Sold Rautaruukki

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

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

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

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".

Added more gold to portfolio

Today I added to my gold position by buying gold in form of "Xetra Gold" bearer note (Frankfurt Xetra: 4GLD). The other paper position I hold is ETFS Physical gold (Frankfurt Xetra: VZLD).

Currently I don't hold real physical bullion as that has larger spreads and requires more laborous buy/sell procedure. Basically you have to go and get the gold from the dealer and then drive it to safe deposit box in bank vault. Paper gold is much easier compared to that, but it has also risks and holding costs that real physical gold does not have. Currently I favor physically backed paper to the real thing, but that may change..

Here is an interesting gold related article I read today:
Seeking Alpha: A. Ash: Emerging Economies Buying More Gold

CBS 60 minutes on Wall Street financial collapse

I think this piece is a must see if you want to understand what happened 18 months ago.

Author Michael Lewis On Wall St's Delusion
"What Led to Wall Street Collapse and Who Predicted It"

CBS 60 minutes link

Gold bubble?

Even though I do not personally believe that there is such thing as gold bubble right now, it is worth to read articles from people who think that there is.

Seeking Alpha: Bookstaber: The gold bubble - beware of following the herd

I happen to believe that Soros, Paulson and other high profile hedge fund managers are joining the ride because they believe there WILL BE a bubble. Right now, I do not see the average people talking about gold price let alone waiting in line outside gold dealers. This is what I expect to see if there would be a bubble. Much like what happened with Internet stocks, atleast in Finland. You got people queuing for hours to sign up for IPOs with ridiculous valuations. People who never before had invested money in stocks and did not have even book-entry accounts.

I bet less than one in a thousand people can tell me what is the spot price of gold for a troy ounce. Even with plus minus 20 percent accuracy. Related to the subject. Here is a good one from Youtube:
http://www.youtube.com/watch?v=Gk5aRIz17fk

Defensive picks

I have sold my ETFs that were following broad European indexes (DAX and DJ STOXX 600). I redirected money from these broad indexes to ETFs investing in "defensive" sectors: Utilities, Healthcare and Telecommunications. Companies in these sectors should generate a healthy profit even if there will be double dip or a new recession. At any rate, I believe these sectors will do better in future than the markets as whole.

The next step is to find good individual companies in these sectors and concentrate money on those. Currently I hold only Fortum and Teliasonera directly. All other investments to these sectors go via ETFs. The main reason is that I haven't had the time to screen European companies from these sectors yet.

Valuation Of Berkshire Hathaway: The Lower Bound For Intrinsic Value

Warren Buffett uses change in per-share book value as yardstick to measure success of Berkshire Hathaway against S&P 500 index, but clearly says that the book value in itself understates the intrinsic value of the company. He defines intrinsic value as “discounted value of the cash that can be taken out of a business during its remaining life”.

Clearly, calculating the said value is not a simple task and the outcome can be very different depending on assumptions used. In the 2009 annual report, Mr. Buffett hints that the companies Berkshire controls are worth considerably more than the values at which they are carried on books, especially the insurance businesses.

The book value of Berkshire Hathaway was stated to be $84,487 per class A share in the annual report. With share price of $119,800 price per book ratio (P/B) is 1.42. With net earnings of $5,193 per class A share the price per earnings (P/E) ratio is 23.1. Looking at these rough measures, Berkshire does not appear undervalued. In fact, looking at just the P/E one could say it may be a bit overvalued.

However, neither of these ratios commonly used for valuation can capture one of the most important aspects of the Berkshire Hathaway: the “float”. Berkshire holds huge amounts of money due to collect-now, pay-later insurance business model. Over the years, the insurance-related float has grown to amazing $62 billion. And for the last seven consecutive years, Berkshire was essentially paid to hold this money via underwriting profits. In addition, derivatives-related float was about $6.3 billion at yearend.

For getting a rough estimate of the lower bound of intrinsic value of Berkshire Hathaway without trying to estimate the future income streams from various businesses, I took a look at the balance sheet. I consolidated the balance sheet a bit further as in the annual report assets and liabilities are listed per business group.


Assets

 
 
 
 
 
 
 
 
 
 
Roughly half of the total assets ($156,9 billion) are in cash or in investments. These make $101,118 per A share and $67.41 per B share. If you add Property, plant and equipment then you arrive to valuation of $203,5 billion ($131,195 per A share or $87.46 per B share).



Liabilities
 

The book value of Berkshire is pretty much same as the "BRK shareholder equity" in the above excel sheet. I used the stated average number of 1,551,174 class A shares to count all per share figures. "Per B share" amounts are divided by 1500.

The total "float" of $68.3 billion is derived from the liabilities. From my point of view this float represents additional value (almost free leverage in hands of an extraordinary investor) to me and therefore I would count it as part of my lower bound of intrinsic value. Adding together BRK shareholder equity and the stated total float I get $199,4 billion. That is $128,548 per A share and $85.70 per B share.

My conclusion from looking at the balance sheets is that the lower bound of intrinsic value is roughly in the same ballpark as the current share price. Therefore, in my eyes Berkshire Hathaway is probably undervalued.