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Geoff Gannon March 22, 2006

Suggested Link: Wall Street 2.0

Visit Wall Street 2.0

I’d like to introduce you to a new investment blog network called Wall Street 2.0.

Three of my favorite blogs (Absolutely No DooDahs, The Enterprising Investor, and The New Wall Street) are part of the Wall Street 2.0 Network. Wall Street 2.0 is an invitation only network of investment blogs. Each of the blogs has a clean, uniform look. The content is, of course, anything but uniform. The network also includes message boards.

Wall Street 2.0 plans to add additional blogs over time. But, the network will remain selective. I highly recommend this fine collection of investing blogs.

Visit Wall Street 2.0

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Geoff Gannon March 22, 2006

Widest Moat Contest: General Electric, Microsoft, or Coke?

The three finalists in the Widest Moat Contest are General Electric (GE)Microsoft (MSFT), and Coca-Cola (KO). The tally so far: Microsoft (2), Coca-Cola (1), General Electric (1). Your vote could make the difference. Vote by clicking the “comments” link at the end of this post.

MarketWizWannabe votes for GE:

Basically, every “product” business that GE is in has a moat – aircraft engines, plastics (think, lexan), locomotives, nbc, power systems (turbines / nuclear systems), and healthcare (MR / CT products). They’re #1 or #2 in all of those products worldwide. That’s a pretty wide set of moats, and it gets my vote.

S. Chin votes for Coke:

My vote is for Coke. GE’s and Microsoft’s moat keep enticing a lot of competitors. Everyone wants to “extend” their brand into their markets like Google, Yahoo or Oracle. Microsoft is the incumbent, but there’s so many people knocking on their door. Same with GE — their financing division also has people reducing their margins and attacking them. NBC always has new lineups from FOX, CBS and cable. When is the last time someone tried to extend in the cola industry successfully. Snapple, Gatorade all tried, but never became a serious threat to the whole franchise. Although, there’s private label items – Coke continues its dominant market share, with a product that 1) does not become obsolete or outdated and 2) requires huge capital investments to produce. Plus, Coke’s has a longer track record… it has several World Wars and recessions under its belt and still going strong. Coke hands down.

Henry votes for Microsoft:

Out of the final 3 companies (GE, Coca-Cola, Microsoft), I’d like to vote Microsoft as having the widest moat. Their monopoly in multiple areas in the software industry is phenomenal. In addition, many people still aren’t aware that they are the biggest R&D; spenders in the industry as well. Microsoft today is no longer a pure software company and will expand rapidly into other areas.

Grant votes for Microsoft:

General Electric has the best managers in the world, Coca-Cola, one of the best brands, but what about Microsoft? It has a complex product with a large installed user base. It is not the fact that its product is complex that digs the moat, but that its intricacies are engrained with so many users.

If you are looking for a turbine, household appliance, or TV channel there are alternatives to suggest. Want a cold non-alcoholic beverage? There are some choices. Suggest to your company to stop using Windows and Office and you would be laughed at. That may be granting too much. The majority of people in the office work environment most likely cannot even imagine using a computer without Microsoft’s products.

Let us know what you think.

Who’s right? Who’s wrong? And which company has the widest moat?


Vote by clicking the “comments” link below.

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Geoff Gannon March 20, 2006

Widest Moat Contest: General Electric vs. Johnson & Johnson

The penultimate round of the Widest Moat Contest is a face-off between General Electric (GE) and Johnson & Johnson (JNJ). Which company has the widest moat? Send your vote via email; or, if you’d prefer, vote by commenting directly to this post.

The voting closes at 11:59 p.m. tonight.

Why should you vote? Obviously, to share your opinions with others, and to engage in a thoughtful debate about the competitive advantages of different businesses. But, for the less altruistic listener, there is one other reason to vote:

You can win a copy of Benjamin Graham’s “Security Analysis” (1940 edition)

The listener who sends in the most interesting email will win a copy of Ben Graham’s “Security Analysis”.

To hear the rationale behind the two picks listen to the Gannon on Investing Podcast: “Buffett’s Letter”

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Geoff Gannon March 18, 2006

On Google Finance

Google Finance launched yesterday. I have mixed feelings about the service. It looks to be a great finance portal. But, finance portals still have a lot of room for improvement.

Google finance begins with search. You enter the name of a publicly traded company into the familiar Google search box. The search is not limited to ticker symbols. Entering either the ticker symbol or the company name will immediately load a company page.

Entering a term like “restaurants” will return a list of relevant stocks and funds (in this case, 2,168 companies and 1 fund). A few of these companies are private; but, many are publicly traded.

The search results for generic terms (like restaurants) are fascinating. There seems to be a bias towards large cap stocks. By this I mean that large cap stocks that are somewhat related to the search term often get placed above highly relevant, smaller companies.

Google Finance’s search feature is very weak. Obviously, it’s an improvement over the other finance portals; but, the generic search feature is badly flawed. For instance, neither Electronic Arts (ERTS) nor Activision (ATVI) is among the top ten results for video games. On the other hand, terms like steel work pretty well.

If the search term isn’t in the company’s name or the company is engaged in more than one industry, the results tend to be very poor. The search feature can’t really be used as an industry search unless you know the exact term that will work best. For instance, you’d have to know to use waste instead of garbage or trash; and poultry instead of chicken. It’s not exactly intuitive.

Some search terms will lead directly to a company page. This is a wonderful feature that lets you find a company without having to know the ticker. Here, Google Finance gets a little cocky. It’s always convinced it knows exactly what you’re looking for, even when it clearly doesn’t have a clue. For instance, the search term “video games” returns Navarre Corporation (NAVR). There are two problems with this. Obviously, a generic term like “video games” should not return a specific result. Also, while Navarre Corporation is a relevant result for the search term, it isn’t even close to being the most relevant result for “video games”.

Google Finance’s search feature doesn’t seem to be able to consistently return subsidiaries. This is very unfortunate, because my first thought upon seeing the Google search box was that users would be able to perform true subsidiary searches. That doesn’t seem to be the case – yet.

For instance, a search for Kentucky Fried Chicken returns Kentucky Fried Chicken Japan instead of YUM! Brands’ KFC corporation division. On the other hand, a search for Duracell does return the maker of the CopperTop. Strangely, Duracell’s (public) parent Procter & Gamble (PG) is not listed in the related companies section of Duracell’s company page.

These are understandable mistakes for a computer to make. But, …

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Geoff Gannon March 17, 2006

On Value Investing

What is Value Investing?

Different sources define value investing differently. Some say value investing is the investment philosophy that favors the purchase of stocks that are currently selling at low price-to-book ratios and have high dividend yields. Others say value investing is all about buying stocks with low P/E ratios. You will even sometimes hear that value investing has more to do with the balance sheet than the income statement.

In his 1992 letter to Berkshire Hathaway shareholders, Warren Buffet wrote:

We think the very term “value investing” is redundant. What is “investing” if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value – in the hope that it can soon be sold for a still-higher price – should be labeled speculation (which is neither illegal, immoral nor – in our view – financially fattening).

Whether appropriate or not, the term “value investing” is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics – a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield – are in no way inconsistent with a “value” purchase.

Buffett’s definition of “investing” is the best definition of value investing there is. Value investing is purchasing a stock for less than its calculated value.

Tenets of Value Investing

1) Each share of stock is an ownership interest in the underlying business. A stock is not simply a piece of paper that can be sold at a higher price on some future date. Stocks represent more than just the right to receive future cash distributions from the business. Economically, each share is an undivided interest in all corporate assets (both tangible and intangible) – and ought to be valued as such.

2) A stock has an intrinsic value. A stock’s intrinsic value is derived from the economic value of the underlying business.

3) The stock market is inefficient. Value investors do not subscribe to the Efficient Market Hypothesis. They believe shares frequently trade hands at prices above or below their intrinsic values. Occasionally, the difference between the market price of a share and the intrinsic value of that share is wide enough to permit profitable investments. Benjamin Graham, the father of value investing, explained the stock market’s inefficiency by employing a metaphor. His Mr. Market metaphor is still referenced by value investors today:

Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you

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Geoff Gannon March 16, 2006

New Podcast: “Buffett’s Letter”

Listen to the Gannon On Investing Podcast: “Buffett’s Letter”

A new podcast episode entitled “Buffett’s Letter” is now available. This is Buffett Week at the Gannon On Investing Podcast. So, feel free to leave a voice mail message about Buffett at 1-800-782-1687. If your comments are worth sharing with others, I will play them on the next podcast.

Enjoy the podcast.

Summary: A discussion of select passages from Warren Buffett’s annual letter to shareholders. The discussion focuses on general investing lessons rather than Berkshire’s performance.

Stocks MentionedEnergizer Holdings (ENR), Procter & Gamble (PG)

Contest Picks: General Electric (GE), Johnson & Johnson (JNJ)

Run Time: 26 minutes

Next Show: “Buffett Businesses”

Listen to the Gannon On Investing Podcast: “Buffett’s Letter”

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Geoff Gannon March 15, 2006

The Great Experiment: Marketocracy Funds Update

About six weeks ago, I set out to conduct an experiment on concentration vs. diversification. I wanted to see how managing a focused portfolio was different from managing a widely diversified portfolio. How would the returns from each type of fund compare?

I created five virtual funds at Marketocracy, placing different restrictions on each. Click below to be taken to the fund page on Marketocracy.

David Fund: May only invest in companies with a market cap less than $1 billion (at time of purchase).

Goliath Fund: May only invest in companies with a market cap greater than $10 billion (at time of purchase).

Jersey Fund: May only invest in companies headquartered in New Jersey.

Shotgun Fund: Attempts to divide assets evenly over top 100 investment ideas.

Sniper Fund: Attempts to divide assets evenly over top 20 investment ideas.

David Fund

This fund has about 12% of its assets in cash. The other 88% of assets are divided among eight stocks as follows: (OSTK): 16.91%

Jakks Pacific (JAKK): 15.33%

Blyth (BTH): 14.34%

Craftmade (CRFT): 9.14%

Journal Communications (JRN): 8.15%

Rex Stores (RSC): 8.12%

Tuesday Morning (TUES): 8.07%

Weyco Group (WEYS): 7.69%

Since inception (1/28/06) the David Fund has returned 1.39%.

Commentary: OSTK and JAKK have carried this fund. At present, I’m happy with the valuation of these eight stocks relative to the market, and look forward to rounding out the roster by finding one or two additional bargains under $1 billion.

Goliath Fund

This fund has just under 50% of its assets in three stocks: Posco (PKX), Deutsche Telekom (DT), and Home Depot (HD). The other half of the fund’s assets is spread over 22 different stocks.

Since inception (1/28/06) the Goliath Fund has returned 3.97%.

Commentary: Most of the other 22 stocks were selected according to Joel Greenblatt’s “magic formula”. Energy and financials are largely absent from this fund. I hope to keep it that way. I don’t expect to make any changes to this fund in the near future, and believe Goliath’s long-term results relative to a basket of all stocks in the $10b+ universe will likely prove satisfactory.

Jersey Fund

This fund has 100% of its assets divided among 10 stocks:

Village Supermarket (VLGEA): 19.86%

Journal Register Company (JRC): 13.90%

J&J; Snack Foods (JJSF): 8.85%

Avaya (AV): 8.62%

Dendrite (DRTE): 8.25%

Campbell Soup (CPB): 8.20%

Movado (MOV): 8.19%

Emerson Radio (MSN): 8.14%

Church & Dwight (CHD): 8.02%

Engelhard (EC): 7.37%

Since inception (1/28/06) the Jersey Fund has returned 1.78%.

Commentary: I’m very dissatisfied with this group of ten stocks. There are few opportunities in New Jersey at the moment; however, I have decided not to hold cash, because the NJ investment universe is limited. I’d rather sell out one or more positions to move into a bargain when it appears, than to sit on a lot of cash. I believe the lower eight stocks will offer a better return than cash – but, not much …

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Geoff Gannon March 14, 2006

Against Mr. Lynn’s Buffett Bashing Philippic

Read Matthew Lynn’s Buffett Bashing Philippic

Warren Buffett’s annual letter to Berkshire Hathaway (BRK.B) shareholders was released on Saturday, March 4th.

Since the letter’s release there has been some Buffett bashing – much of it coming from the mainstream financial press. The most brazen Buffett bashing to date came from Bloomberg columnist Matthew Lynn, who began his article by writing:

Maybe it is his age, his probable retirement or the mediocre performance of Berkshire Hathaway’s shares the past two years. Whatever the cause, Warren Buffett’s ruminations on the financial markets have taken on a grouchy, quarrelsome tone recently.

For years, investors have pored over the annual statements of the world’s second-richest man. Buffett, 75, has been called the Oracle of Omaha, with every folksy, homespun piece of wisdom elevated to the status of unimpeachable truth.

Stop and look more closely, however, and it turns out you would have more chance of success by checking some tea leaves, or a pack of tarot cards, for financial predictions.

Mr. Lynn’s article is not worth reading – not because it criticizes Buffet, but rather because it is a confused piece of drivel. The article ignores inconvenient facts, and does not bother to scrutinize the author’s own argument or the evidence he puts forward.

Still, I can’t say it’s badly written. If you judge the article by the standards of propaganda writing, it scores pretty well. The tone is bitter yet engaging; the message is clear; and there is the requisite illusion of a logical edifice built upon actual facts.

Like any good propagandist, Mr. Lynn makes liberal use of the straw man technique. The result is effective rhetoric that takes on the appearance of Swiss cheese when viewed by those who value logic above impudence.

Early in the article, Mr. Lynn writes, “And now Buffett tells us that hedge funds and buyout firms are fleecing us all. Once again, the evidence is threadbare.”

Then, he quotes a Mr. Tim Price of Ansbacher & Co. in London as saying: “There is an element of protesting too much…When you look at it, Berkshire Hathaway is not a million miles away from being a giant hedge fund or private-equity fund itself.”

There are two problems here. First, the evidence that hedge funds are fleecing investors is not “threadbare”. Managers are making a lot of money. That fact is not disputed. What is disputed is whether they are worth it.

There is a case to be made that individual managers are worth it. That case is similar to the example I laid out in my first podcast, where I basically said: Lance Berkman and Tony Womack both play baseball and both make a lot of money. One of them is overpaid – he just happens to be the guy making less money.

At the time, I was making a point about executive compensation, not fees paid to money managers. However, the two cases are substantially similar. If, over an investing lifetime, the compound annual …

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Geoff Gannon March 14, 2006

News Item: Sherwin-Williams (SHW)

Today, Sherwin-Williams (SHW) raised its earnings expectations for the first quarter of 2006. Analysts had been expecting earnings per share of $0.59 for the first quarter; on January 26th, the company said it expected to earn between $0.56 and $0.61 per share in the first quarter.

Sherwin-Williams now expects the EPS number to be between $0.75 and $0.79. Net sales are projected to grow by 13-14% over sales for the first quarter of 2005. The previous projection had been for sales growth to come in around 10%.

The earnings update is primarily the result of better than expected sales in the company’s paint stores. Expense control has also been better than expected. As a result, SHW’s gross margin will exceed previous estimates.

Sherwin-Williams will report its first quarter earnings on April 20th.

Related Reading

On Sherwin-Williams’ Profitability

News Item: Sherwin-Williams Lead Paint Lawsuit

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Geoff Gannon March 14, 2006

Suggested Link: Overstock Sell Rationale

Here are three posts from a blogger who recently sold shares of (OSTK). Below, I’ve placed the posts in chronological order so you can follow the author’s thinking over the last few weeks:

Step Back, Jack (OSTK)

Good-bye, Big O (OSTK)

World’s Worst Market Timer (OSTK)

These posts come from a blog called One Guy’s Investments. It is a more personal, less analytical blog than my own. I enjoy reading it from time to time. It is a refreshing change of pace from much of the investment writing found online. If you’re looking for another blog to read, you might want to check this one out – it’s different, but I like it.

Visit One Guy’s Investments

Related Reading

An Analysis of (OSTK)

On the Rationale for the Overstock Post

On Overstock (Again)

On Overstock’s Fourth Quarter

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