Holiday recommendations

I decided to link a few holiday gift recommendations.

The first section is for beginning investors (that includes teens :-)

One Up On Wall Street : How To Use What You Already Know To Make Money In The Market

Peter Lynch's first book, shows how you can easily beat the market, by using what you've already learned; if you're a doctor don't buy stocks of technology companies; buy pharmaceuticals.

The Little Book That Beats the Market

I just received Joel Greenblatt's second book in the mail today, I'm already more than half-way done and am extremely enjoying it. It's an very readable book; ideal for beginners.

The Davis Dynasty: 50 Years of Successful Investing on Wall Street

A biography of Shelby Davis and his lifetime of market-beating

Beating the Dow (Revised and Updated)

Show how to beat the Dow by buying Blue-chips temporarily down.

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The First section had four easy to understand books for people who want to start learning about investing. The second has four books for investors who want to further their investment knowledge

Mosaic: Perspectives on Investing

Currently, my favorite book, Mosiac has 26 chapters, on 120 pages. With all of Mohnish Pabrai's articles. You may learn more in this book, then with all other before it combined

Expectations Investing: Reading Stock Prices for Better Returns

Expectations Investing shows how to pick companies based on how the market - in the long term - values it. For more info visit the website.

The Focus Investor

Rich Rockwood does and extremely good job of detailing the focus investment strategy. This book shows how to own less than 15 stocks and handily beat the market while doing it.

It's Earnings That Count : Finding Stocks with Earnings Power for Long-term Profits

Hewitt Heiserman shows how to create two income statements: Enterprising and Defensive, to better see if a company can fund itself while creating value.

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The third section are books that don't come right out and teach investing, but reading of these books will further your investment knowledge

Freakonomics : A Rogue Economist Explores the Hidden Side of Everything

Steven Levitt brilliantly explores different parts of the economy and compares seeming unrelated things with ease, like sumo wrestlers and teachers. I finished this book in a day, then gave it to my Grandpa who read it on a few plane flights.

Latticework : The New Investing

Robert Hagstrom takes Munger's ideas to a new level; relating seven subjects to investing, and making it easy to comprehend.

Power vs. Force: The Hidden Determinants of Human Behavior

The only book on this list I haven't read, Power vs. Force was recommended to me by Mohnish Pabrai.

Bull: A History of the Boom and Bust, 1982-2004

recommended by Warren Buffet, this book shows how the stock market moves in cycles.

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Enough with money books already, the next four books have nothing to do with investing.

Tom Clancy's Splinter Cell

Tom Clancy's Splinter Cell: OPERATION BARRACUDA

The first two books about the character from the best-selling, Tom Clancy created game.

The Opal Deception (Artemis Fowl, Book 4)

The fourth book in the best-selling series about the world's youngest genius, and his magic escapades.

Inside Delta Force : The Story of America's Elite Counterterrorist Unit

An original member of delta Force details how he got in, and what happened after.

Cinderella Man

The story from the movie, about Jim Braddock, a depression-era boxer who inspired the nation.

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Enough books, the final section has two cd's, two movies, and two video games.

Walk the Line, Soundtrack

Go see the movie, then buy the soundtrack for classic Johnny Cash and June Carter songs.

AC DC,Back In Black

This CD comes with a DVD of how the songs were written, and a music video of a back in black concert.

Mindhunters

This movie tells the story of FBI profilers hunting the killer among them. (Rated-R)

Madagascar (Widescreen Edition)

My sister's favorite movie, you'll think it's funny no matter what your age.

PS2 Madden NFL 2006

Madden 2006, for PS2, is by far better than 2005, and will still be fun as you play in the sixth year of your franchise.

PSP MVP Baseball

The first game I got for PSP, I 'VA won the world series with the bosses, Chisox and Brewers, so far.


I hope you like this gift list, if you have a teenager, you can probably find two investment books, and a video game for him, not too shabby :-).

-Mike

Disclosure: I own shares of ERTS, and a portion of revenues from things purchased of the links here will go towards this site

Potential Spin-off Investment

Deep Wealth recently posted about spin-offs. I also wrote about it in my Special Situations post.

I have found an opportunity for a spin-off investment.

Fidelity National Title Insurance was spun-off of Fidelity National Title recently.

I haven't finished my research, but I will provide a few links to research.

Start Here:
This 273 page filing details the in-and-outs of FNT, don't worry it isn't difficult to read as you may think, there are a lot of graphs and tables :-)

"About Us"

10Q

8K

Corporate Governance

News Releases

Other Financial Documents

Get News by E-mail

Contact Investor Relations

There's a lot of stuff, here, to go through. After going through all of it, please share your thoughts.

-Mike

Old Ben Graham Interview

I actually can't remember where, but I found this old Ben Graham interview.

Here are some highlights:


Q-Can the average manager of institutional funds obtain better results than the Dow Jones Industrial Average or the Standard & Poor's Index over the years?

A-No. In effect, that would mean that the stock market experts as a whole could beat themselves--a logical contradiction.

Q-Do you think, therefore, that the average institutional client should be content with the DJIA results or the equivalent?

A-Yes. Not only that, but I think they should require approximately such results over, say, a moving five-year average period as a condition for paying standard management fees to advisors and the like.


Q- What general rules would you offer the individual investor for his investment policy over the years?

A- Let me suggest three such rules: (1) The individual investor should act consistently as an investor and not as a speculator. This means, in sum, that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase--in other words, that he has a margin of safety, in value terms, to protect his commitment. (2) The investor should have a definite selling policy for all his common stock commitments, corresponding to his buying techniques. Typically, he should set a reasonable profit objective on each purchase--say 50 to 100 per cent--and a maximum holding period for this objective to be realized--say, two to three years. Purchases not realizing the gain objective at the end of the holding period should be sold out at the market. (3) Finally, the investor should always have a minimum percentage of his total portfolio in common stocks and a minimum percentage in bond equivalents. I recommend at least 25 per cent of the total at all times in each category. A good case can be made for a consistent 50-50 division here, with adjustments for changes in the market level



-Mike

Early US Value Investor

I'm reading my history book (notes) and I read about how Robert Morris bought 1.3 million acres for 6 cents an acre, and soon after sold them to British investors for $2.00 an acre!

That's a 3233% gain, or a 2.5 million dollar gain on a $78,000 investment.

WOW!

-Mike

Damodaran

I just recieved an e-mail from Aswath Damodaran:

Hi!
I wanted to update you on some recent additiions and
changes I have made to the size.
1. I have added several new papers under papers/research. In particular, I have
four new papers on the following topics:
- Valuing cash, cross holdings and non-operating assets (which also covers gross
debt versus net debt use in valuation)
- Valuing control (What should the control premium be and how can we best
estimate it? How can we use this to value voting share premiums and minority
discounts?
- Valuing illiquidity (How big should the illiquidity discount be in valuations)
- Valuing synergy (A pragmatic look at how best to value synergy and why
companies consistently overpay for synergy)
2. I am working on the second edition of my very first book: Damodaran on
Valuation. I will try to put the chapters online as I get them done but I hope
to be done by December.
3. I plan to update all of the datasets (Europe, US, Emerging Markets, Japan,
Canada & Australia) in January. I should have done an update in July but I was
way too lazy.
4. I am on sabbatical this year (doing next to nothing), but my classes from the
spring are still online and will stay online until I return to my teaching
duties.
I hope that this newsletter finds it way to you (through the thicket of junk
filters, changed email addresses and the rest). I wish you the best!

Aswath Damodaran
http://www.damodaran.com


-Mike

50 % returns

I’m sure we’ve all heard the Warren Buffet quote that if he had less than $1,000,000 he could, no would, make 50% on his money annually. Well, can it be done?

Don’t Trust all the Adds

Every other investing website advertises how they use Warren Buffet’s techniques to pick winning stocks, whether it’s screens, or only buying obscure stocks about 99% of them are bad, as highlighted in this article by Bill Mann. If all of these sites can make all of this money off of Warren Buffet’s techniques why do they need to sell them on a website?

The Theory Behind the Quote

Small investors have tremendous advantages over bigger investors and institutions. It’s your money there are no limits to how many companies you own, what industry they're in, if they have unionized workers, if they're a “sin stock”, or if their market cap is below $100 million.

By combing the pink-sheets or a local stock exchange you can find tons of companies undervalued, simply because they're so small Wall St. doesn’t care enough about them to fully value them. Some of these small companies are truly gems, it’s not that hard to find one that goes up 1000% percent, but it’s easier to find one that will go bankrupt so don’t think I’m tooting penny stocks.

Warren Buffet says if he had less than a million dollars, he would take advantage of that and wouldn’t have to buy the whole company when he found an un-recognized one. Of course Warren Buffet can do it, but it’s a lot harder for every other mortal on the earth to do it.

Just to make sure you not going to go to the stock exchange fifty miles from your house tomorrow that trades companies with market caps less than one million lets clarify that getting 50% returns over a period longer than two months is near impossible. I’m sure some people can achieve those returns over two, maybe three, years, but after those two or three years their returns will suffer and their five-year average will probably be under 30%.

If you think you’re going to get these returns the first thing you have to do is go on Amazon and buy all of the value and financials statement analysis books and read them. After you do that comb the pink-sheets and local stock exchanges for companies with high returns on capital or low price/book or other metrics, it doesn’t really matter what you screen for it’ll probably be undervalued, than use your expertise to find only the best companies that are trading for less than 50% of their fair value and buy them. Even if you do all of this and become an expert, because of the size of the companies you’re working with, chances are probably good that your returns could go down 50% and not up 50%.

OK, I’m not going to get 50% returns, what’s reasonable and how do I get it?

It’s very possible for you to get 15% returns over five years and 12-15% over the long run, but even these take a lot of work. You may still want to buy all those books from Amazon. To do this you’ll have to diversify a little. By this I don’t mean go crazy own 217 companies from every size, industry and country, I mean don’t put all of your money into these micro-caps, that’s suicide. Put at least thirty percent into companies with extra-wide moats and multi billion dollar market caps – like Wal Mart and Bud – only buy these when they have suffered short falls and are temporarily undervalued. Current examples of this are:

· Pfizer (PFE)
· Wal Mart (WMT)
· Boston Scientific (BSX)
· Anheuser Busch (BUD)
· Microsoft, etc.

Put some into mid-cap companies with market caps between 1-10 billion, and finish it off with everything under one billion. Every now and then put some money into an arbitrage situation.

So if Buffet says these returns are easy why didn’t he get them?

He may have, nobody really knows what returns he had before the partnership, but while he had the partnership he got returns of 29% a year. You could say it was because he managed over a million dollars, but I think it’s for a different reason.

The first two companies he invested in for reason other than its trading below Net Net Working Capital were American Express – big salad oil scandal for a different time – and Disney – because he loved the brand – in other words he stopped with the blinders and looked into the intangibles and found value in brand names and competitive advantages. There are a lot of reason for this, but I bet Charlie Munger and Phillip Fisher are the two biggest ones.

If this is correct it means you need to look past how much cash per share a company has, or if its P/E is less than 5, it means that he’d rather “ buy a good company at a fair price than a fair company at a good price.” I’m betting that if he believed in this when he was only managing a few million, he would have gotten 50% returns, but by the time he figured it out he decided to stay out of the market because of its over valuation and he had too much money.

Conclusion

OK now you know not to believe ads that tell you they’ll teach you how to get 50% - or higher, maybe lower – returns, because it’s impossible. Now all you have to do is keep learning and next thing you know people will crowd around you at cocktail parties and ask you for your next big stock tip.

-Mike

Portfolio Spreadhseet

Since TMF stopped thier portfolio service I created a spreadsheet to track my portfolios.

It uses the sheet here

That site has a portfolio spreadsheet, but I didn't like it and created my own.

The sheet is here

Some tips:

- Let it enable the macros

- Go to the page that says "Yahoo" and on the bottom of the left column type in the tickers for the stocks you'll be tracking (you may want to delete all of mine first :-)

- My portfolio is on there as an example, You can just change the tickers to whatever your's are then change the other info to what it is on the Yahoo page.

- It calculates Look-Through Earnings, which you can read about in Buffet's letters and this. If you have any extra question just reply and I'll try to answer them.

-Mike

The Farmer's Input

An article I wrote -- coming from the book How to Think Like Benjamin Graham and Invest Like Warren Buffet -- was recently posted on Shai's blog and also VInvesting.

This post was first a Post of the Day on the Motley Fool site, after Shai asked me to start guest posting for his blog he expressed interest in this post and asked if he could post it, that is here.

After my Special Situations post on Shai's blog, Jay from VInvesting sent me an e-mail asking me to write a column for his site. It is posted here. I also wrote an article for Jay about Warren Buffet's 50% returns, that should be up soon.

The first "Cow Valuation" post was kind of controversial -- see comments on Shai's blog -- in the following story the Farmer will address some of these issues.

A story similar to this is in the book mentioned above, I have re-worded it, added things, and created my own story. Most of my numbers, and time lengths, are off, I'm using them for the purpose of an example.

A few days after her first encounter with the old farmer the broker came back to his farm to purchase the cow.

Upon arriving she found the farmer sitting at his desk with un-organized papers lying everywhere, three calculators were found and the farmer smiled back at her when he saw here enter the room.

"Hi! Nice to see you here, I have some things to talk about."

"All right I've come with $1667 to pay for the cow."

"I have some changes to make, come sit down across from my desk and I'll explain them to you."

"The first thing I have a problem with is the earnings figure you gave me. I don't think it tells me much of anything," The Farmer began.

"Yes, it measures efficiency and economic utility," The broker tried to explain."

"Yes, but yesterday when I was contemplating this deal I looked into my safe and found $300 in cash. You told me my earnings were lower because of some un-important depreciation expense that I never actually expended, the Hummer has nothing to do with my cow."

"All right if depreciation isn't important, then what is?" questioned the broker.

"Cash. Money that I can use to put my kids through college or by a Hummer. My cow will go on for years producing revenues after costs, and it is the future, not the past we need to use in our valuation model."

"To find my asking price I assumed my cow will produce $300 worth of milk for the next five years, and $200 for five years after that..."

"Don't forget risk," the broker interrupted."

"Yes, I will be discounting by the seven-year treasury rate plus a risk premium. After I found what the cow will yield in cash over the next ten years, I added the amount the cow will be worth if you sell the beef after it dies."

"This is pretty simple, you want to the present value of future receipts, then add salvage value. I understand this, but I'm interested in how you found you're discount rate." The broker answered.

"Every day I read the articles from The Motley Fool, a while ago they interviewed Bill Nygren, who said he uses the seven-year bond rate, plus a risk premium. The seven year bond rate is 3.8%, we'll use a 5% risk premium rate, to be safe, and round to 9% as our discount rate."

"Sounds good," answered the broker.

The farmer showed the broker his chart on the value of the cow.



Bessy Valuation (2005)
Year 1 2 3 4
-
5
Cash Earned $300.00 $300.00 $300.00$300.00
-
300.00 Discount Rate 1.09 1.19 1.30 1.41
-
1.54
Present Value $275.23 $252.50 $231.66$212.53
-
$194.98

Year 6 7 8 9
-
10
Cash Earned $200.00 $200.00 $200.00 $200.00
-
$200.00
Discount Rate 1.68 1.83 1.99 2.17
-
2.37
Present Value $119.25 $109.41 $100.37$ 92.09
-
$ 84.48
-
-
Present Value of All Cash Flow $1,672.50
Salvage Value $ 250.00
Value of Bessy $1,922.50
-
-
Value w/o Discounting Cash $2,500.00 Difference $ 577.50

"This is a great model, but you must know that it's easy to discount nice and steady cash flows, but who knows what will happen to the cow as it gets older? There will probably be one-time non-recurring vet expenses. I'll give you $1800, but I think I'm over-paying."

"It's a deal," The farmer answered smiling

-Mike