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The Stingy News Quarterly (Q4/2005)

Happy Holidays!

A Christmas Carol
"MARLEY was dead: to begin with. There is no doubt whatever about that. The register of his burial was signed by the clergyman, the clerk, the undertaker, and the chief mourner. Scrooge signed it: and Scrooge's name was good upon 'Change, for anything he chose to put his hand to. Old Marley was as dead as a door-nail."

In defense of scrooge
"It's Christmas again, time to celebrate the transformation of Ebenezer Scrooge. You know the ritual: boo the curmudgeon initially encountered in Charles Dickens's A Christmas Carol, then cheer the sweetie pie he becomes in the end. It's too bad no one notices that the curmudgeon had a point - quite a few points, in fact."

Christmas movies and bad economics
"But let's talk Christmas turkey. The engine driving the "commercialization" of Christmas is, quite simply, children's desire for presents. As every parent soon discovers, it is not the thought that counts for young children, but the goods. They want nice toys, which do not come free. They have to be made, and the cost of making them has to be recouped."

New @ StingyInvestor

The Top 200: rating every major Canadian stock
"We're pleased to say that our modest experiment succeeded beyond our wildest dreams. Our highest-ranked stocks gained an average of 57.6% since we picked them. That's right, you read correctly. We said 57.6%. Even our second-tier picks thumped the market by double-digit amounts."

Graham's Simplest Way
"Benjamin Graham is often called the father of value investing and during his lifetime provided the world a variety of useful stock-selection techniques. Remarkably, some of his simplest methods have continued to outperform long after his passing. Although many of Graham's methods are easily described, their continued success relies on the fact that they can be psychologically hard to put into practice."

Share Purchase Plans 2005
"The long-term risk-averse investor should consider three factors when selecting stocks with Share Purchase Plans (SPP). First, they should demand a low price. Second, they should require earnings stability. Finally, investors should look for modest, but not necessarily spectacular, earnings growth. I've used these three criteria to find interesting stocks for Canadian MoneySaver readers in 2001 and 2003. In this article, I take a look at the performance of my past picks and provide a new list of SPP stocks to consider."

The Best of Stingy Links

Stingy Links: Academia

Experts and markets
"Economist Burt Malkiel says it this way: "While it is abundantly clear that the pros do not consistently beat the averages, I must admit that there are exceptions to the rule of the efficient market. Well, a few. While the preponderance of statistical evidence supports the view that market efficiency is high, some gremlins are lurking about that harry the efficient-market theory and make it impossible for anyone to state that the theory is conclusively demonstrated.""

"Did Steven Levitt, author of 'Freakonomics', get his most notorious paper wrong?"

Stingy Links: Accounting

Sarbanes-Oxley 'reform' harming economy
"Although Sarbanes-Oxley was sold as a cure for Enron-like corporate misbehavior, the law mostly fails to target the real wrongdoers and instead punishes all public companies as a class. Its costliest part, called Section 404, mandates that auditors not just sign off on a company's numbers, but also its "internal controls.""

Stingy Links: Buffett

Warren Buffett, unplugged
"The hands-off billionaire shuns computers, leaves his managers alone, yet has notched huge returns. He just turned 75. Can anyone fill his shoes?"

Imitation is the sincerest form of flattery
"First we empirically determine the returns Berkshire Hathaway has experienced in both the long-term and risk arbitrage investment activities and estimate annualized returns in the arbitrage investments to be several times larger than even Buffett's estimates. Next we show a popular mischaracterization of Warren Buffett's investment style. Most books and financial press accounts describe Buffett as a value investor who looks for undervalued securities. This is not borne out by his investments from 1980 to 2003. Using the Fama and French size and book-to-market categories we show Buffett's style is consistent with a growth investor in big stocks. Buffett himself admits in his 1987 Letter to Berkshire Shareholders "Charlie and I have found that making silk purses out of silk is the best that we can do; with sows ears, we fail." His philosophy places emphasis squarely on the determinants of value: the estimation of future cash flows and growth rates which is also consistent with his principle of investing in businesses that he understands and is not difficult to predict."

What's in Buffett's shopping bag
"He's making up for missed chances and stocking the liquor cabinet while staying mum on key stakes"

Berkshire Hathaway reveals stakes
"According to amended U.S. regulatory documents, Berkshire Hathaway disclosed that it held 44.7 million shares of Anheuser-Busch stock valued at about $1.9 billion and 19.9 million shares of Wal-Mart stock valued at about $874 million as of September 30."

Stingy Links: Burgundy

No good deed goes unpunished
"Short-termism is not a victimless crime. It has been creeping up on us for years. In its earlier manifestations, it simply demanded earnings increases every quarter, and drove managements to give earnings guidance and sometimes to manipulate earnings. Later it made managers embrace compensation schemes like stock options that aligned managers with very shortterm oriented shareholders in seeking to pump up stock prices by any available means. And now, it appears that short-termism will increasingly affect the capital structure decisions and growth strategies that managers implement on behalf of their shareholders. These decisions are the very essence of stewardship and we wonder if shareholders are aware of what they might potentially be losing if companies end up remote-controlled by financial engineers. A company is not just an accumulation of assets and liabilities. It is a living organism with its own culture and rules, and it needs strong and committed leadership in order to thrive."

Stingy Links: Crime

Most corporate fraud found by luck
"Despite tough regulations aimed at improving corporate governance, financial fraud is still on the rise around the world, and most is still detected by chance"

Stingy Links: DRPs

Invest one drip at a time
"Investing relatively small amounts every month in dividend stocks can add up to big money in the long run. Here's how to figure out what to buy -- and how to buy it."

Stingy Links: Dorfman

ConocoPhillips, GM are in my purloined portfolio
"Once a year, I turn myself into a thief. Don't call 911. What I'm stealing are stock ideas from some of my favorite money managers. Yes, they are my competitors. But most of them are also my friends. And my theft is accomplished by combing through public filings of their holdings."

John Dorfman's small stocks
"I'm partial to small stocks, partly because they are followed by fewer investors than large stocks. That increases my chance of finding a bargain."

Polaris and Exxon show high profit and low debt
"Two qualities I love in a company are high profitability and low debt. High profits signal that a company is doing something right -- providing superior service, offering an innovative product or filling a need that others haven't yet discovered. The allure of low debt is subtler. It's not just a matter of averting bankruptcy. Low debt allows a company the luxury of choice. For example, it can acquire strapped competitors, increase dividends or pour money into new products."

Lexmark and Brunswick hit new lows
"The New Lows list -- a daily compilation of stocks hitting 52-week lows -- is a rich hunting ground for stock-market bargain hunters."

Pfizer and Kimberly-Clark show dividend appeal
"Don't scoff at dividends. In flat and down years, they are a big component of total return in the stock market. And they are sincerity barometers, giving an indication of how much faith a company's board really has in its prospects."

Amerigroup and Diebold are on the casualty list
"Amerigroup Corp. stock was smacked around last quarter, ending with a 52 percent loss. Diebold Inc. was beaten down 23 percent. Wabash National Corp. was roughed up for a 19 percent decline, and H&R Block Inc. was bruised with a 17 percent thrashing. I am putting those four stocks on my quarterly Casualty List. At the end of each quarter, I put a few stocks that have suffered big declines, and that I think have comeback potential."

Simmering Six and Six-High Six
"Each November, I write about two groups of stocks. One I call the Simmering Six. These are half a dozen stocks that have risen strongly in the first 10 months of the year, yet still meet some basic value criteria. These are stocks I like. The other group is the Sky-High Six. These are the six stocks with the highest price-earnings ratios among companies with a market value of $500 million or more and earnings per share of a dime or more. Almost without exception, these are stocks I would avoid."

5 stocks that might exploit a year-end bounce
"As a year winds down, many people sell their losing stocks to reduce their income tax. Traditionally, some of these stocks get oversold. They often bounce back in January as bargain hunters swoop in."

Stingy Links: Dreman

Stick to your guns, Fannie
"If you own either of these stocks, hang in there. If you don't, buy them. They're cheaper. Fannie Mae trades at an estimated 6 times trailing earnings, giving you a margin of safety even if earnings are restated downward. Freddie is at 15 times earnings."

Stingy Links: Economy

Man versus machine
"Both the automated parking and the automated ticket machine were new since the last time I'd been to that theater, no more than a few months ago. And that is why America's low-skilled workers are taking it on the chin. Forget the guy on the phone in Bangalore telling you how to use your new computer. He's a red herring. The job loss statistics tell the same story as they always have: Technology replaces far, far more low-skill jobs than foreign workers do. Think voice mail, ATM machines, automated customer service lines, self-serve gas, online bill paying, automated package tracking, and on and on."

Stingy Links: Funds

Time for a trim
"Hedge-fund assets have doubled in little more than four years and a lot of over-eager new players have come into the market. But lately performance has been poor. Hedge-fund returns, net of fees, were 4.2% in the year to August, according to CSFB/Tremont's measure - less than brilliant compared not only with what they were in the 1990s but with total returns on European shares (though returns on the stagnant S&P 500 were even worse)."

How fund rankings can cause stocks to gyrate
"Mutual funds are a main cause of the boom-and-bust cycle that so often occurs among individual stocks and industry sectors, a new study has concluded."

Stingy Links: Government

Drowning in fines
"As an example of the record of state regulators, take the office of New York's attorney-general, Eliot Spitzer. New York received $100m in a settlement with Merrill Lynch, after the equity-research furore, and $40m in another with Canary Capital, over mutual-fund trades. All of it has been funnelled into the state's general fund. None has yet gone back to the investors who had been ripped off."

Moral hazard
"A suprising thing happens when the government dishes out heavily subsidized pension insurance: People use it."

Stingy Links: Graham

The commandments of value investing
"Benjamin Graham is regarded as the father of value investing and his books are investment classics. Security Analysis (first published in 1934) and The Intelligent Investor (first published in 1949) continue to sell steadily. In addition to this legacy, he has permanently influenced many successful investors, including Warren Buffett, the wealthiest man in America; William Ruane, founder of the super-successful Sequoia Fund; and well-known investor Walter Schloss."

Stingy Links: Gross

Why you'll grow rich...very slowly
"In the past decade, we've ridden two jaw-dropping bull markets. First came stocks. Now real estate is the bubble du jour."

Stingy Links: Health

So what do you have to do to find happiness?
"It's difficult to resist the logic of the happiness doctors. Stay in your Eeyore-ish bubble of existentialist angst and have a life that's short, sickly, friendless and self-obsessed. Or find a way to get happy, and long life, good health, job satisfaction and social success will be yours"

Stingy Links: Indexing

Plenty of room for improvement
"Swensen counsels that intelligent investment behavior begins with a priority on asset allocation that rests on the bedrocks of diversification, equity orientation, and tax sensitivity. People should have realistic expectations, however, and remember that, while 200 years of data suggests the superior return advantage of equities, from 1921 to 1996 dividends provided the major part of equities' 4.3% real average annual return."

Stingy Links: Law

Sticker shock
"caught between lawsuits claiming they failed to protect consumers from "hidden" hazards--is there really any mystery about what can happen when you stand on the top of a ladder?--and the impossibility of making their products idiot-proof, manufacturers slap warning labels on everything but the kitchen sink in order to ward off liability."

Stingy Links: Management

Too many turkeys
"Executive pay is on the rise again - and so are complaints that ordinary performance is attracting extraordinary rewards"

A pink slip in your stocking?
"There was a time that layoffs took a holiday between Thanksgiving and New Year. Not any more."

Stingy Links: Markets

When lobster was fertiliser
"Demand for lobsters, for example, has evolved in a curious way. The armour-plated delicacy used to be super-abundant and dirt cheap, he says - so cheap that it was fed to inmates in prison and children in orphanages. Farmers even fertilised their fields with it, and servants would bargain with their employers to be given it no more than twice or thrice a week. As the crustaceans became harder to find, canned lobster ceased to be profitable. Live lobsters, by contrast, grew in status as they became dearer. A meal that cost $4 (in today's money) in the 1870s cost $30 or more a century later. What was once a manure substitute is now a prized delicacy. What the lowliest servant once refused, the swankiest restaurateur now offers with pride. Mr Jones's menus may reveal something about the historical fate of fish, crustaceans and molluscs. But there is no accounting for that peculiar land-based mammal that eats them."

Investing logically
"In looking at the polls, the strategists try to stay one step ahead. "Think of the investor polls as a crowded theater," Johnson said. "If the polls are telling us everyone is in the market, then, if the smallest thing happens, everyone tries to run though one door.""

The flu of 1918: Dow data
The data shows that the big influenza epidemic of 1918 had little impact on the markets.

Guys, step aside - women are better investors
"The logical conclusion is that men should be cleared off the trading floors. Hedge funds should be installing day nurseries. Investment banks should be getting rid of all that black granite and redecorating their offices in some nice pastel shades. The men have been in charge of the money for long enough. It's time to give the women a chance. It may not be that simple. The markets are competitive and ruthless. If women were better at investing than men, wouldn't more of them be running the big funds? Gender discrimination may be one reason. Yet it is also possible that the truth is more subtle than someone such as Horlick makes out. While a 'feminine' touch may well be the key to putting together a winning portfolio, it probably doesn't matter much whether such an approach appears in the office in trousers or a skirt."

Profiting from the unexpected
"Using options, he can keep betting for years on unlikely events, losing a small amount of money on his many bets that turn out wrong. But in the rare instances when he's right, he makes a fortune. It sounds impossible, but he is proof it works. "People see me lose money all the time," says Taleb, who shared his tax returns to show that he still makes a seven-figure income from trading even while only doing it part-time. "I reduced my trading out of love for philosophy," he says. "Not out of a desire to make money out of books.""

Our elected insider traders
"It turns out that our senior legislators somehow are very astute stock pickers, whose transactions, when evaluated at published market prices, delivered an overall performance twice as good as that of all the corporate insiders themselves, who must report their every trade in their respective stocks within hours of making them so that they can be published promptly. Could the senators (those who reported trading, anyway) know something the rest of us don't know? While we think about that question, consider that US households overall underperformed the stock market in the same period by 1.4 percent, while their elected representatives in the senate outperformed the market by 12 percent (those corporate insiders outperformed by 6 percent). A rising tide like the 1995r boats."

We're still too exuberant
"So he uses a ten-year earnings average, an approach advocated by Graham and Dodd in Security Analysis, the value investor's bible. And while prices are clearly above the long-term trend any way you cut it, by that measure they are still mountainously beyond normal."

A world of trouble
"I have found three things in life to be generally true: Never play poker with a man named Doc. Never eat at a place called Mom's. And--most important--never, never invest in anything with "emerging markets" in its title."

Stingy Links: Munger

The world according to "Poor Charlie"
"The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification. Because I just think the whole concept is literally almost insane. It emphasizes feeling good about not having your investment results depart very much from average investment results. But why would you get on the bandwagon like that if somebody didn't make you with a whip and a gun?"

Stingy Links: Real Estate

Piggy bank -- or house of cards?
"More and more homebuyers are discovering that in a bull market, acquiring assets with other people's money is the path to riches. They're borrowing a rising percentage of their purchase prices, contributing to the housing boom. The danger is that if prices begin to fall, people who have stretched to buy houses with 100% financing will be under water on their mortgages and at risk of default if they have to sell."

Empty houses, falling prices: A boom dies
"You can see how the housing bubble is bursting in places like Columbus, Ohio, where builders and lenders threw common sense away and enticed people to buy homes they couldn't afford."

Hear that hissing sound?
"To judge the fair value of homes, the OECD uses the ratio of prices to rents, which is a sort of price-earnings ratio for housing. If prices are too high relative to rents, potential buyers will rent not buy, eventually pushing down real prices. In Australia this ratio is 70% above its average level over the period since 1970."

Stingy Links: Stocks

Ben Bernanke's favorite stock
"If you found out that Warren Buffett, Peter Lynch, or Alan Greenspan held only one stock in their personal portfolio, chances are you'd want to know what it was. So when I learned that Ben Bernanke, who is likely to succeed Alan Greenspan in the world's most powerful economic policymaking post, held only one stock, I found that newsworthy. Bernanke held stock of a company that evokes strong feelings -- both pro and con -- among investors. That company is Altria Group, formerly Philip Morris, one the world's largest manufacturers of cigarettes."

Now for the reckoning
"Wilbur Ross, a financier who made an impasse-breaking deal with the USW that enabled the bankrupt steel industry to consolidate and leave Chapter 11 in good shape, notes two important lessons from that experience that the UAW - and others, too - might do well to heed. First, American firms need to be globally competitive and can no longer afford to award pay and fringe benefits solely according to American norms. Secondly, "at the end of the day, the only job worth having is one at a solvent company. What's the point of a gold-plated contract with a firm that is going bust?""

Which side are you on?
"Delphi's Mr Miller would have us focus on one: the clash between the interests of young workers and those of their predecessors. As he put it stirringly in an interview with the Financial Times, inter-generational warfare looms "as young people increasingly resent having their wages reduced and taxed away to support social programmes for their grandparents' income and health-care concerns". Short of flinging the oldsters to the sharks, there is no escaping the demographic trend that has fewer workers supporting more baby-boom retirees in most of the developed world (and part of the developing world). The question is whether the burden should fall on workers in specific firms, on all workers, or on taxpayers in general."

10 rock-solid stocks
"After reviewing the latest research and interviewing dozens of analysts and money managers, we trained our sights on 10 moderate-P/E stocks positioned to benefit from secular -- not cyclical -- trends."

Clicks, bricks and bargains
"The internet was supposed to batter traditional retailers. Instead they are coming to dominate it"

Six feet under
"Is Batesville Casket deviously fixing prices and gouging the bereaved? Or is it just a tough company protecting the channel?"

Newspapers: buys among the battered
"If newsboys still stood on corners trying to hawk papers, this could be one of their pitches: "Extra, Extra, Read All About It! Pundits Ring Death Knell for Newspaper Biz!" The demise of the newspaper industry has become a favorite topic on both Wall Street and Main Street. Doomsayers point to perceived fundamental weaknesses as circulation figures weaken and advertisers shift spending away from newspapers and toward other media."

Stingy Links: Trusts

Income trust study raises red flags
"The Toronto company headed by forensic accountant L.S. (Al) Rosen has expanded on an analysis it did in May. A new 40-page report went to clients last week and to a select group of journalists yesterday. "We took a hard look at the figures for the 50 largest business trusts," says Rosen, who has been warning about potential problems with income trusts for the past three years. "Once you compare them to the market, the gross inflation or balloon mechanism of these trusts becomes obvious.""

Income trust checkup
"The number of trusts that have either suspended or cut their distributions continues to rise."

Stingy Links: Value Investing

Disentangling size and value
"When we separate the size effect from the value-versus-growth effect, we find that size as measured by market capitalization is far less powerful than is generally believed. And, reciprocally, the value effect - because some of its efficacy has been siphoned off by the mislabeled size effect - is far more powerful and more consistent than is generally believed."

Seth Klarman's guide to finding value
"If Benjamin Graham were alive today, he might, at first blush, be more impressed by the appreciated value of Seth Klarman's book Margin of Safety, than with the performance of his investment fund ... that's at first blush. Seth Klarman is a value investor and Portfolio Manager of the investment partnership The Baupost Group, and when Klarman first published Margin of Safety it had an original cover price of $25. The book is now out of print, and today sells on eBay for $1,145. That's an increase of 4580%."

5 Dow dogs about to have their days
"The traditional Dogs of the Dow theory no longer works, so here's a better way. Track down giants like Wal-Mart and Home Depot that are snapping up their own stock."

Few bargains left
"Based on a price-to-cash flow basis, Europe and Asia are around 9 1/2 times, versus 12 1/2 times, roughly, U.S. At 12 1/2 times, the U.S. is not cheap by historical measures. We are very much valuation-driven, as opposed to outlook-driven. Not that the outlook seems very rosy, by the way, but it is more because of valuation. Five years ago, the beauty was we had a bifurcated, two-tier market with very expensive growth stocks and tech stocks on the one hand and quite a few cheap small and mid-cap value stocks on the other. That gap has disappeared, so everything looks quite expensive in the U.S."

Better than Buffett
"Companies mired in bankruptcy and turmoil may look ugly to some investors, but to Ian Cumming and Joseph Steinberg they're downright foxy. Using their publicly traded investment firm, Leucadia National, the duo have built a reputation as master takeover artists who buy distressed companies at discount prices, revive them and sell them for hefty profits."

Value investors struggle to find stocks
"Investor Seth Klarman is a patient man. Which is good, because as president of the $5.4 billion investment group Baupost Group, he isn't finding much to buy these days. About 45 percent of his Boston-based fund is in cash, waiting for good companies to fall from investor favor."

Digging for deep value
"The basic idea of that approach is to find stocks that are attractively priced in relation to expected future earnings growth. And sometimes, the market hands value investors opportunities that are almost too good to resist. We'll call these kinds of stocks "deep value"."

Weitz buys Wal-Mart, Tyco
"Weitz has managed the fund since 1986 and sticks to the value- investing philosophy developed by the late Benjamin Graham and adopted by Buffett, the world's second-richest man according to Forbes magazine's annual survey. He buys shares of companies he views as inexpensive that have products or services he understands, excess cash and limited competition."

Bill's bad bet
"As Miller sees it, "Five thousand years of commodity-price history" says that oil should be priced at the "marginal cost of production"--the price at which it makes sense for companies to find and extract it from the ground. And that, Miller says, is currently about $40 per bbl."

Patient Capital Q3
"Income trusts have also increased in value because interest rates have declined. In effect they have behaved like fixed income instruments; rising as interest rates fall. It should follow then that as interest rates rise income returns should at best be muted. In our view, the combination of unsustainable distributions, very high valuations and rising interest rates spell the potential for a substantial loss of capital in the future."

Still going strong
"Kahn, the chairman of Kahn Brothers, a low-profile New York investment firm, might be Wall Street's oldest active investor. He's in the office every business day, reading scientific periodicals, annual reports and newspapers in search of undervalued stocks in the tradition of his friend and mentor, Benjamin Graham, widely considered the father of value investing."

Value investors value newspapers
"Despite obituaries detailing their demise, newspaper companies still hold intrigue for some contrarians. Here's why they haven't written off old media yet."

Stingy Links: Whitman

Third Avenue's discount mantra
"Martin Whitman, manager of the Third Avenue Value Fund, hired Curtis Jensen in 1995 as a successor. A decade later, Whitman, 81 years old, still has not set a retirement date, and his mutual fund is outperforming the Standard & Poor's 500-stock index for a sixth consecutive year."

Stingy Links: World

Arab world, Iraq and al-Qaeda
"As al-Qaeda scores own-goals in its backyard, many Arabs, including some Iraqis, are beginning to rethink their position on violence in the name of resistance"

Held hostage in China
"David Ji used a few good contacts in his homeland to build a billion-dollar business selling cheap DVD players in the U.S. Then he crossed a supplier--and disappeared."

Europe's farm follies
"But there is also a more general resistance to reform that reflects the special place of farming in the French imagination. Its importance runs deeper than agriculture's tiny 4% share of the workforce or its 3% share of GDP. It is not by accident that French politicians rush each year to the Paris Agricultural Fair to pose for the cameras with heaving bulls. Why are the French so infatuated by farming? And what would happen to French farming if subsidies were slashed?"

Deep trouble
"Nagle explains that the U.S. is compromised by the demands of security, environmental issues and other factors. This has had a serious impact on the pressing need to upgrade port infrastructures. For instance, the well-run South Carolina State Ports Authority is seeing a shortfall in federal funds promised versus those actually paid--and this authority is not alone."

The sun also rises
"The slow growth in productivity that makes OECD forecasters gloomy about Japan's potential was a consequence of the country's astonishing waste of capital during the 1990s, combined with a reluctance to cut jobs. Money was misallocated during the great stock and property bubble of the 1980s, but then even more was wasted in the next decade, as banks kept "zombie" companies alive and politicians raided the biggest pork barrel in history. Now that is past, even a modest improvement in the allocation of capital and the use of labour would boost returns and productivity. Reforms in corporate law and changes in the capital markets make it likely that the improvement will be better than modest. And, as workers become scarce again, further investment in information technology and other sorts of automation should boost productivity."

ISSN 1499-2787

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