Book Review: Trade Like Warren Buffett
Gannon On Investing’s contributing writer, Steven Rosales, reviews James Altucher’s Trade Like Warren Buffett.
Read moreOn Barron’s Top 30 CEOs – Bob Simpson, XTO Energy
The latest issue of Barron’s includes a list of the world’s 30 best CEOs. The names are organized alphabetically (i.e., there’s no #1, #17, or #30). Of the 30 CEOs on this year’s list, 21 were also on last year’s list. One of those “returnees” is Bob Simpson.
It’s hard to argue against including the head of XTO Energy (XTO). The company’s long-term performance has been spectacular. Furthermore, XTO employs a strategy that relies heavily on excellent decision making at the top. In fact, very few companies have a clearer history of being shaped by the major capital allocation decisions of top management.
One of the criteria for making Barron’s list was the expectation that the CEO would be missed by investors if he unexpectedly departed. I don’t know if Bob Simpson’s departure would send XTO shares spiraling; but, I do know that XTO’s strategy requires remarkable management at the top.
The company was founded in 1986 by Steve Palko, Jon Brumley, and Bob Simpson. Brumley left in 1996; Palko left in 2005. This is how Simpson described his company’s founding in a 1999 interview with The Wall Street Transcript:
“We brought to the company the best of the philosophy we learned at Southland, which is to buy quality production and make it better. We started with six folks and no reserves, and we’ve used that strategy to build the company to what it is today a buyer of long-lived, quality properties in areas we understand. We then make the properties better.”
The Barron’s article mentions that XTO’s share price has increased nearly fifty fold since the company went public in 1993.
Such share price performance isn’t surprising when you consider XTO’s business performance. Over both the last five and ten years, XTO’s revenues, earnings, and cash flow per share have grown by double digits – and none of the first digits is a one!
While the entire energy sector has performed well over the last few years, the gap in growth and value creation between XTO and its competitors is real. The longer the period of comparison, the better XTO looks.
Improving acquired properties has been the key to XTO’s business growth and share price growth.
Later in the same TWST interview, Simpson explained why it has been possible for XTO to improve the properties it purchases from major oil companies.
“Of course, they are intelligent organizations doing what is logical for their strategy focusing their best people on their main assets. Ironically, this is what we do on a step-down basis. What was considered a small project with junior talent at a major will be a major project with major-league talent at (XTO).”
Unlike most energy companies, XTO’s future is explicitly dependent upon acquisitions. The company has grown through acquiring and improving properties. While XTO can plow a lot of its free cash flow back into the business through investments in already owned properties, it won’t be able …
Read moreOn Billionaires, Their Buys, and Buffett
I recently read a post by Barry Ritholtz over at “The Big Picture“. It’s called “Investing Advice: If you are NOT a billionaire“. Ritholtz starts with a good premise: don’t try to “tag along” on stock market investments made by billionaires simply because they’re billionaires.
Unfortunately, his argument goes off the tracks pretty quickly. He singles out three billionaires: Kirk Kerkorian, Michael Dell, and Warren Buffett. Ritholtz has a point with Michael Dell, but the same point is applicable to an awful lot of insider buying at large, public companies.
As for Kerkorian and Buffett, I’m afraid I can’t find anything to agree with in those arguments. Regarding Kerkorian he writes:
He has a long and storied history as a corporate raider, greenmailer, etc. When one gets closer to the long dirt nap, one thinks of their legacy. For all we know, this GM bid was an attempt to improve his reputation.
I have to admit smiling when I read this, because about a year ago I wrote a post on some notable billionaires (from the Forbes list) that included a fairly long digression on comments made by bloggers about Kerkorian’s advanced age:
There’s been more than enough written about General Motors (GM) over the past year; so, I won’t add anything here. I will, however, mention that one point made by some blogs (and even some “mainstream” media sources) is nonsensical. It’s been written (presumably with a straight face) that Kerkorian can’t possibly be making a long-term investment in GM, because (at 89) he simply doesn’t have enough time left to see such an investment through.
The strongest argument against this line of reasoning is that making investment decisions based on your anticipation of imminent death is akin to making life choices based on the belief that you don’t have free will and all future events are predestined. In both cases, if your assumption is correct, you gain little or nothing. If your assumption is incorrect, you lose a lot.
Besides, all of this assumes you have no interest in leaving greater wealth behind (whether to charity or your family), which seems rather absurd. Kerkorian isn’t exactly forgoing his own enjoyment; he already has far more money than he could ever spend on himself (that would be true even if he were 29 instead of 89).
Also, it’s worth noting that Phil Carret lived to be 101. I don’t mean to suggest Kerkorian may live just as long; rather, I mean to suggest even at 89, you could be hanging up your cleats twelve years too early. To put that in perspective, if the average American male expected to die twelve years before he actually did, he would be planning to die around the time he would start collecting Social Security.
As a rule, investors who are as passionate as Kerkorian usually die long before they retire.
I don’t have anything more to say about Kerkorian. I do, however, have quite a lot to say …
Read moreColumn: Tweeter Home Entertainment
Guest Columnist Max Olson’s latest article is entitled “Tweeter Home Entertainment“. In this article, Max discusses Tweeter (TWTR) and its recently announced plans to close many of its stores.
Read “Tweeter Home Entertainment”…
Read moreValue Investing News: Top Stories – Week of Monday, March 19th
1. Sherwin Williams: No Lead Threat
2. Use Sites Like Yahoo! Finance With Caution
3. Tweeter Home Entertainment
4. Value Delusions and Strategic Thinking
5. On the Risk of Settling
6. On Rex Stores, Real Estate, and Ethanol
7. Chou 2006 Annual Report
8. Festival of Stocks #28
9. Profit With Split-Offs
10. Marty Whitman: Letter to Shareholders
Book Review: Value Investing
Gannon On Investing’s contributing writer, Steven Rosales, reviews Bruce Greenwald’s Value Investing: From Graham to Buffett and Beyond.
Read more20 Questions for Todd Sullivan of ValuePlays
Todd Sullivan is a value investor who writes the ValuePlays blog. ValuePlays is a value investing site focusing on individual stock analysis, investing concepts, and market commentary.
1. Are you a value investor?
Yes.
2. What is value investing?
Purchasing a piece of a company at a price that is below a reasonable valuation.
3. What is your approach to investing?
Look for the current “red headed step children” and pick out the gems.
4. How do you evaluate a stock?
I look for industry leading companies who:
– Have a valuation that is equal to or at a small premium to other shares with a comparable earnings growth rate.
– Have a total return yield greater than the current corp. bond rates.
– Are buying back shares.
– Are increasing the dividend.
– And are increasing cash flow from operations.
All that takes about 20 minutes, if it passes those tests, I begin to dig deeper into SEC filings, annual reports, etc. Earnings call transcripts on Seeking Alpha recently have been providing me a ton of insight, not necessarily for the details, but the general “tone” of management.
5. Why do you buy a stock?
To own a piece of a company.
6. Why do you sell a stock?
The business deteriorates or its valuation becomes irrationally high.
7. What investment decision are you most proud of?
MO at the height of the litigation woes in 2003 and MCD during the “mad cow” scare of Jan 2003.
8. What investment decision do you most regret?
Selling USG in June of that year.
9. Why do you blog?
I love the market and love to write. It also makes me a better investor by forcing more detailed analysis and making me stick to my guns.
10. What’s your best post?
Did SBUX’s Donald Really say that?
Picked up in the WSJ Online
11. What’s your worst post?
SHLD: What Will Eddy Do? Just guess work. Of course if I turn out right, pure genius. 🙂
12. What financial publications do you read?
WSJ, Barons.
13. What investing blogs do you read?
Value Investing News, The Stockmasters, Seeking Alpha, Fat Pitch, Gannon, Peridot, Interactive Investor.
14. What’s the best investment book you’ve read?
“Buffett: The Making Of An American Capitalist”
15. What’s the last investment book you’ve read?
“The Intelligent Investor” – I try to read it at least once a year.
16. When did you start investing?
At 19. I’ve always loved the idea of being able to buy a piece of a company and “go along for the ride”.
17. How have you improved as an investor?
One word: Patience.
18. How do you need to improve as an investor?
Believe in my choices more, my biggest mistakes have not been picking the wrong companies but getting out too soon or not buying at all because I doubted my reasoning…. (see USG, CHD).
19. Where are the bargains in today’s …
Read moreBook Review: The Rediscovered Benjamin Graham
Gannon On Investing’s contributing writer, Steven Rosales, reviews Janet Lowe’s The Rediscovered Benjamin Graham.
Read moreOn the Risk of Settling
Rick of Value Discipline wrote an excellent post yesterday entitled “Value Delusions and Strategic Thinking.” In my view, this post is an especially important read in today’s market environment. Whether current market wide valuations are reasonable or not, it seems clear that the supply of obvious bargains is relatively low.
It’s no secret that “value stocks” have outperformed in recent years. These are the conspicuously cheap stocks – the ones that knock you on the head and say “Look at my price-to-book ratio, look at my price-to-earnings ratio! Does it really matter what kind of business I am? I’m so cheap the only thing you need to know is that I can pay my bills on time.”
And sometimes that’s true. Sometimes, there’s a veritable feast of such conspicuously cheap stocks scattered across a variety of industries. By selecting a diverse group of stocks that share only their conspicuous cheapness and nothing else, an unimaginative investor can rack up solid returns during such times.
Today isn’t one of those times.
There are two kinds of unloved stocks: those that suffer from contempt and those that suffer from neglect. The greatest long-term advantage in hunting for bargains among small cap stocks doesn’t come from the companies themselves – rather, it comes from investors’ attitudes towards these smaller stocks. Since there are so many small stocks, most investors can’t help but neglect a great many of them. And so, there tend to be more bargains born of neglect among small cap stocks than among their larger brethren.
Try this little exercise when you get a chance. Start with a blank piece of paper. Then, write down the ticker symbols of the stocks you currently consider to be cheap. If you’re an unmovable bear, write down the ticker symbols of the stocks you consider to be cheap relative to the market. Treat this as a free write. Don’t linger on a particular stock or second guess yourself – the moment your hand stops moving, you’re done.
Now, go over the list and ask three questions of each stock. One, is this a bargain born of contempt or neglect? Two, is this stock cheap because of company specific concerns or because of industry wide concerns? Three, if this were a private business, would it be considered a great business, a good business, an average business, or a poor business? In other words, is this a strong player in a healthy, growing industry or an also ran in the buggy whip business?
Hopefully, your list will feature a good mix of businesses from a variety of different industries. Ideally, it will have some neglected names on it – truly special businesses that are being valued like they’re nothing special.
I recently performed this exercise myself. After the list was complete and I had gone back over it with the precise ratios in hand, I found the truly cheap businesses were not high quality names and were concentrated in a very few industries. …
Read moreBook Review: You Can Be a Stock Market Genius
Gannon On Investing’s contributing writer, Steven Rosales, reviews Joel Greenblatt‘s You Can Be a Stock Market Genius.
Read more