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The Stingy News Quarterly (Q3/2005)

The Best of Stingy Links

Stingy Links: Academia

The brains business
"This survey will offer two pieces of advice for countries that are trying to create successful higher-education systems, be they newcomers such as India and China or failed old hands such as Germany and Italy. First: diversify your sources of income. The bargain with the state has turned out to be a pact with the devil. Second: let a thousand academic flowers bloom. Universities, including for-profit ones, should have to compete for customers. A sophisticated economy needs a wide variety of universities pursuing a wide variety of missions. These two principles reinforce each other: the more that the state's role contracts, the more educational variety will flourish."

Stingy Links: Accounting

Watchdog sniffs accounting firms
"As a result of the inspections of 23 accounting firms, four firms have had restrictions placed on their business until they improve their auditing practices. Three firms (none of which are named in the report) have been barred from accepting new auditing work from publicly traded companies, while certain partners in a fourth firm will no longer be permitted to perform audits on publicly traded companies."

A volatile brew
"No more will investors be led astray by earnings that don't reflect the value of options to workers. Um, not so fast. Turns out the FASB didn't quite mandate the method managements use to figure out option costs, giving them wiggle room. Hence many companies have rewired the black box of accounting, the options pricing model, to ease the earnings hit--chiefly by tinkering with projected volatility assumptions of the underlying stock."

Investing in the dark
"One of my chief complaints about the trusts is that a majority of them don't seem to be setting aside enough money for maintaining their assets when it comes to calculating how much cash is available for unitholders. It didn't take some trust managers long to figure out that by underestimating maintenance needs, they could overstate distributable cash and get a higher selling price for their units. Recognizing that this is a problem, the CSA stated that it "might" require companies to improve disclosure on the issue in their prospectuses. The bigger problem, aside from the word "might," is how they are going to know who does and does not comply with this guidance. The truth will only be known years later when the selling shareholders have vanished and remaining investors have no recourse."

Wild west accounting
"If you steal a Canadian's wallet, you could end up in jail. But if you steal a Canadian's retirement savings, little is usually said or done about it. Unlike in the United States, we are not seeing any exemplary prosecutions for securities fraud in Canada. And without any widely perceived deterrent, we are virtually encouraging the scam artists to continue taking advantage of Canadian investors."

Stingy Links: Buffett

How Buffett accumulated $40b
"Warren Buffett celebrates his 75th birthday next week. The legendary investor is currently worth some $40b and is the second richest person in the world. While his friends and family struggle to think of a suitable present, mere mortals like you and me probably ought to reflect on how he accumulated so much money."

Invest like Warren Buffett
"If you're looking for a guide to help you navigate this brutal bear market, can we suggest a candidate? He's folksy and a bit old fashioned, the type of person who likes nothing better than relaxing over a Cherry Coke and a Dairy Queen hamburger. He's also hopeless when it comes to technology and he insists on living in the middle of nowhere (Omaha, Neb. to be precise). Still, we think he's got potential. For one thing, he's already made a few billion dollars in the stock market. Better yet, he's survived and even thrived during previous market downturns."

Is Warren ever wrong?
"So did Warren somehow, in some fashion, conjure up this heatwave? It's hard to believe, but he really does seem to be scarily in the right place at the right time. It's likely that this week, with temperatures nearing 120 degrees in places like Phoenix, the nation will exceed all previous energy consumption - and the investor-owned utilities will be supplying it. All it takes to make money, it would seem, is do whatever Buffett says he's doing."

Stingy Links: Crime

Sharks in the housing pool
"Deed thieves, property flippers, equity strippers -- these con artists are duping banks and homeowners, and there are lots of them"

Stingy Links: Dividends

Buy cheap and get paid to wait
"Remarkably, the most overlooked aspect of dividends is the power of compounding. Depending on your starting point, dividends have made up as much as 60% of the total return of the S&P 500 in the last 100 years. Additionally, because of recent tax code changes, dividends now offer a competitive after-tax return to many fixed-income instruments, especially considering the present low-yield environment."

Stingy Links: Dorfman

Schnitzer, Chevron, Reebok pass '15-15' screen
"The concept is pretty simple. These stocks show earnings growth of 15 percent or better for the past five years. And they sell for 15 times earnings or less. Hence the name 15-15. This year only 6 percent of the 2,448 U.S. stocks with a market value of $500 million or more passed the screen."

Eight big-cap stocks to buy
"Small and mid-sized stocks are my investment territory, but many people like the relative safety and stability of large stocks. Accordingly, once a year I offer my opinion on the 20 largest U.S. stocks by market value. "

Occidental and Ryland return to sane portfolio
"I designed the Sane Portfolio in August 1999 as a middle-of-the- road, slightly conservative portfolio. Since then, I have refreshed its holdings each August. For the past six years the average 12- month return on the Sane Portfolio has been 14.9 percent, compared with 0.1 percent for the Standard & Poor's 500 Index. All performance figures in this article are total returns including dividends."

Chubb, U.S. Steel look cheap based on cash flow
"The corporate scandals of the past four years have made a lot of investors cynical about reported earnings. Earnings can be manipulated -- and even when they aren't, they can be unintentionally deceptive. No single measure of corporate performance or stock value is perfect or totally tamper- proof. That's why many professional investors look at stocks using several different measures. One useful lens is the price-to-cash-flow ratio."

Stingy Links: Dreman

Dreman savors Wall Street's lemons
"From an early age in Winnipeg, Canada, Dreman was influenced by his father, a commodities trader who at the dinner table would talk about how too many people voicing the same opinion often wound up getting the market wrong."

The problem with indexes
"Benchmarks used to gauge your portfolio's performance are severely flawed. Know their drawbacks before judging how you did."

Stingy Links: Fun

Life without a paycheck
"And look at your own life. Haven't you dreamed, at least once, of setting out on your own path while you're still young enough to enjoy it?"

Stingy Links: Funds

Winning the active management game
"Swensen offers advice to help individual investors triumph over very daunting odds."

Stingy Links: Government

How to create a shortage
"Legislatures rarely repeal bad laws just as presidents refuse to admit that their military adventures are mistakes. The oil and gasoline price controls of the 1970s began with an executive order in 1971 (as part of Nixon's "Phase One" wage and price freeze that accompanied the collapse of the Bretton Woods international monetary system), and were around for a decade before they were eliminated. One hopes that Hawaii's new system will not be in existence that long, but don't be surprised if legislators continue to ignore the free market and spit into the wind."

Not in my backyard
"Extensive damage wreaked on Gulf of Mexico oil refineries last week by Hurricane Katrina has spurred talk of spreading out the nation's key oil refineries. But the word around the industry is that oil companies would just as soon keep taking chances on occasional hurricane damage rather than take on the hurdles of exorbitant costs and regulations that accompany new construction."

Can government build cities?
"A disturbing trend after Katrina was summed up in George Bush's promise to have the federal government completely rebuild the Gulf Coast better than before the storm, and do so with taxpayer money. Can we really expect government to create quality cities using redistribution, government programs, and regulations?"

Stingy Links: Graham

Ben Graham might like LandAmerica and 4 others
"Benjamin Graham -- professor, hedge fund manager, author and bon vivant -- is widely considered the father of value investing. Graham died in 1976. Were he alive today, I think he might like such stocks as LandAmerica Financial Group Inc. (LFG) and National Western Life Insurance Co. (NWLIA)."

Stingy Links: Health

Little to fear but fear itself
"Perhaps the true tragedy of Chernobyl is that the biggest observable health impact so far has been on the mental health of the millions who have been told they are at risk. Many of these people received radiation doses no larger than they would get on a holiday in a place such as Denver, where the altitude increases exposure to cosmic rays, yet they have spent their lives anticipating illness and incapacity, and this has translated into such undesirable behaviours as drug abuse and long-term dependency on the state."

Stingy Links: Indexing

First style-based international ETFs
"Barclays Global Investors announced today that the iShares MSCI EAFE Value Index Fund and the iShares MSCI EAFE Growth Index Fund began trading on the New York Stock Exchange. Each fund's expense ratio is 0.40%. These exchange traded funds (ETFs) are the newest additions to the largest international ETF product line in the U.S."

Stingy Links: Management

Top 25 Boards In Canada
"Canadian directors have been cleaning up their act since the collapse of WorldCom and Enron nearly five years ago sparked a North American corporate governance revolution. While governance was once merely a footnote in a company's annual report, now many of Canada's largest corporations brag about their independent directors, the top-notch financial experts sitting on their audit committees and their beefed-up board oversight."

Is your boss a psychopath?
"Odds are you've run across one of these characters in your career. They're glib, charming, manipulative, deceitful, ruthless -- and very, very destructive. And there may be lots of them in America's corner offices."

The 5 most outrageously overpaid CEOs
"Here's the pantheon of execs whose paychecks soar while their companies suffer. Also: 5 who produce stellar results for a comparative pittance."

Stingy Links: Markets

Is this a lifetime selling opportunity?
"Today, on the other hand, it seems as if investors had thrown any caution into the wind. Cash returns are so low - courtesy of Greenspan's ultra easy monetary policies that the entire world is 'investment mad'. Investors all over the world are hunting for investment opportunities the way gold diggers were rushing to California during the great gold rush of the late 19th century."

Perils at the pump
"Oil prices hit yet another record this week, on fears of political instability in the Middle East and refining problems in America. So far, the world economy has managed to chug along without much ill effect. But how long can consumers go on paying ever more at the pump without cutting back elsewhere? And why aren't high prices bringing new supplies to market?"

The inevitable crisis
"I am not a pessimist by nature and I have a low opinion of doomsayers who regularly predict the next Great Depression. But there is clearly a crisis looming on the horizon, the only unknown being its magnitude. This crisis will come from the south - the US - and we know why."

What they won't tell you about capitalism
"Thomas DiLorenzo has written a masterpiece. This book should be required reading for every college freshman to immunize him against the anticapitalist drivel he will get in his history and economics classes. It should be required reading for every college graduate to destroy the myths of capitalism that he was exposed to while a student. But this is not just a book for students, for every teacher, politician, and minister needs this book as well. For those of us who are already true capitalists, we have not only a great reference source, but a great weapon in our arsenal against all varieties of socialism, interventionism, and anticapitalism."

Big jobs that pay badly
"Most of us work hard for a living. And if we're lucky, we're well compensated for the effort. But there are some jobs you should take only if you really love the work because the investment you make to get the job and the hours you keep aren't necessarily commensurate with what you earn."

Beer war
"It used to be that if you brought a case of cheap beer like Lakeshore Creek to a party, you were considered, well, cheap. Not so anymore. The value beer market is booming--consumers these days seem less concerned about image, and more about value."

Naked shorts' long shelf life
"What if they passed a law and no one followed it? Not one of those bizarre, outdated laws you hear about -- like in Maine, where people are required to bring shotguns to church -- but a brand new law with an entirely sensible goal, like keeping people from selling equities that don't exist."

Price gouging saves lives
""Price gouging" is nothing more than charging what the market will bear. If that's immoral, then all market adjustment to changing circumstances is "immoral," and markets per se are immoral. But that is not the case. And I don't think a store owner who makes money by satisfying the urgent needs of his customers is immoral either. It is called making a living."

The perfect storm
"There is arguably a drift towards greater risk-taking overall, especially when interest rates are low, so the system has not become any safer and may in fact be less safe. Banks now securitise and flog to third parties their plain vanilla mortgages, keeping on their books the more complicated and less liquid assets that are harder to sell. When interest rates spike upwards, asset prices crash or for any other reason lots of investments have to be unwound in a hurry, banks may be looking for liquidity rather than supplying it to others to keep markets orderly."

Stingy Links: Munger

A must-read for Berkshire fans
"A large, heavy, coffee table book, Poor Charlie's Almanack is part fanzine, part analysis, and a lot of pure Munger. It's an eye-catching, cleverly designed volume, colorfully illustrated and sporting a breezy style and easy-to-digest layout. Its creation was clearly a labor of love for the participants. The title is, of course, a play on Poor Richard's Almanack, the 18th century almanac written and published year after year by Benjamin Franklin, one of Munger's heroes."

Stingy Links: Real Estate

When booms go bust...
"A look at the not so distant past reveals numerous examples of cities that went through housing busts -- followed by years of falling prices. Some have never fully recovered."

Mortgage insurance: homebuyer beware
"The Crown corporation with the lion's share of the mortgage insurance business is making a killing for Ottawa. And Canadians are paying through the nose."

Is housing too expensive? Blame the government
"Elementary economics tells you that in a competitive environment, the price of a new house should equal: the price of land + construction costs + a reasonable profit for the developer. But in most cities, that sum is not even close to what buyers are paying."

Stingy Links: Stocks

Extinction of the predator
"How merger mania has been a disaster for the world's great car manufacturers"

Bic sells 100 billionth pen
"It was also one of the first examples of globalization. You can find these pens everywhere because Bich had a modern concept of low-cost, global marketing. They invented or adopted many of the principles we talk about now, but at a very early stage."

The taming of the screw
"For centuries now the screw has held things together, and for almost as long it has been frustratingly inept at its central purpose. Concrete cracks when it is punctured by a screw. Plastic creeps away from the pressure, sliding down the threads so that even a tightened screw loosens almost instantly. Carmakers have to mold brass inserts into plastic parts to accept screws; otherwise they might loosen and cause a dreaded rattle. Kenneth LeVey has a better idea. A product development director at Illinois Tool Works, the nation's biggest screwmaker, he has reinvented what the company dubs the threaded fastener in a way that lets it grip tight where it used to let loose--and compete with cheaper screws made by offshore rivals."

When to sell a stock?
"So when should you sell? The best answer was provided by the elegant Philip A. Fisher, who died in 2003 at the age of 96 after a 74-year career as a money manager. In his important book, "Common Stocks and Uncommon Profits," published in 1958 and currently available in a paperback edition, he wrote, "It is only occasionally," he wrote, "that there is any reason for selling at all.""

Six 5-star stock ideas from master investors
"Investment companies can themselves make great investments. These businesses often benefit from significant managerial ownership and much longer investment horizons than mutual funds subject to quarterly evaluation by "consultants" dare pursue."

Beat the S&P with strong consumer brands
"Peter Lynch, in the book One Up on Wall Street, refers to these companies as "The Stalwarts." Jeremy Siegel, in one of the great investment books of the year, The Future for Investors, calls them "corporate El Dorados." Warren Buffett has long preached the virtues of these types of companies having "economic castles protected by unbreachable moats.""

America's airlines, flying on empty
"The benefits of Chapter 11 are supposed to be avoiding the unnecessary liquidation of businesses, and the job destruction and total loss to creditors this can involve. But in the airline industry this emergency ward for stricken companies has turned into long-term intensive care, inadvertently wreaking further damage on rivals. In mid-October tougher new rules for Chapter 11 will come into force, so troubled airlines have an incentive to go bankrupt soon, to benefit from today's more benign regime."

Beyond bling
"Claire's Stores meets five of those six criteria and has two other points of note. It has increased its dividends by at least 10% a year, on average, over the past 12 years, and it has no long-term debt. It has certainly made money for its shareholders. But should we care particularly about one smallish company, whose main stock in trade is selling flash fake jewellery?"

Wal-Mart becomes a lifeline
" When the hungry man threatened to get his gun if Wal-Mart's doors didn't open the day after Hurricane Katrina smashed through town, store manager Ray Mathews knew he had trouble. The storm had shattered skylights and flooded the west end of his Wal-Mart Supercenter in Columbia, Miss., 20 miles north of the Louisiana border. The lobsters had died, and the meat and the vegatables were spoiling as the power was out. Mathews couldn't reach most of his 400 workers, either. They were largely stranded when the storm ripped open their homes, knocked down trees, and shut down area gasoline stations. Now, desperate local residents who depend on the Wal-Mart in this remote town were knocking loudly on locked doors."

Stingy Links: Taxes

The estate tax - does it really matter?
"How many families are able to maintain efficient and successful portfolio management for generations at a time? And how likely is it that the third and fourth generations of unearned wealth will be happy with distribution rates of a couple percent? Toss in a decade or two of lax or unlucky portfolio management and a few generations of spendthrift heirs, and familial wealth shrinks faster than the prawn plate at a Cajun wedding."

Stingy Links: Tilson

Blue-chip bargains
"In fact, as the following chart from venerable investment manager GMO shows, higher quality companies -- which they define as those with "high profitability, stable profitability, and low debt" -- are at their lowest valuations ever relative to the overall market"

Stingy Links: Value Investing

Omaha's other oracle
"Although he operates with a decidedly lower profile than his Omaha neighbor Warren Buffett, Wally Weitz's investment record speaks volumes. His flagship Weitz Value fund has returned an average 15.7% per year for the 10 years through June 30, vs. 9.9% for the S&P 500. Since founding Wallace R. Weitz & Co. with $11 million in assets in 1983, Weitz now manages more than $7 billion. Weitz is finding plenty to invest in these days"

Clipper Semi-Annual
"In the long struggle between mice and men, the rodents are winning. Their victory will create lower costs for most investors and lower income for some humans."

Cash is trash
"What to do with all that cash? Some value fund managers, flush with an influx of new money from clients, are letting it pile up rather than investing it in value stocks they view as too pricey. While they wait for a better day, other value managers say letting money sit around in cash is sinful, and they swear good buys still can be had."

Betting against the crowd
"For contrarians like Wadhwaney, 51, investing is a matter of avoiding manias and searching instead for bedraggled castoffs that are cheap precisely because the In crowd won't touch them. "I don't buy prime merchandise," he says. "I buy stuff that's fraught with discomfort. I buy some terrible things." Terrible things that produce terrific returns."

Sequoia Fund shareholders' meeting
"I would add that while we have been pretty good at avoiding mistakes of commission, we have made significant errors of omission. I think that if I had to point to one big mistake we made, it was putting undue emphasis on possible macro economic problems and overreacting to some that seemed overwhelming at the time but were dealt with reasonably well."

Olstein Annual
"We believe that any fund that doesn't admit to being a value fund (seeks to buy undervalued companies) is by admission willing to buy overvalued companies. Funds not paying attention to value (growth at any price, momentum, crowd psychology, etc.) are relying on the foolishness of other investors to make money and we believe only a select few can be successful at this greater fool's game. Admittedly, funds that are capable of consistently outguessing the psychology of crowds will probably have the highest returns. However, we believe that a fund that buys only growth companies at any price is playing Russian roulette with its shareholders' money."

Investing in value stocks
"The advice that we always give is to focus on the long term and to think as a business owner when you put money to work in a company. Don't just think of a stock as a piece of paper or a ticker symbol."

FPA's Robert Rodriguez likes cash
"If I look at the marketplace in general, we see the market as being very flat in valuation. So therefore, the undervaluation in small- and mid-caps has effectively been eliminated in the last five years because of their superior performance vs. large-caps. There may be some value in the micro-caps. But we still think that the earnings expectations are still overstated on average. We have been saying for a while that earnings in large-cap stocks will be disappointing, and you are starting to see that now."

Stingy Links: Whitman

Third Avenue Q3
"A few months ago, I signed an agreement with Wiley to update the 1979 book of which I was the senior author, The Aggressive Conservative Investor. The updated version ought to be out in November."

Stingy Links: World

Boom and bust at sea
"China's astonishing rate of growth cannot last forever. Indeed, spot rates for bulk carriers in Asia recently hit a two-year low after falling by half from a peak in March as Chinese demand has cooled a bit. And the more slowly growing trade across the Atlantic is vulnerable to any slackening of economic activity in Europe or America. If growth and trade stumble while shipping lines are piling on extra capacity, the result could be empty holds, plunging shipping rates and rapidly sinking profits."

Oil and the global economy
"The fact that America's economy has been able to shrug off higher oil prices mainly as a result of a housing and mortgage bubble is hardly a comforting thought. What happens when house prices flatten, or even fall? Consumers will then feel the full force of dearer oil. Come to think of it, a further spike in oil prices could even be what pops the housing bubble, if it unsettles consumers enough. So far, the rising oil price has done little harm; but worse may well be on the way."

After Fahd, Abdullah. But then?
"With the death of Saudi Arabia's ailing, octogenarian King Fahd, his only slightly younger half-brother, Abdullah, takes over the desert kingdom. Though things may continue much as before in the short term, the new ruler will have to cope with strong - and conflicting - pressures for change"

The myth of China Inc
"Fears that Chinese firms are acting as the commercial arm of an expansionist state are thus belied by a more complicated and disorderly reality. The real reason to fear China's overseas expansion is quite different. Because Chinese firms have grown up in an irrational and chaotic business environment, they may export some very bad habits."

For jihadist, read anarchist
"Bombs, beards and backpacks: these are the distinguishing marks, at least in the popular imagination, of the terror-mongers who either incite or carry out the explosions that periodically rock the cities of the western world. A century or so ago it was not so different: bombs, beards and fizzing fuses. The worries generated by the two waves of terror, the responses to them and some of their other characteristics are also similar."

ISSN 1499-2787

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