October 25, 2011

Please, Do Your OWN Homework

I am writing today just to vent about a pet peeve of mine, two in fact. One of my pet peeves is when folks make uninformed declarations about any topic. I mean folks who take a position, an important position, with no qualified information, research or experimentation to back up their claim or position.

We see this all the time, especially when taking political positions. Someone takes the position that they don’t like or don’t care for the President (whomever the Prez happens to be at the time). When asked why they don’t like the President, the person lists so-called actions the President or his administration has taken. But many times the information they have is completely erroneous. What we find is that often times, the person had no idea what they were talking about and resorted to pulling so-called information out of the air.

The other pet peeve I have is when someone takes a position or makes a declaration based on very little information. This person, unlike the previous, has actually done some study. But that so-called study is so lacking thoroughness and depth, no rational person should or would ever draw any serious conclusion from it.

When it comes to investing both these approaches are not only bothersome to someone with my inclination for checking and cross-checking, it can be dangerous to the investor himself. Today I was perusing the CNBC website and noticed two articles about technical analysis. According to Investopedia, technical analysis is “A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.” However, anyone who has ever seriously studied the record of technical analysis knows it is of little value.

CNBC Technical Analysis
source: CNBC. Click picture to enlarge.

But that’s not what caught my attention on the CNBC site. Notice the headlines of the two articles circled in red. Each gives a totally opposing outlook of the future and both credit technical analysis as the method used to make the conclusion. Now an amateur investor, who is confident (falsely) but who isn’t necessarily vigilant in his research, might read either article and take a stance on the market that’s really ill-informed. Thus dangerous to his portfolio.

Venting over.

But here’s an approach I think is sound when it comes to investing on your own:

  1. Don’t pay attention to the talking heads in the financial media.

  2. Have some grounding in basic accounting.

  3. Exercise a “lazy” approach.

  4. Do your own research and make a habit of cross-checking your sources.

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

September 08, 2011

A Day In The Life: The Investing Process

I'm sometimes asked by people who know I'm in "some sort of finance", "What do you do?" Usually the person asking wants to make what I do, since it is "some sort of finance" and most folks have an irrational aversion to numbers, seem more difficult than it really is. What I do ain't rocket science, trust me. Warren Buffett is fond of saying investing requires the math skills of a 5th grader. So I usually answer with as simple an explanation as I can muster. "I help people invest in stocks and funds," is the line I offer by rote.

Recently someone followed up with, "I mean, what do you do day to day? How do you help people invest?" Again, what I do is not that complex or exciting. My answer was, "I read." I wasn’t being flippant. It is just really the answer. I read anything I can and have time for about the companies of interest to me, philosophies on investing to philosophies about other disciplines that might help my approach to investing. Charlie Munger, the long-time partner of Buffett calls this a latticework of mental models. This is what I am trying to create with my reading.

In the past, I have talked about how my process, which is influenced by Buffett, Munger, Benjamin Graham and many less well-known investment managers, leads to superior results. That process includes:

  • A commitment to a long-term investment philosophy.
  • Owning a concentrated portfolio of easy to understand companies that generate high degrees cash and generate high returns on capital/equity.
  • Adherence to a value-oriented approach to investing.
  • Not deviating into non-profitable areas of the market or areas where competitive advantages are hard to come by (i.e. gold, shorting, or commodity trading).

Clearly we’ve done well:

Core Portfolio vs. S&P 500 Index
source:, Standard & Poors. Disclosure. Enlarge image.

As the chart points out, our Core Portfolio has beaten the market in most calendar years and is ahead of the market so far this year. From the time of inception the portfolio’s annualized total return has been more the double that of the market’s total return (Core: 12.3% vs. S&P 500 Index: 5.1%). Over a typical working lifetime of about 40 years, 12.3% will turn a one-time $10,000 investment into $1,000,000 while a 5.1% investment will become $70,000.

A Day In The Life

The following is an example of how my day transpires. No day is typical. It depends on the season, if school is in, if quarterly earnings are imminent. But this gives a good representation.

  • 6:00am: Open emailed version of Wall Street Journal and New York Times and read articles pertinent to the positions in the portfolio. Read any other article that sparks an interest – not necessarily finance related.
  • 7:00am – 8:00am: Get daughters ready for and dropped off to school.
  • 8:00am: Continue reading articles and any alerts emailed to me regarding our current positions.
  • 9:30am: Market opens. Check portfolio to see how our positions opened. Take any action if necessary (which rarely happens).
  • 10:00am: Go to the gym.
  • 11:00am (bulk of the day): Turn on the financial news, primarily for the ticker. Watch any videos on the web that pique my interest. Google/Twitter search for news relevant to our investments or investments I have my eye on. Listen to recorded quarterly conference call or read financial statements or write a blog post, etc. Hop on the train to the New York and drop in on an investment conference, especially if its free or low cost. Read or watch anything I can find by investment managers who share a value oriented approach.
  • 3:00pm: Pick up girls from school.
  • 4:00pm: Market closes. See how portfolio shaped up for the day. Check if any positions currently on our watchlist look like buys.
  • 4:30pm – 8:30pm: Spend time with family. Help girls with homework.
  • 9:00pm: Listen to recorded quarterly conference call or read financial statements or write a blog post, etc. or, Just shut it down for the day and spend that time with family or fun.

The process is not sexy and may be boring but it gets results. There is no secret formula.

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

August 08, 2011

The Downgrade

The Hill
source: Crazy George

The Downgrade:

On Aug. 5, 2011, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA'. The outlook on the long-term rating is negative.

...the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges...

S&P downgrades the credit rating of the United States (link).

David Beers, Standard & Poor's Global Head of Sovereign Ratings, and John Chambers, Chairman of the Sovereign Ratings Committee, explain our rationale for lowering the rating. (video: 18:23 minutes)


"Buffett: US Rating Still AAA, No Matter What S&P Says" by Becky Quick; CNBC (link)

Warren Buffett says there's no question that the United States' debt is still AAA and that he's not changing his mind about Treasurys based on Standard & Poor's downgrade. "If anything, it may change my opinion on S&P," the legendary investor said.

"How will the fallout of the U.S. downgrade affect you?" by Greg Gardner; Detroit Free Press (link)

"Standard & Poor's Defends Lowering U.S. Credit Rating" by David Kerley and Dan Arnall; ABC News (link & video)


'Leucadia National Corporation Stock Downgraded (LUK)" by The Street Wire (link)

"Coach Reports Robust Results" by Zacks Equity Research (link)


"Fatherless to Fatherhood" documentary spot on (video)

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

February 18, 2011

In Defense of Frugal: The Happy Home

Fortune cookie: small house, big happy
source: Myra Matos

One bit of financial advice my father gave me when I was younger was, “Son, you can’t drive your house but you can sleep in your car.” I didn’t really get it at the time but I definitely do now. Essentially he was saying don’t spend too much on a home, you’ll be financially better off if you don’t. Without getting too much into my parents’ finances, on a teacher’s and painting contractor’s income, they have been able to save and invest where their capital will kick off enough income in retirement as they earned when they were working. They live modestly but do not need to. They could actually increase their lifestyle substantially if they wanted, but are satisfied making cookies with my daughters, their grandchildren, and going on the occasional vacation.

Originally, as I promised to do in “Are You A Millionaire?”, I was going to post about the second measure of wealth. I talked about the first in “Your Wealth Ratio”. But some conversations recently prompted me to find out if my father’s advice stood up to muster. I went back and skimmed some of Thomas Stanley’s books, including his most recent, Stop Acting Rich. One of the tidbits I found very interesting is that Stanley’s research revealed that most millionaires carry mortgages despite the ability to pay them off in full. I thought it’d be interesting to see, given recent years’ turmoil in the mortgage and real estate markets, if these numbers still held up.

Using the information in Stanley’s recent work and two of Stanley’s earlier works, The Millionaire Mind and The Millionaire Next Door, somewhere between 50% and 60% of the millionaires surveyed hold mortgages on homes purchased 23 years prior. Additionally, the current outstanding mortgage on homes belonging to deca-millionaires (those with $10 million in or more in net worth) is equal to 7% of the home’s current value while the typical millionaire (50% have less than $2 million) has a mortgage balance of just under a third of the home’s market value. Thus, I assumed a mortgage of 15% of the home’s value for milionaires between $3.5 to $10 million and overall of 30% for those under $3.5 million. I used the IRS Personal Wealth Statistics from 2004 (,,id=185880,00.html) The below chart shows that millionaires still have more than enough cash to pay off the mortgages whenever they want. (Please click the table or here for a larger view.)

In other words, according the IRS study and Stanley, millionaires on average hold nearly five times the value of their outstanding mortgage in cash and cash equivalent securities. They can pay off their mortgage at any time.

Continue reading "In Defense of Frugal: The Happy Home" »

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

January 05, 2011

We Beat The Big Dogs

We Beat The Big Dogs
source: Getty Images

This is just a quick entry to convey one message. Our Core Model Portfolio is likely beating the pants off of your mutual fund! As the chart below shows, the Core Model Portfolio has consistently outperformed the major indexes and the typical mutual fund over the last one, three, and five years as well as since the inception (12/6/2002) of the Core Model Portfolio. But the chart understates the degree to which our portfolio outperformed relative to mutual funds because the costs of owning the funds have not been considered in the returns. (Click chart or here for larger image.)

Core Portfolio Returns
source:, Standard & Poors, Wilshire, Wall Street Journal. Disclosure.

Correction: The annualized 3-year return ending 12/31/2010 for the Core Model Portfolio is actually 3.55% making the "Margin of Victory" for that time period 5.76%.

I do not want to make this post too lengthy. I plan on talking about the costs of mutual fund ownership in later posts. (It’s a topic deserving some attention.) 

Continue reading "We Beat The Big Dogs" »

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

May 29, 2009

All Star Investor Says The Market Is Still Cheap

We follow several investors whom we respect and share our value investing philosophy. These investors tend to deviate from the crowd in their opinions whether the market is cheap or overpriced (video), how to approach buying, how to value companies, and whether or not it's time to buy or sell. Bill Nygren of the Oakmark Funds is one of those investors.

In a recent interview with CNBC (video) Nygren says (actually he's quoted as saying):

"Almost everything in the stock market sells below our business value estimate."

Quite a statement. It's a great time to invest.

Disclosure: none

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

March 09, 2009

10 Signs Your Financial Advisor Is Stealing Your Money (Part 2)

Bernard Madoff
Source: Reuters

Today Warren Buffet appeared on CNBC for 3 hours answering a multitude of questions from Becky Quick, Joe Kernen and a slew of emailers. One emailer from Cincinatti asked "How do we know that you are not another Bernie Madoff?" In response Buffett said:

"Well, that's a good question. I would say this. I--it is a problem with investment advisers. I mean, it--there are going to be a certain number of crooks in the world. And sometimes they're smooth-talking, and the best ones are the ones that kind of don't look like crooks... it is a problem who you put your trust in."

He then later agreed with Joe Kernen that an investor cannot rely totally on government regulation to catch these crooks. So what is an investor trying to protect herself to do?

I wrote a post (Part 1) back in September of last year with the intention of answering this question. This was before the Bernie Madoff or the R. Allen Stanford stories broke. In the post I promised 10 red flags which might alert an investor that his advisor is not on the up and up. I'm finally getting around to listing them. Today I'll do just a couple and get to the rest at a later date.

As a side note, The Wall Street Journal reports that the client list of Bernie Madoff became available to the public. The list contains well known and not so well known folks running the wealth spectrum. The one thing they all have in common is they are all considered sophisticated investors. The list should once and for all prove that "sophisticated" means little in the investment world and underscores my personal pet peeve with the restrictive accredited investor law. I digress.

1. Returns that (nearly) always go up:

If your advisor is reporting returns that always seem to go up, then you should regard his numbers with great skepticism. The markets are controlled by unpredictable human emotion and its movements simply can't be predicted. Madoff's firm produced returns of positive 1% to 2% in gains per month with only five negative months covering a period of 12 years. These types of returns are so improbable that an investor can almost stop here and safely speculate that they've encountered a ponzi scheme or at least an investment manager that is not telling the truth about his returns. But we'll go on.

2. Complex strategies that cannot be duplicated:

When and an advisor has to start using greek letters in formulas to explain his investment strategy, it's time to be concerned. Madoff used an investment strategy consisting of purchasing blue-chip stocks and then taking options contracts on them - a split-strike conversion or a collar. The strategy itself is not complicated. In fact, it's pretty plain vanilla. What was extraordinary are returns Madoff reportedly received with the strategy.

A few individuals attempted to perform due diligence but were unable to replicate the Madoff's past returns. Harry Markopolos was among those that tried. In an interview with 60 Minutes he said:

"As we know, markets go up and down, and his only went up. He had very few down months. Only four percent of the months were down months. And that would be equivalent to a baseball player in the major leagues batting .960 for a year. Clearly impossible. You would suspect cheating immediately... No one's that good."

The above represents a stark contrast to the investment approach employed by Mr. Buffett - value investing. Unlike the method employed by Mr. Madoff, it is niether complex nor does it produce returns that are always favorable. In fact, sometimes years go by without positive results. That's why it is so important to have a long term view as Buffett reiterated today in his interview with CNBC.

BECKY: Yeah. And on a serious note, there are people who look at the stock market and wonder how do they know the whole thing's not a Ponzi scheme?

BUFFETT: Well, the whole thing's not a Ponzi scheme.

BECKY: What--how do they know who to trust?

BUFFETT: We're talking about, you know--we're talking about American businesses that employ, just the ones on the stock market, tens and tens and tens of millions of people. They're real companies... in the 20th century, the Dow went from 66 to 11,000, you know, 400. And we had all kinds of problems during that period. Business works overall. It doesn't work every day or every week or every month, and sometimes it really gets gummed up. And then you need government invention sometimes to get the machines back working smoothly. But the machine works.

JOE: Warren...

BUFFETT: And equities, over time, are the way to do it.

Disclosure: none.

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

January 05, 2009

"The Third Pig" On Reuters, Yahoo Finance and Others

The Third Pig

Articles that appear on The Third Pig occasionally appear on the Seeking Alpha website and are regularly picked up by the general financial media outlets including Yahoo Finance, Reuters and other financial blogs. I have listed some of the latest entries and other locations they can be found:

Asset Allocation in 2009: Best to Go with the Devil You Know at:
Yahoo Finance: and

Coach: Luxury on the Cheap at:
Guru Focus:,42620

Five Things to Be Thankful for in This Market at:
Yahoo Finance:

GM Bailout Would Be Agony For Taxpayers at:
Yahoo Finance: 

Obamanomics and the Stock Market at:
Stock Shoot: 

Buffett and Cramer Agree: It’s Time to Buy Stocks at:
AOL Finance in the Headlines area: 

Greed, When Others Are Fearful, Is Good at:
Wall Street Oasis:

If you would like to share some of the above articles with your friends, family or associates just click any one of the icons below for the various websites including ShareThis, and Facebook. Here is to a wonderful 2009 in the market.

Disclosure: none

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

November 14, 2008

A GM Bailout Would Be Agony For Investors


Talk in the marketplace, Detroit and Washington has been percolating about giving General Motors (GM) and the auto industry in general a bailout ala the TARP for the banking industry. GM is on the verge of running out of money. Cash received from auto sales, down dramatically from last year, will not cover the cost of running its business. GM has a monthly cash burn rate of $2 billion or more per month and only $16 billion in cash left on its latest quarterly balance some of which needs to be held in reserve.

GM blames the current economic environment on their woes. Year-over-year sales at month end October saw a 45% decrease, worse than almost all of their competitors. Toyota (TM) for instance, which will soon overtake GM’s market share in the space, saw sales decline a significant but less severe 23% over the same period. But GM’s execs are not being genuine. GM has never been a great business.

Warren Buffett in a 1991 gave a speech to Notre Dame students and faculty. In it he compared two businesses - Company Agony and Company Ecstacy. Company Agony lost its investors more money than virtually any business in the world while the other, Company Ecstasy did nothing but make money.

The difference in the two businesses was Company Agony, which in Buffett’s story was American Telephone and Telegraph had all kinds of employee benefit programs, stock options, pensions, the works. The business operated under heavy regulation, was heavily unionized and extremely capital-intensive. In fact, shareholders had to continually reinvest in the company simply to keep it going.

Company Ecstasy on the other hand, Thompson Newspapers, didn’t have elaborate compensation programs and never needed to reinvest in the company. They simply wrote a story and produced it by putting ink to paper. Thompson was able to raise prices which raised earnings and there was nothing to do with the money except to return it to shareholders or purchase more profitable businesses.

In advising his audience about which kind of businesses to work for, an Ecstacy non-capital intensive business or an Agony capital-intensive business, Buffett said,

“One is a marvelous, absolutely sensational business, the other one is a terrible business. If you have a choice between going to work for a wonderful business (Ecstasy) that is not capital intensive, and one that is capital intensive (Agony), I suggest that you look at the one that is not capital intensive.”

The same can be said for investing in capital intensive businesses. Investment in a capital intensive, Agony business like GM where market share [chart below] is eroding which began well before an economic recession, labor costs are the highest in the industry at $73 per hour [$30 higher per hour than Toyota’s], the workforce is heavily unionized and it makes products consumers don’t want (i.e. gas-guzzling SUVs), doesn’t seem like a smart move to me.

Click for larger image 

The government is our investment manager now. It must make prudent investments and should make sure we see some return. GM has not returned any money to investors for years and years. In fact, an investment in a simple index fund like the Vanguard S&P 500 Index Fund (VFINX) would have been a much better investment over the long haul. [See chart below].

Click for larger image 

If an investment in GM never made money in the past, what would be different now? I venture to say, nothing.

Disclosure: none


 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

November 07, 2008

Obamanomics and The Stock Market: Part II

Source: Getty Images

We Can All Relax… Maybe Not

Today President-Elect Barack Obama held his first press conference since the election on November 4th. This followed a meeting with his economic advisors the purpose of which was to solidify a strategy to right the U.S. economic ship.

Ah! Now that Obama is on the job we can all relax. Well, not quite. In Obama’s opening statement he said, “We are facing the greatest economic challenge of our lifetime.” Although Obama’s statements were strong, his speech seemed mainly aimed to temper expectations of what he can do as the incoming President. In answering a reporter’s question, Obama said as President his chief goal will be to restore confidence in the market and get people working. Unfortunately, in the President-Elect’s first time out, he fell short of calming the markets. The Dow Jones fell 100 points during his 18-minute press conference. [video]


Are Democrats Good For The Market?

The market’s drop was understandable. The bi-partisan rhetoric dubs Obama “the-most-liberal-senator”. According to Karl Rove, he out-Democrats most Democrats. John McCain picked up this “too liberal” stance at the end of his campaign. The purpose of which was to equate Democrats as being bad for the economy and the stock market. Of course there are those who buy into this, but is it true?

In a recent New York Time article, the returns of the stock market are plotted over an 80-year period, according to the political party in office. The results? The market does better under Democratic Presidents. Under Democratic administrations the average return for the S&P 500 since 1929 was 8.9% and 0.4% under Republican administrations. [click image for larger view]

Source: New York Times

Party Power

Obama will be coming into office with a Democratic House and Senate as well. I have heard the talking heads on stock market television shows say this too is bad for returns. Again, the evidence does not support this view. According to the research conducted by Wharton professor, and stock market historian, Jeremy Siegel,

“…a Democratic president and a Democratic Congress? Well, Siegel's research shows that such a combination has generated annualized returns of nearly 14% since 1948. That's more than 4 percentage points better than under a GOP president and GOP Congress, and more than 3 percentage points better than under a GOP president/Democrat-controlled Congress.”

Here is the dirty little secret. The party that is in power probably has only a slight effect, if any at all, on the trajectory of stock market returns. Stock markets are like living organisms and are affected by many interlacing influences. So the best an investor can do is to invest consistently no matter who sits in the oval office.

Diclosure: none

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

October 13, 2008

What Goes Up Must Come Down... And Up Again

Benjamin Graham’s proverbial Mr. Market is manic depressive and thusly causes much of the daily up, then down, then up again movements in stock prices. When pessimism pervades, Mr. Market will be so eager to sell his shares he will eagerly drive down stock prices to levels that make little sense. We saw Mr. Market do that over the last couple of weeks, driving the S&P 500 down 28% in just 14 days.

Mr. Market was so depressed in fact and so willing to sell, the CBOE VIX Index reached record proportions, topping 50 for the first time since it started measuring all 500 stock of the S&P Index. However, in his haste, Mr. Market has thrown the baby out with the bath water. Values abound as an article in the Wall Street Journal by Jason Zwieg points out:

“Out of 9,194 stocks tracked by Standard & Poor's Compustat research service, 3,518 are now trading at less than eight times their earnings over the past year -- or at levels less than half the long-term average valuation of the stock market as a whole. Nearly one in 10, or 876 stocks, trade below the value of their per-share holdings of cash…”

Zwieg also points to a Benjamin Graham measure of valuing the stock market adopted by Yale professor, Robert Shiller, is at its lowest levels since 1989. The Graham P/E divides the price of major U.S. stocks by their net earnings averaged over the past 10 years, adjusted for inflation. At Friday’s close, when the S&P 500 was 899.22, the Graham P/E stood at less than 15 times earnings. This is good news for those on the other end of Mr. Market’s transactions.

But low and behold, Mr. Market heard some good news over the weekend that the world’s governments were doing all they could to handle the credit crisis. Mr. Market became irrationally exuberant, deciding to buy back all the stocks he had sold the two weeks prior. Today, the S&P 500 gained 11.6% - the highest percentage gain since 1933 – settling at 1003.35.

With the today’s advance, long-term investors might fear all the values Mr. Market left us last week have disappeared. I doubt this is the case. For the S&P 500 to return to its previous high of 1576.09, stocks would have to gain nearly 60% from current levels. Under “normal” circumstances, it takes nearly 5 years to gain 60% in stocks. In other words, the bargains will remain for some time. And as the following chart points out, returns to previous highs can take years. [Click image for larger view.]

Click for larger view

In the meantime, for long-term investors, it is best to heed Jack Bogle’s advice [video]:

“Visualize investment as growing as a steady line, which it does [red lines in charts below], and visualize the crazy market as being all these jags up and down and around this steady line [blue lines in charts below], upward, upward, always upward, I think, then you’ve got to say, I know I’m not smart enough to get out at the high, I know I’m not smart enough to get back in at the low, so I’m just going to stay the course… what you want to do is keep investing…”

Click for larger view

Bottom line is, while this is a scary time to be in the market, it is best to simply keep plugging along. No one will know where the bottom of the market is and it is equally hard to know where the top is. But Mr. Market will always be willing to give you a clue as to what you should do. Buy when he’s selling and sell when he’s buying.


 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

August 16, 2008

Netflix Flub Fixed


If you are a movie lover like me, even a casual one, then there is a good chance you are a subscriber to Netflix. Netflix (NFLX) has been providing online movie rental subscription services for the last decade or so. It allows subscribers access to a library of movie, television, and other filmed entertainment titles on DVD and delivers them to your home. Cool right? The company serves over 8.4 million subscribers – I am one of them.

Over the past three days, Netflix flubbed. For some reason the usually reliable company had a technology problem that disrupted the delivery of its DVDs. Netflix was able to ship some discs on Tuesday and Wednesday but none on Thursday.

In what seems to be the company’s personality it was proactive in acknowledging a problem existed and subsequently offered a 15% credit to affected customers. Although the company could have been more forthcoming with the cause of the technology glitch, it swiftness in correcting the problem earns them some points. However, the credits could be costly to the company, estimated at as much as $3.6 million in revenue lost per day of delay.

Netflix’s shares are up about 17% year-to-date. Interestingly, the news of the week barely moved the stock’s needle. In fact the shares are up about 1% week-over-week. This is probably good news for the company as its customers seem to be an understanding crew, and the market seems to think these glitches won’t hurt Netflix’s bottom line.

I was expecting my Netflix yesterday but have not received it yet. I will give the company a break though. They seem to be on top of it.

Disclosure: I did not, nor did the clients of Brick Financial own any shares of Netflix, Inc (NFLX) at the time of this writing. I however, am waiting for Strange Wilderness to arrive in the mail at any moment

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

April 25, 2008

Contents NOT Hot at Starbucks

StarbucksThe shares of coffee maven Starbucks' (SBUX) took a 10% tumble Thursday after the company announced it was lowering earnings forecasts for the remainder of the year. Howard Schultz, the company's CEO, cited "...The current economic environment is the weakest in our company's history, marked by lower home values, and rising costs for energy, food and other products that are directly impacting our customers." Schultz also mentioned the California and Florida markets, which make up 32% of domestic retail revenues have been especially impacted by the downturn in the housing market. Thus he/the company draws a connection between the struggles consumers are having in the housing market with a downturn in Starbucks' traffic in those states.

While I personally cannot be certain there isn't a direct connection between the housing crisis and lightened traffic at Starbucks's stores, I'm skeptical. If folks are making the choice between their daily java fix and making a mortgage payment, then times are worse than I thought. If there is any diminished traffic at Starbucks' stores it is more likely a result of internal missteps than outside economic forces.

An outside force I am convinced is not to blame for Starbucks' troubles is headwind created by the success of the coffee products from McDonald's or Dunkin' Donuts. Each of these companies does something well - McDonald's makes Egg McMuffins (delicious), Dunkin' makes, well donuts (also delicious) and Starbucks makes high-end specialty coffee. And the customers of each of these companies are as unique. McDonald's customers want a drive-thru window. Dunkin' Donuts' customers want sugar. And Starbucks customers want a place they can sit and enjoy a conversation, a newspaper or search the web. So I'm not troubled by competition. (Read my friend and fellow Starbucksian, Wayne E. Pollard's take on the subject at the Huffington Post.)

There were some encouraging words from the press release. Schultz committed to cutting costs and refocusing the company's efforts on making the best coffee in the world. Today, the company announced it was stepping back from its efforts in entertainment as well. If these actions reignite the company's growth, this period would have marked a prime and rare buying in opportunity.

Disclosure: I and the clients of Brick Financial Management, LLC owned shares of Starbucks at the time of this writing.


 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

April 23, 2008

Still Uncertainty in Financials

Wall StFinancials are doing well even with news that would have normally sent the shares of companies in the sector on a downward spiral.  The earnings of banks are off by a long shot even in comparison to just last year. We're also seeing write offs left and right.  Last month when Bear Stearns basically went out of business and calamity was predicted, the market barely budged (the S&P 500 was down less than 1%). Lehman Brothers announced to the market that it had taken action to sure up its liquidity by raising $4 billion in capital. Why would the firm have done this if it wasn’t in trouble? With all the bad news coming in and undoubtedly more bad news in the near future it's interesting that the stocks of financial companies have actually done well. What one might garner from this is the sector has turned a corner. So does this mean we should all go out a buy a bunch of financial stocks? Quick answer: NOPE!  

My guess is we’re in a period where financials will oscillate. I for one still need to see more information coming in and how the market reacts. For the moment, I’m short the sector (SKF). It’s important to keep in mind the stock market discounts the future, meaning future information and events are usually accounted for in the stock’s current price. An investor’s job is to assess the probability of those future events actually occurring. How well one does that is where the money is made. Right now I’m betting things will get worse before they get better.

Disclosure: I and the clients of Brick Financial owned shares of ProShares Ultrashort Financials ETF (SKF).

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

April 18, 2008

Blockbuster Bids for Circuit City

BlockbusterCircuit City

Blockbuster (BBI) video chain made an offer to buy Circuit City (CC) stores for about $1 billion on April 14th. That is more than the market value of Blockbuster so right off the deal smells bad. Not to mention, neither retailer provides was you would call a great shopping experience.

Bill MaherEven comedian Bill Maher took notice. In his HBO show "Real Time", Maher says,

"New Rule: Crappy companies don't get to merge with other crappy companies. This week, Blockbuster Video announced a hostile takeover of Circuit City. What a brilliant idea. The two places nobody goes anymore finally under one roof. Blockbuster's plan is to combine their expertise in never having the video you want--with Circuit City's high-pressure sales staff of ignorant teenagers--to create the ultimate in horrible retail experiences."

I coud not agree more.

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

April 03, 2008

Traders Bet on Google to Buy Expedia

ExpediaTraders sent shares of Expedia (EXPE) up by about 15% over the last couple of days amid rumors that Google (GOOG) would be interested in purchasing the internet travel company. Certainly Google has the muscle to do it. But the company has not been agressive in acquiring e-commerce companies. Thus an acquisition of the travel company would represent a, albeit slight, departure from Google's current expansion modus operandi.

I find it interesting however that the companies did not outright deny they were in talks. A WSJ article (subscription needed) confirms the companies' reluctance to address the issue. Their respective silence seems slightly conspicuous to me. Definitely something to keep an eye on.

Disclosure: I and the clients of Brick Financial Management, LLC owned shares of Google at the time of this writing and do not currently but have owned shares of Expedia.

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

March 05, 2008

Some More Tenets of Value Investors

Value investors make hardheaded assessments of their competencies. If they doubt their skill in stock selection, they steer clear. Value investors know their limits, thickly drawing the boundaries of their circle of competence. They avoid investment prospects beyond those boundaries as well as anything even close to the boundaries.

Market gyrations, price-value discrepancies, and risks of overconfidence warrant exercising extraordinary caution in selecting an investment. In focusing on the business, value investors ascertain whether the business itself is substantially insulated from adversity. Value investors avoid business with permanent problems. The business itself must be fortified by a moat, a defensive barrier to ill effects such as arise from brand name ubiquity, staple products, market strength, and adequate research and development resources. Franchise value is exhibited by high, sustainable returns on equity and invested capital.

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

February 05, 2008

Buffett on Active Trading

Warren E. Buffett"We believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a 'romantic."

- Warren Buffett

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

January 11, 2008

Tenets of Value Investors

A Penny SavedValue investors make a habit of relating price to value. They recognize that stock markets rise and fall. The prices of individual stocks likewise swing widely. The intrinsic value of a company lies somewhere in between. There are stocks priced about what the underlying business is really worth and stocks priced below that.

Value investors do not guess when the market or a stock is at its peak, trough, or specific points in between. There will nearly always be times when some positions are priced attractively compared to value and others when the opposite is the case. This requires business, accounting and valuation principles.

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

May 20, 2007

Chris Rock on "Black" Wealth

Chris Rock

''We got no wealthy black people. We got rich people. Shaq is rich. The guy who signs his check is wealthy. Here you go Shaq! Go buy yourself a bouncin' car. Bling Bling!"

"If Bill Gates woke up with Oprah's money, he'd throw himself out the mother-bleeping-ing window.''

"Wealth will set us bleep-ing free, okay? 'Cause wealth is empowering, wealth can uplift communities from poverty, okay? A white man gets wealthy, he builds Wal-Marts and makes other white people have some mother-bleep-ing money. A brother gets rich, he buys some mother-bleep-ing jewelry."

 - Chris Rock

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

October 27, 2005

Qualities of Successful Investors

A friend of mine was shopping at a local garage sale and came across a book for 25¢. She picked up the book and after reading the title, “The Money Masters”, quickly determined that she wouldn’t have much interest in it. A gift-giver by nature, she thought that at 25¢ she didn’t have much to loose by purchasing it and further thought that she might offer it as a grab-bag gift for the upcoming Christmas season. [It was only July. She does her Christmas shopping early.] After plucking her quarter down, she shoved the book in her bag and made her way to the neighborhood Starbucks for her daily chai tea.

One highly probable event she was likely to experience during her visit to Starbucks was that she would run into me. [My usual is the grande mild coffee.] When she arrived I noticed the tattered book sticking out of the top of her bag. After our usual salutation, I gloated. I told her that I was happy that I had had an influential role in her reading choices.

A little background is in order. My friend and I, during our many java induced conversations, have often talked about money. Everything from the evils of it, to the lack of it, to the pursuit of it, to the role of it, to the love of it, to the need of it. To be fair, she is much less interested in “money” as subject matter than I am. In any regard, I took most of the credit for her excellent book choice. [And undervalued no less. A used copy on will cost $11.65. She found her copy for 25¢ representing a 98% discount to intrinsic value!] But I had the suspicion that she did not realize what a gem she had stumbled upon.

In an attempt to show her the usefulness of the book I recalled one conversation we had about the genius it took to be a good investor. Her view was that most people were not “smart” enough to be investors. To counter her belief I paraphrased Warren Buffett, arguably the world’s greatest investor, by stating that successful investing requires a rational approach and fettered emotions, not a high IQ. My friend seemed slightly moved by my (and Mr. Buffett’s) stance but openly pondered, “What is meant by a rational approach?” I pointed out that one of the great benefits of possessing “The Money Masters” is that it more clearly spells out Buffett’s (as well as other great investors) approach and core beliefs better than I ever could. In the case of what makes a good investor Buffett lists six qualities in the book:

"You must be animated by controlled greed, and fascinated by the investment process.
You must have patience.
You must think independently.
You must have the security and self-confidence that comes from knowledge, without being rash or headstrong.
Accept it when you don’t know something.
Be flexible as the types of businesses you buy, but never pay more than the business is worth."

Anyone can possess these qualities. It doesn’t take a high IQ to be a good investor. If you find that you do not possess these qualities however you should find a financial advisor or investment manager that does.

Oh yes, I’m happy to report my friend will be holding onto her garage sale gem. She’ll be shopping for used neckties for her grab-bag gift instead.

[Disclosure: I and the clients of Brick Financial Management, LLC owned shares of at the time of this entry.]

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

October 24, 2005

Concentrate Your Bets

Those of you who have read our Client Letters and are familiar with our services know that we are proponents of concentrated portfolios. Of course this belief runs contrary to most of the discourse that exists in the investing public today. Most investors and investment professionals are devout followers of modern-portfolio-theory (MPT) and the efficient-market-hypothesis (EMH). MPT holds that the more diversified a portfolio, the less risk (in terms of volatility) from each of its individual positions. EMH states that stock market prices reflect the collective knowledge and judgment of all investors and thereby reflects the correct price. In other words, no individual investor can gain an advantage over the stock market by selecting specific stocks.

We think that both MPT and EMH are (mostly) bunk. We indeed think that it is possible to beat the market and at less volatility risk by choosing just a few stocks. Two recent articles support our view. A New York Times article about the record of concentrated portfolios points out that:

"...concentrated funds come out slightly ahead (of diversified funds). They returned 8.9 percent a year, on average, over the last 10 years, versus 8.7 percent for the diversified funds, according to Morningstar."
A Businessweek article addresses the volatility issue stating:

"A low-risk concentrated portfolio may sound like a contradiction in terms. After all, the belief in diversification as a way to reduce risk is sacrosanct, and the average domestic equity fund holds 175 stocks. But academic studies show that as few as 50 stocks can give a portfolio volatility levels equal to those of the Standard & Poor's 500-stock index. And many funds get by with less. A screen of those with fewer than 50 stocks on fund tracker Morningstar's database found that more than half had lower betas -- a measure of risk -- than the S&P 500. One-third had lower standard deviations -- which Morningstar measures as the month-to-month variation in the price of fund shares. What's more, according to a 2004 Morningstar study, some 80% of concentrated funds -- also known as focused funds -- outperformed their peers from 1993 through 2003."

An advantage of running concentrated portfolios not addressed in either article is the tendency for such funds to have much lower than average turnover ratios. The turnover ratio is the percentage of a fund's assets that have changed over the course of a given time period, usually a year. The turnover ratio for a mutual fund is calculated by dividing the average assets during the period by the lesser of the value of purchases and the value of sales during the same period.

Portfolios with high turnover ratios (i.e. high levels of buying and selling) tend to have a higher degree of taxable events. Managers that run concentrated portfolios usually create fewer of these events as they tend to buy and sell much less often. Concentrated funds also tend to have much lower trading costs than the average fund. A perusal of the Morningstar database shows that mutual funds with 40 or fewer stocks have an average turnover ratio of 40.7% while the average mutual fund is closer to 100%.

In other words, even if concentrated funds didn't outperform more diversified funds on an outright basis, once costs are considered concentrated funds would come out ahead anyway. Bottom line we tend to agree with the conclusion of a study on concentrated funds presented in The Journal of Finance:

"We find that funds with concentrated portfolios perform better than funds with diversified portfolios."

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

July 15, 2005

Rules of Dumb

Dumb RulesI had a thought about financial "rules-of-thumb". Most don't work. Those that work at all, work in only some situations. What they should call them is financial "Rules-of-DUMB". I can think of a few right off the top of my head. Like:

1. Buy as much house as you can afford.

Now this one is just ridiculous although so many people follow it. Buying a "lot of house" will only serve to make you house rich and cash poor. And usually, what you can afford is determined by some mortgage broker. In my view, that's the last guy you should be listening to. That's like the sheep asking the wolf for advice on how not to get eaten. (No knock against mortgage brokers. I'm just pointing out a conflict of interest there.)

Most of us would be better off buying an easily affordable house. Not "mortgage broker" affordable, but The Millionaire Mind affordable. According to the book's author Thomas Stanley, an easily affordable house is one in which you can afford on HALF your present income for the next FIVE years without disrupting your lifestyle. If this can't be achieved, then consider that you have a house that is not easily affordable.

2. Diversify.

I'll paraphrase Warren Buffett by saying diversification is for the know-nothing investor. The know-something investor should concentrate. Our intent with diversification is to lower our volatility. But what we don't consider is we are also lowering our potential return. If we study our investments a little more and understand them, we'd be better served by concentrating on those investments that offer the highest probability of success. Concentrate to get rich then diversify to stay rich OR stay concentrated to get richer.

3. Save 6 months living expenses for emergencies in cash.

What emergencies are we talking about that would require 6 months worth of expenses? I mean seriously. This is just one of those rules that I think goes too far. If we are properly insured with health, life, disability, home/renter's, auto and the like, most emergencies are taken care of. Most of us, if we were to loose our jobs, will be able to collect unemployment. And if we were to find ourselves in that situation and unemployment doesn't cover our expenses, we certainly wouldn't need that much money in cash (money market fund, savings, under mattress, etc.)!

For most people, having more than say $5,000 in cash is a waste. The rest of your "emergency" funds should be diverted to higher earning liquid assets like stocks. But what if the stock market goes down you ask? Well all I can say is that the stock market is more likely to go UP! In fact, the market goes up about 75% of the time. So it's much more prudent to put your money (your emergency money too) in stocks, though the rule-of-dumb says otherwise.

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

The 2.5 Year Double

Mo' money, mo' money, mo' money! Yesterday marked the day that our Relative Value portfolio doubled. So your $1 became $2, or your $1,000 became $2,000, or your $10 million became $20 million! Feels good especially given that the feat was accomplished in about two and a half years. Our goal is usually to double our money in about six years. We beat our goal by about 3.5 years!!

Another nice little tidbit is that while the Relative Value portfolio has returned 104.9% since December 31, 2002, the Russell Midcap (using the iShares Russell Midcap Index ETF [symbol: IWR] as a proxy) return was 77.3%. So the portfolio has done extremely well over the last 2.5 years compared to its closest benchmark.

Now maybe doubling your money in 2.5 years doesn't seem like much, especially to those that that have dabbled in the real estate market in the last few years. Well, I'd say don't get too excited about those real estate returns. Although stellar, they still haven't exceed the returns of the stock market. Unlevered real estate (meaning leverage isn't considered but neither are mortgage costs in the return calculation), as measured by the the NCREIF Apartment Index has been approximately 38%-40% over this time frame. Of course, this performance could have all been a fluke. It's too short a time frame to tell if our outperformance was luck or skill. Just as the underperformance of the Choice portfolio this year could be a fluke. But we're patient.

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

July 13, 2005

The Emotional Investor

Emotional InvestorOne of the characteristics Warren Buffett looks for in managers of the companies he owns (read: The Warren Buffet Way by Rob Hagstrom) is rationality. In essence, he's looking for managers that will allocate corporate funds to areas that make the most economic sense. An emotional approach to capital allocation would undoubtedly lead to decisions that would decrease shareholder wealth.

I find that very few financial decisions we make for ourselves are rational. Just the opposite in fact. Almost all of our decisions, especially as they relate to our personal finances, have some emotional component. For example, I'm acquainted with a few single 30-somethings that have recently become homeowners. In every case (except for one), these individuals moved out of a small and inexpensive apartment into a much larger and expensive home. A couple were actually moving out of a rent free situation (they were living with mom). Along the line, each one of them has said to me in one way or another, that they thought they were making a good economic decision. In other words what they were saying is that they thought they were being rational and that they'd be making themselves wealthier by buying a home.

It makes me giggle a little that any of them would actually say that they'd be economically better off. I mean, how much better off can you be economically going from paying next to nothing (small apt/living with mom) to paying a substantial something (buying an expensive home in a historically inflated real estate market). These folks are clearly making emotional economic decisions although they'd like to think otherwise. In no way can a situation in which substantial money is spent be better than a situation in which no money is spent. The only explanation is that judgment was clouded by emotion.

But I'll give these individuals the benefit of the doubt as we all have heard time and time again that homeownership is a sure way to wealth. We've heard it so much that we'll even abide by it when the choice of homeownership is the much more expensive choice for us. We dread doing the wrong things with our money (at least some of us). Our emotions take over and suspend our rational thought. Without rational thought, we wind up making the wrong decisions.

Even in situations when we know better, emotions play a big part in our decisions. As some of you (I'm positive not all of you) may be aware paying down a low interest rate mortgage early is not the best financial decision one can make. One would be far better off putting those extra mortgage payments to work in the stock market (or your own business) where one would probably receive a much higher rate of return. But clearly, this is not simply a financial decision. Emotions play a huge part in personal finance and carrying a mortgage is no exception.

I have a friend and with his and his wife's combined incomes, they will be able to pay off his existing mortgage in a very short time. And they will probably go ahead and do just that. My friend also understands that he'll be better off financially if he never accelerated his payments. When I asked him why he planned on paying the mortgage off early knowing what he knows he simply stated, "Cause debt don't feel good."

"Debt don't feel good" is not rational. It's emotional. In Thomas Stanley's book The Millionaire Mind, he profiled several millionaires and their treatment of their homes and mortgages. It was clear that most millionaires are "less" emotional when approaching their own personal finances. Which is why according to Stanley most millionaires (not all) carry mortgages to full term. When millionaires approach a financial decision, they choose the alternative that puts the odds of being wealthier in their favor. This is why they save instead of spend, buy stocks more than bonds (or real estate for that matter), lead low consumption lifestyles instead of ostentatious spend-thrift lifestyles, run their own business instead of working for "the man". I think most millionaires exhibit some form of economic rationality. Paying down a mortgage early or buying an expensive house isn't economically rational. But like my friend says, debt just don't feel good and neither does living with your mama. And maybe that's more important but it won't help your wallet.

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

May 13, 2005

Our Ports vs. Concentrated Mutual Funds

From Brick Financial's April 2005 Client Letter: 

...Although we just told you that the short term doesn’t matter much, it is interesting to see how other highly concentrated (less than 40 positions) value-oriented portfolios are performing.  These types are portfolios are extremely rare in the mutual fund world (they are little more popular among hedge funds).  The list below represents nearly all the mutual funds that fit that description. All of these funds and their managers have been able to beat the stock market over any period greater than 5 years. But let’s take look at the one year returns of these funds compared to our portfolios:



Capitalization Focus

Number of Holdings

1 year return as of 4/30/2005

Relative Value





iShares Russell Midcap Index



Index ETF


Oakmark Select





Mairs & Power Growth





Ariel Appreciation





Legg Mason Special Interest





iShares S&P 500 Index


Large Cap

Index ETF




Large Cap



Legg Mason Value Trust


Large Cap



Longleaf Partners


Large Cap



Legg Mason Growth Trust


Large Cap





Large Cap








White Oak Growth


Large Cap



source: Foliofn

Take note of a couple of things.  First, the range in returns from port to port is very wide (from our port Relative Value at 14.84% to White Oak Growth’s -12.93%).  The second thing you should take note of is that none of these outstanding managers are beating their respective indexes (represented by the iShares ETF funds).  Does this serve as evidence that each manager has lost his/her investment muster? Doubtful.  It is just the economic climate we find ourselves in.

For more of the April 2005 Client Letter click here.

 Subscribe: Email | Reader | RSS | | Email this Email | Print This Print

Subscribe with: 

Subscribe in a readerSubscribe By Email:
-- subscribe to get updated headlines and full length posts delivered right to your email address.

or subscribe by:

Reader | RSS

About Brick Financial Management, LLC

Blogged by Brick Financial

51 JFK Pkwy, 1st Fl. West
Short Hills, NJ 07078
Email Us

Brick Financial Management, LLC is a Registered Investment Advisor specializing in providing investment management services to individuals, families, organizations and institutions. We implement highly focused stock, bond, and balanced portfolios using an investment approach commonly referred to as value investing. Disclosure


ShareThis -- ShareThis lets you instantly access all of your profiles, blogs, friends, and contacts for easy sharing and updating on sites like Digg, Delicious, Reddit, Facebook and MySpace. For more about ShareThis, click here.

Digg! Digg -- submit this item to be shared and voted on by the digg community. For more about digg, click here.

Delicious -- mark an item as a favorite to access later or share with the community. For more about, click here.

Facebook Facebook -- share an item with users of Facebook, a collection of school, company and regional social networks. For more about Facebook, click here.

Ben's Latest Tweet

    Follow Ben on Twitter