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The Stingy News Quarterly (Q3/2004)

New @ StingyInvestor

Unbundling Canadian ETFs
"Consider two options for the truly long-term index investor. The first option is to purchase an iUnit ETF and the second option is to buy the index's stocks directly. At first glance, the choice between buying a low-cost exchange-traded fund that holds many stocks or buying each of the stocks directly appears to be obvious. The exchange-traded fund is likely to be the better bargain. However, buying the stocks directly may be better for some investors because the Canadian stock market is very small and it is dominated by a few big names. As a result, one might reasonably approximate an index fund by holding only a few stocks."

Yield of dreams
"From 1970 to 2003 the top-yielding stocks outperformed the average stock by 1.9 percentage points a year. Their superiority was even higher if you looked at just the period between 1984 to 2003, when they showed an average annual advantage of 2.1 percentage points. And it was higher still if you focused on 1994 to 2003, when high-yield stocks beat the average stock by an average 2.2 percentage points a year."

The Best Of Stingy Links

Stingy Links: Academia
Who gains from trade?
"After costs, we estimate that the trading of institutional investors adds one percentage point annually to their portfolio performance, while the trading of individuals subtracts over three percentage points annually from their performance."

Stingy Links: Accounting

The fall of Andersen
"Trading his customary dark suit for a pair of jeans, Mike Gagel trudged over pallet after pallet of multicolored bricks in the central Ohio storage yard. The summer heat was stifling as he counted once, then twice. Something was wrong."

Reality vs. politics in accounting
"Across the ocean, the House of Representatives voted 312-111 in favor of a bill that Warren Buffett has called "lunacy" but that the sponsors called the "Stock Option Accounting Reform Act." The bill would overrule the Financial Accounting Standards Board and let companies go on ignoring the value of options they give out."

Stingy Links: Buffett

The profitable hobby of Warren Buffett
"These "Workout" situations, as Buffett called them at the time, often represented up to 50% of the profits in his fund, depending on the year, and were heavily influenced by the writings and teachings of Buffett's mentor Ben Graham. In most cases, they were small companies, trading below liquidation value, or where Buffett thought liquidation was in the works or, in some cases, had already been announced. When Buffett expanded his repertoire to buying growing companies above their breakup value, he likened the Graham-Dodd approach to buying "cigar butts -- you can pick them off the ground and smoke one more puff, but that's about it.""

Fuzzy math and stock options
"I have no objection to the granting of options. Companies should use whatever form of compensation best motivates employees -- whether this be cash bonuses, trips to Hawaii, restricted stock grants or stock options. But aside from options, every other item of value given to employees is recorded as an expense. Can you imagine the derision that would be directed at a bill mandating that only five bonuses out of all those given to employees be expensed? Yet that is a true analogy to what the option bill is proposing."

Secrets behind a successful media company
"The Washington Post Company adopted its 'no quarters' stance under the guidance of Warren Buffett, who bought $10 million of stock in the company during the recession of 1974 and joined the company's board that same year. 'My mother realized that he was the smartest businessman she had ever met,' said Graham. Buffett's input 'has been worth billions to the company.'"

Stingy Links: Crime

Our dirty secret
"The Vancouver Stock Exchange may be gone, but shady promoters have found safe havens -- off the radar of regulators -- to prey on naive investors"

Stingy Links: Dreman

Dreman still loves unloved small caps
"Dreman, 68, says he and co-manager Nelson Woodard, 48, have years of research to back up their claim that buying stocks with low P-E ratios outperforms all other strategies in the long run. And the best of the value stocks to buy are small-cap stocks."

Some stocks are cheap
"Equities slowed first from fear of an overheated economy, then from fear of a slowdown. But you can safely ignore the hand-wringing."

Stingy Links: Economy

There's been a huge shift in how consumers spend
"Yet the shifts can be quite remarkable. In 1961, almost 53 per cent of all consumer spending went to what most of us might consider the necessities of life -- food, clothing and shelter. By 1981, that trio accounted for only 46 per cent of spending and by 2000, its share had dropped to just over 40 per cent."

Bush's jobs deficit
"According to the latest figures, American companies added far fewer workers to their payrolls last month than economists had forecast. This comes a week after the equally unexpected news that growth slowed significantly in the second quarter. How worried should George Bush be?"

The evolution of everyday life
"The human capacity for calculation allowed this potential to be fully exploited because humans were able to design rules and institutions that, as Mr Seabright puts it, "make reciprocity go a long way". Much of the book is concerned with the trust-enhancing character of economic institutions such as money. Building on humans' inherited instincts, these rules and institutions allow people to treat strangers as "honorary friends"."

Stingy Links: Fun

Apprentice to a hoax
""A schoolboy's dream... a competitor's challenge. Donald J. Trump is the very definition of the American success story, continually setting the standards of excellence...." It's times like this that I wonder whether the TV-addled American public doesn't deserve every fleecing it gets at the hands of the world's biggest snake-oil peddlers."

How 51 gorillas can make you seriously rich
"Given this strong motivation to succeed, it is astonishing how bad most business books are. Many appear to be little more than expanded PowerPoint presentations, with bullet points and sidebars setting out unrelated examples or unconnected thoughts. Some read like an extended paragraph from a consultant's report (and, indeed, many consultancies encourage their stars to write books around a single idea and lots of examples from the clientele). Few business books are written by a single author; lots require a whole support team of researchers. And all too many have meaningless diagrams."

Stingy Links: Government

$8.6 trillion bill sent to future generations
"It could probably be shown by facts and figures that there is no distinctly native American criminal class except Congress."

The crime wave that wasn't
"One threat in particular stood out. The state prison system had become so crowded that the officials were exporting prisoners to private prisons in nearby Mississippi and Louisiana. The governor and his cronies often warned that failure to pass his tax increase would lead to the early release of many criminals. Voters were told that a cost of rejection would be a crime wave of unprecedented proportions. It was a threat worthy of "The Godfather." But the voters nixed the tax increases, like voters everywhere almost always do when given the chance. And the prison system did give early parole to many of its convicts. But that often mentioned crime wave never happened."

The economics of water in the West
"The American West faces severe water shortages because of U.S. Government policies of this past century; the solution is not for the government to further assert itself, but rather to end the water socialism that it has imposed. The command system of economics that has led nations like North Korea and Cuba into ruin has also created the crisis in the West."

Stingy Links: Grant

A hazardous haven
"Following is a cautionary look at a refuge-that-isn't: the two dozen (and counting) mutual funds that invest in speculative-grade bank loans. With these claims--also known, a little confusingly, as leveraged loans--Wall Street has created a kind of trifecta of unfavorable terms. The yields on offer are small. The opportunity for price appreciation is nil. And the risks to principal are clear and present. What less could you want?"

Stingy Links: Gross

Lemonade for sale
"So if you're thinking about a hedge fund to bolster your portfolio returns, give it a long think. They're risky and they're generally overpriced. You can do better elsewhere or even on your own."

Stingy Links: Health

The health of nations
"Health care consumes a large and growing chunk of rich countries' income, but does it provide value for money?"

Insurance premiums soar 11%
"Health insurance costs are going up, and up, and up. And in some cases, up some more."

Full price
"Dreams of a bright career in a big city lured Rebekah Nix here from the western plains of Texas two years ago. An appendectomy sent her home. But not because she was ill. Ms. Nix, 25 years old, was fleeing the nearly $19,200 in medical bills that had piled up on her bedroom dresser."

Stingy Links: Law

A smoke ring? That'll cost you $280 billion
"Has Philip Morris caught masochism of the throat? No, say its rivals: it is just trying to lock in its half-share of the American market. Tight marketing rules would hurt lesser brands more than they would Marlboro."

The 7 myths of highly effective plaintiffs' lawyers
"Frederich Hayek in his opus, The Constitution of Liberty, wrote that "[t]here is probably no single factor which has contributed more to the prosperity of the West than the relative certainty of the law..." In the year 2003, American civil justice promises only the certainty of expense and a strange, relative sense of justice."

The class action industrial complex
"Congress tried to crack down on the class action racket in 1995. Today shareholders suits are bigger than ever, fed by a cozy cabal of lawyers, unions and public pension funds. The only real loser is you."

Injustice at the Justice Department
"Republicans are criticizing John Kerry's choice for vice president because of John Edwards' trial lawyer background and connections. I'm hoping that maybe someone in the Bush administration will take this criticism to heart and do something about the most egregious trial lawyer operation of all time - the Bush administration's Department of Justice."

Stingy Links: Management

Always on the job, employees pay with health
"The traditional career, progressing step by step through the corridors of one or two institutions, "is finished," said Dr. Richard Sennett, a sociologist at New York University. He has calculated that a young American today with at least two years of college can expect to change jobs at least 11 times before retirement."

From gluttony to class warfare
"For corporate chief executive officers and hedge fund managers, the good times never stop rolling. Twenty years ago, CEOs made an average of 40 times more than the factory floor worker. Last year it was 400 times more, and is now climbing to a multiple of 500."

Governing in the goldfish bowl
"Many companies are reexamining the way they view investor relations and corporate communications. According to a number of directors, CEOs, and consultants interviewed for this story, some outfits need to do a far better job of understanding and addressing the concerns of institutional shareholders. They have no choice."

Toward better boards
"A survey of the governance practices of 131 of Canada's largest companies was undertaken by the coalition last year. The results identified 35 companies with what the coalition considered "high governance risk" for things like a lack of independent directors, stock-option abuse and lack of disclosure. A followup survey of 33 companies this year found improvements in at least 20 of those companies, with one high-risk company improving so dramatically the coalition now considers it a low governance risk."

The uncertain return of the hero boss
"Has Donald Trump saved American capitalism? Investors in the real-estate mogul's duff Atlantic City casino business are unlikely to agree. They are getting stiffed with a low share price and a probable debt restructuring. But Mr Trump's small-screen triumph as a reality-TV star is helping to revive interest in a figure not seen in public since the bursting of the stockmarket bubble in 2000-01: the celebrity boss. Even as erstwhile heroes of capitalism are led away in handcuffs, Americans seem to be flirting with the idea of falling in love with the boss all over again."

Voting 'No' on shareholder democracy
"Another company with dual classes of stock is Berkshire Hathaway Inc., run by the legendary Warren Buffett. The last thing in the world that even second-class shareholders of Berkshire want is shareholder democracy. They're buying into Buffett's benign dictatorship, not into pro-rata shares of the wisdom of any idiot who buys in too. They're delighted to have no say in the company, as long as they are assured that other shareholders have no say either. That is far from nuts."

Stingy Links: Markets

Value will out, but not by a lot
"Laurence B. Siegel, director of investment policy research at the Ford Foundation, has great investment instincts. But he knows too much to follow them blindly, preferring instead to temper instinct with disciplines developed over a lifetime of experience in delving deeply into the best investment research available."

Is investing in stocks worth the risk?
"Compared to cash, bonds and even the canned goods in your pantry, stocks come out on top -- until you consider the risk."

Insuring for the future?
"Lloyd's is trying to make its business practices as sleek as its building. But will that be at the expense of the characteristics that make the market so distinctive?"

Inflated expectations
"If money is too cheap, then rates of return will fall, companies will tend to use capital rather than labour, and people will spend money on riskier assets; on things that have little to do with underlying economic growth; and on things that are in short supply. As it happens, this is a decent description of America in the past few years. Companies have been slow to hire workers even as the economy has bounded along; and workers' share of national income is very low. The low cost of capital has, moreover, encouraged speculation in risky assets, such as emerging markets, or - closer to home, as it were - property."

An alternative inflation index
"Browse the Index components and if you are old enough to remember, ponder how prices have evolved over 36 years."

An eerie calm
"Many financial catastrophes have been caused by selling options. The most famous came in 1995, when a rising star at a British bank sold 34,000 options on Japan's Nikkei 225, driving implied volatility on the world's second-biggest stockmarket from 22% to 11%. But share prices plummeted after the Kobe earthquake, volatility soared, and the bank went bust. The man's name was Nick Leeson and the bank was called Barings."

Realistic rewards
"The return on equities over the next decade is likely to be much lower than most investors expect"

Of course investors can beat the market
"EMH also has a great paradox. In order for their scenario to occur then people will have to believe there are profit opportunities, but what EMH in effect says is that there are no profit opportunities! But if people believed there were no profit opportunities then there would be no one who would act to correct the discrepancy between fundamental value and current price. So a necessary -but not sufficient- condition for EMH to be true is if investors believe it is not true. The more people believe in it, the less true it will be. EMH must assume that people are completely irrational."

Pop goes the bubble?
"Other economists aren't so sure. For one thing, the economy's recent health has been supported by a hot housing market. Refinancing put a ton of cash in consumers' pockets, and high home values made people wealthier. And several industries, from construction to furniture to finance, rely heavily on the housing market. And prices don't have to plunge to make a noticeable impact on these sectors of the economy."

The 'recovery' is living on borrowed time
"The Fed thinks the economy is growing on its own. I think people are using their homes as ATMs. What I don't know is when the bubble will burst."

Epic struggle looms as science tackles the market
"Not everybody is so enthusiastic. ''Academics are stock market technician/chartists whose fields of study are prices, markets and market price histories, not corporate nitty-gritty and the underlying characteristics of securities,'' says Martin Whitman, chairman of money manager Third Avenue Management LLC in New York. ''That does not seem to have much to do with what Third Avenue is, and what Third Avenue is trying to do,'' Whitman wrote in a recent shareholder report."

Stingy Links: Munger

Master's class
"I am more than skeptical of the orthodox view that huge diversification is a must for those wise enough that indexation is not the logical mode for equity investment. I think the orthodox view is grossly mistaken. In the United States, a person or institution with almost all wealth invested long-term in just three fine domestic corporations is securely rich. And why should such an owner care if at any time most other investors are faring somewhat better or worse? And particularly so when he rationally believes, like Berkshire, that his long-term results will be superior by reason of his lower costs, required emphasis on long-term effects, and concentration in his most-preferred choices."

Stingy Links: Stocks

The benefits trap
"Workers bear the brunt of it. Bill Luoma, head of the Mahoning Valley Steelworkers Retirees Council, which counts bankrupt LTV retirees among its members, says that with their health insurance gone, many have stopped visiting doctors other than for emergencies. For companies struggling to compete in the global economy, carrying those burdens themselves is like strapping on a 200-pound weight to run a 40-yard dash. But to shed them is to leave decades of workers devastated. In the end, someone will have to pay. The only question is who."

The coming pension crisis
"Allegheny Technologies is on a roll. Thanks to rocketing prices for its specialty steel and some cost-cutting moves, the Pittsburgh-based company has seen its stock climb 172% in a year. But those expecting nothing but blue skies ought to consider this sobering fact: What it owes its workers in pension payments exceeds what the whole company would be worth in liquidation."

Biggest leveraged buyout ending as a costly fizzle
"The greatest leveraged buyout ever is ending, not with a bang but with a whimper of loss. After 15 years of scrambling and pain, Kohlberg Kravis Roberts is through with its investment in RJR Nabisco and its afterlife of ownership of Borden Chemical."

Flight into the red
"It's a basic problem of supply and demand: too many seats and too few passengers willing to pay full-fare prices. During the last downturn a decade ago, carriers lost more than $13-billion. Since the Sept. 11 terrorist attacks, airlines have lost $18-billion and project a loss of $10.7-billion more this year, counting the effects of a war with Iraq. That's enough to wipe out the industry's cumulative profits since commercial aviation took wing at the end of World War II."

Welcome to the bankruptcy economy
"The final costs of a bankruptcy economy aren't simply measured in cash, however. Workers who don't trust management at many private companies will believe even less in management promises. Workers in the public sectors who thought their pensions were guaranteed will go through a rude and bitter awakening. Social Security recipients will get less back just as current workers are asked to put more in. And taxpayers will get socked with the bill and be left with more anger and cynicism."

Buffett of the North
"Insurer Fairfax Financial has been able to compound its book value at 31% annually since 1986 because of the exceptional investing abilities of its managers. Unfortunately, some recent questionable acquisitions have weakened its balance sheet significantly. Now Fairfax is priced at a huge discount to its sector, making it a high-risk, high-reward investment."

Pensions on a precipice
"The threat by UAL, parent of struggling United Airlines, to walk away from its four pension plans has set off shock waves throughout the airline industry."

The sorry saga of KHI
"The infamous fiascos at Bre-X Minerals Ltd., YBM Magnex Inc. and Nortel Networks Corp. have some new company. The rise and fall of a little-known Halifax company, Knowledge House Inc., is turning into one the largest, messiest morasses of securities litigation in recent memory."

Grey Goose Billionaire's second act
"Frank can certainly afford to indulge in his fairway fantasies. The Grey Goose sale--the largest in liquor business history for a single brand--solidified his spot in the booze business pantheon. It also will land him on the Forbes 400. His personal proceeds from the deal, plus a 75% stake in Sidney Frank Importing, make him worth at least $1.6 billion."

The next wave of airline bankruptcies
"The five characteristics that I used to define the dynamics of the European low-cost air travel market apply to the future of other industries that sell commodity products as well. In an industry like that, companies must run as fast as they can just to stay in place. Price pressure from new entrants to the industry with lower costs are a constant threat. Since part of those lower costs is simply a result of newness, investors in these sectors need to reverse the conventional wisdom that gives the edge to the established companies in that market."

Giant slayer
"Albert Norman has made a minicareer out of blocking Wal-Mart. He has evidently had some success."

Costco has its own formula for success
"Munger considers Sinegal one of the 10 best retailers of the past century. He'll need all his smarts to keep Sam's at bay. For seven of the first eight months of this year, Costco's U.S. same-store sales, a key measure of retail growth, have outpaced Sam's, says retail consultant Management Ventures."

Stingy Links: Tilson

The 80-cent dollar dilemma
"Stocks trading at a 20% discount to intrinsic value will generally follow the market if it takes a tumble. But selling good companies trading at such a discount isn't an acceptable option either. What's an investor to do? Whitney Tilson shares his strategy."

The joy of cash
"Value investor Whitney Tilson scours the investment universe regularly, but says he's found few juicy pitches. So he coolly bides his time and holds onto his cash. Should he worry? Not according to Warren Buffett and other superinvestors."

The tech stock opportunity
"Despite my reservations about the tech sector, I actually think that it is -- or at least should be -- fertile ground for value investors for the simple reason that most of the investors in the sector are irrational, momentum-driven speculators."

The tech stock discount
"Whitney Tilson argues that tech stocks should trade at a discount, not a premium, to the earnings multiples of the market averages, and consequently, warns that tech stocks are valued at more than twice their fair value today."

Stingy Links: Value Investing

Lots of cash, little to buy
"What sets the cash-heavy funds apart? Many of them, including FPA Capital Value and Longleaf Partners, are value investors that look for good, and even troubled, companies whose share prices have fallen below their actual worth. These funds found a wealth of opportunities during the sharp market downturn in 2001 and 2002, and reaped rich rewards in the strong recovery last year. But cash positions have ballooned this year as investors continue to throw money at the top value performers despite a chorus of warnings from their managers that prices are now too high and that little fits their criteria."

Keep your eye on a few basics
"Although investing is a subtle and complicated endeavor, everyone can benefit from a simple set of rules and principles."

Dividends: getting paid to wait
"The picks we selected via a computer screen all meet the following criteria: annualized dividend growth of at least 10% over the past three years, a market capitalization of at least $1 billion, 15% return on equity in the latest fiscal year and estimated 2004 payout ratios--indicated annual dividend divided by estimated earnings per share--below 0.60. Such metrics suggest that these companies can afford to pay a higher dividend at some point in the future."

Identifying franchises
"So I think the answer is that franchises are different now, but I don't think they're any less present. And people aren't as good at managing them. So the irony is that where these franchises are concerned, where you've got a dominant market position, that in a global world -- because it's almost impossible to dominate big global markets (the example people got undermined are the auto companies) -- but in a big global world, you have to think locally. Because the only markets that you're going to be able to dominate are local markets."

Not just any dividend payer
"S&P screens for the most attractive -- stocks with high yields, a history of payout growth, and potential share-price gains"

A fund for the long-term worrywart
"Benjamin Graham was the mentor of Warren Buffett and the granddaddy of the school of investing that says cheap stocks will inevitably deliver greater returns than expensive ones. Barbee is another disciple. He's loath to pay more than about eight times earnings for a stock -- the market average is 26 -- and he never pays more than book value, or the net asset value of a company. The market happily pays nearly five times book."

Patient Capital Management Q2
"Although more than four years have passed it seems like nothing has actually changed. Then as now equity returns in the previous year had been in the double digits and stock prices were expected to grow to the sky. Then as now enthusiasm for equities was very high. Investors and advisors were very bullish, mutual fund cash positions were very low and market commentators were touting the promise of long-term equity returns. As well, surprisingly nothing has really changed with respect to the price levels of the major North American indices. They are at essentially the same levels today as in the summer of 2000."

Value Investing 101
"Warren Buffett and Walter Schloss are not the typical guest lecturers at a business school class. Then again, the Columbia University Graduate School of Business isn't just any business school, and professor Bruce Greenwald's class is anything but ordinary. Greenwald teaches Columbia's value investing course and also authored a book on the topic. In part one of this five-part series, Greenwald shares with Fool contributor Matt Logan the three steps of value investing."

Stingy Links: Whitman

Third Avenue Q3
"A radical change in thinking seems needed if GAAP are to be made more sensible, and even more useful as an analytical tool. Given its present direction, GAAP increasingly impose unneeded and counter-productive burdens on American corporations, American management and American capital markets. GAAP, first and foremost, ought to be geared toward meeting the needs and desires of creditors rather than the needs and desires of short-run stock market speculators, who are vitally interested in day-to-day stock market price fluctuations. Currently, GAAP are directed increasingly toward meeting the needs and desires of short-run stock market speculators. This is accomplished by setting up increasingly rigid sets of rules designed to meet an impossible goal: have periodic statements of cash flows from operations, earnings and earnings per share be as accurate (or truthful) as possible."

Stingy Links: World

Roadblocks to small business curb growth
"The report makes a devastating estimate of potential gains from regulatory reform. It split countries studied into four equal groups, ranked according to ease of doing business. In countries where it was least difficult to do business, the economy grew an average of 2.6 per cent a year over the past decade. At that rate, economies can double their size in 27 years. But in countries that make it hardest for entrepreneurs to operate, the growth rate was only 1 per cent, a snail's pace that takes the doubling time to 70 years, roughly three generations."

Dead firms walking
"Japan's unproductive service industries are holding back its improving economy from achieving even better performance"

The sun also sets
"Never before have real house prices been rising so fast in so many countries"

For richer or for poorer?
"this may be politically convenient for Mr Putin: regional governors who cannot keep up with the payments will become unpopular, making it easier for the Kremlin to dislodge them. That is in line with the general trend of Mr Putin's federalism, which has been to put more of the burden for services on to the regions while concentrating more power and supervision at the federal level."

Consuming passions
"As the American consumer tires, can shoppers in Europe, Japan and China take up the burden?"

Safety matters
"First they steal our jobs, then our credit-card numbers. Those seem to be the fears inspired by outsourcing back-office financial-services work to India. In both Europe and America, the argument that outsourcing costs jobs at home still has political resonance. But it is making way for another bogey: that India cannot offer the standards of privacy and data protection that consumers expect at home. Outsourcing is dangerous and perhaps even illegal."

Emerging markets, emerging risks
"Investors are once again buying emerging-market debt. A perilous punt, if ever there was one"

Stingy Links: Zweig

The way of the calm investor
"If getting rich is supposed to make you feel good, why are so many investors so agitated so much of the time -- even when the market goes up?"

Frugally Yours,
Norman Rothery
ISSN 1499-2787

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