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Geoff Gannon September 29, 2006

On a New High and an Old Price

One of the comments to my previous post, The Human Index, prompted this post.

As the Dow flirts with a new high (and the financial media tests everyone’s patience), it’s worth remembering how far the average investor has fallen and why. In this post, I discuss how far the fall has been.

As for why – that’s a topic that underlies everything written on this blog. Investing is about the price paid and the value received. If valuation seems a dry topic in the abstract, it’s worth remembering the real world cost of ignorance.

Once again, I quote from Graham. I’ve used this quote before. It’s my favorite Graham quote. It’s also the best thing you can learn from this blog (I’ve bolded two phrases of immeasurable importance):

“…the influence of what we call analytical factors over the market price is both partial and indirect – partial, because it frequently competes with purely speculative factors which influence the price in the opposite direction; and indirect, because it acts through the intermediary of people’s sentiments and decisions. In other words, the market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.”

The view of the market to the average investor isn’t really comparable to the view of the market to the average dollar. Individuals don’t have their assets distributed evenly across the various equity issues available in the major public markets. A lot of individuals who have held every share they had six years ago are nowhere near where the Dow is today, because they own the wrong Dow stocks and they own very poor performing non-Dow stocks.

List A

Eastman Kodak (EK)

General Motors (GM)

Intel (INTC)

Microsoft (MSFT)

Home Depot (HD)

List B

Altria (MO)

Caterpillar (CAT)

United Technologies (UTX)

Boeing (BA)

Exxon Mobil (XOM)

Which did more people own in 2000, List A or List B? Which do more people own today? And, in 2000, which list did people think would perform better?

List A is the worst performing Dow stocks since the last high; List B is the best performing Dow stocks.

Other notable issues include Disney (DIS)McDonald’s (MCD), and Coca-Cola (KO). These are the kind of stocks people would love to buy and hold forever. They are sentimental favorites. They are also below where they were trading at the last high – although, they are about in the middle of the pack for Dow stocks.

So, I’d have to say the Dow doesn’t really measure the performance of individual investors’ accounts at all. There’s a selection bias for individuals that isn’t reflected in the DJIA. Obviously, there are also some popular stocks that aren’t part of the Dow.

Recently, internet stocks are the best example. Generally, …

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Geoff Gannon September 29, 2006

Friendly’s CEO Resigns; Largest Shareholder Requests Seats

On Thursday, Friendly Ice Cream Corp (FRN), announced CEO John L. Cutter had resigned. It was not immediately clear whether Mr. Cutter had been forced out.

I mention the possibility that Mr. Cutter was forced out, because Friendly’s largest shareholder, Sardar Biglari, included this disclosure in a 13-D filed approximately one week before Mr. Cutter’s resignation:

“The Reporting Persons have consulted with the Chairman of the Board of Directors and management of the Issuer concerning the business, operations and future plans of the Issuer, and are seeking seats on the Board of Directors for Mr. Sardar Biglari and Dr. Philip L. Cooley. “

The reporting persons are The Lion Fund L.P., Biglari Capital Corp., Sardar Biglari, and Western Sizzlin Corp (WSZL). They own 12% of Friendly’s outstanding shares.

The two notable entities are The Lion Fund, a hedge fund run by Mr. Biglari, and Western Sizzlin, a public company engaged in the operation and franchising of restaurants.

Western Sizzlin

Biglari (and others) effectively took control of Western Sizzlin during late 2005 and early 2006. Individuals controlling more than a third of the company’s shares replaced the existing board. Below is the description provided in Western Sizzlin’s most recent annual report:

“In November 2005, we added three members to out Board of Directors, namely Sardar Biglari, Philip L. Cooley, and Paul D. Sonkin. Subsequently, in March 2006, six of the incumbent directors, namely Paul C. Schorr, III (our former chairman), A. Jones Yorke, J. Alan Cowart, Jr., Pat Vezertzis, Jesse M. Harrington, and Roger D. Sack, resigned from the Board. At that same time, Mr. Sonkin indicated that he would not stand for re-election at the 2006 annual meeting of stockholders.”

The Lion Fund

The Lion Fund is managed by Sardar Biglari, 29. Philip Cooley serves as one of the fund’s directors. Biglari was a student of Cooley’s at Trinity University. The Lion Fund was launched just over five years ago – although Biglari apparently operated the fund with his own money for about one year before welcoming new investors.

Here are two short (old) articles from the San Antonio Business Journal discussing The Lion Fund:

Lion Fund Loses its Roar

Fund Posts Solid Growth

Sardar Biglari

Biglari has an interesting story. He started an Internet Service Provider while still quite young; then, went on to found The Lion Fund. He frequently cites Warren Buffett as an investing influence. His letter to shareholders (as Chairman of Western Sizzlin) certainly bears a resemblance to Buffett’s own annual letter.

Read Biglari’s Letter to Western Sizzlin Shareholders (among others) reported this story. That story prompted this post.

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Geoff Gannon September 27, 2006

On The Human Index

As the Dow approaches a new all-time high (the record close was 11,722.98), now would be a good time to take a break from the financial news found on your televisions, in your newspapers, (and yes) even on your computers.

A new high is an empty headline. I’m not writing to tell you that; you already know that. What you may not fully appreciate is just how arbitrary an index the Dow Jones Industrial Average really is.

Most notably, it’s no longer very industrial. Only about one of every three stocks in the Dow is involved in what might be considered an old-line industrial (heavy manufacturing, extraction, etc.) business. A lot of the Dow components are involved in totally different businesses such as consumer products, health care, and technology. For the most part, these businesses are usually a lot less tangible. The businesses are mostly asset-light; their future prospects are mostly company specific.

Today, the extent to which the common stocks of the thirty companies move together may have more to do with their shared classification as “Dow” stocks than with the future prospects of the underlying businesses.

On April 8, 2004 some changes were made to the Dow. These weren’t the first changes – and they won’t be the last. Such changes add to the arbitrary nature of the index, especially in the short-term.

Generally, the changes have been motivated more by who needs to go than by who needs to come in. Discarded Dow components can usually blame a dying industry for their exit. Sometimes, a rapidly dwindling market cap helped.

The April 2004 changes involved three spots in the index and six stocks.

Departures: AT&T; (T), Eastman Kodak (EK), and International Paper (IP)

Arrivals: Verizon (VZ), American International Group (AIG), and Pfizer (PFE)

Please note that AT&T; is now back in the Dow. In November 2005, SBC Communications, which was itself born from the 1984 divestiture agreement between AT&T; and the Justice Department, changed its name to AT&T; after acquiring that company. It also adopted the ticker symbol associated with that name (T). As a result, a chart of the new AT&T; does not reflect the fortunes of the old AT&T.;

So, I will provide a link to a chart that shows the other five stocks involved in the 2004 Dow reshuffle:

See a chart of EK, IP, VZ, AIG, and PFE from April 1, 2004 to September 26, 2005

(Note: The actual changes to the index occurred on April 8, 2004; however, these changes had been announced by April 1, 2004).

I also added the S&P; 500 to the chart to reinforce the obvious – none of these stocks has fared particularly well. In fact, since the changes, they’ve all basically underperformed the S&P; 500. With the exception of Kodak (and Verizon for a very short time), none of the stocks have even managed to trade above the share price they had at the time of the reshuffle.

Is this just a coincidence?

As a rule, …

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Geoff Gannon September 26, 2006

On Two Very Different Links

I have two suggested links for you today – one serious, the other a bit more whimsical:

Commentary on Buffett’s Partnership Letters

Birinyi Associates Ultimate Stock Selector

Buffett’s Partnership Letters

The more serious of the two links comes courtesy of, a value investing blog. Recently, ValueBlogger presented a three-part commentary on Warren Buffett’s Partnership Letters.

From 1957-1969, Buffett ran an investment partnership. His letters to the partners from 1959-1969 are available online (in PDF).

I have mixed feelings about mentioning this, because the letters were originally private communications. There was (and to some extent still is) an intimacy to the general partner / limited partner relationship that can not be duplicated in the manager / shareholder relationship at any public corporation (including Berkshire.) However, I’m willing to put this privacy concern aside, because these are undeniably extraordinary documents.

Buffett’s partnership letters are to the student of investing what the private correspondence of an American President is to the student of history. They are a primary source illuminating a period in Buffett’s career that hasn’t been adequately explored by those who have written about the man.

The constraints under which Buffett operated during the partnership years were quite different from the constraints under which he operates today. His approach has clearly changed. Some of that change is attributable to his differing circumstances; the rest is attributable to a change of perspective born from a half century of self-analysis.

Anyone with a serious interest in investing should at least read a commentary on the letters, such as the one prepared by Of course, such a commentary is not an adequate substitute for reading the actual letters; however, I am aware of the fact that most people today are not accustomed to reading such documents and engaging in a first-hand investigation of sorts. Therefore, I am sure some of you will prefer to simply read a commentary that reduces the letters into a more easily digestible form. provides just such a commentary – and does it quite well.

Throwing Darts

The more whimsical link comes courtesy of Ticker Sense, one of the blogs included in 24/7 Wall Street’s list of The Twenty Best Financial Blogs.

It’s a dartboard. With tongue firmly in cheek, Ticker Sense writes:

We are pleased today to unveil one of the great, long-awaited products in the history of Birinyi Associates. Representing years of toil by our Research & Development arm, the “Birinyi Associates Ultimate Stock Selector” is the culmination of all of mankind’s collective study and analysis of the stock market and the science of stock-picking. By condensing decades of data and lifetimes of research into an over-riding method for predicting the market’s path, the new Selector is your one-stop reference for investment decisions that is designed to create the ultimate portfolio suitable for any scenario.

I don’t have much to say about this link. I like the “Ultimate Stock Selector” dartboard. I thought some of you might like it …

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Geoff Gannon September 25, 2006

Festival of Stocks Reminder

The third edition of the Festival of Stocks is now up at Value Investing, and a Few Cigar Butts.

The Festival of Stocks is a new blog carnival focused on highlighting bloggers’ best recent posts on stock market related topics.…

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Geoff Gannon September 22, 2006

On Lenox

Below is a letter from Mr. John L. Morgan, beneficial owner of approximately 7% of Lenox (LNX), to Ms. Susan E. Engel, Chairwoman and CEO of Lenox.

Dear Susan,

When your board offered me a directorship on September 18, 2006, we discussed the reasons that made it unacceptable. At that time, I reiterated that I could best serve the shareholders of Lenox Group by assuming a leadership role on the Board of Directors and playing an active role in formulating and guiding the strategic direction of the Company. Furthermore, I expressed my intention to not make changes in the management or Board of Directors. My views were based on information I had at that time.


The Board’s rejection of my offer to help the Company create a successful strategy has given me a different perspective. I now feel that the Board has decided to pursue a course of action that is not in the best interests of the shareholders and is a continuation of the strategies that have failed to create value over the past ten years.

The management team and Board of Directors continue to behave like the Company is a large, successful Company that has margin for making more mistakes. I do not agree. My offer to assist the Company in changing its strategy to benefit shareholders has been rejected although I proposed to work with the existing management and Board of Directors. You have made your position clear and I hope this letter will do the same for me and other likeminded shareholders.

Very truly yours,

John L. Morgan

The Ownership Situation

First, let me explain the ownership situation. The reporting persons are John L. Morgan, Kirk A. MacKenzie, Jack A. Norqual, and Rush River Group. Rush River Group is a limited liability corporation (LLC) of which Morgan, MacKenzie, and Norqual are members.

Rush River was formed in December 1998 in Minnesota and “its principal business activities involve investing in equity securities of privately owned and publicly traded companies, as well as other types of securities.” As far as I can tell, the only members of Rush River are the three aforementioned men: Morgan, MacKenzie, and Norqual.

According to a recent SEC filing, Morgan beneficially owned 6.1% of the outstanding shares of common stock in Lenox, Rush River owned 0.79%, MacKenzie owned 0.07%, and Norqual owned 0.07%.

Please keep in mind that this 7% stake in Lenox is controlled by Mr. Morgan; but, not Winmark Corporation (WINA), a publicly-held franchisor of retail stores. This is an important distinction to keep in mind (especially since Winmark is a public company).

Morgan is the Chairman and CEO of Winmark; MacKenzie is the Vice Chairman. However, their stake in Lenox has nothing to do with Winmark. In fact, last time I checked, Winmark did not have any material investments in marketable securities.

The reported position amounts to 989,300 shares of Lenox. Shares of Lenox last closed at $6.23 a share. So, the position would be worth a …

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Geoff Gannon September 22, 2006

On Forbes List of The 400 Richest Americans

Forbes is out with its list of The 400 Richest Americans.

Have you ever wondered how Forbes knows who to put on the list (and where)? Here, in the magazine’s own words, is Forbes’ methodology:

Our estimates of people’s net worth are deliberately conservative and should be considered “at least” figures. We do our best to value everything, from stakes in publicly traded or privately held companies, real estate and investments in natural resources to art, yachts and mansions. We dig through SEC documents and court records; call analysts, employees, competitors and ex-wives; and look at newspaper and magazine articles. We also take a hard look at debt. However, we do not pretend to know everything on a private balance sheet.

All numbers have been rounded to the nearest $100 million. All publicly traded shares were priced Aug. 31. Privately held companies are valued by coupling estimates (or, in some cases, company-provided numbers) of revenues or profits to prevailing price/revenues or price/earnings ratios for similar public companies.

A lot of people have been (and will be) commenting on this list. So, I’d like to do something a little different. I’m simply going to go through the list (in order) picking out those names that might be of interest to readers of this blog and saying a few words about them (and their companies).

(Due to time constraints, I only selected billionaires who made the top 50.)

1 – William Henry Gates III ($53.0 billion)

Bill Gates, chairman of software giant Microsoft (MSFT), once again takes the top spot. Today, more than half of Gates’ net worth is invested outside of Microsoft. Despite a recent resurgence in its share price, Microsoft is as cheap as it’s been in many years. The stock has even started to catch the attention of some value investors. Microsoft has been buying back shares and has plans to buy back even more.

In June, Gates announced he will give up his day-to-day role at Microsoft; however, he will remain the company’s chairman. This transition will be completed in mid 2008.

Related Reading

On Microsoft

2 – Warren Edward Buffett ($46.0 billion)

Warren Buffett, chairman of Berkshire Hathaway (BRK.B), finds himself in a familiar spot – right behind his good friend Bill Gates. Unlike Gates, Buffett still keeps the vast majority of his net worth in a single stock. Shares of Berkshire are up over the past twelve months.

As a result, Buffett’s net worth increased, despite the beginning of the process that will ultimately lead to Buffett giving tens of billions of dollars to the Bill & Melinda Gates Foundation (and four other charities started by members of his family). The secret to Buffett’s success: since 1965, Berkshire’s value has compounded at an annual rate of 21.5%.

Related Reading

On Some Lessons From Buffett’s Annual Letter

Against Mr. Lynn’s Buffett Bashing Philippic

Berkshire Hathaway Discloses New Investments

On Buffett’s Big Bet

6 – Jim C. Walton ($15.7 billion)

Jim Walton is …

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Geoff Gannon September 18, 2006

Festival of Stocks #2

Welcome to the second Festival of Stocks. The Festival of Stocks is a weekly blog carnival dedicated to highlighting the best recent posts on stock market related topics.

I am proud to present this week’s best entries to the Festival of Stocks. The articles are listed by category. The stock tickers are linked to Yahoo Finance. I have included my post “On Nintendo” in this week’s festival; it is a follow-up to an earlier post discussing Sony (SNE) entitled “On the PlayStation 3 Delay“.

Stock Analysis

Lifetime Brands – In Your Kitchen, Should They Be in Your Portfolio? By Inelegant Investor
The Inelegant Investor takes a look at Lifetime Brands (LCUT), a fast-growing supplier of cutting boards, bakeware, pantryware, tabletops, and cutlery. At fourteen times 2006 earnings, he likes what he sees.

The Buckle (BKE) at $35.10 By Dah Hui Lau
Dah Hui Lau explores the investment potential of The Buckle (BKE), a retailer of casual apparel, footwear, and accessories with a focus on denim. After asking and answering eight important questions (such as “is management shareholder oriented?”), he concludes shares of this undervalued retailer provide an opportunity for long-term value investors.

Costco, At What COST? By SINLetter Blog
Asif Suria always knew Costco (COST) was a good business. However, the stock had always looked a little overpriced. Three weeks ago, Costco’s stock fell when the company warned it expects lower fourth quarter earnings. So, is now the time to start a position in Costco?

Quietly Marvelous (MVL) By One Guy’s Investments
Marvel Entertainment (MVL), home of the X-Men and other lucrative comic book franchises, had a terrific month in the stock market. But, the real test will come in 2007 and 2008. In ’07, the company will release three possible hits. In ’08, Marvel’s first self-produced film, Iron Man, will arrive in theaters.

Dell, Not Yet? By Vitaliy’s Contrarian Edge
Shares of Dell (DELL) now trade at multiples low enough to attract value investors. But, are Dell’s problems truly short-term in nature? Or, do serious long-term threats lurk below the surface?

Tom Joad’s Truck By Jeff Matthews Is Not Making This Up
As a Dollar General (DG) bull reiterates her buy, Jeff Matthews goes on an unscientific tour of some of the company’s stores in Mississippi and Tennessee. He finds nothing but “the same old stuff in the same old displays”.

Reader Question Regarding Unifi By Fat Pitch Financials
A reader asks George what he thinks of Unifi (UFI), “a textile company selling at approximately 0.36 times book.” George smells a cigar butt – and prefers to leave the dirty business of trying to get that last puff to someone else.
StocksUFI By Value Investing, and a Few Cigar Butts
Mike takes a long look at online closeout retailer (OSTK). At a price-to-sales ratio of approximately 0.5, he

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Geoff Gannon September 17, 2006

Gannon On Investing Newsletter

I’ve updated the description of the Gannon On Investing Newsletter. The page now includes actual thumbnail images of sample pages from previous issues of the newsletter.

The Gannon On Investing Newsletter is a quarterly newsletter covering stocks purchased for my personal portfolio. A single issue costs $75.00. A one-year subscription (4 issues) is $275.00.

The newsletter is distributed both as a PDF via email and as a printed copy via U.S. mail.

Learn More About the Gannon On Investing Newsletter

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Geoff Gannon September 14, 2006

On the Upcoming Festival of Stocks

I’m hosting this week’s Festival of Stocks. You can send in your submissions here.

The Festival of Stocks is a new blog carnival focused on highlighting bloggers’ best recent posts on stock market related topics.

Posts discussing specific stocks are especially appreciated. Many blogs discuss smaller and lesser known stocks in great detail. This Festival provides a single location where the best such posts (as well as other stock market related pieces) can be collected and presented to readers who wouldn’t otherwise have had the chance to read them.

If you have any questions about the Festival, please email me.

The Festival will be hosted here on Monday, September 18th.

I’m accepting submissions now; so, you may send in posts as soon as they’re written. There’s no need to wait.

Visit The Festival of Stocks

Send in a Submission

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