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The Stingy News Quarterly (Q2/2007)

New @ StingyInvestor

Canadian stocks that Benjamin Graham might like
"I like to hunt for U.S. value stocks using Benjamin Graham's criteria for defensive investors. The method focuses on solid companies trading at modest prices. You can read all about it in Graham's book The Intelligent Investor which deserves a spot on every investor's bookshelf. But I'm often asked for Canadian stocks that pass Graham's test. This month I've found five candidates that the master might like."

The Best of Stingy Links

Stingy Links: Academia

Where are the shareholders' mansions?
"We study real estate purchases by major company CEOs, compiling a database of the principal residences of nearly every top executive in the Standard & Poor's 500 index. When a CEO buys real estate, future company performance is inversely related to the CEO's liquidation of company shares and options for financing the transaction. We also find that, regardless of the source of finance, future company performance deteriorates when CEOs acquire extremely large or costly mansions and estates. We therefore interpret large home acquisitions as signals of CEO entrenchment. Our research also provides useful insights for calibrating utility based models of executive compensation and for understanding patterns of Veblenian conspicuous consumption."

We don't quite know what we are talking about
"Finance professionals, who are regularly exposed to notions of volatility, seem to confuse mean absolute deviation with standard deviation, causing an underestimation of 25% with theoretical Gaussian variables. In some fat tailed markets the underestimation can be up to 90%. The mental substitution of the two measures is consequential for decision making and the perception of market variability."

Stingy Links: Behaviour

What I learned from 'The Price Is Right'
"Bob Barker, who is taping his final "Price" episode today for broadcast June 15 on CBS, was one of my childhood idols. He was impeccably tailored, and he genuinely engaged the contestants, even when the outrageously T-shirted hoi polloi didn't match the effortless grace of the host. More important, watching "The Price Is Right" taught me an enormous amount about money. Naturally, I loved the showcases, the cars and "Barker's Beauties." But what kept me coming back was the daily lesson in the principles of behavioral finance. If you wanted to know how to exploit - or get trapped by - market inefficiencies and the often irrational behavior of competitors, "The Price Is Right" was essential."

You got your tissues in my peanut butter
"Indeed, many shoppers are repulsed by the thought that packages of food are touching items such as toilet paper, feminine hygiene products, cat litter, or even, in some cases, mayonnaise - all items that subconsciously repulse a lot of people."

It feels good to be good
"The results were showing that when the volunteers placed the interests of others before their own, the generosity activated a primitive part of the brain that usually lights up in response to food or sex. Altruism, the experiment suggested, was not a superior moral faculty that suppresses basic selfish urges but rather was basic to the brain, hard-wired and pleasurable."

Benefiting from irrational investors
"If you're like most people, you probably don't spend a great deal of time monitoring your investments. So when another company uses stock to acquire a firm in which you hold a stake, what do you do with the new shares you suddenly own of a company that you never intended to buy in the first place? Logic suggests that you would be likely to sell those shares. But research by Associate Professor Malcolm Baker, Professor Joshua Coval, and Harvard University professor Jeremy C. Stein shows that 80 percent of individual investors and 30 percent of institutional investors appear to be more inertial than logical. They take the default option, passively accepting the shares offered as consideration in stock mergers and acquisitions."

Is the market rational?
"That brings us back to Thaler, who was working on a Ph.D. in economics at Rochester in the early 1970s. His dissertation was an attempt to put a value on human life by looking at how much more people were paid to work in risky fields like mining and logging. He was working on the assumption, of course, that people rationally weighed the risk of death in their decision to accept a job. Along the way Thaler decided to ask a few friends how much they'd be willing to pay to eliminate a one-in-1,000 chance of immediate death and how much they would have to be paid to willingly accept an extra one-in-1,000 chance of immediate death. What he found was that they wouldn't pay much for the extra margin of safety but demanded huge sums to accept added risk--which isn't, strictly speaking, rational. "I came to two conclusions about these answers," Thaler wrote years later. "(1) I had better get back to running regressions if I want to graduate, and (2) the disparity between buying and selling prices was very interesting." Thaler did discuss his subversive thoughts with a few trusted colleagues and people from other disciplines. One of those people happened to be a newly minted psychology Ph.D., who sent Thaler a copy of a 1974 article by Israeli psychology professors Amos Tversky and Daniel Kahneman. (Tversky died in 1996; if he were still around, he surely would have shared in this year's Nobel.) The article argued that in making decisions involving probability and risk, people rely on mental shortcuts that "are highly economical and usually effective but ... lead to systematic and predictable errors." It was that last part that was so significant. That people make judgment errors wasn't news, but if those errors were "systematic and predictable," well, that was something an equation-wielding economist could get up and run with."

Your brain on Gucci
"Economists used to think consumers made rational purchasing decisions. But a new field of research is revealing neural forces that leave classical theorists scratching their heads"

The executioner of excellence
"And speaking of successful money managers, while Warren Buffett has not exactly taken the same vow of "poverty," he does share Swensen's otherworldliness, living in the same modest house for several decades, fitting out his living room at the Omaha Furniture Mart, and subsisting on Coke and cheeseburgers. Is there a connection between Buffet and Swensen.s relative disdain of the material world and their brilliance as money managers and, more generally, of the superior performance of endowments and public pension plans? You bet there is. Cognitive psychologists have long known that we are very poor judges of what makes us happy: the pleasure from money, fame, possessions, and power turns out to be quite transient (and so is the pain from things which we think would permanently sadden us: the depression caused by sudden, permanent blindness or paraplegia, for example, is surprisingly short-lived). Three things provide long-lasting satisfaction, as quantitatively measured by academic psychologists: autonomy, meaningful contact with others, and the development and exercise of competence." [Correction: Illinois Tool Works generally pays 1.1 or less times annual revenue for its acquisitions.]

Stingy Links: Books

What else is new?
"Old technologies persist; they even flourish. In that sense, they're as much a part of the present as recently invented technologies. It is said that we live in a "new economy," yet, of the world's top thirty companies (by revenue), only three are mainly in the business of high tech - General Electric (No. 11), Siemens (No. 22), and I.B.M. (No. 29) - and all three go back more than a century. The heights of the early-twenty-first-century corporate world are still occupied - as they have long been - by petroleum companies (Exxon Mobil, Royal Dutch Shell, and B.P., Nos. 1, 3, and 4), retailing (Wal-Mart, No. 2), automobiles (General Motors, No. 5), and finance (I.N.G. and Citigroup, Nos. 13 and 14). No Hewlett-Packard (No. 33); no Microsoft (No. 140); no Merck (No. 289)."

Stingy Links: Brokers

The high price of free insurance
"Typically, those who sell policies receive about 20% to 30% of the death benefit. For a $1 million policy belonging to someone with a life expectancy of seven years, a purchaser might pay $250,000, says Adam Balinsky, a partner at Baker & McKenzie in Toronto. But after paying various fees to middlemen that buy policies, the seller would be likely to take home only about $150,000, he calculates. From those proceeds, the seller would have to repay the loan plus various lender fees and interest of 12% to 18%. In the end, the insured might only net about $42,000, Balinsky figures."

Stingy Links: Buffett

Warren Buffett timeline
"A Chronological History of the Oracle of Omaha: 1930-1989"

Top 20 questions from 2007's meeting
"The measurement of volatility: it's nice, it's mathematical, and wrong. Volatility is not risk. Those who have written about risk don't know how to measure risk. Past volatility does not measure risk. When farm prices crashed, [farm price] volatility went up, but a farm priced at $600 per acre that was formerly $2,000 per acre isn't riskier because it's more volatile. [Measures like] beta let people who teach finance use the math they've learned. That's nonsense. Risk comes from not knowing what you're doing. Dexter Shoes was a terrible mistake. I was wrong about the business, but not because shoe prices were volatile. If you understand the business you own, you're not taking risk. Volatility is useful for people who want a career in teaching. I cannot recall a case where we lost a lot of money due to volatility. The whole concept of volatility as a measure of risk has developed in my lifetime and isn't any use to us."

Buffett wisdom
"LTCM had taken a huge leveraged position in these bonds when the spreads were much smaller, but didn't have the collateral to hold on to it when the spread widened. Buffett quoted John Maynard Keynes, who wrote in 1931 that 'The market can stay irrational longer than you can stay solvent'. As the spread widened, Keynes' dictum became devastatingly relevant for LTCM. But Berkshire, with its huge cash hoard, could withstand the pressure of even more market irrationality before the spread eventually returned to normal. Unfortunately, Warren was never able to consummate the deal. He had been invited by Bill Gates to vacation in Alaska when the crisis broke and it was hard to negotiate such a deal on a cell phone. Eventually the banks holding the collateral made a deal with LTCM and Berkshire didn.t have a chance to top their offer. Warren is philosophical about the loss of this opportunity, noting it was the most expensive vacation he ever took. 'Bill Gates cost me about $3 billion,' he shrugged."

Turtles in Omaha
"Most of us frame the success or failure of a financial proposition in terms of the price. For instance, if you buy a stock at $30, any price above that level is mentally successful; any price below it is mentally unsuccessful. What investors often fail to consider is that change in wealth is not a function of how often you're right, it's a function of how much money you make when you're right versus how much you lose when you're wrong. You need to consider both frequency and magnitude to understand investment results. Faith illustrates this point by sharing 20 years of results for a trading system. Over that time span, the system generated about 5,600 trades, or around 250 a year. Of those trades, a shade over two-thirds lost money, making the success ratio less than one-third. But the winning trades earned 2.2 times the losing trades on average, netting a substantial overall profit."

Live from Omaha
"This year's meeting takes place tomorrow in Omaha's Qwest Center, and investors from all walks of life will gather to pepper Warren Buffett and his business partner Charlie Munger with questions on a whole host of topics. ... If you can't make it to the big event, fear not! The Fool has sent yours truly to the land of steaks and corn to join the other 20,000-plus attendees and keep you abreast of the happenings. On Saturday, keep your eyes on to read my live coverage."

What Buffett might buy
"If Buffett is intent on finding a mega-deal, what kind of target is most likely? For starters, the sage favors high-quality businesses with long-term competitive advantages, what he describes as "a moat" that keeps rivals at a safe distance. He shies away from businesses he doesn't understand, such as technology. Perhaps most important, Buffett is looking for a well-run company with a solid management team that he doesn't have to go in and replace. And he's not chasing after a quick buck. Once he buys a company, he wants to hold on for the long haul, unlike most private equity firms."

Regaled with Buffettania
"Will global liquidity keep driving prices higher? The second-richest man in America is "baffled by the liquidity sloshing around in the world. It's hard to find very much fear. That's the trouble with a complacent world." Chimed in Munger: "Eventually we'll have an event that will change people's perception. We always do." What will it be? Privately, Buffett worries about a debacle many times Long Term Capital's demise in 1998. He suggests it will be many hedge funds all with the same highly leveraged positions in derivatives that will be damnably hard--if not impossible--to unwind."

Buffett ready to buy 'big business'
"Berkshire Hathaway Inc.'s Warren Buffett usually laments that his company has more cash than investment opportunities. Yesterday he envisioned an acquisition so big that he'd have to sell some stocks to free up funds."

Buffett, the Wal-Mart shopper
"Buffett, who rarely reveals much about his investment moves in public, started building a big position in Wal-Mart back in 2005, according to filings with the Securities & Exchange Commission. Two years later, Berkshire owns some 19.9 million shares, roughly $960 million worth, making it one of the insurer's largest holdings. Target first popped up in the portfolio about a year ago, a stake some speculate was bought by Berkshire's other bargain hunter, Lou Simpson, chief investment officer at the GEICO car insurance subsidiary. But in the third quarter of 2006, Berkshire held fewer than 1 million shares, and by the end of the year the investment had disappeared from the company's financial reports."

Berkshire Hathaway resembles a mutual fund
"The mix of companies and investments billionaire Warren Buffett's company holds makes some people think investing in Berkshire Hathaway Inc. is a bit like buying shares of a mutual fund that emphasizes insurance."

Buffett's Squanderville all maxed out
"Buffett makes his point with an economic model dressed as storytelling. He invites his audience on "a wildly fanciful trip to two isolated, side-by-side islands of equal size, Squanderville and Thriftville". Squandervillians live it up by borrowing from Thriftville - something they can keep doing until they've mortgaged all their assets, including their land. This process could go on a long time before the market forces an adjustment. And by then, what damage might have been done to Squanderville's economic future, not to mention its strategic position with its financier Thriftville"

Buffett's Berkshire buys big Burlington stake
"Warren Buffett's Berkshire Hathaway Inc. has bought a stake of more than 10 percent in railroad operator Burlington Northern Santa Fe Corp. that's worth about $3.2 billion, according to a filing with regulators."

Stingy Links: Crime

Imperfect union
"Lies, kickbacks, union corruption and tens of millions of dollars in ill-gotten gains are among the accusations laid out in a lawsuit that's likely to strike fear in the hearts of labor leaders and financial executives across the country."

Stingy Links: Debt

Meet the parents-backed mortgage
"The shared equity deals can be a prudent alternative to some of the more creative financing techniques of recent years. Many young homeowners who took on interest-only mortgages, piggyback loans, option adjustable-rate mortgages, and other such gimmicky products are finding themselves financially stretched as the cheaper teaser rates expire and higher market rates kick in. In sharp contrast, equity-sharing deals offer the homeowner a fiscally conservative package. Investors, usually parents, typically put in cash to allow the buyers to amass a down payment of at least 20%. That allows buyers to qualify for a conventional 30-year, fixed-rate mortgage. The equity sharers get back their initial stake plus 10% to 50% of the profits."

The poverty business
"In recent years, a range of businesses have made financing more readily available to even the riskiest of borrowers. Greater access to credit has put cars, computers, credit cards, and even homes within reach for many more of the working poor. But this remaking of the marketplace for low-income consumers has a dark side: Innovative and zealous firms have lured unsophisticated shoppers by the hundreds of thousands into a thicket of debt from which many never emerge."

Down payment rule change won't alter much
"Murphy's Law, adapted to the housing market of spring, 2007: What can become more expensive, will become more expensive. House prices and mortgage rates certainly conform these days, but there's one glaring exception. Effective immediately, you can avoid the hefty cost of mortgage-default insurance if you make a down payment of at least 20 per cent, down from the old standard of 25 per cent."

Stingy Links: Dividends

Dividends point the way
"Dividend investing is often viewed as a conservative -- some might say boring -- strategy where you sacrifice first-rate share price gains for income through quarterly dividends. But it appears that if you buy the shares of companies that steadily crank up their dividends, you can have it all."

Stingy Links: Dreman

Bad times ahead?
"Given their enormous available capital, Freddie and Fannie could be big beneficiaries of the current panic, as other lenders pull back. The same is true for most of the nation's large commercial banks, where subprime loans are a mere fraction of their loan portfolios."

Stingy Links: Funds

A legend sizes up the market
"Miller remains one of the sharpest, most innovative thinkers in the investing game, as we were reminded during a recent interview at Legg Mason's headquarters, next to Baltimore's striking Inner Harbor. Miller is particularly impressive when he argues about the foibles of most value investors and defends his own approach. In the late 1990s, he was criticized for being a value investor in name only because he owned shares of AOL, Dell and Today, his big stake in Google once again leads some to question his credentials as a bargain hunter."

Cundill's quest for hidden value
"Cundill Investment Research, which is owned by fund industry giant Mackenzie Financial Corp., is noted for a strict value approach that means it only buys stocks it believes are trading for less than they're worth. "We buy what everybody else is selling," Mr. Burton said. "That's where we start our search.""

TERs: Another fund cost to consider
"It's called the trading expense ratio, or TER, and it tells you how much your funds are spending to cover the cost of brokerage commissions for buying and selling stocks. People typically determine how much it costs to own a fund by looking at its management expense ratio, or MER. But trading expenses can be a key component of fund costs, and they're not reflected in the MER."

Monte Carlo may be answer to closet indexing
"Performance evaluations can be unsatisfactory when basing them on peer groups because a manager can beat one group while underperforming another. A further drawback is that it can take years, even decades, to determine whether a manager's results reflect skill or luck. Only the likes of Warren Buffett possess such patience. Ronald Surz, president of San Clemente, California-based software company PPCA, has a possible solution for investors who want to measure performance and still escape what Montier calls 'the tyranny of the benchmark.' He recommends using Monte Carlo simulation to construct multiple scenarios that show where an individual money manager falls among a distribution of thousands of possible investment outcomes."

Stingy Links: Government

How to run a budget like an idiot
"Before every red-blooded tax loather spits on this page in disgust, consider the context. Over the past six years we've borrowed nearly $2 trillion to cut taxes for the wealthiest during a time of war, meaning we've slipped the bill for our war and our tax cuts to our kids. How do the candidates - who also claim to be "fiscally conservative" (not to mention devotees of "family values") - square all this?"

Stingy Links: Gross

Bill Gross's British stamps outperformed Pimco fund
"Bill Gross's British stamps, which go on auction in New York on June 11 to benefit a charity, have proven to be a better investment than his bond fund. The manager of the world's largest bond fund stands to raise $5 million or more from the stamps he bought for $2 million, mostly in 2000, said Charles Shreve, Gross's stamp adviser. His $104 billion Total Return Fund had a 6.9 percent average annual return in the past 10 years, according to Morningstar Inc. data."

Stingy Links: Indexing

ETFs for everyone. Even dermatology investors
"The ETF business today is a circus. Close to 100 new ones have been listed for trading on North American exchanges so far this year, compared with 170 in all of last year and about 60 in 2005. It's quite a change from the early days of ETFs a decade ago, when there was only an obscure handful of these index funds that trade like a stock. ETFs began by tracking major global stock indexes such as the S&P 500, the Nasdaq 100 and the S&P/TSX composite (and its predecessor, the TSE 300 index). Today, with a choice of funds for virtually all major indexes, ETF providers are turning to more exotic products to build their franchises."

Stingy Links: Management

Smothered by six sigma?
"Now his successors face a challenging question: whether the relentless emphasis on efficiency had made 3M a less creative company. That's a vitally important issue for a company whose very identity is built on innovation. After all, 3M is the birthplace of masking tape, Thinsulate, and the Post-it note. It is the invention machine whose methods were consecrated in the influential 1994 best-seller Built to Last by Jim Collins and Jerry I. Porras. But those old hits have become distant memories. It has been a long time since the debut of 3M's last game-changing technology: the multilayered optical films that coat liquid-crystal display screens. At the company that has always prided itself on drawing at least one-third of sales from products released in the past five years, today that fraction has slipped to only one-quarter."

Stingy Links: Markets

Why bubbles are great for the economy
"If you blew the kids' college fund on stock back in 2000, or dropped $800,000 last year on that spec house in Phoenix that you knew you could flip for $1.4 million, you probably won't believe me when I say: Investment bubbles are great for the economy. Yes, those periodic outbursts of investor insanity, which inevitably degenerate into venality, corruption, and searing losses - America needs them!"

Big profits = danger ahead
"To gauge how much you're really paying for a dollar of profits, it's more revealing to compare today's prices with average earnings over the past ten years. That formula takes out the big swings in earnings that can make stocks look artificially undervalued or overvalued. By smoothing earnings, Asness gets an adjusted P/E of around 25 for the S&P 500. That's well above the historical average of 14 or 15. That's expensive, and buying in at high prices has always been the ticket to low future returns."

Stingy Links: Montier

Meaty beaty big and bouncy
"The very concept of small cap investing is pretty suspect. From an empirical skeptic's viewpoint, the evidence is not convincing. Since 1981, most of the evidence appears to be that the size effect has vanished. Disentangling the size and value effects suggests that a very large proportion of the size effect is in actual fact a value effect! Even if you still believe in small caps (and it would have to be a matter of blind faith given the evidence) now is certainly not the time to be investing in them. Small caps are trading at a premium to large caps in both the US and Europe. This implies a negative liquidity premium - investors are paying for the pleasure of holding illiquid, inherently cyclically exposed stocks. This doesn't sound like a sound investment proposition to me. In addition, the delivered growth of small caps (whilst in excess of large caps) is usually less than analysts were expecting. Buying an expensive asset with a high likelihood of earnings disappointment (even without the business cycle risk) would seem to expose investors to unnecessary valuation risk."

Prophet among pinstripes
"The speaker wore his usual uniform of a faded black Timberland sweatshirt and jeans; his London audience was all tailored suits and double-cuffed shirts. But as James Montier finished explaining why money shouldn't be equated with happiness, the equity and bond traders rose to their feet in applause. "I don't think they heard much beyond rule 3," Montier quipped afterward. Rule 3 of his 10 for achieving sustainable happiness is, "Have sex.""

Stingy Links: Schloss

Tip of the hat to Walter Schloss
Warren Buffett highlights Walter Schloss in his latest letter. Starting on page 21, "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. Walter did not go to business school, or for that matter, college. His office contained one file cabinet in 1956; the number mushroomed to four by 2002. Walter worked without a secretary, clerk or bookkeeper, his only associate being his son, Edwin, a graduate of the North Carolina School of the Arts. Walter and Edwin never came within a mile of inside information. Indeed, they used 'outside' information only sparingly, generally selecting securities by certain simple statistical methods Walter learned while working for Ben Graham. When Walter and Edwin were asked in 1989 by Outstanding Investors Digest, 'How would you summarize your approach?' Edwin replied, 'We try to buy stocks cheap.' So much for Modern Portfolio Theory, technical analysis, macroeconomic thoughts and complex algorithms." I bring this section of Buffett's report to your attention because it is hard to find much written on the publicity shy Walter Schloss.

Stingy Links: Stocks

The darker side of shareholder democracy
"In truth, shareholder democracy still isn't remotely like democracy as most people think of it. New research shows how twisted it really is and suggests why it could even be the source of the next big business scandal. The research comes from Yair Listokin, an associate professor at Yale Law School, who studied shareholder voting on proposals put forward by management. Those are critical votes, concerning mostly executive compensation but also merger approvals and other large matters. A majority vote is generally required, and much is riding on the outcome. When Listokin collected data on thousands of such votes, he discovered an amazing thing: On hard-fought issues with significant shareholder opposition, management frequently wins by tiny margins - just a couple of percentage points or even less - but almost never loses by tiny margins. "

Coal? Yes, Coal
"Little known outside the energy industry, Peabody is well respected within it. The company is often referred to as the "Exxon of Coal" for its strategic judgment and its immense energy resources. Peabody's 10.2 billion-ton coal pile has nearly twice the energy content of Exxon's petroleum reserves. Its massive mines in Wyoming's Powder River Basin are among the most productive and technologically sophisticated in the world. And its well-timed acquisitions of properties in Australia have proved rewarding, forging a valuable path into fast-growing markets such as India and China. International business now contributes 30% of profits, up from under 1% in 2001."

Stingy Links: Thrift

Lessons from living down and out
"We were poor and unhappy, so I thought having money meant being happy . . . (but) my husband also grew up very poor, and his family was close and he had a loving childhood. (Meanwhile,) many rich people are miserable. Don't confuse money and happiness. They're separate issues and you need to work on your family and relationships just as hard as you work on finances. Don't give up family and relationships in pursuit of money and don't assume money will fix your personal life."

Stingy Links: Tilson

Not-to-be-missed tips for value hunters
"Given that the first step to successful investing is knowing which ponds to fish in, here are the 15 most common types of value opportunities I have been able to capitalise on in my investing career"

Stingy Links: Value Investing

Eveillard: A value maestro's encore
"For almost 30 years, global fund manager Jean-Marie Eveillard made a lot of money bucking trends. After a two-year break, he's back."

Fairfax braces for meltdown
"Prem Watsa says investors around the world are not being paid enough for the inherent risk in stocks, bonds and real estate. The chair of Fairfax Financial Holdings Ltd. is not crying poor for successful capitalists like himself, though. He is sounding a warning call to investors, big and small. The renowned but recently embattled sleuth of under-valued assets . an acolyte of Depression-era investment theorist Benjamin Graham . has acted on his concern to protect his stable of general insurance and re-insurance companies."

2006 Chou Lecture
"While working as a technician for a phone company in 1981, he started an investment club that would later become the Associates fund. Mr. Chou has operated two of the country.s most successful funds, Chou Associates Fund and Chou RRSP fund, for the last 18 years."

In a rocky stock market, play it safe
"Up and down Wall Street, traders' screens are green, signaling that these are great times for stock market investors. The S&P 500 and the Dow Jones Industrial average are setting all-time highs. So much cash is sloshing around the sidelines, and borrowing costs are so low, that practically each day brings news of asset sales or corporate takeovers. Reuters. Chrysler. Stuyvesant Town. MGM. It all seems like the late 1990s."

Aegis Fund overcomes 'worst stock pick'
"Barbee, who has managed Aegis Value since it opened in 1998, buys companies trading at a discount to book value, or assets minus liabilities. The average market capitalization of companies in his fund is $869 million, compared with the $1.3 billion average for those in the Russell 2000 Value Index, which tracks the smallest U.S. companies."

Tight times for deep value investing
"Barbee keeps a watch-list of companies with share prices trading below book value, or net worth (essentially, a company's assets minus liabilities). When the overall market bottomed in late 2002 and early 2003, Barbee found that some 500 stocks were trading below book value (he screens for all stocks with market values of $70 million and up). By early 2004, the number had shrunk to about 100 and has stayed there ever since. "Everyone's had a chance to sift through the bathwater," Barbee says. As for the remaining bargain-bin merchandise, the average discounts are not as large as they once had been, and the quality of the typical company is not as strong."

Patient Capital Q1 2007
"Charts 2 and 3 show the Dividend Yields of the TSX and the S & P 500 over long time frames. The dividend yield is our preferred aggregate market valuation method. Cash dividends paid to shareholders are real; there are no debates about methodology and quality of earnings when compared to the Price/Earnings ratio nor relevance when discussing the market's Price/Book ratio. As my accounting professor used to say "if it doesn't jingle it doesn't count!""

Some 'value' stocks are just losers
"Most veteran value investors have a story about the stock they wished they had let get away. The shares looked attractive and the company's worst troubles seemed behind it. But instead of a quick fix, they got quicksand; the stock languished, a waste of money and time. For John Linehan, manager of the T. Rowe Price Value Fund, such disillusionment comes from a stake in Boston Scientific. The medical-device company appeared to have healthy demand for its products and its costs were under control, he says, but tough competition and an expensive acquisition of heart-device maker Guidant has proved otherwise."

Stingy Links: World

Globalization erodes product safety
"Colgate's announcement Thursday that it found fake and potentially dangerous "Colgate"-branded toothpaste sold in some stores is the latest in a series of product scares that have recently spooked American consumers. More importantly, these incidents of counterfeit toothpaste, melamine-tainted pet food and toothpaste laced with anti-freeze imported from China are raising concern about the quality of food and other products that enter the U.S. and the overall safety of the global supply chain."

Freedom, not climate, is at risk
"As someone who lived under communism for most of his life, I feel obliged to say that I see the biggest threat to freedom, democracy, the market economy and prosperity now in ambitious environmentalism, not in communism. This ideology wants to replace the free and spontaneous evolution of mankind by a sort of central (now global) planning. The environmentalists ask for immediate political action because they do not believe in the long-term positive impact of economic growth and ignore both the technological progress that future generations will undoubtedly enjoy, and the proven fact that the higher the wealth of society, the higher is the quality of the environment. They are Malthusian pessimists."

Frugally Yours,
Norman Rothery
ISSN 1499-2787

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