Category: Value Investing

Why do Value Investors Like Indexing?

Why do Value Investors Like Indexing?

Posted on by David Merkel

In general, most value investors like indexing.? Buffett and many others agree on this.? But why?

1) Most value investors that I have known want ordinary people to have an option of doing pretty well, without investing with them, because the minimums are too high — investing in index funds fits that.? Further, Vanguard, who acts in the interest of their investors is an excellent institution.? If I could have a fund there and be paid 10-20 basis points, I would do it in a heartbeat.

2) The second reason is less noble.? We like less competition.? Index money is thought-free money with respect to company and sector selection.? The more of a company that is held by index investors, the greater the probability that it is mispriced.

Now, that is not necessarily so crass on our part.? Look, good investing for most people is like holding a second job.? Do you really want to devote that much of your life to seeking out bargains?? Not many will want to do that.? (Note: there is a side benefit to doing value investing, no matter what sort of firm you work for.? You learn to think like an intelligent businessman — most employees don’t do that.? The ability to think like a intelligent businessman sets you up for greater responsibility, because you can not only do your task, but you can consider the deeper questions of business, making you a prime candidate for a promotion.)

But… there is another venue for mispriced stocks.? Some large stocks don’t get into the index because they are foreign, or have a large amount of the stock owned by a control group, which makes them less liquid.? The main idea is that stocks that few people think about are less liquid, and more likely to be mispriced, but the question remains: are they mispriced high or low?

That is the question for the value investor, and not for those that buy stocks as commodities, as many index investors do.

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Macroeconomics

 

  • Here’s my plan for reducing the deficit: http://t.co/XJPjf8A5 #mydeficitplan via @wsj Draconian, I know, but the budget shoould b balanced Dec 21, 2012
  • Canada?s exports crucial as sluggish growth continues: IMF http://t.co/iIOJ6PoF Bank of Canada should raise rates 2 reduce excessive debt $$ Dec 21, 2012
  • Everything You Need To Know About the Economy in 2012, in 34 Charts http://t.co/aXnjSkR0 Good stuff; could have been formatted better $$ Dec 21, 2012
  • Fiscal Cliff’s Dirty Secret: It’s Not About Taxes At All, But Too Much Spending http://t.co/UY8rKW9h We need 2 deal w/SS, Medicare & Defense Dec 20, 2012
  • We?ve Nationalized the Home Mortgage Market. Now What? http://t.co/YSCrvVmK Congress loves 2 have cows around that they can milk for $$ Dec 20, 2012
  • EU Banking Re-Unions http://t.co/khSA0co0 The lack of a timetable indicates that things aren’t really finalized; not sure this will fly $$ Dec 20, 2012
  • ?Spending Cuts? Lose Something in Translation http://t.co/DYFxVMno Only in DC is reducing planned growth in spending called a cut $$ Dec 20, 2012
  • Money Funds Brace for Flood http://t.co/4J7VWuxx MMFs r between a rock & a hard place: loose Fed policy & regulatory over-reach $$ Dec 20, 2012
  • Wall Street’s Biggest Geniuses Reveal Their Favorite Charts Of 2012 http://t.co/at12mMsV Very long, but lots of good stuff $$ Dec 20, 2012
  • My forward estimates, derived from TIPS are rising, 2014 inflation, and 2018-2022 inflation. The latter has… http://t.co/tgrGfiDG Dec 19, 2012
  • Estimated 2018-2022 inflation rate continues to rise: http://t.co/ebqeM5KJ Stagflation may be coming. cc: @federalreserve #stagflation $$ Dec 19, 2012
  • Estimated 2014 inflation rate continues to rise: http://t.co/ZrvIc5Nk Stagflation may be coming. cc: @federalreserve #stagflation Dec 19, 2012
  • Economics may be dismal, but it is not a science http://t.co/I6B9LbSw No universal economic theory, & new economic thinking must be eclectic Dec 18, 2012
  • Fisher: Fed Risks ‘Hotel California’ Monetary Policy http://t.co/fRKOYl9d When the Fed starts 2 tighten, it will b hard 2 do $$ Dec 17, 2012
  • FDIC Guarantee Program Set to Expire After Senate Block http://t.co/qPdQNWQF Will squeeze the short end of the yield curve further $$ Dec 17, 2012
  • US Banks Lack Liquidity to Withstand Crisis, Study Says http://t.co/psmQEP1z Liquidity mismatches r pernicious; key risk gets ignored $$ Dec 17, 2012
  • Mkts r discounting mechanisms. Temporary events like bond ratings, debt ceiling & fiscal cliff should not affect market much $$ Dec 17, 2012
  • So, as an example, if the govt runs a deficit, it should not stimulate much b/c people discount future econ adjustment b/c of more debt $$ Dec 17, 2012
  • Same 4 monetary policy; the Fed can “stimulate” as much as it likes; mkt players discount the future removal of policy, inflation, etc. $$ Dec 17, 2012
  • Cliff? What Cliff? http://t.co/QEvklDQU Or maybe, just maybe investors don’t care whether we go over the “fiscal cliff” or not. $$ Dec 17, 2012

 

Stocks & Sectors

 

  • There are 272 gold & silver companies trading on US exchanges or OTC. 59 of them have mkt caps > $100M. 22 of them have mkt caps > $1B $$ Dec 21, 2012
  • Aviva Sells US Life Business to Apollo for $1.8B http://t.co/UqM2kqyr When Aviva bot Amerus, I said that they overpaid massively. Proof $$ Dec 21, 2012
  • Value Investing In Practice: A Conversation About Oaktree Capital http://t.co/4FVok5wz Good value investing does not hyper-diversify $$ Dec 20, 2012
  • ICE in Deal to Buy NYSE http://t.co/ik348vsZ New era; expect 2c more deals like this. As an aside average holders of $NYX stock lost $$ Dec 20, 2012
  • Buffett’s Leading The Corporate Buyback Surge http://t.co/U3piJgDv He has the $$, & 1.2x BV is a defensible floor ||| FD: + $BRK.B Dec 19, 2012
  • Investment Fads and Themes by Year, 1996-2012 http://t.co/cvLFKyRE @reformedbroker on what the broad themes this year & back to 1996 $$ Dec 19, 2012
  • Alterra up after deal, analyst positive on Bermuda peers http://t.co/Y5jTB40c Room 4 a new round of consolidation. $MKL buys $ALTE $$ Dec 19, 2012
  • $ALL Bets on Home Insurance as Stock Rally Withstands Sandy http://t.co/XBQOOSB5 Insured damages (excl flood) low4 Sandy; premratesflat $$ Dec 19, 2012
  • Stocks Held Hostage as CEOs Plan Spending Cuts http://t.co/5c7nBKAS It is difficult to avoid deflation; so much uncertainty presently $$ Dec 18, 2012

 

Credit & Fixed Income

 

  • Swaps ?Armageddon? Lingers as New Rules Concentrate Risk http://t.co/QK3s19Hz Clearinghouses r not a panacea; it is possible 4 them 2 fail Dec 21, 2012
  • Americans Hacked Don?t Know Chamber Left Them Alone http://t.co/DSBDUijq Common programs place yr computr @ risk; CoC defends SW makers $$ Dec 21, 2012
  • The Indianapolis 500 of Corporate Bonds Yields http://t.co/dCamXED3 Too much $$ flowing into corporate credit; feels like 2006 Dec 20, 2012
  • India Cash-for-Gold Loans Hide Shadow-Banking Risks http://t.co/BGnO4YWI 2much lending creates a mess; 2much secured lending creates a panic Dec 20, 2012
  • Pimco Sees Spreading Slowdown Boosting [Australian] Bonds http://t.co/oDFSkGoF Pimco buying the debt of fringe developed nations $$ Dec 19, 2012
  • CAB Legislation Expected in January http://t.co/TSuxBmM4 California legislation proposed 2 limit issuance of Capital Appreciation Bonds $$ Dec 19, 2012
  • Why China May Be Facing US-Style Credit Crunch http://t.co/99xMzC3M “To some extent, this is fundamentally a Ponzi scheme,” [Xiao] said. $$ Dec 19, 2012
  • Pimco’s Gross Cuts Back on MBS http://t.co/4FaxLTKq Lightening up on MBS & Corporates, buying developed fringe, sticking w/TIPS $$ Dec 19, 2012
  • Mind the rate risk http://t.co/nVqjlWW9 Rates may stay low 4 a while, but when they run up, total returns could b worse than 1994 $$ Dec 19, 2012
  • Spain House Prices – Deconstructing Spain http://t.co/7ARRPZqS Housing prices continue 2fall, more foreclosures, setting up bad bank fund $$ Dec 17, 2012

 

Energy

 

  • Valero Received Approval 2 Ship US Crude 2 Quebec Refinery http://t.co/ojABCqu1 Could b start of something big: US exports oil FD:+ $VLO Dec 20, 2012
  • Extracting shale oil from a Dead Cow http://t.co/bok4bNE7 Interesting: after the expropriation of Repsol that oil majors line up4more $$ Dec 20, 2012
  • Gasoline at US Pumps Drops to Lowest in a Year on Supply Gain http://t.co/4pI5SXiV Good news coming to users of refined fuel products $$ Dec 19, 2012
  • California refiners dreamin’ of shale oil face hurdles http://t.co/vJgiW4rm Many efforts t get cheap oil 2 CA; $24/bbl price difference $$ Dec 17, 2012

 

Other

 

  • CEOs Concerned about the Time and Cost of Implementing Predictive Analytics http://t.co/QcABrcFH Big data facilitates cluster pricing $$ Dec 20, 2012
  • In the Flesh: The Embedded Dangers of Untested Stem Cell Cosmetics http://t.co/de2aio1V Adult stem cells can do as much harm as good $$ Dec 19, 2012
  • The First Time Tech Ruined the Music Business http://t.co/d0RE4002 As technologies improve all manner of “rights” issues crop up $$ Dec 18, 2012
  • Advisers Question Modern Portfolio Theory http://t.co/lLbCVvgL Look through the security 2 the underlying economics of the investment $$ Dec 17, 2012
  • Twitter has started rolling out the option to download all your tweets http://t.co/IIOVO6mJ Not common yet, but may b coming soon $$ Dec 17, 2012
  • Schools Safer Than 1990s as Educators Anticipate Killers http://t.co/aQaB6G6Q Students r far less likely2b killed in school than elsewhere Dec 17, 2012
  • Highest-Paid California Trooper Is Chief Banking $484,000 http://t.co/JwgYWfg2 Giving officers comp time rather than $$ 4 unused vacation Dec 17, 2012
  • ‘Followers for sale’: Twitter’s very own black market http://t.co/HKCqo074 Fake Follower Check will estimate how many followers r real $$ Dec 17, 2012
  • SEC Says Asset Firm Manipulated Trades to Enrich Some Clients http://t.co/L8IJQ77k I remember their ads, proclaiming their track record $$ Dec 17, 2012

 

Wrong

  • Bad idea: Africa Dreams of Building Telescopes to Study Space http://t.co/gSwkKIBs Would make more sense 4 Africa to fix agriculture $$ Dec 20, 2012
  • Wrong: US should intervene in Nagorno-Karabakh process at the highest level http://t.co/2tJTKtht We should stick 2r own business $$ Dec 18, 2012
  • Wrong: This is why I generally don’t like Quartz; pretending to be smart $$ RT Our favorite charts of 2012 http://t.co/w2bvLDvX Dec 18, 2012

 

Replies & Comments

  • “This would have been a better article if you had put separators between each graph/explanation.” ? David_Merkel http://t.co/uoMy61H1 $$ Dec 21, 2012
  • @EddyElfenbein Thanks, Eddy. Dec 19, 2012
  • @geekpryde Hey, thanks for the kind words, I appreciate that you follow me. Dec 19, 2012
  • @VIXandMore Ludwig is letting us down, and 3 days after his birthday. Call Schroeder 😉 Dec 19, 2012
  • @Alea_ Cool new avatar, I like it Dec 19, 2012
  • @Money_in_Stereo Well said, though I am not an expert there. Thanks for sharing that. Dec 18, 2012
  • @BarbarianCap Hint: if company is offering u a nice buyout, they r offering less than its worth, unless u no more about when u will die $$ Dec 18, 2012
  • @volatilitysmile @carney I knew a close adviser of Mozillo; he told me stories of how disconnected Angelo was w/reality in 2009 $$ Dec 17, 2012
  • @nicster There have been many changes, but they are all local, and don’t make the news. US Govt was stupid on the shoe bomb. Local better $$ Dec 15, 2012

Retweets

  • Amazing RT @moorehn: “the average lifespan of American musical superstars in the pop, rock and rap genre is only 45.” http://t.co/uXVNuStF Dec 20, 2012
  • Practically. Old bond mgr rule: underweight the most rapidly growing debt class $$ RT @ToddSullivan: didn’t they already do student loan? Dec 20, 2012
  • Remember deriving formula when younger $$ RT @munilass: Twelve Days of Christmas and tetrahedral numbers http://t.co/VVNnyU2V (via @ptak) Dec 20, 2012
  • You can say that again $$ RT @japhychron: @AlephBlog Always funny the way they call economics a science. Studying people is anything but. Dec 18, 2012
  • Banks are insolvent & w/large & rapidly growing budget deficit $$ RT @FGoria: DJ: Cyprus May Be Days Away From Default — Fin Min Official Dec 17, 2012
  • Sad & dumb $$ RT @carney: You’d never guess who has a completely self-serving & bonkers theory of the financial crisis. http://t.co/LIAd8WqB Dec 17, 2012

 

Twitter Summary

  • My week on twitter: 72 retweets received, 1 new listings, 85 new followers, 132 mentions. Via: http://t.co/SPrAWil0 Dec 20, 2012

 

Blog Notes

Blog Notes

Posted on by David Merkel

Once again, I have an article the Baltimore Business Review.? You can download it here.? My article is on page 40 of the PDF.

The Baltimore Business Review is unique, a collaboration between Towson University, and the Baltimore CFA Society.? The CFA Institute highlighted it in the past year, though I can’t find the link.

My article deals with what drives residential housing prices, and sadly, it comes to rather ordinary conclusions.? I hate it when I get a normal? conclusion.

Have a read, and tell me what you think.

=-=-=–=-==–=-=-=-=-==–==-=-=-=-=-=-=-=-=-=-=-=-=-=–==-=-=-=-=-=-=-=-=-=-

Second note: I will be the conference blogger for the NYSSA International Financial Reporting Conference taking place on January 10th.? There is a discount code for Aleph Blog readers: Aleph10, where you save 10%.? Note to CFAs: there is another code where you can save 20%, but I don’t remember what it is.

Accounting is important, and if you are a fundamental investor, it pays to understand it well.? I write this as one who had to learn a lot after becoming an actuary.? I might not know the nuances of all accounting, but I had to learn a lot as I did life insurance accounting, which is more complex than the accounting of most industries.

This is a conference worth attending, though many will ignorantly sneer at accounting conferences.

Sincerely,

David

Focus on what you can Control

Focus on what you can Control

Posted on by David Merkel

In investing, focus is important.? We have to divide the world into what we can and can’t control.

Will North Korea (snicker) or Iran (no snicker) get nuclear arms?? I can’t control that, an I am not sure what I would do if I knew what would happen.

Will the Fed move to inflate goods prices, as opposed to their quantitative easing which mostly affects asset prices?? Or will they look to protect nominal values of debt, and deflate?

There are many things that I don’t know; if I did know the future with certainty, I am sure that most other people would know it at at least a lesser level of certainty.

So focus on what you can control, rather than what you can’t.

  1. You can control your own behavior.? You can’t control the behavior of others, whether it is those who invest alongside you, or manager behavior, or that of clients who invest more and less at the wrong times.? Optimal behavior might mean buying things out-of-favor after the fury of selling has gone cold.
  2. If you are a manager, you can guide, but not control client expectations.? You can educate them on your willingness to take risk, but you can’t control their emotions.
  3. As a manager, you can tell investors the mandate toward which you are managing — and then you must manage within it, because your investors expect it.
  4. You must match the liquidity of investments to the need for liquidity.? Value investors must stress patience.? Hot money investors must keep things liquid.? The same applies to time horizon.
  5. Market conditions may be depressed or ecstatic.? You can’t control movements in the mood of the market, but you can adjust your position so that you can benefit from likely future change, if valuation measures are extreme.

This is one reason why I try to limit the number of decisions that I make, for myself and clients, while trying to make better decisions for all of us.

In general, I think better investment decision-making stems from diversification where you don’t know more than the market, and concentration where you do know better.

 

Investing In P&C Insurers

Investing In P&C Insurers

Posted on by David Merkel

When I was half my current age, an actuary in my life insurance firm said to me, “Property-Casualty insurance is not real insurance.? When they lose money, they just raise rates, and they make the money back.”? Today, with greater knowledge, I know that he was half-right.? Here is where he was wrong:

  1. If a P&C insurer risks a significant fraction of its surplus, such that if they could lose enough in a single year that they would not be able to write more business, that is an insurer to avoid.? Good P&C insurers do not bet the farm.? They manage such that they will always stay in the game, allowing themselves to write good business at good rates after a disaster.
  2. If a few badly-run insurers die after a disaster, that is all the better for those that remain.? Capacity exits, and those left standing raise rates and earn strong profits.? P&C insurers and reinsurers that “swing for the fences” tend to die.
  3. As with most things in life, it is those that take moderate risks that do best.? Invest in those P&C insurers.
  4. P&C insurance is insurance on a micro level.? It is not as if losses are directly rated back to insureds.? On a macro level, conservative P&C insurers and reinsurers are toll-takers.
  5. This applies more closely to short-tail and mid-tail insurers.? Long-tail insurers take a long time to validate their underwriting, and in certain environments, can go broke more easily than other P&C insurers.

That said, P&C insurers and reinsurers that underwrite and invest carefully tend to make money regularly, and with a better return on equity than most industries.? It is one big reason why Warren Buffett has done so well over the years.? Small underwriting gains combined with small investing gains can compound quite well, leading to a very nice overall return.

There is one more advantage here.? Insurance fuses the twin problems of uncertainty and time [accruals].? This is difficult enough, but the accounting treatment discourages many from analyzing the insurers.? Complexity in business begets accounting complexity.

That is why I think that my main job with insurers is analyzing the management team. Good management teams think like owners, and reduce exposure when times are aggressive.

That’s why 15% of my portfolios for clients & me are in P&C insurers.? They have done well in the past, and there are no changes indicating why they won’t do well in the long run if they are conservative.

 

Recent 13F filings

Recent 13F filings

Posted on by David Merkel

I make changes to my portfolio and those of my clients once a quarter, where I trade out of 2-4 of my ~35 companies, and buy a similar number of new companies.? I have detailed that in this article.

But one thing that I do differently now is where I source ideas.? There are three places:

  1. Articles I read that seem to have good ideas.? I print them out and put them in a folder.
  2. My industry studies.
  3. Scanning the 13Fs of ~75 clever investors.? That’s the new part.

I’m not going to write a lot more commentary this evening.? I’m just going to give you a results dump.? I have already gone through my results and made changes to my clients’ portfolios, save for one stock that is a little illiquid, and will take some time to acquire.

As it is, I want to share the following data with you from my trolling through the 13F filings:

Number of investors adding a new stock:

CUSIP New Ticker Name
026874784

6

 AIG AMERICAN INTL GROUP INC
25490A309

5

 DTV DIRECTV
38259P508

5

 GOOG GOOGLE INC.
50075N104

5

 MDLZ Mondelez International, Inc.
65334H102

5

 NXY NEXEN INC COMMON STOCK NPV
896945201

5

 TRIP TRIPADVISOR INC
37045V100

4

 GM GENERAL MTRS CO
399473107

4

 GRPN GROUPON INC
46625H100

4

 JPM JPMORGAN CHASE & CO
53071M880

4

 LVNTA LIBERTY VENTURES – SER A

 

Umm, Groupon, GM?? Interesting.

Number of investors adding to a stock position:

CUSIP Increased Ticker Name
026874784

13

 AIG AMERICAN INTL GROUP INC
38259P508

12

 GOOG GOOGLE INC.
191216100

12

 KO COCA COLA COMPANY
37045V100

11

 GM GENERAL MTRS CO
24702R101

10

 DELL Dell Inc
742718109

9

 PG PROCTER & GAMBLE CO/THE
172967424

9

 C CITIGROUP INC
50075N104

8

 MDLZ Mondelez International, Inc.
65248E104

8

 NWSA NEWS CORP
741503403

8

 PCLN PRICELINE COM INC
037833100

8

 AAPL APPLE INC
896945201

7

 TRIP TRIPADVISOR INC
125509109

7

 CI CIGNA CORP
78463V107

7

 GLD SPDR GOLD TRUST
68389X105

7

 ORCL Oracle Corp

 

The companies most held by my group of investors:

CUSIP Owned Ticker Name
38259P508

28

 GOOG GOOGLE INC.
037833100

21

 AAPL APPLE INC
594918104

20

 MSFT MICROSOFT CORP
68389X105

17

 ORCL Oracle Corp
026874784

15

 AIG AMERICAN INTL GROUP INC
172967424

15

 C CITIGROUP INC
478160104

15

 JNJ JOHNSON & JOHNSON
931142103

15

 WMT WAL-MART STORES INC
084670702

14

 BRK.B BERKSHIRE HATHAWAY INC-CL B
24702R101

13

 DELL Dell Inc
65248E104

13

 NWSA NEWS CORP
060505104

13

 BAC BANK OF AMERICA CORP
747525103

13

 QCOM QUALCOMM INC
084670108

13

 BRK.A BERKSHIRE HATHAWAY INC-CL A
191216100

12

 KO COCA COLA COMPANY
949746101

12

 WFC WELLS FARGO & CO NEW

 

Number of investors decreasing a stock position:

CUSIP Decreased Ticker Name
38259P508

16

 GOOG GOOGLE INC.
594918104

15

 MSFT MICROSOFT CORP
037833100

13

 AAPL APPLE INC
931142103

12

 WMT WAL-MART STORES INC
68389X105

10

 ORCL Oracle Corp
17275R102

10

 CSCO CISCO SYS INC COM
902973304

10

 USB US BANCORP DEL
084670702

9

 BRK.B BERKSHIRE HATHAWAY INC-CL B
060505104

9

 BAC BANK OF AMERICA CORP
57636Q104

9

 MA Mastercard Inc – Class A
65248E104

8

 NWSA NEWS CORP
949746101

8

 WFC WELLS FARGO & CO NEW
254687106

8

 DIS DISNEY WALT CO
717081103

8

 PFE PFIZER INC
92826C839

8

 V Visa Inc-Class A Shares
931422109

8

 WAG WALGREEN CO

 

Number of investors selling a stock entirely:

CUSIP Sold Ticker Name
25490A101

6

 DTV DIRECTV-CLASS A
594918104

4

 MSFT MICROSOFT CORP
931422109

4

 WAG WALGREEN CO
87612E106

4

 TGT TARGET CORP
032346108

4

 AMLN AMYLIN PHARMACEUTICALS INC
037833100

3

 AAPL APPLE INC
060505104

3

 BAC BANK OF AMERICA CORP
57636Q104

3

 MA Mastercard Inc – Class A
65248E104

3

 NWSA NEWS CORP
871503108

3

 SYMC SYMANTEC CORP
172967424

3

 C CITIGROUP INC
78463V107

3

 GLD SPDR GOLD TRUST
032511107

3

 APC ANADARKO PETROLEUM CORP
53217V109

3

 LIFE LIFE TECHNOLOGIES CORP.
855030102

3

 SPLS Staples Inc
053332102

3

 AZO AUTOZONE INC
086516101

3

 BBY Best Buy Company Inc
64110L106

3

 NFLX NETFLIX INC
844741108

3

 LUV Southwest Airlines Co
256677105

3

 DG DOLLAR GEN CORP NEW
91324P102

3

 UNH Unitedhealth Group Inc
30161N101

3

 EXC Exelon Corp
778296103

3

 ROST ROSS STORES INC
690742101

3

 OC OWENS CORNING NEW
46120E602

3

 ISRG INTUITIVE SURGICAL INC
726505100

3

 PXP Plains Exploration
88023U101

3

 TPX TEMPUR PEDIC INTL INC
382388106

3

 GR GOODRICH CORP
532791100

3

 LNCR LINCARE HOLDINGS INC.

 

As a percentage of market cap, new positions added:

CUSIP New Ticker Name
G5784H106

NA

 MANU MANCHESTER UTD PLC NEW
64107N206

27.49%

 UEPS Net 1 UEPS Technologies Inc
06652K103

27.20%

 BKU BANKUNITED INC
86663B102

26.98%

 SNBC Sun Bancorp Inc
147154207

25.80%

 CACB Cascade Bancorp
584404107

25.36%

 MEG MEDIA GEN INC
09064Y307

23.66%

 BIOF BioFuel Energy Corp.
269279402

14.54%

 XCO EXCO RESOURCES
912318201

12.88%

 UNG UNITED STATES NATL GAS FUND
121220107

12.21%

 BKW BURGER KING WORLDWIDE INC
29788A104

10.06%

 EOPN E2open, Inc.
G0585R106

10.03%

 AGO Assured Guaranty Ltd.
25490A309

9.48%

 DTV DIRECTV
44047T109

8.94%

 HZNP HORIZON PHARMA INC
92343E102

8.74%

 VRSN VeriSign Inc.
57686G105

8.58%

 MATX Matson Inc
896945201

7.58%

 TRIP TRIPADVISOR INC
39530A104

7.53%

 GRH Greenhunter Energy Inc-Restric

 

Increases in positions as a percentage of market cap:

CUSIP Increased Ticker Name
G5784H106

361.97%

 MANU MANCHESTER UTD PLC NEW
64107N206

27.49%

 UEPS Net 1 UEPS Technologies Inc
06652K103

27.20%

 BKU BANKUNITED INC
86663B102

26.98%

 SNBC Sun Bancorp Inc
147154207

25.80%

 CACB Cascade Bancorp
584404107

25.36%

 MEG MEDIA GEN INC
09064Y307

24.24%

 BIOF BioFuel Energy Corp.
912318201

15.09%

 UNG UNITED STATES NATL GAS FUND
269279402

14.54%

 XCO EXCO RESOURCES
121220107

12.21%

 BKW BURGER KING WORLDWIDE INC
53635B107

11.90%

 LQDT Liquidity Services, Inc.
29788A104

10.06%

 EOPN E2open, Inc.
G0585R106

10.03%

 AGO Assured Guaranty Ltd.
25490A309

9.48%

 DTV DIRECTV
896945201

9.21%

 TRIP TRIPADVISOR INC
779376102

9.21%

 ROVI ROVI CORP
44047T109

8.94%

 HZNP HORIZON PHARMA INC
92343E102

8.74%

 VRSN VeriSign Inc.
57686G105

8.58%

 MATX Matson Inc
760975102

7.60%

 RIMM RESEARCH IN MOTION LTD
39530A104

7.53%

 GRH Greenhunter Energy Inc-Restric
07556Q105

7.41%

 BZH Beazer Homes USA Inc
194014106

7.06%

 CFX Colfax Corporation

 

Decreases in positions as a percentage of market cap:

CUSIP Decreased Ticker Name
147154207

-28.97%

 CACB Cascade Bancorp
98417P105

-27.68%

 XIN XINYUAN REAL ESTATE CO LTD
624756102

-27.02%

 MLI MUELLER INDS INC
06652K103

-26.06%

 BKU BANKUNITED INC
64107N206

-24.77%

 UEPS Net 1 UEPS Technologies Inc
86663B102

-21.46%

 SNBC Sun Bancorp Inc
83545G102

-18.35%

 SAH SONIC AUTOMOTIVE INC CL A
09064Y109

-15.81%

 BIOF BIOFUEL ENERGY CORP
014481105

-15.75%

 ALEX Alexander & Baldwin Inc
269279402

-13.78%

 XCO EXCO RESOURCES
007865108

-11.85%

 ARO Aeropostale Inc
205862402

-11.69%

 CMVT COMVERSE TECHNOLOGY INC
G0585R106

-10.38%

 AGO Assured Guaranty Ltd.
499183804

-10.21%

 KNOL KNOLOGY INC
25490A101

-9.29%

 DTV DIRECTV-CLASS A
74165N105

-8.79%

 PRMW PRIMO WTR CORP
760276105

-8.36%

 RJET REPUBLIC AWYS HLDGS INC
359360104

-8.22%

 FFEX FROZEN FOOD EXPRESS INDS INC
440441400

-8.16%

 HRZCA HORIZON TELCOM – CLASS A
647581107

-8.06%

 EDU NEW ORIENTAL ED & TECH GRP I
939640108

-7.94%

 WPO Washington Post
960908309

-7.67%

 WPRT WESTPORT INNOVATIONS INC
871206405

-7.48%

 SCMR SYCAMORE NETWORKS INC
863236105

-7.44%

 STRA STRAYER ED INC
918866104

-7.31%

 VCI VALASSIS COMMUNICATIONS INC
532791100

-7.07%

 LNCR LINCARE HOLDINGS INC.

 

Largest amount of stocks sold out in entire:

CUSIP Sold Ticker Name
147154207

-28.97%

 CACB Cascade Bancorp
98417P105

-27.68%

 XIN XINYUAN REAL ESTATE CO LTD
624756102

-27.02%

 MLI MUELLER INDS INC
06652K103

-26.06%

 BKU BANKUNITED INC
64107N206

-24.77%

 UEPS Net 1 UEPS Technologies Inc
86663B102

-21.46%

 SNBC Sun Bancorp Inc
09064Y109

-15.81%

 BIOF BIOFUEL ENERGY CORP
014481105

-15.75%

 ALEX Alexander & Baldwin Inc
269279402

-13.78%

 XCO EXCO RESOURCES
007865108

-11.85%

 ARO Aeropostale Inc
205862402

-11.69%

 CMVT COMVERSE TECHNOLOGY INC
G0585R106

-10.38%

 AGO Assured Guaranty Ltd.
499183804

-10.21%

 KNOL KNOLOGY INC
25490A101

-9.29%

 DTV DIRECTV-CLASS A
74165N105

-8.79%

 PRMW PRIMO WTR CORP
760276105

-8.36%

 RJET REPUBLIC AWYS HLDGS INC
440441400

-8.16%

 HRZCA HORIZON TELCOM – CLASS A
939640108

-7.94%

 WPO Washington Post
871206405

-7.48%

 SCMR SYCAMORE NETWORKS INC
647581107

-7.47%

 EDU NEW ORIENTAL ED & TECH GRP I
863236105

-7.44%

 STRA STRAYER ED INC
918866104

-7.31%

 VCI VALASSIS COMMUNICATIONS INC
532791100

-7.07%

 LNCR LINCARE HOLDINGS INC.

 

Finally, a list of the largest companies held by my investors where there is still net buying going on:

G5784H106

NA

 MANU MANCHESTER UTD PLC NEW
313549404

94.11%

 FDML FEDERAL MOGUL CORP
451100101

92.72%

 IEP ICAHN ENTERPRISES LP
25388BAD6

51.94%

 DRIV DIGITAL RIV INC
09064Y307

40.95%

 BIOF BioFuel Energy Corp.
63934E108

33.61%

 NAV Navistar International Corp
708160106

31.98%

 JCP PENNEY J C INC
254423106

31.23%

 DIN DINEEQUITY INC
584404107

29.86%

 MEG MEDIA GEN INC
64107N206

27.49%

 UEPS Net 1 UEPS Technologies Inc
06652K103

27.20%

 BKU BANKUNITED INC
86663B102

26.98%

 SNBC Sun Bancorp Inc
76117W109

24.37%

 RFP Resolute Forest Products Inc
92552V100

23.72%

 VSAT VIASAT INC
896945201

23.44%

 TRIP TRIPADVISOR INC
L00849106

23.41%

 AGRO ADECOAGRO SA
549463AH0

22.73%

 ALU LUCENT TECHNOLOGIES INC
405217100

21.86%

 HAIN HAIN CELESTIAL GROUP INC
165167107

20.76%

 CHK CHESAPEAKE ENERGY CORP
615369105

20.32%

 MCO Moody’s
912318201

20.06%

 UNG UNITED STATES NATL GAS FUND
812139301

19.92%

 ZZ SEALY CORP
874054109

18.64%

 TTWO TAKE-TWO INTERACTIVE SOFTWAR
205363104

18.40%

 CSC COMPUTER SCIENCES CORP
92927K102

17.65%

 WBC WABCO HOLDINGS INC
459028106

17.54%

 INTL INTL FCStone Inc
92343E102

17.33%

 VRSN VeriSign Inc.
42983D104

17.30%

 ONE HIGHER ONE HLDGS INC
N7902X106

17.11%

 ST SENSATA TECHNOLOGIES HLDG BV
913837100

16.53%

 USAP UNIVERSAL STAINLESS & ALLOY
194014106

15.31%

 CFX Colfax Corporation
N93540107

15.30%

 VPRT VISTAPRINT N V
760975102

14.96%

 RIMM RESEARCH IN MOTION LTD
269279402

14.84%

 XCO EXCO RESOURCES
806037107

14.56%

 SCSC Scansource Inc
79377W108

14.37%

 SKS Saks Incorporated
M25082104

14.06%

 CKSW ClickSoftware Ltd.
151290889

13.89%

 CX CEMEX SAB-SPONS ADR PART CER
45166R204

13.86%

 IDIX IDENIX PHARMACEUTICALS INC
H84989104

13.58%

 TEL TE CONNECTIVITY LTD
064058100

13.57%

 BK BANK OF NEW YORK MELLON CORP
88033G100

13.46%

 THC TENET HEALTHCARE CORP
53635B107

12.86%

 LQDT Liquidity Services, Inc.
779376102

12.63%

 ROVI ROVI CORP
121220107

12.21%

 BKW BURGER KING WORLDWIDE INC
345838106

12.16%

 FRX Forest Labs
79546E104

12.09%

 SBH SALLY BEAUTY HLDGS INC
00724F101

11.91%

 ADBE ADOBE SYSTEMS INC
65248E104

11.82%

 NWSA NEWS CORP
421933102

11.64%

 HMA HEALTH MGMT ASSOC INC NEW
24702R101

11.59%

 DELL Dell Inc
31428X106

11.54%

 FDX FEDEX CORP
62944T105

11.29%

 NVR NVR INC
741503403

11.13%

 PCLN PRICELINE COM INC
512815101

10.95%

 LAMR LAMAR ADVERTISING CO
84264A102

10.87%

 SSE Southern Connecticut Bancorp
037604105

10.57%

 APOL Apollo Group Inc Cl A
90341W108

10.51%

 LCC US Airways Group Inc
150870103

10.28%

 CE CELANESE CORP-SERIES A
66988K102

10.24%

 NCQ NOVACOPPER INC
191216100

10.21%

 KO COCA COLA COMPANY
20854P109

10.09%

 CNX CONSOL ENERGY INC
14040H105

10.08%

 COF CAPITAL ONE FINANCIAL CORP
29788A104

10.06%

 EOPN E2open, Inc.
12504L109

10.02%

 CBG CBRE GROUP INC
489170100

9.97%

 KMT Kennametal Inc.
871503108

9.90%

 SYMC SYMANTEC CORP
G02602103

9.71%

 DOX AMDOCS LTD COMMON STOCK GBP.00
30226D106

9.59%

 EXTR EXTREME NETWORKS INC
25490A309

9.48%

 DTV DIRECTV
G27823106

9.16%

 DLPH Delphi Automotive PLC
774341101

9.09%

 COL Rockwell Collins Inc.
880779103

9.08%

 TEX TEREX CORP NEW
984332106

9.01%

 YHOO YAHOO! INC
44047T109

8.94%

 HZNP HORIZON PHARMA INC
45031U101

8.88%

 SFI ISTAR FINL INC
447011107

8.68%

 HUN HUNTSMAN CORP
66987E206

8.58%

 NG NOVAGOLD RES INC
57686G105

8.58%

 MATX Matson Inc
003881307

8.54%

 ACTG ACACIA RESH CORP
887317303

8.36%

 TWX TIME WARNER INC
53219L109

8.33%

 LPNT LIFEPOINT HOSPITALS INC
808513105

8.28%

 SCHW SCHWAB CHARLES CORP NEW
751212101

8.16%

 RL RALPH LAUREN CORP
812139400

8.15%

 ZZ Sealy Corp
370023103

7.92%

 GGP GENERAL GROWTH PPTYS INC NEW
171779309

7.86%

 CIEN Ciena Corp.
73172K104

7.73%

 PLCM Polycom Inc
774415103

7.72%

 ROC ROCKWOOD HLDGS INC
07556Q105

7.69%

 BZH Beazer Homes USA Inc
31620M106

7.65%

 FIS Fidelity National Information
39530A104

7.53%

 GRH Greenhunter Energy Inc-Restric
103304101

7.42%

 BYD BOYD GAMING CORP
257559203

7.42%

 UFS DOMTAR CORP
20451N101

7.41%

 CMP Compass Minerals
125581801

7.36%

 CIT CIT GROUP INC.
45666Q102

7.27%

 INFA INFORMATICA CORP
G3157S106

7.26%

 ESV ENSCO PLC
251893103

7.23%

 DV DeVry Inc.
256677105

7.14%

 DG DOLLAR GEN CORP NEW
Y2573F102

7.09%

 FLEX FLEXTRONICS INTL LTD
439734104

6.98%

 HFBC HopFed Bancorp Inc.
20564W105

6.97%

 SCOR COMSCORE INC
302130109

6.96%

 EXPD Expeditors Int’l Wash Inc
95082P105

6.95%

 WCC WESCO INTL INC (this can?t be right)
125509109

6.93%

 CI CIGNA CORP
192446102

6.86%

 CTSH COGNIZANT TECHNOLOGY SOLUTIO
588056101

6.75%

 MERC Mercer International Inc.
232820100

6.69%

 CYT CYTEC INDUSTRIES INC
591708102

6.68%

 PCS METROPCS COMMUNICATIONS INC
90384S303

6.50%

 ULTA ULTA SALON COSMETCS & FRAG I
868536103

6.46%

 SVU SUPERVALU INC
413160102

6.44%

 HLIT HARMONIC INC
204018105

6.39%

 CPBC Community Partners Bancorp
382550101

6.24%

 GT GOODYEAR TIRE &
265504100

6.18%

 DNKN DUNKIN BRANDS GROUP INC
432589109

6.12%

 HSH Hillshire Brands Co
918194101

6.08%

 WOOF VCA Antech Inc
024061103

5.90%

 AXL American Axle & Mfg Hldgs
233326107

5.86%

 DST D S T SYSTEMS INC
58501N101

5.84%

 MDVN MEDIVATION INC
867892101

5.75%

 SHO SUNSTONE HOTEL INVS INC N
143130102

5.72%

 KMX CARMAX INC
073302101

5.42%

 BEAV BE Aerospace, Inc.
026874784

5.34%

 AIG AMERICAN INTL GROUP INC
863667101

5.30%

 SYK Stryker Corp
05615F102

5.30%

 BWC BABCOCK & WILCOX CO NEW

 

That?s all for now.? Comments are welcomed below.

 

Full disclosure: long ORCL, WFC, SPLS, ESV, TEL

On Hucksters

On Hucksters

Posted on by David Merkel

I get my share of requests for help.? Some are from naive friends (but not so naive that they don’t ask me) are solicited on Nigerian scams.? A few quick analyses, and I can tell them: don’t do it.? This is a scam.

Then there are people who trot a business idea past me.? Some of the ideas sound pretty good, but upon further examination, I wonder why it hasn’t worked so far.? Probing that, the answer is that “business partners failed me.”? Mmm… I can understand that once or twice but when it repeats, it makes me look at the entrepreneur.

There was one guy who had a compelling idea regarding health insurance that I thought was promising, and so I let him into my network of contacts, while saying to them “This might be promising or not.? There are some good ideas here, but he is too certain of his views, and that worries me.”? A variety of talented executives looked at his idea, and passed.? A friend of mine gave it some attention, thought it had promise, and he met with him, worked with him, but he proved unstable.? In the end, he blamed us.

That typifies hucksters.? Someone else is always to blame, and they have this great untapped concept, but no one will help fund their genius.

So now, I have a client who approached me regarding an investment in the energy sector pitched to him by a friend.? I help my clients.? If they have investment issues away from me, I will take some time to give them my opinion.

But here’s the problem:

  1. The illustrated returns are too good to be true.
  2. The CEO has no experience operating an energy company.
  3. The CEO’s career has gone here and there, but has not amounted to much, such that he can’t fund a $500K project on his own.
  4. All of the helpers/directors in the illustration document have other jobs now, and may or may not be available to help if the project develops.
  5. Some of them have overstated their resumes, or have stated things that can’t verified.
  6. Some board members are questionable.
  7. The opportunities, if true, are of a reasonable size such that small cap public E&P companies could take advantage of the opportunities.
  8. The core idea is that there are a lot of small lazy oil producers who are unwilling to invest to improve output.
  9. The pitchbook mixes in gold mining and clever trading of energy contracts — those are different businesses.? I want developmental stage businesses to focus.
  10. If the first opportunity costs only$500K, you mean the whole group of interested parties doesn’t have $500K to invest?? I don’t want to invest where the management/board is not invested to the hilt.

I don’t see this as a valid concept, and will tell my friend/client to not invest.

All that said, I want to say to all my readers that good investing considers uncertainty, and focuses on the possibility of loss.? Bad investing focuses on possible gains.

Good investing sardonically asks “Why am I the lucky one?“? There are a lot of Baby Boomers out there who have not done well, and are looking for one miraculous venture to give them the retirement that they dreamed of.? They will take chances with the money of others that they would never do with their own.

To my readers: be wary of private investment opportunities.? Beware of those that are very certain they will succeed, but they need your money to succeed.? The certainty is incompatible with the request for external funds in most cases.

Hucksters are always certain; good investors are skeptical.

Charlie Brown the Retail Investor

Charlie Brown the Retail Investor

Posted on by David Merkel

 

Last week I tweeted:? Professional investors would be sad if retail left the mkt. Lucy would feel the same if Charlie Brown gave up trying to kick the football.

Now, I don’t like being cynical, but there is smart money and dumb money.? Some of the smart money is retail.? My mother and my late Father-in-law would qualify as “smart money.”? Most retail investors do not qualify as smart money.

Alice Schroeder spoke to the Baltimore CFA Society last week, on 11/7, and talked about Warren Buffett and his thought processes on investing, and the degree of focus he brings to his work.

No, average people can’t do what Buffett does.? 99.9%+ of people can’t do what Buffett does.? Buffett leads the league in terms of the number of dollars of excess return he has created.

Most retail investors would be better off outsourcing to an investment advisor running separately managed accounts, which is more tax-efficient than mutual funds, and letting them brave the vicissitudes of the markets.

It is not that the investment advisor will beat the averages, but if he has a long enough time horizon and does not give in to panic and greed as most retail investors do, he will provide value to his clients.? He protects them from human nature.

That said, many investment advisors are subject to the same pressures, because they fear the reactions of their clients, if they underperform.

You might argue, “But I can buy index funds, lower my expenses, and live with modest underperformance, rather than greater underperformance on average from active managers.”? If you can do that, and control your emotions, good.? Most can’t.? They sell in a panic at the bottom, and allocate more near the top.? People can argue over rebalancing, but it does help people make better investment decisions, on average.

Though I am not fully happy with my performance for my clients, I have not changed my methods that worked so well for me in the past.? My methods that have worked well will work well again.

What I can say is that toward the end of a fiscal year, I sell one significant loser.? My clients gain the tax benefit of a long-term capital loss.? I may buy it back after the wash sale rules expire.? If I buy it back, it will be after significant study.? I don’t fall in love with stocks, though I usually hold them for three years on average.

As it is, whatever my clients get, I get.? I am the the single largest investor in my ideas, and clients get a clone of my portfolios, whether stocks or bonds.

Those who invest with me get my slowness to act.? My portfolio turnover is around 30%/year, versus 120% for most mutual funds.? Most investment decisions take time to work out, and retail investors leave before the workout occurs, and after disappointment.

I am not asking you to invest with me.? I am encouraging you to think more long term with your investments, and also consider how you can incorporate a margin of safety in your investing.

Aim for “pretty good” investing, and you might succeed.? Aim for “best” investing, and you will likely fail.? That’s the way of the market, on average.

And if I were Charlie Brown (who reminds me of my father) I would say to Lucy, “Okay, hold it there!”? And then, I would walk home, hug Snoopy and Sally, and get a good night’s rest in bed, and let Lucy suffer from holding the ball.

The Rules, Part XXXVI

The Rules, Part XXXVI

Posted on by David Merkel

It almost never makes sense to play for the last 5% of something; it costs too much. Getting 90-95% is relatively easy; grasping for the last 5-10% usually results in losing some of the 90-95%.

When I was a corporate bond manager, and doing my own trading, I had a first question in dealing with any broker: Am I getting a good deal?? If the answer to that question was “yes,” then the proper response is “Done.” Don’t haggle.? Even if you get a slightly better deal, it will damage your reputation.? The best reputation to have is between “reasonable” and “tough.”? Tough is worth more when you are driving the deal.? When the deal is offered to you, and it is a good one, reasonable preserves your reputation as a fair negotiator.

You never want to be seen as a pig.? Once you seem to be a pig, opportunities dry up.? The guy who followed me after my time as a corporate bond manager was a pig, according to my brokers, and as such, the ability to do deals suffered.

This is true of much of life.? In negotiation, leave something on the table for the other guy.? You want to be able to do more deals afterward, and a reputation for being tough but fair is the gold standard.

Kids play for all of the marbles.? Intelligent adults play to win a competent fraction of the marbles.? That is an intelligent way to view many aspects of life.? And so I encourage you to play fairly, but cleverly, for your share.

The Rules, Part XXXV

The Rules, Part XXXV

Posted on by David Merkel

Stability only comes to markets in a self-reinforcing mode, from buy and hold (and sell and sit on cash) investors who act at the turning points.

Beyond the vicissitudes of the markets, there are businessmen.? They have a sense of what their capital costs.? They reason regarding acquisitions and selling off their own holdings/subsidiaries.? They ask themselves how permanent current financing conditions are likely to be.

They don’t play momentum; they just look for when buying or selling businesses makes sense.? The market, on the other hand, has many that only want to buy what is rising, and sell what is falling, to a first approximation.

The market is about business, not stock trading.? Businesses are primal, trading markets are secondary. When businessmen find a publicly-traded business trading at an attractive value, they buy it, particularly if there are synergies between the businesses.? Thus during the bust phase of equity and credit markets, M&A often consists of cash-rich firms buying out firms that are in distress.

The same is true in boom times.? Companies sell themselves, or subsidiaries to leveraged players who think the game will go on much longer than reality will bear.? The sellers sit on the cash; the buyers enjoy the losses when the bust comes.

Volatile markets favor those with strong balance sheets — those that can wait for a better day, or, those that can wait for better opportunities. In either case, they can wait; they do not have to buy or sell now.? They are experiencing no cash flows forcing them to action.

Those with strong balance sheets focus on return on book capital, and avoid leverage.? They look to grow the book value (“net worth”) of their company, and ignore secondary goals.? They are shareholder-oriented.? They take advantage of both sides of the boom-bust cycle — selling near peaks when return on capital is lousy, and buying near troughs when return on unlevered capital is fat.

This is simple stuff, but hard to execute, because the fear/greed cycle interferes with rational calculation.? Regardless, absolute valuation investors put in the tops and bottoms of markets by their selling and buying.? To the degree that technical analysis works, it is because they trace the bread crumbs of large valuation oriented investors.

That’s all for now.? Thoughts?? Give it to me in the comments.

 

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