November 14, 2011

Change Is Good

"The difficulty is not in the new ideas, but in escaping the old ones." - John Maynard Keynes

Warren Buffett is famous for not investing in technology. He is also famous for avoiding international shares. He also has been known to avoid railroads. But things change. Buffett announced this morning on CNBC, he has bought upwards of $10 billion worth of IBM stock. Although investing in a technology company marks new territory for Buffett, he did not come to the decision quickly. He reports he's been reading IBM annual reports for 50 years and finally decided to pull the trigger.

Buffett, has also invested in internationally and in railroads. Recent years have marked and expansion of Buffett's willingness to invest in areas he traditionally hasn't. This is likely less a divergence from his core investment principles than it is an expansion of his investment circle of competence. Perhaps this will also be an boost to Berkshire Hathway's stock. Time will tell.

The embedded video is of Buffett's appearance on CNBC today. (LINK)


"Warren Buffett's Berkshire Was Buying as Stock Prices Fell" by Alex Crippen; CNBC

"Warren Buffett Still a Shrewd Investor: Tilson" by Michelle Fox; CNBC

You can buy one of the greatest collections of businesses [Berkshire Hathaway] run by one of the greatest investors [Warren Buffett]—if not the greatest investor—of all time at a 35 percent discount to intrinsic value. - Whitney Tilson

Disclosure: At the time of this writing, I and the clients of Brick Financial Management, LLC owned shares of Berkshire Hathaway (BRK-B). But positions can change at any time.

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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.

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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.

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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" »

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October 21, 2010

Through The Noise eBay Is Still On Track

eBay, Inc. reported yesterday and the market seems to have like what it heard. The stock is up over 8% day-over-day to $27. Paypal, the company’s online payment platform, continues to shine as its revenues grew 40% over the quarter-to-quarter. However the picture was not all rosey. The company’s main business, dubbed Marketplace, grew only 3%. If CEO John Donahue wants to meet his three year goals of turning this aspect of the business around, he has some work ahead of him.

With that, one quarter should not make or break a company. At least, we’d hope. So I thought I would check to see how eBay is performing compared to where I thought they’d be at this point. You may recall a post a few years back where I did a discounted cash flow analysis on eBay. At the time, the company was trading at about $30. I then said based on my projections of free cash flow, the company was actually worth $60. According to that analysis (here), eBay should have been producing free cash flow somewhere in the $2.2 to $2.7 billion range. Some three and half years later eBay reports free cash flow of $1.9 billion. This includes a one-time tax payment of $207.4 million related to a legal entity restructuring. If we were to add back the $207 million eBay would have a FCF of $2.2 billion.

So it seems my original analysis which had eBay at valued at approximately $60 in 2006 was a pretty decent estimation. The beauty is, eBay is cheaper than it was then, even after an 8% run up, at $27. If Paypal keeps chugging along and Donahue can get Marketplace on track, the analysis I did back in 2006 should remain valid.

Disclosure: I and the clients of Brick Financial Management, LLC owned shares in the companies or funds mentioned in this post at the time of this writing. But positions may change at any time.

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October 20, 2010

Bill Miller: The Time To Buy

Bill Miller of Legg Mason Capital appeared on CNBC today for the first time in about a year. Interviewing him was another great investor, John Rogers of Ariel Capital. It was a good morning for fans of value investing. The main topic of conversation was with the current dismal sentiment among investors, where is the stock market going in the near term. Miller expressed that he had no idea about the timing of ups or downs in the market but expressed now is the best time to invest since the 1980's.

Check out the video:

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July 20, 2009

Why I Don't Trade (Often)

This past January, about the time of Obama's inauguration, Warren Buffett gave an interview to PBS corresspondent, Susie Gharib. In the interview Buffett was asked to give his greatest and most important business lesson. He responded:

The most important investment lesson is to look at a stock as a piece of business not just some thing that jiggles up and down or that people recommend or people talk about earnings being up next quarter, something like that, but to look at it as a business and evaluate it as a business. If you don't know enough to evaluate it as a business you don't know enough to buy it. And if you do know enough to evaluate it as a business and its selling cheap, you buy.

When thinking of stocks as more than just pieces of paper, but actual representations of underlying businesses, the investor is led to a more sensible approach. If as an investor you were considering buying a business that you would own, operate and would provide the majority of your income, it is likely you would not contemplate selling that business within seconds of purchasing it. Just as you would not think of buying a home in the morning and selling it in the evening, if your intent was to live in it.

A great example is Google (GOOG). Google is the dominant player in the search engine world commanding more than 64% of internet searches and is rapidly becoming a threat to longtime tech behemoth, Microsoft (MSFT). Google also produces and obnoxious amount of free cash flow and seems to grow that cash at will (see chart).

Google's Free Cash Flow

With market dominating performance and consistent operating results, it is safe to assume Google's business value is stable and steadily growing. But if you were to look at the stock price, you'd never know it. In the past 52 weeks, Google's shares have gone from a high of $510 to a low of $247 and now sit at around $430. Do these wild fluctuations make any sense given Google's performance? Nope. But for those of us who are more concerned with the underlying business, we can just sit still and only move when to buy when the market greatly undervalues our business and sell when they overvalue them. This is why I don't trade very often and prefer the "lazy" approach to investing.

Disclosure: I and the clients of Brick Financial Management, LLC owned shares of Google at the time of this writing but positions may change at any time.

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July 13, 2009

All Star Singing The Same Tune About Cheap Market

A few weeks back we introduced you to Bill Nygren, manager of the Oakmark Select fund. In the video Nygren plainly states his belief the market is presenting investors with a lot of opportunity to purchase undervalued but high quality companies. In his 2009 semi-annual letter to his fund holders, he reiterates this view. He says,

We continue to believe that today’s long-term investors will increase their capital more by investing in stocks than by investing in other assets. Further, we believe that the long-term return for stocks purchased today is likely to be higher than historical average returns. Here are a few of our main reasons for such optimism.

In his letter, Nygren sites three factors that influence his position - valuation, historically high levels of cash, and lots of skepticism amongst investors. In regard to valuation, Nygren points out that with the S&P 500 trading at about 900, and operating earnings in 2009 expected to be in the $60s, stocks appear reasonably valued with a mid-teens P/E ratio. But Nygren strongly suggests a $60 range for earnings is not normal. Nygren argues that operating earnings were nearly $90 in 2006 thus normal earnings are probably somewhere north of $60.

Nygren also talks about cash, the amount of money market balances which remain historically high. These funds have to go somewhere and the stock market is its most likely destination. The following graph illustrates this point:

In regard to the market's skepticism, Nygren says:

As value managers, we’re used to having people disagree with us. In fact, we prefer it that way. The consensus opinion, almost by definition, is usually reflected in current prices. So when we differ from consensus, we’re excited by the opportunity. We believe that today’s consensus stock market opinion is that the magnitude of the market increase since March has not been matched by fundamental improvement in the economy. The implication is that an investor should wait for the market to fall before increasing their investment in stocks. While we applaud the effort to tie stock price movements to fundamentals, we have to ask, where were these fundamentalists when the market was in freefall?

All in all, Nygren makes for a good fundamental argument to be an investor in today's market.

Disclosure: none

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June 01, 2009

The Lazy Way To Beat The Market

Source: Flickr by timcullen

At the extremes, the bottoms of bear markets and the tops of bull markets, you will undoubtedly hear that buy and hold is dead. We find ourselves in the former market (we hope) thus that old refrain has returned. Over the last 10 year, the S&P 500 has seen a -2.5% annual yield (ending 4/30). Those who become disenchanted with the buy and hold strategy are folks generally uncomfortable with what feels like doing nothing. Alternatively they set to a course of frenetic trading at what seem to be opportune times. Unfortunately this approach leads to very little except frustrated investors.

The Journal of Finance published a white paper by two Cal Berkeley professors, Brad Barber and Terrence Odean which chronicled the folly of the active trading approach. Right from the abstract of the paper they write:

Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent. The average household earns an annual return of 16.4 percent, tilts its common stock investment toward high-beta, small, value stocks, and turns over 75 percent of its portfolio annually. Overconfidence can explain high trading levels and the resulting poor performance of individual investors.

So how does an investor beat the market?

Relax: The first thing to do is to simply take a chill pill. Most of what you need to beat the market comes down to your temperment. If you can keep a cool head while all the world is losing theirs you will have a tremendous advantage. Fear and panic cause investors to make bad decisions more often than not. So stay cool.

Stop trading: Transactions costs, the least of which is commission, eat away at returns. As damaging is the bid-ask spread as well as the capital gains taxes paid on any small gains made. According to Barber and Odean:

The investment experience of individual investors is remarkably similar to the investment experience of mutual funds. As do individual investors, the average mutual fund underperforms a simple market index. Mutual funds trade often and their trading hurts performance. But trading by individual investors is even more deleterious to performance because individuals execute small trades and face higher proportional commission costs than mutual funds.

Control your emotions and your ego: Consistently beating the market is difficult. For this very reason it pays to take your emotions and your ego out of it. Do you really think you will create some investment approach that is somehow smarter and more fantastical than the methods used by Warren Buffett or John Templeton? It's foolhardy to chase the latest fad in investing (or to think you'll create it) when the tried and true works like a charm.

Hold just a few positions: The investor would do well to select only the stocks of companies he understands well. By doing so he will reduce his portfolio's risk by steering clear of permanently weak companies and avoiding overpriced firms, not by excessive diversification. Increasing portfolio positions past 20 to 30 positions does very little to reduce volatility any further. Interestingly though, increasing positions past this point will continue to reduce returns. According to mutual fund manager Robert Hagstrom, concentrated portfolios of 15 securities are 13 times more likely to outperform the market than portfolios of 250 securities. In other words, excessive diversification fails to effectively reduce volatility risk yet greatly handicaps the investor’s ability of beating the market.

Buy at the right price: Even the greatest company will not make a good investment if it is overpriced. Determining the correct price for an investment is difficult as it requires many assumptions. But it is essential to a sound investment process. If bought at a price below the company's real value, all an investor really needs to do is wait until the price of the stock reflects the true value of the company. Eventually, it will.

If an investor follows these few steps, he can relax on the beach and let others worry about the ups and downs of their portfolios.

Disclosure: none

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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

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February 20, 2009

Is There Still Room For Optimism?

Glass Half Full
Flickr by Mr. Keef

Last week I did a video saying that I thought we were still in a new bull market. This was a follow up to a video I did in January listing some of the indicators I follow as reasons I thought we were in the early stages of a bull market. I pointed out that even with all the bad news about the economy, and jobs, and bailouts, the S&P 500 remained above 800. I saw this as a positive sign.

Since last week, the economic news has gotten worse. There have been renewed talks about nationalization of our banking system. [Psst. We’ve basically already nationalized the banks.] In response, the Dow reached a new 6-year low, penetrating the bottom it reached this past November. The S&P 500 broke through the 800 price barrier and threatens to challenge the low of 752 it reached last year. As of this moment (9:55 a.m.) the S&P 500 is trading at 769.

So was I wrong about this being a new bull market? Technically, no if the market holds where it is. Unless the S&P 500 falls below 752 (the November 20, 2008 price), this will still (technically) be considered a bull market. Recall I pointed out in the in first video that only once has the market declined 20% or more, rebounded 20% then, broke through the previous low. Could that happen now? Well we’re very close. It’s definitely possible.

Does any of this matter? Not really. The overall point I was trying to make in the videos and the past few posts on the topic is that stocks are cheap. They remain cheap. As I pointed out in the last video, we don’t know what the market or the economy will do in the next or any six month period. But it is highly probably the stock market will generate very good returns over the next five to ten years. And an investment in stocks now makes a lot of sense at these valuations. I’m still optimistic.

Next week I will be doing another video highlighting why I’m still optimistic about the market using some specific company examples. Stay tuned.

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December 24, 2008

Coach’s Bags Are Expensive, But the Stock Is Cheap

Source: Flickr by

When the holiday shopping season is done for 2008 the results for retailers will show disappointing numbers. Consumers continue to pinch their pennies in this tough economic environment. The International Council of Shopping Centers expects November and December sales at stores open at least a year to fall as much as 1 percent, the largest drop since at least 1969, when the trade group began tracking such data [video].

However, there’s beauty in those numbers for stock investors. While the industry as a whole has performed poorly operationally, some have weathered the storm quite well. But panicked investors have thrown the baby out with the bathwater, pricing the stock of strong companies below reasonable levels.

Take for instance luxury bag and apparel designer, Coach, Inc (COH). Year-to-date, Coach is down 34% right along with the Apparel, Accessory and Luxury Goods sector which is down 37% as of December 19th. But the company has been around for nearly 70 years, a period which has seen at least 10 recessions. Certainly it has seen and weathered some bad times before. Since going public in 2000 they’ve done nothing but continue to strengthen the company.

According to Standard & Poor’s, “For the five years through FY 08, COH exhibited a revenue compound annual growth rate (CAGR) of 27%, a gross profit CAGR of 29%, an EBIT CAGR of 37%, and a net income CAGR of 40%. Total assets grew at a five-year CAGR of 30%, and inventory at a modest 19% CAGR, attesting to a tight operating structure that reduces inventory risk.” The company also sports gross margins of 74%, the highest in the industry. Only Luis Vuitton (LVMHF.PK) comes close with gross margins of 64%.

Coach also holds a commanding lead in the luxury handbag market in the U.S. and is making strides in Japan with a market share 13% behind only Luis Vuitton’s 30% share of the market. Coach sees promise overseas, especially in China. It expects the overall market to more than double in size over the next 5 years to more than $2.5 billion in annual sales, up from of $1.2 billion now.

Even in this difficult environment, Coach has increased sales 18 percent year-over-year has essentially no debt to speak of. Louis Vuitton on the other hand has $4.5 billion in long-term debt and a total-debt-to-equity (TDE) ratio 52%. The industry’s average TDE is 27% (Source: Reuters).

The bags may be expensive at Coach but the stock is cheap. In my humble opinion, a company that is able to perform like this even in bad times is deserving of more than the 9x trailing earnings it now fetches. 

Disclosure: I and the clients of Brick Financial Management, LLC owned share of Coach (COH) at the time of this writing. But positions may change at any time.

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November 24, 2008

5 Things To Be Thankful For In This Market (Part 3)

The last couple of posts (here and here), I have been listing some things to be thankful for in this market. Here's # 3.

3.     The Inevitable Market Rebound

This bear market has been the most severe we have seen since the decline of 1929. The good news is that we are not likely to see precipitous declines from here. So, although it is impossible to pick the exact bottom, it would be my guess that we are in the “bottom range”. I feel strongly that over the next 3 to 5 years, the market will be much much higher. And according to the data below, most of that recovery will come in the first few days and months.

On average, using the last nine bear/bull markets as a proxy, 87% of the S&P 500’s high has been recovered in the first year of the market bottom. On average, all of the prior high, and then some [122%], has been recovered by the second year. This is represented in the following chart [click image for larger view]:

click for larger image

For example, on August 25, 1987 (light blue highlight) the S&P 500 reached a high of 336.77. Then it began a drop over the next three months, which included the infamous Black Monday when the market dropped more than 20% in one day, and by December 4, 1987 the market had fallen to 223.92, representing a 34% drop over that period and a loss of 112.85 points off the index. However, within one year of the bottom, the market had returned to 277.59, rebounding 53.67 points, a 24% return, from the bottom and recovering 48% of the loss of the previous high. By the second year, the market had stood at 348.55, recovering a full 110% of the previous high of 336.77.

In fact, in most instances, you will recover a full third of what you’ve lost in the first 40 days into a new bull market. Buy and hold is not dead. No one can time the market so it pays to stay fully invested even in times of uncertainty.

Disclosure: I and the clients of Brick Financial Managment, LLC hold positions in iShares S&P 500 Index ETF (IVV) and ProShares Short S&P 500 Index ETF (SH) but positions may change at any time.

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November 21, 2008

5 Things To Be Thankful For In This Market (Part 2)

Many of us may find it hard to be thankful for much in this economy, especially when it comes to our portfolios. From its October 9, 2007 peak of 1565.1, the S&P 500 has been down as much as 52% hitting 752.44 on November 20, 2008. But every cloud has a silver lining. The other day I decided to list a few things to list a few things to be thankful for in this, and most bear markets. Here's #2.

2.     Low P/E Ratios

Last month, I pointed to a Wall Street Journal article by Jason Zweig where he points to a Benjamin Graham measure of valuing the stock market adopted by Yale professor, Robert Shiller. Dubbed the “Graham P/E”, it divides the price of major U.S. stocks by their net earnings averaged over the past 10 years, adjusted for inflation.

At October 24, 2008, when the S&P 500 stood at 876.77 the Graham P/E was 15 (I have included November 20th’s low of 752.44, a Graham P/E of 12.5, represented by the red line), the lowest it had been for nearly 20 years the suggestion being the market was greatly undervalued and investors were acting irrational. However, Chris Carroll a Johns Hopkins Professor of Economics, takes a slightly different position in a recent white paper. He points out the numbers predict a 6% or so rate of return over (grey dot, 8% at the red dot) the next 12 years net of inflation, about the historical average. Hardly the panic many market pundits have talked about.

Source: Chris Campbell/Benjamin Taylor

Whether the current market provides for the buying opportunity of a lifetime or simply a return to normalcy as Carroll suggests is of little concern to me. I am finding quality companies at P/E multiples never available before. One company that fits the bill is Coach (COH), the leader in the handbag and accessory market.

 Since being spun off from Sara Lee almost a decade ago, Coach has grown its tangible book value by 49% per year and has not seen its return on equity dip below 40% in seven years. The company has raised its earnings per share by 47% per year and year-over-year EPS has increased every quarter for the at least the last five years including its most recent. Coach also has nearly $410 million in cash with only $2.2 million in debt.

In any other environment Coach would be selling for 25-30x earnings and has since it went public years ago. But today an investor can have Coach for a cool 8x earnings. I must agree with Warren Buffett when he says,

“…fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”

Disclosure: I do not, nor the clients of Brick Financial Mangement, LLC, hold any positions in the companies mentioned but positions may change at any time.

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October 28, 2008

Greed (When Others Are Fearful) Is Good

Source: The Digerati Life,

Buffett’s Detractors
Warren Buffett has had his share of detractors since his New York Times Op-Ed piece in which he announced he would be buying American stocks in his personal account. According to Buffett, “…fears regarding the long-term prosperity of the nation’s many sound companies make no sense… But most major companies will be setting new profit records 5, 10 and 20 years from now.”  

The crux of the detracting argument is Buffett’s call is untimely, he is too rich to worry about asset allocation or time horizons and you, we are not him. Dianne Francis of Canada’s National Post sums up this viewpoint:

"…guys like Warren Buffett also operate in a parallel universe of Cash-Rich, Long-Term, Value Investing. He’s making big bets on American stocks. We should not for lots of reasons. He's just plain wrong and I wrote about that yesterday. The stock markets are not capable of being a valid pricing mechanism for anyone for some time. Besides that every day brings more bad news, and new developments.”

Seems to me the detractors have cherry-picked certain lines from Buffett’s piece. Buffett in no way suggested the near term picture would be pretty. In the near term, markets are likely to continue their record breaking volatility and investors may suffer yet more loses. Buffett wrote,

  • “In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.”
  • “To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions.”
  • “…businesses will indeed suffer earnings hiccups, as they always have.”
  • “Let me be clear on one point: I can’t predict the short-term movements of the stock market.”

But Buffett’s qualifying statements are beside the point. His overall point was clearly missed or ignored - due to the widespread fear in the marketplace, stocks of strong businesses are cheap. And, in the long term, these businesses are likely to grow through economic booms and busts. Since, in the long term, stock prices are highly correlative to the performance of businesses, it makes sense to buy when the prices of stocks are below the value of the underlying businesses. That time, according to Buffett, is now.

The Typical Investor Buys High and Sells Low
Buffett goes on to point out the resiliency of the market. He also emphasizes most investors’ uncanny ability to miss out on those gains because of their tendency to buy when they are comfortable (at market tops) and sell when they are fearful (at market bottoms). To underscore Buffett’s point, consider the following:

Research conducted by DALBAR, Inc shows for the 20-year period ending December 31, 2007, the typical mutual fund investor failed to capture the returns of the market. Although the average mutual fund trailed the market by about 2.5%, during this 20-year period, the typical mutual fund investor received a return of 4.48% while the market returned 11.82%. In fact, the investors’ returns were barely above the rate of inflation which clocked in at 3.04% during the period. 


The disappointing results received by equity investors is totally due to the manic depressive buying and selling described by Buffett. As the chart below demonstrates, investors sell their mutual fund shares [demonstrated by the downward blue bars] just when market performance deteriorates [demonstrated by the orange line in negative territory].
Click for larger image 

When Ms. Francis suggests the market is a “valid pricing mechanism” she demonstrates, as do her fellow Buffett detractors, she does not understand that price and value are not the same. In the short term, stocks markets are never valid pricing mechanisms. Investors who believe otherwise allow their emotions to dictate their investment timing, a sure way to diminish investment results as the chart/table above demonstrate.

Investors Make Easy Things Difficult
Buffett has given the world one of his golden rules to investing: Be greedy when others are fearful and fearful when others are greedy. In fact, one might say this is the definition of value investing. However, as Buffett noted in his 1984 essay “The Superinvestors of Graham-and-Doddsville” there are not likely to be many converts to the practice. He writes,
“Adding many converts to the value approach will perforce narrow the spreads between price and value. I can only tell you that the secret has been out for 50 years [now over 75 years], ever since Ben Graham and David Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years I have practiced it. There seems some perverse human characteristic that likes to make easy things difficult… There will continue to be discrepancies between price and value in the marketplace, and those who read their Graham and Dodd will continue to prosper.

I’ll be re-reading my Graham and Dodd.

Disclosure: none

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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.


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August 19, 2008

Note to Target: Raise Your Prices


Target (TGT) reported earnings today and beat estimates by 5 cents per share. The second quarter (fiscal year 2009) earnings report show the company had made 82 cents per share which amounts to $634 million in profit for the quarter. This might have been better news had estimates not been lowered ahead of Target’s announcement. Given the turmoil in the economy, it is no wonder the company posted its fourth straight quarterly profit decline.

But long term investors in the company should take solace. Target is one of the best-managed and most profitable retailers in the world. It is competitive with Wal-Mart (WMT) on a price basis on most of the items both stores carry, but the typical Target customer earns over $20,000 more per year in income than does the Wal-Mart customer. Right now, in this tough economic environment, customers prefer Wal-Mart to Target based on the perception the latter store is more expensive. There is some buzz on Wall Street the company needs to let consumers know the retailer are just as “cheap” as the competition. However, based on findings regarding human behavior as it relates to consumerism, this would be one of the worst things Target could do. There is a peculiar human trait that wants to believe the more one spends, the more valuable the purchased item is, even if one only perceives he or she has spent more. People value items based on price instead of pricing items based on value. Thus Target has a competitive advantage over Wal-Mart in the minds of most consumers during better economic times.

To illustrate allow me to point to two studies which examine the role price plays in a person’s ultimate purchase satisfaction.  The first study was conducted by researchers at Stanford Business School and Cal Tech. In a blind taste test drinkers were given several glasses of wine priced from $5 to $90 per bottle. The results showed the drinkers preferred the most expensive wine. What the study participants were not told was the wine was exactly the same in each and every bottle.

The second study conducted by Dan Ariely, author of Predictably Irrational, measured people’s reaction to the prices of a pill they were given to mitigate their pain. The pain as it were was delivered via electric shocks administered by the conductors of the study. The result: although the pill was the same for all participants, 85% of the participants who were told their pill cost $2.50 felt less pain while only 61% of those who were told their pill was only 10 cents felt less pain. In the minds of the participant, the more expensive the pill, the more effective it was.

The “predictably irrational” behavior of people at it relates to their wallets has a couple of implications for Target. The company can use this information in two ways. The company could and should raise its prices above similar items found at Wal-Mart. In good economic times, all things being equal, consumers will prefer the perceived higher price alternative thus they will choose Target over Wal-Mart. Although in bad economic times, they may choose Wal-Mart. This actually has some merit as during the 5 year period ending April 2006, a period of economic expansion, Target’s stock clearly performed better than Wal-Mart’s (first chart). However, since then during an economic downturn, Wal-Mart has outperformed.


Since this is a counterintuitive approach it is not likely Target will go this route. Thus, if Target is going to continue be price competitive with Wal-Mart, it should market or continue to market itself as Targét (Tarjay) instead of just plain old Target. That way, it will continue to keep its higher earning customers and not lose them because they are not charging enough.

All that said Target remains a great buy at this level, $49.72 as of this writing. Simply based on its earnings potential, it is worth at least $60 per share. Additionally, since selling half its credit card receivables to JPMorganChase for nearly $4 billion in March of this year, it is likely to redirect that money to share repurchases that will serve to further increase the value of the stock. For the quarter, Target has spent $4.9 billion of the $10 billion it plans to spend on share repurchases. And it has a real estate portfolio (it owns the land its stores are on) with a book value of $25 billion and worth at least $30 billion. That represents 75% of its market cap.

Buying in at these levels (not a recommendation; see disclosure) seems like a no brainer.

Disclosure: I and the clients of Brick Financial owned shares of Target (TGT) at the time of this writing however did not own shares of Wal-Mart (WMT).

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August 11, 2008

Actions Speak Louder Than Words… And Quarterly Returns

Bill MillerNot long ago, Bill Miller who serves as the fund manager of Legg Mason Value Trust mutual fund (LMVTX) issued the fund’s semiannual letter to shareholders for 2008. Miller laments the fund’s poor performance over the last year (July to July), down 34%. Famously, Miller’s fund beat the S&P 500 index a bunch of years in a row. However, as a Fortune magazine article points out, Miller doesn’t provide much guidance for how his fund (or investors) can return to the glory years going forward.

I disagree. The old maxim “Actions speak louder than words” can no doubt be applied here. Throughout this troublesome market, Miller has spoken loudly by adhering to his investment principles. A few of those principles, distilled beautifully by Janet Lowe in her book The Man Who Beats the S&P, are to:

Observe, but don’t forecast, the economy and the stock market. The market has so many players all using different bases from which to compete and adapt to one another. This results in unpredictable short term movements in the economy and the market. There is no simple formula that can predict these movements. Forecasting is folly. However, observing these movements and behaviors provides investment insights.

Seek companies with superior business models and high returns on capital over time. Over long periods, companies meeting these criteria have proven to provide high returns to their shareholders.

Buy businesses at a large discount to the central tendency of their true value. In true value investing style Miller always provides himself a margin-of-safety. In his latest letter, Miller points out that Financials now provide this margin-of-safety as the market prices of these companies are at all time lows compared to their underlying economics. However, remembering that “forecasting is folly”, the performance of these investments in the short term cannot be predicted. Over the long term they should do well.

Sell when 1) the company reaches fair value; 2) you find a better investment or bargain; 3) the fundamental logic for the investment changes. Miller sells to when it maximizes the returns of his portfolio. Most investors, amateur and professional alike, sell at the most inopportune times, like now when the market is depressed.

I doubt Miller will ever be able to duplicate the previous success he enjoyed with Value Trust. But if investors hold fast to his fund or his principles, they should do well.

Disclosure: I did no own, nor did the clients of Brick Financial Management, any shares of Legg Mason (LM) or Legg Mason Value Trust (LMVTX) mutual fund.


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July 25, 2008

More Tenets of Value Investors

Stacking ChipsValue investors worry that they might be wrong. So they add a belt in addition to suspenders. Drawing on the point that prices are different than values, value investors insist on as large a favorable margin of difference between price and value as possible. Doing so produces a margin-of-safety against judgment of error.

Value investors invest only in the stock of companies known to be faithful stewards of investor capital. They seek proven track records of good judgment and fair treatment by management.

Few companies live up to the requirements of value investors when the philosophy is strictly applied. Thus few companies make it into the portfolios of value investors. It is far safer to make the error of omission than to make the error of inclusion.

Value investors view themselves as owners of a business, not simply owners of a stock. It requires a long-term view and means avoiding the rapid-fire buying and selling characteristic of the vast majority of investors.

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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.

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January 11, 2008

Volatility Is Not Risk

Red DiceExcerpt from Brick Financial's June 2006 Client Letter:  

We believe that risk should be measured as the probability of permanent loss of capital. Too many professional and novice investors alike measure risk in terms of price fluctuations. An unfortunate byproduct of this view is that the more risk one takes on, the higher one’s potential returns. In other words, high beta stocks should garner high returns. As it turns out this is not really true. We pointed to Robert Haugen’s book, The New Finance, in our February Client Letter as providing evidence that low beta (low risk) stocks actually perform better in the long term than do high beta (high risk) stocks. Another side of this coin is labeling stocks risky or not risky by the beta or fluctuation compared to the market is foolhardy.

By way of example, let’s say we buy the stock of a company for $50 per share. In our analysis we have estimated the stock of this company should be selling for something close to double that price in the range of $90 to $110. In this example, we have very little risk as we wait for the market to recognize what we have and close the price to value gap by purchasing the stock at increasing prices. But if the stock suddenly falls in price to let’s say $30, the beta of the stock actually increases. The stock has become more volatile thus conventional wisdom says it has also become more risky. If the value of the company has remained unchanged, then the reality is the stock has become less risky as its price to value ratio has become more favorable – the proverbial margin-of-safety has increased. In this example an investor would have the opportunity to by an asset worth a $1 for just 30¢. Prior to the price decline that investor would have only been able to by that $1 for 50¢ although a fifty cent dollar is nothing to sneeze at.

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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.

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June 27, 2007

Keep It Simple

Warren E. Buffett"[Value investing] ideas seem so simple and commonplace. It seems like a waste of time to go to school and get a PhD in economics. It's a little like spending eight years in divinity school and having someone tell you the ten commandments are all that matter."

 - Warren E. Buffett

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April 21, 2006

The "Zealots" Have It Wrong

The following commmentary is an excerpt from Brick Financial Management's February 2006 client letter:
"...The Zealot answer to the problem would be to create a portfolio set with some fixed percentage in stocks, some in bonds and some in cash without regard for valuation. This would be executed through some investment combination in index and actively managed mutual funds. The practice commonly referred to as asset allocation (or the Investment Policy decision), thought by the Zealots to be the most important decision an investor can make. The Zealot believes that the asset allocation decision, and not security selection, is the most important determinant of long term performance.

The Zealots and asset allocation As proof they reference one (that’s right, one) study. We’ll call the study BHB. The Zealots tell us that BHB says that of the determinants of performance - asset class selection, security selection and market timing – asset selection determines 93.6% of long term portfolio performance. [We find it odd that BHB did not consider management fees, transaction costs and taxes among the determinants.] They also went on to say that security selection determined less than 5% of portfolio performance. The Zealots love BHB as it seems to support EMH which states that security selection is pointless.

Variation in returns is not total returns But we (the Heretics), being skeptical by nature and being unable to ignore the success we’ve had with security selection, didn’t buy the interpretation of the BHB study. So we actually read the thing. What did we discover? At no point does the BHB study measure total long-term returns. What it measures is the total variation in quarterly (short-term) returns. In other words, BHB measured how much a portfolio went up and down over short periods and not how much money it made in the long term. BHB determined the successful portfolio as one that didn’t fluctuate a lot. Whether or not the portfolio actually made any money was not a determinant of investing success. Hmm…interesting.

Variation in returns means little We must keep in mind that the variation of quarterly returns alone tells us practically nothing about the prospects of investors achieving their financial objectives. Funding financial objectives comes from portfolio contributions and the compounding of returns over time. In other words, returns should not be ignored, even in the short-term. [Further, even if short term volatility is of utmost concern, we must realize that extreme diversification does not necessarily eliminate it. A more effective technique would be to choose investments that havesimilar returns but do not move in tandem. In other words, they should have a high negative correlation.]

Traditional asset allocation fails When using the material in the BHB study, and interpreting the results correctly, we find that the asset allocation decision determines only 15 percent of returns over a 10-year period. This little tidbit damages the credibility of the asset allocation process as practiced today, which is to say that long term investors should automatically be invested mostly in stocks and short term investors should automatically be invested in bonds and cash. This portfolio management by autopilot is nonsense. In our Client Education Brochure, we point out thatover 10-year periods, stocks perform better than bonds and cash over 80% of the time. But turned on its head, we see that bonds and cash perform better than stocks 20% of the time. If your time horizon is only 10-years long, wouldn’t you want to know which assets would perform best over the coming period? What you wouldn’t want to do is make an assumption that history will repeat itself. We think it important that we account for those times when stocks underperform.

Using, better yet, misusing the BHB study the Zealots set portfolios with rigidity (i.e., 20% large cap stocks, 10% foreign stocks, 15% small cap stocks, 10% short term bonds, etc). They wind up owning stocks from every corner of the market. Should any one piece of the portfolio advance or decline too significantly away from the original asset allocation, Zealots either buy or sell accordingly. This would seem to make sense if it were not for differing time horizons, valuation and costs.

As we just mentioned, there are occasions when both bonds and cash perform better than stocks, usually during extended bear markets. Thus the problem arises when arbitrarily selling (or buying) a portion of a portfolio that has advanced (or declined) significantly. The problem is exaggerated when valuations of the securities and the time horizon suggest just the opposite action should be taken. Extreme diversification, as traditional asset allocation requires, would always have the client in some asset that was underperforming. At best theportfolio would do about average with the market. As Heretics we can’t shake the belief that we should try and can do better than the market.

Value allocation succeeds Brick Financial believes that most investors should have some exposure to stocks, bought at low valuations, at all times. But when we create portfolios we will let the valuations of groups of stocks, bonds and cash, determine the asset allocation. This process is sometimes called “Tactical Asset Allocation”(TAA). A more fitting title would be “Value Allocation” (VA) which accounts for valuation of securities, investment time horizon, costs and fees..."

Read the entire commentary by clicking this link>>

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April 18, 2006

The Little Book That Makes You Rich!

The following commentary is taken directly from Brick Financial Management's November 2005 letter to clients.

The Little Book
Instead of getting into the details of our portfolios this month, we thought we’d change things up a bit with this letter. Recently, a neat little book hit bookstores. Written by hedge fund manager, Joel Greenblatt, The Little Book That Beats the Market explains value investing in (mostly) layman’s terms. The book touts a “magic formula” that Greenblatt says will help any investor beat the returns of the market. A review from the University of Western Michigan Library states:

“Using basic math skills and simple concepts, Greenblatt shows you how to achieve investment returns that beat the pants off even the best investment professionals and the top academics… Through entertaining anecdotes and practical pearls of wisdom, the book explores the basic principles of successful stock market investing and reveals the secrets to buying good companies at bargain prices automatic… The (magic) formula has been tested over hundreds of different periods and thousands of stock picks and has been proven extremely profitable for those who are willing to stick with it...”
Good companies at bargain prices The book is of particular interest to us and the clients of Brick Financial because it so clearly lays out basic value investing principles that we follow every day. Basically the book is about how to find superior companies at bargain prices. Greenblatt’s magic formula helps investors identify those companies.

Following the formula requires caution
Greenblatt goes to great lengths to explain to the reader that the magic formula is not a panacea. The formula is bound to lead to some years of underperformance. [Even proven investors have down years.] Those that don’t have the conviction or where-with-all to stick with it are bound to abandon the approach. Thus, following the formula requires faith in the underlying principles of value investing. It requires the ability to endure the long-term. And it requires, as Warren Buffett has stated, a “quality of temperament…not a high IQ”.

He is also adamant in saying that you should not be investing directly in stocks if you do not know the principles of accounting, forecasting, and basic financial principles. If you can not confidently work your way around a company’s financial statement then, according to Greenblatt,

“You have no business investing in individual stocks on your own!... Choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot.”

Highlights of The Little Book
Some of the main points of the book, and those that are most relevant to clients of Brick Financial, follow:v

  • There is a place where they sell businesses for half price all the time. And it doesn’t take a genius to figure out where to find them. The trick to finding these one dollar bills for 50 cents is that you as the investor must believe that these “dollars-on-discount” exist. Everyone should endeavor to save money. There are places an investor can put his money – under a mattress, in the bank, in government bonds or in corporate bonds. Some investments are better than others though.
  • Buying a stock means buying a percentage share in a business which entitles you to your proportional share of that company’s future earnings. Estimating the current value of the business requires guessing what the future earnings of the business will be. Your investment in any company should offer you more of a return than you might get in “safer” alternatives like the mattress, bank, or bonds.
  • Most stock investors are irrational and speculative which is one reason why the prices of stocks swing wildly in short periods of time. For instance, GM’s stock price can go from $30 to $60 in just a few months. It is improbable that the value of the GM would double in that time. Does this phenomenon make any sense? No! But all we as investors need to know is that it occurs and attempt to exploit it. We don’t need to know why it occurs. Even though it is difficult to value business, we must make our best guess. And when we do decide to invest, we are best served to wait for the moment when the stock price of the company is below our guess of the business’ intrinsic value. Benjamin Graham coined this action as buying with a margin of safety.
  • It is better to buy a company that earns more money relative to the amount you paid for it. In other words, if company A earns $2.40 per share per year and company B earns $1.20 per share per year, yet both companies cost you $12 to purchase, which is the better buy? Company A of course. You’re getting more earnings for your money. Company A’s earnings yield is 20%, while company B’s is only 10%.
  • An investor would also be keen if he bought only good business. How do you tell which are the good business? As an example, let’s say it cost both company A and B $400,000 to build each of their widget stores and get up and running. Let’s further say that company A earns $200,000 but company B only earns $10,000. Which is the better business? Company A once again. Company A’s return on invested capital (ROIC) is 50% while company B’s ROIC is a paltry 2.5%.
  • If an investor stuck to buying good business (high ROIC) at cheap prices (high earnings yields) he’d do well with his investments.
  • Buying good businesses at bargain prices works as an investment strategy. Not only has it worked in the past but because its principles are sound, it will work in the future. There will always be better business than others and there will always be better values than others. But the investor must have faith in the principles.
  • The “magic formula” as well as any well reasoned investment strategy will occasionally fail to do well in the short-term. The short-term can often mean years, not days or months. It is extremely hard to stick with a strategy that may not work for several years in a row. Which is a good thing. If the formula worked all the time, everyone would use it and it would eventually cease to work. The trick is to have a long-term mindset. Long-term in this case means three, four, or even five years or more!
  • Although you want an investment strategy that has worked in the past, a good track record will not ensure results in the future. A good track record will not keep you following if the results are not as good. You should follow an investment strategy if the principles are sound. Buying good businesses at bargain prices is a sound principle and is the definition of value investing.
  • If an investment strategy is sound, the longer the time horizon, the better the chances for success. Time horizons of 5, 10 or 20 years are ideal. Such a time horizon will give an investor a large advantage over most other investors.
  • As much as 95% of the trading that occurs in the stock market is completely unnecessary and meaningless.
  • The stock market offers the best possibility for high investment returns over time. However, most people that should invest should not invest on their own. So it is difficult to know where to start. Stockbrokers generally have NO idea how to help investors. They’re only trained to sell products at the investor’s expense. Mutual funds would be fine but the vast majority of mutual never beat the market. A hedge fund may be a viable option but their high fees are usually not justified by their performance.
  • Since there are so few good avenues for investors to participate in the stock market, the best choice is most often an index fund. Or he may use an easy to use “magic formula” like the one in the book.

Be sure to get the book Finally, we encourage you to read this book. You can click this link to pick up a copy. You can also view a review by The Wall Street Journal here.

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April 16, 2006

Franklin on Value Investing

Benjamin Franklin"I conceive that the great part of the miseries of mankind are brought upon them by false estimates they have made of the value of things."

-Benjamin Franklin






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About Brick Financial Management, LLC

Blogged by Brick Financial

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


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