The Stingy News Quarterly (Q1/2007)
New @ StingyInvestor
Investing by the book
"Investors love profits - the bigger the better. But when evaluating potential stock buys, it's important to consider more than just how much a company earns. You should also take a gander at what it owns. You can often spot valuable opportunities when you find solid assets selling for low prices. One way I like to look for bargains is by examining a company's book value. This is the historical value of all its assets minus its liabilities. The price-to-book-value ratio (P/B) that you see quoted on many financial websites compares this book value to the current price of the company's shares. If you buy stocks with low P/Bs, you're buying assets at a bargain price."
5 Stingy Stocks for 2007
"Since a rocky start in 2001, the stingy stocks have provided a total gain of 183.6% assuming that the old stocks were sold and the new stocks purchased each year. In comparison, the S&P500 (as represented by the SPY exchange-traded fund) lagged by 151.3 percentage points over the same period."
The Top 200 Stocks
"Want to go hunting for buried treasure? Then join us as we once again dig up the shiniest prospects among Canada's largest 200 stocks in the third annual MoneySense Top 200. We're pleased to say that the first two versions of the Top 200 have been a great success. Look, for instance, at our All-Around All-Stars from last year. These were the handful of stocks that scored well for both good value and good growth prospects. Since we selected them in November 2005, they have gone up in price by an average of 37.6%. Fold in the 57.6% return from the 2004 version of the All-Around All-Stars and our top picks are up 116.8% over the past two years. Yes, you heard that right. Someone who invested in our All-Around All-Stars from 2004 then rolled their gains into our top picks from 2005 would have more than doubled their money in two years - and their 116.8% gain doesn't even include the dividends they would have collected along the way."
The Best of Stingy Links
Stingy Links: Academia
Stocks of admired companies and despised ones
"Do stocks of admired companies yield admirable returns? We study Fortune magazine's annual list of "America's Most Admired Companies" and find that stocks of admired companies had lower returns, on average, than stocks of despised companies during the 23 years from April 1983 through March 2006. We link differences between the returns of stocks of admired and despised companies to differences in affect, the quick feeling that distinguishes good from bad, admired from despised. The affect of admired companies is positive, and investors who were attracted by affect to stocks of admired companies paid for it with lower returns. However, the relative returns of stocks of admired and despised companies varied considerably from year to year and from decade to decade and the relationship between admiration and returns is not always monotonic."
How active is your fund manager?
"To quantify active portfolio management, we introduce a new measure we label Active Share. It describes the share of portfolio holdings that differ from the portfolio's benchmark index. We argue that to determine the type of active management for a portfolio, we need to measure it in two dimensions using both Active Share and tracking error. We apply this approach to the universe of all-equity mutual funds to characterize how much and what type of active management they practice. We test how active management is related to characteristics such as fund size, expenses, and turnover in the cross-section, and we look at the evolution of active management over time. We also find that active management predicts fund performance: the funds with the highest Active Share significantly outperform their benchmark indexes both before and after expenses, while the non-index funds with the lowest Active Share underperform. The most active stock pickers tend to create value for investors while factor bets and closet indexing tend to destroy value."
Stingy Links: Behaviour
The riches of irrationality
"Buy low and sell high. In other words, buy when it's cloudy outside but sell when the sun is shining. Yes, aspects of the weather do affect stock markets after all. In a 2001 paper, Ross School of Business Prof. Tyler Shumway and a colleague showed the existence of the sunshine effect, which says the amount of cloud cover in the vicinity of major international stock markets has a significant correlation with trading patterns for the day. Moreover, this significance rises into relevance as researchers show that the sunshine effect will deliver higher returns - even taking into account the transaction costs incurred with trading to the vicissitudes of meteorology."
"The more money we have, the less we want to share with other people. Few of us like to think of ourselves as being greedy, although we might describe ourselves as being self-sufficient or financially independent. And many of us like to think that if we suddenly received a wind-fall, we'd share the wealth. Yeah, sure. The trouble is that self-perception is often very different from reality."
The voices in my head say 'Buy It!' Why argue?
"Now that scientists have spotted the pain and pleasure centers in the brain, they.ve moved on to more expensive real estate: the brain.s shopping center. They have been asking the big questions: What is the difference between a tightwad's brain and a spendthrift's brain?"
Stingy Links: Bonds
Debt-market bomb could hurt us all
"The greatest economic threat today isn't deflation in the housing market. A bigger worry is that a meltdown in the debt markets could force the global economy into a credit squeeze and recession."
Why subprime lenders are in trouble
"As the subprime mortgage market goes into steep decline, threatening to drag the whole economy along with it, many people are wondering what could have gone so wrong so quickly. Until recently, after all, delinquency and foreclosure rates on subprime loans were reassuringly low. The answer may lie in how the quality of these mortgages has changed over the years. While subprime is the term used for loans issued to people with poor credit, not all subprime loans are created equal. And the subprime loans that were originated in 2006 that are turning out to be shockingly weak."
Stingy Links: Books
Everybody's an expert
"People who are not experts in the psychology of expertise are likely (I predict) to find Tetlock's results a surprise and a matter for concern. For psychologists, though, nothing could be less surprising. 'Expert Political Judgment' is just one of more than a hundred studies that have pitted experts against statistical or actuarial formulas, and in almost all of those studies the people either do no better than the formulas or do worse. In one study, college counsellors were given information about a group of high-school students and asked to predict their freshman grades in college. The counsellors had access to test scores, grades, the results of personality and vocational tests, and personal statements from the students, whom they were also permitted to interview. Predictions that were produced by a formula using just test scores and grades were more accurate. There are also many studies showing that expertise and experience do not make someone a better reader of the evidence. In one, data from a test used to diagnose brain damage were given to a group of clinical psychologists and their secretaries. The psychologists' diagnoses were no better than the secretaries'."
A devilish delusion
"In 1982, the Academy Award for Best Costume Design went to a film called Chariots of Fire, the story of a couple of upper-class Brits as they trained for and competed in the 1924 Paris Olympics. (You had to be there.) The movie was the year's big hit; it won a slew of awards, including Best Picture. Have you seen Chariots of Fire? It's about track and field; the actors basically spend the bulk of the movie running around in their underwear. Bam - give'em the costumes Oscar!"
Stingy Links: Buffett
Berkshire Hathaway annual for 2006
"Let me end this section by telling you about one of the good guys of Wall Street, my long-time friend Walter Schloss, who last year turned 90. From 1956 to 2002, Walter managed a remarkably successful investment partnership, from which he took not a dime unless his investors made money. My admiration for Walter, it should be noted, is not based on hindsight. A full fifty years ago, Walter was my sole recommendation to a St. Louis family who wanted an honest and able investment manager."
Berkshire Hathaway's 5-star stocks
"In its recent filing, Berkshire disclosed three new positions: Ingersoll-Rand Company (IR), United Healthcare (UNH), and US Bancorp (USB). It should be noted that Berkshire had been accumulating its stake in US Bancorp since early 2006 but had been granted permission to delay the filing of this position over the last couple of quarters. Berkshire also modestly boosted its stake in Wells Fargo (WFC) and USG (USG)."
The Berkshire Hathaway portfolio
"Now you're probably thinking: Great, if Buffett himself thinks Berkshire's equity investments will only be slower growers, why should I be interested in them? Well, in my view, the ability to buy a fractional ownership interest in some great businesses at attractive prices with limited downside is still a very good proposition, especially when compared to the average investor's current opportunities."
Words of wisdom from Warren Buffett
"Warm and fuzzy aren't words normally used to describe captains of industry. That is unless you're talking about Warren Buffett. He's the second-richest man on the planet, the best investor ever, one of the most significant philanthropists in world history--and yet he seems as down-to-earth and grandfatherly as say, Wilford Brimley. Buffett helps perpetuate this homespun mystique with his annual investor newsletters, which are chock full of folksy words of wisdom."
User's guide to Buffett's portfolio
"Buffett, the smartest investor ever, has done a lot of work for us when he buys a position and then discloses his holdings. Studying in the footsteps of the master and his disciples, but using that as a starting point for your own research, will end up being a very lucrative practice."
Warren Buffet talks competitiveness
"CNBC's Liz Claman and Berkshire Hathaway Chairman Warren Buffett sat down for an exclusive interview March 13 at a high-profile conference in Washington D.C. on the competitiveness of U.S. capital markets hosted by Treasury Secretary Henry Paulson. Buffett, known as the Oracle of Omaha for his investing acumen, was one of the many big-name business leaders who took part in two panels on the subject."
No free rides on Berkshire's dollar
"Sure, there are CEOs who have no qualms about having shareholders foot the bill for frequent use of company planes and other lavish expenses, but Buffett won't be counted among their ranks. Last year he reimbursed Berkshire $50,000 for personal expenses, so that shareholders wouldn't be stuck with the bill for his postage stamps and phone calls home, according to the statement. In fact, Buffett describes his payment as "equal to or greater than the costs" of his expenses."
Buffett bets on housing
"So what is he buying now, and what can we learn from it? First, he's once again making the bet that housing and construction might be in a medium correction but not a long-term slump."
Warren Buffett Q&A video
"The video is about 40 minutes long and contains a lot of great sound bites from Warren on investing, business and entrepreneurship."
One of our favorite 5-star stocks
"Any final words of wisdom for those who own or are considering owning the shares? In my opinion, Berkshire remains a premier franchise whose stock is currently offering investors a very attractive risk/reward scenario. If you bought some Berkshire stock today and put it under your mattress, I strongly believe that 10 years from now it will be worth significantly more than what you paid for it."
Buy 'em like Buffett
"Warren Buffett has established his reputation as the "World's Greatest Investor" by taking the longer view - buying quality stocks with good earnings power and hanging on through both bull and bear markets. During the last few decades, he has parlayed some well-chosen core holdings into an unparalleled performance record - not to mention an enormous personal fortune."
Stingy Links: Crime
New backdating scheme rips off stockholders
"It's tempting to roll your eyes at the latest options backdating news - more evidence that in certain ways American executives are still the world's most creative. But in fact it's worth a closer look, because this type of conniving, which involves backdating exercise dates rather than grant dates, is different and in some ways worse. Bizarrely, while this book-cooking appears to be a tax scam, it may actually leave the U.S. Treasury better off than if the executives had been honest. What it reveals most strongly is some executives' utter contempt for their shareholders."
Big insider-trading bust
"The case involves allegations that hedge funds bought information about impending rating changes on stocks from an executive at UBS, got tips about upcoming corporate mergers from a former Morgan Stanley compliance officer, and paid a Bank of America broker for the right to get shares in hot initial public offerings. There's even a charge that some day traders, who had gotten wind of the alleged activities, were shaking down other traders for money to keep secret their role in the purported insider-trading scheme."
Stingy Links: Dividends
The importance of measuring payout yield
"Previous research showed that the dividend yield process changed remarkably during the 1980's and 1990's, but that the payout yield (dividends plus repurchases over price) changed very little. As such, we investigate the empirical implications of using various measures of payout yield rather than dividend yield for asset pricing models. We find that the widely documented decline in the predictive power of dividends for excess stock returns is due largely to the omission of alternative channels by which firms distribute and receive cash from shareholders. Statistically and economically significant predictability is found in the time series when payout (dividends plus repurchases) and net payout (dividends plus repurchases minus equity issuances) yields are used instead of dividend yield. In the cross-section, we find that payout yield contains information about expected stock returns exceeding that of dividend yield and that the high minus low payout yield portfolio is a priced factor. Finally, we show that trading on this characteristic leads to excess profits that can not be explained by the traditional risk factors."
Stingy Links: Dorfman
Robot's winning streak snaps at 7 years
"The 'Robot' starts with the universe of U.S. stocks with a market value of $500 million or more. It eliminates those companies whose debt is greater than stockholders' equity, and also slices off those with negative earnings over the past four quarters. From the approximately 1,000 stocks that remain, the Robot selects the 10 with the lowest price-earnings ratios (stock price divided by the past four quarters' earnings)."
Value and momentum
"People who scour the stock market for bargains tend to buy too early, and I am no exception. To counteract this problem, some value investors look for stocks that show some upward price momentum. Twice a year for the past few years, I have been put together a list of stocks that I think have both value and momentum."
"While the average stock rose about 7 percent in the fourth quarter, Archer-Daniels-Midland Co. fell 15 percent. That earns it a place -- along with Lincoln Educational Services Corp., Crane Co. and Motorola Inc. -- on my quarterly Casualty List. The list contains stocks that have been roughed up in the previous quarter, and that I think have good potential to recover and make new highs."
9 lessons I learned in the past 9 years
"Today I'm putting away my quill to devote fuller attention to Thunderstorm Capital, an investment firm I founded in 1999. For my last column, I'd like to highlight nine lessons that emerged from writing the column in the past nine years." [Doh!]
Stingy Links: Dreman
Dreman scoops up bank shares
"Just when it looked like the four- year boom in financial companies' shares was over, some of the world's biggest investors are betting the best is yet to come. Dreman Value Management LLC, Pioneer Investments and Societe Generale SA say they're unconvinced surging defaults on so-called subprime home loans, or those made to the riskiest borrowers, will unravel the banking industry. They expect profits at the largest firms to keep growing, bolstered by fees from corporate and private-equity takeovers. The prospect of lower U.S. interest rates may also help support lending."
The sure thing almost nobody plays
"Imagine you are entering a deluxe, well-appointed casino. Off the lavish entry foyer, there are two ample gambling wings, one hued in reds, the other in muted greens. The red wing looks enticing, but if I may insist, let's first enter the less crowded green rooms to watch the action. The atmosphere is unhurried, the blackjack tables are sparsely attended, and every player sits behind a mound of green and black chips. You think at first you've come to the wrong place. You see the ordinary table limits, the ordinary clothes, the ordinary games. But then how did these ordinary people get such piles of money? Then it comes to you. They're all winning. In fact, as you walk around the green wing, you hardly can find a losing player. You know, of course, that the average house take on table games is 5%, but as you count winning and losing hands, you realize these players are getting a better break. They seem to be gaining at a rate of 60% to 40%. You start fresh and take another count. The results are the same. A pit boss appears at your shoulder. "Excuse me," you say, "but can this be right? The odds favor the players?" "Yes, indeed. The odds in the green room usually run 60 to 40. It's been that way since we opened." "But...most of the players must go away winners." "They sure do. At those odds, we calculate that 9,999 out of 10,000 make money. At our high-stakes tables in the back, they do even better, with winners running about 20,000 to 1. It's a good thing we get so few players, or they'd break the house." Somewhat amazed, you thank him and shake your head. There's no time to lose, you decide, but you'll need more than the few dollars you have in your pocket. You hatch a plan to gather your life savings, come back to the casino, and win the bundle you've been dreaming of. On your way out, you glance into the red wing. The action level is much, much higher. The room is crowded and fairly roars with excitement. Can it be even better here, you wonder? Curious, you go in. Players bet multiple table positions, wave frantically for change, entreat the gods for luck. You see few green and black chips, fewer winning players. The piles of chips in front of them are dwindling with each hand. In fact, the odds are worse than normal. Again, you start to count. Although the players continue to excitedly toss in their chips, the odds appear to be maybe 60 to 40 in favor of the house. Once more, your curiosity whetted, you walk over to a pit boss and ask her the odds at these tables. She tells you what you suspected. They are 60 to 40 in favor of the casino. Warming up to the subject, she chuckles and says, "This room coins gold for the casino, the chances are 9,999 in 10,000 rounds that we wind up winners." You don't have to be a genius to see that this is obviously not the place you want to be. You go home and get your stash. You return to the casino with your fistful of money, excited, eager for action, all the time figuring how you'll do even better at the game. But then a strange thing happens. You walk into the red wing and start to play."
Stingy Links: Economy
Why these good times feel so bad
"In essence, the idea boils down to this: Whether it's the job or stock markets, the official numbers report a "net" figure -- the final plus or minus after all the messy adding and subtracting is done. But we live our lives in that messy world of the gross numbers before the final calculations. The reality that we experience is in the gross and not in the net numbers."
Personal savings rate falls to 74-year low
"People once again spent everything they made and then some last year, pushing the personal savings rate to the lowest level since the Great Depression more than seven decades ago. The Commerce Department reported Thursday that the savings rate for all of 2006 was a negative 1 percent, meaning that not only did people spend all the money they earned but they also dipped into savings or increased borrowing to finance purchases. The 2006 figure was lower than a negative 0.4 percent in 2005 and was the poorest showing since a negative 1.5 percent savings rate in 1933 during the Depression."
Stingy Links: Fun
101 dumbest moments in business
"Business 2.0 Magazine's 7th annual look at the year in bungled layoffs, customer-service snafus, and other corporate madness."
If hedge funds kept cows
"A famous series of jokes attempts to define political systems. In communism, for example, you have two cows, your commune seizes them and charges you for milk. In a democracy, you have two cows, the cows outvote you 2-1 to ban all meat and dairy products, and you go bankrupt and starve to death. Similar thinking can be applied to financial markets. Here, then, is the world of money recast in bovine terms."
Stingy Links: Funds
He chooses the best of the bargain bin
"Success and a tidy personal fortune have come to Mr. Chou through a remarkable odyssey. Born in India, he immigrated to Canada in 1976, got a job as a telephone repair man for Bell Canada and worked for seven years, during which time he discovered the legendary Ben Graham, co-author, with David Dodd, of Security Analysis, the book that established value investing as a discipline. Mr. Chou, who had only his Grade 12 under his belt, and half a dozen co-workers chipped into a pool that totalled $51,000 and created the fund that became Chou Associates. Each dollar invested at the start in July, 1981, has become $38, Mr. Chou said. The original investment club was converted to a mutual fund in 1986 and, over the next 20 years, the fund has produced an average annual compound gain of 14.09 per cent, making it one of the top four mutual funds among the 216 with 20-year records."
Chou annual 2006
"it appears obvious that investors are throwing caution to the wind. Risk is not priced into riskier securities at all. Whenever the majority of investors are purchasing securities at prices that implicitly assume that everything is perfect with the world, an economic dislocation or other shock always seems to appear out of the blue. And when that happens, investors learn, once again, that they ignore risk at their peril."
Stingy Links: Government
Mississippi fails to learn from history
"In the 1840s, the state of Mississippi faced economic problems. Governor Alexander McNutt resorted to an easy out: he blamed the state's troubles on foreign investors, and, invoking Judas and Shylock, closed a budget gap by repudiating Mississippi's bonds and debts. Mississippi courts at first refused to recognize the repudiation, but investors who trusted the rule of law were ultimately out of luck: an 1853 referendum refused to raise taxes to pay the obligations, and an 1875 amendment to the state constitution prohibited the state from paying back the bonds. Mississippi had successfully bilked its creditors (including the family of William Wordsworth, who wrote a sonnet about the injustice) for short-term gain, but the victory was Pyrrhic: cut off from the credit markets, the state economy has languished behind the rest of the nation ever since."
Hot air in Essex County wind power
"In fact, countries in Europe that have installed wind power as base load find they end up buying power on the spot market when the wind isn't blowing and then selling their wind power at a loss when the wind is blowing (but air conditioners aren't being used as intensely). Denmark is often considered a leader in wind energy but according to Lee it ends up selling 84% of its power at a loss. "European countries that have put in a lot of wind power end up subsidizing their neighbors," says Lee. "Wind power has not yet enabled the closure of a single fossil-fueled generating station anywhere in the world." The German energy agency recently suggested that increasing the amount of wind energy in that country would increase the cost of electricity to consumers almost fourfold and that a reduction in greenhouse gases could be achieved more cheaply by installing filters and condensers on existing fossil-fuel plants. According to Lee, it's often been suggested that the theoretical maximum for the amount of base load that can be derived from wind power is 15%, but even that seems to be a stretch. A more likely percentage seems to be 3% or 5%, says Lee."
Stingy Links: Graham
Nine stocks for private equity
"This is the peril of market timing, something the buy-and-hold brigade will smugly smirk about as they attempt to get rich slow. The lesson might be, however, to buy cheap rather than buy expensive. This is of course obvious and often considered little short of facetious advice. However, it doesn't need to be. Benjamin Graham, the granddaddy of investment gurus, had a plan to do just that. It boiled down to buying low price-earnings stocks with dividends and a solid business core. This proved to be the foundation for value investment, which is as strong an investment methodology today as it was in the 1950s."
Stingy Links: Health
"It's particularly striking that the science is advancing despite a long-standing dearth of investment in Alzheimer's research. There are currently 4.5 million Alzheimer's patients in the U.S., and the direct and indirect costs of caring for them total more than $100 billion a year, making Alzheimer's the third most expensive illness after heart disease and cancer. Yet the federal government budgeted only $645 million for Alzheimer's research for 2007, $7 million less than the prior year. In contrast, $2.6 billion was allocated for research into HIV/AIDS, which afflicts one million Americans."
Modern snake oil?
"Then-FDA Commissioner David A. Kessler testified that supplements should be treated much the same as drugs. But his rational arguments carried little weight with senators. The supplements industry ended up with the right to make all kinds of claims about their products without proof, and sales took off. The only supplements with unqualified support are calcium and vitamin D for women at risk of osteoporosis, folate for pregnant women, and fish oil, containing omega-3 fatty acids, for lowering cholesterol and blood pressure. Multivitamins, taken by more than half of all adult Americans, have been largely dismissed by the National Institutes of Health. Hurley offers a thorough, well-written account of the fallout from the DSHEA. He describes case after case, from ephedra, the weight-loss product that contributed to the death of Baltimore Orioles pitcher Steve Bechler, to teenagers dying from supplements meant to get them high "naturally." But his irate tone, however justified, gets wearing. And while properly attacking hucksters' claims, he lets another key player pretty much off the hook. That would be us, the customers."
Get healthy - or else
"Two stories - one man saved by the 11th-hour intervention of his employer; another fired on his 30th birthday for smoking - capture the dilemma facing companies around the country. How do executives looking to cut medical costs persuade employees to take better care of themselves without killing morale and spawning lawsuits?"
Stingy Links: Indexing
ETFs: A user's guide
"There's nothing Wall Street loves more than having a new product to peddle, and exchange-traded funds (ETFs) have been one of the most popular offerings of the new century. Last year no fewer than 156 new ETFs hit the market; today, the total is about 400. The pace is set to pick up this year when the Securities and Exchange Commission streamlines the approval process. And ETF sponsors are hoping to make them available in 401(k)s, which would give them a much broader audience. So with all the hoopla surrounding ETFs, you may feel you have to have one - or collect the whole set! But as you would with any novelty from Wall Street, give ETFs a careful look before plunging in."
The weird world of ETFs
"Exchange-traded fund launches are quickly becoming as routine as the launches at Cape Canaveral. Fund companies rolled out 155 new ETFs in 2006, according to Boston consultancy Financial Research Corp. As new products hit the market, the nature of the products is changing. Best known as cheap, tax-efficient portfolio diversifiers, ETFs now provide exposure to even the narrowest - and sometimes most outlandish - investment niches."
Stingy Links: Management
Insurance legend still packs a punch
"Byrne, who returned in May as chairman of the board of the $19 billion White Mountains Insurance Group, doesn't get very upset when talking about a mere $100 million. His company just took an unanticipated loss of twice that amount, and he shrugged that off as well. "Two hundred million is not a killer. We are a company built to withstand stuff like that." Indeed, it's only after he reaches the $200 million mark that he even looks to outside investors, often his good friend, the multibillionaire investor and financial guru Warren Buffett, who once put together a $600 million dollar deal in a 40-second phone call. Now THAT impressed Byrne."
Who's afraid of the big bad boss?
"Employees stuck in an abusive relationship experienced more exhaustion, job tension, nervousness, depressed mood and mistrust. They also were less likely to take on additional tasks, such as working longer or on weekends, and were generally less satisfied with their job. Also, employees were more likely to leave if involved in an abusive relationship than if dissatisfied with pay."
Stingy Links: Markets
Explaining the Wisdom of Crowds
"Debate about the wisdom of crowds - the idea a collective can solve problems better than most individuals within the group, including experts - has percolated in recent years. While enthusiasts and detractors have made their case, much of the marshaled evidence is anecdotal. Even when the idea's supporters specify the necessary conditions for the wisdom of crowds to succeed, there is rarely discussion of how it works. In an approving 2006 New York Times article, columnist Joe Nocera explained collective accuracy by plucking a Hollywood movie line: 'It's a mystery'. Fortunately, Scott Page.s important new book, The Difference, introduces some much-needed rigor into why collectives do well and why they fail, why experts are often inferior to the crowd, and why diversity is important. Page not only carefully defines his terms, he also uses mathematical models to develop and apply theorems. These theorems illustrate the logic of diversity, removing a good deal of mystery from the wisdom of crowds. In this discussion, we apply Page's models to three types of problems and provide real-world examples and data for a pair of them."
"Two contrasting hypotheses can explain recent developments in the financial world. The Great Moderation holds that owing to better policymaking and structural improvements to the financial system, both the economy and markets are more stable than in the past. The newfound stability is viewed as a secular development. In other words, it's here to stay. Therefore lower credit spreads and higher levels of leverage are justified. Investors persuaded by this view will have few qualms about buying risky assets despite their historically low yields. Hyman Minsky, on the other hand, suggests that people's response to stability engenders instability. Such behavior is not necessarily irrational, as there are profits to be earned and bonuses to collect as long as the good times last. In fact, the cycle may extend as long as credit flows and people are hungry for risk. Yet Minsky's credit cycle heads inexorably toward a bust. Investors who accept this analysis will probably conclude that risk and reward are currently out of whack. They will position their portfolios defensively, keeping cash on hand to spend when the rewards for taking risk appear more compelling."
'Suspicious' trades precede mergers
"Lingerie suddenly became very popular on the Toronto Stock Exchange in October. Daily trading for La Senza Corp., Canada's biggest retailer of women's undergarments, more than doubled compared with its 12- month average, and the stock price arced toward a record high. On Nov. 15, Limited Brands Inc. announced it would buy Toronto-based La Senza and pay shareholders a 48 percent premium. That unusual trading wasn't so unusual for the Canadian market. Aberrant trading patterns preceded 33 of the 52 Canadian mergers valued at more than C$200 million ($172.6 million) last year, says a study by Measuredmarkets Inc. for Bloomberg News. Those patterns could indicate insider trading."
Stingy Links: Miller
Bill Miller's letter
"Concentration works when the market has what the academics call fat tails, or in more common parlance, big opportunities. If I am considering buying three $10 stocks, two of which I think are worth $15, and the third worth $50, then I will buy the one worth $50, since my expected return would be diminished by splitting the money among the three. But if I think all are worth $15, then I should buy all three, since my risk is then lowered by spreading it around. For much of the past 25 years, there were those $10 stocks worth $50 around. For the past few years, they have been largely absent, as inter-industry valuations have only been this homogeneous about 2% of the time."
Stingy Links: Montier
CAPM is CRAP
"As an empirical skeptic my interest lies in whether CAPM works. The evidence from the offset has been pretty appalling. Study after study found that beta wasn't a good measure of risk. For instance the chart below is taken from Fama and French's 2004 review of CAPM. Each December from 1923 to 2003 they estimate a beta for every stock on the NYSE, AMEX and NASDAQ using 2-5 years of prior monthly returns. Ten portfolios are then formed based on beta, and the returns tracked over the next 12 months. The chart below plots the average return for each decile against its average beta. The straight line shows the predictions from the CAPM. The model's predictions are clearly violated. CAPM woefully under predicts the returns to low beta stocks, and massively overestimates the returns to high beta stocks. Over the long run there has been essentially no relationship between beta and return."
"Several findings are apparent from examining the table. First (and of foremost importance to me) is that buying cheap stocks did indeed outperform. Simply buying an equal weighted basket (assuming equal distribution of stocks across portfolios) of the lowest 20% of PEs within the MSCI World index generated significant outperformance (9.7% p.a. on average). Such a strategy would have only resulted in absolute losses in only five out of the thirty years in our sample."
Come out of the closet
"Occasionally, the underperformance of fund managers vs. the index is trotted out as evidence of the efficiency of the market. However, this confuses the absence of evidence with evidence of the absence. A new study suggests that closet indexing accounts for nearly one third of the US mutual fund industry. Stock pickers account for less than 30% of the market, yet they have real investment skill."
Stingy Links: Munger
I would not allow directors to be paid
"Paying directors more is going to make the compensation excesses harder to fix. The more you pay directors, the more the directors are going to want to pay the CEO. Putting more duties on the directors and giving them more money is like trying to extinguish a fire by pouring gasoline on it. If I were running the world, I would not allow directors to be paid at all. I would make directors be exemplars and serve just as they serve on the boards of Harvard and Yale."
Stingy Links: Real Estate
Mortgage liquidity du jour
"We believe that 40% of the market (share of subprime and Alt-A) is at risk of significant fallout from tightening credit and increased regulatory scrutiny. In particular, we believe the most pressing areas of concern should be stated income (49% of originations), high CLTV/piggyback (39%), and interest only/negative amortizing loans (23%). The proliferation of these exotic mortgage products has been disproportionately weighted to former hotbeds such as California, Nevada, Arizona and Florida, which have accounted for the lion share of builder profits."
Is your apartment like a dot-com stock?
"The scariest aspect of today's real-estate market is the conviction that houses are always a good investment. In the nineties, the mantra was "stocks are the best investment for the long haul." This had the benefit of being true, then and now; for 200 years, stocks have outperformed every other asset class, including real estate. But the "long haul" is long. For vast stretches of time.1901 to 1920, for example, or 1966 to 1982 - stocks have performed terribly. And, in New York, the same goes for real estate."
Foreclosures force suburbs to fight blight
"In a sign of the spreading economic fallout of mortgage foreclosures, several suburbs of Cleveland, one of the nation.s hardest-hit cities, are spending millions of dollars to maintain vacant houses as they try to contain blight and real-estate panic."
Houses cheaper than cars in Detroit
"With bidding stalled on some of the least desirable residences in Detroit's collapsing housing market, even the fast-talking auctioneer was feeling the stress. "Folks, the ground underneath the house goes with it. You do know that, right?" he offered. After selling house after house in the Motor City for less than the $29,000 it costs to buy the average new car, the auctioneer tried a new line: "The lumber in the house is worth more than that!" As Detroit reels from job losses in the U.S. auto industry, the depressed city has emerged as a boomtown in one area: foreclosed property."
Real estate can only fall 10% to 20%, right? Right?
"You've probably read this before: Even when housing prices slump, they don't fall all that much, at least compared to stocks and other risky investments. I've passed on this bit of "wisdom" myself. And it it's not a totally ridiculous thing to say: Even in the big California bust of the mid-1990s, prices in the L.A.-Orange County metro area fell only 20% peak to trough in the region's worst five years. That's no Nasdaq. But, well, there's a bit more to it than that...."
Not in your backyard?
"But Westie's peaceful life was shattered last January when he and his neighbours found beer cans and crudely spray-painted signs on old-growth trees that read "Active Mining Claim" strewn across their properties. It soon became clear that Bruce Essington - a reclusive nearby resident whose only discernible connection to mining is an old leather miner's helmet that locals have seen him wearing as he tromps through the bush - had painted the signs. When Westie began noticing the man walking on his property - even allegedly lurking around his home - he became so concerned for the safety of his family that he briefly moved his wife and 10-year-old daughter into town and bought a second guard dog. When Westie first called police to complain, he was told there was nothing they could do. Essington had secured the mineral rights to Westie's land and much of the surrounding area. Under Canada's "free entry" mining system, prospectors and mining companies have the right to enter both public and private property to explore and develop their mineral claims. That means they can legally cut down trees,dig trenches, drill holes and even use heavy machinery to take away thousands of tonnes of rock samples . all without the permission of a landowner. "A free miner is the last free man in Canada," says Westie- "They have more power than the RCMP to go on your property and do whatever they wish.""
Stingy Links: Retirement
Are you saying no to free money from your employer?
"About that money your employer has ready to add to your retirement savings. You're not wasting it, are you? Lots of Canadians are. Some aren't participating in group registered retirement savings plans and thus missing out on matching employer contributions. Others are neglecting the money they and their bosses are putting into defined-benefit pension plans and thus hurting their returns. Pensions are complex, so we tend to ignore them and hope for the best. But for many people, pensions and group RRSPs will be as important to them after they leave the work force as the individual RRSPs everyone focuses on at this time of year. The cost of ignorance: Tens of thousands of dollars you might otherwise have had available when you retire."
Destitute at 80
"A number of advocates and studies provide for 5% withdrawal rates: "I only want $50,000 from my million dollars" and have it last for 30 years. The calculated success rate for that rate of withdrawal is 73%. Pretty good odds...except when we consider the impact of valuation."
Stingy Links: Stocks
Costco: The 'anti-Wal-Mart'
""Retailing isn't rocket science. Costco has figured out the big, simple things and executed with total fanaticism," says Charles Munger, a Costco director for the past 10 years. The outspoken Munger, 82, is better known as Warren Buffett's longtime partner at Berkshire Hathaway, where he serves as vice chairman."
Now that's rich
"On April 3, 2006, the first day of post-CCAA trading, Stelco's stock closed at $19.49. The next day, the price was $24. Today, after posting its latest string of losses, the shares are pretty much worth what they were trading at during Mott's first week on the job. But his million-plus options are worth about 15 million bucks. Mott.who was also allowed to buy a million shares at $5.50, netting him more instant millions - insists it's common to offer strike prices equal to the value of shares on the day options are granted. He's right. But Stelco has a reputation for handing out unjust executive rewards, so my question is: why didn't it wait a few days and let the market set a fair price?"
Five breakup possibilities
"A company's various businesses can be worth much more than Wall Street's appraisal of the entire enterprise. In this installment of our Beyond the Balance Sheet series we examine five breakup possibilities."
Every bite you take
"It comes as little surprise that institutions like hospitals, universities, and military bases flock to Sysco's pre-cooked foods. But well-regarded bistros and pubs have also begun to offer such items to save time and money. Recently, New York magazine reported that Thomas Keller uses frozen Sysco fries at his Bouchon bistros. (While a company spokeswoman wouldn't confirm the brand, she confirmed the use of frozen fries.) Mickey Mantle's Restaurant, an upscale sports bar, serves Sysco's pre-made soups, like Manhattan clam chowder and vegetarian black bean. And then there's Edgar's restaurant at Belhurst Castle, which has won numerous awards of excellence from Wine Spectator magazine. There, the kitchen takes Sysco's Imperial Towering Chocolate Cake out of the box, lets it defrost, and then sprinkles it with fresh raspberries before serving it to diners. "We've had a lot of success with that cake," executive chef Casey Belile says. The Edgar's menu, of course, does not list the dessert as a Sysco pre-made cake, but it does charge $8.95 for the experience."
Feds investigating homebuilder Beazer
"Amid the meltdown of the subprime housing sector, mortgage lenders and brokers have come under fire from state and federal officials for predatory lending practices with those risky borrowers. Now one national homebuilder is feeling the heat. BusinessWeek has learned that federal investigators have opened a broad criminal probe into lending practices, some financial transactions, and other dealings at Beazer Homes USA (BZH)."
Top NYSE stocks under $5
"In 2003, Tim Melvin, the co-author of recent bestseller The Little Book of Value Investing with Christopher Browne from Tweedy Browne, told me about a system he tested for 2002. At the beginning of every month, buy every stock below $3 on the NYSE. Sell at the end of the month and begin again."
The number of free stock screeners is dwindling
"A few weeks ago, BusinessWeek magazine shut down its free Quick Stock Search and Advanced Stock Search screeners. That's unfortunate, because BusinessWeek's screeners were easier to use than others with similar capabilities. If you're not familiar with the term, a screener is a program that allows you to search the entire market for stocks or mutual funds meeting your selection requirements. For instance, you could use a screener to list stocks with price/earnings ratios between 15 and 20, and annual sales greater than $20 billion. The demise of BusinessWeek's screeners leaves only two full-feature screeners that we can use for free, MSN Money's Deluxe Screener and Reuters' PowerScreener Lite. Both offer more screening choices than BusinessWeek's screeners did, but both take some time to learn. It's time well spent, however, and once you get the hang of using them, they'll become your best friends."
Stingy Links: Taxes
Keep the taxman at bay
"If you're concerned about CRA applying income rather than capital treatment to your transactions, there may be a good solution. On Nov. 30, CRA issued a technical interpretation (document 2006-0185041E5; you'll need to visit a tax pro if you hope to obtain a copy -- CRA won't be any help), which clarified that it's possible to segregate your portfolio into two parts: One part that may be treated on income account, and one that may be treated on capital account."
Ensure your property is deemed a principal residence
"Selling a home can be one of the most tax-efficient asset dispositions you'll ever make -- if your place qualifies as a principal residence, that is. But will it qualify?"
Beware the minefields of a property 'change in use'
"Where a property is initially used as a residence, but you later completely or partly convert it to an income-producing property (such as a rental property), a "change in use" takes place. Likewise, where a property was income-producing and you later convert it completely or partly into a residence, the same "change in use" happens. A change in use will generally cause a deemed disposition of the property (or a portion of it) at fair market value under Canadian tax law. If the property has appreciated in value, there may be tax to pay on the capital gain."
Stingy Links: Thrift
Could you stop spending for a month?
"For the 28 days of February -- I picked the shortest month to make it easier on volunteers -- those who wanted to participate would buy only necessities. Each person would get to define what was a necessity for himself or herself. At the end of the month, everybody would report back on how their shopping fast went. The point wasn't just to save money. It was also a way of examining our relationship with money."
Take a big bite out of grocery bills
"But as I learned from the food mavens on the Grocery Challenge thread, living in the land of cheap grub is not a reason to become complacent. No, no! As these savvy shoppers will tell you: If you think you got a certain item for a great price, rest assured there's a way to get it even cheaper -- or maybe even for free."
Financial sanity down a country road
"Who knew a beer out here was only $1.50? That's just one of many discoveries I've made since trading the big city for a life in rural New York. The bright spots outweigh the drawbacks so far."
The emergency fund you can eat
"Having a substantial cash emergency fund is an important financial goal, but it's not an easy one. Building up enough savings to cover three months' worth of expenses can take some families years to accomplish, as they struggle with more pressing goals, such as paying off credit card debt and saving for retirement. Fortunately, there's another kind of emergency fund that's a lot easier to put together: a well-stocked pantry."
Looking for love, and money
"Oh, to be dating in the time of Jane Austen. No sooner does a young man move into the neighborhood than everyone knows he's single -- and exactly what his income is and how much property he owns. Not only that, but as this sly opening sentence of Austen's "Pride and Prejudice" suggests, finance and romance were presumed to go hand in hand. It was perfectly acceptable for a gentleman to look for a wife with financial assets or for a woman to seek a beau with the best prospects. Unfortunately, courtship has lost some of its financial candor in the past 200 years. Even with the rise of online dating -- where people answer numerous questions and create elaborate, supposedly revealing profiles of themselves -- it's hard to find your financial match."
Surviving (and thriving) on $12,000 a year
"I'll be living on just over $1,000 a month this year. That doesn't sound like much -- and it isn't -- yet I plan not just to live on it, but to build a savings account."
Living 'poor' and loving it
"Here, then, are the rules for How to Be Poor: Rule 1: Have very little money. Rule 2: Live on it. Rule 3: Rule 2 will change your life, if you let it. Being poor means taking a hard look at your needs and getting ruthless about separating them from the wants."
Stingy Links: Trusts
"The Coalition of Canadian Energy Trusts makes the claim that they pay more taxes per dollar of revenue than non-trust energy companies. Nevertheless, they love being trusts. In fact, they love being trusts so much they are screaming mad that Flaherty is going to make them pay less tax. Yes, that's right. They must convert back to regular corporations over the next few years, and presumably--according to their own research, anyway--will end up paying much less tax. How dare you, Mr. Flaherty!"
Stingy Links: Value Investing
Arnold Van Den Berg interview
"Now there are basically four great psychological states you should look for. And you want to buy stocks that are selling for one of these four reasons. ... So you've got apathy, disgust, and fear and panic. But the ultimate state is anger."
Robot shows it pays to buy outcasts
"Canada has proven in the early going to be a profitable stomping ground for John Dorfman's robot stock selector. A portfolio of 10 out-of-favour stocks selected a year ago using the Boston money manager's automated filtering technique produced a hearty 31 per cent investment return. "
Master of the turnaround
"It turns out that what Williams meant by invoking baboons is that he has a method of investing that has become as natural and comfortable as his own skin. So, sure, to him it seems easy. To learn about those methods, we chatted with Williams at his firm's Manhattan headquarters. We found Williams, who had come in for the day from his office in suburban Essex, Conn., east of New Haven, to be disarmingly unassuming and an investor who likes to keep things simple."
Are good companies bad investments?
"From 1983 to 2006, the mean annualized return of the less admired companies was 17.8 percent, beating the more admired group's 15.4 percent return. Interestingly, both groups beat the S&P 500's 11.2 percent return over the same period."
Patient Capital Management Q4
"As we enter 2007 we are again witnessing a period when investors are greedily buying. The absence of fear and complacency towards risk truly astounds us. As is usually the case, the cause for optimism and complacency is rooted in sharply rising short term security prices."
A wing and a prayer
"Value investing has never been sexy. It involves poring over a lot of financial statements to find companies with shares that are priced below their historic norm or below the inherent value of the business. That slow and steady approach tends to generate solid gains over the long haul (just ask Warren Buffett). But over the short term it can look awfully stodgy compared to growth investing, which tries to identify companies that are poised for rapid expansion - think of Apple Computer since the introduction of the iPod in 2001 and its iTunes online music store in 2003." [Note: Apple was a good value in the summer of 2002 when it traded at a market cap just above the amount of cash it had in the bank. At least that was my view when I bought a few shares.]
Top funds stand by subprime bet
"In recent weeks, as mortgage defaults have risen, shares of subprime lenders have plunged. Countrywide Financial, one of the nation's largest subprime lenders, sank 16.1 percent in the past month. Similarly, homebuilder stocks continue to slump - Pulte Homes, for one, is down 19 percent over the past year. This debacle has damaged the returns of many of the best fund managers around, including Bill Miller of Legg Mason Value (with a loss of 1.6 percent year to date), Ron Muhlenkamp of the Muhlenkamp fund (- 3.7 percent), and Wally Weitz of Weitz Hickory (- 0.7 percent). All three have held on to these stocks in the belief that real estate will rebound. How did these smart stock-pickers make such a big mistake? Well, actually, they don't see it that way. For these managers being out of step with the market is a sign that they are doing their jobs. After all, the best way to earn returns is by spotting opportunities long before everyone else."
Undervalued airline came in top of class
"We all make mistakes. In fact, in May we hung out one of our own boneheaded moves, our "investment" in MRI manufacturer Fonar Corp. (FONR-Nasdaq). Though the stock had crashed to 26 cents from our purchase price of $1.25, we stuck with it because the chief executive officer had just bought shares at 55 cents, and management told a sweet story about the stock getting back over $1 by year end. No dice. We finally pulled the plug and took the tax loss at 30 cents, not far from its current trading price of 27 cents."
Stingy Links: Whitman
Martin Whitman's distress success secrets
"Distress investing begins with companies that have flopped because of bad managers, bad balance sheets, or a combination of both. It uses bankruptcies and sweeping corporate reorganizations to make handsome profits off the misfortunes of poorly run entities. "This is a high .beta' business," Mr. Whitman said with just a hint of sarcasm."
Bad news, good news
"You want the lowest-cost, with best profitability, and a better balance sheet, so you'll be the last man standing, even when business is drying up."
Stingy Links: World
Crouching fraud, hidden losses
"China's accounting has historically been used to support state economic policies, explains Stephen Chipman, an expert in China's financial and accounting systems at accounting firm Grant Thornton. With the founding of the Communist People's Republic of China in 1949, the state became the sole owner of industries. The only economic entity was the state-owned enterprise. That meant businesses reported information according to a centrally planned economy, and China's accounting standards tended to give out paltry information, focusing mostly on an inventory of assets, with very little Western-like level of detail on things like debt, depreciation or returns on investment, Chipman says. On top of that, an accounting profession where accountants truly act as watchdogs also has yet to develop. "China is dealing with not only almost 50 years of atrophy in its financial reporting, but also 50 years without the development of an accounting profession," Chipman says."
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