Archive for the ‘Value Investing’ Category
Merger and Acquisition Talk
Posted by: Todd Metheny in Value Investing on November 3rd, 2009
If you woke up this morning and read the business news, you may have noticed that Warren Buffett (through Berkshire Hathaway), the patron saint of investing, has made a tender offer to purchase Burlington Northern Railroad (BNI). The offer is to purchase the RR for $100 per share in a deal that will be a combination of cash and stock.
Investors in a mood for merger arbitrage have ran into the fray, trying to squeeze a little profit out of Buffett’s purchase. If you’re not familiar with “merger arbitrage,” here’s basically what it is. An offer to buy a company will always be for a higher price than that which the stock is currently trading (otherwise – why would anyone sell – they obviously like owning the stock at the current price, that’s why they do). So say a company’s stock is currently trading at $70 per share. When a deal is announced that the company will be purchased for $100 per share, investors who believe the deal will go through will rush into the stock, driving the price of the shares up toward the $100 purchase price.
This approach isn’t without risk. If the deal doesn’t go through, the price of the stock will come crashing back down toward (and perhaps below) its original price point. As the deal gets closer and becomes more or less likely to happen, the stock price will fluctuate to reflect the probability that the deal will go through. BNI is already at $97.69 as I write this. That means that investors currently feel that there is a very high probability the deal will go through.
Knowing whether a deal is going to go through, though, is difficult for a small individual investor to assess. We’re not plugged into the Wall Street gossip. We don’t work for the companies in question (we shouldn’t be trading if we do). Information regarding these deals won’t come our way first. With that in mind, there’s risk in this approach. In my experience, though, Buffett usually gets his company (though a deal for Constellation Energy fell through last year – Berkshire still made money).
Also related to the deal, if you own class B shares (disclosure: we do), they’re splitting 50-1. That is, for every class B Berkshire share you own, you’ll get 50 shares worth 1/50th as much. The board has already agreed to this wrinkle. It doesn’t really mean anything, mostly class A shares will be used to do the deal. The class B shares are simply a way to pay off BNI’s smaller investors (people like us). Hopefully you owned some BNI yesterday! Thanks for reading.
Tradeking Promotion
Posted by: Todd Metheny in Value Investing on October 9th, 2009
Click on the banner at the bottom this post and you can get $50 free from Tradeking. In order to get the $50, you need to open an account, fund it with $2,500, and make one trade. After you make the first trade, you’ll get the $50 deposited in your account.
It only works when you click on one of these approved banners or links (you’ll see them around the blogging circuit). I have one in the sidebar that will remain there for the remainder of the promotion. The promotion runs through October 31st. If you have some extra cash, take advantage of the free $50.
I actually personally use Tradeking. It’s one of the cheapest discount brokers at $4.95 per trade, and it has pretty good tools and support. I can’t say whether it’s the best. For a rundown of all the cheapest discount brokers, check out this post. Thanks for reading.
Strategy for Investing in Micro-Loans
Posted by: Todd Metheny in Value Investing on September 17th, 2009
Eggs. Baskets. You get it.
Many bold, value-oriented money managers prescribe to a theory of focused investing. Focused investing involves investing your money in just a few baskets, instead of over-diversifying. Joel Greenblatt, manager of Gotham Capital, tells us in his excellent book, You Can Be a Stock Market Genius, “After purchasing six or eight stocks in different industries, the benefit of adding even more stocks to your portfolio in an effort to decrease risk is small, and overall market risk will not be eliminated simply by adding more stocks to your portfolio.”
This is an approach used by some of the best investment managers. The theory is simple, why put 1% of your money into your 100th best invest idea, when you could put 10% of your money into one of your best ideas?
With stocks, I think this is a great theory, idea. If you’re truly convinced, after doing the research, that a particular idea is one that will make you money, and you believe that you’re a person who has the knowledge to make that sort of call…then I think you’re fully justified in investing this way.
When it comes to micro-consumer loans, though, focused investing really doesn’t have a place. This approach works with stocks because they have almost unlimited upside. You can focus your ideas, and one great idea can dwarf your mistakes. The value of the stock can’t go below zero, so the downside is limited to whatever you pay for it – and the upside could be 1000%. When investing with the micro-loan companies, like Lending Club or Prosper (or whatever – those are the two I’m familiar with), it’s important to stay diversified as possible. If you have $1000 to invest, for instance, the maximum diversity you can have at $25 per loan is 40 loans. That’s really not very many. In fact, only being able to diversify into 40 loans is actually extremely risky. Banks make money by being able to spread their risk amongst thousands of loans. They try to make every decision as accurately as possible – they wouldn’t lend to anyone that they thought would default. You won’t either – but I suggest, if possible, that you spread your money out over two or three hundred loans. Good luck and thanks for reading.
The One About Prognosticators
Posted by: Todd Metheny in Business Profiles, Economics, Value Investing on September 15th, 2009
I'd the chance of rain tomorrow is 1000%. You can quote me on that.
There’s a great story in the intro of Common Stocks and Uncommon Profits by Philip Fisher. The intro is written by the author’s son, Kenneth Fisher, another famous investment manager and author. Ken was at conference with his father, and a contest was announced at dinner the first night they were there. Each person was asked to write down what the market would do the next day. The winner would receive a color television, and would be announced the next day at lunch, just after the market closed (CA time). Both men acknowledged that this was a silly exercise. In Ken’s own words:
“Most folks, it turned out, did what I did – wrote down some small number, like down or up 5.57 points. I did that assuming that the market was unlikely to do anything particularly spectacular because most days it doesn’t. Now in those days, the Dow was at about 900, so 5 points was neither huge nor tiny. That night, back at the hotel room, I asked Father what he put down; and he said, “Up 30 points,” which would be more than 3%. I asked why. He said he had no idea what the market would do; and if you knew him, you knew that he never had a view of what the market would do on a given day. But he said that if he put down a number like I did and won, people would think he was just lucky – that winning at 5.57 meant beating out the guy that put down 5.5 or the other guy at 6.0. It would all be transparently seen as sheer luck. But if he won saying “Up 30 points,” people would think he knew something and was not just lucky. If he lost, which was probable and he expected to, no one would know what number he had written down and it would cost him nothing. Sure enough, the next day, the Dow was up 26 points, and father won by 10 points.
When it was announced at lunch that Phil Fisher had won and how high his number was, there were discernable “Ooh” and “Ahhh” sounds all over the few hundred person crowd. There was, of course, the news of the day, which attempted to explain the move; and for the rest of the conference, Father readily explained to people a rationale for why he had figured out all that news in advance, which was pure fiction, and why the market had done what it did, again pure fiction and nothing but false showmanship. But I listened pretty carefully, and everyone he told all that to swallowed it hook, line and sinker.”
I think of that story when I see all the headlines touting that doomsday is near, or predictions that the Dow is going to hit 50,000 by such and such date. There’s clearly an incentive to make such predictions. No one puts your name in the news or publishes a quote that says something to the effect of, things are so-so now and will continue to be so-so in the future, though they might improve or deteriorate just a little bit. If you predict that the world will end in 8 days – that’s an exciting news story.
Plus, if your predictions turn out to be wrong, there’s no penalty. You already had your 15 minutes of fame. They aren’t going to write many articles proclaiming, “Todd Metheny was wrong 5 months ago,” for a couple reasons – I could turn out to be right sometime in the future, and because that’s not news. It’s the next prediction that makes the news. People don’t care who was wrong. People like Peter Schiff and Nouriel Roubini have gained notoriety for their doomsday predictions. Both of those fellows know a lot more about economics than I do, but give me the tempered view. In my experience, the worst case scenarios have often been wrong – from Thomas Malthus‘ prediction that we’d run out of food before 1900 to Chicken Little’s insistence that the sky was falling. There are too many variables involved to be right for any reason other than luck. Malthus was wrong because he ignored the possibility of technological advances and overlooked man’s ability to innovate and survive. Do yourself and a favor and be an optimist. If the worst is coming, it’s not going to matter. People that listened to people predicting the worst for the longest term took their money out of the stock markets, only to see a historic rise. Lately, many of those same people have plowed their money back in at much higher prices, because markets have “stabilized.” If you want to watch someone, watch Warren Buffett. Watch Seth Klarman. Compare Peter Schiff’s returns in his fund to Seth Klarman’s over the last 5 or 10 years (hint: Klarman is killing him). You can have all the PhDs in the world, and it doesn’t mean you’re going to be better at assessing market risk than Buffett or Klarman. Remember that when you hear the prognosticators prognosticating;) Thanks for reading.
Lending Club Approved in Missouri
Posted by: Todd Metheny in Value Investing on September 1st, 2009
Lending Club has been approved in Missouri. Just thought I would let you know. Good luck (and avoid that note trading platform).
Don’t Chase Returns
Posted by: Todd Metheny in Retirement, Value Investing on September 1st, 2009
Chasing returns usually won't bring them to you.
A friend who was considering changing retirement funds called me recently to ask what I thought about the change. I didn’t have much to say, except that it’s probably a good idea to try to find the lowest fees possible and invest in index funds. After checking the year to date (YTD) returns for each fund, he realized that the fund that he was already in was up almost 10% more than the fund he’d been moving to. He me back and asked if he should stay with the old fund to gain the extra returns for the remainder of the year.
Of course, I don’t know the answer to that. Over the remainder of the year, his old fund might go up 1000%. I don’t know anything about it. I don’t know what it’s invested in, or how it’s gained it’s market beating returns, or whether it’s likely to continue. I can, however, spit out some famous investing maxims. These are some of the ones I hit him with: (1) past performance isn’t an accurate predictor of future success, (2) it’s easy to confuse genius with a bull market, (3) don’t chase returns, and (4) don’t focus more on the return than the risks undertaken to earn that return.
When I think of the past performance maxim, I think of growth. Companies can’t grow at 30% a year forever. This makes sense. Eventually things become as big as they can be. Once you put a Starbucks or a McDonald’s on every corner, it’s hard for those companies to grow in the same way they have in the past. They can come up with new ideas and new ways to use their capital – but eventually growth is going to slow and even decline. Companies don’t last forever.
The don’t chase returns rule is one that I’ve learned first hand in the past. When I first started investing, I looked up the Money 70, a recommended list of mutual funds made by the magazine. On that list, at the time, they told you the one year return, followed by the projected annual returns over 5 years and 10 years. The one year return for one of the funds (it was technically an index – for REITs) mentioned was 35%, their 5 year was 31% and their 10 year was 29% per year. When I saw that, I thought to myself, “What a great investment! Even if I make half of that I’ll be making out pretty well!” Of course, what I should have been thinking was, “how can this fun make 29% per year for 10 years? Those are ridiculous returns.” You know how this story goes right? The fund lost about 50% the next year. The price of the fund had been driven up to ridiculous levels because these returns were being advertised all over the place. Luckily, we ended up having very little money in this particular fund, but the credit for that goes to my wife. I believed the magazine. Of course, I’m older, wiser, and more knowledgeable now. I’ve read more, studied more, and talked to more people who know more about investing than I do.
Risk is an important consideration, too. Everyone has risk tolerance to spare when markets are doing well. Seth Klarman and Warren Buffett are known for keeping about half of the value of their entire portfolios in cash. This puts them in a position that enables them to take advantage of great opportunities (like market crashes), and insulates them from market dips. It might decrease their returns in the strongest market conditions, but they are also undertaking less risk by keeping that money on the sidelines (the big risk is inflation). Having less money in play also allows them to focus on their best ideas and not over-diversify into their ideas that aren’t as good. Don’t chase returns and thanks for reading.
Long Term Optimists from a Time Not Unlike This One
Posted by: Todd Metheny in Business Profiles, Value Investing on August 26th, 2009
I found this gem on Youtube. The image quality isn’t spectacular, but it’s definitely worth your time. I especially enjoyed the analogies and thoughts from Sir John Templeton. Templeton died last year. If you don’t know who he is, take a minute and read his wikipedia page. He was known for being not only a great investor, but a great philanthropist. In the interview, he seemed to be a little more fun than Lynch. He seemed sort of folksy, kind of like this guy.
Peter Lynch is one of the most successful mutual fund managers of all time (He took Magellan from about $14 million in assets to $18 billion over the course of 22 years). He’s also well known for writing the books One Up on Wall Street and Beating the Street, both excellent books that I’ve read and recommend. Lynch is famous for his maxim to “buy what you know.” Don’t buy companies if you don’t understand what they make or do and don’t buy a company if you don’t understand how they can be successful going forward. He’s had some big winners in retail, for instance, and he talks in his books about how he would go to the mall just to see where people were going. If something seemed like a hot spot, he would investigate how cheap or expensive the stock was and go from there. When I first started investing, Lynch’s books were actually two of the books that really spoke to me and appealed to me.
The advice they give in the video applies to any era. Both of their approaches were somewhat different, but both were grounded in common sense and relied on patience and the right temperament. A couple of highlights:
Earnings are the key. A company will rise if their earnings rise. Markets aren’t efficient all the time, but if a stock is undervalued, eventually that value will be realized by the market. Sir John Templeton states in the video that he tends to hold stocks for 5 years or more, because it often takes that long to realize that value. You or I may not have the same convictions in our stock picks as Sir Templeton;)
Anyway, if you’re at work and can’t watch the video, I hope you’ll come back to it when you get a chance. Thanks for reading.
Blood on the Streets
Posted by: Todd Metheny in Value Investing on August 21st, 2009
Happy Friday! Yesterday I wrote about how well the market has performed since Warren Buffett encouraged us to buy American. I couldn’t keep myself from also comparing the markets performance in relation to the March lows. Just for fun, I decided I’d do the same thing with my own portfolio.
I’d like to preface this post by saying that almost all of my wife and I’s invested money is in retirement accounts invested in low cost Vanguard index funds. We’re not relying on anyone’s ability to beat the market for our long term wealth. At the same time, I like picking stocks, and we do hold a few individual positions. We’ve held all of our positions for quite some time, with very little movement. There have been some things we considered doing over the last year or so, but on every occasion we’ve decided to do something a different.
I have mixed emotions about sharing my personal portfolio, because in the state its in, I’m admitting I’ve been wrong about a lot of things. I’m not going to tell you what price I entered the positions in. In some cases, I think that would be bragging or whining (depending on the result), and I’m not sure that would serve a purpose. What I’d like the point of this post to be is something that we already know – the time for investing is when there’s blood in the streets – so all I’m going to focus on is the best possible date – March 9th (just because I think that’s fun).
The slash lines are the ticker symbol, the March 9th price, today’s price, and the percentage change. There are 8 positions total and they’re presented in no particular order.
Company Name, Ticker, March 9th, 2009 price, Todays price, % change
Berkshire Hathaway, BRK-B, $2,310.00, $3,274.50, +41.75%
Conoco Phillips, COP, $35.78, $43.25, +20.88%
Bank of America, BAC, $3.75, $17.14, +357.07%
Ace, Ltd, ACE, $31.43,$50.78, +61.56%
Disney, DIS, $15.59, $25.89, +66.07%
Google, GOOG, $290.89, $460.41, +58.28%
Linn Energy, LINE, $12.13, $21.39, +76.33%
Mastech Holdings, MHH, $1.75, $3.30, +88.57%
A couple of notes on the holdings. It’s obvious why I own Berkshire. We like having a small piece of our fate tied to Buffett’s. Rachel and I are fans of his. I like who he is and the way he carries himself. I think he’s a good man who legitimately cares about the world.
We bought ACE, BAC, COP and DIS a long time ago and have held them for awhile. We bought these stocks because we felt like they would be steady, long term stocks that would consistently pay us dividends and increase their earnings over time. BAC and COP obviously aren’t the same companies we invested in. We did buy some BAC pretty low to lower our basis, and that investment has worked out well. Obviously, there was a lot of uncertainty surrounding BAC. The day that people were really worried about the banks being nationalized, BAC momentarily dropped below $2.50. Rachel and I discussed putting a large amount of money in BAC at that point. We didn’t, because we decided we’d be gambling. We didn’t believe the government would nationalize the banks, but we would be betting on that belief versus market forces with better information. That decision would have made us thousands of dollars – but I still feel like it was the right one.
Google is a stock we’ve held, sold for a large profit, and then bought again when it’s price started to freefall. I’ve always been impressed with Google and their vision. Their mission has to do with more than money, and that makes them hard not to root for. The fact that they make money makes it even better. This time around we feel like we got in near rock bottom prices, and are planning on holding unless prices get ridiculous again.
Linn Energy is a copycat stock. I followed Seth Klarman’s portfolio and got into the stock based on its impressive dividend return (currently just under 12%). It’s had a pretty solid run up (probably based on copy cats like us). It may have run it’s course. If the dividend is in jeopardy (I don’t know whether it is or not), it’s probably time to get out. It’s been a pretty good one. Klarman knows his stuff.
Mastech is a spin-off. I learned about the high returns offered by spin-offs reading an excellent book by Joel Greenblatt with a stupid title. Spin-offs tend to make above average returns. The company still matters, and there’s more to it, but in retrospect I wish I had thrown more money at this bad boy.
The moral is that investing in any of these companies, and many others, during the worst part of this year – you would have made out very well. If you didn’t, you aren’t alone. We didn’t buy much either. We didn’t sell anything, but besides adding to some positions here and there we mostly stood pat. I’m not advocating that you try to time the market – Warren Buffett himself says that he can’t do that. I am advocating that you continue to invest and stick to your strategy during times of extreme market turmoil. The people in the worst shape are the people who sold near the lows and are buying back in now that markets are more “stable.” Markets may be more “stable” but stocks are also selling at higher prices than before. If you have a method for determining fair market value of a company, stick to that (or steal someone else’s). Good luck and thanks for reading.
Warren Buffett Speaks
Posted by: Todd Metheny in Business Profiles, Value Investing on August 20th, 2009
Buffett enjoying a Peanut Buster Parfait.
Warren Buffett has another op-ed in the NY Times. This one is titled The Greenback Effect. It’s a well written piece and I encourage you all to read it. It’s worth your time. The basic point of the article is that although the stimulus was initially necessary, the US needs to make its spending more sustainable or the dollar is going to suffer. Completely logical, and it’s nothing that people are saying in coffee shops all over the country. Buffett saying it doesn’t make it any more true – but it makes it more likely that people who can do something about it will listen (case in point). Plus, it’s fun to see a NY Time article with his name on it. I’m not sure there’s anyone they could get to write for them whose opinions I’d be more interested in (though he isn’t the only big name that’s been writing opinion pieces for them lately).
Seeing this piece brought to mind the piece that Buffett wrote in the NY Times last October, urging us to buy American in the midst of an economy that was flailing. Anytime you hear Buffett say anything about the direction of markets, he’ll tell you that he can’t predict the short term gyrations of the market. He doesn’t think anyone else can, either (who am I to disagree?). He doesn’t try to predict the short term direction of markets in this piece, either.
The piece was, in part, simply an attempt to calm people’s fears. In The Intelligent Investor, Benjamin Graham personifies the market as being a moody fellow – swinging from extreme euphoria (Greenspan might call it irrational exuberance) to extreme depression. Buffett’s article was an attempt to keep that depression in perspective. I think the other reason for the article was honest, sincere long term optimism in America. Part of the reason for Buffett’s optimism comes from his personality. It’s part of what makes him such a patient investor.
Clearly, Buffett’s vote of confidence was directed at toward the long term direction of the markets. I thought it might be fun (and hopefully useful in some way) to look at what the markets have done since his article. Hint: things got much worse before they got better.
First, the overall performance. The S&P 500 closed at 996.46. The piece ran on October 16th. On October 15th, the S&P sat at 907.84. Since Buffett’s prediction ran, the market is +9.76%. Of course, things got worse before they got better. On March 9th, 2009, the market closed at 676.53. If you had invested your money on that day, you’d be +47.29%. Buffett’s call wasn’t an attempt to time the market. He was simply saying what he always says, when there’s blood on the streets, that’s usually the time to invest. Overall, we’re still in the short term. When Warren says you should Buy American, he just means that eventually (10, 15, 20 years) down the road, you’ll be glad you put your money to work.
I’m not advocating anything, here, just thought I would toss out some numbers in retrospect. I have no idea what the markets will do going forward. If you’ve been investing during this downturn, you’re probably in the black. Buffett’s famous saying – be greedy when others are fearful and fearful when others are greedy has proven (again!) to be very true. On March 9th, people were pretty fearful. Hopefully you were buying hand over fist. Thanks for reading.
Prosper Approved in Missouri and Louisiana
Posted by: Todd Metheny in Value Investing on August 14th, 2009
At least three of my readers from MO have contacted me and asked when Lending Club would be approved in that particular state. The answer remains – I don’t know. I saw today that Prosper (also in the peer to peer lending space) has been approved in Missouri and Louisiana, though. I would say that Lending Club probably isn’t far behind. That’s purely speculative on my part, but unless they’ve found a significant difference between the two, why not create a little competition, right? In the meantime, you can try out Prosper. Let me know how it goes.
I have a friend and reader in New York, where Lending Club has been approved, who has been using lending club and has funded about $400 worth of loans so far. Some time in the not so distant future, he’s agreed to share his experiences on Lending Club. He already knows a lot more about it than I do. Keep an eye for that post. Should be helpful. Thanks for reading.
