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The Stingy News Quarterly (Q1/2004)

New @ StingyInvestor

A Canadian Graham Stock
Over the last three years I've highlighted Benjamin Graham's time-tested strategy for defensive investors in an effort to uncover undervalued U.S. stocks. Based on the relative success of the method, many people have asked me to apply the approach to the Canadian markets.

Return of the master
"Benjamin Graham, the father of value investing, developed some of the earliest and most successful techniques for selecting stocks. Despite all the changes in the financial world since Graham's heyday on Wall Street in the 1930s, '40s and '50s, some of his simplest methods have continued to perform unusually well."

Dividends at risk
Income-oriented investors have recently been put between a low-interest rate rock and a risky-stock hard place. Long-term government bonds yield little real income which has pushed investors into the stock market in search of healthy dividends. Regrettably, dividends are much less certain than interest and income-oriented investors should keep a close eye on dividend stocks for signs of weakness. Fortunately, there are several ways to tell if a stock's dividend is potentially at risk.

It's RRSP season but don't panic
"To avoid the last minute RRSP panic, simply put new money into high-yielding short-term debt. Good old GICs, high-interest savings accounts, and treasury bills are all possibilities."

Eight Thrifty Value Stocks for 2004
"At the start of each year I search through the S&P500 in an effort to uncover a few thrifty value stocks. Aside from sticking to large companies, I also look for inexpensive yet profitable businesses with little debt. So far, the results have been quite gratifying."

The Best Of Stingy Links

Stingy Links: Academia

Good companies, bad stocks
"The inverse relationship is familiar but why are good stocks such a bad buy?"

Lottery Players/Stock Traders
"Stock trading also is a negative-sum game. But whereas the frame of lottery-ticket buying as a negative-sum game is transparent, the frame of stock trading as the same game is opaque. As Treynor (1995, originally 1971) noted, people confuse the stock-holding game with the stock-trading game. The stock-holding game is a positive-sum game; buyers of stocks can expect to receive, on average, more than they spend. The stock-trading game, however, is a negative-sum game. In the absence of trading costs, management fees, and expenses, stock traders can expect to match the returns of an index of all stocks. But after trading costs are considered, they can expect to lag that index."

The level and persistence of growth rates
"Expectations about long-term earnings growth are crucial to valuation models and cost of capital estimates. We analyze historical long-term growth rates across a broad cross-section of stocks using several indicators of operating performance. We test for persistence and predictability in growth. While some firms have grown at high rates historically, they are relatively rare instances. There is no persistence in long-term earnings growth beyond chance, and there is low predictability even with a wide variety of predictor variables. Specifically, IBES growth forecasts are overly optimistic and add little predictive power. Valuation ratios also have limited ability to predict future growth."

Stingy Links: Accounting

A matter of principles
"Without a superb understanding of the recent accounting changes, investors can easily be led astray. The auditors' proclamation that Canadian GAAP is based on known "principles" is simply nonsense."

Five degrees of computation
"Investors should be aware of two things when looking at financial statements: accounting is not accurate, nor does it have a single purpose. Simply put, investors should not take comfort in the fact that an accountant has prepared the financial statements or that an auditor has agreed with those particular figures."

Mind the GAAP
"Life is getting complex for do-it-yourself investors, and it has nothing to do with the mysteries of the markets. It's those darn accountants. Not the creative type of accountants you used to find at scandal-plagued companies like Enron Corp. Just regular accountants following different sets of perfectly legal rules in a business world that's becoming increasingly global."

A quality improvement for earnings
"The latest update of S&P's Core Earnings measure for companies in the S&P 500 shows a strong rise, thanks mostly to lower pension costs"

Distorted values
"The use of pro-forma earnings by a large number of companies is misleading not only for the specific companies involved, but for the market as a whole. Over a long period of time the average price-earnings ratio (P/E) for the S&P 500 has been about 15.5 times with a range, until 1998, of 22 on the high side to 7 on the low side. Keep in mind that this history is based on trailing reported earnings."

Stingy Links: Bonds

Repudiating the national debt
"Before the Reagan era, conservatives were clear about how they felt about deficits and the public debt: a balanced budget was good, and deficits and the public debt were bad, piled up by free-spending Keynesians and socialists, who absurdly proclaimed that there was nothing wrong or onerous about the public debt. In the famous words of the left-Keynesian apostle of "functional finance," Professor Abba Lernr, there is nothing wrong with the public debt because "we owe it to ourselves." In those days, at least, conservatives were astute enough to realize that it made an enormous amount of difference whetherslicing through the obfuscatory collective nounsone is a member of the "we" (the burdened taxpayer) or of the "ourselves" (those living off the proceeds of taxation)."

Perpetual debt
"In a 1789 letter to his friend James Madison, Thomas Jefferson raised the philosophical and moral question of whether "one generation of men has a right to bind another." He believed the answer was no, "that the earth belongs in usufruct to the living." He believed it a principle of "very extensive application and consequence, in every country." Applying it to government borrowing, he argued that it was unjust and unrepublican for one generation of a nation to encumber the next with the obligation to discharge the debts of the first. After all, the following generation cannot have given their consent to decisions made by their fathers, nor will have they have necessarily benefited from the deficit expenditures."

The breaking of bonds
"Investors have found safety and good returns in the bond market in recent years, but the fixed-income refuge is becoming a dangerous place to dwell."

Stingy Links: Buffett

Buffett's annual letter
"In recent years, however, we've found it hard to find significantly undervalued stocks, a difficulty greatly accentuated by the mushrooming of the funds we must deploy. Today, the number of stocks that can be purchased in large enough quantities to move the performance needle at Berkshire is a small fraction of the number that existed a decade ago. (Investment managers often profit far more from piling up assets than from handling those assets well. So when one tells you that increased funds won't hurt his investment performance, step back: His nose is about to grow.)"

5 investing lessons from Warren Buffett
"His yearly letter to Berkshire Hathaway shareholders holds good lessons for all investors -- namely, when stocks are so expensive, don't be afraid of cash."

Herb lore from the Sage of Omaha
"The heady prices that investors are willing to pay for less-than-fragrant credits can be seen in the weediest of the lot: those awarded a rating of CCC by the rating agencies (the lowest rating is D, which does not stand for durable). Michael Lewitt, who runs Harch Capital, a hedge fund, neatly sums up the risks investors run by buying these bonds: 'It's like playing Russian roulette with all the chambers loaded.'"

Beyond Berkshire's cult of personality
"Buffett wants investors to look at the entire outfit, not just his stock-picking. What they'll find are solid earnings and lots of cash"

Why Buffett's a bargain
"A dozen analysts and money managers, employing different valuation methodologies, conclude that shares of Buffett's company are, at a minimum, reasonably priced."

Buffett sells. Should you?
"Warren Buffett is clearly not finding many opportunities to invest the U.S. stock market today. Despite the fact that he has $27 billion of cash sitting idle, concerns about valuation are driving him to sell some stocks and increase that pile of cash. In doing so, he is sending a strong, clear message not only about the specific stocks he is selling, but also about the U.S. equity market in general. Individual investors should be listening closely."

Stingy Links: Debt

Soaring world debt is your problem
"The ocean of red ink just gets deeper and deeper -- and the United States and China are closest to the edge. Where will your money be when it all falls apart?"

Debt disasters of the rich and famous
"Think you've got a money problem? Look at the celebrities -- child stars to Donald Trump -- who've burned through hundreds of millions of dollars and then filed bankruptcy."

Stingy Links: Derivatives

Genius provocateur
"He made millions for RBC Dominion, and is now suing for wrongful dismissal. He has also quietly become very rich. Perhaps more than anything, though, Roland Keiper - sage, oddball, crusader - has proven that buying and selling stocks is not a game of chance."

Stingy Links: Dreman

Investor delusions
"Why has a new tech mania grabbed hold of the market so soon after the last implosion? Psychologists have an unsettling explanation for the phenomenon."

You call this stodgy?
"Even though tech took wing in 2003, value stocks clocked a very fine performance, unlike in the 1999 market when investors snubbed them as unsexy."

Stingy Links: Economy

Robbing Peter Jr. to Pay Paul Sr.
"Younger workers face dwindling benefits and soaring costs as governments and corporations divert funds to baby boomers"

The loonie flies too high
"Economic misfortune of one kind or another struck almost every corner of Canada in 2003, from the SARS virus in Ontario and mad-cow disease in Alberta to hurricanes in the Atlantic provinces and forest fires in British Columbia. But by far the sharpest brake on growth has been the soaring Canadian dollar."

The sliding dollar is already costing you
"The dollar's plunge is having subtle yet tangible effects on our lives now. Want proof? Start with what it costs to fill your gas tank."

The reserve army
"Flawed though they may be, the employment numbers are of fundamental importance. Two crucial questions for economic output and for the suffering caused by unemployment are: what portion of the working-age population does not work and how many of those that do not work want to do so?"

The jobs of tomorrow: a new low?
"According to a new Bureau of Labor Statistics forecast, most of the big growth areas will be low-skill -- and low-paying"

Stingy Links: Fun

Federal deficit: Meet the other white meat
"They're being total slime-weasels. They're spending MORE. They're pandering their brains out. The Republicans just added a hugely expensive new drug benefit for senior citizens, which the Democrats have bitterly criticized because it isn't expensive ENOUGH."

Toss out the toss-up
"Their preliminary data suggest that a coin will land the same way it started about 51 percent of the time. It would take about 10,000 tosses before a casual observer would become aware of such a small bias, Diaconis says. "Maybe that's why society hasn't noticed this before," he says."

Statistics and sport
"Statistics changed baseball. It may change other sports too"

January, hemlines and the Super Bowl
"Watching how the first five trading days go is really just a truncated version of something called the January barometer. Look at the S&P 500 since 1950, and you'll see that January has predicted the markets' performance for the year all but eleven times. (Last year was one of the misses.) Stunning right? Hang on."

Stingy Links: Government

The buck doesn't stop here
"Why Treasury Secretary Snow can't prevent the dollar from falling, even if he wanted to."

Heading for a fall, by fiat?
"Perhaps, too, investors have been lulled into a false sense of security by the performance of central banks in recent years, and the independence that has been granted to many of them by governments. But this very aura of inviolability may be storing up problems, since it means that governments can borrow still more at cheap rates. And if governments then find themselves crushed by debt, you can rest assured that this independence will be taken away. And then, once again, the paper in your pocket will only be as good as a politician's promise."

Fannie's and Freddie's big fight
"On Feb. 24, however, the gloves came off. Federal Reserve Chairman Alan Greenspan told the Senate Banking Committee that Fannie and Freddie have grown so large -- together they own or guarantee $4 trillion in home loans, or three-fourths of all single-family-mortgages -- that they pose an unacceptable risk to the entire financial system."

How the government manufactures low inflation
"Some government data suggest computer and car prices, among many other things, are falling. But when was the last time you paid less for a car? Here's why you should be concerned."

Stingy Links: Graham

Play it safe the Ben Graham way
"The logic behind Graham's rule is twofold, involving safety and value. In the event of bankruptcy, current assets will be converted to cash at close to their carrying value, so by paying less than two-thirds of net current asset value, you're likely to get most of your initial investment back after paying off all the liabilities."

Commandments for the individual investor
"In greatly simplified terms, here are the 14 points Graham most consistently delivered in his writing and speaking."

Stingy Links: Grant

Forget TIPS
"They no longer protect against rising prices much, with the inflation-adjusted yield half of what it was in 2002. Meanwhile, the CPI is bad at gauging inflation."

What high yields?
"The average ten-year junk bond gives you less than 6.5%. Meanwhile 80% of junk trades above par, and 63% above the call price. Investors are oblivious to the dangers."

Stingy Links: Gross

Tom Hanks - Portfolio Manager
"That history points towards an environment of lower than expected real rates of interest, low total returns for bonds (a 4% total return future world), an apparently overvalued corporate sector, and intermediate maturity bonds that should perform equally with long bonds at half the volatility. The one bond investment that fits into each of these boxes? Intermediate maturity TIPS."

The last vigilante
"Simply put, it means that borrowers will pay more in real terms, affecting consumption, home building and buying, business investing, and government deficits alike. The lower real interest rate "wind" at their backs will instead turn into a mild headwind. The economy will slow. It may falter."

The last vigilante part II
"Hopefully by extensively reviewing the E-mail exhibit on the preceding page, clients and interested readers can understand the bulk of our strategies designed to benefit from current reflationary attempts."

Stingy Links: Law

The case against the prosecution
"The danger is that, by throwing a few bosses to the lions, the government will satisfy the public's thirst for blood and thus ease pressure for deeper, system-wide reform. Indeed, some critics argue that this was the government's intention all along, orif that seems a bit too conspiratorialat least explains its instinct to come down so hard on corporate crooks."

Martha Stewart's surreal ordeal
"So the Martha Stewart trial has come to this. Judge Miriam Goldman Cedarbaum ruled that the government cannot introduce testimony about how Stewart's statements to the press asserting her innocence of violating insider trading law affected investors of her firm, Martha Stewart Living."

Punishing critical analysts
"The judges in the LVMH case cited the analyst settlement reached in the United States as evidence of Morgan Stanley's perfidy. But that case included ample evidence that analysts issued reports they did not believe and caved in to pressure from investment bankers. Such evidence was not required in France."

Futile courtroom dramas
"The solution is not to write off capitalism as a hopeless casino where crooks get rich and the suckers get fleeced, it is to recognize that regulation cannot in reality protect investors if they deal with financial institutions driven by their trading desks to exploit every angle for a fast buck. Before the regulatory wave of the 1930s in the United States and the 1980s in Britain, for those investors who made sure to deal with top quality institutions: J.P. Morgan, the First National Bank, Kidder Peabody and the Boston money managers (or Schroders, Rothschilds, Hill Samuel, Warburgs, Hambros), their money was both safe and earned a decent return. Only investors dealing with "bucket shops" entered the world of Damon Runyon and Arnold Rothstein and lost their money. As Morgan would have told you, regulation is absolutely no substitute for character."

Patent absurdity
"That's because Bristol-Myers Squibb, which makes a similar drug called Taxol--based on a synthetic version of a compound called paclitaxel found in a tree related to the Canada yew--has accused Biolyse of infringing on its patents. Squibb has yet to prove as much, but thanks to what critics claim is Canada's overprotective treatment of patent holders, Squibb merely has to accuse Biolyse of infringement and it can block Paclitaxel for Injection from the Canadian market for years."

Stingy Links: Management

Running out of options
"Some tech investors are starting to show that they're sick and tired of companies not having to include the expense of stock options programs on their income statements."

Saving CIBC
"Instead of leaving the ethics up to management, Finlay says CIBC's board should set up its own committee to ferret out why there was such an ethical disconnect between the flowery rhetoric of CIBC executives and the actual behavior of some of its key employees."

The making of an entrepreneur
"You may think that running someone else's business qualifies you to start one of your own. Think again."

Who's minding the store?
"Recent scandals in business ethics gnaw at the very roots of a capitalist system."

"First, I know of no evidence - none - that shows that stocks of companies that give detailed guidance have higher valuations than stocks of companies that don't. Or are less volatile."

Is your boss a crook?
"Forget shady financial deals and legal shenanigans that grab headlines. It's moral lapses like hypocrisy, favoritism and disrespect for employees that pose the biggest ethical problems at the workplace."

Two-faced capitalism
"This is a switch. CSR was conjured up in the first place because government action was deemed inadequate: orthodox politics was a sham, so pressure had to be put directly on firms by organised protest. Ten years on, instead of declaring victory, as well they might, disenchanted NGOs like Christian Aid are coming to regard CSR as the greater sham, and are calling on governments to resume their duties. Might this be a sign, Mr Benioff notwithstanding, that CSR has finally peaked? If so, it might be no bad thing. If bosses are no longer to get credit for pandering to their critics, they may as well go back to doing their jobs."

German companies cutting pension plans
"Three major German companies this week have disclosed plans to cut back on their pension benefits for workers, with one, Commerzbank, even doing so without first consulting workers - a move that is highly unusual in Germany."

The job "loss" recovery
"If, as Warren Buffett and almost every serious analyst of corporate behaviour and misbehaviour believe, those stock options should be shown as costs, then, in this illustration (that closely resembles real life in technology land), the company's actual costs hadn't declined a dime. In other words, the refusal to include stock options in financial reports is a perverse incentive: it encourages managements to enrich themselves by firing employees and outsourcing jobs without actually benefiting stockholders. It is a multi-billion dollar payoff for mendacity and for callousness in treatment of workers."

Stingy Links: Markets

Crude arguments
"Goldman Sachs now thinks the American economy will grow by only 2.75% (on an annual basis) in the second half of this year and the first half of nexta forecast it has revised down by three-quarters of a percentage point. It might, Buttonwood thinks, even turn out lower than that. Slower economic growth in turn bodes ill for stockmarkets and corporate-bond markets. And if markets tumble, consumer confidence will surely follow. The rise in the oil price, in other words, may leave nerves not so much frayed as in tatters."

The secret power behind America's top companies
"Investors' appetite for passive funds has quietly transferred ownership -- and shareholder rights -- in a good chunk of Corporate America to just four index-fund managers."

A recovery built on retirees' backs
"Every time Washington juggles numbers to keep the recovery going and make deficits less shocking, your golden years get a little more difficult."

A risky world
"There is little room to maneuver after last year's big gains, when anything priced under $5 per share soared on the false assumption that cheap means good value, and companies could dump triple-C bonds on the market with impunity. In a telling sign of overconfidence, the 10-year U.S. Treasury bond is at 4 percent, the lowest since the late 1960s. If something were to go wrongthe Fed accidentally ignited inflation by keeping rates too low for too long, sayrates could jump. Investors would take a hit on yield before they had a chance to sell, says James Grant, editor of Grant's Interest Rate Observer: "Now the financial markets are left with very little margin for error, or for safety.""

A question of perspective
"A storm in a teacup, or a prelude of worse to come? By historic measures few equity or corporate-bond markets are cheap; many are very expensive indeed. This makes it all the more possible that a virtuous cycle of rising growth and appetite for risk can turn into a vicious cycle of falling growth and aversion to riskwhatever the Fed does."

A pipsqueak swinging at the big board
"Seth Merrin's Liquidnet is a peer-to-peer swap market geared solely to big traders -- and it's growing rapidly"

Creative mortgages fuel home sales
"With home prices surging, lenders are coming up with increasingly creative mortgages aimed at homeowners whose budgets are stretched thin."

Are bonds once again 'certificates of confiscation'?
"With yields so low, fixed-income investments offer little except the chance to give money away. Meanwhile, the correction in gold offers a chance to benefit from a bounceback."

An insider's take on insider selling
"Investors may see trouble in recent sales at Newmont Mining, but remember that insiders sell for a lot of reasons. Also: where gold and metals prices might be headed."

Bearish options strategies
"Longtime readers might wonder why a patient, long-biased, fundamental value investor like me would adopt such a strategy, given the high cost and limited life of options. My answer is that I view these investments as insurance policies, hedging my mostly long portfolio."

Suspicious trading preceded bank megamerger
"Exchanges saw a huge spike in the purchase of Bank One options even before news of the huge J.P. Morgan acquisition broke. The transactions were enormously profitable for a fortunate few."

The jobs picture is even worse than it seems
"The closer you look at the numbers, the more you realize unemployment is higher than the headlines tell you. And despite what the experts say, inflation is out there, and we're feeling it already."

If 2004 goes bad, it will go really bad
"The dollar's decline is going to cause huge problems, and the economy is artificially pumped up. When the deluge finally hits, I see stocks falling 50%."

Bubble, bubble, trouble, trouble
"Disney CEO Michael Eisner is in the news again - but it's useful to recall that his record of shareholder abuse didn't start yesterday. Nor was Eisner by any means the only corporate chief who found a way to milk his shareholders during the great stock market bubble of the late 1990s. The story of the Great Milking, and how it came to pass, is the subject of Roger Lowenstein's highly readable chronicle of the era, Origins of the Crash: The Great Bubble and its Undoing. It is terrific."

Irrational optimism
"Since 1900, the worldwide real return on equities averaged close to 5 percent a year (before costs, fees, and taxes). This is appreciably lower than is frequently quoted from historical averages, a difference that arises because we use a longer time frame than other studies and adopt a global focus. Prior views on the long-run safety of equities have been overly influenced by the experience of the United States. Furthermore, the US evidence that, over the long haul, stocks have beaten inflation over all 20-year periods is based on relatively few nonoverlapping observations and is hence subject to large sampling error."

Paying with plastic
"While Korean credit card lenders were reckless and far less experienced than their Western counterparts their recent travails shows the vulnerability of the industry to the bursting of a credit bubble. Shareholders in JP Morgan Chase should start praying that they haven't been passed yet another wooden nickel."

Stingy Links: Stocks

The year of the car
"But now that the Japanese, South Koreans and Germans have unleashed an assault on the light-truck market, Detroit has to respond aggressively. Do the Big Three have what it takes to fight back this time? Their new cars must win customers and do so profitably. This looks like the only way Detroit can stay on the road."

Requiem for the record store
"Now a new threat looms. The market for legally downloadable music is tiny today, but the success of Apple's iTunes online music store and the rush of rival services to the marketplace is expected to gobble up an ever-larger share of the pop music pie. A recent study by Forrester Research, which examines technology trends, predicts that in five years fully one-third of all music will be delivered through modems, and the CD itself will be passe, if not obsolete, in the years after. This isn't necessarily bad news for the record labels, but it could be lethal for brick-and-mortar stores."

Power to the shareholder?
"Michael Eisner of Disney and Sir Philip Watts of Shell have both been forced to relinquish their roles as chairman. These changes have been chalked up as victories for shareholders. But have investors really got the better of the imperial boss?"

Why are shareholders so powerless?
"Investors staged a stunning protest at Disney's annual meeting -- and changed virtually nothing. In fact, their hollow victory could help kill any reform."

Only cheap stocks will make you money
"The easy money is going fast. In 2004, success will come only if you're able to separate cheap stocks from the pricey. Here's how."

Once again, Nortel is covered in question marks
"In cases like this, perhaps it's better to take the advice of Dr. Elitzur, who teaches accounting at the Rotman School of Management, and look at the cash flow. But at Nortel, you won't find much. The company used $347-million in cash in its operations last year, and you have to go back to 1999 to find a year when it actually produced free cash flow."

Steve bids adieu to Walt Disney
"The late Walt Disney built his empire with a mouse. The same can be said about Steve Jobs. In the past month, the two icons of Americana have increasingly been mentioned in the same breath, especially with Jobs, in his role as head of Pixar Animation Studios, crossing swords with the Disney house that Mickey Mouse built."

Legal weapon
"Trizec's defamation lawsuit could have a chilling effect on brokerage research"

Finding money in banks
"Year in and year out, financial stocks make remarkably stable and productive investments. In fact, it's kind of a mystery. If they're so good, why are they so consistently cheap?"

The trouble with mergers
"An exclusive study of 10 years of M&A action shows megadeals can be bad news for shareholders"

Liquidator: 6,500 tech firms among 'walking dead'
"Amid rising hopes for a high-tech turnaround, there's this sobering sign: Martin Pichinson -- a man who has buried nearly 150 failed startups since 1999 -- has swooped into Silicon Valley like a vulture lurking over a pack of wounded animals."

Insiders are bailing on specialty retailers
"With valuations high and the chances of beating last year's stellar numbers low, execs at stores Chico's, Starbucks and Quiksilver are taking their profits now."

Out of control
"The poison pill is one of the most egregious creatures of American corporate law. It exists to stop shareholders enjoying their full ownership rights by threatening, if triggered, to dilute the value of those shares in certain circumstances specified by a firm's board. They first caught on in the 1980s, when boards used them to deter hostile takeover bidshostile, at least, to the board, though not necessarily to shareholders."

Apple debuts lower-priced iPod
"Apple Computer Inc. Tuesday introduced a new lower-priced version of its popular iPod, just weeks after the portable music players flew off the shelves, one of the holiday's season's hottest sellers."

Stingy Links: Taxes

The big payday
"Wall Street thinks tech will win big from Washington's tax breaks. But there are bigger winners."

A taxing battle
"Companies owe it to their shareholders to avoid paying unnecessary taxes. The trouble is that one person's abuse is another's smart planning. And the tension between those two views is likely to increase."

Stingy Links: Value Investing

Buffettesque Superinvestors
"Whitney Tilson talks about 12 up-and-coming, mostly unknown investment managers whom he believes will substantially outperform the market over time. They manage money in very different ways, but all are from the intellectual village of Graham-and-Doddsville. Individual investors stand to learn a thing or two from them."

A Graham-to-Buffett guide to value investing
"The academic world, Buffett wrote, 'has actually backed away from the teaching of value investing over the last 30 years.' He concluded that 'there will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper.'"

Spring training for value investors
"The Berkshire Hathaway annual letter is a unique resource for students of value investing. However, this time of year also features annual letters from many other great value investors, providing the opportunity to learn from the market's heaviest hitters."

The six greatest value investors
"He's Benjamin Graham and if he were alive today, he would be in my lineup of speakers if I had to organize an all-time, all- star conference on value investing. He would be joined by the late Phil Carret, as well as John Templeton and John Neff, who are retired, and David Dreman and Warren Buffett, who continue to practice their craft. Are these the six greatest value investors ever? They get my vote."

Maida one heretic worth heeding
"While almost everyone else is enthusiastic about stocks -- Canadians bought an astounding $5-billion in mutual fund units in February, the industry's biggest month in four years -- he could hardly be less bullish. The cash is piling up again, for the simple reason that Mr. Maida can hardly find a single stock that he likes."

Patient Capital Management Q4
"We are not convinced that the strong growth registered in the latter stages of 2003 and expected to continue into the current year is sustainable. We remain concerned about weak employment growth in the U.S., low capacity utilization rates and unprecedented amounts of debt at all levels of the economy. The very large trade and current account deficits that have led to a rapid decline in the value of the U.S dollar also pose a serious risk. More importantly, our analysis of many companies gives rise to concerns over the quality of earnings, capital structures and valuation levels. Indeed, valuation levels during the previous market bottom did not approach those of earlier bear markets and today's valuations are still considerably above long-term historical averages."

Third Avenue Funds shareholder letters
"the most idiosyncratic letters still come from the fund industry's boutiques. Perhaps the most sophisticated writer is Third Avenue Value's Martin Whitman."

Hagin's theory sees flip side of forecasts
"You may see where this is going, even without me telling you that Hagin once worked with Benjamin Graham, the father of value investing."

The herd mentality - and how to avoid it
"It is amazing how stock investors get taken in by the herd mentality. When markets are surging furiously, everyone wants to buy stocks; when the markets begin to plummet, investors flock to sell their holdings with or without any valid reason."

Clipper annual: amnesia in action
"Four years ago the stock market really divided into two groups - technology and dotcom startups versus everything else. We actually found more cheap stocks then than we find now. Today's rising tide of stock prices has lifted all boats, leaky pirate vessels included."

A walk on the wild side
"Over the past few years, we at Contra the Heard have tweaked our methodology to emphasize a corporation's margin of safety in the selection process and avoid the crash-and-burn stories. After all, sometimes out-of-favour stocks deserve to be neglected. They are, as described by our friend Norman Rothery, who edits and the Rothery Report, "cigarette-butt" stocks: cheap, easy to pick up, but only okay for a puff or two."

A scary time for stocks
"So, without further ado, my opinion on these three factors is quite bearish. In contrast to the current cheery consensus, I think that the economy is not as strong as it appears, interest rates have nowhere to go but up, and high stock valuations already reflect a best-case scenario, so there's little upside and substantial downside."

Dinner and tips
"Tilson, nevertheless, is a curmudgeon -- a young curmudgeon. He is part of an informal gang that's often called Graham-and-Doddsville, after the two financial geniuses Benjamin Graham and David Dodd, who in 1934 wrote the classic book "Security Analysis," which urged investors to "look for a margin of safety" when they bought stocks."

Some fund managers seek 'deep value'
"A company with great prospects hits hard times, a top executive winds up in court and the stock starts to tank. That's when smart investors run, right?"

Dig deep for hidden value
"The trick to value investing is to buy good companies when nobody else wants them, which requires a strong contrarian streak -- and buckets of patience. It is not a game for day traders or investors with weak stomachs."

Value Investing overview by Damodaran
"A value investor is one who pays a price which is less than the value of the assets in place of a firm."

Value Investing by Damodaran
"Value investors are bargain hunters and many investors describe themselves as such. But who is a value investor? In this chapter, we begin by addressing this question, and argue that value investors come in many forms. Some value investors use specific criteria to screen for what they categorize as undervalued stocks and invest in these stocks for the long term. Other value investors believe that bargains are best found in the aftermath of a sell-off, and that the best time to buy a stock is when it is down. Still others adopt a more activist approach, where they buy large stakes in companies that they believe are under valued and push for changes that they believe will unleash this value."

Stingy Links: World

Put down that tool
"Anna Diamantopoulou, the European commissioner for employment and social affairs, smells a rat. Firms in other European countries have not made much use of opt-outs. But, she thinks, nasty British bosses may be forcing workers to sign opt-outs as a condition of taking a job. (Some Americans may actually want to work more than 48 hours, but surely no European would be so daft, seems to be her reasoning.)"

"Why has the German economy performed so much worse than the rest of Europe?"

A renewed force in Asia
"A new economic force is rising in Asia. Growing at an annual pace of 7% in the last quarter of 2003, it left both the old guard of Europe and the big shot, America, for dust. With its exports surging by 17.9% (at an annualised rate) in the three months from October to December, its monetary authorities are struggling to keep its currency down. Meanwhile, its firms are scrambling to add capacity to meet the demands of customers at home and abroad: investment in fixed capital grew by 22% in the final quarter of 2003 (again, at an annualised rate)."

Haier's purpose
"This attitude is widespread in China. Rather than focusing on a core business or dominating a few markets, as western, Japanese and South Korean managers have slowly learned to do, their Chinese counterparts quit any market where competition is rising, as so many other profitable opportunities beckon. Lack of accountabilitynot even Mr Zhang can say who really owns Haierand cheap loans from state banks encourage this trend. The result is firms that are broad but shallow, thinly-spread and managerially stretched. Sadly for Haier, that is the very opposite of a focused, global brand."

Things you can drop on your foot
"China needs them in spades, as it were, which is good news for Japan"

Sickness or symptom?
"Arguably, however, the ILO and others rightly concerned about child labour are looking at the wrong target. It will start to disappear, and faster, if poor countries pursue general policies that help them to grow more quickly, such as cutting tariffs and opening up more to foreign investment. Rather than forever sermonising, rich countries could do more to help eradicate child labour by themselves dropping trade barriers to imports from poor countries."

Behind the mask
"Hailed as the business opportunity of the century, China is bound to disappoint. Sameena Ahmad examines the mismatch between excitable perception and sober reality"

The hungry dragon
"Nowhere is the impact of China's growth clearer than in the world's commodity and raw materials industries. No industries will lose more if that growth slows"

Let the dollar drop
"America must bear much of the blame for its failure to do anything to curb household and government borrowing and so boost saving. Its easy monetary and fiscal policies are now beginning to look reckless. The dollar's slide has rightly shifted some of the burden of economic adjustment on to other economies. Sooner or later, though, America will have to face up to its own responsibilities, too."

Ditching the peace
"Nine years ago, members of the World Trade Organisation agreed not to take each other to court over farm subsidies. But the "peace clause", as this agreement is known, expired on December 31st. Will its end mean the beginning of a trade war?"

Frugally Yours,
Norman Rothery
ISSN 1499-2787

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