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Interesting Items for Saturday, October 27th, 2007

John Bethel of Controlled Greed writes about the Malone / Diller dance described in today’s Wall Street Journal. Read John’s post.

Two of Warren Buffett’s earlier letters to Berkshire Hathaway shareholders are now available online (in PDF). You can now find the 1973 and 1976 letters here.

The Berkshire Hathaway site only archives letters going back to 1977.

Note especially page four of the 1976 letter where a table of Berkshire Hathaway’s equity holdings is provided. Below, I’ve reformatted the table to show each position as a percentage of Berkshire’s equity portfolio at cost:

GEICO Convertible Preferred – 25.75%

Washington Post – 14.10%

Kaiser Industries – 10.97%

Interpublic Group – 6.01%

GEICO Common – 5.46%

California Water Service – 4.79%

Munsingwear – 4.51%

Ogilvy & Mather – 3.66%

National Presto – 2.24%

Other – 22.51%

To understand the rationale for each investment, you need to go back in time to look at the businesses as they really were in the 1970s and the prices they traded at when Buffett bought them.

A search through (online) newspaper archives is always a fruitful experience when researching Buffett / Berkshire. For instance, Buffett explains the logic behind his purchase of Kaiser Industries in the 1976 annual letter to shareholders. If you look through newspaper articles from 1976 – 1977 you will find several that fully explain the situation Kaiser found itself in, the large discount the holding company had traded at, and the manner in which the voluntary liquidation (“breakup”) was effected. You’ll also get an excellent feel for the way Buffett saw the situation. Remember, he reads a lot of newspapers.

By the way, there were a couple good contemporary articles on the GEICO debacle and that company’s subsequent resurrection. If I remember correctly, the best article (from an investor’s perspective) appeared in The New York Times.

It’s also fun to read several articles in succession and see how quickly analyst opinions changed on the company – though to be fair, there were some serious unanswered questions throughout much of that period both concerning GEICO’s capitalization and the full extent of its poor underwriting policies.

Buffett was quoted in a few of the GEICO articles, but he was rather tight-lipped except to say at some price he’d be willing to buy a whole lot of GEICO; at another price he’d be unwilling to buy any of it. Thirty years later, he still sounds much the same whenever he discusses a potential investment.

I highly recommend reading both letters – especially if you’ve already read all of the annual letters archived at Berkshire Hathaway’s own site.

Max Olson, who has written several excellent articles for this site – including Warren Buffett and the Washington Post – recently started his own blog. His latest post is entitled “PetroChina: A Look Back“. Max has carved out a niche for himself writing articles that “reverse engineer” great investment decisions. His PetroChina post is well worth reading.

Warren Buffett’s …

Book Review: Active Value Investing

Review by Geoff Gannon

Vitaliy Katsenelson’s “Active Value Investing” is one of the best investing books published in the last few years. The book is both readable and teachable. It focuses on general principles rather than specific strictures. Although “Active Value Investing” is written in an easily approachable manner, it is structured much like a good textbook ought to be. In this way, Katsenelson’s 282-page book captures much of the spirit of Graham and Dodd’s magnum opus without ever losing sight of our modern day market and the unique challenges it presents.

Katsenelson’s thesis is that the U.S. stock market won’t soon return to its old ways, the ever-rising crescendo of the 1982-2000 bull market on which many of today’s investors were weaned:

For the next dozen years or so the U.S. broad stock markets will be a wild roller-coaster ride. The Dow Jones Industrial Average and the S&P; 500 index will go up and down (and in the process will set all-time highs and multi-year lows), stagnate, and trade in a tight range. They’ll do all that, and at the end of this wild ride, when the excitement subsides and the dust settles, index investors and buy-and-hold stock collectors will find themselves not far from where they started in the first decade of this new century.

With this opening salvo, the reader might well expect the book to devolve into a barrage of unabashed bearishness.

Thankfully, it does not.

Instead the book argues that the bull/bear dichotomy is a false one. True, there are long-term bull markets – but, there are really very few long-term bear markets in the sense in which most people understand the term. Rather, unfavorable long-term market trends tend to be of the “cowardly lion” variety, “whose bursts of occasional bravery lead to stock appreciation, but are ultimately overrun by fear that leads to a subsequent descent“.

That’s the crux of Katsenelson’s book – and quite a crux it is. He has the data to support it – and anyone who has spent any time looking at long-term market trends knows that it doesn’t take much to demolish the bull/bear dichotomy which seems to fascinate Wall Street (and infect its literary output). Terms which may make a good deal of sense in the short-term are used as if they applied to long-term trends, when almost all of market history shows they don’t.

I’m sure it’s more fun to be unabashedly bearish – especially when writing a book – than it is to be realistic. But, the facts are the facts – and the facts say that the word “bear” doesn’t really belong in our long-term market vocabulary.

Katsenelson provides a great service when he demolishes the bull/bear dichotomy and shows his readers the truth – the boring, honest truth – that in the long-run, sometimes markets go up and sometimes markets go sideways; sometimes P/E ratios expand and sometimes P/E ratios contract. These trends can last a long time. …

Interesting Items for Monday, October 01, 2007

Controlled Greed, one of The Eight Best Investing Blogs, has two posts (“life of the blog” and “year-to-date“) discussing the performance of its stock picks.

Value Discipline (another one of The Eight Best Investing Blogs) has several new posts:

The Sub-Prime Crisis and the Hedge Fund Collapse

Is Government Involvement in Energy Worth the Investment Risk?

Nordson and High Quality Capital Goods Companies

Finally, George of Fat Pitch Financials (yes, another one of The Eight Best Investing Blogs) writes about NCAV (net current asset value) bargain Concord Camera (LENS) and its recent 10-K. Even if you don’t like the stock (or the company – and there’s plenty not to like) you might want to read the post, as true net/nets are currently an endangered species.

Over the next week you may notice some changes to this site as I clear away some of the stuff I haven’t been able to update and prepare to resume some other activities on a regular basis. It’ll all make sense in about a week.

For now, please just bear with me – and don’t worry if some of the site suddenly disappears. It’s all part of an effort to improve the site and keep it current.

The blog itself won’t be changing.

Thanks for your understanding.

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