Friday, December 31, 2010

Quotes of 2010

A collection of quotes said or written at some point during this calendar year.

"There are 309 million people out there that are trying to improve their lot in life. And we've got a system that allows them to do it. It doesn't allow things to get changed overnight, though. And-- and-- it's-- it's important to have the right monetary policy. It's important for-- to have the right fiscal policy. But it's nowhere near as important as just the normal regenerative capacity of American capitalism." - Warren Buffett

"Most sports have conceded flaws in their design, and are better off for having addressed them. Tennis added the tiebreaker, football penalties for pass interference, basketball the three-point shot. So why not soccer? Oh, there was one attempt: the penalty shootout. It's like someone said, 'For really important games, let's make the outcome even more random.'" - Richard Bookstaber

"...let's talk about soccer scores. There are a few things that people all around the world need to admit to themselves. Trade restraints slow economic growth, the euro is not a reserve currency and scoreless sports ties are boring." - P.J. O'Rourke

".The purpose of sports—even foreign sports—is not to bore people. Boredom can be so easily obtained. Hunger, exhaustion from making a living and authoritarian governments that ban the fun parts of the Internet provide it free in most of the world." - P.J. O'Rourke

"Nothing But Costs"
"What is Wall Street supposed to do? It's not a creator of wealth. It's a handmaiden to creators of wealth. It occupies an essentially parasitic, but usefully parasitic relationship with the rest of the society. It's totally out of control. It's not making America a great place; it's making America a worse place right now." - Michael Lewis

Markets, Psychology, & the Business Cycle
"...markets have rhythms tied to the interplay of psychology and the business cycle. And while they are only a rough guide for what to expect, what they aren't is irrelevant. Investors forget that it's better to have the problems exposed and absorbed than to be unaware they're there, fuses burning." - Michael Santoli

"The web evolved into a powerful, ubiquitous tool because it was built on egalitarian principles, the web as we know it, however, is being threatened in different ways. Some of its most successful inhabitants have begun to chip away at its principles." - World Wide Web Founder Tim Berners-Lee

"The more you enter, the more you become locked in. Your social-networking site becomes a central platform - a closed silo of content, and one that does not give you full control over your information in it. The more this kind of architecture gains widespread use, the more the Web becomes fragmented, and the less we enjoy a single, universal information space." - Tim Berners-Lee

"...I'm skeptical about the narrowness of the business school curriculum. I happen to believe it should have a much greater liberal arts emphasis, and even a much greater emphasis on the classics. The Odyssey will tell you an awful lot about human nature and life, and therefore about business, and societal values. Read the Odyssey. Read Dante's Inferno. You can also learn a lot by reading Seneca's essay on the shortness of life or Montaigne's essay on vanity." - John Bogle

"Somebody ought to spend a little time thinking...and this gets back to the classics, about the role of business in society. It should add value. But the financial business does not add value. By definition the financial business subtracts value. In round numbers, it takes something like $600 billion out of the pockets of investors every year. That’s $6 trillion dollars in 10 years." - John Bogle

Senator Johanns: "It kinda reminds me what the chief of staff said: 'never let a good crisis go to waste.' And what we are doing here is we're taking this financial reform and we're expanding it beyond where we should be. And I just question the wisdom of that unless somebody can make the case to me that had this been in place the world would be different."

Paul Volcker: "The problem today is to look ahead, and try to anticipate the problems that may arise that will give rise to the next crisis. And I tell you, sure as I am sitting here, that if banking institutions are protected by the taxpayer and they are given free rein to speculate, I may not live long enough to see the crisis, but my soul is going to come back and haunt you."

"What got us into this mess was raw speculation and its offspring, a sustained misallocation of capital." - Michael Lewitt

"I think we have been distracted a lot by people who bleeded about their own things. I'm not sure somebody as technologically ignorant as Al Gore is entitled to speak on the subject. I think you should have punched your ticket in a few better places before you open your mouth." - Charlie Munger speaking on the building of an alternative energy infrastructure

"Idiots and knaves were making a fortune selling shoddy mortgages with ridiculous theories. It was very regrettable behavior. And it was the easy money that allowed it and, of course, the adults who could have fixed it like the accountants who had ridiculous standards without which the bad behavior wouldn't have worked.

The accountants utterly failed us. And, by the way, there is practically no sign of any intelligent reversal of the failure of that profession. I have yet to meet many accountants who are the least bit ashamed for their contribution to our recent troubles but it was immense." - Charlie Munger

"Our system is to swim as competently as we can and sometimes the tide will be with us and sometimes it will be against us. But by and large we don't much bother with trying to predict the tides because we plan to play the game for a long time.

I recommend to all of you exactly the same attitude.

It's kind of a snare and a delusion to outguess macroeconomic cycles...very few people do it successfully and some of them do it by accident. When the game is that tough, why not adopt the other system of swimming as competently as you can and figuring that over a long life you'll have your share of good tides and bad tides?" - Charlie Munger

"...the 3% of GDP that was made up of financial services in 1965 was clearly sufficient to the task, the proof being that the decade was a strong candidate for the greatest economic decade of the 20th century. We should be suspicious, therefore, of the benefits derived from the extra 4.5% of the pie that went to pay for financial services by 2007, as the financial services share of GDP expanded to a remarkable 7.5%. This extra 4.5% would seem to be without material value except to the recipients. Yet it is a form of tax on the remaining real economy and should reduce by 4.5% a year its ability to save and invest, both of which did slow down. This, in turn, should eventually reduce the growth rate of the non-financial sector, which it indeed did: from 3.5% a year before 1965, this growth rate slowed to 2.4% between 1980 and 2007, even before the crisis." - Jeremy Grantham

"I hate gold. It does not pay a dividend, it has no value, and you can't work out what it should or shouldn't be worth," he said. "It is the last refuge of the desperate." - Jeremy Grantham

"Everyone asks about gold. This is the irony: just as Jim Grant tells us (correctly) that we all have faith-based paper currencies backed by nothing, it is equally fair to say that gold is a faith-based metal. It pays no dividend, cannot be eaten, and is mostly used for nothing more useful than jewelry. I would say that anything of which 75% sits idly and expensively in bank vaults is, as a measure of value, only one step up from the Polynesian islands that attached value to certain well-known large rocks that were traded." - Jeremy Grantham

"You don't actually find a strong correlation between— top-line GDP growth and making money in the market. It— it seems like you should. The fastest-growing countries should give you the highest return. They simply don't. But, there's only four of us— that— that believe that story. Everyone else in the world believes that if you grow fast like China, you'll outperform in the stock market." - Jeremy Grantham

"...how little our side of the industry did to move its business to the more ethical firms and to make a fuss about conflicted or unethical behavior. Had a number of us moved our business, we might have slowed or even stopped the 30-year slide in conflicted, unethical behavior that we have experienced. I, for one, regret the modest nature of our moves. We all could have done more. We have tolerated a pretty nasty decline in standards. Shame on us." - Jeremy Grantham

"You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?" - Warren Buffett

"It's quite clear that stocks are cheaper than bonds. I can't imagine anybody having bonds in their portfolio when they can own equities, a diversified group of equities. But people do because they, the lack of confidence. But that's what makes for the attractive prices. If they had their confidence back, they wouldn't be selling at these prices. And believe me, it will come back over time." - Warren Buffett

Happy New Year,

Adam

Quotes of 2009

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Thursday, December 30, 2010

Charlie Munger on LTCM & Overconfidence

From a speech by Charlie Munger to the Foundation Financial Officers Group more than a decade ago just after the collapse of Long-Term Capital Management (LTCM):

"...you may think, my foundation, at least, will be above average. It is well endowed, hires the best, and considers all investment issues at length and with objective professionalism. And to this I respond that an excess of what seems like professionalism will often hurt you horribly — precisely because the careful procedures themselves often lead to overconfidence in their outcome.

General Motors recently made just such a mistake, and it was a lollapalooza. Using fancy consumer surveys, its excess of professionalism, it concluded not to put a fourth door in a truck designed to serve also as the equivalent of a comfortable five-passenger car. Its competitors, more basic, had actually seen five people enter and exit cars. Moreover they had noticed that people were used to four doors in a comfortable five-passenger car and that biological creatures ordinarily prefer effort minimization in routine activies and don’t like removals of long-enjoyed benefits."

 A costly mistake for GM, but nothing compared to LTCM. Munger goes on to say the following:

"Similarly, the hedge fund known as 'Long-Term Capital Management' recently collapsed, through overconfidence in its highly leveraged methods, despite I.Q's of its principals that must have averaged 160. Smart, hard-working people aren't exempted from professional disasters from overconfidence. Often, they just go aground in the more difficult voyages they choose, relying on their self-appraisals that they have superior talents and methods."

After a few years of great returns, I'm sure investors in LTCM were feeling pretty good while not understand the risks being taken and the cliff their money was about to fall off. The fund lasted all of four plus years before it collapsed so it's hard not to chuckle at the name they chose: Long-Term Capital Management.

The value of $1,000 invested in LTCM, the Dow Jones Industrial Average, and invested monthly in U.S. Treasuries at constant maturity.

Deciding to use "Long-Term" in the name of a highly leveraged*, speculative, $ 100 billion fund that used complex mathematical models in what ended up being a failed attempt to profit from fixed income arbitrage is pretty awesome.

Adam

Munger's speech to the Foundation Financial Officers Group - 1998

Related posts:
"Nothing But Costs"
When Genius Failed...Again
Smart Money?
The Madness of Crowds
Max Planck: Resistance of the Human Mind

* Prior to the collapse LTCM had ~ $ 400 million of capital. With more than $ 100 billion of assets that meant the leverage ratio was ~250 to 1. The Federal Reserve Bank of New York organized a bailout to avoid a wider collapse in the financial markets. The partners had $1.9 billion of their own money invested in LTCM. They lost all of it.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Wednesday, December 29, 2010

Buffett on Stock Buybacks - Part II: Berkshire Shareholder Letter Highlights

As a follow up to this post on stock buybacks. Here's a more complete explanation by Warren Buffett of his views on buying back stock.

From the 1984 Berkshire Hathaway (BRKa) shareholder letter:

"The companies in which we have our largest investments have all engaged in significant stock repurchases at times when wide discrepancies existed between price and value. As shareholders, we find this encouraging and rewarding for two important reasons - one that is obvious, and one that is subtle and not always understood. The obvious point involves basic arithmetic: major repurchases at prices well below per-share intrinsic business value immediately increase, in a highly significant way, that value. When companies purchase their own stock, they often find it easy to get $2 of present value for $1. Corporate acquisition programs almost never do as well and, in a discouragingly large number of cases, fail to get anything close to $1 of value for each $1 expended.

The other benefit of repurchases is less subject to precise measurement but can be fully as important over time. By making repurchases when a company's market value is well below its business value, management clearly demonstrates that it is given to actions that enhance the wealth of shareholders, rather than to actions that expand management's domain but that do nothing for (or even harm) shareholders. Seeing this, shareholders and potential shareholders increase their estimates of future returns from the business. This upward revision, in turn, produces market prices more in line with intrinsic business value. These prices are entirely rational. Investors should pay more for a business that is lodged in the hands of a manager with demonstrated pro-shareholder leanings than for one in the hands of a self-interested manager marching to a different drummer."

Buffett later added...

"The key word is 'demonstrated'. A manager who consistently turns his back on repurchases, when these clearly are in the interests of owners, reveals more than he knows of his motivations. No matter how often or how eloquently he mouths some public relations-inspired phrase such as 'maximizing shareholder wealth' (this season's favorite), the market correctly discounts assets lodged with him. His heart is not listening to his mouth - and, after a while, neither will the market."

Even though written more than 25 years ago we've no doubt this past decade seen more than our fair share of shareholder wealth destroying, as Buffett says, "actions that expand management's domain but that do nothing for (or even harm) shareholders."

We've also seen many stock buybacks happen when a company's stock price was clearly above intrinsic value. In fact, if you look at a chart of S&P 500 stock repurchases over the past five years you'll notice most of the buying was being done when the market peaked* in 2007. Evidence of management competence in this regard among public companies is rather spotty to say the least. While this type of mistake may not be caused by a "self-interested manager marching to a different drummer", it is a mistake in judgment that can be just as destructive to shareholder wealth. The quantity of purchases and amount that the stock sells above intrinsic value when those repurchases occur obviously determines the extent of the damage that is done.

From an investors perspective the best type of manager: 1) understands the stock price/intrinsic value relationship, 2) consistently displays good judgment in the use of excess capital for dividends/share repurchases/acquisitions, and 3) does not pursue expansion of management's domain or growth for growth's sake (at shareholders expense) under the guise of "strategic opportunity" or some similar phrase.

Adam

Long BRKb

Related posts:
Buffett on Stock Buybacks
Buy a Stock...Hope the Price Drops?

* Buyback activity was also at or near the lowest levels when the market bottomed in 2009.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Tuesday, December 28, 2010

iPad Rivals: "Not Ready for Prime Time"

An article on how the iPad is doing against its competitors:

...analyst Brian Blair said recent retail checks point to significant end demand for the iPad.

"Even with a handful of tablet competitors hitting the market, the iPad remained the only game in town in our holiday checks largely because many of the tablets hitting the market are junk for lack of a better word," he wrote. "They are underpowered, poorly constructed and largely not ready for prime time."

Not exactly a surprise. Looks like Apple (AAPL) will have yet another impressive holiday season.

Adam

Long AAPL

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.

Monday, December 27, 2010

Ending the Cisco Skid

A new article in Barron's written by Michael Santoli on Cisco's (CSCO) future prospects. It makes the following points:

- When the Nasdaq peaked a decade or so ago, Cisco was selling at 130 times earnings, a huge premium.

- The company was being given too much credit for growth prospects.

The company's earnings multiple is a fraction of what it was back then (more like 12x). From the article:

Investors, making the opposite error they made in 2000, have priced in too much skepticism about Cisco's growth prospects and market-share position, making the stock an attractive opportunity for patient buyers.

Check out the entire article.

Cisco is just one of many tech stocks that a mere decade or so ago sold for an extreme multiple of earnings.

In the past ten years or so, many large cap tech stocks have seen their price to earnings ratio compress dramatically even as the businesses themselves have continued to prosper.

Adam

Long position in CSCO

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Buffett on Stock Buybacks: Berkshire Shareholder Letter Highlights

Warren Buffett wrote the following in the 1984 Berkshire Hathaway (BRKashareholder letter:

"When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases."

If a company's own stock is selling at a discount to a conservative estimate of value, buying back stock is a very low risk way to enrich remaining shareholders.

Other shareholder enhancing moves mostly involve more risk.

Having said that, here's one situation to think about that sometimes gets too little consideration.

Unfortunately, it's possible that a buyout offer comes in at a nice premium to market value but a discount to intrinsic value. If enough owners are okay with the gain that will have occurred compared to the recent price action, the deal may be approved. The quality of a company's board of directors naturally comes into play in such a scenario. If too few have conviction about longer run prospects, the deal may get approved. When too many owners of shares are in it for the short-term or, at least, primarily to profit from price action, the chance of this happening increases.

Well, those that became owners because of the plain discount to intrinsic value and the company's long run prospects will likely get hurt in this scenario.

Adam

Long BRKb

Related post:
Buy a Stock...Hope the Price Drops?
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Friday, December 24, 2010

Buffett on Short Selling

"You'll see way more stocks that are dramatically overvalued than dramatically undervalued. It's common for promoters to cause a stock to become valued at 5-10 times its true value, but rare to find a stock trading at 10-20% of its true value. So you might think short selling is easy, but it's not. Often stocks are overvalued because there is a promoter or a crook behind it. They can often bootstrap into value by using the shares of their overvalued stock. For example, it it's worth $10 and is trading at $100, they might be able to build value to $50. Then, Wall Street says, "Hey! Look at all that value creation!" and the game goes on. [As a short seller,] you could run out of money before the promoter runs out of ideas."

"Everything we've ever thought about shorting worked out eventually, but it's very painful. It's a whole lot easier to make money on the long side. You can't make big money shorting because the risk of big losses means you can't make big bets." - Warren Buffett

Notes from the 2001 Berkshire Hathaway Shareholder Meeting

Buffett on Acquisitions

"...managers need to know how to value a business to think sensibly about acquisitions. Since they don't, they rely on Wall Street, which of course recommends doing deals because they get paid X if the deal doesn't go through and 20X is the deal does." - Warren Buffett

Notes from the 2001 Berkshire Hathaway Shareholder Meeting

Thursday, December 23, 2010

Munger on Black-Scholes

"Black-Scholes is a know-nothing system. If you know nothing about value - only price - then Black-Scholes is a pretty good guess at what a 90-day option might be worth. But the minute you get into longer periods of time, it's crazy to get into Black-Scholes. For example, at Costco we issued stock options with strike prices of $30 and $60, and Black-Scholes valued the $60 ones higher. This is insane." - Charlie Munger

More From Nassim Taleb

According to this recent CNBC article, Nassim Taleb thinks it makes no sense to be against big government but for big business.

He calls this "inconsistent and corrupt".  

From the article:

"They're both very bad, particularly big government. Big government ends up like socialist states," he said. "They end up favoring large corporations that have a lot of employees. That kills growth from small companies who cannot get to Washington, they cannot get lobbyists."

"The problem I have is that Republicans love big business and Democrats love big government, and I hate both big business and big government," he added.

Back in October he also had the following to say in this Bloomberg article:

...investors who lost money in the financial crisis should sue the Swedish Central Bank for awarding the Nobel Prize to economists whose theories he said brought down the global economy.

"I want to make the Nobel accountable," Taleb said today in an interview in London. "Citizens should sue if they lost their job or business owing to the breakdown in the financial system."

He also added the following about the 1990 Nobel award to Harry Markowitz, Merton Miller, and William Sharpe for work on portfolio theory and asset-pricing models. 

"I'm not blaming them for coming up with the idea, but I'm blaming the Nobel for giving them legitimacy. No one would have taken Markowitz seriously without the Nobel stamp."

Taleb thinks the models are built to substantially underestimate risks.

...and finally had this to say.

"If no one else sues them, I will," said Taleb, who declined to say where or on what basis a lawsuit could be brought.

Here's some other thoughts from Taleb over the past year or so:



I'm certainly no fan of those flawed theories. More importantly, my hope is for Taleb to continue offering his opinions, and making similar assertions, if for no other reason than the entertainment value.

Adam

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Wednesday, December 22, 2010

Wells Fargo: Require Banks to Retain More Loans

From an article on how much credit risk banks should be required to hold of the mortgages they originate. 

Regulators are in the process of deciding what mortgages will be exempt from rules requiring banks to retain 5% of the credit risk on loans they originate.

Wells Fargo has broken with other big banks by urging US regulators to require mortgage lenders to retain more of the loans they originate, rather than selling them to investors, a practice that helped to fuel the housing bubble.

Then later in the article John Gibbons of Wells Fargo (WFC), an executive vice president at the bank, said the following:

"The point we are making, unlike others, is that risk retention is a good idea,"

Bob Davis, an executive vice president with the American Bankers Association has a different take...

...wide-ranging risk retention "simply is not necessary for the plain-vanilla types of lending being done today".

Mr Gibbons of Wells Fargo countered that "'Oh, we've learned our lesson' is what you always hear at this point in the credit cycle."

He added: "If we want to discourage the type of 'hit and run' lending that got us into trouble in the future, we need to change the way the industry operates."

It's only 5% yet many bankers are still pushing back.

Amazing if not surprising.

Adam

Long WFC
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Monday, December 20, 2010

Markets, Psychology, & the Business Cycle

From Michael Santoli's latest article in Barron's:

...markets have rhythms tied to the interplay of psychology and the business cycle. And while they are only a rough guide for what to expect, what they aren't is irrelevant. Investors forget that it's better to have the problems exposed and absorbed than to be unaware they're there, fuses burning.

Check out the complete article.

Adam

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Friday, December 17, 2010

Microsoft: Leveraged Recap?

Excerpt from an interview with Robert Kleinschmidt of the Tocqueville fund in Barron's where he talks about Microsoft (MSFT). He argues it makes sense for Microsoft to borrow lots of money and pay it out to shareholders. He says:

- It doesn't need all the cash it has

- It can't invest it all profitably

- It has strong businesses with moats

- It has a 10% FCF yield and a triple-A credit rating

He also said they could borrow long-term, pay it out to shareholders, while having no difficulty paying it off.

Interestingly, in the interview Kleinschmidt had favorable things to say about Pfizer not unlike what David Einhorn had to say in this previous post.

The list of other notable portfolio managers who held significant positions in or bought shares of Microsoft during 3Q 2010 include: Whitney Tilson, Donald Yacktman, David Tepper, Jean-Marie Eveillard, David Einhorn, Arnold Van Den Berg, John Griffin, Wally Weitz, and Tom Gayner.

Most of these managers are much more well known for value investing than technology investing.

Adam

I am a current MSFT shareholder

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Wednesday, December 15, 2010

Einhorn on Pfizer

Last week, David Einhorn had the following to say in this article about Pfizer (PFE):

Shares of Pfizer Inc (PFE) are "substantially" undervalued because of investor pessimism about the company's roster of experimental medicines, but a new chief executive with industry experience could brighten the drugmaker's prospects, hedge fund manager David Einhorn said on Tuesday.

Then later in the article...

Asked if their value is in the "low twenties," he replied: "Oh yes, well above that."

Einhorn holds $387 million in Pfizer stock, his third-biggest holding.

Einhorn's position in Pfizer makes up more than 9%* of the portfolio he manages. Einhorn did not add or sell any shares in 3Q 2010. Donald Yacktman, David Tepper, Irving Kahn, and Robert Bruce are some other notable portfolio managers that have more than 5%* of their portfolio's exposed to Pfizer and added some more shares in 3Q 2010. (David Tepper and Robert Bruce made substantial additions to their Pfizer position's in 3Q 2010)

The stock sold for in the $ 14.00 to $ 17.50 range in 3Q 2010 and currently sells at just over $ 17/share.

The big concern for Pfizer, of course, is that they lose patent protection for the world's best selling drug Lipitor in late 2011. Lipitor makes up ~20% of the company's revenues.

At current prices, Pfizer sells at just under 8x this year's earnings.

I do not have a position in Pfizer at this time.

Adam

* As of 9/30/2010
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Tuesday, December 14, 2010

China's Stock Market

More from the Jason Zweig column on China's stock market:

David Herro, lead manager of Oakmark International, a $6.2 billion mutual fund, says he and his team have visited China twice a year for the past 20 years. How much does he have invested there? "Zero," he says. "The government is still trying to pick winners and losers, and they've done a fairly horrible job at it." Before he will invest, he adds, "we want lower prices, and we want better corporate governance."

An alternative approach to investing in China's markets directly is owning high quality U.S. multinationals and relying on them to wisely deploy capital in high risk/high potential emerging markets.

Adam

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Ben Graham: Low Quality, Favorable Business Conditions

"...the risk of paying too high a price for good-quality stocks - while a real one - is not the chief hazard confronting the average buyer of securities. Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions. The purchasers view the current good earnings as equivalent to 'earning power' and assume that prosperity is synonymous with safety." - From Chapter 20 of Benjamin Graham's book, The Intelligent Investor

Monday, December 13, 2010

Van Den Berg on Microsoft

Arnold Van Den Berg is a student of Ben Graham with a very good long-term investing track record. In his latest newsletter, he had the following to say about Microsoft (MSFT):

As one of the few remaining AAA rated companies, Microsoft has a financial statement so well respected that the bond market recently priced its bond offering almost on par with U.S. government notes and bonds. In total, Microsoft borrowed $3.75 billion in long‐term debt that carried with it an after‐tax rate to this company of just 2.3%. One of the tranches sold was a three‐year note that carried a 0.87% coupon. This was just 0.25% more than a three‐year U.S. Treasury note. On an after‐tax basis it will only cost Microsoft 0.66% per year. When you consider this company earns more than 30% on its capital, this is a very good deal for shareholders.

Van Den Berg goes on to say...

While it is quite possible that Microsoft will grow faster over the next five years, we are only assuming a 5% growth rate. Under this scenario, we believe it has future earning power of $3.95.

The stocks current sells for just over $ 27/share and has nearly $ 4 in net cash and is expected to earn ~ $ 2.40 this year. In his analysis, Van Den Berg argues that considering the quality of Microsoft's business that it deserves a much higher multiple. While that may be true, it doesn't need to for this to work out reasonably well as an investment.

Below, Van Den Berg uses the six month average stock price of $ 24.50 for his calculations.

If you want to be extremely conservative, and just use the last two‐year average, albeit depressed, P/E for Microsoft of 13.65, you will still have a 5‐year annualized return of 17%. Add the dividend, and your total return potential is an annualized 19.7%

With a free cash flow yield of 9.1%, a dividend yield of 2.1%, plus our conservative future growth rate of 5%, we believe that Microsoft stock is a great value and a great investment. Furthermore, we do not believe the disparity between its value and price will continue for long; eventually the value will be recognized.

Given the return potential of this company, along with its AAA financial security, we have to ask the following question: Why would investors buy its bonds, or for that matter U.S. Treasury bonds, instead of Microsoft stock?

Even if some of Van Den Berg's assumptions turn out to be too optimistic, the downside risk versus potential reward doesn't seem to bad at all.*

One big question is whether Microsoft finally runs into serious challenges to its core franchises. Something along the lines of meaningful declines in profitability not simply slow growth. I mean, at or near today's market valuation, Microsoft doesn't need much growth.

Also, if management were to make questionable capital allocation decisions. For example, something like paying way too much for a "strategic" acquisition of considerable size.

Adam

* I am a current Microsoft shareholder.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Friday, December 10, 2010

Yacktman on Pepsi & Coca-Cola

From a recent interview with Donald Yacktman, Stephen Yacktman, and Jason Subotky of Yacktman Asset Management.

During the interview, Stephen Yacktman had the following to say about Pepsi and Coca-Cola:

While Pepsi is partially a beverage company, you've also got Frito-Lay and Quaker foods. Additionally, you have Gatorade, which is extraordinarily dominant in the sports drink category.

On the Frito-Lay business, all I could say is if you walk down the chip aisle of a grocery store, it is hard to find a bag that's not a Pepsi brand. There are niche players, but Frito-Lay has some of the highest market share of any major product in the grocery store. It's a fabulous business. We like to say that if you can buy it from a vending machine, we want to own it. Chewing gum, chips, candy, beverages, sodas — those categories have the wind at their backs compared to other packaged food categories.

Coca-Cola is a diversified company, and prior to the bottling acquisition, 80% of its earnings came from outside the United States. Coke has high market share in many of the top emerging markets, which we think will allow the company to grow volume at an attractive rate for decades to come.

Both are high quality businesses but Pepsi clearly has not been executing on the same level as Coca-Cola recently.

We'll see if that persists.

Adam

Long positions in Pepsi and Coca-Cola

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

The Preferred Destination

Another excerpt from an article in The New Yorker:

...Wall Street has become the preferred destination for the bright young people who used to want to start up their own companies, work for NASA, or join the Peace Corps. At Harvard this spring, about a third of the seniors with secure jobs were heading to work in finance. Ben Friedman, a professor of economics at Harvard, recently wrote an article lamenting "the direction of such a large fraction of our most-skilled, best-educated, and most highly motivated young citizens to the financial sector."

I'm guessing the compounded adverse effect of having so much talent going into finance is not at all small.

Check out the entire article.

Adam

Related posts:
Capital Market Dysfunctionality
The Banking Power Utility

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Thursday, December 9, 2010

Warren Buffett on High Quality Business Owners: Berkshire Shareholder Letter Highlights

From Buffett's 1983 Berkshire Hathaway (BRKa) shareholder letter:

...we feel that high quality ownership can be attracted and maintained if we consistently communicate our business and ownership philosophy - along with no other conflicting messages - and then let self selection follow its course. For example, self selection will draw a far different crowd to a musical event advertised as an opera than one advertised as a rock concert even though anyone can buy a ticket to either.

Through our policies and communications - our "advertisements" - we try to attract investors who will understand our operations, attitudes and expectations. (And, fully as important, we try to dissuade those who won’t.) We want those who think of themselves as business owners and invest in companies with the intention of staying a long time. And, we want those who keep their eyes focused on business results, not market prices.

I believe well over 90% - probably over 95% - of our shares are held by those who were shareholders of Berkshire or Blue Chip five years ago. And I would guess that over 95% of our shares are held by investors for whom the holding is at least double the size of their next largest. Among companies with at least several thousand public shareholders and more than $1 billion of market value, we are almost certainly the leader in the degree to which our shareholders think and act like owners. Upgrading a shareholder group that possesses these characteristics is not easy.

Were we to split the stock or take other actions focusing on stock price rather than business value, we would attract an entering class of buyers inferior to the exiting class of sellers. At $1300, there are very few investors who can’t afford a Berkshire share. Would a potential one-share purchaser be better off if we split 100 for 1 so he could buy 100 shares? Those who think so and who would buy the stock because of the split or in anticipation of one would definitely downgrade the quality of our present shareholder group. (Could we really improve our shareholder group by trading some of our present clear-thinking members for impressionable new ones who, preferring paper to value, feel wealthier with nine $10 bills than with one $100 bill?) People who buy for non-value reasons are likely to sell for non-value reasons. Their presence in the picture will accentuate erratic price swings unrelated to underlying business developments.

We will try to avoid policies that attract buyers with a short-term focus on our stock price and try to follow policies that attract informed long-term investors focusing on business values. Just as you purchased your Berkshire shares in a market populated by rational informed investors, you deserve a chance to sell - should you ever want to - in the same kind of market. We will work to keep it in existence.

One of the ironies of the stock market is the emphasis on activity. Brokers, using terms such as "marketability" and "liquidity", sing the praises of companies with high share turnover (those who cannot fill your pocket will confidently fill your ear). But investors should understand that what is good for the croupier is not good for the customer. A hyperactive stock market is the pickpocket of enterprise.

Buying shares in a business that is owned by other high quality long-term owners eliminates quite a few headaches. Those with a short-term focus behave very different from an investor who owns something for what it's potential is decades into the future.

Adam

Long BRKb
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Facebook: Optimized Dopamine Trigger System?

Excerpt from a recent article in the Washington Post:

...the [Facebook] page itself is purely driven by the act of trying to promote the act of seeking, and seeking is all about delivering small surprises, which trigger dopamine, which puts people into this happy, hazy place where they feel comfortable. But ultimately, it's really detrimental. It has the same kind of effect as cocaine and amphetamines.

So, for me, it's almost like Facebook is an optimized dopamine trigger system.

Then later in the article...

I open up my Facebook page, and I see this news stream, and I see people I know giving me little surprises that are completely meaningless. I don't really care that "chicken-noodle soup stinks." But somehow it rewards me at some basic neurological level, because it's a new piece of information that's related to someone I know. So it triggers a reward, but it's a completely empty reward.

Check out the full Washington Post article.

Adam

Wednesday, December 8, 2010

Financialization of Copper

An excerpt from this CNBC article:

Just a few short years ago, the now-monstrous GLD ETF was but a curiosity in the gold market, an obscure financial instrument in an old-fashioned asset class. It has since become the largest private holder of bullion in the world, buying $30 million worth of gold a day and "wagging the dog" in terms of price action. It has been estimated that GLD alone represents hundreds of dollars per ounce of the spot price of gold.

My question is: What exactly is the benefit of all these commodity ETFs anyway? It's hard to see how this is useful innovation. They appear to be another set of vehicles that helps a sector that has historically made up 2.5-3.0% of GDP become more like 6.5-7.5% of GDP without adding much value.

...in 1965 the financial sector of the economy took up 3% of the GDP pie. The 1960s were probably the high water mark (or one of them) of America’s capitalism. They clearly had adequate financial tools. Innovation could obviously have occurred continuously in all aspects of finance, without necessarily moving its share of the economy materially over 3%. Yet by 2007 the share had risen to 7.5% of GDP! - Jeremy Grantham in his 3Q09 Letter

And Volcker said the following in late 2009.

"I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence," said Mr Volcker...

He said that financial services in the United States had increased its share of value added from 2 per cent to 6.5 per cent, but he asked: "Is that a reflection of your financial innovation, or just a reflection of what you’re paid?" - Paul Volcker

It's one thing to create financial vehicles that end up inflating the value of a mostly useless metal like gold.

I think it is an entirely different matter altogether to distort the prices of something as useful as copper.

Some copper facts:

More than 40 billion pounds is used globally each year with building construction, electrical/electronic products, transportation equipment, and Industrial machinery/equipment consuming the bulk of it.

Over 400 lbs of copper is used in an average single-family home.

9,000 pounds of the total weight of a Boeing 747-200 jet plane is copper. Included in that weight is 632,000 feet of copper wire.

A typical, diesel-electric railroad locomotive uses about 11,000 pounds of copper.

Triton-class nuclear submarine uses about 200,000 pounds of copper.

Since the early 1960s, over 5 million miles of copper plumbing tube has been installed in U.S. buildings. That's equivalent to a coil wrapping around the Earth more than 200 times. The current installation rate exceeds a billion feet per year.

Kinda useful stuff.

Traditional banks need to get back to being a utility that focuses on the role of intelligently lending money and being a trusted holder of deposits.

Basically, get back to banking.

Investment banks need to be, first and foremost, a trusted facilitator when it comes to capital formation and allocation for businesses (from very large to very small).

Basically, put a whole lot less energy into their many casino-like activities. Today, providing access to capital seems a sideshow compared to what they primarily do.

Adam

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Tuesday, December 7, 2010

I, Pencil

Here's something at the other end of the spectrum from yesterday's post on Capital Market Dysfunctionality.

Over 50 years ago Leonard Read's classic essay, I, Pencil, was first published.

Here's a link to that essay.

In the TV show (and book) "Free to Choose", Milton Friedman references Read's essay and had the following to say:

"None of the thousands of persons involved in producing the pencil performed his task because he wanted a pencil. Some among them never saw a pencil and would not know what it is for. Each saw his work as a way to get the goods and services he wanted—goods and services we produced in order to get the pencil we wanted. Every time we go to the store and buy a pencil, we are exchanging a little bit of our services for the infinitesimal amount of services that each of the thousands contributed toward producing the pencil.

"It is even more astounding that the pencil was ever produced. No one sitting in a central office gave orders to these thousands of people. No military police enforced the orders that were not given. These people live in many lands, speak different languages, practice different religions, may even hate one another—yet none of these differences prevented them from cooperating to produce a pencil. How did it happen? Adam Smith gave us the answer two hundred years ago."

Earlier this year, Matt Ridley wrote an essay in the Wall Street Journal that also references Leonard Read and had this to say:

...the sophistication of the modern world lies not in individual intelligence or imagination. It is a collective enterprise. Nobody—literally nobody—knows how to make the pencil on my desk (as the economist Leonard Read once pointed out), let alone the computer on which I am writing. The knowledge of how to design, mine, fell, extract, synthesize, combine, manufacture and market these things is fragmented among thousands, sometimes millions of heads. Once human progress started, it was no longer limited by the size of human brains. Intelligence became collective and cumulative.

The previous post on market dysfunction and its gross inefficiencies seems to contradict this thinking. I'd say they coexist just fine. So, yes, I generally agree with yesterday's post and think things like efficient market hypothesis (EMH) and most of its relatives are deeply flawed. Taken to the extreme these ideas did a lot of damage and have caused a lot of dysfunction.

In the real world participants swing from euphoria to fear, don't always act sensibly, and from time to time are rather susceptible to the deadly sins. In other words, the theory of rational expectations makes little sense in reality. Players are not always cold, calculated, and rational.

Yet, the failure of EMH and its relatives takes nothing away from the value of Leonard Read's (and others like Hayek, Friedman etc.) insights. The tricky part is developing a system that enables powerful free markets to work while recognizing the limits imposed by human nature.

Adam

Video: Friedman on the Pencil

Leonard Read's Essay: I, Pencil

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
 
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