Value Investing and Loading Up the Truck

I just recently read about Seth Klarman, Portfolio Manager of the $5.4 billion investment partnership The Baupost Group, and noted value investor.

Since inception in 1982, the partnership has returned roughly 20% annually, an excellent long-term record. Like most value investors, Mr. Klarman has the discipline to sit on the sidelines when he can't find good value. He also has the courage to dive aggressively in, when he finds what he perceives to be great value.
Mr Klarman also runs a "focused" fund, meaning that he'll have a lot of concentration in a relatively limited number of stocks. What's he buying these days? What he's buying is into the distressed media sector - Rupert Murdock's News Corp. in particular. At present, Mr. Klarman has an almost unbelievable 55% of the fund's value in the class A and regular stock (NWS and NWS-A).

This is something that I also talk about in my book, which I call the ability to "load up the truck" when a very good investment is available at a discount price, in order to produce market-beating performance. Mr. Klarman isn't the only one to have ever benefited their portfolio's returns by doing the same: superinvestor Warren Buffett once said that he had well over 50% of his portfolio in one undervalued stock, and slept like a baby every night.

Mind you, if you do load up on a single stock like that, you better be very confident that it has minimal downside, and very significant upside. And it's almost always easiest to find this type of situation in so-called "value stocks", which is another of the reasons that I have learned to prefer being a "value investor". Stocks with mind-bending PE ratios often lead to mind-bending hair-pulling events - value stocks let me keep my receding hairline relatively intact.

While I can't speak to the relative value of NWS, I think it's noteworthy that a well-known value investor has taken such a large position.



JW

The Confused Capitalist

Deep Value Investing Situations: Use a Scorecard - Part I

One of the things this site promises is a "value" investing orientation. And one of the things most needed to properly assess deep value" situations is a scorecard. Without a scorecard, it's too easy to get caught up in the pessimism of the investment situation, or to become too euphoric because you think you've found the greatest thing since sliced bread.

What you need is a scorecard - and hopefully one that's been tested as having some utility over time. Over the next few days, I'm going to present one that's been used fabulously by its creators, The Contra Guys, North American deep-value investors, Benj Gallander and Ben Stadelmann. These gents run a very fine newsletter service indeed, with an enviable record has produced a 40% annual return over the past five years, and over 26% over the past ten. As with most deep value situations, trading costs are minimized by relatively long holding periods.

(Note: Since these returns are stated in Canadian dollars, the past five year record would be even higher for those whose investments are denominated in US currency.)

In their book and other places, they have produced an investing scorecard that aids them in deciding whether or not to invest in a deep value situation. Their scorecard consists of twenty-three items, to which ordinal values of between -2 to +4 can be scored for each particular measure. The scorecard will be shown over two postings here, so this only consist of approximately one-half of the measured items:

1. Recent downward share price spiral -1
   
2. Single, double, triple, quadruple price upside +1 to +4
3. Negative margin of safety -1
4. Stock is likely to undergo a share consolidation -1
5. Good or excellent management +1 to +2
6. Management ownership position +1 or +2
   
7. Insider trading -1 to +1
8. Excessive versus equitable executive compensation -1
9. High research and development expenditures +1
10. Favorable demographics +1
11. Excessive, or reasonable debt -2 to +2
12. Dividend payout +1

The rest of The Contra Guys scorecard will be presented later, within the next day or two.

JW

The Confused Capitalist

Is a Financial Advisor's Hand-Holding Worth It?

A recent survey by Environics Research Group indicated that self-directed investors were more likely to be nervous about value fluctuations in their portfolio than those that had an investment advisor.

The survey asked over 1,600 investors between age 21 to 80 various questions. Amongst those included was one that both a majority of self-directed and advisor-driven answered relating to what they'd do if they had a large amount of money to invest over the next five years. Both groups answered positively that they'd choose an investment that offered "a substantial opportunity for returns with moderate risk of losing some of your original investment".

However, overall the self-directed group felt more uncomfortable with "any fall in value" of the investment (22% agreeing with that), compared to only 16% in the investment advisor driven group agreeing with that sentiment.

So I guess that the education and "hand-holding" function that is offered by investment advisors is generally helpful to their clients, in that they help keep their clients in the market during soft periods. The question remains as to whether that hand-holding function alone offsets the cost of the advisor.

• If you aren't willing to see the value of your investment fluctuate by up to 50% annually, then you probably shouldn't invest in the stock market.

- Superinvestor Warren Buffett



JW

The Confused Capitalist

Interest Rates/Inflation: Back to the Future?

More and more, recent times remind me of the 1970s in terms of the economic background of high commodity prices, high oil, and US fiscal problems, much of it brought on by an increasingly unpopular war.

Which got me thinking about the comment I first came across on Random Roger's site, wherein an article in the WSJ postulated that long-term interest rates might be notably lower than otherwise, due to baby boomer's moving progressively out of the stock market, and into the bond market. Aside from questioning the long-term logic of this from an individual perspective, something I did over here, I began to think about it in a more recent historical context, and conclude - in my opinion - that's it's unlikely to have much effect. Perhaps some, but not much.

I'll use the last decade of noticeably high interest rates as an example: the 1970s. Some of the factors that should have produced lower interest rates in that decade were:

• A low birth rate between 1930 (depression era) and 1945 (WWII), resulting in relatively few 25-45 year olds in the 1970s (25-45 year olds tend to require the most loans, due to family formation, house and car purchases etc.);
• A number of persons aged 50-65; then considered to be prime savings years;
• Infrastructure expenditures of the late 1940, 1950s and early 1960s relating to the re-building of Japan and Europe mostly or fully complete;
• Major American infrastructure expenditures, mostly of the 1950s and 1960s, complete;
• Most of the baby-boomers had not yet reached significant household formation age - a time of major draw on capital markets.

In short, I think this should have been a time of relatively light capital requirements, yet interest rates started the decade at a mostly benign level, but quickly accelerated to relatively - and persistently - high levels. Other factors swamped what I think should have been a time of light draw on the capital markets and produced markedly high interest rates.

I think in a similar fashion that other factors of today will have a far more significant impact on long-term interest rates than boomers who may - or may not - move capital into the bond markets.

Now this is just my own quick thoughts on this situation - I'd love to hear from others who might point out flaws in my thinking. Also excuse me if the WSJ already brought these up, as I haven't read that original article. Interest rates and inflation - back to the future?



JW

The Confused Capitalist

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ONE of you will live longer than you think: Staying in the Stock Market

A recent posting by my internet friend, Random Roger, pointed to a recent Wall Street Journal article that postulated that long-term interest rates might be held down by the number of aging boomers shifting a portion of their portfolios towards bonds and CDs, and away from the stock market.

While this might be true, only the uninformed pension-aged couple will do anything more than a modest move away from the stock market. For only through long-term growth - perhaps using quality divided paying stocks - like ones I recently highlighted over here - can you expect that long-term growth and growth in dividend payments be reasonably expected to offset the effects of inflation over a long retirement.

And that's partly because ONE of you will probably live longer than you think. A 65 year old male has an average mortality around 80, and a 65 year old female, 83. However, according to the Society of Actuaries, there's better than 45% chance that one of you will still be alive at 90, and a nearly a one in five chance that one of you will be alive at 95.

Now if you put a lot of your funds into bonds at age 70, then what do you think the chances are that you'll have much left some 25 years later? Unless it was a small (perhaps large?) fortune to begin with. And the averages also hide some other factors - it's reported that blue collar workers suffer 40% higher mortality in the years immediately following retirement, so if you're a white collar worker, you can expect you or your "sweetheart's" chances to survive to be even higher.

So if you're approaching your retirement years, or have already moved your portfolio this way, this is something you definitely should review and reconsider.



JW

The Confused Capitalist

Blog "Index" Investing Challenge

I have a number of links on the right hand side of my page, one of the most interesting (to me anyway) is one that estimates a value for any particular blog. It does this based on a blog that was purchased for a purported value between $25 to $40 million, and calculating a value per incoming link to that blog.

In other words, if one site has 1,000 links from elsewhere on the web, while another only has 10, presumably, the one that's linked to 1,000 times is much more valuable. One of the links I have on the right is entitled What's your blog's value. From this site, you can enter the web address of a site, and get an estimated value, based on the aforementioned rationale.

This site tells me that my blog, with only three incoming links to date, "is worth $0.00". ;-) I guess that's to be expected - I just started it a couple of weeks ago.

Anyway, you'll see several links of what I call, "Blogs: Some Good Ones", over to the right as well. I think they're interesting and useful and highly recommend you visit them. Here's what the reportedly value of each blog is:

• 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

So here's the challenge: you've just been given $600 to invest by your old auntie, who just loves the internet. However, she's specified that you have to invest as a "private equity investor" in any, or all, of these six blogs, with the intention of maximizing that $600 - in other words, just like the stock market! We'll call all six the "Blog Index" and it will be equally weighted.

Each of the sites has much to recommend them, and each offers their particular advantages and disadvantages. Abnormal Returns offers a synopsis comment on many other sites, and is thus useful in that way, Random Roger updates frequently with a sort of "stream of market consciousness", and so on. So you may think that some things are going to offer more desirability and that they will ultimately attract more links. And thus be worth more.

Remember that if the value of a particular blog moves up by say 10% and you have some holdings in that, then the value of your holdings increases by that same 10%. So you are looking to find the site, or combination of sites, that you feel will move up by the highest percentage.

I'm going to invest in just two of them, dividing my money equally between The Big Picture and Value Discipline. We'll check in at a later date to see how I'm doing, compared to the "Blog Index", and to other competitors that will (hopefully) enter.

Anyone can join in late, if however, you do so, you will be given the same amount of funds that the lowest competitors "portfolio" is then worth. So, please feel free to join in by adding a comment on how you'd spread that cash around. We'll check in occasionally to see how everyone's "portfolio" is doing.


JW

The Confused Capitalist

Is the Real Estate Market Still Too Hot?

There has been much gnashing of teeth and beating of breast lately as to the extent of the existing housing bubble, or in fact whether one even exists. Aside from the obvious signs of slowing demand as interest rates move up toward more traditional long term levels, as someone formerly involved in the finance industry, I just spotted the sure-fire sign.

I was drawn over to Ditech.com the oft-advertised on-line financier, with this offer: "Finance your Home to 125% of it's current value" . No appraisal needed! It's called (how's this for spin) ... the 125 Freedom Loan.

Having seen the tall-headed gnomes in my own financial field previously lend to extreme ratios in the dying days of a real estate upswing, I thought they'd have figured out that lending like that at the end of a long cycle, isn't very good for the bottom line.

Or maybe they are smarter than me and they're aware that the default ratio for home loans remains relatively low, through all portions of the economic cycle. Still, I wonder what the interest rate would be on that mortgage ... doubtful if it's the headline rate on their site, i.e. 5.875% for a 30 year mortgage.


JW

The Confused Capitalist

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Berkshire Hathaway: Law of Large Numbers Catching Up

Superinvestor Warren Buffett's company, Berkshire Hathaway, recently announced a 54% increase in quarterly earnings, and a 16% increase year over year. Performance like this has led Berkshire's shares to attain lofty prices, and to continue to outpace the broader market, year after year.

However, just like the mouse on the left would have more trouble gaining 10% of its weight than the mouse on the right, Berkshire is - as Mr. Buffett has repeatedly warned - going to have trouble continuing to outpace the S&P500 as the company becomes larger and larger.

In fact, more and more of Mr. Buffett's acquisitions take him farther and farther from his preferred investments - such as insurance companies and banks, and companies that commend "top of mind" presence with the element of repeated purchase present (i.e. think Coca-Cola, a major holding of Berkshire). Some recent acquisitions include home builders and RV makers. These obviously don't fit that profile and tend to be more in commodity-oriented type venues, where price becomes a larger factor than prestige or habit.

In fact, just as Mr. Buffett warned, his marked outperformance vs. the S&P500 is clearly waning. The following info is taken from the Berkshire web-site and shows his average annual outperformance of internal book value vs. the S&P500 by decade:

• 1970s - 15.8% better per annum
• 1980s - 11.4% better per annum
• 1990s - 6.3% better per annum
• last ten years - 5.6% better per annum

This isn't to say that Berkshire shares don't still represent an above-average investment and probably offer better value than the standard mutual fund - just that the outperformance going forward is unlikely to match that of the past. In fact, in three of the most recent seven years, Berkshire's increase in book value per share, didn't meet the return of the S&P500 - an unprecedented result!

Nevertheless, Mr. Buffett has a remarkable record of outperformance, and that outperformance - albeit by a diminishing margin - may very well stay intact for many years into the future.

You can buy one share of Berkshire Hathaway "A" series (BRK-A) for a cool $87,400, or one of the "B" series (1/30 economic value) for $2,911 (BRK-B).


JW

The Confused Capitalist

Blogosphere pounding analysts

Ding, ding: Round one!

Well, analysts of all sorts are taking a pounding lately in the blogosphere. Many critics have latched onto the sub-par record of analysts in predicting anything, including picking winning stocks, something recently noted in the research study done by European investment house Dresdner Kleinwort Wasserstein, in The Seven Sins of Fund Management (note: link is a pdf file). I don't know if scathing is the right word for some of the conclusions reached therein, so I'll simply quote directly ...

For those of us who think longer term, it would be nice to think that these disturbing findings were merely a reflection of the wider mania that was the investment landscape in 1999. However, our simple analysis of consensus analyst current recommendations and their characteristics, reveals something deeper behind the analysts' behaviour. In the US, the stocks most favoured by analysts tend to be expensive in terms of PE, price to sales, and price to cash flows (PCF). They tend to have very low dividend yields, and very high expected growth rates. They also have high price momentum over the last 12 months.

and further ...

Price momentum appears to be one of the strongest inputs into the analysts' recommendation structure. This tells us something about analysts' time horizons. Price momentum effects are generally found up to around the 12-18 month mark. Beyond that you tend to observe reversals. That is to say, at time horizons beyond 12 months, past losers start to outperform past winners (by 8% in year two on average between 1980-2005).

Noting the poor record of stock selection, a sample reading of current blog comments includes the Nyquist Capitals' blog that recently highlighted one analysts "hold" recommendation of Intel through a recent price rise, his subsequent "buy" recommendation near the price peak and subsequent decline, and then his current revised "hold" recommendation as the price has fallen again.

Peridot Capitals' blog lambasted another analyst for his timing in ditching his Sherwin Williams "buy" recommendation during its recent lawsuit troubles, right at the nadir of its two day plummet. Within days, it subsequently gained about 20% over that intraday low. Peridots summary comment was ... " ... analyst stock picks won't make you any more money than a monkey will throwing darts at the Wall Street Journal stock tables." OUCH!

The Stalwarts blog takes offense at a pointed rebuttal by Michael Eisenberg of Benchmark Capital, wherein Mr. Eisenberg accuses the blogosphere of "drinking its own kool-aid".

Jab, counter-jab. Round two forthcoming, I'm sure.




JW

The Confused Capitalist

Canada: Beating the Swiss at THEIR game?

After the 2002 Olympic Gold-medalists Canadian men's hockey team recently lost to the Swiss team in Turin, there's now word that Canada may be beating the Swiss at THEIR game: economic fundamentals and a rock-solid currency.

Douglas Porter, deputy chief economist at BMO Nesbitt Burns recently stated that Canada now boasts "some of the soundest economic fundamentals in the world", including some positives that the Swiss cannot match, including a federal government bugetary surplus, and solid growth in gross domestic product. Mr. Porter further contends that the "loonie" - as the Canadian currency is popularly-known - can aspire to a role long played by the Swiss as a "go to" currency in times of global turmoil.

Tim Mazanec, senior foreign exchange strategist at Investors Bank and Trust in Boston agreed that Canada's current account surplus is the envy of most countries and helps explain why the loonie is so strong. "There's many countries in the world that can only dream of it", he said.

From a economic basket case back in 1994, when Canada owed 44% of it's GDP in net foreign liabilities, to today, when that figure has been slashed to just 12%, Canada has worked hard to place its finances on solid ground.

Mr. Porter concluded his statements by saying that, "I think to some extent we (Canadians) should be celebrating it (the strong currency, which has gained about 40% over the past five years), because it's partly a reflection of the real improvement we've seen in Canada's fundamentals in the past ten years."

You can invest in the Canadian market through the iShares exchange traded fund, EWC.

Oh Canada ... now if our hockey team could only play the same tight game ...



JW

The Confused Capitalist

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Energy Demand: Nuclear Renaissance?

As investors, it pays to be ahead of the rest of the investing crowd. Nuclear energy may offer one such option. While the focus of the Wall Street crowd today is oil and gas, future gains in uranium may vastly outstrip those remaining in the oil and gas field.

Today, it's estimated that, in addition to the 440 operational nuclear plants around the world, there'll be another 60 on-line to serve the growing world-wide energy demand, by 2020. Additionally, some environmentalists, such as James Lovelock, Ph.D., now embrace nuclear power as the only way to avoid complete environmental catastrophe. Add to that the obvious demand that will continue to occur as China's and India's 2.2 billion citizens become part of industrialized societies and the demand side of the equation is obvious.

What is less obvious is that the uranium industry has been undermining for years, perhaps even decades now. This deficit, currently estimated, at about 25 million pounds annually (of a total demand of 150 million pounds), has been met by the over-stockpiling of uranium from the 1950s-1970s, and by the decommissioning of Soviet nuclear weapons in this decade and the 1990s.

However, the "well is running dry", so to speak as these sources are themselves being drained. All of which leads us to a long-term investment thesis, of uranium producers experiencing very good gains for a lengthy time period, perhaps as long as ten years. Uranium mine approvals, world-wide, are subject to obvious governmental red-tape and this is only overcome at considerable time and expense.

In the interim, sit tight and enjoy what I believe will be superior medium to long term investment gains. The largest global producer of uranium is Cameco, on the NYSE as "CCJ".


JW

The Confused Capitalist

When is value, value?

Synonym for Value: Warren Buffett.

My internet friend, Roger Nusbaum, had something to say about value and the perception of value with a recent comment he made. He was discussing a comment that I'd made relating to value or perceived value in some of the emerging markets.

I'd suggested that, in comparison to the S&P 500 - with its' 18 PE ratio and projected earnings growth over the next year of about 10%, didn't necessarily represent good value in comparison to some emerging markets. Particularly Brazil, Korea and Russia, who have projected earnings growth of 11% or better, and PE ratios are below 12. A good combination of growth and value, I thought.

In Roger's comments, he makes a good point that cheap isn't always value, and that many of these markets have traditionally traded at low PE ratios. All true.

However, growth with value almost invariably gets noticed, and the lower risk profile that many emerging markets now have makes for safer investments than in years past. Many of these economies now have good free trade agreements, floating currencies, and generally more stable economic situations. In my opinion, this is part of what is leading investors to willingly pay more than ever for emerging markets: lower risk and a superior growth profile.

The inverse is of course true for the US market, with its continued burgeoning trade and fiscal deficits. If these trends continue, not only will the US currency continue its' descent, but even its' markets will eventually be revalued lower.

Cheap isn't necessarily good, nor is expensive wonderful. It must all be considered in its' rightful context: value.

"Price is what you pay - Value is what you get."

Warren Buffett


JW

The Confused Capitalist

Emerging Markets: Head for the Hills?

I haven't read the full results of the Morgan Stanley report entitled Head for the Hills but, apparently in their view, emerging markets are poised for a slump, after several years of strong gains.

This is of course, completely contrary to what I recently reported wherein State Street Global Advisors considered emerging markets to be valued similarly to three years ago. Should we rank these varying sentiments according to the number of employees of each has? Morgan Stanley has about 53,000, while State Street has about 20,000.

So give a 2:1 preference ranking to Morgan Stanley? Perhaps not that good a way to resolve this conundrum?

That's the reason we have a brain I suppose (to weigh opposing opinions), and diversification in our portfolios. I suggest, that you not panic and "Head for the Hills" (nice alarmist statement, guaranteed to churn accounts), and simply review your portfolio to see if you are comfortable with your weightings. It's as simple as that ...


JW

The Confused Capitalist

Scrapbook Your Investment Ideas

One thing that I've done in the past as an investor that's lowered my returns has been to flit around from stock to stock whenever I come across a "good idea". This has dampened my returns, since I haven't had the full patience to wait for my other good ideas to come to proper fruition (ie waited for the market to properly value them) and I haven't considered those ideas within the context of other investment ideas that seemed profitable.

I've now worked out something that works much better for me, and it just might for you too.

And that's to toss all these ideas into the equivalent of a scrapbook, with a couple of notes about where you came across the idea, what seems so good about it, and anything else you happen to have on had about it. Now, unless it offers an absolutely stunning value opportunity to be exploited immediately - then you can just sit on it for a bit, and wait.

Then, every couple of months, you can go through your accumulated ideas, perhaps examine some basic valuation metrics on it, and see how it might blend into your investment portfolio to date. Make sure you ask yourself a few questions about it - but you also get the opportunity to compare it to your other "bright ideas" and at least consider the risk/value issue in a broader context - ie other opportunities you're actively considering.

I almost guarantee that this sort of activity will lower your trading profile and increase your returns, unless your portfolio suffers from comatose activity, in which case I believe it will then both increase your trading and your returns.

A beneficial activity in either case: scrapbooking - it's NOT just for the bored housewife anymore!


JW

The Confused Capitalist

The Rise (and Fall?) of Indexers

Indexing the market, primarily through ETFs and other passive index-matching investment vehicles has clearly been in ascendancy through the last decade or so.

Just about anyone who reads the financial papers on a regular basis is aware of the dismal record of most actively-managed mutual funds. Very few manage to beat the index they are competing against for any sustained period of time; typically, over a 10 year period, it would be less than 20% beating the index.

So investors around the world have asked the same question and are generally arriving at the same conclusion: If you can't beat the index, then join it (through ETFs or low cost index mutuals).

Recent research by Indiana University professors Bhattacharya & Galpin, confirm this as a world-wide phenomenon - of 39 national markets viewed, only in 4 of them was stock-picking (ie non-index trading) on the rise compared to previous periods analyzed. In the US market, stock-picking peaked at about 70% of all trading activity in the 1960s, and has steadily declined to today's level of just 24% as actively chosen stocks.

The good professors further conclude that the markets can remain efficient to as low a level as 11% actively picked stocks, for index funds to persist on at least an equilibrium level with an actively chosen comparable portfolio.

However, given the continued explosion of index funds of various descriptions, the question arises as to:

• Exactly when will the typical actively-managed mutual fund begin to consistently outperform index funds? (I can tell you, that you'll see mutual fund sales people dancing in the streets in their Armani suits that day, however) and;
• How much of an advantage will begin to accrue to the the serious do-it-yourself stock-picker as that day of market inefficiency gets closer and closer?
  

A couple of thoughts worth pondering as that day draws closer and closer ...



JW

The Confused Capitalist

Risk: Your Human Capital - Stock or Bond?

Professor Moshe Milevsky of the Schulich School of Business asks whether you are you a Human Bond? Or Speculative Stock?

Professor Milevsky does work in the emerging field of Quantitative Wealth Management, trying to help individuals make more rational and better decisions about personal wealth and risk management issues.

Milevsky writes about "You Inc." in Wealth Logic: Financial Planning for the Smart Investor and suggests that the most significant financial portion of "You Inc." is not your accumulated financial wealth in terms of stocks, bonds, 401(k)s, real estate equity, etc. It is the amount that you will be worth as an earning machine over the lifetime of your working career. What he calls your "Human Capital".

Milevsky suggests that you stop and consider what type of capital you are personally and, in the interest of a balanced portfolio, purchase or weigh your other financial investments to offset the type of risk inherent in your "human capital". For instance, Milevsky states that as a tenured professor himself, he's the equivalent of a "human bond". Steady, regular and reliable payments, practically no matter what. In the Quantitative Wealth Management field, Milevsky suggests that this should be offset by a very high ratio of investment into the stock market, rather than into more bonds or other savings type investments. And this is exactly what he himself does.

I also know another individual like this - he's got a very secure government job as a middle manager - another "human bond" - but he's very conservative and probably doesn't invest for the rate of return he should be seeking on those investments, given his "human bond" characteristics. On the other side of the coin, Milevsky suggests that those whose job is more like a volatile speculative stock - a commission salesperson of "big ticket items" comes to mind - should probably invest a higher than average ratio into more conservative investments.

Interesting stuff. Human Bond, Blue Chip Stock, Speculative Stock? What's your "Human Capital" most like?

JW

The Confused Capitalist

Emerging Markets: Bubble? Or Value?

There's been some discussion lately that emerging markets are entering potential bubble territory, due to magnificent gains of 56% in 2003, 26% in 2004 and 34% in 2005, for the iShares MSCI Emerging Markets ETF (Symbol: EEM). This can get an investor worrying about whether or not they are buying into a bubble if they are considering purchasing an emerging market ETF.

Surprisingly, even after the recent strong gains, the answer seems to be "No". According to research from State Street Global Advisors, they state that in January 2003 the MSCI Emerging Markets Index held the following value metrics:

• PE Ratio - 14
• Price to Book Ratio - 1.4
• Price to Cash Flow Ratio - 9
• Dividend Yield - 2.4%

By comparison, in January 2006, the same metrics were as follows:

• PE Ratio - 15
• Price to Book Ratio - 2.4
• Price to Cash Flow Ratio - 8
• Dividend Yield - 2.5%

The reader can see that the only metric undergoing significant change is the price to book ratio, perhaps a sign that these economies are undergoing the first vestiges of an industrialized country valuation metrics. By comparison, the S&P500 trades at:

• PE Ratio - 15
• Price to Book Ratio - 2.4
• Price to Cash Flow Ratio - 11
• Dividend Yield - 1.9%

While one can argue that emerging markets have particular risks all their own, these are generally diminishing, while the US market is obviously overhung by the gigantic trade and fiscal deficits, and are thus more risky than they were a dozen years ago.

A summary comment relating to the emerging markets issues was as follows:

"Valuations make it more difficult to argue for dramatic outperformance of emerging markets, but otherwise the fundamentals still look reasonably good. With good global growth and continued low interest rates, there appears to be little to derail emerging markets other than the psychological burden of three good years of performance"

• Brad Ahram, head of emerging markets, State Street Global Advisors

So, emerging markets still look like reasonable value to this observer(given their better estimated earnings growth over the next year or so), but I would suggest either buying a wide swath ETF, or watching what particular countries you select in your ETF basket. I personally like Brazil, Russia and South Korea as being reasonably priced with good growth prospects.

JW

The Confused Capitalist

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Dear (Investment) Diary

Dear Diary: What I write down is important!

In addition to things covered in recent blog postings relating to planning to improve your investment returns, there's also another thing you can do.

And that is to keep an investment diary - what you bought, when, and why (most important is why, since your statements will tell you the what and when). Write down a bit about what attracted you to that stock/ETF/investment, and what your "exit point" is. There's almost always an "exit point", even for the most conservative investments - perhaps it's when/if the yield falls below a certain level. If you're a more active trader and trade in small cap stocks, then you are probably looking for a certain pe ratio to be achieved ... write it down.

Review your writing occasionally. This will help you to stay the course where needed, or to remember where you thought was a good point to get out (before you got all those huge gains and got married to the stock!). It can help foster a better perspective.

In addition, it can help simply to write down when you are thinking of changing your portfolio, and getting your thoughts straight before doing anything drastic. This definitely helped me in the days and weeks following hurricane Katrina, when I initially felt the economic effects might be much worse than originally envisioned.

Finally, it can also help in your annual review of what you did right and can get even better at, and what you need to mitigate - you'll have a record that you can peruse with detachment on your thoughts and worries of the day.

One last thing we'll cover later before moving onto another topic is: "scrapbooking". More later ...

JW

The Confused Capitalist

Lift Your Investment Returns

In addition to the planning items I've recently discussed in the last two postings, there's also another way to raise your investment returns.

And that is done by analyzing what you have done with your portfolio over the past while, perhaps a year or so. Because if you stop to look and think about your various trades, you'll probably be able to glean some insights into your own investment personality.

For instance, you might find that you are drawn to the latest and greatest growth story, something that was discussed in the fascinating research paper, The Seven Sins of Fund Management as Sin Number Six, or you might be more subject to Sin Number Five. Whatever; the point is that if this particular investing flaw is causing you to have a lower than potentially possible return, then you need to do something about it. And that can only be possible by realizing you are doing it, looking at it, seeing it, and hopefully choosing a strategy in the future that allows you to minimize its effects.

On the other side of the coin, analyzing your pattern of trading and investing also allows you the opportunity to exploit your strengths to even greater advantage. You might find that you are doing one thing particularly well, that is adding some dollars to your investing each year. If you realize it, you might be able to figure out a way to take even greater advantage of it.

In an analysis of my own investing over the past year or so - done by looking at all my trades - I came to certain conclusions, some of which are as follows:

Right things:

• I accurately over-weighted my portfolio when I found a cheaply-priced (ie low pe) fast-earnings growing stock (but I could have done this even more, I see in hindsight);
• I accurately purchased additional position, when I saw a stock
  suffering from a temporary weaknesses.
  

On the other side of the field, some of my bad habits were:

• Bought too many micro-cap "story's", that lacked adequate net earnings and these returns impaired my overall return (and also increased my propensity to trade often);
• Bought some expensive (ie high pe) fast-earnings growing stocks, and that also impaired my returns.

The point here is that I've looked at both things I done right, and mistakes I've made in a considered way. In the future this should allow me to do, respectively, more of the first, and less of the second. Thus improving my overall investment returns. If you do the same, you'll see certain things you have done, or habits you have, that become more obvious to you. This allows you insight into your investing style and worries - thus providing you with the opportunity to raise your future investment returns by modifying your behavior.

A little more on this topic later ...

JW

The Confused Capitalist

Planning for Emotional Control

We all have emotions - which is great in our personal lives, but doesn't help that much in our investment lives.

In fact, many great investors have stated that being in control of one's own emotions allows one to tread where others fear to go, and to fear to tread the well-worn path. What this means is that the best returns are generally earned when no one is considering that sector/company or timing (due to a recession, for instance), while returns earned when everyone is on the bandwagon, are typically only fair, and often poor.

Fidelity reportedly did an analysis on their then flagship "Magellan" mutual fund, and found that the average investor in the fund typically did much worse than the fund itself. Why? Timing, they found - investors piled more money in after a period of strong returns, and tended to pull more out after a period of weak returns.

So we as investors want to avoid the same fate. One way to do so is through planning. Make a plan to start the year and follow it. Write down what could cause you to want to deviate from that plan. Then when you are tempted to change your investment strategy, go and review your plan to see if you'd already predicted that could happen. For instance, bearing in mind my own plan for the year (see prior post) and my own personality, I considered that these items could possibly derail my attempts to follow my strategy:

1. The volatility of my leveraged investments might worry me - so just ignore them and remember that volatility is the order of the day with this investment type;
2. Ensure that I have enough money to continue to invest in my small cap stocks - I really enjoy investing in this area, and if I completely exited it, I know I'd get "itchy feet" with my other investments;
3. Trust that the investments based on the "value screens" of others will produce worthwhile long-term results - just as they have in the past;
4. Avoid excessive diversification, bearing in mind that superior investment results usually come from a focused portfolio.

If you read between the lines, you can see that a number of my reminders have to do with the characteristic of impatience. If I can control that within myself, this will personally make me a better investor.

The point here is that we all have our weak points, and if we recognize them, write them down, they hold less power over us. Your weak point as an investor might be the same as mine, or it might be different. As Sun Tzu is reported to have said in The Art of War:

If you know neither the enemy nor yourself, you will lose every battle, if you know yourself or the enemy you may win some battles and lose some, but if you know both yourself and the enemy, you will win every battle.

At least improve your investment "battle" chances by knowing yourself.

JW

The Confused Capitalist