Thursday, March 24, 2011

The Intelligent Investor (part I)

I have been reading Benjamin Graham's book "The Intelligent Investor". Some thoughts of the first five chapters of the book that Warren Buffett has stated to be “by far the best book on investing ever written”:

Graham advices you never to have more than 75% of your total funds in stocks (the rest being allocated to bonds). His advice is probably valid for most investors and especially the ones who can’t afford to take significant losses or are in it for the short run (in which case you should not in my opinion be invested into stock market at all). One of the earliest books I read on investing stated “never to invest more money than you can’t afford to loose”. I live by that advice.
In my opinion, to be 100% invested into stock market you should:
• set aside pension etc. related investments that you can’t afford to lose (in Finland this is automatic – I have zero control over my work pension because of how our system works – unfortunately so in my opinion)

• set aside enough cash to cover any foreseeable sudden (unplanned) expense (e.g. broken car/refridgerator etc.). Our buffer is approximately what our family spends in three months. This has proved to cover even multiple large sudden expenses.

• have adequate protection in case of unemployment (in my case, I am guaranteed at least 6 months full pay + 500 days of partial salary – what happens after that is then up to combined income of me and my wife. However, in Finland everyone is guaranteed minimum amount of income for the very basic needs indefinitely)

• be debt free

• preferably own a house / apartment (i.e. limit your monthly payments and diversify your assets - a house is also a very long term investment like stocks should be)

• not be planning to use the money for anything in the foreseeable future

Graham advices you to “have adequate though not excessive diversification”. By this he means between 10-30 stocks. I don’t want to put myself any specific limit, but his advice seems like an excellent starting point. Even 20 stocks or so requires quite much work to select and manage. This I already know. I consider exchange traded index funds (ETF) to be an excellent way to diversify without having the need to do a lot of research.

However, if you have the interest and the time to do research then picking a few large cap stocks from inside an index fund may be a good idea. If you are in it for the long run, then you will save a lot of money. Total expense ratio of an average index fund ranges from 0,3% to 1% annually. On top of that, many ETFs have way larger spreads than most of their holdings. This means you pay additional 0.5-1% or so extra every time you buy or sell.

Monday, March 14, 2011

10 Most Owned Technology Stocks Among 'Super Investors' tracks investment activities of successful value oriented “super investors” such as Warren Buffett and Bruce Berkowitz. I wrote an exclusive for Seeking Alpha about top 10 most owned technology stocks by the 49 investors tracked by Dataroma (full article available only via Seeking Alpha – here is only my conclusions).

Top 10

Microsoft Corporation
Cisco Systems, Inc.
General Electric Co.
Dell Inc.
3M Co.
Intel Corporation
Hewlett-Packard Company
Texas Instruments Inc.
International Business Machines Corp.
Automatic Data Processing, Inc.

It is interesting to see that in many cases insider actions are opposite to those of fund managers. This might be due to the different time period observed or because they simply have different views and investment goals. In most of the cases, insiders are selling. In case of Microsoft, HP (HPQ) and IBM insiders sold $606 million, $59 million and $48 million worth of stocks respectively. At Dell (DELL), insiders bought some $100 million worth of Dell stocks.
All things considered, Microsoft and Intel seem to be the most attractive ones out of the examined stocks. Cisco, GE, Dell and HP are also worth considering in my opinion.

Disclosure: I am long MSFT, CSCO, INTC.

Tuesday, March 8, 2011

Riding The Second Gold Bubble

No matter which gold price diagram you look, the price of gold seems to be going upwards. We are above old all time highs. Is it just a huge bubble or is the price justified?

The price of gold in dollar terms was pretty flat until 1934 when dollar was devalued against gold by 69%. In the previous year Franklin D. Roosevelt declared gold ownership illegal and U.S citizens were required to sell all their gold to Federal Reserve at the official exchange rate $20.67 an ounce. Gold ownership in USA was illegal until 1975.

After the Second World War, a system similar to a Gold Standard was established by the ”Bretton Woods Agreement”. Under this system, many countries fixed their exchange rates relative to the U.S. dollar and U.S. promised to fix the price of gold at approximately $35 per ounce. [Wikipedia]

The system broke down in 1971 when U.S. announced that dollars were no longer convertible to gold. This was the result of France converting its dollar reserves to gold (calling U.S. bluff), fiscal strain of federal government due to expenditures for the Vietnam War and persistent balance of payments deficits. [Wikipedia] After 1971 the price of gold soared due to the reasons stated before and due to high inflation.

The full article with charts of gold price and U.S Dollar purchase power over 110 years is published exclusively via Seeking Alpha.

Saturday, March 5, 2011

Book Review: 'Fooling Some of the People All of the Time: A Long Short (And Now Complete) Story'

Fooling Some of the People All of the Time: A Long Short Story” by David Einhorn, the President and founder of Greenlight Capital was published before credit crisis of 2008. The update to the book titled “Fooling Some of the People All of the Time: A Long Short (And Now Complete) Story” was recently published. The original book has been updated with new epilogue that concludes the story about Allied Capital.

The name of the book describes the content very well. Apart from the first four chapters that introduce readers to Mr. Einhorn and to the history of Greenlight Capital the book is a long story about selling short Allied Capital and trying to get others to see the same problems that Einhorn and a few others saw in it.

As foreseen by the writer already in the introduction chapter, I did say to myself before even reaching the midpoint of the book: “Enough! I get it already! You have made your point!” Apparently regulators, media and government officials are much harder to convince. And that is why the book is so long and why the title also says “fooling some of the people all of the time”.

Einhorn claimed already in 2002 in public that Allied Capital was using questionable accounting practices to prop itself up. In 2008, he made similar claims about Lehman Brothers and shorted it too.


Read the full arcticle from Seeking Alpha:

Tuesday, March 1, 2011

Buffett's 2010 letter

Warren Buffett's annual letter to the shareholders of Berkshire Hathaway is absolutely a must read for every value investor. In addition to discussing Bershire's business, holdings and investments in detail Buffett gives his opinion on market uncertainty ("tomorrow is always uncertain") and US economy in the long run. He also explains his management style ("hire well, manage little").

A section titled "Life and Debt" discusses using leverage (debt). It's no news that Buffett isn't keen on companies that have a lot of debt. He shares a letter that was sent by Buffett's grandfather Ernest to Buffett's uncle Fred. The letter talks about importance of keeping some cash for unexpected events (i.e. an emergency fund). Buffet keeps $20 billion and stated that they will always keep minimum of $10 billion as cash or equivalents (US treasury bills). Hurricane "Katrina" cost Berkshire $3 billion. However, the cash is also there in case of sudden panics in the market. Buffett invested $15.6 billion in the 25 days following Lehman bankruptcy in 2008.

In the end Buffett shares his biennial letter to CEOs of Berkshire subsidiaries. He states how important reputation and good business practises are. Then he asks his managers to tell him who is their primary candidate for succession at their company in case something happens to them. That's it.