Investing in Japan – Questions and Answers

A reader sent me this email:

In your research have you come across any good closed end funds? So far I’ve only found JEQ and JOF.

I don’t plan to buy a closed end fund. I plan to buy stocks I select myself.

If your broker can buy in Japan, I’d suggest doing that. Last I saw, the discount/premiums on Japanese closed end funds and ETFs are tighter than normal not wider. In other words, like in Egypt, foreigners are buying into the country wide funds in the middle of the crisis. People are fleeing the specific stocks. But that doesn’t seem to be matched – and certainly not exaggerated – in the funds. Usually, slow motion market declines show the reverse trend. But people may actually be attracted by bad headlines when they happen fast in a country they normally don’t invest in.

I’m working on a list of 100+ Japanese stocks. These are individual stocks I picked myself based purely on their 10 year earnings records. I’ll probably just make my own basket out of those instead of buying into a fund.

But, depending on your broker, that could be too expensive in your case.

A reader also sent me this email:

How are you sizing your Japanese positions? Are you setting a maximum limit of how much your portfolio will be invested in Japan?

I expect to put 25% of my net worth into Japanese stocks.

If prices fell a lot from here and I found stocks I liked, I’d definitely put 50% into Japan.

I’m unlikely to put more than 50% into Japan under any circumstances. It would be possible. But the Japanese stock market would have to drop further by some crazy amount like 50% or something for me to put more than half my net worth into Japanese stocks.

I’m saying that now, but I could change my mind. If I really liked the prices, there’s ultimately no limit to what I’ll put into one country. They’ve got enough public companies in Japan that interest me. If they offer them at low enough prices, I’d be willing to go to 100%. But I already own some American stocks I like, so putting more than 50% in Japanese stocks would be hard right now.

I’m expecting my portfolio will be 25% to 50% in Japanese stocks very soon.

Beyond that – your guess is as good as mine.

But I won’t buy indiscriminately. I’m not going to buy a fund. I’m going to buy from my own list of the cheapest Japanese stocks.

A reader also sent me this email:

“How are you thinking about currency risk?”

I always think about currency risk in terms of purchasing power parity. I just assume I will exchange my foreign currency back into U.S. dollars at the lower of today’s exchange rate or purchasing power parity.

So, I punish overvalued currencies, but don’t treat undervalued currencies as being more attractive. That keeps me out …

15 Japanese Net-Nets

Since my “Buy Japan” post I’ve been getting lots of emails asking exactly which Japanese stocks are worth buying.

 

Warren Buffett’s Letter to Shareholders – Intrinsic Value

Warren Buffett just released his letter to Berkshire Hathaway (BRK.B) shareholders.

I’m reading it now. I’ll talk about it in depth later. But I thought I’d give you my first impression of what matters.

For Berkshire shareholders, Buffett goes into much more detail than usual concerning how to value Berkshire Hathaway. He even tells us what he thinks normal earnings are for Berkshire right now.

As usual, he’s also presenting my favorite way of valuing Berkshire – the two bucket approach. You take the investments per share and you slap a multiple on the pre-tax earnings per share.

Personally, I suggest 10 times pre-tax earnings is the right multiple.

So, if you look at page 6 of the annual letter, you’ll see per share investments are $94,370 and pre-tax earnings per share are $5,926.04. That suggests Berkshire’s intrinsic value – using the two bucket approach and no earnings normalization – is $153,630.

A “B” share is 1/1,500^th of an “A” share. So, Berkshire’s “B” shares – the ones individual investor are most likely to buy – should be worth about $102.

The last trade on Berkshire’s “B” shares was $84.87 a share.

Of course, those earnings aren’t normalized. Buffett gives an estimate of normalized earnings this year.

But I thought I’d share the usual two buckets of value approach and what is says about Berkshire this year.

It’s a smidge undervalued.

Talk to Geoff About Berkshire Hathaway…

Warren Buffett May Be Buying Brasil Foods; Reporters May Be Mistranslating Something

There are reports today that Warren Buffett’s Berkshire Hathaway (BRK.B) is buying shares in Brasil Foods. These reports are very possibly true. But still weird. I am seeing something in the U.S. reports that I’m not seeing in the Portuguese report I could find. However, I can’t read Portuguese. So I assume reporters at places like Bloomberg understand the Portuguese report better than I do.

U.S. sources all seem to be talking about a report in a Brazilian paper. When I check that paper’s website this is the only report I see.

In the original Portuguese:

O megainvestidor Warren Buffett chegou ao Brasil. Executivos da BRF -Brasil Foods contaram a investidores, durante reunião promovida pelo BTG Pactual, que gestores da Berkshire Hathaway, empresa de investimentos do bilionário americano, visitaram o país e estiveram em unidades da empresa. Depois de conhecerem a companhia, formada pela união de Sadia e Perdigão, iniciaram compras das ações na bolsa.

And now in the Google Translated English:

The investor Warren Buffett arrived in Brazil. Executives of BRF-Brazil Foods told investors during a meeting sponsored by BTG Pactual that managers of Berkshire Hathaway, an investment company of billionaire American, visited the country and have been in business units. After becoming aware of the company, formed by the union of Sadia and Perdigao, began buying shares in the stock market.

But, like I said, I can’t read Portuguese so I’m assuming Google Translate and I are missing something here and there are actually fund managers mentioned in some report in Brazil.

If you can read Portuguese, perhaps you see that mention above.

Even if there is such a mention, I don’t believe it.

I believe Warren Buffett may be buying stock in Brasil Foods. I just don’t believe he sent any “fund managers” to Brazil. Someone from Berkshire may have visited. But unless it was Warren Buffett or Charlie Munger, it’s unlikely to have been anyone Americans would call a fund manager.

Regardless, Berkshire Hathaway may own stock in Brasil Foods.

If it does, I’m sure Warren Buffett hates that someone at Brasil Foods opened their yap at an investor conference.

It’s like Posco all over again.

Talk to Geoff About Warren Buffett and Brasil Foods…

Borders (BGP) Files for Bankruptcy

The second-largest book store chain in the United States, Borders (BGP), filed for bankruptcy today.

You may remember my misadventures in the stock of Borders’ biggerst competitor, Barnes & Noble (BKS).

I bought Barnes & Noble shares at $15.36 a share in August. I sold them at $14.82. In the meantime, I received $0.50 a share in dividends. The stock is now at just under $19 a share. Up 28% since I sold it. Given the announcement that Borders will close 30% of its stores in just a few weeks – well, Barnes & Noble will pick up a couple points of market share almost overnight.

I’d be surprised if Barnes & Noble’s shares didn’t close higher today. The bankruptcy was expected. But the combination of the store closing and the New York Times saying that Bill Ackman is still interested in a Barnes & Noble and Borders merger if and only if Borders can close enough of its worst stores in bankruptcy was not necessarily expected.

So, overall, selling Barnes & Noble was not my proudest hour.

As you probably know, they spent too much on the Color Nook for my tastes. They didn’t suspend the dividend. And they did defeat the proxy battle waged by Ron Burkle. They were also slow walking the process of getting bids for the entire company.

That made me unable to evaluate their future and quite able to know their cash flow situation would not be as good as it should have been. The stores, remember, still throw off a lot of free cash flow. It was the Nook that sucked it up.

Obviously, Barnes & Noble is the big winner today.

Borders’s bankruptcy filing is shown below.

Page 10 of the filing shows the company’s top creditors. They’re publishers. Here’s what Borders owes them:

1. Penguin – $41,118,914
2. Hachette – $36,879,656
3. Simon & Schuster – $33,757,444
4. Random House – $33,461,061
5. Harper Collins – $25,793,450
6. Macmillan – $11,434,306
7. John Wiley – $11,191,435

Those are just the top 7 creditors. After that, it’s distributors, coffee/cafe, etc.

There are a couple more large publishers way down the list. McGraw-Hill is owed $3,093,871. Pearson is owed $2,784,766.

Borders Petition

Talk to Geoff About Borders Filing for Bankruptcy…

If I Want to Be a Professional Investor, Do I Need to Get an MBA?

A reader sent me this email:

I’ve been studying value investing for about 2-3 years now. The more I speak to my friends and family about investing the more they tell me I need to go back to school to get my MBA. Since my background is in computer programming I’ve looked into all the different ways to go about switching my career. I’ve looked into different MBA programs around the country but I have reservations about spending a large sum of money on a degree that probably won’t teach me how to become a better investor. I also have reservations about spending large sums of money period. The curriculums at many of these schools really don’t interest me except for a few classes. And if I’m not interested in a subject, I will fail it. What I really want to do in the end is become a better value investor and manage a small portfolio. So my questions to you are:

1. What is your (educational) background?
2. What are your thoughts on getting an MBA?

Thanks,
Tom

I’m a high school drop out. I never completed any school year beyond 8th grade. (That’s age 14 for our non-U.S. blog readers). I have a GED. And I briefly went to college.

I don’t think an MBA will make you a better investor. However, an MBA can be used to show you are serious. Basically, it’s like having a liberal arts degree from an Ivy League school. It’s useless. But it might convince employers you’re smart or at least hardworking.

The three things that make people take you more seriously for a career in investing are: a CFA, a MBA, and an undergraduate degree in economics from a top U.S. school. A CFA is best.

The most useful designation by far is the CPA. It’s not even close.

Training as an accountant and training as a lawyer are the two most useful educational backgrounds for an investor to have.

Accounting knowledge is directly useful. Legal training is indirectly useful. The way law schools train their students to become lawyers exercises the same mental muscles you use when you invest.

The eight most useful courses for investors to take are:

1. Financial Accounting
2. Managerial Accounting
3. Tax Accounting
4. Business Law
5. Marketing
6. Business Administration
7. Microeconomics
8. Macroeconomics

The cheapest way to learn these subjects is to buy the textbooks and read them yourself.

None of those courses are hard.

Like I said, I dropped out of school after 8th grade and I had no problem passing those 8 courses when I briefly went to college.

If someone who never really went to high school can pass those courses, I’m sure someone who finished college – even if it was as a computer programmer – can teach himself those 8 subjects at home using the standard textbooks.

To answer your question: I would strongly advise against getting an MBA.

But – then again – I’m a high school drop out. So I’m not sure you want to …

Why I Don’t Invest in Chinese Stocks

A reader sent me this email:

Hey Geoff,

Let me start this off by saying I am an almost brand new investor (rather than speculator), or at least I hope to become one. I read Warren Buffett’s biography the Snowball, which led me to the Intelligent Investor, and now I am trying to learn everything I can about value investing….I have only been in stocks for a few weeks.  I have bought some well known companies that looked cheap like MSFT, SKX, and RSH, but I am increasingly fascinated by the possibilities of small and micro caps. There are 2 Chinese companies that I have bought and I keep looking at the numbers and they almost seem too good to be true….They do not appear to be associated with the same fraud as a lot of the Chinese reverse mergers, and their P/E ratios and returns on equity look pretty awesome. Do you think I’m crazy to call these companies “investments”?

I don’t invest in Chinese stocks.

Since I look for net/nets, I often end up with a list of Chinese stocks. And my initial impression of Chinese net/nets has been extremely negative. I have seen things literally within seconds of opening their 20-F that turned me off. Things that made me feel there was a chance you could lose everything in the stock.

I could look at the specific stocks you mentioned if you really want. But, honestly, I work at this investing thing pretty hard. I spend a lot of time thinking about investments. I’ve read thousands and thousands of SEC reports. I started when I was 14. I’ve been writing about investments for the last 5 years. And I don’t trust myself to analyze Chinese stocks. I don’t trust my own judgment enough to let me go through the filings and try to separate the good ones from the bad ones. So I’m not sure why you should trust my judgment on any Chinese stocks.

I’m not just saying don’t consider Chinese stocks because you’re a new investor and I’m being overly protective and blah, blah, blah. I’m saying I personally have banned myself from ever considering Chinese stocks because I have seen things you wouldn’t believe in these filings. I don’t like to talk about it because I don’t short stocks. I don’t want to get into controversies over shorting stocks. And I don’t want to come off as racist or anti-China or something. But there are frauds in U.S. listed Chinese stocks. There are some very, very obvious frauds.

I have read press releases from Chinese net/nets where I honestly believe they are saying an event occurred that did not occur. I think they made the whole thing up. I don’t mean they shaded the truth one way or another. I mean they flat out lied about why their CFO left. I’ve seen this more than once.

I think there are Chinese companies out there that are consciously and actively lying to their investors …

So You Think You Can Read – Thursday

Find stocks reading articles written for nerds not investors. (The Frog’s Kiss)

Microsoft isn’t some old, stodgy industrial outfit. (Controlled Greed)

Travel Centers of America has a lot of leverage and conflicts of interest, but… (Whopper Investments)

Tobin Q, Shiller P/E, and AAII survey show stocks are overvalued and investors are overbullish. (ValueWalk)

Altria has 43 years of rising dividends, a 6% yield, and a fair stock price. (MagicDilligence)

Comamtech is a difficult merger arb play, but still a stock worth studying. (Whopper Investments)

Whitney Tilson hasn’t had success shorting good businesses at high prices. (Market Folly)

Old school value investors are getting outdone by newer, more aggressive players in St. Joe. (Stableboy Selections)

Green Mountain Coffee Roasters trades at $37 a share. It’s worth $5. (Special Situations Monitor)

Rock-Tenn is really buying Smurfit-Stone for just 5 times EBITDA. (Special Situations Monitor)

Charlie Munger speaks and Daily Journal shareholders transcribe. (Canadian Value Investing)

Richard Perry thinks bargains aren’t plentiful but event driven opportunities are. (Market Folly)

JANA Partners starts new positions in companies making value maximizing moves. (Market Folly)

T.Clarke is a good company with lots of heritage, but its future is tied to construction. (10 Value 10)

Dewhurst is a hidden champion. (Interactive Investor)

Maxco is liquidating. (Whopper Investments)

And Winmill & Co. is wondering why a prospective investor wants to see a balance sheet. (Whopper Investments)

Talk to Geoff…

Understanding Depreciation: 4 Depreciation Archetypes

A lot of investors don’t give depreciation enough thought. Whenever you compare P/E ratios, you are – to some extent – counting on depreciation between companies being totally comparable.

It’s not.

Forget loans for a second. And forget the idea of “appreciation” and “depreciation” in the sense of a rise or fall in value. Instead, we’re just going to talk about depreciation and amortization as they are used in financial statements.

We’re talking 10-Ks and 10-Qs. We’re talking balance sheets and income statements.

We’re talking accounting.

For our purposes, the words depreciation and amortization mean the same thing. It’s just that we’re going to say depreciation when we’re talking about something we can touch – like a cruise ship. And we’re going to say amortization when we’re talking about something we can’t touch – like a management agreement.

Otherwise, depreciation and amortization are synonyms.

You sometimes hear it said that depreciation is a reserve for the replacement of an asset. That’s wrong. Depreciation is a method used by accountants to spread the cost of an asset over the period in which the asset provides a benefit to its owner.

Basically, we’re talking about matching the costs and benefits – the revenues and expenses – of an asset so they appear on the income statement at the same time.

The basic idea you need to get from reading this article is that no one is attempting to account for the replacement cost of the asset when they determine the depreciation expense. Replacement cost has nothing to do with depreciation.

Instead, they are taking the cost – the expense – of what you are buying today, and then chopping it up and spreading it out over the time you use it.

If you want to think of the difference between buying a car and renting a car to understand depreciation, that’s fine. If you rent a car, you get charged every day. If you buy a car, you get charged once (but it’s a big charge). In a sense, depreciation is about providing the folks who read financial reports with a picture of a business’s performance that shows the car buyer in much the same way it would show the car renter. Each day we’re asking: what did it cost the driver to use his car today?

That analogy is far from perfect. And I’ve made things sound simpler than they really are. But, now, I’d like to move past talking abstractly about depreciation and amortization and move to talking about specific examples you will see in your investing adventures.

I’ve singled out these 4 stocks because they are examples – in fact, rather extreme examples – of 4 types of important depreciation situations you’ll come across when you research stocks.

In a sense, these 4 stocks are archetypes of situations in which depreciation and amortization can be important in picking stocks.

Although I said depreciation is used to match the timing of the expense of owning an asset with the benefits …

Accounting Connections

I just wrote an article over at GuruFocus that I think is worth reading. I get a lot of questions asking what’s a good accounting book to learn from. Right now, I’m reading John Tracy’s How to Read a Financial Report.

The point of the book is seeing the connections between the financial statements. That’s so important. And it’s really the only thing I have to say about accounting. It’s about fluency. It’s not about knowing in detail how this or that is calculated. It’s about knowing how things on the income statement and the balance sheet and the statement of cash flows work together to tell the story of a business.

Recently, I’ve written 3 articles that show how investors can use accounting:

DuPont Analysis for Value Investors

Warren Buffett: Berkshire Hathaway, Leverage, and You

Warren Buffett: Inflation, Depreciation, and the Earnings Mirage

If you want to see how I think about accounting, you should start with those articles.

Talk to Geoff About Accounting Connections…