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The Stingy News Quarterly (Q3/2006)

New @ StingyInvestor

Canada's best income trusts
"A year ago we decided to guide our readers through the murky world of income trusts. To shed some light on the subject, we ranked 100 of the largest income trusts in our first annual All-Canadian Trust Guide. We used entirely objective criteria and assigned each trust an A, B, C, D or F grade depending upon how its numbers stacked up. We figured that our top-rated trusts might provide you with a few good starting points for your own research. We're pleased to say that our humble efforts yielded solid returns. Our top-of-the-class trusts - those rated either A or B - gained an average of 29.7% (and that's without reinvesting distributions) since we did our ranking. We think most investors would be delighted with nearly a 30% annual return."

The Best of Stingy Links

Stingy Links: Academia

A great company can be a great investment
"A classic investment mistake is to confuse a great company with a great investment, since a company's well-known virtues are presumably already factored into the price of the company's stock. We test this "mistake" by looking at the stock performance of the companies identified each year by Fortune magazine as America's most admired companies. Surprisingly, a portfolio of these stocks outperformed the market by a substantial and statistically significant margin, contradicting the efficient market hypothesis."

The limits to learning
"Everybody thinks they are experts at learning. After all, most of us have gone through years of university education and emerged on the other side with a piece of paper 'proving' our ability to assimilate information. However, I'm not concerned with book learning; I am far more interested in learning from our own errors and mistakes or, somewhat more accurately, why we often fail to learn from our own past failures."

Stingy Links: Brokers

Rob's on-line brokerage rankings
"Costs are the most important factor in this eighth edition of the Globe's broker ranking, and the reason is that they're uppermost in the mind of do-it-yourself investors. In a survey conducted recently on the website, a little more than one in three of the 1,641 participants ranked cheap commissions and fees as the top attribute of an on-line broker. No other attribute was even close."

Clients deserve to know annual rate of return
"A Toronto financial consultant is leading a campaign to have investment companies fix a ridiculous deficiency in the way they show clients how much money they're making or losing."

The time's come for full disclosure on return rates
"Certainly, the vast majority of firms do not disclose to clients how much money their portfolios are making or losing each year. This is scandalous when you think about it and yet another example of how the investment world sometimes treats its clients like infants."

Stingy Links: Buffett

Would you like that $11 billion in twenties?
"On July 3, Warren Buffett drove himself downtown, walked into the cavernous and nearly deserted central branch of U.S. Bank in Omaha, descended a flight of steps, and opened his large safe-deposit box. He took out a 1979-dated certificate for 121,737 shares of Berkshire Hathaway A stock, on that day worth about $11 billion - roughly one-quarter of his Berkshire fortune. Driving back to his office, he pondered the next step: getting that certificate and a few others (worth only tens of millions) to Wells Fargo in Minneapolis for conversion at a 30-to-1 ratio into around 3.75 million shares of Berkshire B stock. He considered FedEx and elected instead to turn one of the 16 people working at Berkshire headquarters into a courier."

The battle of the billionaires
"You don't become a billionaire by making a lot of bad bets. But two of the world's richest men are now on opposite sides of a wager that may see one of them lose a fair chunk of change. The two men: Warren Buffett, whose mastery of value investing has helped him accumulate more than $40 billion, and Carl Icahn, the corporate raider who has earned more than $8 billion with astute and aggressive stock plays. They are now taking sides over the fate of USG Corp., the leading gypsum wallboard maker, which just emerged from bankruptcy protection. Which investor turns out to be right will depend in large part on the ultimate health of the U.S. housing market."

Warren Buffett Interviews
"Warren Buffett stunned the world when he announced he was giving his fortune to the Bill and Melinda Gates Foundation. Charlie Rose is the only broadcast journalist with access to Buffett and Gates on their friendship which resulted in this historic announcement."

Stingy Links: Crime

Suspicions and spies in Silicon Valley
"HP has now admitted to spying on its own directors' personal phone records in order to root out a leaker. It did so by using private investigators who engaged in "pretexting - calling up phone companies and impersonating directors seeking their own records. HP late last week additionally admitted to spying on the phone records of nine journalists, including at The New York Times and Wall Street Journal, some of which date to 2005. HP's Dunn stands accused of orchestrating the investigation. Perkins quit in a rage over the surveillance and wants Dunn out as chairman; HP is painting him as an angry traitor with a vendetta against Dunn. Lying, spying, name-calling, finger-pointing - all of it is a tragicomedy that Shakespeare might've penned had he gotten an M.B.A."

Partners in crime
"The SEC figured out that many of the stocks were involved in mergers or acquisitions -- and that Merrill Lynch had worked on each of the deals. "It was an aha moment," says Markowitz. "It looked like there was a constant leak out of one of the biggest banks in the country." About a week into the investigation, Melissa Coppola, an SEC forensic accountant, came into Markowitz's office. While the Merrill Lynch explanation worked for five of the stocks the group traded, it didn't for the 22 others. Then Markowitz remembered an old scam he'd heard about: "Were any of these stocks mentioned in Business Week?" he asked. When Coppola checked, she unlocked much of the rest of the case."

Theft of home prompts Ontario bill
"The story of an 89-year-old Toronto man who lost his home to identity thieves has left many homeowners in Ontario feeling "scared and vulnerable," Tory MPP Joe Tascona says. Tascona, the provincial government services critic, was referring to Paul Reviczky, who was recently shocked to learn that the thieves, using a fraudulent power of attorney, had sold the home he had owned since 1980 to an unsuspecting purchaser, and that under Ontario law he may never get it back. After the Legislature reconvenes Sept. 25, Tascona plans to introduce a private member's bill to pressure the Liberal government to take action. But Gerry Phillips, Ontario's minister of government services, told the Star yesterday that he does not need prodding from the opposition through a bill. "We as a government are very much seized with the issue and we will be moving quickly," Phillips said."

Fat cat sleaze escapes our outrage
"We are in the midst of a slimy, sleazy, putrid scandal of corporate self-dealing and cronyism. It points up just how elitist and corrupt the power-suited set of the corporate boardroom can be. And it is widespread. Over 100 companies -- major corporations -- have been implicated so far. And yet ... where's the outrage? C'mon. Even a dead man was getting a piece of the pie."

Stingy Links: Debt

Fortune's fools: why the rich go broke
"Mr. Foreman, who stared down financial collapse as an adult despite a troubled, impoverished childhood, said he knew real wealth when he saw it. "If you're confident, you're wealthy," he says. "I've seen guys who work on a ship channel and they get to a certain point and they're confident. You can look in their faces, they're longshoremen, and they have this confidence about them." He says he can spot a longshoreman who has enough equity in his home and enough money in the bank to feel secure, and that some people, no matter how much money they have, never get there. "I've seen a lot of guys with millions and they don't have any confidence," he says. "So they're not wealthy.""

The dark side of debt
"Lending is a sober business punctuated by odd moments of lunacy. Genoese lenders' indulgence of Philip II of Spain's expensive taste for warfare caused not only the world's first sovereign bankruptcy in 1557, but the second, third and fourth as well. Lenders recycled petrodollars to third-world countries in the 1970s in the wilfully naive belief that countries, because they cannot go bust, will not default. The world is once again in the grip of a spree of lending, but this time to companies rather than countries."

The bankruptcy boom is back
"A tough 2005 law initially slashed the number of filings, but the numbers are rising again because the root causes of unpaid debt were never addressed."

Stingy Links: Derivatives

Derivative danger
"With the global numbers and values already enormous, adding U.S. pension funds, more institutions and a retail investment audience to the hundreds of trillions of capital the derivatives market attracts could further shift the scale in favor of them more than any other financial instrument or asset class. Yet, it wouldn't take all that much to create a domino effect of market mishap. And there is no net. The Securities Investor Protection Corporation, which insures brokerage accounts, recently announced its reserves. It has a little more than $1.2 trillion. That may sound like a lot. Compared with half a quadrillion, it's a pittance."

Stingy Links: Dividends

Sticking to 'Dogs of Dow' strategy
"Hennessy invests 75 percent of his fund's net assets in the 10 highest-yielding Dow stocks and 25 percent in U.S. Treasuries that mature in less than a year. He buys the dogs in equal dollar amounts each month and, in effect, runs 12 mini-portfolios that hold the stocks for a year. Then he sells shares to reallocate the proceeds among the Dow's 10 new dogs. The fund has a Sharpe ratio of 0.74, less than the 1.24 average for large-company value funds, according to Morningstar. While a higher Sharpe ratio indicates better risk-adjusted performance, the Hennessy fund's ratio is lower than its peers because of its Treasury market investments."

Stingy Links: Dorfman

Dorfman's ratings on the 20 largest U.S. stocks
"The largest stocks rarely sizzle. Yet many people like them for their safety, stability and liquidity. Each September since 2001, I have offered ratings on the 20 largest U.S. stocks. My 'buy' rated big caps have provided an average annual return of about 10 percent, including dividends."

U.S. diversifiers
"While Europeans often pepper their portfolios with stocks from several countries, Americans often stick with U.S. stocks. I like the American market very much, yet a portfolio exclusively based in the U.S. may be too plain vanilla. If you stick to only one country, you may miss some bargains. You certainly miss the chance to diversify."

The casualty list
"Parker Drilling Co. and Boston Scientific Corp. were banged hard in the second quarter. I think their chances for recovery are excellent, and have put them on my Casualty List -- a quarterly compilation of stocks that have been knocked around, and that I think will bounce back."

Value plus growth
"Just as a person can have both beauty and brains, a stock can possess both growth and value characteristics."

Good based on cash flow
"Most assets gradually lose their value over time. That's why accounting rules specify depreciation schedules for assets such as factories, equipment or oil in the ground. In the real world, the assets may be depreciating faster or slower than accounting rules assume. They may even be appreciating. That's why some analysts like to look at stocks through the lens of cash flow instead of earnings. Cash flow is a measure of actual cash flowing into and out of a business."

Short-selling contest
"Who likes wars, recessions, hurricanes, terrorist threats and corporate scandals? Short sellers do, if you listen to their detractors. Short sellers are investors who profit when a stock declines. Some folks view these renegade investors as antisocial. I have a more positive view."

Perfect 10 Portfolio
"My Perfect 10 portfolio contains 10 stocks, each one selling for 10 times earnings, as of the time the portfolio was created (this year, July 21). That is cheap compared to the current multiple on the S&P 500 (about 17) and the long-term average (about 15). In the six years that I have compiled the Perfect 10 Portfolio, it has achieved an average one-year return of 17 percent, compared to 2.2 percent for the S&P 500. It has beaten the index four times out of six."

Value and Momentum
"Buying on bad news is a technique often used by value investors, people like me who scour the stock market for bargains. Of course, worse news can follow. That's why some folks prefer to buy stocks that are in rising, not falling, trends. Twice a year, for people who like their value leavened with a touch of momentum, I compile a list of stocks that I think offer both."

The 2006 sane portfolio
"The Sane Portfolio, which I compile each August, is designed as a middle-of-the-road, slightly conservative collection of a dozen stocks. To be eligible for inclusion, a stock doesn't have to be outstanding in a single respect; rather, it must be fairly good in most respects."

Stocks Benjamin Graham might like
"Ben Graham, the father of value investing, has been dead for 30 years. Hundreds of disciples, however, keep alive his bargain-hunting style. Most of us are less strict in our criteria than Graham was. His definition of 'cheap' was stringent, and his balance-sheet criteria were exacting."

Good on price-to-sales ratio
"When people go hunting for cheap stocks, several ratios can serve as range finders. One is the price-to-sales (P/S) ratio, which is a stock's price divided by the company's per-share sales (or revenue). The P/S ratio is a cousin of the more familiar price-to- earnings (P/E) ratio, in which the denominator is per-share earnings, rather than sales. In an era when accounting tricks are rife, sales figures are somewhat more resistant to manipulation than earnings numbers. If a company isn't very profitable, it may not look cheap based on its P/E ratio. Yet it may have a low P/S. In that case, it may be a turnaround candidate, ripe for a shape-up campaign by new management."

Stingy Links: Dreman

Surviving inflation
"A classic example is the 1977--81 period, when the U.S. flirted with hyperinflation. Worriers evoked the Weimar Republic of the 1920s. During the unhappy 1977--81 span the Consumer Price Index rose 12.6% annually. Equities at the outset retreated 7.2% in 1977, but over the next four years stocks returned 12.3% annually, versus 10.8% for the CPI. Even though inflation remained sky-high, stockholders more than kept up with the cost of living."

Stingy Links: Economics

The mystery of capital deepens
"But the victory of the Buenos Aires squatters was only partial. Eight of the former landowners accepted the government's compensation in 1986, one did not relent until 1998, and the remaining four are still contesting it in Argentina's Dickensian courts. As a result, several hundred families now own their land, but their neighbours still squat uneasily on theirs. This is unfortunate for the squatters, but a rare opportunity for economists to test the power of property rights. Sebastian Galiani of San Andres University and Ernesto Schargrodsky of Torcuato di Tella University believe the case provides a natural experiment. The families lucky enough to win title can be compared with a ready-made control group: the otherwise identical families that did not. This makes it possible for the study to distinguish cause and effect; to isolate the impact of title from all the other confounding factors."

Stingy Links: Economy

The uses of adversity
"In 1871 America added about 6,000 miles of track to its railways, an endeavour that occupied a tenth of its industrial labour force. But by 1875 track-building had fallen by more than two-thirds, and employed less than 3% of America's workers. According to Brad DeLong, an economic historian at the University of California, Berkeley, the violent ups and downs of the railway industry help to explain the popularity, before the Great Depression and John Maynard Keynes, of a fatalistic view of the business cycle. Recessions, however unpleasant, were cathartic, and therefore necessary. They released capital and labour from profitless activities (such as laying the year's 6,000th mile of track) as an essential prelude to redeploying them elsewhere. "Depressions are not simply evils, which we might attempt to suppress," wrote Joseph Schumpeter. They represent "something which has to be done"."

Car-sales indicator suggests a recession is near
"If things are miserable for America's new-car dealers, can a recession be averted? History says it cannot and suggests a downturn may have already begun."

Stingy Links: Education

What price college admission?
"Even valedictorians are finding it hard to land spots at the nation's most-selective colleges, so "Ben" wasn't about to take chances. Over the past four years, the New Jersey father of two has spent about $30,000 for guidance from Michele Hernandez, a Lake Oswego, Ore. college counselor who charges up to $36,000 per student for advice on everything from what courses to take to how to spend summers."

Stingy Links: Fun

Stolen lunches? Substitute cat food for tuna
"Someone stole my lunch from the office refrigerator the other day. It was a really good lunch - leftovers from dinner the night before accompanied by caramel flan, yogurt, a peach and delicate French cookies from a previous brown bag seminar. Now, it could have been nicked accidentally. Or maybe someone was really hungry and needed the food. Either way, I was annoyed, and after taking an informal survey, it turns out I'm hardly the only victim."

Fear of flying
"Your life-jacket can be found under your seat, but please do not remove it now. In fact, do not bother to look for it at all. In the event of a landing on water, an unprecedented miracle will have occurred, because in the history of aviation the number of wide-bodied aircraft that have made successful landings on water is zero. This aircraft is equipped with inflatable slides that detach to form life rafts, not that it makes any difference. Please remove high-heeled shoes before using the slides. We might as well add that space helmets and anti-gravity belts should also be removed, since even to mention the use of the slides as rafts is to enter the realm of science fiction."

Stingy Links: Funds

Is seg fund security worth the high cost?
"In most cases a segregated fund will mimic a regular mutual fund. You name the asset class and it's likely there are several mutual fund companies with a corresponding segregated fund. When it comes to MERs, the difference between segregated funds and their twin non-segregated fund is often huge."

Protected notes may leave you exposed
"Principal-protected notes (PPNs) have long been one of those "have your cake and eat it too" financial products that -- in my view anyway -- just didn't cut it for average investors."

Saxon finds value in oilpatch juniors
"What they "keep doing" is in fact bottom-up, value-oriented investing. Sector weightings are "serendipitous" as a result, explains Tattersall. They employ a variety of measures of value; price-to-book was the key measure at inception, he recalls, but they are relying much more these days on standard measures of cash flow. Their value style translates into overweight in industrials, underweight in technology - and no gold stocks. The key, he concludes, is not so much what they own as what they don't own."

Stingy Links: Health

Medical tourism
"Erickson, 44, hopped a plane to New Delhi, where he toured hospitals and met U.S.-trained doctors. His first thought: "My God, this is the perfect arbitrage situation. Buy below market and sell below market.""

Stingy Links: Indexing

Alpha betting
"Nevertheless investors will probably keep pursuing alpha, even though the cheaper alternatives of ETFs and tracker funds are available. Craig Baker of Watson Wyatt, says that, although above-market returns may not be available to all, clients who can identify them have a "first mover" advantage. As long as that belief exists, managers can charge high fees."

Seeking sanity amid a market of ETF mania
"There's a slightly crazed, peak-of-the-market feeling to the gusher of new exchange-traded funds being issued these days."

Index funds are more subtle than you might think
"Some things are meant to be simple. The world really doesn't need purple ketchup, blueberry vodka or talking toasters. But if you're an index investor - a wonderfully simple investment strategy - it might be time to add new types of index funds to your portfolio. We're not talking about funds that track Andorran utilities or large-cap binocular manufacturers. But some index funds measure the market in more subtle ways than traditional index funds do, and they're worth looking into."

"They're red-hot these days because folks assume they are cheaper than funds. That's not always true. And some of the things ETFs track are getting a bit loopy. Here's what to watch out for."

Stingy Links: Law

Efficient markets can land you in jail
"Because market prices reflect all available information, argued the court, misleading statements by a company will affect its share price. Investors rely on the integrity of the price as a guide to fundamental value. Thus, misleading statements defraud purchasers of the firm's shares even if they do not rely directly on those statements, or are not even aware of them. That ruling has proved a goldmine for America's trial lawyers, who have won fortunes by suing firms for damages when news (often, in practice, a restatement of their accounts) is followed by a sharp fall in their share prices. The fall is treated as proof of overvaluation due to the initial, wrong statement. Increasingly, a similar logic has been used in criminal cases"

Stingy Links: Management

CEO bought a yacht?
"When someone who's supposed to be looking out for public shareholders is instead mulling over wallpaper samples for staterooms, it's time to sell. The yacht has long been the classic indicator of someone who has so much money that he doesn't need to make any more. Unlike a jet, which can speed busy executives to their offices efficiently, a yacht has no useful purpose. And who has time to play with such an over-the-top toy? Someone who doesn't work weekends figuring out how to make money for other people. A classic 1940 investment book, aimed at debunking the practices of Wall Street, was called Where Are the Customers' Yachts? Today, you should ask: Where are the shareholders' yachts? If you look at the recent record of CEOs who have become yachtsmen, it's clear that when they buy a boat, it's the shareholders who usually get soaked."

Cheaper stock options
"That, of course, depends on your perspective. At companies where volatility numbers have been notched down too far, the cost of options doled out in 2005 has effectively been lowballed. An honest mistake, perhaps. It's still early in the options-expensing era. But if volatility continues to rise, warns Zion, that fact will have to be reflected in next year's estimates, driving up options costs and weighing on earnings in the future."

More than 100 firms probably backdated options
"Some options-granting practices under fire could be considered ethically dodgy but not illegal, while others could prove to be illegal, despite what the companies issuing them at the time may have thought."

Tech CEO pay doesn't match performance
"In the recent study, DolmatConnell & Partners, an executive compensation consulting firm based in Waltham, Mass., found there was an inverse correlation between tech CEO pay and shareholder returns over a one-year period. Companies analyzed in the study included Cisco Systems, Dell, EMC, Google, Hewlett-Packard, IBM, Microsoft and Oracle, as well as telecommunications providers, technology services companies and products distributors."

Options gone wild!
"Options have long been used to attract and retain people from CEOs on down. Companies give employees the right to buy a set number of shares at a fixed price for several years. The price is generally where the stock trades when the options are granted. Simple, right? If only. As common as options have become, doling them out is something of a black art. Some companies have ultrastrict rules, and some give management wide latitude. Still others followed what they thought were acceptable practices, which now turn out to be potentially illegal."

When shareholders aren't valued
"Anyone who says the American Midwest is dull and monochromatic obviously has not been to Omaha, Nebraska. The city of Warren Buffett, the investor who has generated huge gains for his shareholders over the years, is also home to Vinod Gupta, the colorful chief executive of infoUSA, who has destroyed enormous value for outside shareholders in recent years. Now that's diversity. Unfortunately for the shareholders of infoUSA, a database marketing company, much of its story is a throwback to the pre-Enron days of cozy boards and entitled executives."

Tearing up the Jack Welch playbook
"Just try to find an executive who hasn't been influenced by his teachings. What came to be known as Jack's Rules are by now the business equivalent of holy writ, bedrock wisdom that has been open to interpretation, perhaps, but not dispute. But the time has come: Corporate America needs a new playbook. The challenge facing U.S. business leaders is greater than ever before, yet they have less control than ever - and less job security. The volatility of the markets is so unpredictable, the pressure from hedge funds and private-equity investors so relentless, the competition from China and India so intense, that the edicts of the past are starting to feel out of date."

Stingy Links: Markets

An ode to quant
"So why not quant? The most likely answer is overconfidence. We all think that we know better than simple models. My own confession at the start of this note is a prime example of such hubris. The key to the quant model's performance is that it has a known error rate, whereas our error rates are unknown. The most common response to these findings is to argue that surely a fund manager should be able to use quant as an input, but still have the flexibility to override the model when appropriate. However, as mentioned above, the evidence suggests that quant models tend to act as a ceiling rather than a floor for our behaviour."

Buying into crisis
"For anyone hunting a market opportunity in the terror madness, the episode was instructive. A lucky few may have bought and sold at exactly the right moments, earning themselves a bunch of cash and bragging rights at their next barbecue. But the more likely result for an investment in such a stock was a lot less glamorous. And that is the peril for those who seek opportunity in calamity. Crisis investing may seem savvy, but for most individual investors it's a slightly ghoulish version of stock market gambling."

Yield curve as a predictor of recessions
"The yield curve - specifically, the spread between the interest rates on the ten-year Treasury note and the three-month Treasury bill - is a valuable forecasting tool. It is simple to use and significantly outperforms other financial and macroeconomic indicators in predicting recessions two to six quarters ahead." [Currently, based on these findings, the probably of a U.S. recession in 4 quarters is almost 30%.]

Value trumps growth
"Internally, the stock market exhibits two disparate faces, as in tragedy and comedy. The performance difference between growth and value stocks widens sharply in favor of value--by some 12 percentage points year-to-date. Growth managers cry themselves to sleep, while value players smirk irrepressibly."

City forecasts are for suckers
"Errors in the way fund managers make decisions are caused by a number of behavioural traits, chiefly over-confidence and over-optimism (in a survey 75 per cent of fund managers said they were above-average at their jobs). The love of forecasting is also driven by a tendency known as 'anchoring' - fixating on irrelevant numbers for support. Montier suggests we anchor share values on something we can measure, like dividends. These errors are deeply ingrained, he says : 'It's hard to go to fund managers and say "you are wasting your time", but really analysts need to get back to analysing and forget about forecasting. And as for knowledge, it really is a case of less is more.'"

Gold rush or fool's gold? Leith Wheeler's view
"Conventional wisdom suggests that the price of gold (denominated in US dollars) moves up when the US inflation rate increases. We tested this relationship over the past 25 years and found no meaningful correlation between the price of gold and the US inflation rate. Some would argue that the price of gold is a leading indicator of the future US inflation rate and that the recent rise in the price of gold is anticipating a future rise in the US inflation rate. This is possible, however we found no statistical evidence of such a relationship over the past 25 years."

The story of Soros
"I try to avoid pure chance. I'd like to be, have a better understanding of the situation than the market and then I bet on my judgment that I know I can anticipate the future better. So that's not gambling. Now you can't avoid taking risk and very often, my judgment is wrong and then I take a loss. But I only take a risk when I think that I have a better perspective and a different perspective from the market."

Pump and dump
"Penny stocks are considered ideal for spammers because they trade in low volumes, allowing a small amount of investment activity to generate wild swings in value. This gives tipsters the greatest opportunity to make a profit. Generally, they create excitement about a stock that they also invest in, only to sell it after they successfully push up the price. That can set off a wave of selling which eventually depresses the share price."

Big merger wins point to investor losses
"The backdrop for the mega-merger announced this week in the mining industry is a slagheap of similarly grandiose deal making that has often disappointed or, worse, crushed the small investor."

Companies still cling to big hits
"As companies watch the Web grow, and hear promises of greatly expanded niche sales, it's tempting for them to expand inventory to get in on the supposed land rush. But Matthew P. Reilly, with George Group Consulting of Dallas, says doing so could be a "recipe for disaster" at companies that make tangible, as opposed to purely digital, products -- if only because of the inevitable increase in execution risks they face in expanding their inventories. "The iTunes model doesn't work for most companies," he adds. While inventories should be expanded only with the greatest care, such prudence might be difficult these days, considering the current popularity of Web utopian fantasies about the way sales of niche products can rival those of hits."

Naked fines
"Brad Niswonger, a senior vice president for brokerage firm Robert W. Baird Co., complained in a July letter to the SEC, "It seems like every day the SEC fines someone for fraudulent stock transactions, but they walk away after collecting their fee without completing the transaction by making these players buy in the illegal short positions." A Canadian brokerage firm also complained to the SEC about its experience trying to settle its purchases of shares in The broker, Research Capital of Toronto, says it tried to buy shares of Overstock to satisfy customer orders but has never received the actual shares it bought, even after 39 attempts to force the brokers who sold it the stock to produce the shares. Research Capital says this has been going on since February 2006. "The failed deliver has simply been replaced with another delivery commitment which also fails," the brokerage says."

Naked horror
"Suspicious trading last year in shares of Global Links, a small Nevada real estate holding company, was far more intense than previously thought. New data from the U.S. Securities and Exchange Commission reveals trade settlement fails in early February 2005 that were 27 times greater than the total number of shares Global Links had issued at the time. The data show suspicious trading in Global Links far earlier and to a far larger degree than any previously released by the SEC."

Stingy Links: Real Estate

Getting real about the real estate bubble
"For the past five years, the housing bulls have been trotting out one rational-sounding argument after another to explain why the boom made perfect economic sense. Forget about a crash, they assured homeowners. Expect a "soft landing" where your three-bedroom colonial in Larchmont or Larkspur not only holds onto its huge price gains, but keeps appreciating at a "normal," "sustainable" rate of 6 percent or so into the sunset. Americans wanted to believe, and they did. Now, the giant popping noise you're hearing is the sound of yesterday's myths exploding like balloons pumped up with too much hot air."

Read between all those for-sale signs
"Perhaps the biggest reason to be skeptical about a real estate crash is that the country has not really suffered through one before. Not since the Depression has the combined value of residential real estate fallen over the course of a full year. Homes seem to be much less vulnerable to crashes than other assets, because people rarely sell them in a panic. But earlier booms have been followed by modest price declines in some cities that turned into long periods in which increases trailed inflation. After peaking in much of California and the Northeast in the late 1980's, house values fell during the recession of 1990-91 and then drifted for years, often rising more slowly than the price of milk." [Note Shiller's interesting long-term graph at the end of the article]

When homeowners are desperate to sell
"In its report released Aug. 15, the National Association of Realtors reported that 26 of 151 metro areas experienced outright price declines in the March-June quarter. The biggest price drops in percentage terms were in Danville, Ill., where home prices fell by 11.2% in the spring compared with the spring of 2005, and the Detroit area, where home prices were down 8%. For condominiums, 1 in 4 metro areas reported a decline in prices."

Be greedy when others are fearful
"So why are we pounding the table for homebuilding stocks? In short, some homebuilders are well positioned to survive this housing downturn, and current share prices reflect a doomsday scenario that's unlikely to happen."

The housing bust is here
"It begins with the story of a Detroit accountant who was looking to lower her monthly payments. In 2004, she refinanced a $312,000 mortgage via an option-adjustable-rate mortgage that offered various payment choices, as do so many of these plans. Her (introductory) rate of 2.3% is now up to 8.75%, and her loan balance has grown to $324,000. She claims that the terms weren't clearly spelled out. But if she actually read the documentation, as accountants often do, and didn't get it, you can imagine how many people truly understand their mortgages. (Hint: The number rhymes with "hero.") Since she's unable to refinance (in part, due to a nasty prepayment penalty), she must sell her house. The problem: Because everyone else is pretty much in the same boat and Detroit's economy isn't so swell, she can't -- even with having reduced her original asking price of $470,000 to $270,000. (Note: That would leave her $54,000 in the hole.)"

Housing crash puts sellers in debt crisis
"Auction clearance rates are hovering around 48 per cent since the recent interest rate rise, but plummeting property prices have meant many vendors are confronting negative equity, where they owe more on the property than it is worth."

CMHC's risky mortgage moves a bad bet for taxpayers
"The thing is, CMHC is out of control. Last week, CMHC announced that it was going to enter the sporty world of "sub-prime" mortgages by offering insurance on interest-only mortgages, waiving the application fees on such loans, and also insuring mortgages with 30- and 35-year amortizations. No money down, no principal payments for five years and 35 years to pay: That may work for The Brick, but it's a lousy business model for a taxpayer-funded entity."

Stingy Links: Retirement

A 'layer cake' plan for your retirement
"The "conservative" client wants to leave a legacy and assumes a longer than 30-year lifespan, reducing her withdrawal rate to 4 percent. The "aggressive" client assumes a shorter than 30-year lifespan, a performance-based withdrawal approach, and other factors that boost his withdrawal rate to 7.6 percent."

Bing's secrets to a happy retirement
"The truth is, those who intend to have a happy retirement must deliver the goods on the human aspects of the issue as they do on the fiduciary ones. Unfortunately this takes the kind of cogitation that you, as a reader of this magazine, are no longer set up to do very well. You've been in business so long that your mind is accustomed to a fine blend of wishful thinking and can-do attitudinizing on subjective subjects. "It's gonna be great!" you tell yourself. "Wake up at noon every day like I did when I was a teenager! Have a bagel! Play 36 holes! Couple of drinks at the 19th green! Wake up and do it again the next day! That's what I call living!" Right. Have you thought about what 25 years of that will be like?"

Stingy Links: Taxes

Life insurance can be a saviour if you own a holding company
"The truth is, life insurance can be an effective tool. Today, I want to look at a "corporate insured annuity," which can make sense for those with holding companies."

Location is key to tax breaks on risky assets
"The Amaranth debacle should remind us that there's a best place to hold risky investments -- and that is outside your registered retirement savings plan or registered retirement income fund. The reason is simple. If you hold an investment inside your RRSP or RRIF and it drops in value, you'll get no tax relief from the loss."

Naming the kids' guardians is no child's play
"If you're the parent or guardian of minor children, here are some thoughts to keep in mind about naming guardians for your children."

Flow-through shares produce charitable bonanza
"You'll also be entitled to a donation tax credit for the $10,000 value of the shares, which will save approximately $4,600 in tax. So, you paid $10,000 for the shares, got $4,600 back in tax savings from the deduction, and $4,600 from the donation tax credit, leaving a net out-of-pocket cost of just $800. That is, a $10,000 donation to charity cost you just $800. That's what I call charitable arbitrage."

Self-employment can pay for your child's education
"Here's the overall result: Mike claims a deduction for the $15,000 in wages paid to Rick, which will save Mike $6,900 in tax (assuming a marginal tax rate of 46 per cent). Rick has $15,000 in his bank account, pays no tax on the amount, and now uses the $15,000 to pay for school. In effect, Mike has claimed a deduction for the amount used to pay for his son's education. And it doesn't really matter what costs Rick uses the $15,000 to cover; the amount is still deductible to Mike regardless."

Uncle Sam wants you ... to file
"When it comes to U.S. citizens living in Canada, many have bad memories -- or simply don't want to remember -- about tax obligations south of the border. Since there are so many of you, let me remind you of some of the rules you should be aware of."

Split share ownership can be a capital idea
"Sharing can save you money, and particularly income taxes, if you're willing to share ownership. Let me explain."

An annuity can brighten your golden years
"As Canadians get older, two of the biggest challenges we face are memory loss, and how to generate income. I can't help much with the first problem. But let me share an idea that might just result in more income for you in retirement. This idea is a cousin to the idea I shared in my article on July 15 that applied to those with holding companies. This idea is called a "back-to-back prescribed annuity" because it involves buying an annuity and insurance "back-to-back.""

Stay off the taxman's hit list
"Last November, an Auditor-General report shed light on how the Canada Revenue Agency (CRA) chooses tax returns for verification, which can be helpful in assessing the likelihood that your return may be selected. Here's the highlights."

Your small business has woes? Here's how to protect yourself
"It's the same feeling many Canadians have experienced when investing in a small private business, only to be disappointed that the business has failed. You get your hopes up, then you realize the dream has fallen apart. From a tax perspective, what next?"

Stingy Links: Thrift

How we did it
"We asked readers to tell us how they met major financial or life goals and the answers that poured in were extraordinary. Whether you want to get rich on a middle-class salary, turn your hobby into a business, escape the rat race, or pay off your house in three years, we found the tips you need to succeed - from people who've actually done it."

Financial infidelity is rampant
"Is it cheating if you lie about where the money went? Yep. And it's every bit as damaging to your relationship as the physical kind."

Extreme saver
"When Jessica Nixon began her first job at Whataburger, her father gave her some pretty sage advice: start saving early for retirement. She was not even 16 years old at the time, but she took his recommendation to heart almost immediately, socking away 10 percent of every paycheck. Now 23, the Dallas-based electrical engineer has transformed herself into a financial wunderkind, having put aside $49,000 towards retirement, and an additional $20,000 that she has earmarked for a home and a new boat. "Saving to me is another bill you have to pay," says Nixon. "Saving comes before a lot of other things.""

Stingy Links: Trusts

A history of neglect
"If the Spanish philosopher George Santayana had been a Canadian, his oft-quoted aphorism about history might have read: Those who cannot remember the past are condemned to exceed it. Certainly, this is the case when it comes to investor protection. Unlike the U.S., Canada has actually managed to systematically erode the integrity of its capital markets."

Stingy Links: Value Investing

Seminar in value investing
"In this archive you will find recordings of guest lectures delivered by accomplished and world renowned investors. These individuals have generously contributed their time to share their insights with Columbia Business School students and have kindly agreed to have their lectures shared on this website as a valuable resource to the value investing community."

Value vs. glamour stock returns
"This paper sheds further light into the discussion of whether the value premium is driven by risk or behavioral factors by providing out of sample tests using Canadian data, a search process that involves both P/E and P/BV ratios and a research methodology that minimizes any potential data snooping problems. We document a consistently strong value premium over the 1985-2002 sample period, which persists in both bull and bear markets, as well as in recessions and recoveries."

Value veteran dances to his own tune
"If you want to ask Tim McElvaine where stock markets are going, he will tell you that you've come to the wrong person. "I'm pretty sure that I am the only investor who missed the entire metals, minerals and oil and gas boom completely," says McElvaine, 43, manager of the $89.8-million McElvaine Investment Trust and president of Vancouver-based McElvaine Investment Management Ltd. "I joke with people that I dance to my own tune, in a corner," adds McElvaine, in his characteristic self-deprecating style. "Sometimes, out of sheer luck you will be in beat with the music and sometimes you will look awfully stupid. But at least you're enjoying yourself. That's where I am, dancing the foxtrot while everyone else is doing the rumba.""

The ultimate value investor's portfolio
"I thought investors could benefit by a model portfolio of the top 10 names recommended by Morningstar's analysts, and also owned by a number of these world class investors. I've selected the following 10 stocks based on the number of the above funds holding them, a 5-star Morningstar Rating for stocks, and the price/fair value estimates, using Morningstar's estimates of intrinsic value as of Sept. 7."

Miller says fund 'clearly wrong'
"Still, Value Trust is hanging tough on its key holdings, Miller and assistant portfolio manager Mary Chris Gay wrote in their quarterly letter to shareholders. "It is our willingness to own securities which other people regard as wrong which historically has been part of the long-term success of the fund," Miller and Gay wrote, adding that "in order to do better than the market longer term, you must be doing something different.""

The $700 Used Book
"Why does anyone care what Klarman wrote 15 years ago? The author, now 49, is one good investor. Klarman earned his MBA at Harvard Business School in 1982, graduating near the top of his class. A group of wealthy families took notice and gave Klarman $27 million to manage, which was the start of his firm, the Boston-based Baupost Group. Between its February, 1983, inception and the end of June, 2006, Baupost's largest and oldest partnership posted a cumulative return of 6,133% after fees. During the same period, the Standard & Poor's 500-stock index was up 1,517%, with dividends reinvested."

Weitz Q2
"In this increasingly risky environment, we have focused on companies that can (1) survive financial market upheaval and (2) take advantage of distress sales of assets. Happily, in this increasingly speculative market, large growth companies with very strong balance sheets (e.g. Wal-Mart, AIG) have been out of favor and available at prices that value investors are willing to pay. Thus, as we have upgraded the overall financial strength of our portfolios, we think we have also increased the upside potential for our Funds. As for companies with the capacity to take advantage of capital markets weakness, we start with Berkshire Hathaway. Berkshire holds over $42,000 per share in cash and bonds that is available for investment and Warren Buffett is equally at home buying individual securities and whole businesses."

Stingy Links: Wealth

America's 400 richest
"A nine-figure fortune won't get you much mention these days, at least not on these pages. This year, for the first time, everyone in The Forbes 400 has at least $1 billion. The collective net worth of the nation's wealthiest climbed $120 billion, to $1.25 trillion."

Stingy Links: Whitman

The Whitman system
"The bible of value investing, Benjamin Graham and David Dodd's 'Security Analysis,' dates back to 1934. And yet 72 years later the distinction between market risk and investment risk seems more muddled than ever."

A cowardly approach by Whitman?
"Whitman, who describes himself as a "cowardly" investor, says he basically looks for four things in an investment: 1. A high quality balance sheet. 2. Competent and shareholder-orientated managers. 3. Understandable and honest disclosure documents. 4. Priced at 50c-60c on a dollar. The first three characteristics are related to safety and the fourth to how cheap the stock is. "And 'safe' is more important than 'cheap'", says Whitman."

Stingy Links: World

A tale of two factories
"To get a sense of how China's rise is playing out, Fortune went to two factories -one in China and one in the U.S. - that make the same product for the same company. Our conclusion: China's progress is impressive, and it will continue. That said, America's factories have strengths of their own: U.S. manufacturers have improved productivity at least 4% a year for the past decade. Although wages in Shanghai are rising sharply, labor is still comparatively cheap. But that is an advantage that goes only so far."

The billionaire prince who owns Canada's treasures
"But even in today's polarized world, US$24 billion can buy a lot of goodwill, and Alwaleed remains in the market. And there is certainly no shortage of distractions to feed his obsessive pursuit of the next deal, while he waits for his investments in peace and understanding to take hold. For one thing, there is hotel real estate to sell, lots of it. Perhaps some worth buying, too. He's still planning to issue shares in his company on the Saudi stock exchange. He recently bought a US$390-million stake in the Bank of China, spreading the reach of his international empire even further. And there has been talk that his good friend Rupert Murdoch may be ready to buy a stake in Alwaleed's Arabic media giant Rotana. He has even mused about an English-language cable station aimed at better representing the Islamic world to Americans."

The case of the unpaid parking ticket
"On a humbler scale, we all face the same choice. We can try to earn money by doing something useful, or we can try to steal or extort it from other people. A society where most people are doing something useful has a good chance of being rich; a society full of corruption will be poor. That is a glib enough explanation of wealth and poverty, but it is surely just the start of the story. What causes corruption?"

U.S. foreign debt shows its teeth
"Over the past several years, Americans and their government enjoyed one of the best deals in international finance: They borrowed trillions of dollars from abroad to buy flat-panel TVs, build homes and fight wars, but as those borrowings mounted, the nation's payments on its net foreign debt barely budged. Now, however, the easy money is coming to an end. As interest rates rise, America's debt payments are starting to climb, so much so that for the first time in at least 90 years, the U.S. is paying noticeably more to its foreign creditors than it receives from its investments abroad. The gap reached $2.5 billion in the second quarter of 2006. In effect, the U.S. made a quarterly debt payment of about $22 for each American household, a turnaround from the $31 in net investment income per household it received a year earlier."

Frugally Yours,
Norman Rothery
ISSN 1499-2787

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