On Blogging

A while back someone asked me why so many investment bloggers stop blogging.

I didn’t have an answer for him.

Bloggers stop blogging for a lot of different reasons. But, that wasn’t the question? The question was why investment bloggers stopped – especially good investment bloggers. Why, once established, and with some number of regular readers would an investment blogger stop blogging?

Good question.

I still don’t have a good answer.

My own experience with blogging has been mixed. I’ve had some wonderful exchanges with readers and especially with other bloggers. But, I’ve also had a lot of listless exchanges. A lot of people write to you – they don’t comment so much on my blog as email me directly – with questions that aren’t really questions. See, they want a certain answer, and if you don’t give them that answer – well, I’ve found almost everyone to be exceedingly polite. However, very few people are exceedingly interested in actually changing their mind. Very few people write to me asking for advice with the intention of actually allowing that advice to enter into the equation. It’s a strange feeling. Someone writes to you, you write back, they thank you profusely, etc., etc., etc. but you also know they’re going to do exactly what they intended to do before they wrote you.

I must sound awfully jaded. But, it really is a strange dance you have to experience to understand. It makes you wonder about the silent majority of readers who don’t write. Has anything I’ve written ever made a difference to them – ever entered into their thought process at all – about any stock, investment, approach, etc. I really don’t know. And I had intended to be a source of information (and improvement) rather than entertainment.

One thing I’ve been very lucky with is the cool-headedness of people who email me (and comment on the blog). When I first started the blog, the specter of ranting readers was the thing that worried me most. I’ve read other blogs. I know that people with the most extreme views will tend to be the most vocal promoters of those views. I know that the anonymity of the internet encourages more ranting, more raving, and more ad hominem attacks then ever occur face to face.

And yet somehow this blog has tended towards civility.

I didn’t expect that.

If the most vocal readers are as cool, calm, and collected as those I’ve exchanged emails with – the silent majority of readers must be on sedatives.

Overall, I’ve been impressed with my readers. And somewhat less impressed with myself. It took a little while to find my voice, and even then, I wasn’t very good at balancing the blog format, my readers’ interests, and my own interests. On several occasions, I made grave mistakes – usually by writing about something that interested my readers more than it interested me. My biggest mistakes in this area were when I had the most traffic data …

News Items – Tuesday July 1, 2008

News

Starbucks to Close 600 Stores; Cut Up to 12,000 jobs

Steak N’ Shake Appoints Biglari Chairman

Seeking Alpha / Micovision Story…

Reading List – 29 March 2008

Some Posts Worth Reading

Value Discipline: Recurring Revenues and Industrials
Bill Rempel: Fundamental Portfolio Struggling YTD
Cheap Stocks: Premier Exhibitions (PRXI) – Value Not Without Controversy
Cheap Stocks: Net/Net Index In Positive Territory

Some Books Worth Reading

Investing The Templeton Way
The Little Book That Builds Wealth…

An Email on Economic Catastrophe

I don’t usually write on macro topics; however, I do get lots of emails asking me about the economy, markets, etc. I try to respond to these emails. Here are some excerpts from an email response I sent out tonight (some of the following has been edited):

The Fed is in a very tough position. This is a credit problem. It’s serious. It’s hard to say what the result will be – but it could potentially be very bad. You can have some pretty catastrophic things happen when people start to panic – as far as what happens with money and how all sorts of things can seize up at once. It’s really a psychological problem – a spiral of negativity and panic that feeds on itself. People start to do irrational things and then others respond in irrational ways to their irrational actions and so on and so forth.

The possibility of terrible outsized effects from the kinds of problems we’re seeing with Bear Stearns etc. is real. The housing problem is real. The economy can deal with a lot of things clogging up the system, but credit is probably the toughest.

This is the most serious threat the economy has faced in a long, long time – much more serious (to the economy) than the September 11th attacks. People always want to see just one catastrophic event – point to that – and explain away horrible problems. It doesn’t happen that way. You have a whole climate of negativity, fear, panic, etc. that feeds on itself and causes real problems. It really does come down to psychology. And it’s amazing how fast it can happen.

It’s something that either achieves a sort of critical mass or it doesn’t. It’s like a riot. Either it never really gets out of control and we all forget about it, or it builds on itself and it gets bigger and uglier faster than anyone could imagine.

I don’t worry about single issues. The price of oil alone means next to nothing. Housing alone means something, but it’s really how housing indirectly influences everybody’s behavior where you get problems. A stock market crash means next to nothing to the economy. But the totality of some combination of these things – the climate created – that means everything.

We are on the brink. We haven’t seen such potentially perilous economic times in a long, long time. But if the peril passes no one remembers it. People remember 1929 because the peril didn’t pass – because that climate of depression fed on itself in so many horrible ways that things got worse and worse not better. It seems almost inevitable in the past – but there was a point (no one knows when at the time) where you were on the brink, where terrible things lasting a long, long time could have happened (and eventually did) where you could have broken a downward spiral.

People always want to look at just one “black” day and …

On Ignorance Admitted

In finance, liquidity is not a physical state it is a psychological state. Liquidity is a state of mind. Worse yet, liquidity is in the eye of the beholder. That is not merely to say that liquidity is subjective. Liquidity is subjective, but it’s also more than subjective – it exists in the minds of others – others who can and do transact business with you. So liquidity is – to a great extent – uncontrollable.

Good assets may not necessarily be liquid assets. As a result, good decisions do not necessarily lead to good outcomes when an actor is dependent upon liquidity. An actor is dependent upon liquidity whenever liabilities are great relative to assets. However, an actor can avoid insolvency and make good decisions that will almost certainly lead to good outcomes if the actor can studiously avoid disbursing cash or other assets to meet obligations in the near-term. An actor who can finance an asset by selling a thirty-year zero-coupon bond does not have to worry much about liquidity. Any actor so financed weds its destiny almost entirely to the intrinsic value of the asset – and only the intrinsic value of the asset. All other worldly concerns seem to melt away. This sort of financial nirvana is rarely achieved by any actor who has tasted of the sweet, sweet nectar known as debt.

Actors – like addicts – can develop a dependence through regular use. There is no such thing as non-habit forming debt. Debt is so addictive precisely because it is so useful.

Wonderful businesses have been brought down by a lack of common sense and an abundance of debt. Great businesses – even some simple, great businesses – have been brought down by debt.

What their competitors could never do to them, these great businesses did to themselves.

Berkshire Hathaway (BRK.B) bought Fruit of the Loom out of bankruptcy. It’s hard to bankrupt an entrenched underwear business. Only debt could kill a business like Fruit of the Loom or Hanes (HBI).

So how can investors evaluate a debt-laden liquidity whore? For the most part they can’t.

Investors never like to hear that. But it’s true.

Hanes may have debt; but at least its business isn’t directly dependent on liquidity. Like Fruit of the Loom, Hanes can go bankrupt, but Hanes can also be evaluated without reference to all sorts of variables beyond the company’s control. An investor can decide if the company has too much debt without giving much thought to capital markets, interest rates, commodity prices, and all the other much discussed macro variables. The further an investor ventures from the specifics of the business he is evaluating the more unstable all of his assumptions become. As he stacks unstable assumption upon unstable assumption, he builds a teetering tower crowned with an intrinsic value estimate that could prove perilous.

If you can make successful macro bets, make them. If that’s your strong suit, stick with it. But don’t confuse the business of …

Is Warren Buffett’s Berkshire Hathaway Worth More Dead or Alive?

Alive – definitely alive.

This question – more than any other – dogs every discussion of Berkshire Hathaway (BRK.B). It isn’t immediately visible to those arguing on either side (“Berkshire is overvalued”, “No! Berkshire is undervalued”) but it underlies their arguments all the same.

What do I mean when I say Berkshire Hathaway is worth more alive than dead? I mean that Berkshire as a continuing whole is more valuable than a Berkshire that is dismembered into its constituent parts this very day – a Berkshire that is cut up and dished out like a Christmas ham.

Why?

A lot of people value Berkshire as a closed-end investment fund. Peter Lynch wouldn’t make that mistake. He’d see that Berkshire fits the bill as one of his stalwarts:

“Stalwarts are companies such as Coca-Cola, Bristol-Myers, Procter and Gamble…and Colgate-Palmolive. These multibillion-dollar hulks are not exactly agile climbers, but they’re faster than slow growers…When you traffic in stalwarts, you’re more or less in the foothills: 10 to 12 percent annual growth in earnings”.

(From Lynch’s One Up On Wall Street)

That’s what Berkshire is – not a lifeless closed-end investment fund, but a living, breathing stalwart – a mega-cap company that needs to be compared to (and valued like) other mega-caps.

I tried to make this point in the comments section of an earlier post, when I wrote:

“So, now the question isn’t whether Berkshire can compete with its past (it can’t). But, whether Berkshire can compete with similarly sized public companies such as Nestle, Unilever, Google, Microsoft, General Electric, Johnson & Johnson, HSBC, AT&T;, Wal-Mart, Bank of America, and the big oil companies. Can it? I think it can. So, relative to its peers (in terms of size) Berkshire isn’t overpriced. Is it overpriced compared to the Berkshire of twenty or thirty years ago? Yes. But, so is just about every asset on planet earth. So, that’s not the right yardstick to use. You have to compare Berkshire (the stock) to other stocks you can buy today – and Berkshire the company to other companies with similar size constraints. On both counts, I think a valuation of about $140,000 a share is appropriate and fair.”

Berkshire’s value is every bit as dependent on growth as the value of those other corporate behemoths – more so, in fact, because Berkshire doesn’t pay out dividends. You need to value Berkshire based on its likely intrinsic value growth rate, because that rate will determine what the stock is worth in 3, 5, and 10 years’ time – just as it will at Microsoft and Bank of America and Wal-Mart and Google.

Berkshire is a growth stock. And how fast is it growing? Since 1995, I estimate intrinsic value has grown a little more than 15% a year. Of course, when I assign a value to Berkshire shares, I don’t assume it can keep up that kind of intrinsic value growth. Rather, I assume it could grow at a still stalwart …

Announcing the Gannon On Investing Book Store

Visit Gannon On Investing Book Store

Books are an important part of value investing and an important part of this site. They were an important part of value investing right from the beginning – when Benjamin Graham and David Dodd published Security Analysis in 1934 and they were an important part of this site right from the beginning when I reviewed that august title and others on my podcast back in early 2006. Since then, Steven Rosales of Value Blog Review has helped fill the void on this site by supplying reviews for this site’s book reviews section.

Finally, I’ve gotten around to improving the lack of good reading resources on this site.

I’ve created a Gannon On Investing Book Store.

It’s very simple. But, I think you’ll find it useful. I’ve included and categorized value investing titles in the way I thought would be most helpful. The best part of the store is probably the Gurus Section where you can find book written by Benjamin Graham, Phil Fisher, Peter Lynch, Joel Greenblatt, David Dreman, Mohnish Pabrai, Marty Whitman, John Neff, and Phil Carret.

I’ve also included a general Value Investing Section.

Then, there’s the Buffett Books Section and the Buffett Quotes Section.

I rounded out the collection with investor profiles, books that broaden your horizons, and business books – all three selected with the investor in mind. Every book in the store is investor centric.

Finally, I added a section for all the books reviewed on this site – mostly by other people.

Let me know what additional categories you’d like to see added.

As for personal picks, there will be plenty of time for that later, but for now the one book I’d recommend for anyone and everyone is Roger Lowenstein’s excellent but outdated biography Buffett: The Making of an American Capitalist.

For the true Buffett buff, the hands-down favorite is “Of Permanent Value: The Story of Warren Buffett ”. It’s basically an entire Warren Buffett museum crammed into two hardcover books – at $50 it’s an absolute steal and a beautiful book. I’m surprised Amazon still has copies.

If you have any questions about my favorite editions of certain titles, which editions of Security Analysis are canonical and which are apocryphal, and how you can find titles that can no longer be purchased new – please send me an email.

Regarding the store – comments, suggestions, and complaints are welcome.

Browse Gannon On Investing Book Store

Visit Value Blog Review…

Happy New Year!

Here are some of this blog’s most popular posts from 2007:

Gannon to Barron’s: Berkshire Fairly Valued…As a Buffettless Empire!
Pompous Prognostication: Irish Banks
Book Review: Active Value Investing
The Eight Best Investing Blogs
20 Questions for Clyde Milton of Cheap Stocks
The Normalized P/E Ratio Series
On Posco, Berkshire, and Buffett

Predictions

It’s something of a tradition in all financial media to do predictions at this time of year. The more predictions you make the fewer predictions people tend to remember – this can be a good or bad thing depending on your prophetic powers.

Anyway, I’ll stick to just one country and one stock. The country is Ireland and the stock is Bank of Ireland (IRE).

We’ll see how that pick does for 2008 – hopefully, I won’t look too stupid on January 1st, 2009.

Feedback

I’m planning some changes for the site. I’d appreciate any feedback about what you love or hate about this site. It should help me plan for the future. If you’ve been reading this blog for a long time – or if you remember the podcast – I’d appreciate any comments you have. Please email them to me.…

Top Financial Bloggers Face-Off: Gannon’s Picks

Asif Suria of SINLetter.com is running a stock picking contest where Top Financial Bloggers Face-Off. He invited me to join the contest, so I thought I would post my entry on this blog. The contest length is Q1 of 2008. It requires that you pick three stocks (either long or short) and a prediction for the S&P; 500 at the end of Q1 2008 (to be used only as a tiebreaker). I didn’t want to worry about the S&P; 500 prediction – so I just entered 1470 as my prediction (last: 1468.36).

All three of my picks for the contest are long. They are Bank of Ireland (IRE), NutriSystem (NTRI) and YRC Worldwide (YRCW).

Bank of Ireland (IRE) – $60.44
Irish stocks are cheap. Irish banks are even cheaper. IRE has very strong position in attractive banking market. More conservative than most large banks trading at higher price-to-earnings, price-to-book, and price-to-dividend. A competitive dividend yield should help encourage buying even if dividends don’t count toward the contest.

NutriSystem (NTRI) – $26.98
Stock shorted like a fad last year – but company isn’t a fad. Beaten down to extremely cheap levels. Should be buying back own stock at these levels. Wonderful business model with plenty of revenue from customers once acquired. Can afford to pay a lot in advertising to acquire a new customer. Program works; people actually lose weight without any unpleasant side effects. Hit hard by new diet drug. Launching a new, improved program (now) in Q1 2008. Management has shown they know how to design, market diet programs better than anyone else. But, most of all, the market has set the bar very, very low on this one.

YRC Worldwide (YRCW) – $17.09
Big, cheap trucking company. Cheap on just about every measure. Not expensive on trailing earnings; even cheaper on any sort of average, normalized earnings. High operating leverage causes extreme sensitivity to small changes in the U.S. economy – so those betting for a recession will bet against YRCW; but, in time, the price of YRCW has to move back to something approaching normalcy over a full cycle. No reason to think YRCW shares won’t improve before the industry does. Good stock at best; untimely at worst.

For the contest, the picks won’t actually be priced until after the first day of trading of 2008. So, the prices shown above are just year-end quotes on the three stocks. Contest rankings will be based on percentage changes in stock price over the course of the first quarter of 2008 – regular dividends don’t count for or against you whether long or short.

See Contest Rankings

Visit SINLetter.com…

Steven Crist On Finding Mispriced Bets

Lincoln Minor of Reflections on Value Investing links to an excellent talk given by Steven Crist of the Daily Racing Form at the Legg Mason Capital Thought Forum.

This is a great talk. Anyone interested in investing should read the whole thing at least once.

Read Steven Crist’s Talk at Legg Mason Forum

I am here to talk about why most of what you have heard about horse racing is wrong, and why horse racing is much more similar to what you do than other forms of gambling. The general public probably thinks that for the most part, horse racing is just like the state lottery or playing craps or roulette in a casino, except that you have horses running around in circles rather than ping pong balls or a spinning wheel… The reason that you can win at poker and horse racing is the same – you are not betting against the house; you are betting against the other players. This is such a crucial and fundamental difference, and it is lost on the general public…. When the other players are setting the prices, it is an entirely different story because somewhere between frequently, occasionally and rarely, the public makes the wrong price. That is the beginning of the successful equation in horse racing…. In ten minutes I can teach anyone in this room how to pick the most likely winner of a horse race. There are data about past performance that we publish in the Daily Racing Form that correlate very strongly with the most likely winner in the race. Most horse players spend their lives thinking that if they just studied a little bit harder or got a little bit smarter, they could pick the winner of the race enough to make some money. There is no such thing. Picking the most likely winner is no great feat…. What you really want to do is determine which most-likely winners are good prices and which most-likely winners are bad prices. It is a very simple equation:

Price X Probability = Value

The entire world of investing is that simple too.