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The Stingy News Quarterly (Q2/2005)

New @ StingyInvestor

Selling Graham Stocks
"While discussing Graham's method for defensive investors, many people asked me how Graham went about selling such stocks. Regrettably, Graham didn't provide a clear selling strategy, but there are a few simple approaches that investors can use."

Dogs of the Dow: these dogs can bite
"Want proof? It turns out that 1999 was the worst year on record for the Dogs of the TSX. David Stanley, University of Guelph professor emeritus, tracks the Dogs of the TSX and rebalances his portfolio each year on May 25. Stanley calculates that the Dogs have gained an average of 13% a year since 1987, trouncing the index by 3.6 percentage points a year."

The Best of Stingy Links

Stingy Links: Accounting

Many trusts will turn out to be scams
"Outspoken forensic accountant Al Rosen has a bit of a reputation in the industry. And it's no wonder. Rosen claims cooking the books is practically a national sport in Canada, laws make it impossible for investors to seek redress and because there are no big lawsuits, the issues are largely ignored by the media. Right now, Rosen has his sights set on income trusts. He says the market is running the same scam Nortel executives used in the late 1990s, only this time around the accounting tricks are being used by companies who are targeting retired people."

Stingy Links: Bogle

The arithmetic of mutual fund investing
"Most of you are likely familiar with the EMH - the Efficient Market Hypothesis - that suggests that most stocks are fairly valued, most of the time. But the relentless rules of humble arithmetic remind us of something both more certain and more profound than the EMH. I call it the CMH - the Cost Matters Hypothesis - the iron rule that investors as a group must always lose to the stock market by the amount of the costs they incur."

Stingy Links: Brokers

Whose clients are they, anyway?
"Carolann Steinhoff was at the top of her game. Until she decided to quit ScotiaMcLeod. That's when an all-out rumble broke out over who would get her customers. Because, in the brokerage business, your book is everything"

Stingy Links: Buffett

Cash happens
"The purpose of this commentary is to provide our clients with an update on our thoughts with regard to this significant investment we have made on their behalf. Though relatively straightforward, in our view, Berkshire's business model and the attractiveness thereof remains misunderstood by the general investing populace. Fortunately, our target audience in these periodic commentaries is an informed and knowledgeable investor universe which has the context and perspective with which to utilize the information contained herein."

Warren Buffett's problem child
"Now at the center of a series of investigations, General Re is one of Berkshire Hathaway's biggest buys -- and worst investments"

American Everyman
"Buffett's public image represents a singular cultural accomplishment whose difficulty is hard to overstate. Until Buffett came along, the notion of a folk-hero investor was an oxymoron in America. Before the 1920s, buying and selling corporate securities was regarded by ordinary people as an occult activity practiced by a shadowy elite acting in nobody's interest but its own."

Warren Buffett's invisible empire
"For years, Warren E. Buffett has been selling us everything from Dairy Queen sundaes and Fruit of the Loom briefs to Benjamin Moore paint and skillets from The Pampered Chef, not to mention insurance, carpets, furniture, and lots else. Now, it turns out, the Oracle of Omaha has also been selling us our houses."

Roundup of the Berkshire Hathaway meetings
"We don't produce verbatim transcripts--we can neither write quickly nor listen infallibly--but we do believe that we've captured the essence of Buffett and Munger's thoughts. In any event, Berkshire will conduct meetings again next year, and any shareholder may attend. As a bonus, we think Berkshire shares look cheap at the moment, which isn't a bad way to acquire an admission ticket. However, anyone can attend the Wesco meeting, which is usually more intimate, and the odds of being selected to ask a question are substantially higher."

Buffett's dividend talk Is daunting
"If the king of investors can't find anything worth buying, where does that leave the rest of us? The question has been hard to avoid ever since the annual meeting last weekend of Berkshire Hathaway Inc., at which Chairman Warren Buffett once again lamented a dearth of investment opportunities."

Still earning after all these years
"The legendary investor who stood the efficient-markets thesis on its head has hit a spot of bother. But Warren Buffett has survived such spots before"

Buffett exclusive: trade, taxes, terror
"Investment guru expounds on reforms in corporate America, trade deficit and terrorism against U.S."

Notes from the 2005 "Woodstock of Capitalists"
"Berkshire doesn't do much asset allocation. We don't want to have our search constrained by pre-set limits. On this issue, we are out of step with modern investment management. That's okthey're wrong. We could've owned $30 billion in junk bonds if the market hadn't gone up so quickly. I'm a big believer in the saying that "If it's not worth doing at all, then it's not worth doing well.""

The oracle speaks
"It was below freezing in Omaha early Saturday morning, with frost silvering the golf courses and rolling lawns of the city where Warren Buffett's Berkshire Hathaway Inc. is headquartered. But the atmosphere was warm inside the Qwest Center arena, where roughly 20,000 shareholders gathered from around the world to hear Buffett and his vice chairman, Charles Munger, answer questions for more than five-and-a-half hours."

Stingy Links: Crime

Deep Throat's lessons for whistle-blowers
"Plenty of folks have taken Mark Felt's lonely path since Watergate days. Here's a look at what it takes to successfully reveal wrongdoing"

Zero to a billion in two years flat
"Bob Rusko got an eerie feeling when he first stepped into the office of Portus Alternative Asset Management Inc. It was midnight on Friday, March 4, and Rusko's team had been trying to get into the company's two offices in downtown Toronto all evening. Portus had been put into receivership by an Ontario court that afternoon and Rusko, a senior vice-president at KPMG Inc., was named receiver. Things had gotten off to a bad start. The landlord at the company's main office wouldn't let Rusko's people in. Another team had gone over to Portus's other office, located a few blocks away on the 69th floor of First Canadian Place. This time no one stopped them. Rusko joined them. When he opened the door, he couldn't believe his eyes. The place had been stripped bare. There were no phones, no computers, no paper. Even the paintings had been ripped from the walls, leaving small gouge marks where the nails had been. Just about the only thing left behind was an empty tequila bottle."

Stingy Links: Dorfman

10 stocks showing value and growth
" Value stocks are cheap relative to a measure of intrinsic worth, such as earnings. Growth stocks exhibit a rapid increase in sales, earnings or both. Usually the two types of stocks are mutually exclusive, though occasionally a company will display both growth and value characteristics. They often make good buys."

Risk factors to ponder when picking stocks
"When compiling a list of stocks that should come with a warning label, there are three risk factors that are to be considered: 1) A loss in the latest reported fiscal year. 2) Average annual sales growth of less than 3% in the last five years. 3) Stock price of at least 3 times sales per share."

Exxon, Old Republic head low-debt stock list
"Companies with low debt are sitting pretty. Let the Federal Reserve do its worst in raising interest rates. These companies have little to fear. What's more, they can afford to make strategic acquisitions, and they will never be forced to sell assets to stave off creditors."

U.S. Steel and Molson Coors are on casualty list
"Sigmatel Inc., First Marblehead Corp., U.S. Steel Corp., Commercial Metals Co. and Molson Coors Brewing Co. were bruised in the second quarter. These five stocks are on my quarterly Casualty List, devoted to stocks that have been banged up and that I think have a good chance to recover. Previous Casualty List stocks have beaten the Standard & Poor's 500 Index by an average of 58.3 percentage points."

General Motors joins five below-book picks
"For the coming 12 months, I recommend five stocks that are selling 'below book.' They are Phoenix, General Motors, Molson Coors Brewing Co., Piper Jaffray and TD Banknorth Inc."

Stingy Links: Dreman

The dinosaur at Wall and Broad
"But specialists have shamefully used their franchise to work against both the little guys and the big ones (money managers). Using their exclusive knowledge of order flow to wrongfully pad their profits, some specialists have frequently front-run both buyers and sellers. That is, for their own benefit, the specialists buy stocks ahead of buy orders or sell them ahead of sell orders. Such actions do little to provide better price stability and liquidity. They do a lot to undermine faith in the auction system."

Black gold
"People, understandably, are wondering what to do. If you own bonds, keep your positions small and your maturities short, preferably under a year. If inflation accelerates, which appears likely, holding long bonds would take a chunk out of your capital. By staying short, you may not make anything after inflation and taxes, but you will keep your capital intact for opportunities ahead. In your stock portfolio avoid deep cyclicals (autos, airlines, steel, heavy machinery) and other issues heavily dependent on riding a robustly growing economy. Even if economic growth ticks up from its current rate, the play in these stocks is over for a while. More attractive are health care and consumer staples, which are less sensitive to economic rhythms."

Stingy Links: Funds

Great shareholder letters
"Mutual fund managers are required to publish quarterly reports, which are usually accompanied by a letter to shareholders, written by the portfolio managers. These letters are available to anyone who's interested on most funds' Web sites. Shareholder letters are often packed with rich content, including: commentary on the current state of the market; investing philosophies; recent stock picks; opinions on what the future may bring; and pretty much anything else the manager wants to talk about. Although a letter is typically written for the benefit of shareholders in a particular fund, it also serves as a great fix for stock junkies who hope to glean some keen insight from investment managers and perhaps pick up a good pick or two along the way."

Stingy Links: Government

Pork Report 2005
"Feeling a little poor after paying your income taxes? You also may begin feeling a little angry when you hear where some of your tax dollars are going."

The gang of 17
"Just how convoluted are the regulations that govern the investment industry? Suppose we used the industry's model to regulate the way we buy and drive cars. First, force every driver in Canada to get a driver's licence and licence plate for every province and territory, even if they don't live there or own a vehicle there. Then, force them to display all 13 plates on their bumpers. After that, require everyone to pay a fee to another agency to regulate speed. Then, set up another agency to enforce traffic rules. To top it all off, have an Association of Car Dealers decide what reckless driving is. The association should also fine salespeople who harm their clients, but let dealers collude on new vehicle pricing. Does that sound crazy? It would sound fine to anyone in the securities business."

Stingy Links: Grant

Stocks for inflatophobes
"The CPI is way understated. Amid today's monetary laxity, oil, tobacco and gold shares from overseas will serve you quite well."

Stingy Links: Indexing

New take on index funds
"A better way to construct an index, he maintains, would be to weight stocks based on measures of what firms actually have accomplished, rather than solely on the often fleeting beauty contest of stock capitalization."

Stingy Links: Law

The slavery shakedown
"In other words, Thompson's apology was for something Wachovia didn't do, in an era when it didn't exist, under laws it didn't break. And as an act of contrition for this wrong it never committed, it can now expect to pay millions of dollars to activists for a wrong they never suffered. What is going on here?"

Stingy Links: Management

While pensions fall short, CEOs fly high
"Ford, GM, United Airline, Continental. They're just four of the companies struggling with falling profits and pension problems as their executives get huge payouts."

Stingy Links: Markets

What cost "noise"?
"the magnitude of underperformance by the largest-cap stock is huge; the average shortfall over the subsequent year is 7.1 percent, expanding to a startling 5.0 percent a year at 10 years, which compounds to a 40 percent performance shortfall relative to the average stock in the S&P 500 in 10 years."

Scaling the depths of our 'lizard' investment brains
"Money begets primal urges. We become irrational, do stupid things. We buy high and sell low. We panic, become guilt ridden. Sometimes we just want to slither away from our money foibles. That's because we are all lizards inside, and once in awhile -- or all too often -- that scaly inner self comes out. This isn't crazy talk. Neuroscientists and economists have teamed up to posit we revert to hot-blooded mania when making certain financial decisions because of unconscious core patterns our brain exerts on our behavior."

Threatening eBay's dominance
"In 2002, John Wieber started worrying about his business, which sold refurbished computers through Internet auctioneer eBay Inc. Although he was earning $1 million a year in revenue, profits had started to slip as competitors flocked to the site. EBay also raised its fees, further cutting margins, and fraud was becoming a problem. So Mr. Wieber revamped his Web site and began selling through other online companies, such as Inc. and Yahoo Inc. Last year, his sales neared $5 million, but his eBay revenue grew at a much slower pace, making up only a quarter of the total. It will likely fall still lower. Of the auction site, where he got his start, Mr. Wieber says: "Too many sellers, not enough buyers.""

The creditors' ball?
"Welcome to Wall Street's latest conflict-of-interest problem. Regardless of the outcome, the FiberMark case highlights a growing practice--hedge funds that join a bankrupt company's creditors' committee but continue to trade the company's securities. At issue is whether, as members of a creditors' committee, hedge funds are misusing the private information they receive. Federal regulators are sniffing around: Last year, the U.S. Securities and Exchange Commission reportedly dispatched a team to investigate how Wall Street trades the distressed debt of financially troubled companies."

Simply Stephen
"Executives are greedy, investors are oppressed by predators, securities regulators are ineffectual and U.S. President George Bush has exploited a single terrorist attack the way Adolf Hitler demonized Jews for political ends. The sort of controversial and fearless attacks on the ruling class have made Stephen Jarislowsky a darling among business reporters for years, but at 79 he is now attracting book readers with a curious mix of biography, investment tips, sermons on ethics and social commentary."

Tackling the bears-with no bull
"The wonderful thing about being old and rich and respected is that you get to say pretty much anything to anyone. And if you're really fortunate, like legendary investment guru Stephen Jarislowsky, the 79-year old founder of Montreal-based Jarislowsky Fraser, you even get to write a book airing your blunt opinions."

Stingy Links: Neff

Retired Vanguard manager still aggressive
"Legendary money manager John Neff hasn't lost his touch in retirement. He says that since he retired as manager of Vanguard Windsor Fund at the end of 1995, his stock portfolio has gained 18 percent a year, or double the return of the Standard & Poor's 500 index. "I am doing pretty well in my dotage," said Neff, 73."

Stingy Links: Real Estate

The danger of a global house-price collapse
"The whole world economy is at risk. The IMF has warned that, just as the upswing in house prices has been a global phenomenon, so any downturn is likely to be synchronised, and thus the effects of it will be shared widely. The housing boom was fun while it lasted, but the biggest increase in wealth in history was largely an illusion."

The global housing boom
"Japan provides a nasty warning of what can happen when boom turns to bust. Japanese property prices have dropped for 14 years in a row, by 40% from their peak in 1991. Yet the rise in prices in Japan during the decade before 1991 was less than the increase over the past ten years in most of the countries that have experienced housing booms (see chart 3). And it is surely no coincidence that Japan and Germany, the two countries where house prices have fallen for most of the past decade, have had the weakest growth in consumer spending of all developed economies over that period. Americans who believe that house prices can only go up and pose no risk to their economy would be well advised to look overseas."

Real Estate Vulnerability Index
"Housing prices have risen so far and so fast, who can afford to buy anymore? Plenty of people. Of course, those people don't live in New York. Or San Francisco. Or Miami."

Appraisal fraud: your home at risk
"In theory, it's in a bank's best interest to make sure its loans are based on accurate appraisals, said M. Thomas Martin, of the National Mortgage Complaint Center in Seattle. "But if you're selling the loans to the secondary market, you really don't care," he said. "The higher the value, the better.""

Boomtown USA
"Something strange happens when real estate makes everybody rich. Is this where your town is headed?"

Stingy Links: Retirement

Reality retirement planning
"Traditional retirement planning assumes that a household's expenditures will increase a certain amount each year throughout retirement. Yet data from the U.S. Bureau of Labor's Consumer Expenditure Survey show that household expenditures actually decline as retirees age. Consequently, under traditional retirement planning, consumers tend to oversave for retirement, underspend in their early years of retirement, or postpone retirement."

S&L redux
"Not so in America, where people are speaking openly of a taxpayer bail-out to rival the rescue of America's savings-and-loan (S&L) sector in the late 1980s. The pensions insured with the PBGC showed a shortfall of almost $354 billion at the end of the last fiscal year, compared with $279 billion a year earlier. If the deficits of less underfunded plans are rolled in, the total shortfall is more than $450 billion."

Stingy Links: Stocks

Pensions that bear mention
"Altria Group is on fire. The company responsible for Marlboro cigarettes and Oscar Meyer wieners has returned 37% to shareholders over the past year. But if investors bothered to read the company's financial statements, they might be less sanguine: Altria is $2 billion in the hole on its pension obligations--quadruple the deficit from three years ago."

Fortune's best stocks
"Famed value investor Benjamin Graham developed a number of techniques to uncover cheap and financially stable stocks. We based our screen on Graham's recommendations for the "defensive investor." As he explains in his 1949 classic The Intelligent Investor, this is someone who's looking for "safety and freedom from bother." We adhered to virtually all of Graham's many strict investing guidelines, but we did make a few exceptions. For instance, we dropped the requirement that current assets be greater than total debt, because a well-managed business should be generating enough cash to meet its obligations. We also loosened Graham's rule that stocks sell for less than 1.5 times book value."

Stingy Links: Taxes

Demolishing Shaky Tax Shelters
"As the feds continue to scuttle dubious and outrageous schemes, new players are reshaping a chastened financial-advice industry"

Stingy Links: Value Investing

Divergent opinions and performance
"Divergence of opinions among investors, manifested in the dispersion of analysts' earnings forecasts, may play an important role in asset pricing. This article reports tests of whether disagreement can explain the cross-sectional return difference between value and growth (or "glamour") stocks in the U.S. market over the 1983proposition that stocks subject to greater investor disagreement earn higher returns, the tests found value stocks to be exposed to greater investor disagreement than growth stocks. This finding suggests that the return advantage of value strategies is a reward for the greater disagreement about their future growth in earnings. Alternative multifactor asset-pricing tests supported the proposition that investor disagreement plays an important role in explaining the superior return of value stocks."

Good enough to eat
"Believe it or not, the best place to begin looking for great stocks may be your own mouth. Firms that make things you eat, chew or smoke have performed sensationally over the past half-century, yet next to nobody realizes how impressive an orally obsessed portfolio can be."

FPA Capital Fund's annual report
""You never know the value of liquidity until you need it and don't have it." This is one of those times when it takes a great deal of patience, discipline, and conviction to maintain such a contrarian position, because of the potential business and investment risk that it entails."

Patient Capital Management Q1
"In March of 2000 we truly believed that over a typical five-year period we would be presented with enough attractive investment opportunities to get us into a fully invested position. As we have come to see the past five years have been anything but typical. While the technology based NASDAQ declined sharply the broader based TSX Composite and S & P 500 have remained largely unchanged. In addition, volatility in the share prices of the businesses that interest us have been unusually muted. Not surprisingly, the high quality investments that we seek have not reached our buy prices."

Clipper Fund's Q1
"Start with profits. After-tax profit margins on the Standard&Poor's Industrials are at a record high. Measured as a percentage of GDP, corporate profits are back to levels last seen in 1929. For capitalists, but not workers, these are the (relatively) good old days. It gets better.Not only are profits at historically high levels, but investors are willing to capitalize those profits at generous price-to-earnings ratios. Not only have (note the past verb tense) the prices of stocks been bid up, so have the prices of other long-term assets such as bonds and real estate. While owners have been getting richer, they also benefit from the conspicuous absence of one sometimes fatal fear that historically has afflicted the rich."

Stingy Links: Whitman

Video: Blue-Ribbon Panel on Value Investing
"Whitman School alumni and Wall Street giants Marty Whitman, of Third Avenue Management, and Robert Menschel, of the Goldman Sachs Group, discuss their approaches to investing and the people and experiences that have shaped them as financiers."

Investments legend shares his wisdom
"Whitman is one of the truly great investors of modern times. He's also charming, gracious and refreshingly outspoken. He will criticize anyone: Alan Greenspan, Bill Miller of Legg Mason, even Graham and Dodd, the Columbia professors who wrote the classic text, "Security Analysis.""

Third Avenue Q2
"This year, I led seminars on value investing at the Schools of Management at both Syracuse University and Yale University. At the first session of the seminar programs, I contrasted the underlying assumptions pervading value investing with the underlying assumptions that seem to govern both academic finance and conventional research department analyses. Hopefully, it will be useful for TAVF shareholders if I share with them what I said at these first sessions, as well as how I believe the Fund's investment approach comports with a number of the underlying assumptions."

Notes from Marty Whitman's talk
"Running Mutual funds and Money management beats work. These Managers hardly work and continue to generate terrible returns. Market gives you an 8-10% return, and these managers with their intelligence under perform the market."

Stingy Links: World

Land of Hope and Glory
Cartoons and poems on the tragedy in London.

The corporate savings glut
"Companies in the main developed economies have switched, as a group, from being big borrowers to being net savers: ie, their profits exceed their capital spending. The total increase in companies' net saving in the past four years has been more than $1 trillion, 3% of annual global GDP and five times the increase in net saving by emerging economies over the same period."

The frog and the ox
"In reality, a weak Europe is much more of a threat to America's interests than a strong one. The no vote not only guarantees several more years of Eurodithering and introspection: it also makes it much less likely that Europe will be able to absorb Turkey, let alone Ukraine, anytime soon, if ever."

Fast food and strong currencies
"The Big Mac index, which we have compiled since 1986, is based on the notion that a currency's price should reflect its purchasing power. According to the late, great economist Rudiger Dornbusch, this idea can be traced back to the Salamanca school in 16th-century Spain. Since then, he wrote, the doctrine of purchasing-power parity (PPP) has been variously seen as a "truism, an empirical regularity or a grossly misleading simplification.""

Outsourcing: Getting the measure of it
"Then again, says the McKinsey Global Institute, if current demand continues, the supply of suitable labour in the popular cities of Prague and Hyderabad will run short by 2006 and 2008 respectively. The demand for engineers from Britain and America alone, it claims, will use up the suitable supply in all of China, India and the Philippines by 2011."

Lula's mid-term blues
"Last month, Veja, a weekly magazine, published excerpts from a videotape showing a manager of the federal postal service taking a bribe. He claimed to belong to a bribe-collecting network headed by Roberto Jefferson, the boss of the Brazilian Labour Party (PTB), a member of the governing coalition. Mr Jefferson denies wrongdoing. The bribe-taker has since recanted. But allegations keep coming. Federal police are investigating charges that the state-owned reinsurance monopoly has funnelled money to a brokerage headed by a friend of Mr Jefferson."

Frugally Yours,
Norman Rothery
ISSN 1499-2787

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