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Geoff Gannon November 15, 2006

On a Small Project

There haven’t been many posts recently (and there won’t be a post today) because I’ve been working on a small project in preparation for an upcoming post – actually, the project will probably spawn several posts.

I don’t normally write posts on “macro” subjects. But, there is one terribly important subject that I do need to address: what kind of returns you can expect over your investment lifetime.

I’d like to include some graphs in the post. Unfortunately, to have them drawn the way I want a little number crunching is required. It’s simple work; but, it takes up a lot of time. I’m almost done. I might even have the post for you on Friday.

Until then, here are two items to keep you busy:

A video of Warren Buffett taking questions from some MBA students

An update on what stocks Buffett has been buying and selling recently

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Geoff Gannon November 13, 2006

Festival of Stocks #10

Welcome to the tenth 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 Overstock’s Terrible Third Quarter” in this week’s festival; it is a follow-up to a series of earlier posts on that stock.

Overall, I was very pleased with this week’s submissions. What today’s festival lacks in quantity it more than makes up for in quality. The festival includes six posts discussing specific stocks, three posts on topics in investing, and a poem. Yes, you read that right. This week’s festival concludes with a poem. It’s the proverbial cherry on top of this satisfying stock sundae.


Stock Analysis

Hotung Baby! By Margin of Safety
Margin of Safety revisits Hotung Investment Holdings, a Taiwanese venture capital firm. The author notes that Marty Whitman’s Third Avenue Management recently added to its stake in the company, despite a nearly 50% increase in the share price over the last year.

Legg Mason: Unloved for Now? By Banker Notes
Banker Notes provides a brief overview of the investment case for Legg Mason (LM). At a price-to-book ratio of just under 2, the stock looks “relatively cheap”.

uWink: A Promising Project from Gaming’s Most Legendary Entrepreneur By Value Blogger
Kevin Kelly and Zac Bissonnette take a long look at uWink (UWNK), a small public company with an innovative restaurant concept and the leadership of Nolan Bushnell, “the 68-year old entrepreneur-extraordinaire” who founded Atari and Chuck E. Cheese.

Mueller Water Products, Walter Industries Remain Strong Buys By Controlled Greed
John Bethel revisits two of his holdings, Mueller Water Products (MWA) and Walter Industries (WLT). Both stocks sold off sharply last week, so now would be a good time to take a serious look at them.

Western Union Purchased By Fat Pitch Financials
George of Fat Pitch Financials explains the logic behind his purchase of Western Union (WU). The global leader in money transfers was spun-off from First Data (FDC) earlier this year. George thinks this spin-off of a wide moat company is a fat pitch – and he’s swinging.

On Overstock’s Terrible Third Quarter By Gannon On Investing
After Monday’s announcement of a year-over-year revenue decline for the third quarter of 2006, I’ve changed my tune on (OSTK). Earlier this year, I argued Overstock was worth at least $1.5 billion. After the company reported a year-over-year decline in revenues for the third quarter of 2006, I realized I didn’t understand the business.


Observations on Risk-Don’t Confuse Liquidity with Brains By Value Discipline
Rick of Value Discipline takes on the topic of risk aversion: “Risk aversion unfortunately tends to

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Geoff Gannon November 8, 2006

On Overstock’s Terrible Third Quarter

I did not expect to learn anything significant about (OSTK) until the fourth quarter results were in, because the Christmas season is so critical to the company’s success. However, Monday’s announcement of a year-over-year decline in revenue was completely unexpected.

Based on Byrne’s remarks and the reported results, it looks like Overstock got everything right except conversions. I was pleasantly surprised with how well the company managed its IT systems and its inventory. In the past, management had made mistakes in these areas and Overstock paid the price. This quarter they did a great job on both fronts.

Unfortunately, the fantastic growth that had allowed Overstock to move forward despite serious missteps (in previous quarters), was totally absent this quarter.

In his letter to owners, Byrne wrote:

“In the past we ran at an A- and regularly generated 100% growth: now I think we are running at an A+ but seeing no growth. I am not entirely sure what to make of that.”

I agree. That’s the real story. The company gave its best performance – and posted its worst results. The CEO can’t explain it and I can’t either.

At the beginning of this year, I thought Overstock could grow sales at 10-15% for the year. I expected to see total sales for 2006 of between $875 million – $925 million. In the first three quarters of 2006, the company only generated about $500 million in sales. So, Overstock would need $375 million to $425 million in sales during Q4 to get to where I expected them to be at the end of the year. To put that in perspective, the company had sales of $318 million in Q4 of ’05.

So, Overstock would need to post year-over-year growth of 18 – 34% during the fourth quarter of this year just to reach a target I thought was sufficiently conservative when I set it about a year ago.

Then, there’s the issue of cash. Like I said, Overstock did everything right this quarter and still posted very poor results.

In February, I wrote that “Insolvency could only occur through gross managerial ineptitude”. Clearly, I was wrong. Overstock’s management is not inept; in fact, they’ve made meaningful improvements to the business in the first nine months of 2006. Overstock is a much more efficient operation today than it was a year ago.

However, there is a real risk of insolvency. If Overstock’s fourth quarter results don’t show year over year growth of at least 15-20%, it seems nearly certain they will have to raise cash in 2007.

Even if the fourth quarter looks great, there may be a need to raise cash. If the company has to raise cash while its prospects appear terribly dim, the terms on which the cash is raised are likely to be extremely detrimental to current shareholders.

Overstock has a solid business model. Unfortunately, the logic of that model is predicated upon sales volume growth. The business simply …

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Geoff Gannon November 2, 2006

Guest Columnists Wanted

I’m always looking for additional contributing writers. Contributors must be:

1) Passionate about investing
2) Curious about investing
3) Able to think and write clearly about investing
4) Willing to work with an editor (me)
5) Willing to work for free

If you’re interested in writing for the site, please send me an email.…

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Geoff Gannon November 1, 2006

Guest Columnists

As part of my continuing effort to increase both the amount of content and the diversity of content on this site, I’m proud to present two new guest columnists: Max Olson and Steven Rosales.

I’ve added a “Columns” section to the website. If you look in the “Navigate Site” box on the right-hand side of your screen, you will see that the third link down now reads “Columns”. This link will take you to the Gannon On Investing Guest Columns Page, which presents all the articles written by guest columnists in reverse chronological order (i.e., in the same manner as a blog).

If you’d prefer you can jump directly to a specific column by following one of the links a little further down on the page. Once again, if you look to the right-hand side of your screen, you will see that the third box down is entitled “Guest Columnists”. Currently, there are two links in that box: “Max Olson” and “Steven Rosales“. Simply click on the name of a columnist and you’ll see his latest articles.

For now, I’ve only posted one article from each guest columnist. Of course, you’ll see many more articles appear in the days ahead.

Please take this opportunity to sample the work of each writer.

Column: Max Olson

Column: Steven Rosales

Max’s articles will cover a variety of different topics in value investing. Steven has a series of articles planned. His first article serves as an introduction to that series. Therefore, I’m reprinting it below:

I am a new investor. What does that mean? Simply that I do not have much experience investing. While I had read books about investing and was aware of the stock market, I had never given much thought to investing.

I saw the stock market as a competition where I was at a disadvantage; investing involved too much risk for the potential reward. Therefore, as of January 1, 2006, I had never purchased a stock. But that has changed. It changed because I reached a point in life where I had funds to invest and needed to make some decisions on how to invest them.

Now many people think that the best way to invest is to place your money with a mutual fund. I was one of those people up until November 2005 when I read John Bogle’s book on mutual funds. Two things about this book stood out to me. The first was that whether the fund increases or decreases my investment, the people who are running it get paid, and that these “fees” impact my investment results (if I am up 10% on the year, and I have to pay a total expense fee of 1.5%, I have actually only made 8.5%).

The second point that stood out to me was the fact that the vast majority of money managers do not outperform the stock market. In his book, Bogle points out that most people would be better off just

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