of after-tax free cash flow, and could earn about $2 a share if the business returns to earlier levels. We value Atlantic at about $10 to $15 a share.

The Gas Company operates the only private gas utility in Hawaii. District Energy operates the largest district cooling system in the U.S. Together the businesses earn 55 cents a share. Along with some tax assets, they're worth about $7 a share.

.How will Macquarie unlock this value?

The game plan is to pay out dividends. The company pays 80 cents a share, giving it a 3.2% yield. In a few years they could pay as much as $3 a share, if not more. There is no debt at the holding company. Executive compensation is tied to the stock's outperformance relative to a particular benchmark. For management to receive extra performance fees, the stock needs to reach the mid-30s. Macquarie is worth 40 to 45 a share.

This is exactly the type of situation that I am in love with right now. I have been trying to add the stocks of companies that I believe will substantially increase their dividends, and likely as a result in turn their share prices, in the future. Along these lines, I currently own UAN, SEMG, ROIC, and PEB and I am always actively looking for more. I may see if the Barron's pop fades in a few days and pick up a little MIC if I like what I find when I dig into it a little more."

I am up around 11% on MIC in my personal portfolio and 18.5% on it in CAPS right now, but if things play out favorably I expect those numbers to increase significantly."

I am now up 28.5% on MIC in CAPS and I still think that it has a ton of room to run if it receives a favorable decision in arbitration some time in the next couple of months.

Wow, that was one long post.  If you've made it this far :), thanks for reading and have a great day!


7 Comments – Post Your Own

#1) On February 23, 2012 at 2:51 PM, portefeuille (98.88) wrote:

good old MIC ...


#36) On March 02, 2009 at 2:14 PM, portefeuille (99.81) wrote:

MIC - 0.94 - outperform


(from here)


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#2) On February 23, 2012 at 2:57 PM, SkepticalOx (98.63) wrote:

*so happy Deej is blogging again* +1

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#3) On February 23, 2012 at 3:01 PM, portefeuille (98.88) wrote:

You should start following my fund, by the way. I think my long term performance will be about as good as those of Ackman, Klarman, Simons, etc. And you do not have to wait for my filings ...

portefeuille, resident hedge fund manager.


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#4) On February 23, 2012 at 3:21 PM, Valyooo (33.88) wrote:


I skipped the part about MIC, but I liked the rest.  Although I am not sure this is such a break through.  Have you ever seen an illiterate old man learn to read?  Or somebody learn a new language as they got older?  Kinda flies in the face of the conventional wisdom without any experimentation required.

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#5) On February 23, 2012 at 3:22 PM, Valyooo (33.88) wrote:


Unfortunately, most hedge fund clients would not accept performance overviews that included "with and without DSCO"

hehe ;)

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#6) On February 23, 2012 at 3:23 PM, Valyooo (33.88) wrote:

Oh and I love the pic of the old guy

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#7) On February 23, 2012 at 3:38 PM, portefeuille (98.88) wrote:

"with and without DSCO"

The DSCO position was in the green for a few minutes today.

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