Tom's Life Bits

There are stats that I calculate that expose more of my thinking than I want to have exposed - so I do not show them often. At year end - and being almost fully invested - I had decided to share those stats. I really hope that most of you do not go to the effort to understand them - and that most of you believe this is a bunch of voo-doo math that will never work in the real world. That is partially a correct impression - because I will show that the stats are only about 70% predictive and 30% in error.

Given that the statistical analysis is NOT the end of my investigations - and not the sole determinant of my investing decisions, I can live that with level of error. The statistical analysis is just the beginning - it highlights what MLPs I want to investigate further.

And the first step in generating predictive numbers is to generate good forward CAGR [compound annual growth rate] numbers. The first spreadsheet shows where I get those numbers - and why the numbers I use differ from the CAGR estimates the one can find at Yahoo! Those numbers are in the next message.

MLP CAGRs - Why Consensus Estimates Are Not Used

The dominant factor in assigning amended CAGRs is the distribution coverage ratio, with forecast DCF growth second and recent distribution growth third. My CAGRs are close to the analyst estimates - with only a few exceptions.

Enchilada part five

 I had thought about leaving out part five - it being 'the truth' - and some folks can't handle the truth [grin]. But what the heck - if you can't handle it, then you can just ignore the message. Part five is a short discussion on why I justify placing a large part [but not the WHOLE part] of my investing decision based on numbers.

 Having a numeric representation of the forward projections works for me - even knowing up front that there will be errors in those numbers. If making decisions with my gut worked for me - then I would use that. But the 'numbers' method not only works in netting better returns - it works a WHOLE LOT BETTER on the psychological level.

 I can accept my numbers being right only 65% of the time and combining metrics of 65% correctness to raise the level of accuracy in their predictions to around 70%. If my gut was only 70% accurate [and if I were using my gut to make decisions], then I would be questioning myself left and right - wondering why I was such a failure - wondering how I could be so smart in 2006 [where investments in ETP and BWP led my portfolio to soundly beat the sector average] and so dumb in 2007 [where my investments in ETP, BWP and PAA caused my MLP portfolio to slightly under-perform the sector average].

 I can also work hard on getting the numbers right - adding new metrics - changing the weighting of different variables. Adding SSNOI and rent spreads should make my metrics on REITs better - or more predictive. Tracking changes in book values should make my bank metrics more predictive. Testing if the MLP metrics are more predictive using current year projections are next year projections - that improves the model.

 It is hard to add something to your gut gut without adding weight. [grin] Can you listen to EVEN MORE conference calls? Examples: PAA promises 10% distribution growth, but ETP fails to promise anything. Does that make PAA the better choice? The management of ETP is a bunch of lying jerks [they have told me to call back from a conference call to get data - then stonewalled on giving the expected data], but PAA's management seems to be straight shooters. Does that make PAA the better choice?

 Going with the gut puts intangible questions like THAT in your mind. I believe you can spin those mental wheels forever and get nowhere. Or maybe I was never taught WHAT to listen for - so I was listening and nitpicking all the wrong things.

 At least with numbers - I know to what degree I am changing, if things go wrong. I can add weight to the dividend discount model and cut the weighting to the current price. I can add to the price at a logical P/E ratio and cut the weight to the price at a logical Price/DCF model. I can add target prices to the mix. I can back-test the data.

 One can not do similar back-testing on the weighting of 'promised distribution growth vs. the promising of nothing'. And if ETP outperforms PAA - then maybe ETP just under-promised and out delivered, turning a negative into a positive. So my mind must have been fooled hearing a negative in the first place. Right? Wrong? Heck if I know!

. . . . So that is my thinking - and why I like numeric decisions better than gut decisions. That is why I tend to focus on the numbers. A focus on the numbers is sometimes a focus on the facts. And even when the numbers are not facts [a lot of numbers I use are only opinions], at least they are quantified opinions. And one can do something with a quantity. I can believe that the management at ETP is a bunch of @ssholes - but what does one 'do' with such an opinion?

 So I let the numbers play a large part of my decision process. And this could also be the reason why I still own units in ETP - its the numbers. And it is the reluctance to pay a lot of deferred taxes.