The Stingy News Quarterly (Q4 2002)
New @ StingyInvestor
Growth is what it's all about for investors. Every investor wants to see their portfolio grow and many attempt to generate wealth by buying growth companies. At first glance, it seems to be a simple matter to buy companies that have grown the most and, therefore, are likely to continue growing. Regrettably, as with many simple investment concepts, selecting growth stocks is fraught with difficulty.
10 Graham Picks for 2003
December is filled with family, friends, and, for investors, the dreams of healthy dividends. In what has become a December tradition, I look at Benjamin Graham's strategy for defensive investors using the MSN.com stock screener. Long-time Canadian MoneySaver readers will note that this is the third time I've discussed Graham's conservative technique.
Stingy Selections & Dartboard Dynamos
Last year I attempted to achieve success by hand picking twelve value stocks from the S&P500. Well, I managed to avoid the success part. My twelve picks lost an average of 1.92% from December 5, 2001 to December 5, 2002. Mind you, this was much better than the S&P500 which fell by 22.12% over the same period. Normally outperforming the index by 20.20% would be cause for celebration but a loss is still a loss.
Dividends are making a big comeback with investors and it's not hard to see why. Many blue-chip stocks are now paying more than GICs, government bonds or high-interest savings accounts. The tax advantages of Canadian dividends makes them even more attractive.
The Best of Stingy Links
Stingy Links: Academia
Boys will be boys
"Theoretical models predict that overcon.dent investors trade excessively. We test this prediction by partitioning investors on gender. Psychological research demonstrates that, in areas such as .nance, men are more overcon.dent than women. Thus, theory predicts that men will trade more excessively than women. Using account data for over 35,000 households from a large discount brokerage, we analyze the common stock investments of men and women from February 1991 through January 1997. We document that men trade 45 percent more than women. Trading reduces men's net returns by 2.65 percentage points a year as opposed to 1.72 percentage points for women."
Is that a $100 bill lying on the ground?
"A few days before Kahneman and Smith got their phone calls from the Nobel Prize committee, Wharton hosted a debate that addressed these questions. Called "Two Views of Market Efficiency: A Discussion of Behavioral Finance and Efficient Market Theory," the scrimmage took place between Burton Malkiel and Richard Thaler, and was moderated by Wharton finance professor Jeremy Siegel, author of Stocks for the Long Run."
Trading is hazardous to your wealth
"Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent. The average household earns an annual return of 16.4 percent, tilts its common stock investment toward high-beta, small, value stocks, and turns over 75 percent of its portfolio annually. Overconfidence can explain high trading levels and the resulting poor performance of individual investors. Our central message is that trading is hazardous to your wealth."
Stingy Links: Bonds
Doors now closing http://www.economist.com/finance/displayStory.cfm?story_id=1403724 "Yet evidence continues to grow that the supply of capital is being shut off, too. It is a process that started with the riskiest securities-that is, junk bonds and new issues of shares-but is now spreading to the safer parts of the credit markets, including those for bank loans and for high-grade corporate bonds."
Don't go hungry in the coming yield famine
"Stalking yield is trickier than ever -- you need to build enough of the right kind of returns into your retirement portfolio so that you cut risk down to size. Here are some of your choices."
Stingy Links: Brokers
Spitzer's slap: Small change on the street
"The fines aren't onerous, and skeptics are scoffing at the required shift to independent research. This remedy may be more crock than cure."
Frank Quattrone's heavy hand
"Newly obtained e-mails show how CSFB's bankers pushed analysts around."
Stingy Links: Buffett
The jewels in Berkshire Hathaway's crown
"Robert P. Miles, professional speaker and the author of The Warren Buffett CEO: Secrets From the Berkshire Hathaway Managers, and 101 Reasons to Own the World's Greatest Investment, shares his insights into Warren Buffett's investment strategy and his entry into the jewelry industry."
Buffett succeeds at nothing
"Warren Buffett is known as being one of the best investors of all time. But it might come as a surprise to many that his investing strategy often encompasses long periods of what he calls "sitting on my butt." There have been periods of years when Berkshire Hathaway has purchased not a single share of stock, interspersed with some enormous activity. Sometimes doing nothing is the best thing you can do."
Stingy Links: Dreman
Four simple rules
"We still just can't trust earnings, despite all the talk about reform. So here are some tips on other ways to gauge stocks."
Stingy Links: Economy
The painful truth about profits
"But let's be blunt: Profits may very well rise next year--but it won't simply be a normal business recovery. The process of boosting earnings is going to be far more difficult than most people expect, and it is going to entail far more pain for workers. Under mounting pressure from investors and corporate boards to get their earnings up--without accounting tricks--executives are going to have to make deep cuts in payrolls and productive capacity."
Myths about business
"Of course, people by nature are "greedy." We want not only more money and more possessions, but also more time to spend with our family, more time to read and learn, and more time to relax. Would you go to work everyday if you didn't get paid? Have you ever turned down a pay raise or Christmas bonus? I think I know the answer. So, why aren't we portrayed as evil or greedy for trying to get as much as we can, but businesses are evil if they want to get as much as they can?"
A lost generation of job seekers?
"The young and those in mid-career are bearing the brunt of layoffs. And new jobs are harder to find, as older workers delay retirement."
Stingy Links: Fraud
Fake escrow site scam widens
"Six months later, the scam has widened considerably, and it now appears to be among the most successful Internet cons ever. By taking advantage of Net auction winners' inherent trust of escrow sites, the con artists are stealing as much as $40,000 at a time from big-ticket auction winners. Their total take may well reach into millions of dollars so far. And while federal authorities, including the Department of Commerce and FBI, are investigating, there seems to be no way to slow down the con artists."
Was the IPO frenzy rigged?
"Remember those high-flying stocks sold for the first time in the 1990s, the ones that soared from $20 a share to $100 a share in hours? Some insiders now say the great price leaps for these "initial public offerings" - IPOs - were the result of insider agreements designed to force prices artificially high. The scam is called "laddering.""
Stingy Links: Fun
The new vocabulary
"Here are 33 handy excuses for saving too little or making foolish investments, plus translations for what each excuse really means."
Who moved my thumbs?
"We find a management theory that makes getting fired look pretty good."
"The economist-pundit wanted to find a way to describe the workings of the Bank of Canada in terms that everyone could understand and enjoy talking about at Christmas parties, and which could possibly be the basis of a handsome book that would be bought by middle-aged people desperate for something to give their elderly uncles."
"It was an odd roulette wheel. Labeled "S&P," it had 500 slots. There were others nearby that were even larger. It was a strange casino I was in. But, hey, here to play, right? I moved my chip toward Red 19 -- an old favorite play of mine."
Stingy Links: Government
Fatalities of Kyoto
"When this risk analysis is combined with the Department of Energy's conclusion that Kyoto would reduce GDP $397 billion by 2010, the results are startling. Based on Lutter and Morrall's findings (adjusted for inflation), Kyoto would result in 32,000 to 42,000 additional deaths per year by 2010. Unfortunately, because these deaths would be seemingly random, linking individual deaths to Kyoto could prove extremely difficult. Thus, while morally unacceptable, these deaths won't be politically damaging."
The great milk fiasco
"Parity and fairness are the two watchwords when discussing farm subsidies, and we find ourselves up against the old conflict. Not surprisingly, Mises had a strong grasp of the likely outcome when he wrote, "what those people who ask for equality have in mind is always an increase in their own power to consume.""
Subsidies for stock pickers
"The bureaucrats have designed a broad plan to tax the investment banks and transfer the money to smaller stock research firms with no investment banking business. While the plan for a government board to choose the recipients of this revenue is meant to guarantee research free of conflicts of interest, it can do no such thing. In fact, the plan will create a stock research cartel more prone to conflicts and corruption than the system it replaces."
Enron, one year later
"The real macro focus (apart from the Fed) should be the "agency problem," the problem of management not having the incentive to efficiently use stockholder funds. Agency problems definitely played a major role in recent scandals, especially given that the wave of corruption was almost completely isolated to corporations, not proprietorships and partnerships. Business per se in America hasn't been shown to be corrupt."
Stingy Links: Grant
"Investing in fallen tech stocks is hard when both Wall Street firms and investors are scared of them. But the question is: Do you have a strong stomach?"
Why James Grant will never be Louis Rukeyser
"One of the striking things about the financial press during a bear market is what isn't in it: bona fide financial celebrities."
Stocks on stilts
"The entire U.S. is heavily leveraged. Now the bulls want you to leverage still more, mortgaging the house to buy stocks--even if you have to pay 50 times earnings to get them."
Stingy Links: Gross
What a fool believes
Bill Gross continues to be negative on stocks and takes a swing at proforma P/Es
Questions for the genie
Bill Gross talks about inflation, interest rates and the outlook for bonds.
Stingy Links: Law
Should you sue?
"Guess what: You already have. What do you do when you're part of a class action?"
Overpaid CEOs? Try suing the paymasters
"Delaware judge, in warning signal to boards, opens door to courtroom remedy."
The hunch that led to Tyco's tumble
"Perhaps the most remarkable thing about the fall of former Tyco CEO Dennis Kozlowski is the unlikely string of events that brought him to Manhattan criminal court for the first time on June 4, 2002. The discovery that set off a subsequent cascade of indictments, firings, and frozen bank accounts, seems nearly a fluke in retrospect. Here's what happened, based on numerous interviews with people close to the case."
Stingy Links: Managment
The case against professionalism
"It is easy to forget that professionalism is the enemy of the high-tech startup. If these companies were operated by professionals, they would never have been founded. Nor would a professional tolerate the conditions necessary for startup survival. Michael Eisner never emptied a wastebasket at work, but I'll bet Walt Disney did."
Year of the scandal
"2002: greed, accounting conflicts, book-cooking helped derail Wall Street. Will 2003 be any better?"
The rise and fall of Dennis Kozlowski
"Kozlowski's claims to greatness were shredded this year by his indictment on two sets of charges brought by Manhattan District Attorney Robert M. Morgenthau. The first startled in the pettiness of the greed it exposed: A mogul worth at least $500 million chisels New York City out of $1 million in sales tax due on fine art. But the second indictment, handed down on Sept. 12, shocked in the scale of corruption alleged. In essence, prosecutors accused Kozlowski and former Chief Financial Officer Mark Swartz of running a criminal enterprise within Tyco's executive suite. The two were hit with 38 felony counts for pilfering $170 million directly from the company and for pocketing an additional $430 million through tainted sales of stock."
A billion up his sleeve
"Magician and radio baron Allan Slaight still has a few surprises to pull out of his hat."
Conseco collapse deals new blow to CEO cult
"Even now, nobody is connecting the dots when it comes to Gary Wendt's role in the demise of Conseco. Most reports about Tuesday's bankruptcy filing by the Carmel, Ind., insurance and lending behemoth have suggested that the former CEO's turnaround plan was more or less doomed from the start. The assumption appears to be that, given the large debt load taken on by previous management, Conseco was too sick to be cured even by Wendt -- who joined the company in June 2000 with one of the most impressive reputations in corporate America. "
Compensation is getting personal
"Imagine that your company's human-resources department does away with standard salaries, one-size-fits-all benefits, and the usual raft of yawn-inducing seminars. Instead, HR execs huddle over computer programs that slice and dice data on you and your cube-mates -- controlling for age, tenure, educational background, commute time, residential Zip Code, even the age and condition of the office you work in."
Where did everyone go?
"Firms are laying off workers even as business revives. That boosts profits - at the cost of morale."
The war against excess worker waistage
"Companies are taking on employees' ever-widening girths in a quest for lower health-care costs and higher productivity."
Stingy Links: Markets
Going against the crowd really paid in 2002
"The best SuperModels ideas were those that discounted so-called expert opinions like those from Standard & Poor's. The worst: an early-year play on a rally and a misfire on defense."
Look out! Insiders are bailing
"Want one more reason why this rally might not be for real? Insiders sold in droves in November."
Dive right in, Siegel says, the P-Es are fine
"Siegel is just as bullish now as he ever was, insisting that investors can confidently expect to make an average of 5% a year after inflation over the next 20 to 30 years. The main reason? Today's buyers are getting in at prices more than 40% lower than in March, 2000. That matters because the five big market busts of 40% or more over the last century were followed by above-average annual real returns of 8.6% over the next five years. "You're starting from a much lower base," says Siegel. "I don't consider this market to be dirt-cheap, but it is a good, if not better-than-average, time to buy equities.""
Through the past, darkly
"In fact, markets typically fall five years in a row, and they would have recently, except for those two extenuating circumstances. The S & P (or its reconstructed equivalent) fell five years in a row from 1825-29 (inclusive). It fell seven years in a row from 1836-42, five years in a row from 1853-57, and five years in a row from 1873-77. Look at the charts. The S & P fell four years in a row from 1881-84, five years in a row from 1892-96, and five years in a row from 1910-1914, and every one of these declines was part of a longer bear cycle."
Bill & Bill's excellent bull signal
"The stars of 2002's financial news programs aren't the slick CEOs of the boom years -- they're the more circumspect money managers shepherding their flock away from the bear's grasp."
Corporate America's crunched numbers
"S&P's "core earnings" calculation accounts for stock options and pension costs -- revealing profits that are far lower than reported."
Stingy Links: Stocks
Location, location, location?
"Few of the Rankin Inlet families buzzing by on their quads bother to look over at the gaggle of outsiders-mostly executives and upper managers of the North West Co. Inc. (TSX: NWF.U)-climbing out of the store manager's crew-cab pickup. Despite the extreme isolation of this community of 2,200-there are no roads to the outside world, and the nearest major city, Winnipeg, is nearly 1,500 kilometres to the south-the heavy hand of government and the resurgence of mining in the region have resulted in a stream of visitors to the remote town on the windy western shore of Hudson's Bay. Besides, there are plenty of familiar faces among the group, thanks to their past visits. Moments after they step inside the store, a squat Inuit woman hustles over from behind the KFC fried-chicken counter located near the entrance. "My nine-year-old daughter harpooned her first seal the other day," she tells them with a wide, toothy grin. No, Toto, we're not in Toronto anymore." Bankruptcies: investors do have a hope http://www.businessweek.com/bwdaily/dnflash/nov2002/nf20021114_2450.htm "It's conventional wisdom for investors unfortunate enough to own a stock in a company that files for bankruptcy: Just get out. Even if you have to sell for pennies a share, that probably will be more than you'd get when the company emerges from bankruptcy, since shareholder equity is usually wiped out in the reorganization."
Growth can be bad for investors
"Companies often pursue expansion long after their golden opportunities have passed, when they should be paying dividends. McDonald's and The Gap illustrate just how costly this can be."
Pedal to the metal
"Metal Supermarkets is one of Canada's top retail chains. You'll never guess what they sell."
The stupid loan bubble
"The case of Motorola and Nokia vs. the Uzans may read like a gangster novel. But it also opens a window onto an unexamined chapter of Internet mania, one with urgent relevance for the ongoing crisis in the telecom industry. Motorola and Nokia agree with the Uzans on only one thing: that the loans looked sensible from the dizzying heights of the bubble, when dozens of telecom start-ups vied to rule the coming Internet world. Many of the world's most famous banks are now in trouble because of bad loans they extended to telecom start-ups. But at least JPMorgan and Commerzbank have some expertise in the business of lending money. The two biggest mobile-phone makers in the world could hardly make the same claim. And it was not only Motorola and Nokia but Lucent, Cisco, Nortel and others that started acting as reckless creditors, vying with one another in a race to extend millions, even billions, in financing to-telecom-bubble start-ups, often after those companies were refused loans by real banks."
The long shadow of Big Blue
"Can Microsoft now hold on to its dominant position-or might it go the way of IBM in the 1980s?"
Stingy Links: Value Investing
High dividends are now a predictor of growth
"It may seem too good to be true, but companies that pay the highest dividends are also likely to grow the fastest. For years, many finance professors have taught just the opposite. Reinvesting current earnings back into a company is supposed to promote earnings growth. Higher payout ratios are supposed to be followed by lower earnings growth. But research conducted by Robert D. Arnott of First Quadrant and Clifford S. Asness of AQR Capital Management reveals a very different picture. For the overall stock market between 1871 and 2001, corporate profits grew fastest in the 10 years following the calendar years in which companies had the highest average dividend payout ratio. In contrast, the 10-year real earnings growth rate was the lowest following years with the lowest average payout ratios."
Lessons from the man who sells to Buffett
"Chief executive of secretive Private Capital Management of Naples, Fla., Sherman specializes in taking large to very large stakes in up to 75 companies at a time, and holding for as long as it takes to make a bloody fortune. In the past four years alone, he has sold four companies to the Buffett investment vehicle Berkshire Hathaway, including the ice-cream joint International Dairy Queen, carpet maker Shaw Industries and children's clothing maker Garan."
Running with the 'Dogs of the Dow'
"Just as a contrarian would have predicted, the strategy started working just as disillusionment with it peaked. The formula beat the Dow in both 2000 and 2001. While the jury is still out on this year for the strategy, it is running neck and neck with the blue-chip index itself through the end of this third quarter."
Cognitive biases in market forecasts
"There is no statistically significant relationship between dividend yields and P/E ratios and returns in the subsequent one or two years. The relationship between P/E ratios and dividend yields and stock returns over 10-year periods is much stronger, but it offers far less than perfect reliability."
The P/E myth
"There is no linkage of market P/Es to subsequent returns--no matter how you measure the ratio and no matter over how long (up to five years) you measure returns."
Nothing pays dividends like a new dividend
"Investors would do well to look for cash up front. Few companies are launching dividends anymore, but those that do often follow up with market-beating performance."
Sell on strength, legendary investor says
"Age can turn a man bearish. For the greater part of the past half-century Wall Street financier Leon Levy has been an optimist. Levy believed that the U.S. economy would, through a succession of business cycles, reignite and spark the higher profits that are the fuel of rising share prices. Today, at 77, worn but wealthy and still active as an investor, he is more pessimistic about the U.S. economy and stock market than ever before in his adult life. "The outlook for profits is disappointing," Levy says. "It's very hard to tell how bad the economy will be. Still I feel it will be worse than any time since World War II.""
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