Thoughts Of A Private Investor

Analysis Of Consumer Gold Demand

2012-03-01T23:33:00.002+02:00

The year 2011 was yet another positive year for gold. It ended the year 9% higher in terms of U.S. dollars despite of increased price volatility. However, gold demand grew only 0,4% in the year 2011 compared tothe year before. On the other hand, consumer demand for jewellery, bars and coins grew 7,2%. These demand categories accounted for 84,8% of total demand in 2011.
To determine where this demand growth comes from I analyzed consumer demand for gold in selected countries and regions based on data recently released by World Gold Council (WGC).

India and Greater China (China, Hong Kong, Taiwan) accounted for over 50% of total demand for gold jewellery, coins and bars. Europe and VIST (Vietnam, Indonesia, South Korea and Thailand) are the next biggest hoarders of golden items.

Comparison of consumer demand for the precious metal in 2011 to the year before reveals a mixed picture. Consumer demand decreased in India, Middle East and USA while dramatically growing elsewhere in the world.

Changes in consumer demand have a big impact on the price of the yellow metal given the importance of consumer demand in the overall demand picture for physical gold.

Disclosure: Long physical gold via various instruments.

Gold Fever - still on

2012-02-20T19:30:00.000+02:00

My first blog post was titled "Gold Fever!" (posted on February 12th, 2010). I wanted to go back to that article to look if anything has changed in two years.

The price of gold is now significantly higher than in early 2010. My feeling is that we might have a gold bubble forming, but we have not yet seen the mania phase of the bubble. Two main facts supporting this are:

1) Inflation adjusted gold price in U.S. dollars is far above the levels where it has traded in the last 110 years. However, it needs to be kept in mind that the gold hasn't traded freely during that time period. Gold ownership in USA was illegal between 1933 and 1975. The gold price in U.S. dollars was fixed until 1971. The first bubble in gold was formed during 1971-1980. This followed the liberation of gold and also was a period of high inflation. At the moment, inflation is low.

2) Gold prices have risen for 11 consecutive years and the record high gold price (over $1900) in September 2011 was not that far away from the peak of the previous bubble. The monthly average for January 1980 was $678 ($1919 in 2011 dollars) and all time high was $850 ($2406 in 2011 dollars).

There are many people looking out for exit. This has already led to volatility (wild price changes) and this likely will continue as greed and fear alternate in the minds of the speculators and investors. The last bubble resulted in much faster appreciation (you may call that "the mania phase") and much higher price in real terms than what we saw in September 2011. Therefore, gold still might have long way to go (upwards). How high it goes and whether it bursts in the same way as before remains to be seen.

It all comes down to supply and demand of gold. The demand side looks strong. World Gold Council recently reported that in 2011 investment demand for gold hit record of 1640,7 tons. India, China and Europe were the main drivers of investment demand, which comprises the purchase of gold bars and coins as well as exchanged-traded funds.

Inflation and especially expectations for future inflation will have a big impact on the price of gold in any given currency. For example, purchasing power of the U.S. Dollar has been declining steadily for the last 110 years, except for a few deflationary periods (most notably after 1929).

[You might want to check my old article written for Seeking Alpha titled "Riding the Second Gold Bubble" which review the last 110 years of gold price history as well as supply and demand]

In fall of 2011 we sold part of our gold position. We remain exposed to both the gold itself and to two of the biggest gold miners out there (Newmont Mining and Barrick Gold). Overall, our exposure to gold price continues to be much bigger than what is typically recommended for diversification purposes (2-5%). My investment thesis into gold remains unchanged from what I wrote in my first blog post: "There are many reasons to own gold or any tangible things right now. In my mind, two of the biggest are fear of inflation and fear of another, a far more serious financial meltdown than experienced so far."

Two years ago all eyes were on Greece and they still are. However, now it seems to be much more widely accepted that the problem isn't just Greece or any of the so called "PIIGS" countries. Most of the Western Europe along with USA and Japan has big problems. Huge piles of debt, chronic budget deficits, chronic trade deficits, unemployment and so forth. Politicians go for the we-have-to-grow-our-way-out-of-this -story as they always do. Secretly, they probably hope central bank bails them out because most of the factories have gone East and the prospects of growth are quite limited in the manufacturing sector at least.

Therefore, like so many times in history, countries will resort to money printing in one form or another. Any other way to cover the liabilities and pay back debt is just too painful. I believe this will take place eventually in Europe also. The only reason we have "PIIGS" crisis is that they can't resort to money printing ("quantitative easing" as they call it in U.S.). They no longer have that option after they joined eurozone. They don't have own central bank that can do the trick and Germans don't let them off the hook via European Central Bank (ECB)- for now. Eventually ECB is the only one that can bail out the banks and the countries in Europe.

This is where the yellow metal comes into play. Even though gold is not used broadly as currency right now, it has been used as such in history and may be used once more. It continues to be the ultimate benchmark for currencies. That is why central banks hold it. In the West, central banks have always kept a significant part of their reserves in gold whereas in the East emerging countries have very little gold. Thus, there may be plenty of central bank purchases in the years to come as emerging countries continue to diversify into gold. According to World Gold Council, central banks continued to be net buyers in 2011 (439,7 tons up from 77 tons the year earlier).

The problem with gold is that it does not yield anything. Central banks don't seem to care because it is the ultimate reserve for them. In fact, when interest rates are low, gold is an attractive alternative to traditional bank savings (cash) for anybody. Jeffrey Currie, the head of Goldman Sachs commodity research, reportedly said in Goldman Sachs Global Strategy Conference in London in January 2012: "We will continue to be long on gold until we can see an absolute turn in the rate cycle, which we don't see happening any time soon." [source: Dow Jones Newswires]

The author was long gold and gold mining companies at the time of writing.

Portfolio update

2012-01-17T19:25:00.000+02:00

Our portfolio is allocated currently 91% to stocks and 9% to gold.

Geographical allocation of stock portfolio:

North America 46%
Europe 42%
Emerging Markets 12%

Sector allocation of stock portfolio:

Information Technology 21%
Health Care 19%
Communication Service Providers 15%
Mining & Exploration 13%
Low Emission Power Generation 12%
Oil & Gas 11%
Other 9%

Portfolio performance 2009-2011

2012-01-05T16:32:00.000+02:00

I track the performance of our portfolio against index investing. I have chosen MSCI All country world (ACWI) index as our benchmark index. Our performance during 2009-2011 has been as follows.

Our portfolio is currently defensive (less risky) and less volatile than the ACWI index. Therefore, it has underperformed in bull market and overperformed in bear market. So far (starting from end of 2008) it has produced exactly same results as investment into passive index would have resulted.

My post from a year ago discusses results from years 2009 and 2010. While updating the calculation to include year 2011 I found a couple of errors in the calculation so results for those years are now somewhat different from the previous update.

Our benchmark index 2007-2011 (based on MSCI All Country World Index)

I have not calculated our performance during 2007-2008 because we were off the market. During that time and also before that our benchmark index would have been different because the investment objective was different and risk level was much lower.

About the "benchmark investment"

I have chosen to construct my own imaginary benchmark index fund out of MSCI ACWI index instead of choosing one particular index fund that tracks the index. The main reason for this is that I would never invest all our money in any particular fund. I would rather choose several funds managed by several companies that as a whole would track the index close enough. My estimate for average cost level for the benchmark investment is 0.5% per transaction and 0.5% per year.

The index data itself is available via MSCI Barra web site as excel-file at least at the time of writing this post. I use a version of ACWI index which has large and mid cap companies in it. I use it with the following parameters:
- EUR (as in euros)
- Daily (as in daily quotations of the index)
- “Net” (as in “With Net Dividends” that takes into account taxes that you would have to pay before you can reinvest back into the fund. “Gross” option reinvests dividends wholly.)

The benchmark investment is always fully invested into the passive index. Starting balance was invested at end of 2008 to the index. By dividing the money with the value of the index, you get “shares in index”.

About calculating the yearly returns

The yearly return of the index and the "benchmark investment" will be different due to addition of money into the brokerage accounts during the year. The yearly returns are simply calculated as
[balance at end of year N] - [(balance at end of year N-1) + (additions to brokerage accounts during the year N)] / [(balance at end of year N-1) + (additions to brokerage accounts during the year N)]

Orion & patents

2011-12-03T15:00:00.000+02:00

There was a question to my previous article on Orion regarding patent expirations and why I think those have been already discounted in the price of the stock. The reason why I think patent cliff is already fully discounted is the fact that this is widely followed stock in Finland and probably by major stockholders around the world. Information about impending loss of patent protection has been in news for a long time know - especially regarding their Parkinson's disease drugs. Market has a habit of discounting all known information to stock price. However, I wanted to take a deeper look and here is what I found out mainly by reading what Orion has published.

According to Orion's Q3 2011 presentation, Entacapone molecule patent expires in November 2012 in EU. It expires a year later in USA (October 2013). This is the key patent for Stalevo, Comtess and Comtan, which are the best selling drugs of the company related to Parkinson's disease. Combined sales of these drugs was 252,7 million euros in 2010. All proprietary drugs for humans based on a molecule patented by Orion are listed in the following table. As you can see, there are not many of them:

Proprietary drugs for humans based on molecule originally patented by Orion

Stalevo enjoys data protection in EU until October 2013. Thus, it will probably take until 2014 that there will be generic competition for Stalevo in EU (this was an estimate in Orion's CMD 2010 presentation). Comtan has data protection in Japan until 2015. Stalevo has not been yet launched there.
It is in Stage III in R&D pipeline. When approved, it should get 6 year exclusivity (my own interpretation).

According to Wikipedia test data exclusivity is as follows:

United States: 5 Years for new pharmaceutical chemical entities, 3 years for new indications for pharmaceutical drugs, and 12 years for biologic products.
European Union: 8 Years (+ 2 Years market exclusivity + 1 year for new indication)
Japan: 6 Years
China: The government promised a protection period of 6 years for pharmaceutical drugs, when applying for membership to the World Trade Organization (WTO).

[More about what test data exclusivity means: See http://en.wikipedia.org/wiki/Test_data_exclusivity]

When generic drugs enter the market

Once it is possible for generic drugs to enter the market, they won't eat all of Orions profits overnight. Based on what I found from internet, it seems to be common that generics may take 50% of the market share in 12 months and 80% in 24 months. However, after that the decrease will be slow. The most loyal customers are left. Rather than slashing prices, the company behind the branded drug which has lost protection might actually increase the price of the drug rather than enter into price war with the generic alternatives. Whatever they do they are sure to lose revenue compared to time before the patent expiration.

In case of Orion, it will probably take until 2014 before the effect from losing protection in EU and US for some of its key drugs start to show in results. Meanwhile, a lot can happen. They may launch some new drugs or introduce existing drugs to new markets (like Stalevo for Japan). Also, existing sales of other product segments (>50% of the company) can grow.

Worst case scenario

In the event that they would fail in these actions and top line (net sales) would shrink gradually about 290 million euros by 2020 they could lose 70% of their bottom line unless they would adjust R&D and sales etc. costs. This is very unlikely scenario. Even if they would lose all that sales and get nothing offsetting that they would most certainly adjust their fixed costs (R&D, sales, general costs) to soften the impact on bottom line unless they were sure that investments to R&D and sales would pay off later.

Even in the worst case scenario I would expect them to be able to provide 6,5 euros worth of dividends from the company from years 2011-2020 discounted to this date with 5% rate. All this naturally assumes that they maintain the high payout ratio of over 90% of net result. And even if this worst case would happen you would still have a profitable company although that profits would be smaller and dividend yield not what it is now (compared to current stock price).

Looking at Orion's research areas

In the field of proprietary products, Orion's key compteneces are focused on selected areas of central nervous system disorders and critical care. In recent years, also urology and prostate cancer have become strong areas of expertise. I think these are cleverly chosen areas of expertise. They address mainly aging population. The pharmaceutical industry in general should get lift from this and the fact that the population in developing economies get increasingly wealthy leading to increased standard of living and better access to health care.

R&D pipeline of the company has so far produced 8 proprietary drugs four of which are for humans and four for animals. It has in-licensed patented products such as Enanton, Vantas and Kentera. The easyhaler product line is based on generic active substances. The company does R&D collaboration in cancer research.

The therapy areas of research are:

central nervous system
oncology (cancer)
critical care
inhaled medical products
generics
animal health

R&D pipeline

Stage III (i.e. last clinical phase for marketing authorisation):

Easyhaler combined formulations for asthma and COPD (chronic obstructive pulmonary disease)
Stalevo for Japanese market (Parkinson's disease)

Stage II:

Androgen receptor antagonist for advanced prostate cancer (partner: Endo Pharmaceuticals)
Alpha 2c receptor antagonist for Alzheimer's disease
Alpha 2c receptor antagonist for Raynaud's phenomenon

Stage I:

More effective levodopa product for Parkinson's disease
Dexmedetomidine (non-intravenous) for pain management (partner: Recro Pharma)

Pre-clinical:

Projects for prostate cancer, neuropathic pain, Parkinson's disease and Alzheimer's disease

Clinical phases typically last as follows according to Orion:

Phase III (last stage): More than 3 years
Phase II: 1-3 years
Phase I (first stage): 1 year

Orion

2011-11-26T11:25:00.000+02:00

During the past week I added Orion to our porfolio. It's a Finnish pharmaceuticals and diagnostics company that derives most of its sales from Europe. Orion pays out most of its profits as dividends. From 2011 it is expected to pay dividend which gives approximately 8,5% yield at current stock price (14,27 euros). I continuously screen Finnish companies and currently Orion is top on that list. The reasons for that are:

Good past growth
Good margins
Excellent ROA, ROI and ROE
High dividend yield
Moderate valuation (currently P/E 2011 below 10)

Orion has demonstrated steady growth during last years and had net sales of 849,9 EUR million in 2010. Orions return on equity is excellent. It has been over 30% between 2006 and 2010 reaching 40,7% in 2010 after taxes. Most of company´s net sales comes from two segments

Patent protected "proprietary products" 44%
Specialty products 35%

As with all other companies in the pharmaceuticals sector expiry of patents is topical for Orion too. The most important Parkinson's drug patents and product protections will expire in 2012-2013. These drugs contributed 252,7 EUR million to the top line in 2010. I believe patent expirations are already discounted in the stock price and explain the low valuations.

Updated Analysis on Talvivaara

2011-11-20T22:02:00.001+02:00

Talvivaara Mining Company Plc. (LSE: TALV; Nasdaq OMX Helsinki: TLV1V) has an open-pit Nickel mine in Sotkamo, Finland. The project leverages one of the largest known sulphide nickel resources in Europe. Talvivaara has 1121 million tonnes of mineral resources in ”measured” and ”indicated” categories and additional 429 tonnes in category ”inferred” (no reserves). Mine life is expected to be close to 50 years. Talvivaara uses a process called "bioheapleaching" to extract the metals from ore.

Production at the mine started in October 2008 and production ramp up is still ongoing. The annual production target for 2011 has been cut multiple times and is now iterated to be minimum 16,000 tonnes of Nickel (it was supposed to be 30,000 tonnes). In the Talvivaara capital markets day 2011 (17th of November) the company estimated the 2012 production to be between 25,000 and 30,000 tonnes of Nickel.

At full planned capacity (50,000 tpa of Nickel) the mine will also produce approximately 90,000 tpa of zinc, 15,000 tpa of copper and 1,800 tpa of cobalt. According to Talvivaara CMD 2011 presentation: "All processes and equipment exist for the 50,000t production level, and have been proven to be capable of running at full capacity "

Also uranium can be extracted profitably from the ore as by-product. Talvivaara has already made an agreement with Cameco regarding building a uranium extraction plant and delivering uranium. The current environmental permit is for 30,000 tonne annual capacity and does not cover uranium extraction.

Back in February I published An Analysis of Talvivaara Mining Company which needs to be updated to reflect the recent guidance. Talvivaara is now experiencing serious headwind pushing stock price to all time lows:
• production problems
• environmental problems leading to bad press, investigation by police and public pressure from Minister of Environment (Ville Niinistö – the chairman of the Green party)
• nickel price has been falling significantly since February (from $28000 USD/tonne used in my first analysis to $18000 USD/tonne used in this update)
• overall economic uncertainty

Valuation of Talvivaara Mining Company

For this update I used the following metal prices:
• Nickel $18000 USD / metric tonne
• Copper $7500 USD / metric tonne
• Cobalt $28500 USD / metric tonne
• Zinc EUR 350 / t + USD 268 / t (Nyrstar 1.25Mt streaming agreement)
• Uranium (Yellow Cake) 55 USD/lb (82 EUR/kg)

Treatment charges are estimated as follows:
• Nickel: 3000 USD/t (2012), 2500 USD/t (2013-2014), 2000 USD/t (2015)
• Copper: 25% treatment charge
• Cobalt: 44% treatment charge

EUR/USD = 1,35

Table 1. Value of production (30ktpa Nickel)

*) Streaming contract.

Table 2. Value of production (50ktpa Nickel)

*) Streaming contract.

Table 3. Value of potential uranium production

The following calculation assumes:

• Operational costs for 2012 (and Nickel production level 30ktpa in general): 250 MEUR
• Operational costs for production level 50ktpa of Nickel: 375 MEUR (Assuming basically 90% of OPEX being tied to the level of production)
• Depreciation etc. 2012: 45 MEUR and 50 MEUR from thereof
• Finance costs: 30 MEUR per year
• Corporate tax level 26%
• Talvivaara stock quote in Helsinki 18.11.2011: 2,42 EUR
• Number of Stocks (millions): 250 (2012), 263 (2013-2014), 290 (2015)
• Attributable to owners: 84%
• Uranium extraction begins late 2012 and it takes until end of 2013 to repay Uranium extraction facility construction ”loan” to Cameco.

Table 4. Estimated profit levels and P/E

Talvivaara stock price appears to already discount the 30,000 tpa production level (est. 2013). Uranium extraction, if permitted by authorities, will have significant impact on bottom line (est. 2014). Further upside comes from operating at full capacity of 50,000tpa (est. 2015; if permitted by authorities) and ”operation overlord” (expansion to 100,000tpa production). Talvivaara states that they have also excellent near-mine exploration potential especially between Kolmisoppi and Kuusilampi deposits.

There is nothing Talvivaara can do about Nickel prices. There is, however, a lot it can do about environmental problems and bad press. If not handled properly these might become blocking points for uranium extraction and ramp up to full capacity (not to mention production expansion / mine area expansion).

***

Full disclosure: Long Talvivaara at the time of writing.

***

Notes:

MEUR = million euros

tonne (t) = metric ton = 1000 kilograms

kt = kilotonne = 1000 tonnes

Mt = Megatonne = Million tonnestpa = tonnes per annum

Interesting article about rare earth companies

2011-11-11T22:18:00.000+02:00

Streetwise Reports interviewed recently John Kaiser the editor of Kaiser Research Online about rare earth companies. He singles out several companies that have a chance to be producing towards end of this decade (2016-2017) by stating: “The world does not need dozens and dozens of these deposits, however, which is why I think the race has already pretty much been wrapped up by companies Quest, Rare Element Resources, Tasman Metals and Avalon Rare Metals..”. He talks about companies with heavy rare earths prospects [Please check my earlier post about rare earths on why some rare earth elements are more rare than others].

His estimate is that Tasman’s Norra Karr deposit could take care of Europe’s needs for 50+ years. The problem with Norra Karr is that it “involves a mineral that has never been commercially exploited. So a key milestone is the publication of a preliminary economic assessment based on a bench scale-established metallurgical flow sheet that establishes the recoveries and the associated energy and reagent costs.”

Note that the following companies mentioned in the interview are sponsors of The Critical Metals Report: Commerce Resources, Quest Rare Minerals, Tasman Metals, Rare Element Resources. Note also that John Kaiser stated that he personally and/or his family own shares of the following companies mentioned in this interview: Quest Rare Minerals and Tasman Metals.

The author of this blog also owns shares in Tasman Metals at the time of writing (11/11/11). Please also note that investment into exploration stage companies is highly risky.

Exposure to Emerging Markets via an ETF

2011-11-04T06:05:00.001+02:00

A while ago I decided to start a new position in Vanguard MSCI Emerging Markets ETF (NYSE: VWO). The fund holds 540 equity components mainly from Asia (55%) and Latin America (21%). There are mostly large cap corporations scattered over great many industries. Banks (18%) are the largest sector, which is typical to emerging markets.

Country exposure: China (16%), South Korea (15%), Brazil (14%), Taiwan (11%), India (7%), South Africa (7%), Russia 6%), Mexico (4%) and a whole bunch of countries at 3% or below. The largest holdings are Petroleo Brasileiro (2,11%+1,75%), Samsung (2,78%), and Gazprom (2%) at the time of writing.
In my previous post I discussed direct stock holdings vs. owning an ETF. This particular ETF meets my general conditions for a good ETF:

seems to directly own the stocks as far as I can tell (as opposed to playing with swap-contracts)
low expense ratio (0,22%; source XTF)
average ask/bid ratio of just 0,03% (source: XTF)
XTF ranks the fund in 78th percentile with regards to structural integrity (takes into account many things such as previously mentioned metrics as well as tracking error etc.)

Vanguard is a big player. This one ETF alone has market capitalization of $46,2 billion USD.

ETFs or direct holdings?

2011-10-24T07:12:00.002+03:00

Peter Lynch, the legendary money manager, has called excessive diversification as "diworsification". By this he meant that you should not be afraid of putting a lot of eggs into a single basket. However, unless you happen to devote most of your working time to screen potential investments and looking deep into company files, you are probably not going to have enough confidence to do so. And even if you would, you are probably better off if you diversify (distribute your money over lots of quality companies) anyway. Most money managers don't actually beat their benchmark index.

After reading "Random Walk Down Wall Street" I become believer of investing into index funds. However, after trying it out for a couple of years I noticed some drawbacks in passive-index ETF (exchange traded fund) investing:

Some ETFs do not replicate index by directly owning the stocks. They do this by swap-contracts. So you have got some level of counter-party risk (in case the other bank defaults and can't make good on the contract).
Most ETFs are expensive (net fees and costs 0,5%-1% per year or more)
Most ETFs have very big spreads (difference of buy/sell bid)

This is typically tied to size of fund and daily volume of it.

You have to trust the company running the fund

Even if they claim that the assets are separate, I don't trust any banker 100%.

Taxation of dividends

Atleast in Finland, there is a difference in directly holding stocks and holding an ETF
I get a 30% tax break on dividends from Finland and all countries with whom we have a tax contract. Essentially this means paying capital tax on 70% of received dividends.

Therefore, I mostly invest directly into stocks. Typically I pick big corporations that would anyway be well presented in any passive index. I also diversify over several companies in the same business. Lately, I have noticed that there are several big ETFs (>billion dollars of capital) with very low fees (as in 0,1% or less) and low spreads. Those remove some of my concerns.

Generally I think passive-index unleveraged ETFs are good if you can't diversify otherwise. Also, when investing outside your county and developed markets, it is probably a good idea to use ETFs. However, even with ETFs you need to think about diversification (across multiple funds and money management companies). Don't trust any one money management company too much!

Who pays the bill?

2011-10-16T23:00:00.000+03:00

A group of 97 prominent Europeans published an open letter to eurozone leaders on Wednesday 12th of October 2011. In the letter they called upon the governments of the Eurozone to agree in principle on the need for a legally binding agreement to: “1) establish a common treasury that can raise funds for the Eurozone as a whole and ensure that member-states adhere to fiscal discipline; 2) reinforce common supervision, regulation and deposit insurance within the Eurozone; and 3) develop a strategy that will produce both economic convergence and growth because the debt problem cannot be solved without growth.”

While this proposal could work long term, it will take ages to negotiate and faces opposition in countries like the one I live in (Finland). That’s why they insist that the European Financial Stability Facility (EFSF) and the European Central Bank (ECB) would guarantee and eventually recapitalize the banking system.

Sounds easy – but is not. Otherwise, the crisis would be over by now - right?. It’s still about who pays the bill (accumulated losses). Not all countries behind EFSF and ECB are easily going to guarantee everybody else. A joint recapitalization of the entire European banking system is not too popular in countries (like

Finland

) that do not have banks with big pile of soon-to-be-rotten debt.

George Soros, one of the 97 people behind the open letter to eurozone leaders, published an essay “A routemapthrough the eurozone minefield” the following day. He does not believe banks will be recapitalized by banks themselves or by national governments. Instead Soros believes that the only sensible path is for ECB to solve all problems. He goes actually further than the joint letter and claims that EFSF is actually not even needed short term.

Again: If it would be so easy, why it is not being done?

Continued to tune portfolio risk lower

2011-09-12T21:58:00.000+03:00

The situation in eurozone seems to be slipping from bad to worse. Thus, the risk of recession and even full panic (think Lehman 2008) seems to be greater than ever before during the eurozone debt crisis.

Therefore, I decided to lower my exposure to basic minerals and oil, which I presume would be hit the hardest if another recession/slowdown would begin. I sold shares in Talvivaara and Chevron. I completely eliminated the position in Noble Corporation, which represents exposure to offshore drilling contractors in our portfolio along with Fred Olsen Energy. I decided to leave Fred Olsen Energy and Statoil untouched as both are not too far from the lows of 2009 (in terms of Norwegian Krone). Thus, the downside with these seemed to be much less than with the ones I sold (Nickel price is still very far away from lows of 2009 and both Noble Corp. and Chevron are still riding high).

I really don't like holding cash, but now it seems like a good time to hold some for the time being..

Europe's debt crisis as seen by 9-year old

2011-09-07T22:39:00.006+03:00

Michael Cembalest, the Chief Investment Officer of J.P. Morgan, describes the European debt crisis in a funny but understandable way in the "Eye of the market" letter dated September 6th, 2011.

For the debt crisis in the European Monetary Union as seen by a 9-year old" see page 2 of the letter.

"If today’s diorama analysis borders on the absurd, so does maintaining the fiction that accumulation of massive public and private sector claims in Europe can somehow be engineered away."

10 Most Owned Stocks By 'Super Investors'

2011-09-07T22:22:00.000+03:00

Dataroma.com tracks investment activities of successful value oriented “super investors” such as Warren Buffett, David Einhorn and Bruce Berkowitz. Here I examine the top 10 most owned stocks by the 49 investors tracked by Dataroma. Microsoft (MSFT) is the most owned stock currently (24 out of 49 investors holding it).

Read the full article at Seeking Alpha:
http://seekingalpha.com/article/291897-10-most-owned-stocks-by-super-investors

Bye bye Nokia (for now)

2011-09-02T22:35:00.003+03:00

It's hard to take loss. It's even harder to admit that the reasons why you bought some stock were wrong. Well, after a review of our portfolio and couple of weeks of thinking I decided to let go of Nokia. It's too hard to value right now.

I sincerely hope they will succeed in the chosen path, but I think it is better for me to reallocate our money to some other stocks in our portfolio. I don't like to wait for turnarounds especially when the company is facing incresingly tough competition in mobile phones and loosing market share so fast.

An Analysis Of Supply And Demand For Gold

2011-08-30T20:50:00.000+03:00

Please read my article "An Analysis Of Supply And Demand For Gold" from Seeking Alpha:http://seekingalpha.com/article/290559-an-analysis-of-supply-and-demand-for-gold

UPM

2011-08-17T22:36:00.003+03:00

UPM, a Finnish pulp and paper company, calls itself "The Biofore Company". I'm not particularly keen on pulp and paper industry as such, but UPM is much more than #1 producer of graphic paper in the world and a leading producer of chemical pulp: it has substantial forest land holdings and it is a significant generator of low emission energy.

UPM owns 43.09% of "Pohjolan Voima" (PVO) which in turn owns 58.39% of "Teollisuuden Voima" (TVO). TVO operates two nuclear plants in Olkiluoto, Finland and is building a third reactor there. They have also secured permit to build a fourth one! In addition to this PVO has a portfolio of hydropower and condensing power plants. UPM also directly owns hydropower and combined heat and power plants (CHP). At the end of 2010, UPM controlled 2959 MW of nominal power generation capacity

UPM owns 900,000 hectares of forest in Finland (1 hectare = 2.47 acres), 7,000 hectares in UK and 76,000 hectares in USA. UPM’s eucalyptus plantation company Forestal Oriental, that is an integral part of the Fray Bentos pulp mill in Uruguay, owns 200,000 hectares of eucalyptus plantations.

One interesting future project within UPM is BTL-biodiesel (BTL = biomass-to-liquid). The raw material used in the production of advanced biofuels would mainly consist of energy wood: logging residues, wood chips, stumps and bark. The company is also investigating bioethanol and bio oil. All of UPM’s biofuels will be based on non-food raw materials.

The operating profit/loss of the company will be determined for a long time by pulp and paper segments (FY2010 +577 million euros and -254 million euros respectively). Energy is the stabilizing segment with significant operating profit (FY2010 +234 MEUR) compared to revenues. Other segments and their operating profit/loss in 2010 were Forest and timber (+181 MEUR), Label (+87 MEUR) and plywood (-18 MEUR).

UPM has P/B of 0.6 and P/E 2011 estimate of 8.2 (data from Valuatum). Yeild might be as high as 6%. However, dividends have fluctuated in recent years and the company is cyclical so profits and dividends might swing wildly.

For me the company is a long term value and asset play. With the very uncertain outlook for world economy, the cyclicals are dangerous plays. However, the prices of cyclical Finnish companies were slashed in recent weeks due to broad sell off and foreign investors fleeing periphery markets such as Finland. It was a good time to start to add to a new position close to home.

A European REE Play

2011-08-09T23:32:00.001+03:00

I have been itching for some time to pick up a pure rare earth play and now the ongoing market turmoil has lowered the values of these companies to some extent. Therefore, I decided to put the money I got from selling half of Nautilus Minerals position to a small company called Tasman Metals. It is equally risky play: another lottery ticket if you will.
"Tasman Metals Ltd (TSX.V: TSM; Frankfurt : T61; Pink Sheets : TASXF) is a Canadian mineral exploration and development company focused on Strategic Metals in the European region."

They are pretty one the only ones having a serious prospect in Europe. Currently high tech companies in both Europe and U.S. are getting their REE metals from China. And China is cutting export quotas for REE metals each year. This is why stock prices of pretty much any serious REE play have been skyrocketing for the last year (many raising 500% or more). There might be some serious shortages in the next 5-10 years as it will take a long time to get the mines outside China rolling big time.

Their primary mineral prospect is located in Norra Kärr in Sweden. It contains a large inferred REE Mineral Resource with unique properties. REE content is tilted towards heavy rare earth elements that are more rare than the other rare earths (most mines coming online in the next 5 years will not provide a lot of heavy rare eart metals). It also does not have a lot of radioactive materials. Many potential REE mines do have radioactive materials mixed with REE to the degree that special permits might be required (depending on country).

They are also active in Finland where I live.

Note that Tasman Metals Ltd. is a very high risk investment and like with any investment, you might end up losing a lot of money. The author holds shares of the company (at the time of writing) and is willing to take the risk of potentially losing all of the capital involved. Please read the disclaimer in the rightmost column of the blog.

Tuning portfolio risk lower

2011-07-25T19:16:00.000+03:00

I decided to lower risk a little bit in the portfolio in the face of potential market disruption due to U.S debt ceiling.
Sold half of my BYD position (at loss).
Sold gold (at profit) to keep it inside 10% allocation range.
Sold half of Nautilus Minerals position (at profit).

Out of my all positions these I think BYD and Nautilus are most risky. Gold, on the other hand, is there to keep balance and to speculate. Now it was time to offload it a bit. I believe the gold bubble has still room to grow. So many debt problems and US may keep "printing" dollars ("QE3")..

Earlier this year I have been adding to many positions so before this we were about 0% cash. Now at approx. 5% cash. Planning to wait atleast until early August before putting the cash back to work.

Thoughts on stress tests for European banks

2011-07-16T10:38:00.000+03:00

Eight of the 90 banks failed the stress tests. 16 came close to failing.Not bad?

Well, the main question is that were the tests tough enough. I have an engineering background and I have long worked with mission critical systems (i.e. systems in which a system-wide failure is not an option). The very basic questions with these type of systems are: What happens if X fails? What happens if X and Y fail simultaneously? And so on..

Therefore, a real stress test for European banking system should include atleast a single failure (i.e. default by one eurozone country). An even better test would take into account multiple failures and the resulting financial panic.

The now conducted stress tests simulated what would happen to bank finances during a recession where growth falls more than 4 percentage points below EU forecasts.

That sounds of a bit soft scenario given the number of countries facing serious debt problems. You got the usual suspects from Europe, but also USA with its debt ceiling talks and then there is Japan..

10 Good Reasons to Consider Microsoft for Your Portfolio

2011-07-14T11:13:00.000+03:00

1. Microsoft (NASDAQ: MSFT) is the most widely held stock among the value oriented ’super investors’ tracked by dataroma.com: 24 out of 49 had it in their portfolio last time they disclosed their positions. It was also the most added stock during the first quarter of 2011 among the tracked investors.

2. The market values Microsoft to be worth 224,6 billion USD. This translates to forward P/E of just 9.6 and Price per free cash flow 11.6. For every share worth $26,63, Microsoft has $5.95 of cash. It gives great return on equity at 44.0% and is highly profitable (Profit Margin 31.8%). It is no wonder that value oriented investors are flocking to Microsoft.

3. Microsoft requires little capital investment. In an inflationary environment, it won’t have the problem of replacing assets at much higher prices. On the other hand, as it is low on debt (Debt/Equity 0.22), it won’t suffer from increasing real interest rates in a deflationary environment either.

4. It’s out of favor – even hated by many. Hot stocks in hot industries are carrying a hefty price premium that may vanish. Stocks that are out of favor are more attractive to value investors – especially when the company is making lots of money and has growing product segments to offset declining ones.

The 6 other reasons you can find from my article published exclusively by Seeking Alpha:

http://seekingalpha.com/article/279355-10-good-reasons-to-consider-microsoft-for-your-portfolio

Disclosure: I am long MSFT, NOK.

The future of electric cars is in China

2011-07-05T15:41:00.002+03:00

The economist published recently an article in which it presented an estimate that China would be the biggest electric car market in 2020 with annual sales of 1.9-2.5 million vehicles.

"The Chinese government wants to have 500,000 electric cars, lorries and buses on Chinese roads by 2015 and 5m by 2020. It is providing customers with subsidies worth up to 60,000 yuan ($9,250) and other incentives, too. If it carries on doing so, electric cars and plug-in hybrids could account for 7% of new-car sales in China by 2020, says a forthcoming report by the Boston Consulting Group. That would make China the biggest market for electric vehicles, by volume, in the world."

The article also discusses BYD (HK:1211, Pink Sheets: BYDDF, Frankfurt Xetra: BY6) - the company that claims that their e6 electric car has a range of 300km (186 miles), which is about twice that of Nissan’s Leaf.

"BYD is struggling, however, to get its new e6 electric car to market. It was supposed to go on sale in America last year, but was not ready. It is now being tested by taxi fleets in Shenzhen, where BYD is based."

BYD stock price has been declining for a long time now due to not meeting the high expectations after it became public in September 2008 that Billionaire Warren Buffett's Berkshire Hathaway has bought 10% stake in it through MidAmerican. The stock rallied after the announcement, but has been on the decline now for about two years.

Chart courtesy of StockCharts.com

--
The author was long BYD at the time of writing.

Nautilus Minerals revisited

2011-06-18T22:08:00.002+03:00

Nautilus Minerals is the first company to commercially explore the ocean floor for copper, gold, silver and zinc deposits. It holds tenement licences and exploration applications in various locations in the western Pacific Ocean and is establishing a pipeline of prospects for development.

On July 14, 2010 I published an article about Nautilus Minerals (TSX/AIM: NUS), an exploration stage company. Since then it has become the most accessed article in my blog. I continue to hold a small position in Nautilus Minerals and have been following their progress in Solwara 1 project. I decided to write an update to the article since there has been significant progress in the pioneering project.

Based on information in the company news releases (latest released 14th of June at the time of writing) Solwara 1 project looks to be progressing nicely. However, the project is not yet sanctioned. If that would occur in the first half of 2011, then it is expected that production may commence on site at the Solwara 1 Project in the last quarter 2013.

Joint ventures established for mining and for production support vessel

Picture 2. Ownership of Nautilus Minerals and joint ventures established for Solwara 1 project.

Nautilus Minerals has formed a strategic partnership with German shipping company Harren & Partner. A joint venture (“Vessel JV”) will be formed to own and to operate a production support vessel for Solwara 1. Nautilus Minerals needs to pay 32 million euros for their share in vessel JV. Harren and Petromin will cover the rest. The production support vessel will cost 127 million euros.

The Government of Papua New Guinea has exercised its option for 30% stake in Nautilus Minerals Solwara 1 project (“Mining JV”). The government’s share of the JV will be held in Petromin PNG Holdings Ltd (“Petromin”). A payment between 20 and 25 million U.S dollars (USD) will be made by August 2011 pending an audit. The payment covers development and exploration costs until the date of grant of the mining lease (Jan 2011). From January 2011 onwards, Petromin will contribute funds to the project in proportion to its interest. The Government of Papua New Guinea also took 5% position in the holding company for vessel JV and has made an initial deposit of 1.8 million USD for it.

Mining equipment

The key components of the envisioned seafloor mineral production system are seafloor production tools, riser and lifting system and production support vessel. Seafloor Production Tools and Riser and Lifting System are scheduled for delivery in early 2013 and will be wholly owned by the Mining JV.

Permits for Solwara 1

• Environmental permit was granted already in 2009
• Mining Lease granted on January 2011 for 20 years.

Mineral Resources and Production estimate

43-101 Resource Estimate for Solwara 1 is still 870 kt Indicated (6.8% Cu, 4.8 g/t Au, 23 g/t Ag and 0.4% Zn) and 1300 kt Inferred (7.5% Cu, 7.2 g/t Au, 37 g/t Ag and 0.8% Zn) [1]. Anticipated daily production rate remains at an average of 3710 tonnes (1.3 Mtpa) excluding site initiation and shutdown. This should translate to annual production of 80kt of copper and 150,000 oz of gold. However, at this rate the Solwara 1 deposit won’t last very long (about two years). The beauty in the underwater mining is that the equipment can be easily relocated elsewhere. The company has not stated which deposit would be next in line for mining. The company does have a lot of promising prospects besides Solwara 1 but only Solwara 1 has an officieal 43-101 Resource Estimate at this point. Given the high daily cost for production support vessel and crew contracted for 8 years at $80.000/day, they need to have more deposits to leverage after Solwara 1 is exhausted.

Cost estimates

Total capital cost for Solwara 1 project excluding capital costs of the vessel JV (production support vessel) is now estimated to be 407 million USD according to recent information from the company. The earlier estimate [1] was 383 million USD including 17.5% contingency as well as ore transport barges. Due to changes in ownership, Nautilus Minerals is no longer the only one providing capital to Solwara 1 project.

Nautilus has decided to charter rather than purchase the barges. This increases operating costs. I calculated that operating cost per tonne would increased by 11.2% [the company has not stated this directly!]. Previous info was 70 USD per tonne (including 10% contingency) so my own estimate based on information available is now 78 USD per tonne.

Financial status

At the end of Q1 2011 the company had 139 million USD in cash and cash equivalents. The company stated that this would be sufficient for the next 12 months. On May 24, 2011 Nautilus Minerals Launches Marketed Public Offering to gather about C$150 million, but later (June 10) withdrew the proposed capital raising claiming “weak financial market conditions”.

Given that the company needs to invest still roughly 300 million USD before Solwara 1 is up and running, they will need more cash from somewhere. Looking at the cash balance and expected money inflow and outflow, my guestimate is that they need 210 million USD at minimum by end of 2013. They have committed to certain amount of exploration, they are spending approximately 12 million a year for G&A and so on. These expenses they need to cover on top of any Solwara 1 capital expenses.

At June 14th Nautilus Minerals reported to have 155,6 million common shares and 9,3 million options outstanding (average exercise price for the options being C$2.67). If they would issue shares (let’s say at around C$2.4 a share) to cover the over $200 million gap in financing they need to issue around 90 million shares more. That’s a lot. Whether they will get the money by issuing more shares or lend it, there will be more people and organisations tapping into the future profits.

Economics of Solwara 1

My assumptions:

• Out of estimated indicated mineral deposits 90% are there and can be extracted

• Out of estimated inferred mineral deposits 60% are there and can be extracted

• Yield recovery (from extracted ore taking into assumption supposedly all costs from royalties to PNG, processing, smelting and so on) as stated in the feasibility study [1]: 70% for copper, 59% for gold, 57% for silver and assuming 60% for zinc (no info found).

• Metals prices: Cu $9000/t, Au $1500/oz, Ag $35/oz, Zn $2200/t

• Metals sold at above prices

Using the above assumptions the indicated resources could be valued at 458 million USD and inferred resources at 555 million USD. Thus the total revenue for the project could be 1013 million USD. I say “could” because it is quite unlikely that all the assumptions will hold. For example, the company could enter into a streaming agreement in which they will get a specific sum of money upfront in the exchange of specific metal they will extract. Typically the money that can be got upfront is only a small fraction of what is calculated above. Companies that need capital in order to ramp up operations enter this type of agreements quite often.

Whatever the revenue from Solwara 1 will be, it looks like the most valuable asset there is copper (69% of calculated project value). Gold comes second with 26% of calculated project value. The rest (5%) is then divided between Silver and Zinc.

Given my estimate of 78 USD per tonne for operational costs and 2170 kt (thousand metric tonnes) of ore to extract, they will spend 169 million USD extracting the ore. That leaves 844 million USD for operational profit from Solwara 1. 70% of this, 591 million USD would go to Nautilus. Given all the operational costs and capital costs, it seems quite unlikely that shareholders will see any profit from Solwara 1 (in form of dividends). However, Solwara 1 is a stepping stone into a whole new industry.

If Nautilus Minerals is successful in Solwara 1, there should be plenty of money to be made in the areas the company has claimed. Nautilus Minerals has grants or applications in place for tenements covering approximately 600,000 km2 of prospective territory. The more projects they have after Solwara 1 the more profitable they will be (Solwara 1 pretty much covers all the needed investments for production system). If they fail with Solwara 1 for one reason or another, all bets are off. Being a shareholder, I naturally believe that they have a decent chance of pulling it off.

Note that Nautilus Minerals is a very high risk investment and like with any investment, you might end up losing a lot of money. The author holds shares of Nautilus Minerals (at the time of writing) and is willing to take the risk of potentially losing all of the capital involved. Please read the disclaimer in the rightmost column of the blog.

Source material:

• Company news releases for 2011
• [1] Offshore Production System Definition and Cost Study

Gold as collateral

2011-05-28T20:28:00.001+03:00

Last week one news article in particular caught my eye. Francesca Freeman of Dow Jones Newswires reported that European parliamentary committee approved a proposal to allow clearing houses to accept gold as collateral:

“The European Parliaments Committee on Economic and Monetary Affairs Tuesday agreed unanimously to allow clearing houses to accept gold. The proposal, under the European Market Infrastructure Regulation, will be passed to the European Parliament and the Council of the European Union for another round of voting in July.”

Same type of announcements (but with less significance):

“In October 2009, CME Group Inc. said it would allow physical gold to be used as collateral for margin requirements, a move that was followed by rival IntercontinentalExchange Inc. in late 2010.”
“In February this year, JP Morgan Chase & Co. announced its decision to accept physical gold as collateral in some financial transactions.”

Also consider this:

“At the same time, many traditional collateral assets, such as European government bonds, have continued to see a deterioration in credit quality as a result of the sovereign-debt crisis.”

Oh, Really? ;-)

For thousands of years, gold has played an important part in monetary systems of the world. Most central banks still have it in their vaults despite the fact that no modern currency is officially transferable to gold with a fixed exchange rate. It used to be so. I’m not expecting that world is going back to gold standard any time soon. However, the importance of gold is clearly rising.

Book Review: Endgame

2011-05-24T22:31:00.001+03:00

I finally finished a book published earlier this year titled "Endgame – The End Of The Debt Supercycle And How It Changes Everything" by John Mauldin and Jonathan Tepper.

The first half of the book deals with basics of economics and looks at recent research about sovereign debt problems. Besides some economics 101 they explain the concepts of the debt supercycle, deflation, inflation and hyperinflation. In the second half the authors look at various countries and their specific problems: The United States, The European Periphery ("PIIGS"), Eastern Europe, Japan ("the bug in search of a windshield"), The United Kingdom and Australia.

The authors argue that we are in a balance sheet recession which is the end of the 60-year long debt supercycle. They write: "The recovery time in much of the developed world is going to be measured not in months but in years, perhaps decades for some. It will be a much more volatile economy with more frequent recessions. For some countries, this will be very deflationary; for others, not so much. And for some, the risk of high inflation is very real.”

The full review is available only via Seeking Alpha:
http://seekingalpha.com/article/271521-book-review-endgame-the-end-of-the-debt-supercycle-and-how-it-changes-everything

Our portfolio grows with Statoil

2011-05-13T21:12:00.000+03:00

I decided to add Statoil (OSE: STL, NYSE: STO) to our portfolio after following some time the overall decline in the oil-related stocks. A while back I wrote an article about Statoil to Seeking Alpha and the conclusion was that I wasn’t overly excited about the stock, but thought that it is certainly worth to consider Statoil as an oil & gas play.

Chart courtesy of StockCharts.com.

The reason why I finally decided to add Statoil was simply that it was time to grow the portfolio with an additional company from oil and gas sector to complement Chevron (producer), Noble Corporation (drilling rig provider) and Fred Olsen Energy (drilling rig provider). I don’t expect that one can really find bargains in companies of this size. They are all equally fairly priced in the market. It would seem rather stupid to assume anything else. Even more stupid would be to expect that I would be the one spotting a true bargain. Therefore, the main drivers behind the decision were the fact that the company was high in my short list for this sector and the fact Statoil is a Norwegian company. Not quite local (i.e. Finnish), but close.

Statoil is already taxed quite heavily. Therefore, I do not believe that the tax burden will grow from the current level unlike what can happen to companies elsewhere in the world. Given that the state of Norway has majority of the shares it is unlikely that resources would be nationalized. They pretty much already are (given the combination of government ownership and taxation). Despite of this the company offers dividend yield which is among the best in the industry as well as healthy net income. Also, given that most of the production happens near Norway Statoil seems like a very safe play in this sector.

The company is much smaller than Exxon and other giants in terms of market cap and revenue. Therefore, it is easier to get a meaningful growth rate. The gross margin of the company is among the best in the whole industry so the company can afford to invest. They have technical skills to operate in tough environments and have experience in exploiting ever harder-to-find and harder-to-drill pockets of oil and gas. They are also tapping into unconventional oil deposits (tar sands) in Canada as well as shale gas in USA.

As always, I started with as small position as it is meaningful to have given the size of the overall portfolio and the transaction costs related to buying stocks. As I don’t believe in timing the market, I continue to add to existing positions regularly and especially if there is a good buying opportunity (and if I happen to have cash available at the time ;-).

Rocking The EU-boat

2011-05-04T23:00:00.000+03:00

The faith of Portugal-bailout by EU is now in the hands of these three Finnish political figures. One of them OKs the rescue package, one of them said NO to all kinds of bailouts (for any country) and one of them isn't quite sure.

Here they are from right to left in terms of political views:

Jyrki Katainen

Jyrki Tapani Katainen (born October 14, 1971) is chairman of the Finnish National Coalition Party (Kokoomus) and the Finance and Deputy Prime Minister of Finland. He wants to bail out Portugal and has been the Finance Minister in charge of previous EU-bailouts. He doesn't like it, but he says that it is the lesser of two evils (the other being another EU/World-wide financial panic).

source: Wikipedia

Timo Soini

Timo Juhani Soini (born May 30, 1962) is a Finnish politician, and co-founder and current leader of the True Finns party. The party combines left-wing economic policies with strongly conservative social values. They are basically against EU and not surprisingly against any EU-level bailouts. Just a few months ago, the party was a rather small player, but is now third biggest party and very close to #1 (Finnish National Coalition Party) and #2 (Social Democratic Party). It will be extremely hard to not to let these guys to next cabinet.

source: Wikipedia.

Jutta Urpilainen

Jutta Pauliina Urpilainen (born 4 August 1975 in Lapua) is the Chairman of the Social Democratic Party of Finland (SDP). She is the joker in the deck. It is basically up to Social Democratic Party whether the EU-bailouts get a green light from Finnish parliament. So far SDP have demanded that investors of Portugal and other EU-countries in trouble will be made partly accoutable. However, it seems that there is no way to re-negotiate the already negotiated EU-bailout packages. Therefore, it remains to be seen what SDP and Urpilainen does.

source: Wikipedia

Jyrki Katainen have been forced to invent an ad-hoc process to get the Portugal bailout approved. The ex-Prime Minister Mari Kiviniemi has said that they won't advance the matter and she will not present anything to Finnish parliament regarding bailouts. Her party lost big time in the election - a lot of their seats in parliament went to True Finns. The position taken by Kiviniemi and Soini puts Jyrki in a tough spot. The solution that he came up is to try to get approval from each party separately. Without the support of Jutta and SDP it looks like he will not get majority behing the package.

What happens if Finland does not support the bailout is unknown.

The Helsingin Sanomat newspaper listed today some pros and cons if Finland rocks the EU-boat big time. The pros include:

People living in EU and Portugal in particular will remember that Finland is part of EU.
Finnish citizens have been wining for a long time that why Finland needs to always be the model member of EU. Not anymore.
EU gets slap in the wrist and reminder that the national parliaments still have a lot of power.

OK. Maybe so, but the list of cons is a long one and at the extreme end of it looms another financial panic. The cost of yet another panic would by likely be much larger than any foreseeable cost of bailouts.

By 13th of May we will know.

I am glad I have put together a fairly defensive portfolio. At the moment I am also letting cash to pile up.

Statoil: The Goose That Lays the Golden Eggs for Norway

2011-04-15T21:39:00.000+03:00

Full article at Seeking Alpha: http://bit.ly/h58wfp

Statoil (OSE: STL, NYSE:STO) is an international energy company primarily focused on upstream oil and gas operations. The company is headquartered in Norway and employs over 30,000 people worldwide in 42 countries. The Norwegian state is the largest shareholder in Statoil, with a direct ownership interest of 67%.

Statoil has 40 producing oil and gas fields and is one of the world's largest net sellers of crude oil. It is also the second-largest exporter of gas to Europe. Approximately 80% of oil and gas production of the company comes from Norway. The rest of the operations are scattered throughout the rest of the world.

Strategically, Statoil is positioned as a technology-driven upstream energy company. Currently some 80% of oil and gas production of the company comes from Norway, but in the long run this is likely to change. While the production outlook remains stable towards 2020 in Norway, according to Statoil, it's looking for growth elsewhere in the world.

The Norwegian state benefits immensely from Statoil. It is the largest shareholder in Statoil and also imposes high taxes on the profits (above 70%). Therefore, Statoil is the goose that lays the golden eggs for the state of Norway. Looking at the key figures and the peer review, Statoil is a good choice also for an individual investor. It offers an excellent alternative to US- and UK-based oil giants in a stable region.
I have no position in Statoil.

How High Can Gold Go?

2011-04-01T10:28:00.000+03:00

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? I wanted to look further than the customary 10 year charts available. In my previous article about gold, I took a look at 110 years of gold price history. In this article I examine gold price history from 1971 until today in various currencies:

• US Dollar
• Australian Dollar
• Canadian Dollar
• Euro
• UK Pound
• Yen
• Indian Rupees
• South African Rand

The article has been exclusively published via Seeking Alpha so you need to read it from there:
http://seekingalpha.com/article/261185-how-high-can-gold-go

The Intelligent Investor (part I)

2011-03-24T13:27:00.000+02:00

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.

10 Most Owned Technology Stocks Among 'Super Investors'

2011-03-14T21:54:00.000+02:00

Dataroma.com 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.

Riding The Second Gold Bubble

2011-03-08T18:12:00.000+02:00

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.

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

2011-03-05T23:59:00.000+02:00

“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:
http://seekingalpha.com/article/256575-book-review-fooling-some-of-the-people-all-of-the-time-a-long-short-and-now-complete-story

Buffett's 2010 letter

2011-03-01T21:04:00.000+02:00

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.

Impressive.

An Analysis of Talvivaara Mining Company

2011-02-27T10:59:00.035+02:00

Executive summary

Talvivaara Mining Company Plc. (LSE: TALV; Nasdaq OMX Helsinki: TLV) has an open-pit Nickel mine in Sotkamo, Finland. The project leverages one of the largest known sulphide nickel resources in Europe. Production at the mine started in October 2008 and production ramp up is still ongoing. The planned annual nickel production is 50,000 tonnes. As by-products the mine will also produce approximately 90,000 tpa of zinc, 15,000 tpa of copper and 1,800 tpa of cobalt. Also uranium can be extracted profitably from the ore if Finnish state gives OK for this. Talvivaara uses a process called "bioheapleaching" to extract the metals from ore.

Talvivaara has 1121 million tonnes of mineral resources in ”measured” and ”indicated” categories and additional 429 tonnes in category ”inferred” (no reserves). Mine life is expected to be close to 50 years. This analysis concludes that Talvivaara, once in full production, should have revenues at close to 1,2 billion euros (at current metal prices). Possible uranium extraction, end of Zinc streaming agreement and near mine exploration will be increasing the revenues and the result in the long term.

Given the current stock price of 6,6 euros (Helsinki stock exchange), to me it seems that market values Talvivaara at P/E 9,5-11,8 against intermediate 30ktpa Nickel production (target 2011, but there are concerns to that end). However, given full capacity of 50ktpa Talvivaara is undervalued at current metal prices at P/E below 4.

I personally like Talvivaara because it is a local (Finnish) project, has long expected mine life and to me looks like attractively valued when taken into account the full production targets.

Introduction

Talvivaara Mining Company Plc. (LSE: TALV; Nasdaq OMX Helsinki: TLV) has an open-pit Nickel mine in Sotkamo, Finland. The Talvivaara polymetallic deposits, Kuusilampi and Kolmisoppi, comprise one of the largest known sulphide nickel resources in Europe.

Production at the mine started in October 2008 and production ramp up is still ongoing. The target for year 2011 is to produce 30,000-35,000 tonnes of nickel. However, since they could not sustain 30,000 tpa production rate in 2010 than only for a while, the target seems to be tough to say the least.

The planned annual nickel production of 50,000 tonnes is anticipated to be reached in 2012, but let’s see first what happens in 2011. At any rate, I will be analysing the company with the full production rates in mind. It may happen 2012 or then get delayed. To me it does not matter as it does not fundamentally change the outcome of the analysis.

Picture 1. A Chunk of Nickel. Source: Wikimedia Commons.

As by-products the mine will also produce (at full production) approximately 90,000 tpa of zinc, 15,000 tpa of copper and 1,800 tpa of cobalt. Also uranium can be extracted profitably from the ore if Finnish state gives OK for this. Talvivaara use a process called "bioheapleaching" to extract the metals from ore.

Talvivaara has launched ”Operation Overlord” to study and implement expansion beyond 50,000 tpa Nickel production. Scoping study is scheduled for 2011 and production ramp up target is 2015. Talvivaara states that they have also excellent near-mine exploration potential especially between Kolmisoppi and Kuusilampi deposits.

Mineral Resources

Talvivaara has 1121 million tonnes of mineral resources in ”measured” and ”indicated” categories and additional 429 tonnes in category ”inferred”. Resources in the lowest category (”inferred”) have more uncertainities regarding tonnage and grade compared to highest category (”measured”).

Table 1. Mineral Resources.

Talvivaara does not have Mineral reserves (either ”proven” or ”probable”) yet. The reason for this is unknown to me, but according to the Australasian Code for Mineral Resources and Ore Reserves or ”JORC code” that Talvivaara have used as basis of its resource statement it requires not only geological facts, but also ”Consideration of mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors” to upgrade ”measured” resources to ”proven” and ”indicated” resources to ”probable”.

Picture 2. The relationship between mineral resources and Ore Reserves as described in the JORC code (2004 Edition).

Chris Morrissey, a former chief geologist of the Rio Tinto Group, explains the ins and outs of resource/reserve statements in the arcticle titled ”In the opinion of a Competent Person” published Rio Tinto Review magazine, issue 80: ”With some deposits there is so much natural variability, for instance in grade and shape, that the high levels of confidence needed for proved reserves are impossible to achieve. Nuggety gold veins are an example of that, as are diamond deposits in which much of the value comes from stones of exceptional size and quality which are so rare that no amount of sampling can safely indicate how often they will be mined."

"Reserves are the highest form of mineral asset a mining company can have. They are not as good as money in the bank, but they can be given a monetary value in the company’s balance sheet. They are normally replenished from resources attributed to the same operation, by building up positive information on the largely non geological matters listed. Technical and economic matters are only part of it; reputational considerations are very important too, as well as questions of title and ownership. It is a two way street, meaning that reserves can be “demoted” if crucial information proves faulty or turns negative.”

Calculating from the resource statement one can get the amount of each metal Talvivaara assumes to be in the ground. The calculation assumes 100% accuracy in the statements 100% recovery of each metal.

Table 2. Amounts of metals in the ground.

I have seen statements of mine life varying from 46 years to 60 years. If calculating from the above table, one gets 52 years and 69 years for mine life assuming 100% accuracy/100% recovery for M+I and total resources respectively. Clearly, Talvivaara does not assume 100% recovery so their statements regarding mine life are less than the ”ideal” calculation suggests. In any case, 50 years or so is eternity in the modern investment world.

Metal Prices

In my analysis, I use the following metal prices (USD / metric tonne):

Metal: 5 Year Lows: Current Price level

Nickel $10000 $28000

Copper $3000 $9750

Cobalt $30000 $42000

”Base case” will later indicate ”Average of Current price and 5 year lows” for these metals.

EUR/USD = 1,35

Zinc* $472.5/t

Uranium (Yellow Cake) 50 USD/lb (82 EUR/kg)

*) The Zinc price reflects the 1.25 Mt streaming agreement that will be in place for the next 14-17 years depending on production ramp up (i.e. when 90 ktpa capacity is reached). According to the agreement there will be 350 EUR/t fee and 335 million USD pre-payment against the first 1.25 million tonnes of Zinc from Talvivaara.

Below you can see 5 year price level in the London Metal Exchange for each metal courtecy of metalprices.com.

LME Nickel Prices 5 Years

LME Zinc Prices 5 Years

LME Copper Prices 5 Years

LME Cobalt Prices 5 Years

Value of Talvivaara production

Assumptions: Copper 75% net smelter return. Cobalt 59% net smelter return.

Production level 30 ktpa Nickel (2011)

Table 3. Value of production (30ktpa Nickel)

*) Streaming contract.

Production level 50 ktpa Nickel (2012)

Table 4. Value of production (50ktpa Nickel)

*) Streaming contract.

Potential additional profit

Uranium

Table 4. Value of potential uranium production

Zinc

Table 5. Additional profit from Zinc production once the streaming contract ends.

Valuation of Talvivaara Mining Company

The following calculation assumes:

Operational costs 2011: 245 MEUR, 2012: 270 MEUR
Depreciation etc. 2011: 60 MEUR, 2012: 64 MEUR
Capital expences 2011: 80 MEUR, 2012: 30 MEUR
Finance costs: 30 MEUR/a
Corporate tax level 26%
Talvivaara stock quote in Helsinki 25.2.2011: 6,6 EUR
Stocks (fully diluted): 263,669,291
Attributable to owners: uses same ratio as used in 2010 annual P&L calculation

Table 7. Estimated profit level for 30ktpa (2011) and full capacity (2012).

Talvivaara stock appears to be cheap if compared to what it is capable of producing at full capacity at current price levels of Nickel and other metals. On the other hand, it does not appear to be that cheap compared to 2011 production target given that it may be hard for Talvivaara to reach the announced 30-35 ktpa capacity this year. If it does achieve this and it seems that 50 ktpa production target is feasible and probable, then the stock is likely to soar as P/E 2012 under 4 is very low indeed. Even in the case of lower metal prices (assuming ”base case”) the P/E is below 7.

Another way to value Talvivaara is to look at statements it is has made regarding net cash cost of Nickel. Talvivaara states that they expect net cash cost of Nickel to be 2.3 EUR/lb in 2011 and 1.6 EUR/lb in 2012. ”Net cash cost” means in this case ”net of by-product credits”. That is, all other metals are sold to lower the production cost of Nickel. Using these the Net cash cost of production for 2011 is 152 MEUR (30ktpa) and 176 MEUR (50ktpa) for 2012.

Table 8. Estimated profit level for 30ktpa (2011) and full capacity (2012-2013).

In the long term the following factors drive revenue and the result upwards:

Increase inmetal prices (speculative)
Possible increase of production capacity beyond 50ktpa (Operation Overlord)
Zinc production valued at market price (takes 14-17 years)
Increase of mineral resources via near mine exploration
As emerging major player in Finnish mining scene, Talvivaara is well positioned to aquire projects from junior mining companies.

I personally like Talvivaara because it is a local (Finnish) project, has long expected mine life and to me looks like attractively valued when taken into account the full production targets.

Full disclosure: Long Talvivaara at the time of writing.

***

Source material used in the analysis:

Notes:

JORC refers to ”The Joint Ore Reserves Committee of The Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and Minerals Council of Australia”.

Tonne = metric ton = 1000 kilograms
kt = kilotonne = 1000 tonnes
Mt = Megatonne = Million tonnes
tpa = Tonnes per annual

ktpa = 1000 Tonnes per annual

Added to BYD position

2011-02-26T16:15:00.001+02:00

BYD (HK:1211, Pink Sheets: BYDDF, Frankfurt Xetra: BY6) have lost over 30% since I took a position in it.

Chart courtesy of StockCharts.com.

It appears that BYD did not meet their sales targets for 2010 are are slashing prices. Thus, the downward movement. Also, money seems to be moving away from emerging markets and specifically from China (as illustrated by iShares FTSE China 25 Index Fund (NYSE: FXI):

Chart courtesy of StockCharts.com.

Since I don't see any reason to exit this long term position and given that I already suffered the loss, I decided to buy some more of it. I was anyway going to add to this position at some point of time and now seemed to be a good point to do it.

Bought shares of Talvivaara Mining Company

2011-02-24T16:38:00.001+02:00

This week I added a new stock to our portfolio: Talvivaara Mining Company. Talvivaara is listed in Helsinki and London stock exchanges. I had to let go of some of my gold for this, but I think this mine has far more potential / inflation protection than gold in itself.

Some facts (source: Talvivaara web site):

Talvivaara Mining Company Plc. has an open-pit Nickel mine in Sotkamo, Finland.
Production at the mine started in October 2008.
Production ramp up is still ongoing.
The planned annual nickel production of 50,000 tonnes is anticipated to be reached in 2012 (intermediate target: 30,000 tpa 2011).
As by-products the mine will also produce aprox. 90,000 tpa of zinc, aprox.15,000 tpa of copper and c.1,800 tpa of cobalt.
Also uranium can be extracted profitably from the ore if Finnish state gives OK for this
The Talvivaara polymetallic deposits, Kuusilampi and Kolmisoppi, comprise one of the largest known sulphide nickel resources in Europe with 1121 million tonnes of ore in measured and indicated categories, sufficient to support an anticipated production for at 46 years.
Talvivaara use a process called "bioheapleaching" to extract the metals from ore.
Excellent near-mine exploration potential

I am working on an analysis of Talvivaara which I plan to publish later on.

Gold or Gold Miners?

2011-02-18T23:43:00.000+02:00

I am bullish on gold and view it as a perfect portfolio hedge against all ills ranging from inflation to yet another financial panic. I also have shares of gold miners in my portfolio because they should appreciate even faster than gold itself. Profits of gold miners that do not hedge their output tend to swing much more than the price of gold because their expenses do not have relation to gold price but their profits do. If you are not bullish on gold or you are sensitive to large swings in share price you should not own shares of gold miners.

Example: Let's assume a hypothetical gold miner "A" can extract gold from ground with average "cash cost" of $700 per troy ounce of gold. In addition, let's assume that all other costs related to the ongoing mining operations (depreciation of assets, etc.) are $200/oz. With an average gold selling price of $1300/oz the company makes pre-tax profit of $400 per ounce. If the price of gold changes 10% in this hypothetical case (i.e. $130, up to $1430 or down to $1170) the profit changes 33% (i.e. $400 plus/minus $130).

..The rest of the article can be read only from Seeking Alpha:
http://seekingalpha.com/article/253292-gold-or-gold-miners

Portfolio Allocation Status

2011-02-13T14:09:00.002+02:00

I have now 21 companies in our portfolio. The distribution of funds is as follows:

Sector: Portion of funds: (Target)

Cash 2.5 % (0%)
Gold 13.1 % (10%)
Green Energy Technology & Generation 15.8 % (15%)
Health Care 15.7 % (15%)
Information Technology 10.8 % (15%)
Mining & Exploration 11.5 % (15%)
Oil & Gas Production 12.8 % (15%)
Telecommunications 17.7 % (15%)

Chinese companies China Mobile and BYD have been going down since the purchases. Also Cisco is down 10%. Despite of this, I continue to believe in these companies. In general, I am waiting for the dividends to roll in.

First Year of Blogging

2011-02-12T19:18:00.004+02:00

Exactly one year ago I published my first article titled "Gold Fever!" in this blog. It took me a while to decide whether I use english or finnish, but I selected english because I believed that what I say interests probably more outside Finland than inside. Looking back using Google Analytics as tool - I was right. So far there has been 5,867 page views from 2,881 unique visitors from 95 countries. Thanks for interest! This is certainly much more than I ever expected to have after first year!!

Top 5 traffic sources (countries)

1. Finland
2. United States
3. Canada
4. United Kingdom
5. Australia

Top 5 traffic sources (sites/referral)
1. Direct
2. Google
3. AP Areena / Arvopaperi.fi
4. Seeking Alpha
5. My finnish blog

Top 10 articles (pageviews)

1. Nautilus Minerals
2. Fred Olsen Energy
3. An Indepth Look on Sanofi-Aventis*
4. The Myth Of Moore's Law
5. Soros and Gold
6. Is Western Digital a Bargain*
7. The End of The Golden Age*
8. Financial Crisis 2.0
9. Critical Materials for Clean Energy Technology
10. BYD - Build Your Dreams*

The articles marked with asterix (*) have been also published as articles in Seeking Alpha. Seeking Alpha focuses on U.S. stock market so the qualifying articles have to touch subjects that interests their readers. I typically submit such articles atleast to my "instablog" at Seeking Alpha.

The pageviews for my articles at Seeking Alpha have ranged from 3,640 to 54,389 per article (typically some thousands rather than >10,000). Encouraging numbers - so I will keep on writing.

Nokia and Microsoft

2011-02-11T23:37:00.001+02:00

I added both to our portfolio. I have been Nokia holder many times during last 15 years and have considered lately to buy in again. Well, today came the perfect opportuníty. I am glad I didn't buy before the big announcement, because now I got them below 7 euros. And that I consider to be some seriously cheap Nokia stock. For one thing, I do not think market really values Nokia Siemens Networks (a joint 50/50 venture owned by Siemens and Nokia) and Navteq at all. Not that they contribute much to the overall result. Nevertheless, as separate companies each would be worth billions. Therefore, I believe there exists a healthy margin of safety in the current valuation of Nokia (forward P/E 11.96, P/FCF 11.77, P/B 2.08). In addition, the dividend yield is now in the range of 5%.

Microsoft, on the other hand, stands to gain handsomely from the Nokia's announcement to focus on Windows Mobile. Markets obviously don't think so as Microsoft was trading downwards both today and yesterday when Nokia-Microsoft deal was already looking quite obvious given all news, leaks and speculation on the subject.

Microsoft, like I have written before, is one of those companies that have moat. Economic moat is a competitive advantage that is difficult to copy or emulate and which provides a significant barrier to competition from other firms. Warren Buffett has often referred to an economic moat as being similar to a fortress or a medieval castle that one can not penetrate. Microsoft is as close to monopoly (in PC/laptop operating system market) as a company can get.

Like Nokia, Microsoft is also attractively valued. Forward P/E 10, P/FCF 12.55 and P/B 4.77. Microsoft dividend is 2.3%. Both Nokia and Microsoft have a big pile of CASH making the valuations even more attractive.

Source for all stock data / valuations: Finwiz.com.

Critical Materials For Clean Energy Economy

2011-02-03T21:41:00.002+02:00

Rare Earth Elements

Rare earth elements have geochemical properties that make them typically dispersed and not often found in concentrated and economically exploitable forms [Wikipedia]. These metals are used in many hi-tech devices. In particular, rare earth elements are used in clean energy applications such as wind turbines, electric vehicles, photovoltaic cells and energy-efficient fluorescent lighting. Clean energy technologies currently constitute only about 20 percent of global consumption of critical materials. However, their share of total consumption is expected to grow as the use of these clean energy technologies is expected to grow rapidly.

Source: Critical Materials Strategy, U.S DOE, 2010.

Export restrictions placed by China for rare earth metals have raised conserns of supply disruptions. However, the Critical Materials Strategy published by U.S Department of Energy in December 2010 points out that only a handful of rare earth elements are actually at risk of supply disruptions in medium term (5-15 years).

Table 1. Critical materials for clean energy technologies (Data source: Critical Materials Strategy published by U.S Department of Energy in December 2010)

The table 1 summarizes the key data in the DOE report in my opinion. The materials that are either listed as critical (red) or near critical (yellow) are bolded. The ”criticality”-factor in the table is a sum of “supply risk” (1 = low; 4 = high) and “importance to clean energy” (1 = low; 4 = high) as determined by DOE in their report (see pictures below from the report for reference). Higher number indicates higher risks.

Short term Criticality Matric. Source: Critical Materials Strategy, U.S DOE, 2010.

Medium term Criticality Matric. Source: Critical Materials Strategy, U.S DOE, 2010.

If you want to know more about these critical materials I suggest that you check this rare earth primer, this excellent article about lithium and information about the periodic table.

Only five metals continue to be critical in terms of supply risk in medium term (5-15 years).

• Dysprosium (Heavy REE) is used in permanent magnets for wind turbines and vehicles with electric drive trains.

• Neodymium (Light REE) is used in batteries for vehicles with electric drive trains and in permanent magnets for wind turbines and vehicles with electric drive trains.

• Terbium (Heavy REE), Yttrium (Heavy REE) and Europium (Medium REE) are used in fluorescent lighting phosphors.

Most rare earth mines in operation provide lots of Lanthanum and Cerium as will do those mines that are the most likely to come online in the next 5 years. Therefore, Lanthanum and Cerium supply situation looks rather good compared to many other strategic materials.

Table 2. Projects that have possibility to come online in the next 5 years (Data source: Critical Materials Strategy published by U.S Department of Energy in December 2010)

The most attractive rare earth elements are naturally the ones with the highest risk of supply disruptions in medium term (5-15 years): Neodymium, Europium, Terbium, Dysprosium and Yttrium. These metals are highlighted as red in the table above. In terms of critical REO content out of total REO, the projects can be ranked as follows:

1. Alkane Resources: Dubbo Zirconia project (32,3%)

2. Avalon Rare Metals (AVARF.PK): Nechalacho project (29%)

3. Great Western Minerals (GWMGF.PK): Hoidas Lake project (24,3%)

4. Arafura Resources (ARAFF.PK): Nolans Bore project (22,3%)

5. Lynas Corporation (LYSCF.PK): Mount Weld project (15,7%)

6. Molycorp (MCP): Mountain Pass project (12,2%)

7. Vinacomin/Sojitz/Toyota-Tsusho: Dong Pao project (10,7%)

I happened to notice that Lynas Corporation has reported a bit different distribution of REO materials in their investor presentation from March 2010. Based on that report, the percentage of critical REO out of total REO is 19,1%. Nevertheless, I decided to go with DOE figures to be consistent as it was not possible for me to get data from all these corporations regarding exact REO content. Before investing in any of these companies, I suggest a thorough review of their resources and other projects as well as funding.

Lithium and two other metals determined as “near critical” to clean tech by DOE

Three metals are determined to be “near critical” in medium term (5-15 years).

• Lithium is used in batteries for vehicles with electric drive trains.

• Indium and Tellurium are used in photovoltaic thin films for solar cells.

Regarding Lithium the U.S. DOE reports: “Lithium is the only key material that shifts into a higher criticality category from the short to medium term. This change is due to the rapid increases in market penetration projected for vehicles using lithium-ion batteries, which increases lithium’s importance to clean energy. This market penetration would significantly increase demand even as lithium production capacity increases, thus increasing supply risk slightly.”

Lithium is best played in my opinion with Global X Lithium ETF (LIT) that includes lithium miners and battery manufacturers. The valuations of most companies included in the ETF are quite reasonable when compared to rare earth companies that are not even producing anything yet.

Full disclosure: Long LIT.

Top 10 most owned stocks by super investors

2011-01-14T22:40:00.002+02:00

Dataroma.com tracks investment activities of successful value oriented “super investors” such as Warren Buffett and Bruce Berkowitz. This article examines the top 10 most owned stocks by the 48 investors tracked by Dataroma. Microsoft (MSFT) is the most owned stock currently (21 out of 48 investors holding it). Dell is the 10th most owned stock (12 out of 48 investors holding it). As you can see from the table below, the Top 10 has changed a lot in 4 years. Only three stocks remain the same: Johnson & Johnson (JNJ), Wal-Mart Stores (WMT) and Dell Inc (DELL).

Source for data: Dataroma. Used with permission.

A closer look at history revealed that only Johnson & Johnson and Wal-Mart have stayed in Top 10 in all quarters for the past 4 years. Between Q1 2007 and Q2 2008 Dell dropped out of Top 10. By plotting the rankings of these three companies quarter by quarter it becomes clear which stock has been the true favourite of these super investors between 2007 and present: Johnson & Johnson (JNJ).

Source for data: Dataroma. Used with permission.

Note: 11th place means “out of top 10” (i.e ranking lower than 10).

It is also interesting to see that now half of the Top 10 consists of financial or insurance companies. Back in 2007 there were only two: AIG and Citigroup. Neither of those companies are in Top 10 anymore.

Full disclosure: Long JNJ.

Top yielding stocks

2011-01-14T10:26:00.002+02:00

For all value investors seeking Top yielding stocks, the following web site might be of interest: http://www.topyields.nl/

Hat Tip: user ”stocksteve3” at Seeking Alpha.

Can a company be evil?

2011-01-12T23:25:00.001+02:00

Pecunia non olet ("money does not smell") is a Latin saying that was originally related to the urine tax levied by the Roman emperors Nero and Vespasian in the 1st century upon the collection of urine [Wikipedia].

Most investors are in it for the money. But for many, like myself, it is not the only motive. I also want to own parts of businesses I see as great companies and to which I would have no problem to be personally associated with. If the company is making lives of people better or is particularly "green" - it is a bonus. But can there be EVIL companies?

Certainly many seem to view resource companies like oil giants and miners as "evil". I don't think they are evil. They are just producing something that is needed and they try to do it the best they can. Almost everybody in the developed world use products that leverage work of oil and mining companies on daily basis. If you think you don't use or have gold: check your computer that you currently are using to read this. There is a good chance that there is gold in either inside of the processor package (bonding between the chip and the chip package) or in the printed circuit board (surface finish such as ENIG). I am almost certain that you have gold in some device you are using since it has so many uses in electronics. And oil/diesel/gasoline. If you eat then you are using oil-derived products indirectly (used in transportation and farming).

An evil company to me is such that deliberately breaks laws, misleads public or dumps waste in the environment in an illegal or irresponsible manner (mining companies are forced to dump the so called tailings which I consider normal operation if done responsibly). Also exploitation of child or slave labor directly or indirectly is evil - pure and simple. Working conditions are also something that may turn a company "evil" in my mind.
There is a so called "The Public Eye Award" that has been organized since year 2000 by Berne Declaration and Friends of the Earth (in 2009 replaced by Greenpeace). It marks a critical counterpoint to the annual meeting of the World Economic Forum (WEF) in Davos. The Public Eye reminds the corporate world that social and environmental misdeeds have consequences - for the affected people and territory, but also for the reputation of the offender.

The "contenders" for this "award" are this year (in the order of ranking at the time of writing this article):

BP: The oil disaster in the Gulf of Mexico cost 11 people their lives and has killed off vast marine areas for years to come.
Neste Oil: Under the misleading name of “Green Diesel", Neste Oil mass-produces biofuel that results in the clearing of rain forest.
Axpo: Axpo obtains Uranium from the most radioactive place on Earth and has been concealing this fact for years.
Foxconn: Foxconn’s miserable working conditions drove at least 18 young Chinese to commit suicide in 2010.
AngloGold Ashanti: AngloGold Ashanti’s gold mining in Ghana contaminates soil and poisons people.
Philip Morris: Philip Morris filed a complaint against Uruguay’s anti-smoking laws and thus undermines public health policy.

While I'm not a big fan of Greenpeace due their anti nuclear power stance which I find unpractical as the so called "green" alternatives are really not that green if you take the whole supply and material chain into account. And I don't like some of their other activities, but this type of activity I can support. I do take this type of information into account when doing investment decisions - at least I try to. Newmont Mining (one of my holdings) has been awarded this dubious price in 2009, but I do not find anything particularly "evil" in the background info. Open pit mining, like the ones in China used to extract key materials for wind turbines and hybrid cars, are not exactly good for the environment nor the people living nearby. But that's usually the safeast and cheapest way to extract minerals.

However, I did drop one gold miner from my portfolio because their safety history was just horrific. Gold mining is dangerous business, but there seems to be big differences between the operators. Some have quite poor safety records.
You can cast your vote by following this link: http://www.publiceye.ch/en/vote/.

20 Nordic stocks yielding more than 4%

2011-01-08T13:42:00.001+02:00

Nordic countries include Denmark, Sweden, Norway, Finland, Iceland and their accociated territories (e.g. Greenland). “Scandinavia” is also used often as a synonym for the Nordic countries, but it the strict sense Scandinavia only includes Denmark, Sweden and

Norway

. The region has population of approximately 25 million and cover 3.5 million square kilometres (Greenland accounting for around 60% of total area alone). [source: Wikipedia]

Picture: “Scandinavia from space in winter”. Source: NASA via Wikipedia.

If you are not familiar with these countries, you probably have heard about Vikings. They came from Scandinavia and between eight and eleventh century settled or raided most of Northern Europe including coastal Finland and cities like London. They sailed in the south all the way to Sicily in Mediterranean Sea and in the west all the way to North America. Their heritage can still be seen in the successful shipping and ship construction companies.

Denmark, Sweden and Finland belong to European Union. Out of these, only Finland belongs to eurozone, while others maintain their own currency. Danish krone has been tied to euro via ERM II mechanism since 1999 and is required to trade within 2.25% range of the specified exchange rate of 1 EUR = DKK 7.46038. [source: Wikipedia]

Here is a list of Nordic companies yielding more than 4% and which I believe are available to US investors either as NYSE/NASDAQ listed companies or via pink sheets (OTC). The source of the data is from FT.com stocks screener:

* While some of the companies are incorporated outside Nordic countries, I have counted them as Nordic companies because they are primarily listed in one of the Nordic stock exchanges and their roots and much of the operations lie in the region.

(pk) = Should be available via pink sheets / OTC market. I did not want to include the ticker symbols for pink sheets as you should do your own due diligence before investing in them or before deciding which is the right instrument to trade.

The companies directly listed either in NYSE or NASDAQ in the list above are:

Frontline: “The worlds largest oil tanker company”.

Millicom: “Millicom provides affordable, widely accessible and readily available prepaid cellular telephony services to more than 30 million customers in 13 emerging markets in Latin America and Africa where the basic telephone service is often inadequate and where economic development and rising personal income levels are creating increasing demand for communication services.”

Seadrill: “leading offshore deepwater drilling company”

Nokia: Worlds largest mobile phone manufacturer and a leading provider of telecommunications networks (via a joint 50/50 company with Siemens).

Statoil: “a leading energy company in oil and gas production”

For readers that have access to OMX Nordic, here is the full list of companies:

Remember to check forecast for 2010 yield & conduct do diligence before investing!

All-in on C-day

2011-01-04T22:46:00.000+02:00

Today I established position in Cisco Systems (NYSE: CSCO) and added to my China Mobile and Chevron positions. So it was a C-day ;-)

Now I'm basically "all in" as they say in No-limit Texas Holdem game.

Portfolio performance in 2010 and 2009

2011-01-01T16:02:00.002+02:00

I calculated portfolio performance vs. alternative index investment for 2010 and also for 2009. In 2009 my gain (partly realized, partly unrealized) was 23% while comparable investment to index fund investing into MSCI All Country World Index (ACWI) would have yielded 23.8% year-on-year.

In 2010 my portfolio gained 16.3% while the ACWI index fund would have gained 19.5%. I lost to the index mainly due to my high cash and gold positions and overall defensive portfolio. I think this was quite expected. I also think I am underinvested currently to emerging markets, but I will correct this long term.

If my portfolio vs. index fund is compared starting from 1.1.2009 with no "reset" at year end in comparison then the numbers are 48.8% vs. index fund 53.9%.

The allocation at year end was:

Cash 10.8%
Gold 14.4%
Mining stocks 12%
Utilities 13.5%
Oil & Gas 11.3%
Pharmaseutical/Healthcare 14.3%
Telecommunications 13.5%
Technology stocks 10.2%

In terms of geography the allocation for stocks is:

Europe 44.9%
North America 44.4%
Emerging Markets 10.7%

Note: There is no index fund investing into MSCI ACWI and re-investing dividends. Therefore, I have constructed my own imaginary benchmark index fund out of MSCI ACWI index (net index in euros) against which I compare my performance. You can find a post from December describing the process in detail.

Last buys before the New Year

2010-12-31T09:37:00.002+02:00

Bought more Vodafone (NYSE: VOD) stock.

Added Global X Lithium ETF (NYSE: LIT) to portfolio. The Fund seeks investment results that correspond to the price and yield performance of the Solactive Global Lithium Index. The index in turn consists of equities related to Lithium mining, battery production and such. I was looking at the individual companies in the index and decided to buy the index itself to hedge bets. Some of the companies look very expensive, but on the other hand Lithium is one of the key resources in the Green Race (electric cards, smart grids..).
10 largest holdings of the fund:
Symbol: Equity name: Percentage of fund: Currency

SQM QUIMICA Y MINERA CHIL-SP ADR 20,10% USD
FMC FMC CORP 16,71% USD
AVL AVALON RARE METALS INC 8,10% CAD
ROC ROCKWOOD HOLDINGS INC 5,97% USD
AONE A123 SYSTEMS INC 5,47% USD
XIDE EXIDE TECHNOLOGIES 4,95% USD
SAFT SAFT GROUPE SA 4,94% EUR
6674 GS YUASA CORP 4,48% JPY
6764 SANYO ELECTRIC CO LTD 4,32% JPY
ABAT ADVANCED BATTERY TECHNOLOGIE 3,84% USD

Beating the market - or not

2010-12-30T21:47:00.000+02:00

Who believes in Efficient Market Hypothesis?

I don’t believe that efficient market hypothesis (EMH) completely captures what is going on in the markets. In other words, I believe that some investors can beat the market in long term and it is not just pure luck. According to EMH super investors like Warren Buffett and Charlie Munger of Berkshire Hathaway (BRK.A) are just incredible lucky. I don’t think so. Markets failed miserably in IT bubble, US housing bubble and recent EU debt crisis. The information about the risks was out there long before the crash, but market in general ignored the realities. Mr. Market failed to price assets “correctly” according to publicly available information.

Riding the bubbles with Mr. Market

Tree caricature from South Sea Bubble cards. Copyright expired. Source: "Extraordinary Popular Delusions and the Madness of Crowds" by Charles Mackay / Wikipedia.

The IT bubble was obvious case of pure mania, but even if I knew that I was riding a bubble I could not help to stay out (like Buffett did). On average, I got out pretty clean with a healthy net gain despite of some big losses in the aftermath of the bubble as I came back in too early. All in all, I probably was lucky that I did have only relatively small amount of money to invest back then. I was foolish enough to allocate all my money to single sector (technology/IT).

There are no mistakes or failures, only lessons. - Denis Waitley

I did not have any clue on US housing bubble, but I did start to sell off family stock positions in 2006 because I knew we needed the money for a house within 2 years and wanted to reduce risk by moving all money into short duration time deposits. Thus I completely avoided the crash, but I also lost some profits by hopping out of a very strong bull market that continued until around mid 2007.

Eruption at Eyjafjallajökull April 17, 2010. Source: Árni Friðriksson / Wikipedia. Some rights reserved. Distributed under the terms of the GNU Free Documentation License.

While I was unaware of what was happening in the US, I and plenty of others in Scandinavia suspected that there was something terribly wrong in the banking system of Iceland. Many prominent people in Finnish banking sector warned about Iceland banks that were luring people in with one year time deposit offers yielding whopping 5% or even more. Some people wrote these warnings off as jealousy, but I did not touch any of those offers. It was widely known that the Iceland banking miracle was built with good old leverage using cheap credit in the aftermath of IT bubble and low interest rates. Therefore, it was really a time bomb set to go off if interest rates raise and stock market plunges. When the perfect storm came into Europe from USA Iceland banks started to fall like dominos.

Does it make sense to try to time the market?

I came back into markets late 2008 as I simply could not believe how cheap some companies were selling. For the first time and probably last, I used borrowed money in investing as all of our savings were already spent on a house (our housing market has not crashed – at least not yet). It took a while to convince my wife to agree to this, but eventually she agreed that I can spend less than 5% of the value of the house back then. So off I went. I think I saw what every other value intestor saw back then: low valuations with healthy margin of safety.

Now, given all this bragging you might think that I believe I can time the market. No, I don’t believe I can – I don’t believe anyone can get it all right. However, I believe that a person with better than average knowledge about stock markets can spot the extremes: the lowest of lows and the highest of highs. Most of the time, timing the market is just pure waste of time. For the past two years I have tried to do that and in the process I have lost to the index due to my cash and gold positions. Also, I have deliberately built a defensive portfolio that does not behave well in bull market, but does not have a lot of downside risk either. Still, it is extremely interesting and useful to understand how ones portfolio compares to a suitable index.

How to benchmark your portfolio

First you have to select an index. I would recommend a broad index like “S&P 500” for USA, “MSCI World” for developed markets, “MSCI All Country World index” or “FTSE All World index” for developed markets combined with emerging markets. I have chosen the MSCI All Country World index for me because I am investing also outside the developed countries. It is important to study the index closely as the name does not always tell what it actually tracks (i.e. “MSCI World” really does not represent the world and “MSCI All country world index” does not actually do that to the fullest extent possible either).

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View the full ACWI chart at Wikinvest

After selecting the index, I recommend to find an ETF that tracks the index and reinvests the dividends. Then all you have to do is to compare performance of your portfolio to that of a single ETF. I wasn’t able to find one for my purposes, so then I looked for an ETF that distributes dividends and tracks index similar to “MSCI All Country World”. I found three candidates: “iShares MSCI ACWI Index ETF” (ACWI) tracking “MSCI All Country World Index”, “Vanguard Total World Stock Idx Fd ETF” (VT) tracking “FTSE All World index” and “WisdomTree Global Equity Income Fund” (DEW). However, I find it a bit hard to convert back and forth from USD to EUR and then also to track the dividends. Therefore, I chose to track the index itself and compile own benchmark index “fund”.

How to construct own benchmark index “fund”

It is actually not at all hard. First you need to find the index data. You can download MSCI index data from their web site in Excel format. Before doing so, make sure that you have selected the right index, currency and index level. I used the “Net” as in “With Net Dividends” that takes into account taxes that you would have to pay before you can reinvest back into the fund. “Gross” option reinvests dividends wholly.

Then you should get data from your brokers about your investments, cash position etc. The additions in cash to the brokerage accounts are a bit problematic. I chose track these as if I had purchased my imaginary benchmark index fund on the very same date. By dividing the money with the index, you get “shares in index”. Be sure to take into account the usual expenses in purchasing and owning an ETF. I decided to use 0.5% for yearly expenses and 0.5% for purchase cost and spread. The rest is then just a matter of “small” Excel exercise.

In nutshell: you are comparing your actual investment performance to passive index investing. You don’t have to track the individual trades, dividends or such. You only have to look at cash and stock balances at year end and take into account any additions or removals to/from brokerage accounts. This may sound easy, but actually is not. It may take a while to get hang of it. But believe me, it will be worth the time and next year you have got a template ready!

BYD: Build Your Dreams

2010-12-19T23:31:00.001+02:00

“The companies that succeed are often the ones who just improve better and faster than the competition and just keep doing that. And that is the essence of BYD.” This how Berkshire Hathaway Vice Chairman Charlie Munger described BYD in an interview with Fox Business back in May 2010. Berkshire Hathaway (BRK.A, BRK.B) owns 9.9 percent of BYD (BYDDF.PK, BYDDY.PK) through its MidAmerican Energy Holdings subsidiary. Charlie Munger introduced Buffett to the company that he had discovered via Li Lu, a hedge fund manager that also happens to have a large stake in BYD.

“Build Your Dreams” or “BYD” is in the business of making cars: conventional, hybrids and electric ones. It is also a major battery and electronics manufacturer that supplies components to major cell phone manufacturers. Despite that the fact that the car division of BYD didn’t even exist until 2003 it is now brining in the most revenues. In 2009, over half of the revenues came from auto division while handset components and assembly services contributed 37% and battery division 10%. So far, the growth has been mostly due to home market as over 80% of revenues come from China. Therefore, the potential of this company is huge if it succeeds also in other markets.

BYD e6 shown at 2009 North American Auto Show, Detroit, Michigan, US. Source: Wikipedia.

Wang Chuan-Fu founded BYD back in 1995 in Shenzhen, China. By 2000, BYD had become one of the world's largest manufacturers of cellphone batteries. Both Buffett and Munger sing high praises for the CEO of BYD. "This guy," Munger told Fortune in April 2009, "is a combination of Thomas Edison and Jack Welch - something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I have never seen anything like it." Buffett actually wanted to buy 25% of BYD, but Wang Chuan-Fu only wanted to let go of 10%, which Buffett took as a good sign.

Looking at the owners of the company, one can immediately see that majority of the stock is controlled by insiders and a few investment companies.

Notes
*) owned 89.5% by Mr. Lu Xiang-yang
**) via MidAmerican Energy Holdings Company
***) controlled by Mr. Li Lu

The market capitalization of BYD is about USD 13 billion when valuing the company using all outstanding shares and the price of H shares listed in Hong Kong and available for foreigners to buy. P/E 2009 is roughly 21 and P/E for 2010 can be estimated to be in the same ball park given that the profitability that fell drastically in Q3 will pick up. Otherwise the P/E 2010 might be closer to 30. Therefore, by no means the company can be considered cheap.

The revenue growth has been very good and gross margin has stayed in range of 19-22 for more than five years. The problem with BYD seems to be that the net profit swings quite wildly. Apparently in Q3 2010 BYD was barely making profit while first half of 2010 seemed to go better than ever. Despite of this, earnings per share has gone up consistently over long run and is likely to do so also in future if gross profit margin stays in the same ballpark as now.

Using current price for H share ($5.42 for BYDDF.PK) the P/B of the company is 4.5. Therefore, it can hardly be referenced as a value investment. It is clearly a growth play. So far the growth has been phenomenal and more importantly – profitable! It is quite intriguing to find Buffett and Munger still so committed to BYD at these valuation levels. They have stated that BYD might become one of the biggest auto manufacturers in the world. Bold statement, but not at all hard to believe given what they have managed to achieve so far.

I recently bought BYD via Frankfurt Xetra (BY6).

Is Western Digital a bargain?

2010-12-10T15:19:00.001+02:00

The company

Western Digital (WDC) is one of the world’s largest makers of data storage products. Specifically, it is a global leader in the development and manufacture of hard drives and solid state drives for internal, external, portable and shared storage applications. The products Western Digital offers are used in computers of all kinds ranging from a notebook to high end servers. They are also used in other applications such as mobile devices and home entertainment equipment.

Picture. Inner view of a Seagate 3.5 inches hard disk drive Medalist ST33232A model manufactured in Malaysia in 1998. Copyright: Eric Gaba (Wikimedia Commons user: Sting).

Hard Disk Markets
The data storage industry is expected to ship some 660 million hard drives this year. Western Digital and Seagate (STX) compete neck to neck for the number one position in this market. Western Digital is number one in terms of shipped units, but Seagate gets more revenue as it serves the high-end enterprise sector. Western Digital employs a low-cost business model and gets lower average selling price. Combined they ship over 60% of all hard drives. Hitachi (HIT) has third largest market share (18%). The other significant players are Toshiba and Samsung.

The market is still growing. Industry observers foresee a compound annual unit growth rate of 5.6 percent for the years through 2013. The driver of this growth is simply the amount of data that needs to be stored and backed up in the world.

Threats to hard disk sales: Solid-state disks and Tablets

Picture. Mtron solid state drive. Source: Wikipedia user 76coolio.

Solid-state disks do not have moving parts like hard disks do. Therefore, they are faster in seeking data, immune to vibration and shock and also more reliable. Solid-state disks are superior to hard disks in many respects except what comes to storage capacity and price. Therefore, it will take years for solid-state disks to have significant share of the overall storage market in terms of terabits sold.
Tablets that use solid-state disks are feared to cannibalize PC and notebook sales. While this might be true to some extent, the tablets are also complementary to PCs and notebooks so the overall storage market grows leaving plenty of room for hard disks still far into the future.

Increased capital spending

According to iSuppli the hard disk companies will spend considerable amount of money in the near future on their manufacturing plants. Western Digital will spend $1.2 billion during the next five years on its plants in Malaysia. Likewise, increased capital expenditures have been announced by the likes of Toshiba, Samsung and Hitachi.

Western Digital vs. Seagate

Data source: finwiz.com

Seagate has higher long term debt / equity – ratio and price per book than Western Digital, but on the other hand it has higher margins and lower P/E and P/S valuations. Looking at these values, both companies look like good picks. However, I started leaning towards Western Digital as I followed the buyout talks regarding Seagate in which Western Digital seemed to have an upper hand. Also, Western Digital products populate five positions in Top 10 list of most sold hard drives in my favourite local computer dealer whereas Seagate has only two (WDC #2,3,6,7,8: STX #4,9). This fact and the fact that Western Digital is volume & cost efficiency champ, I place my bets on it at this point of time.

A closer look at Western Digital

Western Digital has very strong balance sheet. There is only tiny amount of long term debt compared to cash and cash equivalents. Subtracting long term debt from cash leaves net cash position of $2596 million or $11.30 per share.

The valuations of the company also look very attractive if the net cash is taken into account. Also, the growth rate has been phenomenal so far. Even if it reduces to 10% p.a. the company looks cheap. Finwiz.com estimates price per free cash flow at 7.09. My own back-of-the-envelope questimate is that FCF for ongoing fiscal year will be at least $800 million (or $3.48 a share). Taking into account net cash position, I arrive to conclusion that the price of the business divided by free cash flow is 6.8. Not awfully cheap, but given the growth prospects, I think it’s a buy.

Inflation tax

2010-12-07T19:26:00.002+02:00

Mr. Taxman collects payments in many forms ranging from income tax to sales tax. The most unjust form of taxation in my opinion is capital gains tax that does not take into account inflation. Atleast in my country capital gains are taxed in nominal terms, not in real terms. Only certain holdings like your own house where you live are exempt.

Let's assume that Mr. X won in lottery and bought a property worth of 1.000.000 FIM back in 1980 for investment (not for living primarily). This translates to 168.188 euros and change in nominal terms.

Fast forward to 2009 when the property is now valued at three times the original purchase price: 504.564 euros. He decides to sell. Does he make a profit in real terms? No.

Picture. A tax collector at work – from an illustration by Henry Holiday in Lewis Carroll's „The Hunting of the Snark“ (1876). Copyright expired. Source: Wikipedia.

See that lizard in the picture? Look left. Lower ... There it is reaching for the pocket of the man sitting (and presumably working despite of all the strange creatures wondering around). At any rate, that's Mr. Taxman collecting money from Mr.X.

Mr.X actually makes a loss of 36.721 euros in real terms. This is because Mr. Lizard (alias the tax man) collects 28% tax from nominal gain - not from real gain.

The nominal gain in this example is 336.376 euros. Therefore, Mr. taxman collects 94.185 euros from Mr. X. That leaves 410.379 euros for Mr.X to reinvest.

In real terms, one million finnish marks in 1980 translates to 447.100 euros in 2009. The real profit Mr.X made is 57.464 euros. However, because he is taxed on the nominal gain, he loses money in real terms. This is what I would call "inflation tax" or "stealth tax". Bummer!!

What drives gold upwards?

2010-12-04T15:35:00.000+02:00

While I typically ignore all predictions on the price of gold at certain time (because of very high volatility of gold prices), I highly recommend this excellent article on gold:
Four Reasons Why Gold Will Hit $1,900 in 2011

In his arcticle Peter Krauth summarizes his bullish case for gold:

Ongoing global stimulus initiatives figure to ignite inflation, which is highly bullish for gold.
The so-called concept of "peak gold" is real, and that even in the face of record gold prices, miners can't seem to crank out enough of the "yellow metal."
Global demand is burgeoning as wages rise in such newly emergent markets as China and India - a trend that's not going to quit.
Global investors remain dramatically under-invested in gold.

I could not agree more!

Here is a couple of recent articles from Seeking Alpha regarding exploding Chinese demand:

I am a gold bull

2010-12-04T00:03:00.001+02:00

Having gold in portfolio seems crazy to many. However, to me it has been increasingly easy to add to my gold and gold stock positions even though the price of gold has skyrocketed. I am no gold bug. I don't believe that we should return to gold standard (i.e. that paper money in circulation should be convertible to gold at a fixed exchange rate). Instead, I am a gold bull. I not only believe that it's good to own gold as portfolio diversifier, but I believe that it is quite possible that it will be the best performing part of my portfolio. So far, it hasn't been. I have paid a price from my gold bullishness and also from my overally defensive stock portfolio. I probably have lost to most indexes. So far.

It is sobering to read economics 101 books. Equally so, it is sobering to study how central banks and fiat money work. Ever wonder why we have inflation? ....It's not some "law" as in gravity or second law of thermodynamics. It's created by the central bank in control of the fiat money in question. They add money to the system via banks as long as they get the inflation rate they are targeting. Why it's important to have inflation? ... So that you spend your money and don't sit on it like Uncle Scrooge. Because sitting on money (i.e. saving) causes deflation (i.e. negative growth - job losses etc.) if everybody does it. And that's not good. Therefore, we have to have some of it. Not too much, not too little. Just "right" amount.

The fact that central banks cause deliberately inflation leads to the fact that economies have to grow atleast at the inflation rate. Otherwise, economy will be actually declining in real terms. And that's why we just gotta have always growth. Not necessarily real at all. But people are lot happier that way. They get salary increases and they think that they are getting more wealthier. It is just the perfect scheme.

You really can fool most of the people ALL THE TIME. But you can't fool all of the people all of the time. I was long fooled, but I am no more. For me gold is money. When I don't keep all of my savings in stocks and property, I invest some of it to gold. I also have to keep paper money: dollars, euros, swedish krona and so on for practical reasons and to hedge my cash positions. The reason I hold gold and cash should be obvious to anyone following the financial news. The situation does not need much more sparks to get the fire really going. I really hope it does not happen, but who knows. Anything might happen. You got basically a currency war brewing: the mighty race to bottom. When US devalues, other have to follow. Not just because they want to keep their currency "cheap", but because that's the ultimate way to get the debt load reduced. And it might work, if just most of the people have faith.

It's all about faith. What we really have is a faith-based monetary system. And right now, the gold charts tell me that more and more people understand where we are headed ultimately and try to protect atleast part of their wealth from the doom day scenario. I really hope we don't eventually get hyperinflation, but inflation we will have. Because the central banks make everything to get the inflation started. The big risk here is that they really don't understand how global economy works. Nobody does. So they might overdo it. Then it's the 70s all over again.

An Indepth Look on Sanofi-Aventis

2010-11-24T23:57:00.002+02:00

I hold pharmaceutical companies because they are good defensive plays, offer decent dividend income and are currently fairly valued. Also, I believe that in the long run, aging baby boomers in the western world and people rising to middle class in the east will drive up the revenues big time. While food, water and shelter are high on everybody’s priority list, prevention and treatment of illness is not far behind. The modern medicine can do wonders and the ever increasing number of pharmaceutical products helps people to increase quality of life and even life expectancy.

VEGF Trap (aflibercept) molecule. Copyright: Dominique Sarraute. For press use only.

Introduction to Sanofi-Aventis

Sanofi-Aventis (SNY) caught my eye when browsing the portfolio of Berkshire Hathaway (BRK.A/BRK.B). At year end 2009 it was the 9th largest common stock investment of Warren Buffett valued at approximately $2 billion. Looking at information available via Datarom.com also two other famous value investors have Sanofi-Aventis in their portfolio. This is not much compared to U.S. based companies Pfizer (PFE) and Johnson & Johnson (JNJ) that are much more widely owned among the tracked investors. Makes me wonder if there is a U.S bias among the tracked investors or whether there is something wrong with the stock compared to the others in the same sector.

French Sanofi-Aventis is one of the biggest drug manufacturers in the world. It has roughly $85 billion market capitalization and annual sales of $40 billion (2009). The product portfolio of Sanofi-Aventis includes vaccines, prescription medicines, generics, consumer health care and animal health. It has worldwide presence and 100,000 employees in over 100 countries.
Sanofi-aventis generates a substantial share of its revenues from the sale of certain key products. Ten best selling products of Sanofi-Aventis:

Out of all sales 87% come from prescription medicines and the 10 best selling products deliver almost 50% of top line.

Patent protection and regulatory exclusivity of existing products

Without patent protection and regulatory exclusivity products can be manufactured and sold by anybody. When so called generic products enter the market, sales of the original branded product will fall dramatically as generics are typically sold at significantly lower price. Therefore, the future profits of current products of any pharmaceutical company depend heavily on both patent protection and regulatory exclusivity.
Sanofi-Aventis own a broad portfolio of patents, patent applications and patent licenses worldwide. These patents relate to active ingredients, pharmaceutical formulations, product manufacturing processes, intermediate chemical compounds, therapeutic indications/methods of use, delivery systems and enabling technologies. Regulatory protection including obtained pediatric extensions of currently 10 best selling products is summarized in the following table:

Table is based on data from 2009 annual report.

Notes:
*) In most of EU
**) Later filed improvement patents. Patent protection of Taxotere beyond Nov 2010 was invalidated recently by Delaware court.
***) Sales figure for Stilnox includes also some related products with different trade name: Myslee, Ambien and Ambien CR.

Looking at the above table, one can see that the 10 best selling drugs have no regulatory exclusivity left after this month in EU and US and also the patent protection is getting quite thin in the next two years. In five years, the protection will be almost non-existent. Most of the “big pharmas” face the same problem, so this is an industry-wide problem. Therefore, it is no wonder Sanofi-Aventis has been busy in acquisition front.

Acquisitions

Looking at various acquisitions done in 2009 and 2010, Sanofi-Aventis is expanding business to generics and consumer health products as well as strengthening its R&D pipeline and product lines. The 2009 acquisitions include:
• Zentiva N.V. - a branded generics group with products tailored to the Eastern and Central European markets
• Laboratorios Kendrick - one of Mexico’s leading generics manufacturers
• Medley - a leading generics company in Brazil.
• BiPar Sciences, Inc. - an American biopharmaceutical company
• Fovea Pharmaceuticals SA - a French biopharmaceutical R&D company
• Laboratoire Oenobiol - one of France’s leading players in health and beauty dietary supplements
• Chattem, Inc. - one of the leading manufacturers and distributors of branded consumer health products, toiletries and dietary supplements in the United States.
• Shantha Biotechnics - an Indian biotechnology company that develops, produces and markets vaccines to international standards
• Remaining 50% of Merial - a world-leading animal health company

The acquisitions and tender offer in 2010 are summarized in the following table:

The takeover offer for Genzyme (GENZ) is by far the largest undertaking and the tender offer has been covered widely in Seeking Alpha already so no need to dig deeper into that one:

• Sanofi Takeover Offer for Genzyme: The Pressure Is On (October 5, 2010)
• Sanofi-Aventis Makes Hostile Bid to Acquire Genzyme: Are They Overpaying? (October 5, 2010)
• Sanofi / Genzyme Battle Likely to End Somewhere in the Middle (October 11, 2010)

R&D pipeline

The research and development pipeline of Sanofi-Aventis is full of products in different development phases and it’s quite frankly quite hard to assess the commercial potential of these drugs and whether some of the drugs in the early phases ever get even approved. Majority of late phase products are vaccines or related to either thrombosis or cancer treatment. Almost the same therapeutic areas describe the early phases of the pipeline except that there is nothing related to thrombosis and lots of drugs related to central nervous system.

Strasbourg Research Center: Protein dispensing in a eppendorf tube. Copyright : Antonin Borgeaud / Interlinks Image. For press use only.

Somewhere in this pipeline there ought to be the next billion-dollar-a-year selling drugs. Without many of those, the annual sales and profits will decline. This in turn, starts the vicious cycle of cost cutting and then the 4-5 billion euro per year R&D budget gets cut down making the chances of hitting home runs even more remote. The R&D process typically takes 10 to 15 years from discovery to commercial product launch, so anything started this year won’t help the problem at hand in five years from now.

In addition to its own R&D, Sanofi-Aventis pursues a strategy of acquisitions, in-licensing and partnerships in order to develop new growth opportunities. Also, it is outsourcing R&D as explained in article “Sanofi Continues to Look Beyond Its Own Walls to Fill the Void From Drugs Going Off-Patent” published October 3rd in Seeking Alpha. It seems that outsourcing R&D is the trend among big pharmas.

Valuation

Sanofi-Aventis is currently trading at same level than it was back in 2005. With P/E ratio of 10 it looks cheap, but you have to keep in mind all the drugs going off patent. I have look at all the big pharmas selling around or below 10 and they all have the same problem. In short: the are not really cheap. Nor they are awfully expensive either. I won’t second guess Mr. Market what comes to companies as closely followed as these. Looking at P/B of 1.2, Sanofi-Aventis is by far the cheapest of all major drug manufacturers. It also pays nice dividend (4.5% yield). [Data source: finwiz.com]

I calculated from information available in Berkshire Hathaway 2009 annual report that Buffett had paid on average a bit over $80 for each share of Sanofi-Aventis. Given that two ADRs represent one actual common share, then you need to divide that average price by two to get ADR average pricing which becomes then $40.37. Sanofi-Aventis ADR was trading at $32.67 at the time of writing this article. This means 19% discount compared to the average purchase price of Mr. Buffett. Not bad.

A look at the latest quarterly report

Net sales and EPS were up 4.8% and 8.7% on reported basis for the first nine months compared to last year. Quarterly figures were less impressing. With constant exchange rates, both Net sales and EPS were actually declining when compared to figures year ago. The net sales of Pharmaceuticals, the largest segment by far, declined 3.5% mainly due to generics competition on Q3. All other segments were growing. Consumer health care and generics segments were demonstrating especially strong growth and so did emerging markets sales. Basically sales outside US and Western Europe were growing while sales inside these regions were declining.

Sanofi-Aventis has plans to cut down US sales force significantly and redeploy resources towards strategic priorities in 2011. The R&D to sales ratio is also trending down. In Q3 it was 13.9%. Net debt level was reduced in the first nine months of 2010 thanks to strong free cash flow. Profit margins stayed on very healthy levels.

Conclusion

Sanofi-Aventis was not my first choice in pharmaceutical/healthcare sector mainly due to very high amount of sales coming from products that face increasing generics competition in the next years. Also, pharmaceutical segment is quite dominating in the group unlike in Johnson & Johnson that have more balanced portfolio to stabilize the up and downs of pharmaceutical segment. However, there seems to be sufficient margin of safety in the current pricing. Also, the dividend yield is attractive. I am bullish for the healthcare and pharmaceutical segments in the long run due to aging population in the western world and rising standards of living in the east. Therefore, I find Sanofi-Aventis quite suitable to my defensive portfolio mostly made out of dividend and asset plays.

I bought Sanofi-Aventis today (NYSE: SNY, Paris: SAN).

Portfolio status

2010-11-15T23:16:00.000+02:00

I have been steadily decreasing my cash reserves. Now I have approximately 20% of portfolio as cash and I intend to decrease cash position to zero within 6 months. By cash position, I mean cash that I have allocated to investment use by moving that to brokerage account.

Rest of the money is pretty evenly allocated between the following:
- Gold
- Mining companies
- Utilities
- Oil and gas
- Healthcare/Pharma
- Telecom

.. and then I have the category "Other" in which there is only Intel at the moment.

Geographical distribution of stocks looks like this:
- Europe 51.4%
- North America 39.2%
- BRIC 9.3%

I know.. the share of BRIC should be bigger. If we fast forward 20 years further, I belive my alloction is more like Europe 25%, NA 25%, BRIC 30%, Other developing nations 20%. And Gold: 0%. Once the bubble really gets going I'm gonna sell the barbaric relic and turn that to shares in wonderful companies!

Man.... I just hope that I could someday do this (investing) for living..

Sunset in Silicon Valley

The End Of The Golden Age

2010-10-24T22:13:00.001+03:00

King Oil

One can argue that the world would be very different from what it is today if we hadn’t found crude oil and invented how to leverage this very convenient and relatively cheap energy source. The energy density of oil derivatives such as gasoline is superior to any other substance in liquid or gas form. That’s why majority of cars are propelled either by gasoline or diesel and airplanes use kerosene. Also, approximately 15% of oil is used to make asphalt, plastics and wide variety of critical chemical products. Therefore, crude oil plays a key role in the modern globalized world economy. It has truly enabled a golden age for those that can afford to leverage it.

Oil derrick in Okemah, Oklahoma, 1922 (Source: Wikipedia)

Peak Oil

Unfortunately, oil is a finite resource and some day we will run out of it if we continue consuming it like we do. Long before this happens we will have serious problems - as soon as demand exceeds the supply. This is the essence of “peak oil” concept. International Energy Agency (IEA) estimated in their 2008 World Energy Outlook that oil production should not peak before 2030 if 64 million barrels per day (mb/d) of additional capacity is taken into use between 2007 and 2030. In theory, this is possible, but in practise there is a very real risk of under-investment since the required new capacity is equivalent to six times the current production of Saudi Arabia. Therefore, the report concludes that an oil-supply crunch can happen as early as 2015.

It is immensely hard to estimate the maximum rate at which the oil can be extracted from all different sources, both conventional and unconventional. Therefore, it is also hard to estimate when oil production will peak. What seems fairly certain is that it will do so within the next 30 years and I am personally tilted towards it happening within the next 10 years. US production has already peaked long time ago (early 1970s) as predicted by Hubbert back in 1956 using knowledge of past oil discoveries to predict the future production. Hubbert’s ideas are taken increasingly seriously by main stream analysts. Guardian published a very interesting article back in 2005 in which Chris Skrebowski, editor of Petroleum Review, predicted that the peak would be 2008. Remember those oil prices back in 2007? The financial crisis might have actually masked the problem – for now.

The Ever Increasing Demand For Black Gold

China, India and other fast growing economies are currently far behind in per capita consumption of oil compared to EU or U.S. Consider this: If you sort all of the countries by per capita daily oil consumption and start from the lowest consuming countries, you need to sum up the consumption of nearly 100 counties to match the daily oil consumption in US. Among these countries are China and India. Altogether the citizens of U.S. consume the same amount of oil than 4,8 billion people elsewhere.

Crude Oil Consumption Profile Of The World [Data Source: CIA World Factbook].

In the above graph, the country with the highest per capita oil consumption (Virgin Islands) is the leftmost dot while the country with the lowest consumption (Chad) is the rightmost dot. Between those two are plotted all the countries for which I found statistics for both population and oil consumption. The two parameters are summed cumulatively for each country starting from the country with highest per capita oil consumption.

As you can see, the most oil consuming 1 billion people spend more oil than all the rest 5,7 billion or so. Most of the so called developing nations with huge GDP growth rates happen to be in the group “rest”. I think it’s fairly safe to assume that they will increase the per capita oil spending from the current level in the future.

The Ever Tightening Supply

According to the CIA World Factbook there is about 1382 billion barrels of oil in the proven reserves. In addition, there are unconventional resources such as Athabasca oil sands region in Canada and heavy oil in Venezuela. The problem with unconventional resources seem to be that only a fraction of them is determined to be recoverable:

Source of estimates: Oxford Energy, CIA World Factbook and the Government of Alberta

Even though unconventional resources seem to be vast, they are estimated to add only approximately 10 million barrels per day to the supply side in the best case when taking into account all unconventional sources such as biofuels and oil from coal. For example, The National Energy Board of Canada estimated back in 2006 that the best case for oil sands production in 2015 would be 4.4 million barrels a day while the base case was 3.2 mb/d and the low case only 1.9 mb/d.

The current production rate of oil is about 84 million barrels a day so the unconventional resources will not have major effect in the long run given depleting conventional sources. Also, a major problem with all sources is decreasing EROEI ratio (energy return on energy invested). For oil it used to be 100 a long time ago and now it is somewhere below 20. EROEI for biodiesel is roughly 3 and for ethanol it is not much more than 1. Depending who to believe, EROEI for oil sands is between 2 and 4. Basically anything above 1 makes sense, but because we are used to high ratio (= cheap energy) we may have serious problem when the average EROEI of all supplies of oil goes below 5.

World oil reserves (source: Wikipedia)

The Last Hurrah Of Offshore Oil Production

After pumping oil from land deposits, the industry went offshore. First submerged oil wells were drilled already in late 1890s. Oil & gas production in Gulf of Mexico in 1990 was almost exclusively done in shallow waters (less than 1000 feet). By 2005, majority of production was in deep water (1000-5000 feet) and ultra deep (more than 5000 feet). Before the accident in Gulf of Mexico, it was estimated that by 2020 majority of production would have come from ultra deep water wells. However, there is one problem with all this in addition to the work being increasingly costly, energy consuming, difficult and dangerous: Yearly production decline in deep water wells is reported to be much higher than in shallow water wells. This makes it increasingly hard to sustain the already achieved production rate in offshore wells as production declines in older wells.

Platform P-51 off the Brazilian coast (Wikipedia/Agência Brasil)

Who Will Profit From The Raising Demand For Petroleum
The entities owning the oil and gas reserves are certainly going to profit from the peak oil as it will drive the value of their reserves and yearly production up while their costs are not likely to increase at the same rate. The big problem with the reserves is that the entity owning them right now, might not be the one owning them in the long run. If oil, gas and other critical finite natural resources are not at the heart of national interests yet in some countries, they will certainly be so in the long run. High oil prices are likely to cause unrest and discontent among citizens and politicians will respond with the usual remedies: socializing either the profits via higher taxation or taking ownership of the resources. While many of the oil majors and super majors seem to be reasonably valued and well positioned right now, one has to consider the possible outcomes of the next energy crisis. Government ownership might be actually a plus.

The companies to consider include Exxon Mobile (XOM), Chevron (CVX), ConocoPhillips (COP), BP (BP), Shell (RDS.A) and Total (TOT) all of which were featured in an excellent SA article. In addition, companies such as CNOOC (CEO), Statoil (STO), PetroChina (PTR) and Petroleo Brasileiro (PBR) are worth considering. Many of these are heavily involving also into natural gas, which is becoming increasingly important source of energy and is likely to last much longer than oil. The companies having significant investments on the unconventional side include Suncor (SU), Canadian Natural Resources (CNQ), Imperial Oil (IMO) and Nexen Inc. (NXY).

The Case For Offshore Oil & Gas Drillers

The offshore drillers pop up in my stock screens often since they got the right stuff: growing revenues, relatively low debt burden, excellent margins, low valuations in terms of P/E, P/B and price per cash flow. In exchange of all this, you have the risks which are all too familiar to everybody by now. However, these companies are less likely to experience socializing as they do not own the reserves, but only the rigs used in drilling the offshore wells. So far, it has seemed to be excellent business and I am betting my money that it will continue to be excellent business in the long run (5-20 years) as long as there is something worth drilling on the bottom of the ocean.

Different types of production platforms (Wikipedia, NOAA)

Drillers that have equipment used in deep and ultra deep production are the most appealing as that is the segment which is growing. This means that they have floating rigs, drill ships and such equipment either in use or under construction. The more they have these as percentage of their entire fleet the better. Also, I prefer ones with geologically diversified portfolio and big oil companies as customers (lower counterparty risk). The companies worth studying for these traits include (in the order of market cap): Transocean (RIG), Diamond Offshore Drilling (DO), Noble Corporation (NE) and Atwood Oceanics (ATW). Brief financial and valuation summary of these corporations:

Data source: finwiz.com

Related long positions: Chevron and Noble Corporation.
Full disclosure of positions: http://thoughtsofaprivateinvestor.blogspot.com/

New position: Intel

2010-10-18T22:43:00.005+03:00

Today I opened two new long positions: Intel and Noble Corporation which I will discuss later.

Intel is probably the next best thing besides owning a monopoly. However, the chip-making giant is now so big that it's hard to grow much bigger. Therefore, in no way it can be thought as a growth play. To me it's both a defensive value play as well as a dividend play.

Picture: Intel i5 processor (source Wikipedia / Qurren).

It has some 20.3 billion in cash and cash equivalents ($3.65 a share) and operational cash flow in range of 11 billion a year. Management is authorized to spend 5.7 billion on buying back own shares. Currently Intel pays out quarterly dividend of 15.75c which is roughly 3.3% yield at $19.2 a share. Intel has very low debt to equity ratio so it is really a cash cow. In addition, it has amazing pricing power and huge technological edge to all competitors.

There are not many companies left that can build manufacturing lines by themselves for the nanometer scale structures needed in the state of the art processors. These factories require huge amounts of knowhow, skill and money to build and operate successfully. Simply put: Intel has moat (competitive advantage) like no other technology company in my opinion.

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At P/E 10.3 and P/CF 7.75* I think Intel is a pretty good catch. If it still grows, it will be only a bonus.

*) P = quote minus cash & equiv. per share

The Myth Of Moore's Law

2010-10-09T20:28:00.001+03:00

One very good example of a reverse-engineered law (i.e. no law at all, but a presentation of what has happened) is the one called Moore's Law. From the evolution of this law, one can see how this type of laws are created: they are basically continuously modified to fit what has happened in the past. So they have actually very little predictive power in the long run. I believe many laws in economics are just like this one, but let me concentrate on this, because this is way closer to my circle of competence and work.

I absolutely admire what Gordon Moore and Intel has done so this article is in no way meant as attack against them. I don't know who have modified the law and when, but that does not matter in the end because the "law" now in circulation has very little to do with the original one.

The original prediction (later titled Moore's law) was presented by Gordon E. Moore in "Electronics" Volume 38, Number 8, April 19, 1965 and this is the direct quote from that paper:

"The complexity for minimum component costs has increased at a rate of roughly a factor of two per year (see graph on next page). Certainly over the short term this rate can be expected to continue, if not to increase. Over the longer term, the rate of increase is a bit more uncertain, although there is no reason to believe it will not remain nearly constant for at least 10 years. That means by 1975, the number of components per integrated circuit for minimum cost will be 65,000."

So the original law calls for doubling every year counting from 1959 (1 transistor). As a reference, the Intel 8080 introduced in 1974 had only 4500 transistors and not 32768 as had been predicted by Moore. Intel managed to surpass 65000 transistors only in 1982 with Intel 286 that had 134000 transistors. Moore's law predicted 8,4 million so by now it was very clear that the original prediction was way off.

In fact, the law was fairly accurate only between 1959 and 1965. I.e. up to the point when the article was written. So it did not actually manage to predict anything right. Sure, the increase of transistor count has been incredible, but not as incredible as predicted by Mr. Moore back in 1965.

Because the original law predicted way too high growth rate, the "law" has been adjusted as follows:

"The number of transistors that can be placed inexpensively on an integrated circuit has doubled approximately every two years." [source: Wikipedia]

You can see for yourself how accurate that law is. It basically grossly understates the development. According to this Law #2 there should have been only 32768 transistors back in 1989, but Intel managed to put 1,2 million transistors into Intel 486. So c'mon this law does not work either if it starts in 1959.
Because even this adjusted law (#2) is not accurate, a third modification has been made to reset the law basically early 1970 to first Intel chip (Intel 4004 introduced 1971). Now this law #3, is somewhat accurate description of what has happened, but it has absolutely nothing to do with the original prediction.

And like law #2 it too falls short. It predicts 1,7 billion transistors whereas Intel 8-core Xeon Nehalem EX has 2,3 billion and NVIDIA GF100 has 3 billion transistors. But hey, let's call that a rounding error in the law. It's really amazingly accurate if you use logarithmic scale that hide the "small" differences of, say, 1,3 billion transistors that is roughly the same as the high end chips had in total ín 2008 (NVIDIA GT200).

Note: logarithmic scale!

The increases in clock speeds and transistor counts have been truly amazing. My first computer was Commodore 64 back in 1984 and in my wildest dreams I could not have imagined the awsome power that I can harness today from my PC and the amount of data I can store. However, there have not been nor will be any hard laws of progress behind this and nor there will be. I laugh every time I see Moore's Law and it's awsome predictive powers referenced. At that is often.

Note: logarithmic scale!

Investment checkerboard

2010-10-08T21:56:00.001+03:00

I sorted my investments by using a 6 by 6 checkerboard where the vertical axis is used to measure growth and horizontal axis has six categories to place a particular company into. The checkerboard was inspired by Peter Lynch's book "One up on Wall Street" where he introduces his method of mapping a company into one of six categories. Three of the categories are essentially growth categories and three others are: cyclicals, asset plays and turnarounds.

I wanted to give each company two dimensions: growth category and then a second property which essentially gives away the primary reason why I invested into the company.

Here we go:

The growth is measured as yearly average growth from last 3-5 years (depending on what was easily available). Dividend rate is either from Google Finance or then from a local Arvopaperi stock magazine.

At any rate, I don't have cyclicals or turnarounds as I have constructed my portfolio as defensive one. All commodity plays (oil, gold etc.) are asset plays in my opinion. I believe both oil and gold to rally long term and that will unlock the hidden value in the companies (basically the huge leverage they have on these commodities). Then rest of my stocks are pretty straightforward dividend plays. Note that some of the dividend plays also buy back shares and that is not taken into account in the grouping.

This was quite a useful excercise as I now recognise that I should look for some growth plays also. And it would not hurt to find companies that give decent dividend AND grow minimum of 10% p.a.

On economics and physics

2010-10-02T18:43:00.000+03:00

What's next: Deflation, double dip, inflation...?

Quite frankly, I do not think even the best economists know the answer for sure. I am no economist and after reading Economics book about half way through I don't know what to think about the dismal science. Mathematically, micro/macro economics 101 is easy to follow. The only question is: does it really work that way? Is there laws?

Atleast to the latter I can say that there seem to be very few hard laws in economics. And I am talking about the kind of laws which you can use to predict what will happen given a set of starting parameters. In physics you can make accurate predictions based on work released in 1687 (Newton: Philosophiæ Naturalis Principia Mathematica). Still works today like clockwork if given certain limitations (that were pointed out later by Einstein in theory of relativity), no need to discuss about it.

Take economics: There seems to disagreements over the very key concepts.

What causes inflation? Some say money printing and some say something else.
How about what to do if an entity (like city or country) is loaded on debt and near bankrupt due to rising cost of funding their debt load and especially due to deficit spending. How about a little bit more debt? Or should they just admit that maybe you have overextended themselves and need to cut back?

Would it be a good idea to cure hangover with some more alcohol? Maybe once, but not every day..

What is clear to me is that many western economies are now in the corner. Anything bad happens and shit will hit the fan. The only way out seems to be ... yes! ...more money out of thin aír!

Penultimate Preparedness

2010-09-30T23:07:00.001+03:00

I continue quoting Peter Lynch's "One Up On Wall Street":

"No matter how we arrive at the latest financial conclusion, we always seem to be preparing ourselves for the last thing that's happened as opposed to what's going to happen next. This 'penultimate preparedness' is our way of making up for the fact that we didn't see the last thing coming along in the first place."

Greed on the way up, fear on the way down. Both are contageous. That is why we always miss the turn of the tide.

"The day after the market crashed on October 19, people begin to worry that the market was going to crash." [he refers to 1987 Black Monday]

"Those who got out of the market to ensure that they wouldn't be fooled next time as they had been the last time were fooled again as the market went up."

His point eventually is in the book... you should not try to time the market because you can't. No one can. I know I have tried. Sometimes almost correct, many times not at all. It's like tossing coin. You may get enough success to think you can do it and then you get really wiped out. And I totally agree on the penultimate preparedness. That leads to excellent buying opportunities as was the case in early 2009. Both crashes and bull markets will always be overdone. Always have been and always will be.

Passing The Mirror Test

2010-09-29T22:59:00.000+03:00

I just finished "One Up On Wall Street" by Peter Lynch, the legendary fund manager of Fidelity Magellan. The chapter 4 in the book is called "Passing The Mirror Test". In short, you should answer:

1) Do I Own A House? (A: Yes)
2) Do I Need The Money? (A: No)
3) Do I Have The Personal Qualities It Takes To Succeed? (A: Yes)

For questions 1 and 2 the answer is easy as they are objective. The third one is tricky as probably anyone investing already will say yes :-)

The qualities related to success as an investor according to Lynch:

patience
self-reliance
common sense
a tolerance for pain
open-mindedness
detachment
persistence
humility
flexibility
willingness to do independent research
willingness to admit mistakes
ability to ignore general panic

And on top: "In terms of IQ, probably the best investors fall somewhere above bottom 10%, but also below top 3%".

Still say Yes to the third one? I say "Maybe, hope so"..

Crappy investments: Airlines

2010-09-28T22:14:00.000+03:00

I haven't been flying with Finnair for a while and noticed that they have reduced their service in the intra-Europe flights to the level of a low cost airline (give or take a sandwhich). However, their ticket prices still ain't in the same ballpark, which leads me to believe that they have basically given up the competition in those routes and are only flying them to feed their long distance routes to Asia. Why in the earth would anyone want to pay 30-50% premium for flying with them? Better service (definitely not this time)? Better pilots? (I do not think so)

Next time I pick a low cost airline. That will also save the money of my employer. I guess they have airmile cards too..

Airlines in general are crappy investment due to cronic overcapacity in the business. Apart from a few airlines most of them are running on losses. I don't touch them even with a very long stick. But for some reason new airlines emerge and the old ones don't seem to have trouble attracting capital. Beats me..

Talk about business that has need for high CAPEX, generates tons of CO2 and is utterly dependent on cheap oil.. They will get really screwd over long run..

Gold: pros and cons

2010-09-20T18:43:00.000+03:00

Every time gold sets new records gold related articles fill the media. In Seeking Alpha, gold related articles appear daily and in large numbers. Here are some picks that I found interesting recently:

Pro gold articles:

Critical articles:

Despite for repeated bubble calls, I remain pro-gold. It is the ultimate hedge against irresponsible government behavior. Currently such behavior (deficit spending & money printing) is rather common throughout the western world (so called "developed" countries ;-).

Closer look to most retirement schemes reveal that they are nothing more than giant ponzi schemes with a twist. The twist being that governments never get procecuted on the fraud. They just either lend some more money or print it. Or default under the debt load.

The most powerful signal towards continuing gold rally is the unwinding of hedge books by major miners (such as AngloGold as told in the first referenced article).

No matter how convinced I am to gold as speculative investment (or wealth preserver), I will not put a significant amount of my money into it. House, piece of land and farmland are also quite good inflation hedges if you are into them for a very long run. You see, land is no longer "manufactured" ;-)

Gold continues bull run

2010-09-15T21:46:00.000+03:00

Gold seems to continue bull run after seasonal (summer) weakness. New records have been set in dollar terms..

I have recently bought a bit more gold and more shares of my two favourite gold miners (NEM & ABX). Like anything in my portfolio, I will be steadily adding gold and gold miners to keep their share in my portfolio constant. Currently my target is to allocate 15% to gold and 15% to gold miners. That makes me more of a gold bull than Soros although you have to take quite many zeros off when talking absolute value in dollars ;-)

Eying Wintel

2010-09-08T23:28:00.000+03:00

I have been avoiding tech stocks ever since the crash of 2000-2001. Not because I got burned badly, because I wasn't. Sure I lost almost 100% on one stock and more than 50% on a couple, but I also made some spectacular gains on the ones I was wise enough to dump between 1999 and 2000.

The reason why I don't like tech stocks in general is that the field is very competitive and requires huge R&D spending. You can loose your #1 position very fast. There are numerous examples of companies that were ones great, but now are either bankrupt or dimineshed to some niche market.

There are exceptions: the ones having moat.

An economic moat is a competitive advantage that is difficult to copy or emulate, which provides a significant barrier to competition from other firms. Buffett has often referred to an economic moat as being similar to a fortress or a medieval castle that one can not penetrate.

Two companies come instantly to my mind: Intel and Microsoft often referred as "Wintel". Both companies are so strong in their fields that they are close to monopoly without being one. Currently both are trading quite low P/E ratio so many prominent hedge managers characterised as "value investors" have picked up either one or the other. I too am eying both companies.

I could buy them tomorrow, but on the other hand I want to space out my investments in order to keep the market timing minimal. Also, as everyone else, I am still cautious on the "recovery"...

Took a position in Chevron

2010-09-01T22:28:00.000+03:00

I basically transferred money from CHNG to Chevron (CVX). Out of all big oil companies, I found Chevron to be most attractive based on financial comparison between the big ones.

Otherwise, a good summary of oil&gas majors can be found here:
http://seekingalpha.com/article/221875-is-now-the-time-for-the-energy-conglomerates

Unfortunately the article does not include PetroChina and PetroBras, which I found interesting in addition to Chevron and maybe ExxonMobil.

Dumped CHNG

2010-09-01T22:22:00.000+03:00

The Rosen Law Firm today announced that a class action lawsuit has been filed on behalf of purchasers of China Natural Gas, Inc. common stock during the period from March 10, 2010 through August 19, 2010. CHNG was trading over $10 a share in beginning of the period. Since then the stock has declined over 50% (or 110 MUSD in market value) so the potential damages are quite huge compared to the remaining market price and book value of the company.

Shortly after seeing this announcement I dumped all my shares in CHNG.

I happen to be one of the people that purchased the stock during that period so I need to consider whether I want to participate in the lawsuit. My largest purchase was on the 20th of August so that won't qualify. At any rate I don't want to stick around while other people loot the company via the lawsuit especially if I won't qualify for it or have other reasons not to participate.

Even though I increased position in CHNG fairly recently, I did that without fully understanding the underlying problems in CHNG and similar stocks. These problems are fairly well summarized in the following arcticle:
http://seekingalpha.com/article/223026-12-signs-and-158-reasons-investors-should-avoid-chinese-rto-stocks

Here you can find the Barron's article + some commentary in the end:
http://chinainvestorking.blogspot.com/2010/08/article-barrons830-beware-this-chinese.html

I feel like a sucker. But this will teach me one more lesson. It's not the first time and won't be the last... Such is life..

Telecom picks

2010-08-20T23:05:00.000+03:00

I added two telecom stocks to my portfolio: China Mobile (NYSE: CHL) and Vodafone (Nasdaq: VOD). In China Mobile there are three main things that make it attractive to me: 1) first it is a telecom stock (defensive), 2) it is Chinese stock, 3) by any standard ít is doing excellently.

I use Swedish TeliaSonera as benchmark for all telecom sector stocks. Not many can raise to the same level but China Mobile can in terms of ROA/ROE/ROI and margins.

Vodafone is not doing so fine, but it is low on valuation and I am betting on Verizon resuming dividend by 2012. Vodafone owns 45% stake in Verizon.

Doubled bet on CHNG

2010-08-20T22:50:00.000+03:00

China Natural Gas (Nasdaq: CHNG) is selling below $5,40. I took a real good look at Q2 results and don't agree with the market valuation. I do not see any fundamental reason for the sell-off. So I bought more of it. If it was a good by at higher price, it is more so at the current price. At least I think so.

It is not ofter that you can get a growth stock at P/E below 7 (my estimate for 2010 EPS is $0.80).

Soros and Gold

2010-08-18T22:00:00.000+03:00

I browsed through the latest SEC filing from Soros Fund Management and found out that Soros has quite big exposure to gold and gold miners: 17,5% of the whole portfolio.

The biggest position is by far the SPDR Gold Trust (638 MUSD). The rest of 890 MUSD gold related position is invested in gold miners. As the list of holdings is quite long (hundreds of entries), I may have missed something. I basically browsed through all with word "gold" or "resource" and found these:

ALLIED NEVADA GOLD CORP
BARRICK GOLD CORP
FREEPORT-MCMORAN COPPER & GOLD
GAMMON GOLD INC
GOLD FIELDS LTD
GOLDEN STAR RES LTD
GREAT BASIN GOLD LTD
IAMGOLD CORP
KINROSS GOLD CORP
MARKET VECTORS ETF TR GOLD MINER ETF
MARKET VECTORS ETF TR JR GOLD MINERS
NOVAGOLD RES INC
SPDR GOLD TRUST GOLD SHS
SEABRIDGE GOLD INC

From the gold miners. Soros has by far the largest positions in Novagold (90 MUSD) and Kinross Gold (66 MUSD).

The Oracle of Omaha increases JNJ position heavily

2010-08-17T09:12:00.000+03:00

It seems that Warren Buffett increased dramatically Berkshire Hathaway's position in Johnson & Johnson during the last quarter. He also seems to think it is a good buy after drop of about 10% in May. JNJ is one of my biggest positions at the moment.

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Becton, Dickinson & Co.

2010-08-02T19:24:00.000+03:00

I took a new position in Becton, Dickinson & Co. (NYSE: BDX), a global medical technology company. I added this company to my fairly long list of companies to study when I noticed that Warren Buffett (Berkshire Hathaway) has been steadily increasing Berkshire's position in this company and the company happens to operate in a sector that interests me. It was added to Berkshire's holdings in Q2/2009 and subsequently the position was increased in both Q4/2009 and Q1/2010.

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What really got me interested in this company was in-depth presentation on Becton Dickinson by East Coast Asset Management published in Seeking Alpha by Market Folly. They basically argue that the company is worth $90-$95 a share. This range comes from several valuation methods, which I won't dive into here. It is worth to mention that valuation using 8% discount rate and assumption of no growth in free cash flow gives valuation of $65.

At first look BDX does not appear to be very cheap (P/E 13,6 and P/B 3,1). However, I tend to keep in mind a quote from Buffett: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price". I think this actually comes from Charlie Munger, who introduced this thinking to Buffett at some stage. At any rate, after reading the East Coast paper and looking into the company, I can understand why Berkshire has a position in this company.

In short:

steady increase in demand is there making it hard to believe that company can not increase free cash flow
company has multiple competitive advantages
margins are excellent and have been improving last 5 years
ROE average over last 5 years is 22.2%
37 consecutive years of dividend increases
the company has been purchasing it's shares back using more money per year than for dividends. Therefore, the current not-so-high dividend yield has great potential to rise also in the future (in 2009 the company used 550 MUSD for share repurchase and 317 MUSD for dividends). The company could easily pay dividend which would give over 5% yield at $70 share price.

Fred Olsen Energy

2010-07-20T15:11:00.000+03:00

The tragic accident in Deepwater Horizon oil drilling rig and the resulting oil spill as well as all previous major oil spills are horrible reminders of just how dangerous oil drilling and transportation are to the environment. In addition, the use of oil in transportation and electric generation is also pollutive and adds ever increasing CO2-level in atmosphere. Therefore, nature would be much better of without us using it.

Deepsea Delta semi-submersible drilling rig in North Sea (source: Wikipedia)

Unfortunately, oil is very much needed by the global economy now and far into the future. Therefore, oil drilling and transportation will have to continue. All the easy oil deposits have been probably already found in the land and under the sea. The demand for deepwater drilling rigs have been growing and the demand for shallow water rigs have been declining or staying flat for years (reference: see page 14).

I have been looking more companies in the oil and gas sector to my portfolio and Fred Olsen Energy (Oslo OSE: FOE) looks attractive. Fred Olsen Energy provides exploration and production services to the offshore oil and gas industry. It has 7 drill rigs, 1 accomodation platform and 1 drill ship which it rents for oil and gas companies. Currently it has no exposure to Gulf of Mexico. Most of the rigs are in the North Sea currently.

Compared to many of its competitors Fred Olsen Energy is small. However, the offshore drilling segment of the company is very profitable. Engineering and fabrication segment is loosing money, but the amounts are not significant compared to the main segment. The balance sheet reveals that the company has quite high debt load. However, it looks to be manageable especially in the current abnormally low interest rate environment.

The first half of 2010 has been weak in terms of revenue, but still the company has respectable cash flow from operations. The contract status of the fleet seems to be also in order. Five out of Nine rigs/ships have contracts in place until 2013-2015. The rest are shorter term. There seems to be a slight oversupply still in the floater market. I am sure that that and the contract status are reflected by the valuation of the company already.

What caught my eye in the first place was the forecast figures I saw in recent Arvopaperi magazine for this company (source: Facset):

P/E 2010: 4,9
EV/EBITDA: 4,2
yield: 8,19 %

The forecasts are even better for 2011. Looking at the Q2 raport from the company, I am not sure if these are conservative enough given that both revenue and profits are way down from 2009. At any rate, these valuations are so low that I think there is sufficient margin of safety for me. The latest dividend was NOK 10. The shares of the company are trading right now at 178 NOK.

Nautilus Minerals

2010-07-14T21:15:00.002+03:00

Exploration stage mining companies are sort of lottery tickets. You can loose pretty much all your money in investing in them or then you can make spectacular gains. It all depends on what the company finds and if the mineral deposits are feasible to mine.

Last week, I took a small position in an exploration stage company called "Nautilus Minerals" (TSX/AIM: NUS). I am typically not interested in exploration stage companies, but this particular company does something that at first sounds like sci-fi: Their first mine will be located 1600 meters below the surface of Pacific Ocean near Papua New Guinea. In fact, long ago it was sci-fi. Jules Verne envisioned underwater mine in his book "Twenty Thousand Leagues under the Seas" back in 1870. I haven't read it, but I sure am familiar with Captain Nemo and Nautilus (the submarine) that were introduced by this book. It seems that Nautilus Minerals have taken their name from Nautilus the marine creature (not the sub) based on their logo.

The Nautilus, as pictured in "The Mysterious Island". Source: Wikipedia.

Oil and gas industry went offshore in the 1940s and now it might be the time for mining companies to do the same. Nautilus Mining will use existing offshore oil technologies to cut ore from the seafloor and pump it to the surface as seawater slurry. Once the ore is dewatered, it will be shipped to shore for processing.

Recently published independent engineering study titled "offshore production system definition and cost study" related to the first ever underwater mine "Solwara 1" reveals some very interesting things. Indicated and inferred resources combined and valued at market prices for metals put the mineral deposit somewhere around 1,6 billion USD (at the time of writing). Most of this is copper (about 1 billion USD) and gold (about half a billion). Extraction requires 383 million USD capital expenses and approximately 150 million operating expenses (estimated based on $70 USD per tonne OPEX). The difference of resource value minus direct CAPEX and OPEX is over 1 billion USD. Naturally not all of this can be clarified as profit as there are other expenses involved in the process (such as smelting and refining).

Nautilus Minerals has about 169 million shares outstanding (diluted) and 196 million USD in cash (additional 40,7 million USD if all options etc. are excercised). The required CAPEX needs to come from somewhere. Either they have to issue more shares or then they need to sell some of the future revenue for cash today. So let's assume they sell more shares. Let's further assume that they can cover this by issuing 131 million shares putting total shares outstanding to 300 million.

Now, to justify the current share price of 2.11 CAD (about 2.05 USD) they would need to be able to make profits in the range of 600 million (net present value of future profits). If successful and completed within the CAPEX and OPEX estimates, the Solwara 1 alone should give this kind of profit with a healthy margin for error.

Yes, there are some very big IFs since this is a pioneering project. There are also big risks that the whole concept of underwater mining comes under attack for environmental or other reasons although the company claims that the environmental and social impacts are smaller than those associated with conventional land based mines. Also, between now and the completion of the mine, the company will have negative cash flow (Q1 2010: -13,3 million USD) due to exploration and other operating costs that are not related to mineral extraction from Solwara 1.

Solwara 1 was granted environmental permit in December 2009 and the company is expecting to have the mining lease in place during 2010. The company has over 450.000 square kilometers of tenements in five jurisdictions. There are many other high grade mineral deposits already found besides the Solwara 1.

Recently the stock has gained a lot and has been trading with wild daily swings up and down.

Technical Analysis and Roulette Systems

2010-07-07T14:20:00.002+03:00

I'm not a big fan of technical analysis. I simply do not believe that past can be used to predict the future in apparently random system. Speaking of which.. Long ago, I read a book on roulette betting systems. One of the simplest strategies known as "martingale" is based on making only on those bets giving double return (red/black, even/odd etc.). Then you are supposed to double the bet after each loss in order to eventually win the amount that you first bet.

Picture author: Conor Ogle, source: Wikipedia

So, if you start with $10 you will eventually win $10 and get your bets back. The strategy is flawed to begin with, but this one of the reasons casinos use zero and double zero in addition to capping the maximum bet. Given that you would have 50/50 chance and very large amount of money to use for betting, you would beat the casino every time. And that's not OK for casinos.

But let's assume for a while that there would be a casino with roulette which has no zeros and no cap for maximum bet. I.e. betting on black/red would really be a 50/50 chance. This would be then equal to coin tossing (head or tails), which is typically used as an example in many books on probability.

The biggest flaw in the martingale strategy even in case of 50/50 chance winning is that it requires very large amounts of money to get even a small win. Let's assume you want to win $10. The table below gives you the probability (p) of loosing "n" bets in a row. It also shows what bets you need to place using the strategy.

Even though it is very rare (1 in million) to see 20 heads (or 20 black) in a row, it is not impossible. In fact, in the roulette book, the writer said that he had witnessed a streak of over 20 of the same color. Assuming that you would win on the 20th bet, you would still need some 5,2 million dollars to claim your 10 dollar victory.

To make odds better, the writer introduced a "system of five". Meaning that you wait until there has been eg. five times black and then you start applying martingale using red. Unfortunately, this strategy does not increase you chances of winning at all. Even if you would wait until 10, 15 or 20 of the same, you chances would not increase.

You still would have chance of 50% in loosing the next bet and the table above does not change one bit from that point forward. I believe it is a very common error to think if you see someone get 10 times heads in coin tossing, the probabiliy of next heads is low. The probability of seeing 10 heads in the row is 9,77% (i.e. low), but in case that is already in the past then it won't matter. The next toss carries 50%/50% probability for tails/heads in the same way that every single toss does.

Similarly I believe that technical analysis does not give significant advantage, because what has happened in the past won't matter now or in the future. You might get lucky and it works for awhile, but eventually you will loose if that is the only strategy you have. Naturally, technical analysis can be used as a tool among others to determine what is going on in the market. I.e. understanding what has happened until now.

Basically the casinos and the online brokers have the same design. The more you play, the more you will loose to the "bank". Therefore, it is no wonder that many brokers and the like advocate technical analysis. The more trades there are the more money they will make. People implementing true buy and hold strategy are lousy customers for brokers.

Still, if you want to gamble with your money, it is much more wise to gamble in stock markets than to do so in a casino. Because your odds are much much better and you can limit your losses more easily.

Two new reactors

2010-07-01T16:43:00.001+03:00

Finnish Parliament gave today approval for construction of two new commercial nuclear reactors. One new reactor will be built by energy company Teollisuuden Voima (TVO) in Olkiluoto. Fortum owns 26,6% of TVO. Therefore, as long time supporter of nuclear power and shareholder of Fortum, I am naturally happy about the decision.

TVO has two existing reactors in operation, one 1600MW reactor (TVO3) being built and one more in the planning pipeline (TVO4). The fourth reactor is likely also in the range of 1600MW meaning that both new reactors will be each equivalent to 2-3 currently operating reactors. Fortums's share of each new TVO 1600MW plant is roughly 425 MW. In comparison, Fortum's fully owned reactors in Loviisa are producing 488 MW each.

Picture: Picture. Fortum’s Loviisa nuclear power plants from air. Source: Wikipedia.

The other reactor will be built by Fennovoima in either Simo or Pyhäjoki in northern Finland. Behind Fennovoima are various Finnish entities with 66% stake and the world’s largest privately owned energy company E.ON from Germany with 34% stake.

Fortum applied, but did not get preliminary green light for third reactor to Loviisa. It remains to be seen when and if it gets go ahead for that. The Loviisa plants are quite old (built in early 1970s) so eventually they need to be replaced.

New position: China Natural Gas Inc

2010-06-24T14:57:00.002+03:00

I have been following and studying a company called "China Natural Gas Inc" (NASDAQ: CHNG) for a while now. I finally decided to take a long position in it.

The company provides pipeline natural gas for industrial, commercial and residential use and compressed natural gas (CNG) for vehicular fuel in Xi'an, China. Xi'an in Shaanxi province is a fast growing city supported by a population of approximately 8.5 million. The company is also active in Henan province which is the China's most populous province.

They have very good growth possibilities because:

China is likely to overall increase use of natural gas (both in absolute terms and relative to other energy sources)
The northern region of Shaanxi Province is the home to China's second largest natural gas reserve.
By the end of March 2009, CHNG had operated 35 retail CNG fueling stations. This is not much compared to how much potential there is.

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To start with, the valuation of the company is very attractive. P/E is at 7.2 and if you take into account the amount of cash the company owns (roughly 30% of whole market cap in my estimate) the price is morea than attractive. P/B at 1.05 is also screaming BUY!

Some other statistics (all statistics in this article from: finwiz.com):
ROA 11,4%
ROE 16,7%
ROI 11,9%
Gross margin 48,4%
Profit margin 22,7%

The company is fairly small (market cap 155 MUSD) but is growing at a very fast pace. It does not seem to pay dividend, but that is understandable in the current situation the company is in (growth phase). The company is low on debt even though it has an ambitious investment program (LNG plant etc.).

From stockholder point of view, I think the biggest risks related to how the company will grow (i.e. do they issue a lot of new stock in a way that does not benefit current stock holders), do they issue preferred stock (which seems to be OK'ed but not implemented) etc. Also, the usual question is that how much the management will take from the cake in form of compensation and stock options. There were also some quite "interesting" loans granted to some individuals which is something that I haven't come across before in a publicly listed company.

However, I think overall the company is a clear BUY.

In particular I like the concept of natural gas propelled vehicles. That is such a superior concept from environmental point of view and also much cheaper fuel than gasoline or diesel. Some day in not-so-distant future there will be oil crisis because there certainly will not be enough of it to go around. That is why countries like China will favor alternative energy sources and there is no other way than UP for companies like CHNG.

New position in Brazil: Copel

2010-06-17T23:52:00.001+03:00

I have been searching for attractive investment opportunities in the utility sector besides Fortum Corporation (Helsinki: FUM1V) and now I have found a good one: “Companhia Paranaense de Energia” or “COPEL” (NYSE: ELP).

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Copel is a Brasilian company and that’s a big plus to start with. Long term, I believe that BRIC countries are better places to put your money than the so called developed countries. One word: Growth!

The company was founded 1954 and is now the largest company in the state of Parana. It serves some 2,8 million homes, 67 plants and 300 commercial establishments and has staff of 8440 employees. Copel produces about 7% of the total electricity consumed in Brazil.

I am a big fan of electric power companies that generate majority of their power in either nuclear- or hydroelectric plants (i.e. no direct CO2 emissions). Copel is basically pure hydro play as out of its fully owned 18 plants 17 are hydroelectric plants. Hydroelectric plants have total of 4530 MW of installed capacity. The only fully owned thermoelectric plant has installed capacity of 20 MW. Via partnerships the company also has 220 MW of hydro, 388 MW of thermal and 2,5 MW of wind power.

Most of the contracted energy seems to go to regulated market until 2012 after which the free market portion will grow from the current low figure of 11%. To me this kind of information translates to higher average sales price for electricity and there seems to be definitely a big upside for profits in near future.

In addition, Copel has close to 2000km of high-voltage transmission lines and 180.000 km of distribution lines. It also operates optical transmission network for telecom/data reaching 217 cities and totalling 9580 km worth of optical cables.

The state of Parana owns 31,08% of the company, BNDESPAR (BNDES being Brazilian Development Bank so this looks like some sort of government entity) owns 23,95%. 44,09% of the stocks are free float. The stock capital is divided to common stock and two different preferred stock. Only 13,5% of common stock is free float while 78,5% of preferred stock is free float.

When buying the company from NYSE, you basically get preferred B stock. The dividend policy seems to favour preferred A, but on the other hand preferred B stock gets more dividend than common stock. For year 2009, the dividend was R$ 1,63 per class A, R$ 0,96 for class B and R$ 0,87 per common stock. With current real/USD exchange rate and ELP quote, 2009 dividend yield is around 2,8% for preferred B stock.

Some statistics (source: finwiz.com):

P/E 7,7
P/B 1,2
ROA 9,8%
ROE 16,1%
ROI 11,8%
Gross margin 58,3%
Profit margin 21,8%

Debt/Shareholders’ equity ratio is 0,24. Out of all debt, most is denominated in local currency.

I hope they keep up the good work as I now own a little piece of the company!

Increased JNJ position

2010-06-14T17:18:00.000+03:00

Johnson & Johnson (NYSE: JNJ) has lost about 10% of its value since I included it to my portfolio late April by buying a small position in it. I decided to triple my bet in it making it now one of my largest stock holdings.

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Back in April I thought it is an excellent company trading at fair price. The price still ain't cheap, but I feel this is a good entry point. Double dip or no double dip.

The case for gold miners

2010-06-01T16:06:00.034+03:00

The reason why I like gold miners is really simple: When gold goes up, the companies profits multiply a lot faster than the price of gold. Here is an example:

Let's assume a hypothetical gold miner "A" can extract gold from ground with "cash cost" $600 per troy ounce of gold. In addition, let's assume that all other costs related to the ongoing mining operations (depreciation/amortization, financing costs etc.) are $200/oz.

With gold price $1200/oz the company makes profit of $400 per ounce.
If gold price changes 10% in this hypothetical case (i.e $120, up to $1320 or down to $1080) the profit changes 30% (i.e $400 plus/minus $120).

No wonder many prominent hedge fund managers are long on gold miners. So am I, but not as much long yet as I will be. The reason is that the mining stocks take as much beating on bear markets as any other sector or even more. You can check yourself what happened to gold miners between 2008 and 2009.

Currently I am confortable holding two large caps that are unhedged (i.e. do not have significant derivative positions that fix the price of gold that they are selling in future). What I just explained above does not apply to those miners that have large hedge books because they will not benefit from the raising gold prices. On the other hand they don't suffer if the price falls significantly.

Newmont Mining

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Barrick Gold

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It has been a while when I last took a deep dive into these companies, but here is what was my rationale behind taking a position in these companies.

They are large, have several big and profitable gold mines.
Most of the mines are located in politically relatively safe areas.
Newmont does not have hedge book, Barrick may have still a small one (but not significant in my opinion anymore)
They have huge reserves (especially under "proven & probable")
Manageable debt levels
No preferred stock outstanding (I hate the concept of someone taking guaranteed cuts of profit before common stock)
They pay dividend, although still small compared to some other sectors
They look fairly priced compared to their peers, but not necessarily compared to other sectors. Newmont P/E is 16,3 (source: Google Finance) while you get many utilities, telecom and pharma stocks with P/E around 8-12. However, it's all about _future_ profits. Not 2009 or 2010 estimated profits. Barrick 2009 P/E was negative due to unwinding of their hedge books.

Too much trading?

2010-05-24T22:17:00.004+03:00

I should probably burn my password/codesheets to my brokers and get new ones after summer as I have the urge to do too much trading. I am definitely not a day trader and as a big believer of buy and hold strategy I really should minimize selling and short term investments. But somehow I managed yet again do something else than buy and hold.

Here is some changes I have done on friday and today:

Closed leverage long positions for gold - not a very smart move as now gold price is shooting up again. However, volatility is not good for leveraged ETFs so maybe I keep my hands off them given that so far my short term trading has yielded pretty much zero profits, maybe even a small loss.
Sold Sampo shares even though not long ago I said it's definitely a long term investment. I kind of realized that even though it is a great company, it really did not fit into all the other moves that I have made (selling Berkshire Hathaway). Also, I realized for some articles that I read yesterday that I may be sitting on a time bomb there. You see, Berkshire has most of it's holdings in stocks and I sold it because I believe we are now in a fairly long bear market. Sampo on the other hand is heavily exposed to bonds. Here is why bonds (or atleast bond funds) are not so good idea: http://menafn.com/qn_news_story.asp?storyid=%7B88E69BCA-9396-4AA0-9DC0-C6696D6AA709%7D. So I figured that if I sold BRK for time being, why I am still holding this one. I probably can get back into both cheaper later IF I am right about bear market.
Moved money away from ETFS Physical gold (Frankfurt: VZLD) as I don't like the rumours about HSBC which holds the gold in London for ETFS and it seems also for SPDR Gold Trust (NYSE: GLD) which seems to get a lot of flak from some of the gold bulls:
http://www.bullionbullscanada.com/index.php?option=com_content&view=article&id=10825:the-bogus-bullion-etfs&catid=42:rokstories
http://seekingalpha.com/article/206320-seriously-the-spdr-gold-trust-isn-t-a-scam-but-phys-might-be (Article in defence of GLD, but you should also see the comments!)
I have seen a lot of this type of commentary and it kind of seems like yet another conspiracy theory. Although I have to admit that if all this is just that then these guys are the best conspiracy theory writers I have ever seen. Don't fully believe it, but sold anyway as I also needed the profits to cover some of my losses (tax planning :).
Put some more money into Xetra Gold (Frankfurt: 4GLD) as I find it somehow more credible than other alternatives. But in the end of the day, it's only bits in cyberspace as well, but I can live with it for now.

Increased gold position

2010-05-19T15:39:00.000+03:00

I pretty much moved all cash that was sitting in euros to gold bearer notes (Frankfurt: 4GLD) and took yet again a leveraged position via an 2x ETF (Frankfurt: 4RT8). Although this time the position is pretty small.

Portfolio check

2010-05-17T14:54:00.001+03:00

Closed the 2x leveraged gold positions (approx. 10% portfolio size) and pocketed some nice gains there.

My portfolio looks now as follows:

Cash 48,8% (in US dollars, Swedish Krona and Euros)
Gold 16,5%
Sampo 8,2%
Fortum 8%
Teliasonera 6,6%
Gold mining companies 6,4%
Pharma/healthcare companies 5,5%

All of these positions except cash are long term buy and hold. I will not offload these even in case of bear market which I am expecting. Instead I will be increasing my positions when anything goes down significantly given that fundamentals why I own these won't change.

Gold price soaring

2010-05-12T14:40:00.000+03:00

ECB seems to follow FED on kind of operations not really supporting the currency like buying "toxic" assets. It may be just a matter of time when the "printing presses" will be turned on. You can roll over the debt from one "credit card" to the next quite long, but not indefinitely.

I guess this is one reason why gold price is soaring:

Auch

2010-05-10T14:27:00.000+03:00

Closed my STOXX 600 banks short position and took some pretty severe damage there. Kept leveraged gold position and actually increased it from the dip. Let's see what happens.

Pretty big rescue package from EU. I'm just wondering where does all this money come from. Everybody is running a deficit while they should run surplus to offset raising healthcare and pension costs in the future. In some point of time they may have to turn on the printing presses and that will be good for gold.

My non-leveraged gold positions are long term investments. The leveraged ones are short term as volatility will do severe damage to leveraged ETFs long term. Besides their costs are also higher.

Ultralong Gold, Short Banks

2010-05-07T14:13:00.000+03:00

I took two speculative short term positions. One is 2x leveraged bet on gold price and the other is 1x short on STOXX 600 Bank index. I have entertained these positions for quite some time and have missed probably the best gains. Let's see.

I have now also fairly large cash position is US dollars and Swedish Krona.

Sell Sell Sell

2010-05-05T14:20:00.001+03:00

Yesterday and today, I offloaded most of my holdings except for the ones I have selected as key long term positions. The reason for the sell-off is that I believe major correction is imminent. The rationale for this can be found from my earlier posts like "Financial Crisis 2.0" or my recent posts in Twitter. Simply put: the Greek crisis is just the first domino in a long series. Even that has not been solved yet - far from it!

A paper from Bank of International Settlements titled "The future of public debt: prospects and implications" sum up the upcoming problems quite bluntly:

"Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable. Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability."

It's not just the PIIGS. There is UK, Japan, US and many others which are in a very bad trajectory.

Any one of these countries default or start monetizing debt in serious way (i.e. printing money to pay back debt), there will be serious consequences. Actually, nothing really needs to happen. It is enough if markets as whole loose faith.

I will be going step by step my remaining portfolio in forthcoming blog posts. Also, I will be looking at some short positions and other speculative bets as well.

Bear in the room

2010-05-02T22:43:00.000+03:00

Past week I tried hard to look at things from bull's point of view, but it is not really working for me. I'm still bearish and increasingly so.

I'm torn between hold and sell for a number of my stocks which I know will take severe beating in case of 2.0 version of the financial crisis. So I decided to sell the most obvious ones: The ETFs with dividend strategy. These funds had a significant exposure on banking sector and companies in cyclical business.

As the result my cash (euro) position is now at 15% of portfolio. Not a happy position knowing that inflation eats that away all the time and euro is in decline. I now have to find a suitable parking space for that cash as I'm pretty sure I won't be increasing my stock positions for a while.

Last week I also increased my gold position which is now my largest single position.

Johnson & Johnson

2010-04-27T14:30:00.002+03:00

I started accumulating Johnson & Johnson (NYSE: JNJ) as one of my health sector picks as it seems to be an excellent company and one of the most respected ones out of all U.S corporations (like Berkshire Hathaway).

It did not first hit my screens, but I took a look at it because Warren Buffett has purchased it to BRK's portfolio and it is one of the major holdings BRK has via common shares. His has paid on average 60,42 USD per share. JNJ is now trading at 64,76 USD.

Unlike pure pharmaseutical companies, JNJ has actually three legs: Pharma, Medical devices/ diagnostics and consumer segment. Thefore, sales in long run is not as much affected by patent expirations, which all of the big pharmas will suffer in the next five years in a major way.

By typical valuation methods (P/E, P/S, P/B) it certainly is not cheap, but not expensive either. I would call it fairly priced. Also, compared to most other pharmas, it is low on debt which is allways a good thing.

Thanks, Mauri

2010-04-23T14:04:00.002+03:00

When Minister of Finance Jyrki Katainen said yesterday "Thanks, Mauri" (Mauri meaning Minister of Economic Affairs Mauri Pekkarinen) he indicated that he was very happy of the "big energy package" including preliminary decision for two new nuclear power plants in Finland.

I want to say Thanks, Mauri with a different meaning. First of all, as stockholder of Fortum I am naturally not happy about Fortum being left standing with aging nuclear power plants without licenese to replace them.

I see two things positive in the decision:
- 2 new nuclear reactors is better than one or none - position held by Mauri and many members of the same party for a long time
- Teollisuuden Voima (TVO) got permission to build it's fourth reactor. Fortum has 26,6% stake in TVO so it gets some new capacity in that way.

However, if Fortum does not eventually get a permission to replace it's Loviisa plants, it means pretty much that Fortum does not increase it's share of Finnish nuclear power plants in long run. In fact, Fortum's share of the two new reactors in Olkiluoto is less than what it has now running in Loviisa.

So, It seems that the cabinet of Finland will propose two new reactor licenses for approval in Finnish parliament. If approved in parliament, these would go to TVO and Fennovoima. Behind Fennovoima are various Finnish entities with 66% stake and the world’s largest privately owned energy company E.ON from Germany with 34% stake.

I simply do not understand how it's better to give license to a brand new entity without existing nuclear power plants in Finland (hence no experience in building and running a plant and no existing solution for the nuclear waste apart from maybe the co-owner E.ON). There are now two locations that have nuclear waste being cooled down for eventual shipment to the final storage deep underground: Loviisa and Olkiluoto. The decision to grant license to Fennovoima means a new site will contain (cool) nuclear waste and perhaps also a new location is needed for the final storage unless TVO and Fortum yield in the matter and give permission use Posiva's site.

The Finnish state has majority ownership in Fortum and it is indicated to be company with strategic significance: "Besides a strong shareholder interest, the company is connected with strategic interests owing to which the State is to remain so far a strong shareholder or to safeguard in other ways the strategic interests concerned, if the shareholding is reduced or relinquished."

Apparently the state has plans to diminish the significance of Fortum as a player in the Nordic power market. Or then there is some other reason for this kind of decision. Helsingin Sanomat speculated today that this might be yet another punishment for Fortum for granting too generous stock options in the past for the management. This was based on quote from somebody near the matter. Excuse me, but:

- ain't that a very old matter
- Former CEO and chairman were basically "lynched" connected to that and more recent disagreements about the size of bonuses (forced to resign)
- with majority ownership that state could have capped the option and bonus plans, but they didn't (so politicians should have looked into mirror long ago about how they have managed Fortum over the years)

The big old Fortum options fuss was never handled properly. Not by the press, nor by the politicians. You see, the fuss was never about dilutation effect (the TRUE cost of options) - it was about how much money that generated for the managers. These are two completely separate things. Apparently it would have been "OK" for the politicians, the press and the public that the options would have yielded smaller profits. This would basically meant LESS taxes to the state (managers have typically tax rate of 50-60%) with the same cost (dilutation effect to the state's own share of Fortum's profits).

So with this kind of FUZZY LOGIC one can maybe understand also how it was possible to grant the permission to Fennovoima instead of Fortum.

I would have only granted Fennovoima a license if THREE licenses would have been granted. Now the state is saying to the state-owned Fortum that "you can not invest into your home country". GREAT!

Sold Russian ETF

2010-04-21T14:24:00.000+03:00

I have been gradually selling shares in an ETF tracking DJ Rusindex Titans 10 and have now completed offloading all of them. To begin with that was a high risk investment as there was only 10 stocks in the ETF and about 70% of them from oil & gas sector.

While I expect that best returns in really long run (30 years) will come from BRIC countries, I have sold both Brazil and Russian ETF now and only hold small positions in ETFs tracking stock indexes in India and China. The particular euro-denominated Brazil ETF tracking Ibovespa index that I used to have, has already surpassed its pre-crisis top. The Russian index has also had pretty spectacular gains already. Enough for me, for now.

BRIC indexes are likely to hit hard if there will be a double dip / new recession. And I believe there will be soon enough. I don't think the situation is "normal" as interest rates are abnormally low AND most of the western world has unsustainable deficit levels. Not to mention the overly bullish sentiment.

Each passing week I have become more bearish.

Trillion dollars

2010-04-12T15:23:00.002+03:00

It is said that one of the warning signs of upcoming serious inflation is introduction of new "powers of ten" in reference to amounts of currency that have been formerly rather unknown to the public.

You know, it used to be millions this and millions that. Once upon a time a millionaire was the term to reference really rich people. Now it's billionaire.

Recently term trillion has been popping up a lot. Like in reference to the US budget deficits.

So, how much is $1 Trillion?

I guess 200 euros or dollars a day is a pretty big spending budget in any country for an average person. Atleast in my country that would require earning something well over 10.000 euros a month. At any rate, if you were given a million, you could spend like that for 13,7 years. Actually longer, as you would probably earn interest on the remaining money.

So if you were a billionaire, you could provide the same purchase power to 999 of your friends and relatives too. Or then you could spend your lifetime like that and leave the rest to your kids, grandkids and so one until thousands of years were spent.

A trillion is so much money that it can not be dealt in terms of even above average purchase power. So lets check the spending rate of MILLION A DAY.

You could go on like that for the next 2700 years. Or then you could alternatively provide that nice spending budget of 200 a day for a million people. Because trillion is "million times million".

These video clips sum up the number quite well also:

- http://www.youtube.com/watch?v=oPfY0q-rEdY&NR=1
- http://www.youtube.com/watch?v=at3MNu8BRwQ

Pretty BIG number, don't you think?

Cheap Big Pharma stocks?

2010-04-03T22:20:00.000+03:00

Analysing pharmaceutical companies proved to be much more challenging than I initially thought. I started screening best stocks in this sector with my usual parameters (ROE, ROA, gross margin etc.) and first focused on the ones paying over 3% dividend and having the lowest P/E ratios.

As the efficient market hypotesis (EMH) suggests, all information available should be already reflected on the stock price. Therefore, there should be a good reason why some Big Pharmas trade at P/E over 14 and some below 10. While I don't fully agree with EMH in it's broadest form which suggest basically that people like Warren Buffett should not exist, I do acknowledge that Big Pharmas are probably priced correctly as they are probably being followed by hundreds of professional analysts and there is no free lunch to be found. Nevertheless, I am curious as to why such a big differences in P/E.

So far, I have looked at two companies: AstraZeneca and Merck that have P/E below 10. While Merck has some fairly big one-time items in profit and loss statement explaining low P/E calculated from 2009 result, I found out something much more interesting.

I have been aware of the significance of patent protection for drugs, but I imagined the big companies had large enough existing portfolio and a lot of new drugs in the R&D pipeline to offset the impact of patent expiry. I may have been wrong. Although, it is immensely difficult to assess the drugs in the R&D pipeline for their eventual selling potential.

Three of the most revenue generating drugs for AstraZeneca are Nexium, Crestor and Seroquel. Each of these drugs generated between 4.5-5.0 billion USD of revenue 2009. That's a lot compared to sales of 32,8 billion for the whole company. Overall, four out of 10 best selling drugs will be without patent protection by 2012:

Patent expiration will likely take away most of that sales as generic drug companies will come into play and the prices will be slashed. AstraZeneca better have some pretty good stuff in the R&D pipeline as many of their key selling products will face competition in five years.

For Merck the situation seems to be pretty much the same, although they seem to have their sales spread over their product portfolio more evenly:

I will be going through some more annual statements in near future to look for similar information as I want to understand if these patent expirations explain the differences in P/E of big pharma companies.

Sold Rautaruukki

2010-03-26T14:03:00.000+02:00

I sold my Rautaruukki (Helsinki: RTRKS) shares today as I want to move that money to sectors that I believe will do better in the future. I think Rautaruukki is a fine company, but the business it is in is too cyclical for my taste.

I originally picked it up because it was selling below what I thought it was worth. Also, I believed that the cyclicals were hammered low enough (and they were). My problem with cyclicals _now_ is that I no longer believe in full recovery of the economy. Therefore, I want to pick companies from more defensive sectors.

Bought AstraZeneca

2010-03-25T22:20:00.001+02:00

I added AstraZeneca today to my portfolio after screening all medium to large cap medical companies. I have a long term goal to move money from generic healtcare ETFs to individual companies. This was the first step. I will be looking for two more companies for this sector.

The potential downside with healthcare stocks like AstraZeneca is quick limited because the valuations are rather conservative, but the upside looks strong with aging western world and growing emerging markets.

I like bets with limited downside, but with limitless upside. And above all, I like AZN gross margin at 83%. There simply ain't many big companies in the whole world that can pull that off.

Stock screeners

2010-03-24T14:05:00.001+02:00

I tried out several stock screeners to see which ones are best. The obvious starting point are Yahoo and Google stock screeners, but these are only for US markets. Also, I finally found
http://finviz.com/ which I think is far better screener than either Google or Yahoo.

For europe, I think the FT.com screener looks the best:
http://markets.ft.com/screener/customScreen.asp

However, I haven't yet played with that as much I have played with the FINVIZ.

Learn from the best: Warren Buffett

2010-03-21T23:00:00.001+02:00

I have read many good investment related books, but I have to say that "The Warren Buffett way" had a huge impact on my thinking when I read in the aftermath of Internet bubble bursting. I'm currently reading "The Snowball: Warren Buffett and the Business of Life", which seems even better as it goes deeper into life and methods of the worlds greatest capital accumulator.

To get idea of investment/management philosophy of Warren Buffett, you do not necessarily need any book as the core ideas can be read free from the web. You just need to put the pieces together.
- Annual letters to Berkshire Hathaway shareholders
- Owner's manual for Berkshire Hathaway

To understand Buffett's stellar performance, you have to understand concepts such as "insurance float".