This is a little out of the ordinary for those who frequent my blog, but here is something that my wonderful wife and I use to help our children learn math. If you did not already know, we homeschool our eight children. We are not big on math drill; we think word problems teach reasoning far better. But to do word problems effectively, the ability to have instant recall of the 100 math facts in addition, subtraction, multiplication and division is crucial.

We have our children work at it until they can get it perfect in five minutes in third grade, and three minutes in fifth grade.

To use the spreadsheet (right-click and use “save link as” to download), select the tab that you want to work on. “little add, and “little subt” are the 64 math facts with no number greater than 10. To use the sheet, hit the F9 key to recalculate the sheet, which places all the problems in a new random order. (You’ll never get 2 sheets the same.) Then hit the print icon. F9, print, F9, print, etc… pretty soon you’ll have a lot of unique sheets for drill purposes.

Use and distribute as you see fit. I just want to see children who are good with their math. And, if it works for you, let me know.

Last year, I wrote and ill-timed piece at RealMoney entitled, “Life in Warren’s World Is Expensive,” and a follow-up, “Buffett the Businessman.” I claimed that Berkshire Hathaway was overvalued. It has since risen by 15-20%. I am eating my crow, and wish that I had more salt.

Trouble is, I think that my thesis is still correct. I view Berkshire Hathaway as an insurance company that uses its liability structure to fund its operating businesses. To me, the performance of the insurance enterprises is a critical aspect of whether Berkshire is a good or bad investment.

In 2006, Berky wrote some of the riskiest coverages that the rest of the insurance industry would not touch on the property side of the business. Then came a “no catastrophe” year. Is it any surprise that the stock is higher? Give Buffett credit for the AAA balance sheet that allowed him to be the last man standing in writing risky property coverages. Even in this year’s letter, he says he is willing to lose $6 billion in a single event. Pricing is slipping, and I have no doubt the Berky won’t chase the pricing down below levels where they can’t make their profit on average. That may mean that Berky will have a lot of idle cash.

Warren has changed his tune regarding retrocessional coverages in the last few years. In the 2007 letter, he explains how it can be used to ameliorate the risks of other insurers. This is a good and proper use of retro. In years 2005 and prior, he would crow about his riskless deals, which no doubt passed accounting muster, even if they missed the spirit of the regulations.

Berky has $50-70 billion to put to work. I don’t see how they can do that easily. Berky’s acquisition pattern over the past few years is to scrape up a few distressed companies, and a few companies where the owner was willing to sacrifice on price to preserve the culture. Outside of bold moves like acquiring ConocoPhilips outright, I don’t see how they can deploy that much capital.

Give Buffett credit for staying in enough of his foreign currency trade to draw a profit from it. I agree with Buffett over the state of our national finances, and think the dollar is headed lower over the intermediate term. That said, I increased my size of the trade when he lightened up in 2006.

Finally, they are looking for a successor to Buffett. Whoever that man may be, he will have to reckon with a few realities. If the objective is to grow long term book value, what is he best way to do that? Hold onto cash and wait for a crisis? Buy reasonably priced operating businesses with a hope of growth? Wait for utilities to go on sale? Behave like Magellan, Contrafund, or any other large mutual fund? (Not Buffett’s way.)

In summary, I can’t see Berky doing that well over the next twelve months because of the weak pricing environment for insurance, and the difficulty the Buffett will have in deploying the free cash of Berky. It is a more competitive environment for investments, which means that Berky will not deploy much cash.

Full Disclosure: Long COP

Today the broad market fund was up about 75 basis points, which isn’t that amazing. Leading the parade were Cemex, Fresh Del Monte (that has been on a tear), SABESP, and Lyondell Chemical. Bringing up the rear were… wait, none of my stocks were down more than a percent yesterday. That’s a pretty broad based rally.

In general, the markets feel like the majority of players are concluding that they don’t have to worry about systemic risk for the nonce. Swap spreads, bond spreads, implied volatility, and other variables show a continued willingness to take risk. I wouldn’t want to say that I like being a short term bull; there are many worries in the present environment. But at present, the willingness to take risk and finance risk taking persists. That may change, but until then, the bull market continues. I will combat risk through my ordinary risk control mechanisms, as described in my eight rules.

I’m going to have to defer on my industry models for one more day because of time constraints.  Apologies.

Full disclosure: Long CX FDP SBS LYO

Up about 1/4% today, against a lousy market. Giving extra help today were Valero Energy (though I sold a little), Helmerich & Payne, and ConocoPhillips. Hurting the cause were Royal Bank of Scotland and Lithia Automotive.

Is the recent panic over? Yes and no. No, because you can never tell what additional macroeconomic problems will crop up. Yes because CDOs [Collateralized Debt Obligations] are still getting funded. I have a saying that bubbles only pop when cash flow is insufficient to finance them. Well, the riskiest part of the debt markets, CDO equity, still has willing participants. That indicates that it is not bubble-pop time yet, and that has positive implications for the junk debt and equity markets. Party on!

Industry models tomorrow.


Full Disclosure: Long HP VLO COP RBSPF LAD

Though it is something that will grow, the major article list section of this blog is now up-to-date. It is a complete index of my long-term writings at RealMoney (primarily).

The one thing that would make it better would be to index my long term Columnist Conversation posts. It is my favorite part of RealMoney, and that is why I have concentrated there, even though I don’t get paid for cc posts. (sad that) What would be interesting would be to scour my cc posts for long term value, though I have over 1500 cc posts. I’m not doing that anytime soon. 80% of my cc posts are ephemeral, and I’m not sure it is worth the effort to get the other 20%.

I can’t remember the last time that all of my stocks were up. 28 of them were up by more than 1%. If anyone would like to track the performance of my broad market portfolio, I have it listed at Stockpickr.com. Two notes though, at present I am running with 8% cash, and Allstate and the Japan Smaller Capitalization fund are roughly 1.5x the size of the largely equal-weighted portfolio. Today, the portfolio continued to beat the S&P 500, returning roughly 1.9%. Leading the charge were Fresh Del Monte (what a move over the last month), Barclays plc, Royal Bank of Scotland, SABESP (wish it had gone down more, would have bought a bunch), and Deerfield Triarc. Deerfield Triarc pointed out that as a mortgage REIT, they had minimal exposure to subprime mortgages. No surprise to me, but in this environment, everyone is suspect. Nice yield of around 10%.


As for my project of the week, I have all of my tickers contending to be in my portfolio, and I will share them with you here:

ABY ACI ADM AGU AIMC AL AMGN AMK APPB AVT AXL AYI BBV BEZ BG BGG BLX BP BPOP BRL BRNC BTU CAJ CAKE CALM CAR CAT CHK CMI CMP CNQ COO DB DF DGX DSW DT DUK EAC EAT ECA EMN ENI EPD ESV EVEP FCL FINL FL FSTR GGC GI GIL GMK GMR GPI GRC GSF HAL HES HSOA HTCH HTZ ICO IDCC INSP IOM JRCC KBR KOMG KONG KPN LABL LAD LCUT LINE LMC LNG LNX LRW LSCO MCHX MEE MEG MOT MU MUR MWE NAT NBR NCOC NEM NFX NGPC NOV NTE NXG NXY NZT OCR OPMR PCA PD PDS PHG PMTC POT PSO R RAD RDC RIG RIO RSG RSH RTP SCM SKX SNSA SON SPC STX STZ SUG SVU SWFT TAP THE TJX TK TKR TMA TMO TNP TOT TSCO TSN TSO TUES UNT URI VLI WDC WERN WIRE WPI WTI YRCW YZC

The next two tasks are calculating the industry ranks from two different models, and setting up the spreadsheet so that I can compare companies against one another. That’s for tomorrow and Thursday.

Full Disclosure: Long ALL FDP BCS RBSPF SBS DFR JOF

I have a technique that I call “portfolio reshaping,” to go along with my better known practice of “portfolio rebalancing.” (Better known to those who read me, of course.  Rebalancings happen often, but reshapings are relatively new to me, and have been slowly developed over the last three years.)

Four times a year, I sit down to make major portfolio changes.  Typically, I swap out names that have appreciated versus their fundamentals and trade for names that are cheap versus their fundamentals.  The idea is to compare the entire portfolio versus all of the replacement candidates all at once to make the best shift in aggregate.  This takes the emotion out of the decision for two reasons.  Number one, there are a lot of candidates vying to get in.  Two, I forget who recommended the idea to me, so I don’t rely on authority, but on my own analytical ability.

The process starts with a 1-2″ stack of papers acquired since the last reshaping.  I enter each ticker into a spreadsheet.  Typically that takes an hour or so.  This is the beginning of the process.  As the week progresses, I will show you more of the process as it unfolds.  This will end up being an article for RealMoney.com when it is done, but in a simpler and condensed form.

Family responsibilities have kept me from posting. As a father of eight (five adopted), I found the WSJ article on how much children cost fascinating. Fascinating, and hooey. It doesn’t take that much to raise children properly. In a large family, particularly, one of the benefits is that the children like having so many siblings (even as the parents go nuts). It restricts the number of extra activities that any child can take on, particularly as older children must help to make the family work.

It is very easy to be too indulgent with children. Children respect and love strict parents, if the parents are rational and communicate why they are that way.

But I digress. Last week was tough. I did 60 bp better than the S&P 500, and considerably better than small cap indexes. That’s cold comfort when you’re losing money.

Last week, some oddball names helped me. I sold some Fresh Del Monte Produce to rebalance my positions, because it had run so much. I will do the same with Grupo Casa Saba if it runs another 5%. Much as I think the stock is undervalued, on any stock I own I still take a modest amount of profits after every run of 20%.

Anyone looking at my broad market portfolio would see a decent amount of economic sensitivity in the names there. I am not trying to overdo it; I am aiming at cheap names in sectors that I like. That’s how I invest. I let industry selection and cheapness limit my risks, rather than exiting the equity market altogether.

More to come next week as I look at my indicators, and see how the market responds after the weekend. Personally, I would be neutral-to-positive over the next week.


Long SAB FDP

It’s been a weird three days as far as portfolio management goes. Each day I outperformed the S&P 500 by 10-20 basis points. It’s been too regular, and it has to shift, but which way?

Cement names hurt me today, including Cemex and Lafarge SA. Barclays plc also hurt. On the plus side were SABESP and Grupo Casa Saba. On net, the results were nearly breakeven to me.

There may be other exogenous discontinuous events ready to smack the market around, but after early panic yesterday, the market became very rational in aggregate. The panic is over. Time to adopt a normal posture of moderate bullishness.

Moderate bullishness should be the posture of most investors because absent famine, plague, war on your home soil, and aggressive socialism, markets tend to appreciate over the intermediate term.

As I have pointed out at RealMoney, it is important to avoid non-prime lenders and homebuilders for now. Short them?! Well, that is for gamblers, not investors.
long SBS SAB CX LR BCS

I was a little ahead of the market yesterday, say 10-15 basis points ahead of the S&P. Leading the charge were Fresh Del Monte (my current largest loser), and Grupo Casa Saba (what a great undiscovered stock). Fresh Del Monte was upgraded from underperform to neutral after their less bad earnings. Grupo Casa Saba reported excellent earnings. They run drugstores in Mexico, an excellent industry for a country with a growing middle class. For my balanced mandates, I kicked out the QQQQs that I bought yesterday. The rally wasn’t as big as the reduction in short term risk implied by the VIX.
At RealMoney.com, I had a post late in the day called, “What I Have Learned Over the Past 36 Hours.” It attempted to put forth a dozen things that have been revealed since the recent crisis hit. Here’s an explanation:

  1. China sneezes; the world catches cold. If we needed any proof that America no longer solely dominates the global scene we saw it on Tuesday.
  2. Systemic risk may or may not be a problem now, but a lot of people acted like it was a problem. Thus the rallies in the currencies used to finance the carry trades. The Yen and the Swiss Francs are good hedges here. I am more dubious about long Treasuries, though not long TIPS. (It was neat to see the rallies in the yen and swiss francs. Thne long bond fell more today than the carry trade currencies did.)

  3. The current equity market infrastructure is marginal to handle the volume of the last two days. Given the nature of modern finance, major errors are not acceptable. I got off a couple of good trades as a result of the accident, but those trades were accidental as well.
  4. The lack of human intermediaries with balance sheets leaves markets more volatile than before. It genuinely helps to have someone who can stop the market at certain volatile points, and then restart with an auction so that a fair level can be determined after news gets disseminated. Also, liquidity providers show their value in a crisis.
  5. Algorithmic trading and quantitative money management is making stock price changes more correlated with one another than they used to be. Markets behave differently in normal times, and under stress. The methods that make money when the market is calm exacerbate volatility when market stress appears

  6. Panic rarely pays.
  7. Patience usually pays.
  8. Diversification pays.
  9. In a crisis, strong balance sheets and free cash flow are golden. During times of stress, these four bits of wisdom pay off. They protect an investor from his own worst temptations.
  10. People want the Fed to loosen more than the FOMC itself does. The FOMC doesn’t care about weak GDP if labor employment is robust. The FOMC certainly doesnot care about te stok market unless i affects the banking system, which is unlikely.
  11. The oscillator is not oversold, yet. Sad, but true. We have a decent number of days in the rear-view mirror that aren’t so bad. The intermediate-term panic level is not high.
  12. What do you know? Cyclicals are cyclical. I’m just glad I didn’t get kicked worse yesterday. That’s the danger in playing cyclical names. I take my risk therethough, rather than in growth that might not materialize.

All this said, I feel well positioned for the next few trading sessions. I am working on my quarterly portfolio reshaping, which will take out a few companies, and replace them with cheaper companies in industries with more potential. Once I complete that analysis, you will hear about it on RealMoney and here.
Long SAB FDP