Lock down your ARMs!

Adjustable Rate Mortgages - it's not just a one way street!

Some think that adjustable rate mortgages are the greatest thing since sliced bread and point to studies that show they would have save the typical mortgage consumer thousands of dollars annually over the past several decades. While true, it these also ignore fundamental truth - that interest rates were on a secular decline, resulting from high interest rates and the inflation of the 1970s, which took almost a full decade to reign in. These studies almost invariably ignore the fact that if you'd locked in your mortgage in the late 1960s or early 1970s, you would have saved thousands annually in borrowing costs, as the then secular trend was, just as now - rising rates.

Looking forward, many think that the Fed only has to worry about trailing inflation, and are hopeful that the number of increases will be limited. "One and done" was the hue and cry from this crowd, before "Gentle Ben" of the Fed dissuaded investors of that hopeful notion. I think the new rallying cry might be "Give Two it's due, then we're through!" Unfortunately, it won't end with two more increases either.

We in Canada were in the same unfortunate position just a decade and a half ago, wherein inflation was muted, but our deficit was not having in 1992, reached a all-time historical high. This led to higher and higher rates as we sought more and more foreign capital to finance our accumulated debt and deficit.

Unfortunately, the US is now in the same shoes, as a small posting by Random Roger points out over here. This, my friends, is the sign of things to come and can only be overcome by raising interest rates higher and higher (thus defending the currency, and attracting the dollars necessary to finance the debt). Lastly, don't forget that almost all developed nations are on a credit-tightening cycle - just when the US most needs to borrow. This increased cost of borrowing will, of course, help balloon the deficit even more. A "dis-virtuitous circle" has been created, which will take ten to twenty years to correct.

So go ahead and mark my prediction down on a calendar here - in two to three years, ARM mortgages will be higher than today's 30 year fixed, and much higher in five to seven years. My advice is to take your lumps now folks, lock down the ARMs, and - very shortly - you'll be happy you did.


JW

The Confused Capitalist

To the Moon Alice, to the Moon ...

We recently profiled a potential portfolio over here, that analysts state is slated to underperform. On the basis of aggregate analyst opinion being a contra-indicator of actual performance, it was suggested that portfolio may well be slated for above-average performance.

At the opposite end of the scale, we have a potential portfolio that analysts just love - in fact, they love them so much, some way had to be found to limit the size of the lists (unlike the underperform portfolio). The base selection criteria were similar in that they had to have an aggregate "strong buy" from the analysts, with the additional proviso that if it was a NASDAQ-listed stock, it had to be covered by at least seven analysts (because there were so many "strong buys" among that wildly enthusiastic crowd).

So, just like in "The Honeymooners" where Ralph was always threatening to send Alice "to the moon", the analysts claim that these stocks are going "to the moon". Their name, trading symbol and March 16th 06 closing price are as follows:

1. AC Moore Arts - ACMR - $16.44
2. BE Aerospace - BEAV - $24.57
3. Cognex - CGNX - $28.30
4. Comcast - CMCSA - $27.17
5. DepMed - DEPO - $5.80
6. DOV Pharmacuetical - DOVP - $17.05
7. Petrohawk Energy - HAWK - $13.10
8. Jupitermedia - JUPM - $16.99
9. Ness Technologies - NSTC - $11.31
10. Open Solutions - $26.46
11. Pinnacle Financial Partners - PNFP - $27.90
12. RC2 - RCRC - $38.71
13. Signature Bank - SBNY - $33.50
14. Select Comfort - SCSS - $36.50
15. Stage Stores - SSI - $28.77
16. Banc Corp. - TBNC - $11.79
17. UTI Worldwide - UTIW - $101.19
18. Xyratex - XRTX - $25.84

With the exception of Stage Stores (#15 on the hit parade), they ALL trade on the NASDAQ. (Perhaps the analysts there are subject to wild boosterism, I guess we'll find out).

Anyway, they say that these stocks are all slated to outperform - we'll check in later and find out if analysts are as useful as their employers think they are....

JW

The Confused Capitalist

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Learning from the Newspaper

One of the things I always try to do, is learn from some of the good columnists in the financial pages. I tend to place less importance on temporal "stock tips or picks', than long term strategies. Picks come and go - and there are lots of them - but the best strategies help long-term performance and also change a mindset. Both are key to bettering oneself as an investor.

I'm lucky enough to read The Globe and Mail, and there's an infrequent column there by money manager Avner Mandelman, whose firm, Giraffe Capital, specializes in value-oriented tech situations. For those with the entry fee - $250,000 (CDN) - you get some outstanding performance. For readers of his column, you also get some advice on how to improve your long-term performance, some of which has come through Mr. Mandelman's own "school of hard knocks", including a recent confession that he originally "decimated" his own annual bonus not just once, but three times, by following standard stock-picking advice.

This led Mr. Mandelman on a journey to meet with successful private investors to learn their secrets. After an epiphany from legendary investor Jim Rogers brought it all together, Mr. Mandelman arrived at these five simple rules for outperformance:

1. Look only for extraordinary opportunities; as a small investor, you don't have to invest if you can't find them, you can stay in cash.
2. There aren't many extraordinary opportunities available - if you can't find them, then stay in cash.
3. Be extraordinarily selective in buying and selling, and even in choosing stocks to research - the majority of stocks (at their price of the day), aren't even worth thinking about.
4. Focus only on stocks in which you have special knowledge, or an exclusive niche. If you don't, those that do will take your money.
5. Focus ruthlessly on price. Even if everything else is great, but the price isn't also great, then pass, and keep your cash.

There's probably nothing here that's extraordinary knowledge, but the discipline to maintain that it is "where the rubber hits the road". Giraffe once sat on 70% cash for the better part of a year, while awaiting extraordinary opportunities - which of course ultimately arrived.

Thanks to Mr. Mandelman for reinforcing these obvious truths (aren't all truths obvious, once they're laid down in a cogent, cohesive, manner?)

Keeping your cash while awaiting extraordinary opportunities - a simple wealth-creating strategy.


JW

The Confused Capitalist

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US Auto Makers Driving Themselves Into The Ground

A recent posting in the ControlledGreed blog mentioned a posting in the blog of Douglas McIntyre which suggested that GM may be able to turn around much faster than many anticipate. He attributes this to a perceived willingness by the UAW to discuss many cost/union issues that could drag GM into bankruptcy. He suggests the UAW would want to avoid this, since many GM pensioners (and soon to be ones) could have their retirements wiped out by a GM bankruptcy.

While this might be true in the short term, in the longer term, the trend of declining market share is going to continue. Unfortunately, I think it's hard to be positive on the long-term of any of the American-based auto makers.

Until they start producing cars with decent reliability, I think they will continue to be, at the very least, on the edge of perpetual trouble. People will forgive a lot of things, but in today's world building a lousy - read unreliable - product, isn't one of them. GM's long-term problem -- and Ford's and Chrysler's for that matter -- isn't cost!

Until the US makers of autos stop filling the "pages of shame" ("Avoid these used vehicles") in magazines like the respected Consumer Reports, it can only be one long decline ...


JW

The Confused Capitalist

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Blog Index Investing Challenge - Leg 2

Well, earlier this month, I started the first "Blog Investing Challenge", wherein I challenged all comers to "invest" as private equity investors in the various blogs I have linked to from my site.

The original posting is located here, and provides some background to the challenge.

Let's compare and contrast: Last week:

• Abnormal Returns - $14,678
• Random Roger - $44,034
• The Big Picture - $478,165
• Peridot Capital - $9,032
• Value Discipline - $4,516
• Fat Pitch Financial - $14,678

This week:

• Abnormal Returns - $14,678
• Random Roger - $44,034
• The Big Picture - $478,165
• Peridot Capital - $10,162
• Value Discipline - $5,081
• Fat Pitch Financial - $35,566

In terms of rate of increase, we've had some movement on Peridot Capital (this is something to be expected, given that the site owner, Chad Brand, was recently featured in a Wall Street Journal article). Value Discipline has also moved, up, by a roughly similar percentage. However, the clear leader here - and it's not even close, is Fat Pitch Financials, which has more than doubled in value!

This means that Fat Pitch Financials is attracting a boatload of new links, and this is probably due to its recently introduced Fat Pitch News, where readers can "bid up" stories. Of course this invites some interactivity, as well as more interest from others: we all like watching what others find interesting: hence the enduring popularity of street cafes, where people-watching is a near Olympic sport.

So, if you haven't "made your investment" yet, you're invited to (refer to the orginal aforementioned posting). I'll update all comers from time to time, to see where we all stand as theoretical private equity blog investors.


JW

The Confused Capitalist

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Reducing Content for about 3 weeks

Unfortunately, I am cutting back on the number of postings I will be updating to my blog over the next three weeks.

Due to a large time commitment for about three weeks for "what pays the bills", - a heavy workload if you will - I must reduce the production of postings I am doing here. Currently this is generally twice a day Monday to Friday, and once per day on Saturday and Sunday. During this three week period, I'll be posting just four to six times a week. Once the three weeks are over, I hope to resume a more normal posting schedule.

Thanks for your patience and your continued readership ...


JW

The Confused Capitalist

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Crossing Wall Street

For those of you who haven't been there, I recommend Eddy Elfenbein's blog, Crossing Wall Street. It's a mixture of smart round-up's of others thoughts about the stock market and various stocks, as well as original articles from Eddy himself.

I personally prefer when Eddy brings his own sharp mind to bear on a particular issue, and these are some samples of that:

• Taking Jeremy Siegel to task
• Looking at cyclical stocks
• Looking for stocks that outperform the herd

I highly recommend taking a tour around his site.


JW

The Confused Capitalist

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Raising the Median - Averages

An average can be very misleading. For instance, knowing the average (mean) weight of ten mice and one elephant doesn't really tell you very much about each.

Yet this same measure, this average (mean) is often used to analyze economic policy and wealth, to see what effect it's having on the ordinary person, the so-called "average" person. Unfortunately, this is usually done by using the mean average, rather than the median average.

To use an extreme example, if ten people have exactly the same income, say $30,000 annually, but a change in economic policy results in just one person whose income zooms to $330,000 annually, but the rest remains the same, then policy-makers can claim that their policy was successful, as the average income doubled! Sure, great for the one guy, but the lot of the nine others hasn't changed at all. Successful policy? Or not?

A mean average can hide a multitude of sins. As Wikipedia says about a mean average ...

"It is used for many purposes and may be abused by using it to describe skewed distributions, with highly misleading results."

A much better but under-used measure for these sorts of things is, in my opinion, the median average. The median measures what change occurred for the very middle value of any array. In this case, it would show that a $30,000 annual income was still the normal value here. It definitely shows how the policy hasn't really changed the lot of the ordinary person.

So the next time you hear a news report claiming that the average (mean) has moved this way or that, ask the question - "But, what has happened to the median?" And maybe even fire them off an email. And make sure you ask the same of your politicians, and public bureaucrats. It can even be useful in your personal investing. It'll lead to better answers everywhere!

Jay Walker - Raising the Median!


JW

The Confused Capitalist

Analysts say this portfolio will underperform

It's a given that almost all stocks that analysts follow have a "buy" or "hold" rating. For instance, in work done by the The Globe and Mail's Rob Carrick, of the 500 S&P stocks, only four could be found that had a consensus "sell" rating. Only a single S&P500 stock garnered a consensus "strong buy".

So with the idea that these "strong buy" or "sell" ratings could be an indicator of future outperformance (academic work has shown that, on average, "sell" rated stocks outperform the broader market), the S&P500 and Nasdaq stocks that have garnered a consensus "sell" rating are presented, together with their stock symbol and closing price at March 16:

• Aether Holdings - AETH - $3.27
  
• Creative Technology - CREAF - $7.29
  
• Dillards - DDS - $26.43
  
• Eastman Kodak - EK - $29.27
  
• Ford Motor Co. - F - $7.93
  
• General Motors - GM - $22.22
  

The first two are Nasdaq-listed stocks, while the later four form part of the S&P500.

And for our Canadian readers, there a similar analysis of the S&P/TSX composite yielded the following TSX listed-stocks:

• Advantage Energy Income - AVN.UN - $22.95
• InterOil - IOL - $15.99
• Prime West Energy Trust - PWI.UN - $33.59
• Royal Group Technologies - RGY - $10.22
• Sobeys - SBY - $38.30
• Sears Canada - SCC - $17.85
• Tesco -TEO - $21.48
• Torstar - TS.NV.B - $22.85

With the exception of the energy-oriented Canadian companies, most of them appear to be in unloved industries - usually a deep-value investors first good sign! We'll follow this portfolio, euphemistically named "The Tortoise Portfolio", periodically to see how it's doing against the broader market.

Very soon in the future, we'll also present the opposite portfolio; one in which the consensus ratings are only "strong buys", which we'll nickname as "The Hare Portfolio". Due to the boosterism here, a few adjustments had to be made to whittle the list to a manageable amount. Stay tuned.

JW

The Confused Capitalist

A tale of two cities (stocks): Value Investing

Perhaps I should subtitle this posting: why it pays to be a so-called Value Investor.

"Value Investing" isn't about trying to find a cheap used cigar, as it has sometimes been put. It's about trying to find a stock that seems economically-priced, relative to it's own earnings/balance sheet/revenue, i.e. its own prospects, and that also seems cheaply priced by the market, relative to competitors and even the broader market.

Companies that perform very well often become stocks that are 'priced for perfection', and hence subject to a fall. Which brings me to today's tale. About three years ago, I talked to several of my friends and colleagues about sub-prime mortgage lender Home Capital Group, on the TSX exchange as "HCG". I just loved the prospects of that stock; growing it's earnings at about 30-40% annually, and a PE ratio of about 15 or so. Great balance sheet, very low defaults - believe me, there wasn't much not to love. I bought a bunch and was quite happy with my gains as they unfolded.

However, I later sold out of the stock - it was still a great company, but it's PE kept expanding faster than it's earnings to the point where it was priced (at one point), at a PE of about 30 or so. In pretty short order, it went from $15 to nearly $40.

Readers here know that I generally don't like stocks with mind-bending PE ratios, and so I sold out my shares. With some of the proceeds I invested into a similar situation, the sub-prime lender, Xceed Mortgage Corporation (XMC). A very nice PE, below 10, similar very high earnings growth rate to HCG; not much not to like. It's gone from $4.50 or so, to recently over $10. And with a modest PE expansion to about 13.

Which brings me to Tuesday's news relating to Home Capital - they warned that earnings growth was slowing, but felt they may be able to make their long-time annual target of 20% EPS growth. And now why I don't like stocks "priced to perfection" - over the past two days, Home Capital has lost 23% of it's value, bringing it's PE down from 23 to 17.

Xceed? Well, the stock "fell in sympathy" as they say, but only by 7%. And the major reason for that is the much more reasonable PE - 13 or so. So the PE fell to just under 12. I'm sure that whatever the situation is as it unfolds for Xceed and Home Capital, and others in the sub-prime lending group, that my investment is better protected in the "value investment".

Value Investing: not just your father's investing!


JW

The Confused Capitalist

Site Now Back Up

Sorry that many of you might have been getting a 403 Forbidden Error when you tried to enter my site. This was a problem originating from Google/Blogger/Blogspot, which apparently affected a number of Blogger sites.

Mine seems to be fixed now - if you've had problems with other blogspot sites, you might also want to give them a try now.


JW

The Confused Capitalist

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Caution - Rising Markets! Really?

I recently read a Bloomberg article by Chet Currier, advising caution in the emerging markets. Mr. Currier primarily points to several good years of outsized gains in the emerging markets investing field and then points to parallels of the NASDAQ "tech wreck" of 2000-2002. While Mr. Currier does say that he believes in the future of the emerging markets - and won't change his own personal investments there - he does tend to paint to a negative picture with sub-titles like "Look Out Below".

It's when reading columns like this that readers need to remain on alert regarding their own emotions. If I was reading this article and had investments like this, I'd make sure that I asked myself, what actual analysis does the writer bring to the table, other than vague parallels? Does he offer any particular valuation metrics which show that my particular investment seems over-priced?

If the answer is no, and you've already done your own homework in this regard, and are comfortable with the valuations, then you probably shouldn't give the article too much heed. Simply pointing out that the market has risen a lot recently doesn't mean that it's primed to fall, particularly if it has been under-priced in the past. If, on the other hand, the analysis points to some worrying new factors, or valuation metrics that you hadn't considered, then YOU DO need to think about and consider the issue.

My point here is to think about what the article actually brings to the table in terms of new information and then to carefully consider what effect that has on your thinking about your investment in that area. The fact that an investment has gone up a lot isn't exactly a cause to worry. You might, for instance, want to contrast the aforementioned Bloomberg article, to the hard facts provided here.

To use an example from my own portfolio, I had two stocks that doubled in value - one in less than six months, and one that took just over a year. If someone had written about them at that time, effectively saying "they're priced a lot more than they used to be, look out below", I wouldn't have worried, having done the proper fundamental analysis to begin with, and knowing that they were still under-priced, relative to competitors and the broader market.

And that's all I'm suggesting that you do.


JW

The Confused Capitalist

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Enron's long shadow fading slowly ...

"I don't think we wanted to show people what we were doing."

-- Andrew Fastow, Enron Corp.'s former chief financial officer, testifying in the Houston trial of his former bosses, ex-chief executive officer Jeffrey Skilling, and Kenneth Lay, former chairman. (Picture: Kenneth Lay)

Notwithstanding the current trial of Skilling and Lay, the long shadow of Enron is starting to fade in numerous ways. For instance, there definitely seems to be a move afoot to soften some of the "more onerous" sections of Sarbanes-Oxley. In other ways too, other corporations that became entangled in Enron's greedy web are recovering.

In Canada, CIBC, one of the five large Canadian banks, with a market capitalization of $24 Billion, saw it's value sliced by 15% this past summer as the bank (which long proclaimed its' innocence in abetting the Enron accounting schemes), agreed with regulators to a $2.4 Billion settlement, or almost 10% of its market value.

In addition, the CIBC board has been tied up with this issue, as has the new CEO, Gerry McCaugherty. The settlement allowed the bank to move forward, apparently to good success, as it recently announced quarterly earnings of $1.62 per share, which was far in excess of analysts estimates of $1.50. The share price has since recovered nicely as well, rebounding by 23% from the summer low, and is now tracking new highs.

Lost in the shuffle, now, were calls for former CEO John Hunkin to give back some of the bonuses earned over the "Enron period", since they were clearly fattened by profits earned by the Enron deals. Unfortunately, this is just another example of weak corporate governance - don't get me wrong, the banks have in more controls than just about any other sector, but when the CEO can gain like that without the board privately threatening Mr. Hunkin with a lawsuit, while bank and Enron shareholders suffer, there's something wrong and immoral with that.

Our hearts go out to all the investors who were swindled by Enron executives; let's hope they all get their due desserts.


JW

The Confused Capitalist

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How Your Broker Can Really Make Money For You!

Some people really don't like stockbrokers - especially the full-service kind - hence the migration over to the self-serve department and the on-line brokers.

Me, I say (as in the James Bond movies), live and let live. However, yesterday, an excellent column by Graef Crystal over at Bloomberg about the fat pay of the five chiefs of the biggest Wall Street firms got me recollecting a wealth enhancement technique I'd discussed in my Global Walkers Investment Newsletter, back in the 1990s.

So, I re-calculated this strategy based on more recent history and, yes, it still works - produces massive outperformance, very handsomely. However, you're going to have to stow this column until the right conditions re-arrive - specifically, another bear market, or a significant dip. Might have to wait a few years - nevertheless, a worthy venture.

Brokerage and investment banking firms typically have volatile earnings - great when the market is going well, but suffering more than the average S&P500 firms when things go poorly. Naturally, their stock prices tend to follow that same volatility - down much more than average in the grips of a bear market, and then exploding upwards from that as the economy and their earnings recover.

For instance, the five largest firms saw their share price increase by a mean average of 107% (median of 113% increase) since the first trading day of 2003 - near the nadir of the bear market. By contrast, the S&P500 tracking ETF, "SPY", only increased 44% over that same period.

Adding in the brokers that derive much or all of their revenue from on-line operations shows even more volatility - E Trade (ET) increased by 399%, and TD Ameritrade (AMTD) increased by 256%. This is essentially the same pattern as when I reviewed this strategy against smaller dips in the 1990s.

The wealth strategy here is obviously to move some funds out of the broader market during a bear market, and into these brokerage/investment banks. Then sit back and wait - don't forget to buckle up for the bumpy ride! Make money from your broker - buy the broker's stock!

Don't forget to print up this posting and put it into your investment diary, something I talked about here and also over here.

Post production note: My dream has been answered, there is now a "Capital Markets ETF", whose main constituent parts are investment banks / brokerage houses / publicly traded stock exchanges. It's a State Street product, through Street Tracks, and tracks the KBW Capital Markets. It trades under the symbol, KCE.

Aside from those, some of the smaller brokers include PIPER JAFFRAY (PJC), Charles Schwab (SCHW), TD Ameritrade (AMTD), E*Trade (ET). The best overall, with a strong balance sheet, is SCHW. ET is highly leveraged, AMTD and PJC operating CF doesn't exceed earnings.


JW

The Confused Capitalist

Myopic Analysts?

Should stock analysts be judged by the same criteria that they seek to judge company CEOs with? Or would that be too myopic?

Perhaps that would be unfairly demanding a higher standard than that seen in our investing society today - the ability to exhibit some patience during trying times. Seems as if our society doesn't have too much patience anymore, whether that is waiting for improvement in corporate fortunes, or waiting for our stocks to produce outperformance. And hence the unbelievable turnover in some mutual funds, as much as 75-150% annually.

According to The Seven Sins of Fund Management (warning: link is a 105 page pdf), the average holding time for an NYSE-listed stock is now just 11 months, in comparison to an average of eight years in the mid-1950s. Does anyone think that the average investor returns are significantly better due to all this frenzied trading?

In light of this, a recent news item caught my eye ...

"Turf CEOs after five poor quarters, analysts say"

According to a recent survey of 282 analysts, based in North America, Europe and Asia - conducted by Hill & Knowlton Canada - up to 52% of them will forgive poor financial performance for three quarters, but by five quarters, their collective patience has run out. After that, they say, the CEO should be replaced.

Which of course begs the question on my part - would these analysts be willing to subject themselves to the same criteria - i.e. if their "buy" picks don't outperform others in the sector over that same time frame, would they acknowledge their failings and leave?

No?

Hey, just asking.


JW

The Confused Capitalist

Liberation by Following the Rules?

There can be tremendous liberation in setting down some self-imposed rules as an investor, and then seriously attempting to follow them.

Today, like no other generation before, we are swamped by information, and by envy. Both can be self-destructive to an investors long-term goals, which should be the creation of wealth, at the minimum possible risk for the path chosen.

Because we are swamped by information, we often think that we HAVE to act upon these messages to garner the maximum possible return. This is furthered by our natural state to want to be the best, do the best, and be seen as the best. We envy others who are.

This compromises our position as it should be in in order to be successful investors. And that is simply to be as rational as possible.

So without rules, we're kinda like a guy who the media tells him that he's after a woman. Without some rules, we flit about here and there - ranging from the wrinkled 80 year old Elbonian woman who doesn't speak English, to the 20 year old wunderkind with a 170 IQ. And everything in between. Many of whom are obviously ill-suited to us, our situation and even our temperament. So it is too with stocks and investments.

Some of my own rules include not looking at stocks without earnings, avoiding stocks with PE ratios above 30 and trying to find ones below 15, and an inclination towards financial sector stocks (I have a background here), and also away from large-cap stocks and towards small and micro-cap stocks. Because I've got these rules, I now find it much easier to avoid the siren song of "next great thing". While I don't always follow the rules (naughty boy, up to the blackboard you go!), more often than not, I'm sorry when I don't.

So my advice is to set yourself some rules, and try to follow them. Will you miss some wonderful opportunities? Absolutely! Will you make more money because you've focused your mind, and actually concentrated? Absolutely!


JW

The Confused Capitalist

Blog Index Investing Challenge - Leg 1

Well, last week I started the first "Blog Investing Challenge", wherein I challenged all comers to "invest" as private equity investors in the various blogs I have linked to from my site.

The original posting is located here, and provides some background to the challenge.

To date, we've had Barry Ritholtz from The Big Picture come by and comment, Rick from Value Discipline come by, and George of Fat Pitch Financials actually "lay down" his bet ($500 on Value Discipline, and $100 on his own site [the maximum permitted in that circumstance]). George also offered us a mysterious tip that "Sometimes data issues can mislead the market." Not too sure what that meant, but I'm sure he'll reveal more in due course.

I placed my bet 50/50 on Value Discipline and The Big Picture (i.e $300 on each). Let's compare and contrast: Last week:

• Abnormal Returns - $14,678
• Random Roger - $44,034
• The Big Picture - $478,165
• Peridot Capital - $9,032
• Value Discipline - $4,516
• Fat Pitch Financial - $14,678

This week:

• Abnormal Returns - $14,678
• Random Roger - $44,034
• The Big Picture - $478,165
• Peridot Capital - $9,032
• Value Discipline - $4,516
• Fat Pitch Financial - $14,678

Holy cow! That's right, nobody's value has moved: a dead heat. Except yours truly that is - my blog is now "worth $1,129.08" :-) . However, that's unfortunate, ;-) since it's NOT part of the contest.

But this little exercise just shows you that investing is really meant to be a longer-term venture - and not the 100-150% annual turnover that a lot of mutual funds have.

Anyway, we'll follow this up again later, and remember that it's not too late for YOU to join in, just read the rules at the prior link (including the comments), and feel free to add your portfolio here as a comment, and we'll follow it too.

Anyway, as I'm taking my kids up snow-boarding and skiing at Big White, this will be my only post of the day. See you again tomorrow!




JW

The Confused Capitalist

Phoney Baloney Fibony (Fibonacci)

Technical Analysis. Ever heard of it? If you haven't, maybe you should steer clear of this posting, in the hopes that it doesn't inadvertently infect you.

If you've never heard of technical analysis, it is a (purported) system simply by looking at the price history of a stock, and by analyzing that alone, of being able to tell where it's going to go in the near future. Calling it a "voodoo science" complements it, in my opinion, because then the word "science" would be right beside it.

Might as well just get a child out to draw a bunch of intersecting lines on the stock chart and make a prediction than use Fibonacci lines, Elliott Wave theory, and all the other gibberish nonsense used by those in this witchcraft field. Even the Wikipedia entry for it says that "Technical analysis is viewed by many of its practitioners as more art than science." Art! Art just like a child's' scribblings are "art".

Here's a recent prediction by a technical analyst with a national audience, relating to a security then priced by the market in the $69-$72 range for about two weeks ... get ready ... here it is ....

The share price has broken below the 10 and 20-day MA's as is it retreats from an overbought condition. The daily MACD is issuing a sell signal thus consolidation of its recent gains may continue until the share price reaches the oversold lower Bollinger band at about $63, where it would offer a potential buying opportunity. It appears that the stock is in a corrective fourth wave of a five wave Elliot Wave advance. Once the correction is over it appears the stock's technical target extends to $97, attainable over the next year.

So, I'll try put that in English for you ... it appears to be priced too high at $69-$72 currently - if it drops to $63, buy it, because it looks like it's going to $97 within the next year.

Huh? Sell at the current price, in the hopes it drops a few bucks, because it's going up even more?

This kind of gibberish is all too frequent with this "technical analysis", unfortunately. I can't believe that people pay money to follow it, or even do anything more with this "analysis" than line their bird cage.

Stick to "fundamental analysis", you know, things like earnings, earnings growth rates, cash flow and their growth rates, revenue and it's growth rate, and the price of the stock (as measured by the PE ratio, for instance). You'll do a lot better in your investing.


JW

The Confused Capitalist

Canada: Let the Good Times Roll!

Due to the continued strength of the world economy and the need for basic commodities such as oil and metals, Canada's economy moves from strength to strength.

The latest report shows Canadian unemployment down to a generational low of 6.4%, a rate not seen since the mid-1970s. Some places, like oil-rich Alberta whose unemployment rate is only 3.1%, is experiencing a shortage of workers of all sorts, but particularly those whose skills are needed in the oil patch. The average hourly wage in Alberta is now some $21.39 per hour, and expectations are that this will continue to rise.

This economic boom is expected to be continued to be fuelled by proposed investments of up to $25 billion to turn areas near Edmonton into a refinery hub to rival areas along the Gulf Coast of Texas (sans hurricanes of course). Other areas of the province are booming along with the massive incoming investments, to such an extent that even basic service jobs, like those in fast-food restaurants and grocery stores, are going unfilled.

This too is drawing workers from the long-suffering Atlantic provinces, some 3,000 miles distant into the Alberta economy. While young people have for some time left the region in search of employment, now the chance to earn $5,000 weekly is drawing fathers away from their families for extended periods, as they work in oil fields camps for several months, and return quarterly or semi-annually to get re-acquainted with their wives and children.

In other areas where these resources don't play such a large part in the local economies, such as people-rich Ontario, Quebec and the Atlantic provinces, the angst is palpable, as the soaring Canadian dollar has made it more difficult for manufacturing-dense Ontario and Quebec to import into the US market. There has been much hand-wringing over the fate of the manufacturing region of the country and whether Canada will be subject to the so-called "Dutch Disease".

In any case, while there's some local disruption, there's also no doubt that the boom as a whole is a net economic benefit to Canada, and more particularly, to Alberta.

Aside from the obvious stock market plays into the oil and gas sector, and the mining sector, different Alberta-based public companies should enjoy extended periods of super-sized profitability. These would include those involved in the real estate sector. Three such companies include ALberta-based land developers Melcor Developments Ltd., which trades on the Canadian TSX Exchange under the symbol "MRD", and Genesis Land Development Corp. which trades under the symbol "GDC", and the Boardwalk Rental Communities REIT - the largest owner of residential rental suites in Alberta. It too trades on the TSX index, under the symbol "BEI.UN".

Canada - not just a place that cold fronts come from!


JW

The Confused Capitalist

Raising the Median - Innovation

Build a better mousetrap and ...

Our world suffers from an acute lack of innovation. That's right - that's what I think. Despite all the great new products in our world, we are unbelievably under-innovated.

And that's because we rarely stop to actually try to actively innovate in our businesses. As pointed out in a recent book review over at bankstocks.com, innovation doesn't have to be large. But way too often, we just proceed along our merry way, thinking we already have the best available.

One of my best stories in this regard is surgical tools. You'd think that those in the medical industry, and surgeons themselves, being smart, ambitious people, would be using the best possible medical implements, which MUST be subject to constant scrutiny for improvement and re-design. As it turns out, however, the scalpel hadn't really been changed for nearly 100 years. It's still essentially the same sharpened butter knife that it was back then. Difficult for a surgeon to hold and manipulate, and subject to cutting themselves or their co-workers.

Enter Lee Valley Tools with their quality wood-working tools and Dr. Bell. Turns out that many surgeons enjoy woodworking - it both clears their mind of worries, and improves their surgery skills. One day, Dr. Bell talked to the owner - Leonard Lee - and complained about corrosion on his carving tool. Mr. Lee was rather surprised, but asked what he was doing with it.

Dr. Bell replied ...

"Well, I've only autoclaved it about a half dozen times."

Obviously, Mr. Lee then realized it was being used for surgery. A wood-working tool turned out to be a better surgical instrument, than one which was supposedly "designed" for surgery. Read the rest of the story here, including the start of a brand new business for Mr. Lee.

Under-innovated; that's my opinion on our society. Let your employees mingle with some customers and suppliers, and some in other fields for one or two hours a month. Then ask them what innovations, large and small, they think that your business might be able to enjoy.

Other resources:

• Harvard Business Review on Innovation
• Open Innovation
• The Ten Faces of Innovation
  

JW

The Confused Capitalist

Definition of "Deep Value" Investing

I wasn't satisfied with the definitions I found on the web of "deep value" investments or deep value investing, so I sought to create my own. Which is as follows:

Deep Value investors employ an extreme version of value investing that is characterized by holding the stocks of companies with extremely low valuation measures. In today's market place (industrialized countries), this might include those with price/book ratios well below 1.0 or price/earnings ratios below six or seven. Often times, these companies are particularly out-of-favor or in industries that are out-of-favor or combine both: out-of-favor companies in out-of-favor industries.

Very often, they are seen as "old school" investments in so-called "sunset" industries. Occassionally, nothing appears very wrong with a "deep value investment", except that nobody else seems to want to buy it, and it has languished at low prices/valuation metrics for several years, despite decent earnings and balance sheet.

From time-to-time deep value investors end up with investments that simply do the "deep six" and never recover. That's simply the nature of the beast. Deep value investing requires more internal strength than any other type, and greater ability to ignore the herd.

Deep value investing - extremely profitable for the right personality type.

JW

The Confused Capitalist

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Paradise by the Dashboard Lights

Well, yesterday felt like a very nice day as an individual investor. The dashboard on my computer showed almost all green - 3 out of 4 of my positions were in the green yesterday. Not too unusual given the rise in the S&P500, Dow Jones Industrial, and my "home" index, the Canadian S&P/TSX 60.

I felt like the motorist who thinks God has decided to favor him that day - all green lights all the way to his destination.

(Which reminds me of a joke about the desperate Irishman, Paddy, late for an appointment and looking for parking space. "God, if you give me a space, I'll never miss a Sunday service again."

Miraculously, one appears. Paddy looks up to the heavens and says "Oh, never mind, I just found one.")

While not every day is going to be like that, it's nice to have them once in a while and they are definitely enriching to a portfolio if they happen often enough.

However, I fully expect that Monday will be a down day - not for any particular reason, except that when the market has good (poor) gains one day, the next is mostly likely to have poor (good) gains. That's just the nature of the beast.

Knowing this, and being mentally and emotionally ready for it, makes me less susceptible to doing foolish things with my various positions and reviewing them in a more methodical way from time to time.

Get out and enjoy the sunshine today (if it's like where I am) or go for a short walk. Just a couple of thoughts for the weekend - enjoy yours!


JW

The Confused Capitalist

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Stock Analysts: Make Better Use of Them?

A better use for analysts? No lawyer jokes, please.

Given the blogosphere's relative disdain of the use of stock analysts to provide stock picks that outperform the market - something I wrote about the other day - it occurs to me that the first few analysts considering a stock provide a valuable service in disseminating market information. In other words, they produce an opinion on, say General Electric (GE) that offers some usefulness. They can provide some insight for investors into the underlying business fundamentals, and the relative value of the stock in comparison to its current market price.

However, the marginal utility of additional analysts diminishes considerably: i.e. what does the sixth, tenth, or fifteenth analyst considering the merits of GE as an investment "bring to the party" that hasn't already mentioned by the others? On average, very little or, more likely, nothing.

So my question to some of the smaller investment houses would be this: Why use them at all for the larger covered companies? Wouldn't it simply be cheaper to open brokerage accounts at the largest investment houses such as Merrill Lynch, Morgan Stanley, etc. and gather their reports relating to the large firms. A writing or accounting student could be hired to provide a "synopsis report" of the thinking of the five largest ones, together with what those analysts think is the major opportunities and pitfalls with buying this stock. In this way, a client who wants to own the big issues could gain access to the current thinking on it.

So instead of hiring an expensive analyst to further cover an already over-covered stock, your analysts instead concentrate on the uncovered, undiscovered, or minimally covered stocks, where your people can truly add some value for your clients. Furthermore, how about basing some performance bonuses on how well those recommendations do in comparison to a peer group of stocks in the same sector or segment? In my opinion, this would be sure to produce "buy" ratings when they are more likely to fatten your clients wallets.

To those readers in the business: any comments?


JW

The Confused Capitalist

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Deep Value Scorecard - Part II

This continues on a scorecard from The Contra Guys, half of which was shown over here, yesterday. The premise was, that in order to properly assess "deep value" investments, a good scorecard is needed.

Given The Contra Guys excellent long-term record of very high returns using their contrarian investing techniques (26% return annually over 10 years), it's felt that this particular scorecard offers unusual utility. Anyway, yesterday, the first 12 items were given; today, the remaining eleven are shown:

1. Positive financial condition +1 or +2
2. Amount of time followed +1 to +4
3. Book value +1 to +2
4. Reasonable price/earnings +1
5. Downtrodden industry +1
6. Readable annual report +1
7. Public awareness +1
8. Excellent cash flow +1
9. Our understanding of the business +1
10. Possibility of a takeover +1
11. Intangibles +1
    

The benchmark of these 23 items that's required before The Contra Guys will invest is a minimum score of ten. The higher the better obviously. If you want further explanation, you can buy their book, The Contrarian Investor's 13.

Still, using this scorecard alone in assessing deep value situations isn't going to guarantee success. However, it should improve your chances of success by allowing you to more diligently assess a situation, and also ensuring that you have methodically looked at a number of different areas that can enhance returns.

Perhaps another day, I'll show you another scorecard I've used that's been well "field-tested".


JW

The Confused Capitalist