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The Stingy News Weekly (12/20/2009)

"Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results." - Warren Buffett Stingy News Flash The December edition of our Graham Value Stocks letter is now (link)">available exclusively to Rothery Report subscribers. Get your copy today!

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Is Mr. Market off his meds?
"The market often behaves like a deranged manic-depressive and it was clearly off its meds this year. Just last winter it was in a deep funk, and panicky investors couldn't sell fast enough. Then all of a sudden, the gloom vanished, the market reversed course, and it shot skyward. It's all a bit zany. But how should you deal with such massive market swings? Benjamin Graham had the answer. You should help out manic-depressive investors. Buy when they rush to sell. Sell when they line up to buy."

Top 500 U.S. Stocks
"Hints of economic recovery are in the air and the U.S. stock market is starting to sparkle. It's true that a host of worries remain, but that hasn't stopped investors from looking beyond the economy's current troubles to the return to normalcy. As a result, stocks are up smartly from their lows. Even better, our highest-ranked stocks from last year provided some handsome returns. These high-grade U.S. stocks gained 24.1%, not including dividends. That's much better than the S&P 500 (SPY), which only climbed 4.2% over the same period."

Stingy Links

The economist's guide to happiness
"Spend less time with your children. Don.t underestimate the benefits of a divorce. Never serve dog food at a dinner party. These are some of the unexpected revelations to have emerged from an unlikely combination: happiness, and economists."

Upper mismanagement
"One of the themes that came up while I was profiling White House manufacturing czar Ron Bloom earlier this fall was managerial talent. A lot of people talk about reviving the domestic manufacturing sector, which has shed almost one-third of its manpower over the last eight years. But some of the people I spoke to asked a slightly different question: Even if you could reclaim a chunk of those blue-collar jobs, would you have the managers you need to supervise them? It's not obvious that you would."

Thinking about politics
"Bruce Yandle uses bootleggers and Baptists to explain what happens when a good cause collides with special interests. When the city council bans liquor sales on Sundays, the Baptists rejoice - it's wrong to drink on the Lord's day. The bootleggers, rejoice, too. It increases the demand for their services. The Baptists give the politicians cover for doing what the bootleggers want. No politicians says we should ban liquor sales on Sunday in order to enrich the bootleggers who support his campaign. The politician holds up one hand to heaven and talk about his devotion to morality. With the other hand, he collects campaign contributions (or bribes) from the bootleggers."

When an annual report speaks volumes
"Want to find a great long-term investment? Look for an annual report that treats you like a human being. Most don't. The standard-issue annual report features heroic photos of the CEO, staged snapshots of maniacally grinning workers, and vague assurances that, despite enormous challenges being faced by the stalwart management team, the future looks just fine. Only a handful of annual reports talk to you like a partner. These reports don't spend a fortune on glamour shots of smokestacks basking in the sunset. They avoid canned promises to "respect all our stakeholders."

Instead, they deliver a blunt assessment of both the firm's successes and its failures. In a high proportion of cases, these exceptionally honest reports come from companies that are also exceptionally good at making you money."

Ten years after
"I've been working on a year-end piece - this is my last day at the office in 2009 - and I came across an article from Feb. 20, 2000, in which 10 money managers each chose one stock to buy then and hold until 2010. It's almost 2010, so I checked to see how they had done. For most, not well." and yet "Here is more good news. Thanks largely to Henry Schlein, an investor who bought $1,000 of each of those 10 companies, and held on, would now have more than $13,000, even with losses on eight of the holdings. That performance is much better than that of the overall market."

Will fees stop bugging investors?
"Don Phillips, managing director at Morningstar Inc., the fund researcher, argues that 12b-1 fees "are a farce, because they don't capture all the distribution costs." Some fund managers pay for marketing out of their management fees, for example. Mr. Phillips suggests that funds should overhaul their financial statements by sorting all expenses into three main buckets: "investment management," or what it costs to research and run the portfolio; "sales and marketing," or what it costs to distribute the fund; and "operations," or overhead like accounting and legal expenses."

From the 'do a little evil' file
"Thanks to an extremely fortuitously timed stock-option repricing (exchange), Googlers have made a killing in the past eight months at shareholder expense."

Montier on Value Investing
"I've been thoroughly enjoying James Montier's new book Value Investing: Tools and Techniques for Intelligent Investment. I heartily recommend it to value investors. "

Graham's net-nets: outdated or outstanding?
"One of Ben Graham's favoured valuation signals was a stock selling at a price below net current assets (that is selling for less than its 'net working capital, after deducting all prior obligations'). Graham's methods are often dismissed as anachronistic. However, rather than dismissing Graham's approach as outdated, our evidence shows that buying net-nets is still a viable and profitable strategy. Buying a basket of global net-nets would have generated a return of over 35% p.a. on average from 1985 to 2007."

Cyclicals, value traps and margins of safety
"We have tested Graham's suggestion by constructing PE's based on average earnings rather than just one-year earnings. The results show that this simple adjustment has significant merit. For instance, a simple PE strategy based on one-year trailing earnings has beaten the market by around 2-3% p.a. since 1985. However, a strategy using a 10-year Graham and Dodd PE shows a 5% p.a. outperformance on average."

Value in the TSX60
"Our value scorecard for stocks in the large-cap S&P/TSX60 highlights stocks with the best value ratios. It also alerts you to those with the worst value metrics. The whole list is shown in the spreadsheet below."

The worst-run big city in the U.S.
"It's time to face facts: San Francisco is spectacularly mismanaged and arguably the worst-run big city in America. This year's city budget is an astonishing $6.6 billion - more than twice the budget for the entire state of Idaho - for roughly 800,000 residents. Yet despite that stratospheric amount, San Francisco can't point to progress on many of the social issues it spends liberally to tackle - and no one is made to answer when the city comes up short."

A career spent finding value
"'He was something of a collector,' said analyst A. Michael Lipper of Lipper Advisory Services. 'It took a lot of disappointment for him to get rid of an underperforming stock. Could somebody else have produced better results by getting rid of the losers? One might think so, but it wasn't [Tweedy, Browne's] style.'"

Excess cash and mutual fund performance
"I document a positive relationship between excess cash holdings of actively managed equity mutual funds and future fund performance. The difference in returns of portfolios of high and of low excess cash funds amounts to over 2% annually, or approximately 3% after standard risk adjustment. I study whether this difference in performance can be explained by the differences in managerial stock selection skills, market-timing abilities, fund liquidity needs, and operating costs. I show that managers of high excess cash funds make more profitable stock purchasing decisions, while low excess cash fund managers make better sell decisions. Neither high nor low excess cash groups exhibit significant market-timing skills; however, funds with volatile excess cash holdings are successful market timers. The difference in returns between high and low excess cash groups is particularly pronounced during periods of low fund flows, suggesting that high excess cash funds are better able to anticipate fund outflows. Finally, I show that high excess cash funds incur significantly lower operating expenses than do their low excess cash peers. I additionally document new important determinants of mutual fund cash balances, showing that funds with riskier or less liquid shareholdings, as well as those with higher return gap measures hold more cash. The determinants I consider jointly explain three times more cross-sectional variation in cash positions than variables studied in prior literature."

Altman Z-Scores for the TSX Composite
"How likely is a firm to go bankrupt? If in doubt, you can just look up its Altman Z-Score. High scores indicate that bankruptcy in the next two years is unlikely. Low scores indicate that the firm is at risk. I've listed the Altman Z-Scores (AltZ) for the stocks in the S&P/TSX Composite below. But you won't find financials in the list because the method was developed for non-financials."

Dividend growth lives
"Still need convincing that dividend growth stocks, and utilities in particular, deserve a place in a well-diversified portfolio? In his December investment outlook, Pacific Investment Management Co.'s Bill Gross - manager of the world's biggest bond fund - urged investors to move money out of ultra-low-yielding savings accounts and money market funds and into utilities stocks. Utilities are reasonably priced, and "their growth in earnings should mimic the U.S. economy as they always have, and most importantly, they yield 5 to 6 per cent, not .01 per cent," he wrote."

Sardar Biglari's 2009 letter
"Because metrics are proxies for performance, managing by a single metric causes the tail to wag the dog. Using just one metric is akin to taking a picture of a two-ton elephant: No single angle can capture the 'big picture.' Analysts who evaluate same-store sales trends almost to the exclusion of other metrics, and the CEOs - who either primarily weigh that one piece of data or (shudder) listen to the pundits - do their best to deliver on that one statistic, but usually cost their shareholders dearly."

Picking (up) winners without placing a bet
"For the past 10 years, Jesus Leonardo has been cleaning up at an OTB parlor in Midtown Manhattan, cashing in, by his own count, nearly half a million dollars' worth of winning tickets from wagers on thoroughbred races across the country. During his glorious run, Mr. Leonardo, 57, has not placed a single bet."

Why social beats search
"That's a controversial post headline and I don't mean that social will always beat search, but there's a rising chorus out there about "content farms" and search optimized content creation that is worth touching on."

Christopher H. Browne dies
"His firm, where he had worked since 1969 and which his father co-founded, occupied a special niche in Wall Street lore due its relationships with two legendary clients: Ben Graham, author of two seminal books on the subject of how to value stocks, and Mr. Graham's most famous pupil, Warren Buffett. Tweedy Browne brokered trades for Mr. Graham from the 1930s through the .50s and from that experience developed an extensive business relationship with Mr. Buffett."

Bad investment ideas for 2010
"I always did like the Grinch a lot better before those meddling Whoville residents swelled up his heart. In tribute to that (ig)noble creature, I offer Bad Investment Ideas for 2010. Unlike all those sappy happy Best Investment Ideas pieces from my fellow Morningstar analysts that congest your inbox and befoul your spirits, this article delivers recommendations that would warm the Grinch's soul, if he had one. Ideas that, if implemented, would lead to wonderfully empty space under next year's Christmas trees."

A stock trade a day keeps stress away
"Traders seeking a break from volatile global markets may want to head to Bhutan's bourse, where stocks are traded on just four computers -- when they have not crashed -- only twice a week."

Kill these job-killers
"Here's a thought: Instead of trying to "create" jobs by tweaking this tax break or increasing that spending program, why not stop doing things that destroy jobs?"

Capitalist pigs and global warming
"Dear Secretary of State, My friend, who is in farming at the moment, recently received a check for 3,000 from the Rural Payments Agency for not rearing pigs. I would now like to join the 'not rearing pigs' business. In your opinion, what is the best kind of farm not to rear pigs on, and which is the best breed of pigs not to rear?"

What matters now
"Here are more than seventy big thinkers, each sharing an idea for you to think about as we head into the new year. From bestselling author Elizabeth Gilbert to brilliant tech thinker Kevin Kelly, from publisher Tim O'Reilly to radio host Dave Ramsey, there are some important people riffing about important ideas here. The ebook includes Tom Peters, Jackie Huba and Jason Fried, along with Gina Trapani, Bill Taylor and Alan Webber. Here's the deal: it's free."

Select dividend club
"Canada's most exclusive dividend club just got a whole lot smaller. After a year in which some high-profile companies slashed their dividends and many others failed to increase their payments as they dug in for the recession, the S&P/TSX Canadian Dividend Aristocrats index is losing 15 members - including most of the banks - and gaining just one."

Books for Stingy Investors

The Aggressive Conservative Investor
by Martin Whitman & Martin Shubik

Originally published in 1979, this value classic is once again in bookstores with a new introduction but most of the tome remains unchanged. Aside from providing a glimpse into investing in the late 1970s, much of Whitman's basic moneymaking approach, which focuses on balance sheet values, continues to apply today. A great book for more seasoned investors but it might be a little heavy for some.
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Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...