The author is a student at Yale. He is obviously a Warren Buffett devotee – as a picture of him with Buffett adorns the site. Perhaps even more telling, his portfolio holdings (which he lists for all to see) reflect Buffett’s influence.
Of course, none of this is particularly remarkable. There are plenty of investors who seek to emulate Buffett and a few of them even write their own blogs.
What isremarkable is how similar many of the companies he writes about are to the ones I write about on this blog. That’s why I think you’ll enjoy visiting his blog, if you’re already reading mine.
Here are two stocks he’s mentioned that I’ve mentioned as well:
It’s the end of the year. A lot of bloggers try to do something special at this time – make a prediction, summarize the past year, look back, look ahead, etc. I am planning something special for you this weekend.
But, for now, I don’t have anything of my own to share. Rather, I’d like to share the fruits of other people’s labor.
So, I now present some great sites I don’t mention enough (and you probably don’t read enough):
I haven’t done an official count, but I think it’s safe to say the blogger who has given me the most material to work with this year was Bill Rempel. His blog is quite different from my own, but his posts always leave me with something to think about. Most recently, I wrote a post “On Gold and Rome” after reading Bill’s post entitled “Not Bullish On Gold“. Several of my best posts were written after reading something Bill wrote. If you haven’t checked out his blog yet, I encourage you to do so now.
By the way, you can see Bill’s responses to the questions posed by Ticker Sense in their Financial Blogger Outlook. Click the image of a table to see Bill’s views on housing, gold, the dollar, bonds, etc.
George of Fat Pitch Financials is a value investor and (in many ways) a disciple of Warren Buffett. He looks for “fat pitches” whether they are spin-offs, arbitrage opportunities, or simply great businesses. He also started Value Investing News, a great place to browse some of the best recent articles and posts in the world of value investing.
As you probably know, Steven Rosales contributes to this site (in fact, he writes most of our book reviews). He also has his own site where you can find plenty of material that doesn’t appear here. He reviews books, blogs, and online resources of interest to new investors. He’s also started discussing a few of his early trades. This is a great site for new investors to check out. You’ll feel like a fellow traveler setting off on a journey into the world of investing together.
This great resource tracks about thirty investing “gurus” – people like Warren Buffett, Bill Miller, Marty Whitman, Seth Klarman, and Bruce Berkowitz. I love how easy this site is to browse. There are other sites that track some of these gurus. But, this one is by far the best. I can’t recommend it highly enough. Don’t wait until the New Year, bookmark this site today.
This is a site you want to check once a day – everyday. Make it a kind of ritual. There’s often something interesting here and they keep the material coming constantly. You can’t live on posts like mine alone, you need a balanced diet and 24/7 Wall St. is just the kind of blogging buffet (for once …
In a previous post, I explained why I chose to present the performance of high and low 15-year normalized P/E years by measuring the compound point growth in the Dow over the subsequent fifteen years:
“I thought if long-term performance was as closely tied to “earnings power” as I thought it ought to be, then fifteen years of past earnings data and fifteen years of future share price growth should be enough to detect this relationship…I gave no thought to the possibility that any normalized P/E effect would be discernible over much shorter time periods.”
Well, I should have given that possibility some serious thought, because the normalized P/E effect is discernible over much shorter periods of time.
In fact, the normalized P/E effect is discernible in a way I did not expect to find – and may even have subconsciously preferred not to find.
I write about long-term investing on this blog, because I think about long-term investing and I want others to think about it too. As a result, I really don’t want to present findings from my little normalized P/E study that suggest there is a short-term P/E effect. More than anything, I really don’t want to present findings that suggest the normalized P/E effect is ever more pronounced over a shorter period of time than a longer period of time.
That last sentence requires some explanation. I will need to (reluctantly) employ a physics analogy. I say “reluctantly”, because I’ve (not so subtly) hinted that economists (and their science) suffer from a certain degree of physics envy, as well as an unhealthy attachment to precisely quantifiable figures. Nevertheless, I think this physics analogy will work, because everyone knows enough physics to know what I’m talking about.
The Weighing Force
Conceptually, I thought of the normalized P/E effect as evidence of a perpetual, pervasive, propensity that I’ll call “the weighing force” (for Ben Graham). Knowing what we know about markets, their participants, and the aims of those participants, we should expect markets to often appear efficient, simply because there is a natural tendency for price and value to converge.
I use the term “natural” quite loosely here, because we’re dealing with a complex, human phenomenon. Still, it seems appropriate to consider this tendency for price and value to converge to be a natural consequence of value-seeking market participants.
This is especially true, because some market participants are capable of extracting value outside the market by purchasing stock to gain influence or complete control of a business and then milking that business for cash, selling corporate assets, or integrating the entire business into their own operations.
For evidence of this “outside” influence on the stock market, consider Marty Whitman’s Third Avenue Value Fund, which makes purchases with the expectation that value will be extracted from many of the fund’s holdings without the fund actually selling shares in the open market.
Simply put, if you create a market for productive assets (like pieces of businesses) the weighing force is …
That explanation will come later in the day. First, I’d like to revisit two topics about which I’ve received quite a bit of email over the last twenty-four hours. The two topics readers seem most interested in are the election cycle and the relationship between 15-year normalized price-to-earnings ratios and one-year point growth in the Dow.
First, let’s tackle the election cycle. When writing about this (normalized P/E) project, I run a lot of numbers I never report to you. For the most part, I only share interesting or unexpected findings. However, I still routinely check to make sure I’m not missing something obvious. Despite these checks, I encourage (and ultimately depend on) your attempts to keep me honest by pointing out the possible holes in my logic.
So, let’s poke a bit at the findings from the last post and see if we can find a hole.
The Hypothesis
One obvious explanation for the election cycle effect is that mid-term years might tend be abnormally cheap years. Is this hypothesis supported by the data?
Technically, mid-term years do have below-average 15-year normalized P/E ratios. But, I wouldn’t say these years have abnormal 15-year normalized P/E ratios, because other randomly selected groups from within this same set of years (1935-2005) would also have normalized P/E ratios that fall a bit below the average for the entire set.
The Comparison
The “full set” (1935-2005) had an average (mean) 15-year normalized P/E of 14.08, a median of 13.59, and a range of 6.88 – 30.84. Just under 44% of the years in this set had a normalized P/E of less than 12.50.
The “election cycle set” (1938, 1942, 1946…) had an average 15-year normalized P/E of 13.46, a median of 13.00, and a range of 6.88 – 28.05. Just over 47% of the years in this set had a normalized P/E of less than 12.50.
The 12.50 Rule
The importance of this last check (percentage of years with normalized P/E of less than 12.50) is based purely on logic. Before beginning this study, I felt that when the Dow has a 15-year normalized earnings yield of 8% or more (i.e., a normalized P/E of 12.50 or less) there is a very good chance it is an attractive purchase for long-term investors, because other assets don’t tend to offer long-term returns superior to those expected from an asset priced at 12.5 times its “earnings power”, and sometimes present greater risks (including a loss of purchasing power) than a diversified group of large businesses like the Dow normally does.
Obviously, the fact that, since 1935, the Dow has been (what I would call) “undeniably cheap” nearly 44% of the time helps explain why it has done so much for long-term investors. Stocks are not inherently attractive; …
Bill makes two important points early in his post:
1) Gold is not “original money” 2) When a government controls money, it will manipulate the situation to its advantage
Inflation is not a modern phenomenon; it is a governmental phenomenon. Many otherwise intelligent people completely miss this point. For those investors with more knowledge of history than economics, Spain’s experience with New World gold probably stands out as a clear example of inflation. That’s good, because knowledge of two or more separate occurrences of the same phenomenon under seemingly different conditions is often the key to better understanding that phenomenon.
There’s another excellent example of inflation that is rarely studied. It happened roughly two thousand years ago in Europe, Africa, and the Middle East.
If you have any interest in inflation during Roman times, I’d recommend Kenneth Harl’s Coinage in the Roman Economy, 300 B.C. to A.D. 700 (Ancient Society and History). I should warn you this book was not written to address inflation specifically or even economics generally. It certainly sheds some light on those topics, but the subject of the book is exactly as the author describes it on page one:
“The objective of this book is an examination of how the Romans used coined money – its role in payrolls, tax collection, trade, and daily transactions – over the course of a millennium, 300 B.C. to A.D. 700. Although there are many books about Roman coins, they are, for the most part, numismatic works devoted to the study of coins as objects rather than as evidence for the economic and social life of the Roman world. This is an attempt to redress the imbalance by dealing with coins both as fiscal instruments of the Roman state and as the medium of exchange employed by the Roman public.”
I find this stuff interesting. If you do too, read the book. However, if your only interest in Roman monetary history is better understanding inflation (in modern societies), you’ll want to skip the book – but learn the history. I can’t cover Roman monetary history in a single blog post; however, I will try to touch on some highlights that relate to Bill’s post.
The first point worth mentioning is that Rome’s early monetary history clearly demonstrates that gold is not “original money”. Early Italian people used iron and bronze as money long before adopting gold. Before that, they may have reckoned prices in cattle.
In fact, Pliny the Elder wrote that the first forms of money (pecunia) were actually substitutes for cattle (pecus), and that’s where the Latin word pecunia came from. There may be some truth to this, as the English word “fee” is believed to be derived from a German word for cattle, which is itself quite possibly a cognate of pecus. Clearly, there was some connection between cattle and wealth in these societies; however, …
Guest Columnist Max Olson’s latest article is entitled “Warren Buffett and the Washington Post”. In this article, Max attempts to “reverse engineer” Berkshire’s 1973 investment in the Washington Post Company.
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.
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.
Enjoy.
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. Stocks: HTIVF
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”. Stocks: LM
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. Stocks: UWNK
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. Stocks: MWA, WLT
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. Stocks: WU
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 Overstock.com (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. Stocks: OSTK
I did not expect to learn anything significant about Overstock.com (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 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 …
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.…
. I should warn you this book was not written to address inflation specifically or even economics generally. It certainly sheds some light on those topics, but the subject of the book is exactly as the author describes it on page one: