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The Stingy News Quarterly (Q1 2002)

The Best Of Stingy Links

Buffett Bonanza

Buffett's 2001 letter
"Some people disagree with our focus on relative figures, arguing that "you can't eat relative performance." But if you expect - as Charlie Munger, Berkshire's Vice Chairman, and I do - that owning the S&P 500 will produce reasonably satisfactory results over time, it follows that, for long-term investors, gaining small advantages annually over that index must prove rewarding. Just as you can eat well throughout the year if you own a profitable, but highly seasonal, business such as See's (which loses considerable money during the summer months) so, too, can you regularly feast on investment returns that beat the averages,however variable the absolute numbers may be." [PDF]

Buffett lashes out at options
"Warren Buffett, using the forum that Berkshire Hathaway Inc.'s annual report provides, has renewed his attack on the widespread use of stock options and the ways corporations find to ensure that executives will profit from options even if the company's share price declines."

Nebraska Business interviews Buffett
"The simple test of good ethics, is how would you feel about any act, if a reasonably intelligent, but unfriendly reporter were to write it up and put it in tomorrow's paper for everyone to see. If it passes that test, it's okay, and if you have to think about it, it probably isn't the right thing to do." [PDF]

Buffetting corporate America
Bill Gross talks about the secret to Buffett's success and highlights GE's precarious position.

Has Warren Buffett lost his touch?
"Berkshire wasn't the only insurance company hit by the terrorist attacks that destroyed airplanes, buildings, and thousands of lives. But Berkshire's insurance losses, combined with declines in a vast stock portfolio that includes Coca-Cola and American Express, was a blow to Berkshire, which has a sparkling reputation for providing dependable gains to investors." - Time to load up on some Berkshire?

Missing the plate
"Buffett's considerable cheering section, the millions of investors who were taught by Buffett that stocks can be a safe investment, will now be wondering if his famous buy-and-hold strategy no longer holds." - More evidence of a BRK buying opportunity.

Dashing Dividends

Shakespeare's preferreds
"Nevertheless, because of the attractiveness of dividend investing for those in the bottom tax bracket, and because of inefficiencies in the preferred share market, careful investors can be well rewarded as long as they pay attention to detail."

Dividend stocks pay off
"After all of my reading, it was Benjamin Graham and his books Security Analysis and The Intelligent Investor that really influenced me more than anything. I realized that it was values that, in the long run, determine price more than anything else."

Study links profit to dividends
"Throughout the booming 1990s, dividends fell out of favour as investors turned their focus to rising stock prices and juicy capital gains. Corporate North America convinced investors that profits were best spent expanding businesses rather than paying out fat dividends, leading to stronger growth in years ahead. But new financial research argues the opposite is true; that low dividend payouts lead directly to poor profit growth."

The dividend scandal
"Dividends are crucial for pricing a firm since finance theory states emphatically that the price of a stock is not the discounted value of future earnings, but the discounted value of future dividends and other cash distributions. Earnings are only a means to an end, and that end is to maximize the future cash returns received by investors."

Corporate Scandals

Dirty rotten numbers
"Enron has made us shine a light on the books of America's public companies. Now, if your company carries even a hint of bad accounting, the stock will be savaged."

Prescription for disaster
"In this post-Enron world, investors understandably want to know if Elan is an isolated case, or if the pharmaceutical industry is potentially as riddled with accounting problems as, say, the energy-trading business."

How not to invest in the next Enron
"While Wall Street analysts and Big Five auditors were looking the other way on Enron and financial journalists had their heads in the sand, signs of dubious accounting in Houston were there for anyone willing to wade through the company's mind-numbing corporate filings."

Does Tyco play accounting games?
"Don't let the recent buoyancy of the stock market fool you. Most investors are still deep-in-their-gut afraid to dive back into the water. And the fears have little to do with the latest Fed report, inventory statistic, or other economic indicator. No, the big concern is the weather. Will another Enron-like storm be sweeping across the country? Are there torrents of financial funny business yet to be uncovered?"

How telecom's bad boy did it
"The emerging scandal at Global Crossing has many of the same ingredients as Enron's: a colossal bankruptcy, a politically connected chairman who walked away with millions, dubious accounting, and inadequate disclosure. There's even a whistle blower's prophetic warning and a familiar accounting firm, Arthur Andersen. The SEC and the FBI are looking into whether Global Crossing used improper

Acrobatic Accounting

Rosen the gadfly of accountancy
"Among the CICA's beefs with Mr. Rosen is his persistent public denunciation of Canadian accounting standards. He describes them as a 'massive Ponzi scheme,' and says they attract fraudsters to this country. He's equally critical of the major accounting firms for 'protecting one another with an unspoken secret pact,' as well as the 'bozos' they employ to perform financial audits for public companies."

Regulators address concerns about non-GAAP earnings
"Canada's securities regulators are publishing guidance to address concerns about companies' widespread use of unconventional earnings measures."

One plus one makes what?
"Where were the auditors? People ask that question after every corporate collapse, and lately they've been asking it with disturbing frequency. At Waste Management, Sunbeam, Rite Aid, Xerox, and Lucent, major accounting firms either missed or ignored serious problems."

Pricey stocks risk a fall into the GAAP
"The gulf between what corporate America would like people to think it earns and what it has actually been earning, according to the rules of accounting, has never been so wide. Perhaps that's because if investors started looking at actual bottom lines, rather than their jazzed-up ones, stocks might be significantly lower." - Check out the keen P/E graph.

Destructive Debt

How debt triggers can sink a stock
"You may not know they exist. But these debt deals can force companies to cough up a load of cash--immediately. And that could prove fatal to your portfolio."

Don't get burned by PIPEs
"Private investments in public equities are a way for cash-starved public companies to raise money. But shareholders should beware."

Betting the house on a better life
"A recent cautionary story in the Detroit Free Press ( warns reverse mortgages can become an expensive trap. It describes the experience of a couple who weren't prepared for large up-front fees that are higher than with a conventional loan, years of high interest charges applied against their home and the fact the spendable income received from a reverse mortgage is less than the home equity eaten up by the reverse mortgage."

Senior learns tough lesson on perils of leveraged investing
"It's late 1999. Imagine you're a bank loans officer and a 72-year-old retiree proposes that you lend him $90,000 to buy a Nasdaq index fund. He's not in the best of health, but offers to put up $10,000, for a 9-to-1 leveraged investment loan. His only income is $2,000 a month from his RRIF and he still has a $66,000 mortgage on a modest home in the country."

A record for corporate bankruptcies?
"Unemployment is down. New orders are up. And even Federal Reserve Chairman Alan Greenspan thinks an economic upturn is in the cards again. But not everything is coming up roses: Some experts are bracing for a record number of corporate bankruptcies in 2002."

The Economy

Is housing the next bubble?
"In fact, housing didn't just hold its own during the slump. It zoomed. Activity has been so strong that sales of new and existing homes hit all-time records last year. Not exactly what you'd expect when around two million people were losing their jobs, is it? What's

Are we there yet?
"Like unhappy families, every recession is different. Some are short and shallow, others protracted and deep. Since the early 1950s none has lasted for more than 16 months. If this one were to match the record jointly held by the slumps of 1973-75 and 1981-83, it would end in July 2002."

Ranking the economic forecasters
"Only lawyers are the butt of more jokes than are economists. A recent report by Sweden's central bank, Sveriges Riskbank, drills down into the dismal track record of the dismal science with what the authors claim is uniquely comprehensive scope."

Terrorism insurance: pray as you go
"In fact, in the past weeks, thousands of companies whose commercial-property, commercial inland marine, farm, crime, and business-owners insurance policies expired on January 1 have received letters stating that the policies will not be renewed as written. While the standard property policy, for example, will still guard against the perils of fire, explosion, smoke, theft, and wind, it will not cover them if terrorism caused the problem."

The friction economy
"American business just got the bill for the terrorist attacks: $151 billion--a year"

The panic spreads
"The world--including even the previously sanguine Japanese--is now catching on to the fact that Japan's 12-year slump has deteriorated into a full-blown crisis, threatening a wild global ride. Falloffs in various indicators in the world's second-largest economy resemble the plunge of such countries as the U.S. into the Great Depression of the 1930s."

Bullish Brokers

A rare breed
"Independent analysts aren't perfect, but at least they're free to speak their minds. Too bad most retail stock investors are limited to brokerage reports."

"When the Internet bubble burst in March 2000, unlucky investors watched more than $3 trillion of their money disappear. What spurred the incredible dot-com bull run on Wall Street? Was the public blinded by dreams of small fortunes and easy living or did the nation's investment banks manipulate the IPO market and exploit public trust?"

Ten things your financial planner won't tell you
"The majority of financial planners work on commission, which doesn't make them bad people but can make for bad financial planning. When Irvine, Calif.-based CFP Scott Dauenhauer worked as an adviser at a few big-name brokerage firms during the '90s, he says he was constantly being pushed into selling the firm's proprietary "

Advisor fees, revisited
"If management costs can reduce your return by 30 to 70 percent, new ways to make money don't mean very much. You'll still suffer the losses from excessive costs. The most productive step any investor can take to improve his long-term returns is to reduce the cost of investing."

Fund Fun

MERs offer best guide to funds' future peformance
"Funds that ranked among cheapest in their category by MER generally had a good chance of outperforming over time frames of one, three and five years, the study found."

In tough times, fees matter more
"But then along comes a year like last year, when a fund loses 20 or 30 per cent -- as some did in 2001 -- and suddenly, some may more closely question the 2 or 3 per cent they are paying a professional to manage their money for them." -- Have fun spotting the 'sell side analysts'

Beating the market, until the expenses pile up
"Devastating as the conclusions may be for the fund industry, they contain a silver lining for the rest of us. In contrast to previous studies that found that it was impossible to consistently pick stocks that outperform the market, Professor Wermers shows that not only is it possible, but also that it is not particularly unusual. By creating our own portfolios -- and assuming that we can pick stocks as well as the average fund manager -- we stand a good chance of saving the bulk of the 2.3 annual percentage points spent on fund inefficiencies -- and a betting chance of actually outperforming the market."

Devoured returns
"What even the most actively trading managers will concede, though, is that if you'd better have a good reason. Otherwise, turnover can chew up a big chunk of your fund's returns, particularly if you are holding that fund outside a registered plan."

Active fund trading costs remain high
"Many individual investors believe that professionally managed funds have a trading cost advantage over them, but this is not the case. A recent study suggests that smaller volume traders have gained the most from recently shrinking commissions and smaller bid-ask spreads from regulatory changes."

Money in your pocket
"A trailer fee is the commission that mutual fund companies pay fund sellers to entice investors into buying their products. It can often go as high as 1% annually for every dollar you have invested for as long as you hold the fund (regardless of how well the fund performs)."

Indexing Ideas

Jack Bogle, man on a mission
"Here the longtime advocate of low-cost index investing describes what he expects from the market in coming years and what he believes investors should be doing, as well as what issues in the mutual fund world he's working on at the Bogle Center."

Not a better mousetrap
"Given the benefits of ETFs, holders of Vanguard's index funds are likely wondering whether they should dump their open-end shares and buy VIPERs instead. For most investors, according to financial analysts and advisers, the answer is no."

Time can conjure up the profits
"The evidence from both the US and the UK is that shares with value characteristics (such as a relatively high dividend yield and a low price-to-book ratio) have consistently produced higher returns than those with growth characteristics. Returns from the highest-yielding stocks among the top 100 UK companies, for example, have generated returns of 11.5 per cent per annum, against 8.6 per cent for the lowest yielding stocks, a fact that thanks to the power of compounding can produce big differences in cash returns over long periods."

Great expectations
"The equity premium (also known as the equity-risk premium) is a measure of the average annual return over and above riskless debt, such as government bonds, that shareholders expect to receive as compensation for holding risky shares. This risk is no illusion: shareholders are always the last to be paid, after other creditors get their cut. The authors conclude that all the world's stockmarkets offer strong evidence that riskier assets, on average, return more to investors"

Miserable Management

Optional illusion
"Stock options are a real expense, even if they're not noted on the balance sheet. Investors will soon get to see the hidden costs -- which can turn black into red."

Don't get burned
"As investigators untangle the complicated accounting at Enron, your own financial health depends on asking a simple question: What are earnings? Ignore the accountants, the analysts, and the brokers who snigger at your stupidity."

Sam Walton made us a promise
"Wal-Mart's founder made a pact with employees: He would be fair to them, and they would work hard for him. It was a good deal, but can it survive in the 24-hour service economy?"

Market Musings

TSE 300-stock index headed for extinction
"The TSE and its index manager, Standard & Poor's Corp. of New York, are expected to announce this morning an overhaul of the TSE 300 that will see many small companies eliminated from the list of 300 stocks it now includes, and a new name created for the benchmark index."

TSE important index change
"On May 1st, 2002, Standard and Poor's will officially take over the administration of the TSE 300 Composite Index. This benchmark index will be renamed the S&P/TSE Composite Index. The S&P/TSE Composite Index will join the family of S&P Canadian indices which include the S&P/TSE 60, launched in 1999, as the index for senior capitalization companies in Canada, the Canadian mid-cap and small cap indices and the recently launched S&P/CDNX Index - all barometers that reflect the unique and diverse nature of the Canadian capital markets. Details on the index and the changes that will take place are available here."

Show me the earnings!
"In this surreal bubble-era in which we curiously find ourselves still languishing in the United States, the average stock investor seems to have totally forgotten that the only ultimate reason to own a given company is earnings!"

Of risk and myopia
"To repeat: the risk tolerance of an investor is determined largely by how often he checks his portfolio. This is nothing new. Benjamin Graham commented in The Intelligent Investor that holders of obscure mortgage bonds happily held onto them through the depths of the Depression until they eventually recovered their value because they were highly illiquid and not often quoted. On the other hand, holders of frequently-quoted corporate bonds (far less risky but priced daily in the papers) panicked and sold after their initial drop."

Fool me twice, shame on me
"On this scale (as of December 31, 2001), the P/E of the S&P 500 is the highest in all of recorded U.S. history back to 1871. Stocks cheap? I think not."

Past the glory days
"Among the many banks stung by recent bankruptcies in America, one name stands out: J.P. Morgan Chase was a big lender to three of the biggest corporate failures - Enron, Kmart and Global Crossing - and has had to write off hundreds of millions of dollars."

Stocks: are you expecting too much?
"Investors often accuse Wall Street analysts of inflating earnings estimates to hype stocks. But guess what? Investors are guilty of outrageous expectations, too. Just look at Vitesse Semiconductor (VTSS ), the telecom-chip maker: Analysts estimate a 33.1% annual growth rate for the company's earnings for the next five years. But if you run the stock through a complex valuation model that incorporates earnings, stock prices, volatility, and interest rates, Vitesse's current share price of $12.47 assumes that earnings will grow at a hefty 56.1% a year over the same period."

Flawed giants
"Fannie Mae and J.P. Morgan Chase seem mighty. But their stocks are cheap for good reason. Their risk exposure is huge, with a big reliance on derivatives."

Bubbles, Human Judgment, and Expert Opinion
"The widespread public disagreement about whether the stock market has been undergoing a speculative bubble in the past few years reflects an underlying disagreement about how to view human judgment and intellect." [PDF]

Longer time horizon does not reduce risk
"'You must ask what is the proper way to make use of that data when forecasting for the future,' says Bodie. He suggests an exercise: write every one of those years of stock market returns on a piece of paper and put them in a hat. Then pick 25 out at random, but one at a time and returning each to the hat before picking again. 'The likely result is that in 95 per cent of cases, your 25-year return will be higher than the return on bonds. But there will be 5 per cent where the results will be bad - in some cases spectacularly bad.'"

Signs of the times
"The odds are six to five that 2002 is going to be a bull year. At least that's what some bookmakers are giving the current favorites, the NFC's St. Louis Rams, to win this year's Super Bowl."

NASDAQ 100 companies report $82 billion loss
"For the first three quarters of 2001, the one hundred companies that make up the NASDAQ 100 reported $82.3 billion in combined losses to the Securities and Exchange Commission (SEC). For the same period, these companies reported $19.1 billion in combined profits to shareholders via headline, "pro forma" earnings reports-a difference of $101.4 billion or over $1 billion per company."

Media Mania

Rukeyser gets the boot
"Louis Rukeyser, the venerable financial commentator who has hosted public television's "Wall Street Week With Louis Rukeyser" for 32 years, said Thursday he has been forced from the program by his partner, Maryland Public Television."

Paying for time
"This story is an inside look into how some TV business shows are charging companies to appear on their programs. It's called "pay for play" and often it allows companies to have editorial input during the filming and scripting process. Good coverage can then raise the company's stock price. It's a win-win situation for everyone - except the viewers, who are not in on the deals."

Tax Tips

RRSP meltdown
"Buoyed by hefty pensions and irked by the tax hit awaiting their heirs on their undepleted RRIFs, a growing number of RRSP holders are drawing down their registered accounts, paying some tax and putting the balance - or, rather, its borrowed equivalent - into growth stocks. But how much risk is it worth to outsmart the taxman?"

Gains from past losses
"The bear that mauled stock market investors in 2001 can now help them get back some taxes they shelled out in prior years. Indeed, the bear and the tax man have teamed up to make a limited-time offer that lets your clients recoup capital gains tax paid as far back as 1998, when market values and tax rates were much higher."

Crime and Punishment

As phony as a $3 bill
"With all the recent news about con men operating phony businesses, I was struck by a curious item I came across on eBay. It was a $3 bill from the Salem & Philadelphia Manufacturing Company of New Jersey, dated 1828. It wasn't the $3 amount of the note that caught my attention, as notes from that period came in many amounts that have long since gone out of style. It was the issuer, the Salem & Philadelphia Manufacturing Company. From my reading of the newspapers of the day, I recognized the issuer to be one of the many scams of that time, indeed, one of the more audacious."

White-collar criminals
"They lie they cheat they steal and they've been getting away with it for too long."

The $200 billion miscarriage of justice
"Asbestos lawyers are pitting plaintiffs who aren't sick against companies that never made the stuff--and extracting billions for themselves."

Dark Humour

How enron works
"Here's how Enron works. It's really quite simple. Ismail is a successful mule trader in Peshawar. Every year Ismail delivers 30 mules to the Kabul Mule Market and gets $40 per mule."

Enron was, in layman's terms, a nest of dirtballs
"If you're an average layperson, your grasp of high finance consists of knowing your ATM code. So you're probably bewildered by this scandal surrounding the collapse of Enron, which had been the seventh-largest corporation in America. (The sixth largest is the guys who go ``WHASSSSSSUP!'')"

The 101 dumbest moments in business
"In a perfect world, a list like this would not exist. In a perfect world, businesses would be run with the utmost integrity and competence. But ours is, alas, an imperfect world, and if we must live in one where Enron, Geraldo Rivera, and Cottonelle Fresh Rollwipes exist, the least we can do is catalog the absurdities."

Media should bring back our beloved bubble
"Do these things, and we're on our way. But don't be discouraged if it doesn't happen all at once. Remember, the Internet Bubble wasn't built in a day. It took, like, a week."

Our military ready to join hunt for Enron boss
"DEBATE continues to rage in Ottawa over what role our military should play in helping the United States find, capture, and bring to justice the notorious Kenneth Lay."

New @

Down with the dogs
Investors seeking income often buy stocks that pay a healthy dividend. Canadian dividends are taxed more favorably than interest from GICs but dividends may be reduced and the initial investment is not guaranteed. Dividend investors employ a variety of popular approaches to pick stocks including dividend growth, relative dividend yield and the Dogs of the Dow. In this article I focus on the Dogs of the Dow which is wildly popular in both Canada and the U.S. but has its flaws.

Frugal Funds
There are two general lines of thought when it comes to picking funds. Indexers expect that they will do better than active fund investors by minimizing fees. On the other hand, active fund investors postulate that they will do better by relying on the skill of expert portfolio managers.

Stingy Selections & Dartboard Dynamos
Stock picking contests are both fun and frivolous. The typical approach is to pick a few high-risk securities and, if possible, to use massive leverage. While this might be a good way to play the game, it makes for lousy investing.

Stingy News Weekly Archive


Bullishly Yours,
Norman Rothery
ISSN 1499-2787

Refer to legal & conflict of interest disclaimers.
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