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The Stingy News Quarterly (Q3/2013)
New @ StingyInvestor Fishing for a bargain among small-fry "Insisting on value helps to keep the prices I pay in line, while keeping an eye on dividend growth points the way to reasonably healthy businesses." In Paris, value stocks are in bloom "I have a soft spot for Mr. Tobik's value investing philosophy. But, much like a slice of Roquefort cheese, the tiny firms he favours aren't for everyone. If you're looking for a bit of extra flavour to determine whether these firms might suit your own palate, check out what his site has to offer." A warning for dividend lovers "Even a little bad news has the potential to go a long way. Should rising interest rates slow the economy down, it's fairly easy to envision the possibility of much lower stock prices and more than a few dividend cuts along the way." Negative EV stocks "Enterprise value has one peculiarity that market capitalization does not. It's possible for a company to have a negative enterprise value. That might sound odd at first but remember the calculation subtracts a firm's cash from the market value of its equity and debt." Hedge fund math "The lesson here is to try to minimize your costs and employ sensible tax planning methods. While a 2-per-cent annual fee might not seem like much, it can really add up over time. Throw in a performance fee on top, as most hedge funds do, and the costs skyrocket." [Btw, the calculations included a high-water mark] How to choose an actively managed fund "There is a myth going around that most fund managers are bad stock pickers. It is undoubtedly true that some are, but it turns out that most beat their benchmarks over the long term." A dangerous season for stocks "But the idea that stocks might also have a natural rhythm is a little more controversial. It's obvious that the market isn't perfectly correlated with the seasons, but research points to a weak relationship between the two that some investors might want to try exploiting." A recipe for a better dividend portfolio "As the weather gets colder and I get older, I've begun to enjoy the comfort provided by a warm bowl of soup. There's nothing like a delicious mix of vegetables and chicken to ward off the chill in the air. As I sat down to my first bowl of the season my thoughts turned to how I might pay for my humble repast for years to come. A few good dividend stocks might do the trick." Price-to-long-term-earnings ratios "The idea of using long-term earnings when evaluating companies is hardly a new one. Benjamin Graham, the father of value investing and a highly successful money manager in his own right, suggested employing a similar technique when studying individual companies." The case for low-fee balanced funds "While balanced funds aren't a cure-all for the ails of market timing, they do represent a useful tool for new investors and for those who get a little jittery in downturns. When shopping for balanced funds it is important to keep a close eye on the fees they charge. All too many funds offered to Canadians charge outrageously high fees." The Best of Stingy Links Stingy Links: Academia Quality Minus Junk "We define a quality security as one that has characteristics that, all-else-equal, an investor should be willing to pay a higher price for: stocks that are safe, profitable, growing, and well managed. High-quality stocks do have higher prices on average, but not by a very large margin. Perhaps because of this puzzlingly modest impact of quality on price, high-quality stocks have high risk-adjusted returns. Indeed, a quality-minus-junk (QMJ) factor that goes long high-quality stocks and shorts low-quality stocks earns significant risk-adjusted returns in the U.S. and globally across 24 countries. The price of quality - i.e., how much investors pay extra for higher quality stocks - varies over time, reaching a low during the internet bubble. Further, a low price of quality predicts a high future return of QMJ. " Stingy Links: Behaviour Why the paradox of choice might be a myth "It could be one of the most memorable economic studies of the last half century. Researchers presented an array of tasty jams and enticed shoppers to buy a jar. In one version, there were six varieties shown to shoppers. In another, there were 24 jams. The second, larger array attracted more traffic. But the smaller array led to ten times more purchases. Sometimes, they concluded, too many options repel us. The researchers called it "the paradox of choice." You might call it "feeling overwhelmed by options." But some economists are calling it something else: "complete hogwash."" The tragedy of the commons "The problem with Hardin's logic was the very first step: the assumption that communally owned land was a free-for-all. It wasn't. The commons were owned by a community. They were managed by a community. These people were neighbours. They lived next door to each other. In many cases, they set their own rules and policed those rules." Hard-wired for giving "The Darwinian principle of "survival of the fittest" echoes what many people believe about life: To get ahead, you need to look out for No. 1. A cursory read of evolutionary doctrine suggests that the selfish individuals able to outcompete others for the best mates and the most resources are most likely to pass their genes on to the next generation. Then there is classical economic theory, which holds that given the choice, we will often opt for a personal benefit over a personal loss, even if that loss involves a benefit to someone else. The philosopher and economist John Stuart Mill championed the self-centered theory in the mid-1800s, describing man as a creature that "does that by which he may obtain the greatest amount of necessaries, conveniences and luxuries, with the smallest quantity of labor and physical self-denial." But the latest science shows that, in fact, we are also hard-wired to be generous." Stingy Links: Brokers The problem of small accounts "Good advice costs money. Really good advice costs a lot of money, and is worth it, if you have enough money to spread the cost over. But when you have a small account, you have a problem in getting advice." Stingy Links: Buffett The 1975 Buffett memo that saved WaPo's pension "The letter alone is quite amazing. In it, Buffett identifies the pension problems that others would key in on only a decade or so later. But he also lays out perhaps for the first time -- Buffett was 45 when he wrote it and years away from attaining the investment fame he has today -- his philosophy behind what it takes to be a successful investor. His main pieces of advice: Think like an owner, look for a discount, and be patient." Berkshire billionaire with more than Gates "There are probably other Berkshire billionaires to be uncovered. In a June 2010 Fortune magazine article, Buffett said that he knew of two Berkshire shareholders who qualify for the Forbes 400 list of wealthiest Americans, and weren.t on it." Stingy Links: Economics Munger on milk "Mike Munger of Duke University talks with EconTalk host Russ Roberts about why milk is in the back of the grocery store. Michael Pollan and others argue that milk is in the back so that customers, who often buy milk, will be forced to walk through the entire story and be encouraged by the trek to buy other items. Munger and Roberts argue that competition encourages stores to serve customers and that alternative explanations explain where milk is found in the store." The disappearance of James Duesenberry "This is puzzling because his theory of consumer behavior clearly outperforms the alternative theories that displaced it in the 1950's - a striking reversal of the usual pattern in which theories are displaced by alternatives that better explain the evidence. His disappearance from modern economics textbooks is an intriguing cautionary tale in the sociology of knowledge." The price of Coke "Prices go up. Occasionally, prices go down. But for 70 years, the price of a bottle of Coca-Cola didn't change. From 1886 until the late 1950s, a bottle of Coke cost a nickel. On today's show, we find out why." Stingy Links: Fun The romantic appeal of savers "The desire to attract a romantic partner often stimulates conspicuous consumption, but we find that people who chronically save are more romantically attractive than people who chronically spend." Stingy Links: Government How Detroit went broke "Detroit is broke, but it didn't have to be. An in-depth Free Press analysis of the city's financial history back to the 1950s shows that its elected officials and others charged with managing its finances repeatedly failed - or refused - to make the tough economic and political decisions that might have saved the city from financial ruin." Puerto Rico's pension crisis "Puerto Rico can cover only 11.2 percent of its public pension costs, which is even less than the notoriously underfunded Illinois retirement system" Feds vs. raisins "The government allows them to sell one out of every two raisins.The farmers were always supposed to get a percentage of the money raised from the reserve pool raisins, but as profit margins dwindled over the years, so did the return to farmers. The tipping point came in 2003, when farmers received zero dollars in return for the 47 percent of the crop they had surrendered." Detroit gap and pension math "Until mid-June, there was one ray of hope in Detroit's gathering storm: For all the city's problems, its pension fund was in pretty good shape. If the city went under, its thousands of retired clerks, police officers, bus drivers and other workers would still be safe. Then came bad news. Seemingly out of nowhere, a $3.5 billion hole appeared in Detroit's pension system, courtesy of calculations by a firm hired by the city's emergency manager." Did Goldman Sachs overstep? "A month after ace programmer Sergey Aleynikov left Goldman Sachs, he was arrested. Exactly what he'd done neither the F.B.I., which interrogated him, nor the jury, which convicted him a year later, seemed to understand. But Goldman had accused him of stealing computer code, and the 41-year-old father of three was sentenced to eight years in federal prison. Investigating Aleynikov's case, Michael Lewis holds a second trial." Stingy Links: Graham Ben Graham did not give up on value investing "So, no, Ben Graham did not give up on value investing. One could easily say that he was arguing for value indexing." Stingy Links: Hallett Stock pickers' markets a myth "Whenever the notion of a volatile sideways market bubbles up among portfolio managers, they claim indexing will fail in comparison to active stock selection. In other words, portfolio managers argue that trendless volatility is ripe for active management skill to shine. They call it a stock pickers. market. I call it a myth for retail investors." Industry risk rating failing investors "Floating rate note (FRN) funds are gaining in popularity because of their marketed 'promise' to protect capital during periods of rising interest rates. In Canada since the mid-2000s, FRN funds invest mainly in corporate loans bearing a fluctuating interest rate. They appeal to investors who fear rising interest rates - which is most - but offer competitive current yields. Investors seduced by this class of funds should be aware that hedging one risk often heightens exposure to other risks. And standard industry risk ratings fail to communicate this trade-off, which risks significantly understating these funds' true risk exposure." The weather rock "When asked for shorter-term predictions, I always respond candidly that I can guess what's going to happen from year to year but I don't know. Nobody does despite the proliferation of forecasts that our industry produces for each coming quarter, six months or year. And stock market returns from the past several years illustrate this nicely." Stingy Links: Indexing Confessions of an institutional investor "I've spent my entire career managing institutional portfolios for pensions, endowments and foundations. A few have used a simple, conventional approach while the majority have used the more complex, alternative model that is so popular these days. My current job is with a large fund that uses a complex approach with a focus on downside volatility and the use of hedge funds and private investments. This experience has cemented my opinion that the simple approach is just plain better." How low can prices go? "This is what it has come to in the ETF business after about 15 years in Canada: Companies are now competing with price cuts that amount to mere cents on a modest investment. Some may mock this as a sign the ETF business has run out of ideas to attract new customers, but not people who understand that low costs are one of the foundations of successful investing. Switch funds over a difference of 0.02 of a percentage point on fees? That's pointless. Put the fund with the lowest fees on your short list of places to invest new money? Definitely." Who should try to beat the market? "Instead, Zweig thinks Graham would have advised those who have an edge at stock-picking to do so, while recommending those who don't take a passive approach with index funds" Stingy Links: Management The case for banning tips "For over eight years, I was the owner and operator of San Diego's farm-to-table restaurant The Linkery, until we closed it this summer to move to San Francisco. At first, we ran the Linkery like every other restaurant in America, letting tips provide compensation and motivation for our team. In our second year, however, we tired of the tip system, and we eliminated tipping from our restaurant. We instead applied a straight 18% service charge to all dining-in checks, and refused to accept any further payment. We became the first and, for years, the only table-service restaurant in America where you couldn't pay more money than the amount we charged you. You can guess what happened. Our service improved, our revenue went up, and both our business and our employees made more money." Stingy Links: Markets More on long-term returns "Throw bonds into the mix and a 60/40 portfolio will generate just 2.77% real, the fourth lowest result in all the years since 1871. If we assume a 2% inflation rate, then nominal returns will be a little under 5%, compared with the 7.5-8% assumed by pension funds." Quality could still be underpriced by markets "The researchers measured value creation with their own metric that they call CFROI, for cash flow return on investment. It is based on cash flows (not earnings, on which accounting manipulations are possible and which are affected by leverage), adjusted for inflation, as a proportion of operating assets - a measure that excludes accounting devices such as depreciation allowances. By taking inflation and different accounting rules out of the equation, the metric allows comparisons across time, countries and industries. It produces some fascinating findings." Never bubbles today "A cursory reading of the academic literature on asset prices reveals a litany of puzzles, conundrums, paradoxes, and anomalies. Much of the research on asset prices continues to rely on highly stylized models with identical agents, rational expectations, and optimizing behavior. According to the prevailing view, asset price surges that many would perceive to be bubbles are not really so. Instead, they are seen to reflect the influences of fundamental forces, such as a decline in risk appetite. This reminds me of the White Queen in Through the Looking-Glass, who says jam will be given every other day, but never today. Adherents of this view may admit that bubbles have occurred in the past - like the dot-com boom and bust. And they may even be willing to accept that bubbles are something to worry about in the future - say, in financial supervision. But, in practice, they are never willing to find a bubble in the present. There's always a reason why what looks like a b! ubble, walks like a bubble, and quacks like a bubble is not actually a bubble." Bullish on cash "Charles de Vaulx has an investment idea: cash. That may seem an odd choice, since cash earns less than inflation, making it a money-losing proposition. But Mr. de Vaulx, who oversees $17.8 billion as chief investment officer at International Value Advisers in New York, has been boosting his cash position. He is having trouble finding stocks he considers cheap and won't buy overvalued stocks. He considers bonds even more overvalued than stocks, leaving him perched on a lumpy cash pillow." The long cash squeeze "But there's a similar emotion that I am seeing and hearing a lot of - the long cash squeeze. That is the feeling of being long cash that you want to deploy as the market rises." Stingy Links: Munger Charlie's secret "Charlie Munger is Warren Buffett's co-chairman of Berkshire Hathaway and an investing genius in his own right. He's almost 90, six years older than Buffett, but every bit as sharp and cagey even in his advanced age. And also, he kicks the shit out of all you momentum investor hotshots, what with your risk parities and your quant factors and your newfangled social networking stocks. Munger has run into more burning buildings than the NYFD, dodging scores of other investors fleeing in the opposite direction without even a second's hesitation." Munger triples publisher's value "Daily Journal Corp., the California publisher that counts Charles Munger as its chairman, more than tripled in value since 2008 after the company jumped into stocks during the financial crisis." China roundtable "China Bilateral Investment with Victor K. Fung, Charles Munger, and Jim Sinegal" Stingy Links: Retirement Canadians can afford retirement "A recent study from Statistics Canada on 'The Adequacy of Household Savings' explicitly takes wealth into consideration. It found that two-thirds of Canadians exceed optimal savings for retirement; for the rest, the 'undersaving is small' at less than $30,000 on average and concentrated among low income earners, who already get substantial pension supplements from government. These arguments are validated by the OECD Report on pensions that found that Canada has one of the lowest rates of elder poverty in the world." Stingy Links: Stocks Cohen hauls fortune in unmarked trucks "There's a reason why Richard B. Cohen escapes attention. The chairman of C&S Wholesale Grocers Inc. works out of a nondescript office park once slated to house a county jail in Keene, New Hampshire, a leafy mountain hamlet 90 miles northwest of Boston. The truckers who deliver goods from the company's 54 distribution centers drive unmarked tractor-trailers. Cohen's last interview was published a decade ago. Even the Keene Chamber of Commerce overlooked C&S as one of the town's largest employers." Stingy Links: Thrift The ever increasing value of parsimony "We're in a bull market for parsimony. Maybe even a parsimony bubble. Parsimony, which is a polite way to talk about penny-pinching, has never been a more valuable habit. Even with investment yields up from their recent lows, I think it is safe to predict that parsimony is well on its way to becoming a high art." Risk-free returns for everybody "Investment professionals too often forget that a dollar saved in costs or fees is actually worth more than a dollar earned from investment returns (thanks to taxes). In addition, investing in cost and fee reduction can provide far greater returns per unit of risk than anything else an investment organization can do. In fact, there.s an argument to be made that cost and fee savings represent risk-free returns to investors." Jon Chevreau talks Findependence "I thought it would be great to have Jon back. This time we go into a bit more detail about his book." Time as money "But their data, primarily drawn from the Consumer Expenditure Survey from 1980 to 2003, provide an alternative explanation for why expenditure falls as people enter old age. To start with, they reveal that spending on non-essential items does not drop. In fact, it increases. But three categories do see declines: food, transportation and .personal care. (which includes clothing)." Stingy Links: Value Investing Market underestimates BlackBerry "'The market's very emotional,' he adds. 'You'll find huge optimism when everything's going well, huge pessimism when things are not working out as well. And what we say is the truth is in between.'" Francis Chou seminar "Francis talks value at the Ivey business school" It doesn't work all the time "There are valid theories on investing, and they work on average. If you pursue them consistently, you will do well. If you pursue them after failure, you can do better still." Stingy Links: World Mind the expectations gap "So it should come as no surprise that the economic performance of the past few decades has strongly influenced expectations about economic growth. However, when optimistic expectations get detached from reality we risk creating a significant expectations gap - a disconnect between what we take for granted given our recent experiences and what we should anticipate given simple arithmetic." Lottery raided "Argentina owes itself more money than ever as President Cristina Fernandez de Kirchner squeezes pesos out of public institutions from the pension agency to the lottery, a decade after losing its access to overseas financing." Slow ideas "Some innovations spread fast. How do you speed the ones that don't?" America has changed the way it measures GDP "The problem is that there is scant information on investment costs. Moreover, the asset - the right to the music, manuscript or TV format - is rarely sold. Rather it is used to create a future stream of products, like books and TV shows. So the BEA must estimate likely future royalty fees, and translate them into today's money to value the investment." Chinese stocks earn 1% per year "The MSCI China Index has gained about 14 percent, including dividends, since Tsingtao Brewery Co. (168) became the first mainland company to sell H shares to international investors in Hong Kong in July 1993. That compares with a 452 percent return in the Standard & Poor's 500 Index, 322 percent in the MSCI Emerging Markets Index and 86 percent from Treasuries. Only the MSCI Japan Index had a weaker performance among the 10 largest markets, losing about 1 percent." Why Buffett bailed on India "India has long been viewed as a value investor's dream: rapid growth, 1.2 billion people pining for a taste of globalization, and underdeveloped industries ripe for turnarounds. So it surprised few when the genre's guru, Warren Buffett, placed a bet on the world's ninth-biggest economy. What did come as a surprise, though, was last week's decision by the billionaire's Berkshire Hathaway Inc. to give up on India's insurance market after just two years. Adding to the drama, the withdrawal came the same week India unveiled plans to open the economy as never before to foreign-direct investment." Stingy Links: Zweig Consuelo interviews Jason Zweig "'There's no doubt that the pursuit of yield is bordering on a mania' says Jason Zweig, The Wall Street Journal's Personal Finance Columnist. Don't miss Consuelo's discussion when she asks Zweig about dangerous investor behavior and why he is concerned as investors are abandoning bonds and flocking to dividend-paying stocks." | ||||
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