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Geoff Gannon March 28, 2006

Quarterly Newsletter

Preparing the quarterly newsletter is taking more time than I had anticipated. This comes at the expense of the blog and podcast. The quarter ends on the 31st (Friday); so, the amount of content on the blog and podcast should (at least) return to past levels next week.

I’m delaying the podcast episode “Work Habits” until next Tuesday. Expect this to be a very slow week on the blog as well.

Sorry for the inconvenience. This is a one time delay caused by the design, format, and printing of the newsletter. In the future, I will only have to worry about content.

You can learn more about the quarterly newsletter by clicking the newsletter link on the sidebar. A single issue costs $75. A one-year subscription is $275. The newsletter covers the period ending Friday, March 31st. The April issue should be delivered sometime next week.…

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Geoff Gannon March 27, 2006

Widest Moat Contest: Final Round

The voting for the Widest Moat Contest closes at 11:59 p.m. tonight. The three finalists are General Electric (GE)Microsoft (MSFT), and Coca-Cola (KO). Here’s where the voting stands:

1. Microsoft (6)

2. Coca-Cola (5)

3. General Electric (4)

Which company has the widest moat?

Vote by clicking the “comments” link below.…

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Geoff Gannon March 27, 2006

Widest Moat Contest: Microsoft Wins

The final round of voting has closed. Microsoft is the winner of the Widest Moat Contest.

Congratulations to Microsoft – and to George of Fat Pitch Financials.

I will announce my selection for the best comment tomorrow. The author of that comment will receive a copy of Benjamin Graham’s Security Analysis.

The final vote tally was:

1. Microsoft (6)

2. Coca-Cola (5)

3. General Electric (4)

Thank you to everyone who voted.…

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Geoff Gannon March 27, 2006

Widest Moat Contest: Best Comment

I selected this comment from Dave as the contest’s best:

Initially I was going for GE, but the more I think about it, it seems that Coke has the greatest franchise. GE makes, markets and services great products, but I’m not sure many people buy their products because they are made by GE. (By “people” I mean the average consumer. Aerospace and medical customers may be different.) Their products are extremely capital intensive, which in itself creates a moat, but one which must be shored up with capital constantly.

Coke, on the other hand, has a product which no one needs, but many want, and which many display a strong preference for. It is more like cigarettes in this way. In my younger days I was addicted (habituated is more precise) to Coke. I drank a quart every day. This is a wide and deep moat for sugar water. It is unbelievable! The main competition is from Pepsi, which with it’s Frit-Lay division, is the only real threat to Coke. And Pepsi has no international distribution to match Coke.

I believe that Coke has the moat and it is theirs to lose. I’ll admit that they have been trying over the last 10 years, but I think they may be waking up some. I didn’t mention MSFT because I don’t think it’s worth mentioning. A great company with a moat more fragile than most would like to believe.

Dave will receive a copy of Benjamin Graham’s Security Analysis. Congratulations!

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Geoff Gannon March 26, 2006

On Probability, Observation, and Investing

Investors need to think about exactly what they mean when they use terms from probability. They need to appreciate the role of the observer (and his limited knowledge). For instance, if I flip a coin and cover it before you can see how it has landed, is it really correct to say there’s a 50% chance the coin has landed head-side up?

The problem is that we know that the class of (fair) coin flips will be populated by as many instances of heads as tails; therefore, if we know that a coin flip belongs to the class of fair coin flips (but know nothing else about the special case), we may say that there is a 50% chance the coin will land head-side up.

But, there is one somewhat unsettling matter to consider. Once I have flipped the coin and it has landed, we can all agree that it has either landed head-side up or tail-side up. The event has already occurred. But, it hasn’t yet been observed. Of course, I could lift my hand a bit and sneak a peak. Then, I’ve observed the outcome, but you haven’t.

Speaking probabilistically, you might still say there’s a 50% chance the coin has landed head-side up. But, you would now know that there is a difference between the knowledge possessed by different observers. The unsettling part comes when you realize that a probabilistic statement can not be made independent of the observer (and her knowledge).

It may seem a trivial problem when we consider the observer to be a single individual. But, all our knowledge is dependent upon observation, and all our probabilistic statements are dependent upon our knowledge – so, all of our probabilistic statements are dependent upon our knowledge.

That’s obvious, because we only make such statements where our knowledge is limited (we know something about the class but not the special case). The problem for investors is that two analysts with the same data may interpret that data differently such that they arrive at two very different conclusions. Essentially, they will make two different probabilistic statements (largely based on what data they believe pertains to the special case in question).

For instance, you can make a statement about stocks trading at a P/E of 12, or stocks trading below book value, or stocks that have achieved a ROE of greater than 15% in nine of the last ten years. But, that may not be the best class to consider.

I just mentioned Harley-Davidson (HDI) in a previous post. Does Harley-Davidson belong to the class “stocks with a P/E of 15”? Or, does Harley belong to the class “stocks of companies with entrenched consumer brands”? After all, some stocks with a P/E of 15 may be in commodity businesses.

The investor needs to reference several different past records at once. She needs to consider the past record of entrenched consumer brands (how many had their earnings power diminished? How many of the brands lost their luster? …

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Geoff Gannon March 25, 2006

Off Topic: On Cause and Effect and Inherent Randomness

This is an off-topic post (i.e., it doesn’t pertain to investing). Below, I have reprinted a comment written in response to my post On Technical Analysis and my response to that comment.

Amanda Gerrish writes:

Good article. However, I must take exception to your idea that there are no truly random events in nature. Quantum physics proposes that all quantum processes (sub-atomic events) have an inherently random element. These events are not apparently random because we don’t have enough information, or we don’t have the correct model. They are inherently uncertain. At best, we can assign probabilities. Since all macroscopic events (including human actions, markets, the weather, etc.) are built upon microscopic (sub-atomic) events, this implies that there is an inherent, irreducible uncertainty or randomness to all events. Well, at least, if you believe quantum mechanics.

My response:

You make a good point about quantum mechanics, but I have seen it taken too far. For instance, one philosopher argued that an inherently random element supports the case against the existence of God (or a prime mover of any sort). I have a few problems with this argument. The biggest problem is that it favors accepting the existence of an uncaused event over the prudent course of withholding judgment because far too little information is known.

When I say far too little information is known, I mean simply this: an inherently random element does not fit with the law of cause and effect. So, we have three options. One, we could throw out the law of cause and effect and assume that the best we can ever do is establish correlative rather than causal relationships. Two, we could throw out the idea of an inherently random element in quantum mechanics. Or, three, we could withhold judgment, because we feel our understanding of these matters is insufficient.

I favor the third course, largely because I think our understanding of time remains inadequate. In several different places, the study of physics has bumped up against our ignorance of what time really is, and just how it works in the extremes. This gets us into some very strange sounding discussions. However, we will need to address them eventually.

Are there more dimensions than we perceive? Is our perception of time flawed? Can actions occur outside of time? Is any “inherently random element” actually the result of a cause that did not occur in the dimensions we perceive? Simply put, is it possible we can’t perceive the cause, or even the general laws under which the cause operates, and therefore can not conceive of the effect as being anything but random?

I wouldn’t put it into these words, but I think eventually people will say that it’s possible there may be causes operating “outside of time” – simply meaning that there may be causes that do not operate according to the principles of time as we know them. As strange as it sounds, I think the logical idea of …

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Geoff Gannon March 24, 2006

News Item: Harley-Davidson (HDI)

In early April, Harley-Davidson (HDI) will open its first dealership in China amid a flurry of festivities. Harley-Davidson named Beijing Feng Huo Lun as its first authorized dealer in China. The dealership, located just outside downtown Beijing, will have a staff of 14. It will operate under the Beijing Harley-Davidson name.

The dealership will sell Harley-Davidson motorcycles, parts, and accessories. Harley-Davidson apparel and collectibles will be sold as well.

Harley-Davidson’s management believes the move into China represents a long-term opportunity. Progress will be gradual. Ownership and riding restrictions remain impediments to the company’s growth. Disposable income is still too low in China to support a large “premium, heavy-weight” motorcycle market. The company hopes that ownership and riding restrictions will be reduced as disposable income continues to grow.

On Friday, Harley-Davidson’s share price rose $1.88 to $51.07. At their closing price, shares of Harley-Davidson offered a 6.68% earnings yield.

Over the last ten years, Harley-Davidson’s book value per share compounded at a 17.78% annual rate. During that same period, annual EPS growth was 21.92%.…

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Geoff Gannon March 23, 2006

New Podcast: “Buffett Businesses”

Listen to the Gannon On Investing Podcast: “Buffett Businesses”

A new podcast episode entitled “Buffett Businesses” is now available. This podcast wraps up Buffett week.

Enjoy the show.

Summary: The entire show is a discussion of the kind of business Warren Buffett looks to invest in. The discussion focuses on owner’s earnings, return on equity, and earnings growth.

Run Time: 29 minutes

Next Show: “Work Habits”…

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Geoff Gannon March 22, 2006

Value Investing Directory: New Additions

Visit the Value Investing Directory


The “Navigate Directory” section will remain at the top of your screen after you pick a new category. To navigate the directory, simply click on a category and then scroll down to see the listings within that category.

After you click on a category, the “category tree” will remain at the top of your screen; however, the listings below will change. Therefore, you need to remember two things: 1) Scroll down to see the listings 2) Choose “deeper” sub-categories to refine your search. For example, there are fewer listings in Blogs > Investing Blogs > Value Investing Blogs than there are in Blogs > Investing Blogs, because all value investing blogs are also listed as investing blogs.

The directory now includes 5 new listings. First, let me discuss the submission process. Then, you can view the list of new additions.


To submit a site for inclusion in the Value Investing Directory please send an email to [email protected] with the site’s URL. All submissions will be evaluated within 48 hours; however, most submissions will be rejected.

Prospective sites are evaluated on the basis of utility alone; neither reciprocal links nor payment is required. Linking to the Value Investing Directory (or any other part of the Gannon On Investing website) will not affect the evaluation process.

If you would like to propose a new category, request a change to your site’s listing, or request the removal of any site, please send an email to [email protected]. All reasonable requests will be considered; however, I reserve the right to list and describe sites in whatever manner I deem to be most useful.

New Additions

Personal FavoritesSeeking AlphaWall Street 2.0

Worth a Lookpfblogs.orgPhat InvestorRule #1 Investor

All new additions by category:


Online Resources > Value Investing Sites > Rule #1 Investor

Online Resources > Blog Aggregators / Networks > Phat Investor

Online Resources > Blog Aggregators / Networks >

Online Resources > Blog Aggregators / Networks > Seeking Alpha

Online Resources > Blog Aggregators / Networks > Wall Street 2.0

Visit the Value Investing Directory

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Geoff Gannon March 22, 2006

Widest Moat Contest: General Electric Defeats Johnson & Johnson

General Electric (GE) defeated Johnson & Johnson (JNJ) in the most recent round of the Widest Moat Contest voting. I was surprised by how wide the margin of victory was. They were both very good picks.

Once again, I received some excellent email votes. Remember, the person who picks the company that ends up winning the contest isn’t the only one who will win a copy of Benjamin Graham’s Security Analysis. The author of the best email vote will also receive a free copy of Ben Graham’s magnum opus.

Thank you to everyone who voted.

The Widest Contest will end with a true clash of titans. The three finalists are General Electric, Coca – Cola, and Microsoft. You can vote for one of these companies right now. I will accept votes submitted as comments to this post as well as email votes.

This final round of voting will conclude at 11:59 p.m. on Monday
. The winner of the contest will be announced on Tuesday. At that time, I will also select the best email vote of the contest.…

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