Wednesday, January 31, 2007

Show Me the Moola, LaFarge!

:s49: :s49: :s49:

It really amazes what these buggers are doing. It's no wonder the investing community do not rate this stock as highly as the other listed cement stocks in the country.

This is what they announced last night.


How much? Only 566.46 million.

Take a look at their cash balances.

Now have a look at the group total loans.

Incredible eh?

I thought so too!

Oh, mind me not, the stock should probably zoom after this.

Tuesday, January 30, 2007

Overcoming Overconfidence Issue

Read this article from Capitalideasonline: link

  • Overcoming overconfidence
    Posted on 25th August 2006
    Chetan Parikh

    Adults stage frequent displays of over­confidence, and investing is fertile ground. People are prone to con­fuse accidental success with investment know-how. "Everybody's a genius in a bull market," goes an old saying on Wall Street. When stock prices are rising, many investors get swept up in an exhilarat­ing sense of omnipotence. Conversations turn to how much money they've made in the market-even if it's only on paper. Those who haven't shared in the new wealth often become envious and are given to investment risks they might otherwise avoid.

    But when the stock market becomes a money machine, why not pull the handle? For good reason. When investing seems a sure thing and novice players are convinced that they can beat experienced veterans, the risk of a fall is actually greatest.

    Overconfidence fosters this false sense of empowerment. We tend to revel in our successes and forget the failures.
How true isn't it? The article then continues...

  • Just to break even on these trades, a replacement stock has to perform strongly enough to cover trading costs. But Odean found that the stocks investors bought actually fared worse over the fol­lowing year. On average, the new stock underperformed the old one by 2.3 percentage points. Once trading costs are factored in, this shortfall more than doubles. By their reasoning, investors might think they're getting rid of losers and replacing them with winners. But in fact, they're doing just the opposite, as Thaler observes:

    People exaggerate their own skins. They are optimistic about their prospects and overconfident about their guesses, includ­ing which managers to pick. If you ask people a question like "How do you rate your ability to get al0ng with people?" ninety percent think they're above average. 90 percent of all investors also think they're above average at picking money managers, which is why they think they can find the one-third who can beat the index, and why they're willing to pay money to get that chance.

    Overconfidence is particularly acute in the independent ­minded world of online investing, where investors can tap into great quantities of information and buy or sell with just one click. But information is not knowledge. Odean studied the investment habits of 1,607 people who switched to Internet-based trading from telephone-based trading between 1991 and 1996. Before making the change, these investors outperformed the market by 2.4 percentage points on average. After going online, they traded more speculatively and less profitably-underperforming the market by 3.5 percentage points a year.

    Investors would be better off to own the stocks of quality com­panies and hold them, instead of trying to sample everything in the store. As Pogo Possum, the classic comic strip character, might have noted wryly about active stock traders: "We have met the enemy and he is us." Trading is not investing. Many overconfident investors are convinced they have "hot hands," in the way a bas­ketball player on a shooting streak will keep racking up points.

I think this is an extremely interesting issue.

This reminded me of an interesting posting in the Wallstraits froum: Do not buy on the way down

  • The reason most investors/traders fail to make money in the market consistently is because of their mindset. People in general have a tendency to want to be right but of all endeavours, wanting to be right in the marketplace is a very costly exercise.

    ( Mindset issue! Do you all agree? Me think so woh! )

    For most professions, being right is a clear necessity for the job especially those in the medical profession. Do anything wrong and you risk a patient dying on you. Thus this concept or need to be right is strongly ingrained in our mental psyche since we were young.

    Now recall my other thread "Value Investing and Value Destructing"? The key problem I highlighted is that the average value investor aspires to be Warren Buffett. But there is only one Warren Buffett. As such, the average aspiring value investor is bound to fail in this very difficult task of figuring out the intrinsic value of a company. So what does this all mean? Does it mean then that it is hopeless of that the average investor will ever make money consistently in the market?

    ( Again let me say this... too often I have witnessed market players cannot accept the fact that perhaps they have made the mistake themselves. Simply put, 'they blame the 'machine', instead of acknowledging that perhaps it was the user that was wrong! )

    Well, one of the most ironic things about the market is that you do not even need to be smart to make money. Because if one invests/trades with the trend of the market, one already has the odds on his side. Needing to be right and insisting that the market must perforce agree with you is the leading cause of poor investment performance.

    ( Hmmm... I do agree with that statement! )

    Many value investors proclaim that it is impossible to tell when a bull or bear market or uptrend or downtrend is in force. Yet, all that is needed is common sense since when prices fall day after day, it does not take a genius to figure that the trend is down. On the other hand, if prices rise more often than they fall, does it take a genius to tell that an uptrend is underway?

    Listen closely to the message of the markets instead of trying to predict the trend of the market. Let the markets tell you when to buy and when to sell. But this means that you surrender your intellect to the collective wisdom of the market. And this is of course hard to take for many egoistic human beings. Your thinking is often more irrelevant than you think.
This statement:
  • Well, one of the most ironic things about the market is that you do not even need to be smart to make money. Because if one invests/trades with the trend of the market, one already has the odds on his side. Needing to be right and insisting that the market must perforce agree with you is the leading cause of poor investment performance.

Which reminded me of this one saying from Warren Buffett..

  • It's optimism that is the enemy of the rational buyer. None of this means, however, that a business or a stock is an intelligent purchase because it is unpopular; a contrarian approach is just as foolish as follow the crowd strategy. What's required is thinking rather than polling.

Now this is where I find extremely interesting.

The very fine line between optimisim, confidence and the right reasoning.

Investor and traders know that the right reasoning is the very key to their success but being overconfident and not accepting the fact that perhaps we could be wrong in our own judgement could be extremely deadly.

Take a look at ourselves.

Well, who do we think we are???


Who are we?

Are we all ever going to be the great Warren Buffett?


We can try to be but let's be realistic, we will make mistakes along the way. Acknowledge this fact. Do not use the phrase 'it's ok because I am investing long term'.

This is because the greatest danger is if your initial stock selection is flawed, it is wrong.

And holding it long term is HOPING the market corrects your stock selection mistake. Remember mistakes costs us money!

So acknowledging we can be wrong is one extremely important issue.

Don't you think so?

I do think so.

***** This posting is dedicated to Unker Cili. *******

A bit about Copper

Read an interesting comment posted by Rob Kirby on copper: Contrary Views on the News

This section is worth reading:


China And Base Commodities In Context, Perhaps?

So, while empirically – a current chart of the price of copper looks like this;

We might be well advised to remember that while this graph illustrates the price of copper falling off a cliff – it really only mirrors the U.S. housing industry to a tee. Perhaps we should all stop and take stock of what is going on regarding copper in China. Remember folks, copper is essential to the build out of infrastructure – equally as is nickel.

Has anyone [namely the copper bears] stopped to consider the non-confirmational behavior of nickel recently? Take a look:

Last I read was that China is still expecting GDP growth of double digits++. The dynamic driving infrastructure build out in China is vastly different than “home building in the U.S.” Firstly, in China – infrastructure build out is the NATIONAL POLICY of the best heeled purchaser [the Chinese Gov’t] the planet has ever seen and they keep getting RICHER – as evidenced by their swelling foreign reserve account.

While the U.S. consumer is SPENT – we’ve all known that for a long time.

Now, China’s exports to the U.S. account for roughly 8% of Chinese GDP. If this trade was cut to ZERO – and how likely is this? – China would likely still have substantially positive GDP growth.

Additionally, while the Chinese are well known to be “hoarders” – in the past they have been shown to be totally absent from [or even sellers in] strategically important markets which they CATEGORICALLY MUST be major buyers in – but only for short periods of time – like here and now in COPPER.

For those with good memories, it was just a couple of years ago that a China Aviation Oil blew up “shorting oil” – or jet fuel to be more exact – and then hid the loss. I’m sure everyone can appreciate the FACT that China is CATEGORICALLY NOT a REAL exporter of petroleum products.

In the meantime – the charts are all “set up” so that a strategic PUSH by a major industry/futures player [like a large investment bank/futures player, perhaps?] on copper in the next few days will have every Technician in the bloomin' world pressing the ejector seats on their positions with CNBC, Bloomberg et al right at their sides TRUMPETING – and giving the play-by-play demise of the commodity bull.

Remember folks, asset prices like base commodities are set in global markets – if markets really are “free” – and have been raising largely in response to excessive money [debt] and credit creation. While a housing slump in the U.S. has a definite effect on domestic U.S. demand, growth [and ultimately price] at the margins in many of these base commodities is now set in foreign lands.

I’ve said it before but it bears repeating, stockpiles of too many of these strategic base commodities are at historic lows – until that picture fundamentally changes – everyone should treat their investments in companies that produce them accordingly.

Monday, January 29, 2007

Lingui's Q2 Quarterly Earnings

In a seperate announcement, Lingui reported its quarterly announcement.

And the Edge had a write-up:

  • Lingui 2Q profit surges to RM76m 29 Jan 2007 7:35 PMLingui Developments Bhd net profit for the second quarter (2Q) ended Dec 31, 2006 surged to RM76.13 million from a net loss of RM2.34 million a year ago due to favourable timber prices.

This is what reported in that article.

  • Lingui 2Q profit surges to RM76m

    Lingui Developments Bhd net profit for the second quarter (2Q) ended Dec 31, 2006 surged to RM76.13 million from a net loss of RM2.34 million a year ago due to favourable timber prices.

    The company told Bursa Malaysia on Jan 29 that its revenue improved by 38.18% to RM409.87 million from RM296.61 million during the period under review.

    Earnings per share were 11.54 sen from a loss per share of 0.35 sen.

    For the first half up to Dec 31, 2006, Lingui's net profit soared to RM162.27 million from RM2.23 million during the first six months last year.

    Revenue jumped nearly 40% to RM845.38 million from RM605.55 million in the previous corresponding period.

    Lingui said the price outlook for timber products remain buoyant due to contraction of Indonesian log supply in line with the Indonesian authorities' continuing curb on illegal logging as well as proposed logging moratorium in critical areas following widespread flooding last December.

    “With continuous support from markets like Japan, China and India, the group anticipates the price trend to be sustained in the forthcoming months. China and India would remain strong markets with their rapid infrastructure and development programmes,” the company said.

    Lingui said although prices of timber products remained strong, adverse weather conditions would impact upon the group's performance.

    Shares of Lingui closed at six-and-a-half year high of RM2.89 after adding 24 sen with 13.89 million units done on Jan 29.

Taking Lingui Private

This one is good. Real Good.

Appeared on Saturday Bizweek.

  • Taking Lingui private

  • About ten months ago, the Samling Group made an offer to take Lingui Developments Bhd private. The offer price of RM1.01 did not create much of a stir. The Samling Group raises offer price in a second attempt.

Have a look:

  • Saturday January 27, 2007

    Taking Lingui private


    The Samling Group raises offer price in a second attempt.

    ABOUT ten months ago, the Samling Group made an offer to take Lingui Developments Bhd private. The offer price of RM1.01 did not create much of a stir. This is evident in the fact that the parent company since then has only managed to mop up about 20% of the shares it did not own, bringing its shareholding up to 60.6%.

    Well, they say that if at first you fail, try again, and that is exactly what Samling plans to do. It will soon launch its second attempt to privatise Lingui.

    This time around, however, BizWeek understands that the offer price will be about RM4 per share. Samling, helmed by Datuk Yaw Teck Seng @ Hiew Teck Seng and his son Yaw Chee Ming, have appointed CIMB Investment Bank as the merchant banker for the exercise. At RM4 per share, Samling will fork out slightly above RM1bil for the 259.5 million shares it does not own in Lingui.

    The offer price of RM4 is a premium of 54% to Lingui close of RM2.59 on Thursday. The last time the shares were traded at these levels was in September 2000. As at end September last year, Lingui had a net asset per share of RM2.20 per share.

    Trading of Lingui shares heightened in mid November last year, and since then the company’s stock has gained almost 120%.

    Good prospects

    However a source says that much of the premium offered could be because of the strong timber prices at present and the company’s New Zealand timber operations, which is ripe for felling.


Now what is more incredible... i noted this posting dated on 28th Jan 2007. Hmm... so serious, that Lingui took the time and post the announcement on Bursa Website?

Have a look:

Type : Announcement

Contents :

We refer to the news article appearing in page BW3 of the Star on Saturday, 27 January 2007, which states, amongst others, the following:

(i) "It (Samling Group) will soon launch its second attempt to privatise Lingui."

(ii) This time around, however, BizWeek understands that the offer price will be about RM4 per share.

The Company wishes to announce that it has on 27 January 2007 received a letter from Samling Strategic Corporation Sdn Bhd ("SSC") stating that it does not have any plan itself or through its subsidiaries to privatise Lingui and it is not aware of the basis of the statements to that effect in the abovementioned article.

By order of the Board

Tan Ghee Kiat (MICPA 811)
TV Sekhar (MICPA 1371)
Company Secretaries

28 January 2007

Oh.... today, the stock rose 24 sen.

Must have been some punters chasing up the stock upon reading such a news. But did anyone notice that announcement? A news which is denied by the company!

So what do you think?


Jim Puplava's Storm Watch Series

I first became a huge fan of Jim Puplavae after reading his Storm Watch series. His latest update is titled Forecast 2007:Disinflation then ReinflationPart 1.

Give it a read!


Articles on Bill Miller

Found some articles posted on Wallstraits on Bill Miller. ( )

Many conservative investors seek out high dividend paying stocks in place of bonds, but is this wise...

Like so many great value investors, including Lynch, Munger and Neff, Bill Miller studied philosophy not finance...

Legg Mason strategist Michael Mauboussin discusses the reasons why most investors make such poor decisions...

Managing Money the Warren Buffett Way, Part III...

Managing Money the Warren Buffett Way, Part II...

Robert Hagstrom of Leg Mason Funds follows up The Warren Buffett Way and The Warren Buffett Portfolio with The Essential Buffett, a deep look at focus investing methodology...

WallStraits’ oldest portfolio (and most successful) is the Singapore Gorilla Portfolio. Even during this bear market, our total investment of S$34,000 over the last 3 years is worth $126,000 today. To refresh our memories on selection of winning Gor

Bill Miller, the philosophical fund manager!
Who has the best record of any mutual fund manager in America? Most people would guess Peter Lynch. Not so. Bill Miller is the title holder. Bill has outperformed the S&P 500 each and every year since 1991. (Peter Lynch only managed a record of 7 stra

Saturday, January 27, 2007

Huge Article on MP Technology

Last evening I blogged that MP Technology announced its Quarterly Earnings. Just saw a huge write-up on Star Bizweek on this company.

In loud distress
MPTech grapples with financial irregularities and tough industry conditions:

  • It is clear that MPTech is a company is in some distress. Its shares closed last Friday at 7 sen, the lowest among companies that are not under PN17 status. But that soon changed. In the evening, the company announced that it had a RM66.7mil deficit in its shareholders' equity, thus shoving it under the PN17 banner.

    But the company's woes are not all about financial irregularities. It operates in a tough industry blighted by the high oil prices, which have led to rising raw material costs. The evaluation of anti-dumping duty in Europe during the second half of 2005 has had an impact as well. On top of that, MPTech has undergone a painful transformation.

    In the annual report 2005, Mat Hassan, writing then as an executive director, attributed the poor performance to loss on disposal and discontinuance of the operations of certain subsidiaries.

    He said these changes had been planned and executed by the board of directors and the management in response to shifts in the market environment and following an internal operation review.

    The action plan, he added, was part of a group-wide reorganisation plan that also included consolidation of the remaining operating units, diversification to reduce dependence on the plastic industry and reduction of gearing.

    “Whilst this action caused a one-time write-off in the books, the board believes that its leaner business structure will augur well for the group going forward, “ he wrote back in April last year. The reorganisation plan was completed in financial year 2005.

    However, as evident from the latest numbers, there is no sign of a recovery. MPTech is still bleeding. For the year ended November last year, the company recorded a net loss of RM144.5mil.

    In the notes to the latest quarterly results, the company said the negative publicity about the financial irregularities had further dampened the group’s effort to bounce back.

    It added, “In view of the major setback in the FY06, a new board was formed comprising parties with different expertise to regularise the group in both operation and financial aspects, and new group managing director was appointed as well to turn around the group going forward.”

    The financials are not the only sign of trouble. The company has seen several boardroom changes over the last six months and the composition of its audit committee has been altered almost as many times. The new group MD is Cai Zhao Quan, a 54-year-old Singapore entrepreneur.

    Cai, who had been the chief operating officer of a plastic player in Singapore for two decades, was appointed MPTech's managing director last Monday. Insiders say he was brought in to try to revive MPTech's fortunes. He may have a lot more to contend with, if the financial irregularities turn out to be crippling problems.

Update on TechnoDex

Last July 31st 2006, I blogged about this stock making a bold earnings projections on the eve of its IPO: TechnoDex Bhd. Anyway, as i was doing some house cleaning, I remembered this posting, I thought do an update on this stock and check out how the company performed since listing. And most of all, compare the fancy earnings projections versus the actual earnings.

TechnoDex expects net profit of RM7m for FY07
By Gan Yen Kuan

Mesdaq-bound TechnoDex Bhd, a business technology provider specialising in open source solutions, expects to achieve a net profit of RM7.02 million on the back of RM12.46 million in revenue, for the financial year ending June 30, 2007 (FY07).
The projection represents a 60% jump in revenue and 40% in net profit, compared with the targeted revenue and net profit of RM7.78 million and RM5.01 million respectively for FY06.
TechnoDex managing director and chief executive officer Nigel Lee said the projection was based on the wide interest in the company’s products. He said that the company would leverage on its matured technology platform and products to boost sales.

Quarterly rpt on consolidated results for the financial period ended 30/9/2006

That was the quarterly earnings for TechnoDex's 1st quarter fiscal year 2007.

It recorded a sales of only 2.401 mil. And its earnings 1.022 mil. At such a pace, annualising these numbers, we are seeing a potential seals of 9.6 million and most of all a net earnings of only 4.088 million.

Which makes one wonder. How is this company going to meet its bold pre-IPO satetements? How is it going to meet a sales target of 12.46 mil? And most of all, how to meet net profit of 7.02 mil??

:s28: :s28: :s28:

Anyway, I had a look at its earnings notes. The following comments were interesting in my opinion.

  • The Group’s decrease in profit before taxation by 61.52% principally relates to the lower revenue invoiced during the period. Consistent with the nature of the Group’s activities, the Group bills its customers upon attainment of the agreed milestones.

And this is how the company rates its prospect for the year.

  • With the expected increase in awareness of Open Source Technology and its advantages in market, and the Group’s commitment in undertaking its expansion strategy, barring any unforeseen circumstances, the Board is positive of the Group’s performance in the financial year ending 30 June 2007. TechnoDex® Platform is expected to continue to be the significant contributor to the Group’s revenue in the financial year ending 30 June 2007.

Stay tuned.

Friday, January 26, 2007

MP Technology announced its Quarterly Earnings

MP Technology just released its earnings tonight: Quarterly rpt on consolidated results for the financial period ended 30/11/2006

Quarterly losses totalling 133.274 million!


Value destruction or what!!

  • The group revenue up to the current quarter was RM21.6 million cumulatively as compared to RM110.4 million reported in the preceding year corresponding quarter. The group also posted a loss before tax (“LBT”) of RM144.5 million as compared to RM33.4 million reported in the preceding year correspondence quarter. The drop in performance was mainly attributable to the significant other operating expenses registered during the current financial year which consist of doubtful trade and other collectibles written off, property, plant and equipment and stock written off, provision for doubtful debts, impairment loss on investment in unquoted shares and associates, impairment loss of goodwill, provision for diminution of investment etc. The other operating expenses alone have contributed total loss of RM128.7 million in the current quarter under review.

    To the best knowledge of the Directors, no other known item, transaction or event of a material and unusual nature has arisen in the interval between the end of this reported period and the date of this announcement, which have affected substantially the results of the operations of the Group.

And this is what the company said about its prospects:

  • The financial year 2006 being the tough year for the Group, seeing significant drop of both annual turnover and margin coupled with loss before tax of RM144.5 million. Besides, negative publicity with regards to the possible financial irregularities further dampened the Group’s effort to bounce during the fourth quarter under review. In view of the major setback in the financial year 2006, new board was formed comprising parties with different expertise to regularize the Group in both operation and financial aspects and new Group Managing Director was appointed as well to turnaround the Group going forward.

    In view of the optimistic economic prospect ahead, the management believes the Group would revive its business volume and profitability going forward

Big Mess! Especially when you consider the issues mentioned here: Update on MP Tech

Oh, their auditors resigned Special announcement MP TECHNOLOGY RESOURCES BERHAD ("MPTECH" or the "Company") RESIGNATION OF AUDITORS

And then Default in payment under Practice Note 1/2001

  • The Company is now announcing that the financial position of the Company is insolvent.

Got listed via RTO of Kelanamas in 2004. Insolvent by 2007!

Like i said..

Value destruction or what!!

Iris' plan to buy stake in Patimas Rejected


The following article was posted on Star News:

  • Iris buys 32% stake in Patimas

    PETALING JAYA: Iris Corp Bhd has accepted an offer to buy a 32% equity stake in Patimas Computers Bhd for RM72mil or RM3 per share.

    With the purchase, Iris becomes the single largest shareholder of the main board-listed technology company.

    A source close to the deal said Iris accepted the offer in view of Patimas' expertise in back-end information and communications technology (ICT) support.

    “The deal complements Iris’ strength, which is in the front end of the (ICT) business,” the source said yesterday.

    He said Iris' position in bidding for turnkey projects had been strengthened considerably with the acquisition.

    The source said the price of RM3 per share was reasonable because “Iris would have a controlling stake in Patimas.”

    “Analysts may perceive the price as high but Iris is also issuing new shares at the current (high) price,” he said.

    A statement from Iris said yesterday the company would issue new ordinary shares to the vendors at the five-day weighted average market price.

    “Based on the prevailing price, the new shares to be issued represent about 8% of Iris' enlarged share capital,” it said.

    Iris managing director Datuk Tan Say Jim said in the statement the proposed acquisition would create ample synergies and cross-selling opportunities for both companies besides pooling their resources.

    “The proposed acquisition is definitely a cheaper entry for Iris, which can save us considerable time and effort if we were to develop similar ICT platform ourselves.

    “We can also tap into Patimas' existing client base to promote our products.

    “Similarly, we also provide Patimas an avenue to introduce their products and services to our existing customers,” Tan said.

    He said the acquisition was earnings-per-share enhancing because the two companies would be able to expand their businesses at a faster pace.

    IRIS : [Stock Watch] [News]
    PATIMAS : [
    Stock Watch] [News]

April 2006.

Look at the picture in the article. Those were the prices of IRIS and Patimas.

Today. Jan 26th 2007.

SC rejects Iris' plan to buy stake in Patimas

  • THE Securities Commission (SC) has rejected Iris Corp Bhd's plan to buy a 31.75 per cent stake in Patimas Computers Bhd.

    Iris told Bursa Malaysia yesterday that the deal was not approved as it does not show clear benefits towards Iris and consequently to its shareholders, taking into account the financial results of Patimas for the previous financial year.

    The SC, in a January 24 letter to the company, also had doubts about the reasonableness of the purchase consideration for the Patimas shares to be acquired, OSK Investment Bhd said on behalf of Iris.

    The proposed deal involved Iris buying 24 million Patimas shares of RM1 each for RM72 million from Forum Pintar Sdn Bhd, Mazlan Muhamed and Datuk Ng Back Heang.

    It would have been satisfied through the issuance of up to 109.09 million new Iris shares at 66 sen each or by way of cash payments.

    Patimas and Iris closed unchanged at 16 sen and 36 sen respectively yesterday.

    Iris is a security solution provider with core expertise in the area of securing government security documents.

Took so long to reject the deal???

Bill Miller's Letter to Shareholders 2007

Found this posting. Give it a read, it's about the legendary investor, Bill Miller, Legg Mason's money manager: 'We made some mistakes,' Miller says of streak's end

I found the following comments worth noting:

His definition of Value:

  • Looking at the sources of our outperformance over those 15 years yields some observations that I think are applicable to investing generally. They fall into two broad categories, security analysis and portfolio construction. Analytically, we are value investors and our securities are chosen based on our assessment of intrinsic business value. Intrinsic business value is the present value of the future free cash flows of the business.

    I want to stress that is THE definition of value, not MY definition of value. When some look at our portfolio and see high-multiple names such as Google residing there with low-multiple names such as Citigroup, they sometimes ask what my definition of value is, as if multiples of earnings or book value were all that was involved in valuation. Valuation is inherently uncertain, since it involves the future. As I often remind our analysts, 100% of the information you have about a company represents the past, and 100% of the value depends on the future. There are some things you can say about the future with a probability approaching certainty, such as that Citi will make its next dividend payment, and some that are much iffier, such as that the present value of Google's free cash flows exceeds its current $150 billion market value. Some value investors such as those at Ruane Cunniff have a high epistemic threshold and do exhaustive analysis to create near certainty, or at least very high conviction, about their investments. Others such as Marty Whitman take a credit-driven approach and ground their margin of safety by insisting on strong balance sheets or asset coverage. What unites all value investors is that valuation is the driving force in their analysis.

    Trying to figure out the present value of the future free cash flows of a business involves a high degree of estimation error, and is highly sensitive to inputs, which is why we use every valuation methodology known to assess business value, and don't just do discounted cash flow analysis. We pay a great deal of attention to factors that historically have correlated with stock outperformance, such as free cash flow yield and significant stock repurchase activity. It all eventually comes down to expectations. Whether a company's valuation looks low or high, if it is going to outperform, the market will have to revise its expectations upward.

    Being valuation driven means that we minimize our exposure to the panoply of social psychological cognitive errors identified by the behavioral finance researchers. I think those are the source of the only enduring anomalies in an otherwise very efficient market, since they cannot be arbitraged away.

    What we try to do is to take advantage of errors others make, usually because they are too short-term oriented, or they react to dramatic events, or they overestimate the impact of events, and so on. Usually that involves buying things other people hate, like Kodak, or that they think will never conquer their problems, like Sprint. Sometimes it involves owning things people don't understand properly, such as Amazon, where investors wrongly believe today's low operating margins are going to be the norm for years.

    It is trying to invest long-term in a short-term world, and being contrarian when conformity is more comfortable, and being willing to court controversy and be wrong, that has helped us outperform. "Don't you read the papers?" one exasperated client asked us after we bought a stock that was embroiled in scandal. As I also like to remind our analysts, if it's in the papers, it's in the price. The market does reflect the available information, as the professors tell us. But just as the funhouse mirrors don't always accurately reflect your weight, the markets don't always accurately reflect that information. Usually they are too pessimistic when it is bad, and too optimistic when it is good.

    So grounding our security analysis on valuation, and trying to abstract away from the sorts of emotionally driven decisions that may motivate others, are what leads to the stocks that we own, and it is the performance of those stocks that has led to our performance.

And last but not least his comments of portfolio management:

  • The other factor in our results is portfolio construction. We construct portfolios the way theory says one should, which is different from the way many, if not most, construct their portfolios. We do it on risk-adjusted rate of return. We do not do it based on the sector or industry or company weightings in the index. We do not approach things saying we want to be overweight financials because we think the Fed will ease, we want to have tech exposure because it is the right time in the cycle to own tech, or whatever. That is, we don't do things the way most others appear to do them.

    We do not start out thinking we need to be exposed to each sector in the market, because that would mean we would automatically be invested in the worst part of the market. (Some sector has to be the worst, and if your policy is to be in each of them you are going to be in the worst.) If we are in the worst part of the market, it is because we made a mistake, or we have a different time horizon from others, but it will not be as a matter of policy. We want our clients and shareholders to own a portfolio actively chosen based on long-term value, not based on index construction.

    A key reason for the streak has been our factor diversification. By that I mean we own a mix of companies whose fundamental valuation factors differ. We have high PE and low PE, high price-to-book and low price-to-book. Most investors tend to be relatively undiversifed with respect to these valuation factors, with traditional value investors clustered in low valuations, and growth investors in high valuations. For most of the 1980s and early 1990s we did the same, and got the same results: when so-called value did well, typically from the bottom of a recession to the peak of the economic cycle, so did we. And when growth did well, again usually as the economy was slowing and growth was harder to come by, we did poorly, along with other value types.

    It was in the mid-1990s that we began to create portfolios that had greater factor diversification. In the mid-1990s, many cyclical stocks were down and acting badly, just the sort of thing we tend to like. I looked at steels, and cement companies, and papers and aluminum, all things being bought by classic low PE, low price-to-book, value investors.

    At the same time, though, technology stocks were also selling at very cheap prices. Dell Computer was selling at about 5x earnings. Even Cisco could be had for about 15x earnings. I could not see why one would own cyclical companies that struggled to earn their cost of capital when you could get real growth companies that earned high returns on capital for about the same price. So we bought a lot of tech in the mid-1990s.

    Buying tech was not something value investors did back then. That was because tech was not thought to be predictable in the way something like Coke was, for example, since technology changes rapidly. But we had learned from Brian Arthur at the Santa Fe Institute about path dependence and lock in, which meant that while technology changes rapidly, technology market shares often don't, so they were much more predictable than they looked. We bought them and got lucky when tech values turned into a tech mania in 1998 and 1999.

    The result was we did well when first-rate value investors such as Mason Hawkins and Bill Nygren did poorly. They had almost no tech, and if you didn't have it, you had almost no chance to outperform.

    We realized that real value investing means really asking what are the best values, and not assuming that because something looks expensive that it is, or assuming that because a stock is down in price and trades at low multiples that it is a bargain. Federal regulations mandate how concentrated a mutual fund can be; they require a certain amount of diversification even in funds called non-diversified. Diversification has rightly been called the only free lunch available on Wall Street. It follows from the fact that the future is uncertain that one should multiply independent bets. Indeed, the Kelly formula, discussed in Bill Poundstone's Fortune's Formula, would indicate that if you were certain about something earning an excess rate of return, you should put 100% of your money in it.

    Although funds are subject to requirements regarding diversification by industry or company, they do not have to be diversified by factor, that is, by PE ratios, or price-to-book, or price-to-cash flow. And they mostly are not: value funds tend to have almost all their money in low PE, low price-to-book or cash flow, and growth funds have the opposite. Sometimes growth funds beat value funds and the market, as from 1995 through 1999, and sometimes value funds beat growth funds, as from 2000 through 2006. Sometimes growth is cheap, as it was in 1995, and is today in my opinion, and sometimes so-called value is cheap, as it was in 1999. The question is not growth or value, but where is the best value?

    We were fortunate to recognize that so-called growth was cheap in the mid- 1990s and so avoided the extended underperformance of many of our value brethren in the late 1990s. We were also fortunate to recognize it was expensive in 1999 and sold a lot of those names reasonably well. We were not so smart as to have realized we should have sold them all, so we did less well than many of our value friends during the bear market that ended in March of 2003.

    We continue to be factor diversified, which I think is a strength. We own low PE and we own high PE, but we own them for the same reason: we think they are mispriced. We differ from many value investors in being willing to analyze stocks that look expensive to see if they really are. Most, in fact, are, but some are not. To the extent we get that right, we will benefit shareholders and clients.

    It has been wrongly suggested that concentration, owning fewer rather than many stocks, is a strategy that adds value. Studies have shown that concentrated portfolios typically outperform others.(2) All true, but an example of what Michael Mauboussin would call attribute-based thinking. The real issue is the circumstances in which concentration pays, not whether it has in the past.

    We suffered from being too concentrated last year. Being more broadly diversified would have led to better results. We benefited, though, from our concentration during the streak period. But being too concentrated was one reason the streak ended.

    Concentration works when the market has what the academics call fat tails, or in more common parlance, big opportunities. If I am considering buying three $10 stocks, two of which I think are worth $15, and the third worth $50, then I will buy the one worth $50, since my expected return would be diminished by splitting the money among the three. But if I think all are worth $15, then I should buy all three, since my risk is then lowered by spreading it around. For much of the past 25 years, there were those $10 stocks worth $50 around. For the past few years, they have been largely absent, as inter-industry valuations have only been this homogeneous about 2% of the time.(3)

Thursday, January 25, 2007

Warren Buffett Articles VIII

Here is a great collection of articles from Wallstraits


Tuesday, January 23, 2007

As Expected: EON Capital

Blogged on Eon Capital on Saturday.

And as expected:

  • Subject : Articles Entitled : "Foreign suitor for EON Cap" and "US investment bank is expected to acquire EONCAP at RM9.35 per share"

    Contents :

    We refer to the query from Bursa Malaysia Securities Berhad dated 22 January 2007 on the above articles published in the Star, Bizweek Section and Nanyang Siang Pau, Business Section on 20 January 2007.

    We wish to inform that the Company is not aware of any such plans as
    stated in the article published in the Star, Bizweek Section.

    With regard to the article appearing in Nanyang Siang Pau, Business Section, we wish to inform that the Company is not aware of any United States-based investment bank's interest in acquiring the Company.


As expected, wasn't it?

Warren Buffett Articles VII

Here's another classic.

The following write-up is taken from a compilation by Cesar 'Bud' Labitan called The Warren Buffett Business Factors.


Intelligent Investing

On December 6, 1994, we attended a session at the New York Society of Financial Analysts entitled "A Tribute to Ben Graham". Ben Graham would have been celebrating his 100th birthday if he had been alive. Three of Graham's former students spoke at length: Warren Buffett, Irving Kahn, and Walter Schloss, all very successful investors.

"This is the 100th anniversary of Ben's birth, I believe. And on the creative side, if what I consider his three basic ideas are really ground into your intellectual framework, I don't see how you can help but do reasonably well in stocks. His three basic ideas - and none of them are complicated or require any mathematical talent or anything of the sort - are:

1. that you should look at stocks as part Ownership of a business,

2. that you should look at market fluctuations in terms of his "Mr. Market" example and make them your friend rather than your enemy by essentially profiting from folly rather than participating in it, and finally,

3. the three most important words in investing are "Margin of safety" - which Ben talked about in his last chapter of The Intelligent Investor - always building a 15,000 pound bridge if you're going to be driving 10,000 pound trucks across it.

I think those three ideas 100 years from now will still be regarded as the three cornerstones of sound investment. And that's what Ben was all about. He wasn't about brilliant investing. He wasn't about fads or fashion. He was about sound investing. And what's nice is that sound investing can make you very wealthy if you're not in too big a hurry. And it never makes you poor - which is even better. So I think that it comes down to those ideas - although they sound so simple and commonplace that it kind of seems like a waste to go to school and get a Ph.D. in Economics and have it all come back to that. It's a little like spending eight years in divinity school and having somebody tell you that the ten commandments were all that counted. There is a certain natural tendency to overlook anything that simple and important. But those are the important ideas. And they will still be the important ideas 100 years from now. And we will owe them to Ben.

In Berkshire’s investments, Charlie and I have employed the principles taught by Dave Dodd and Ben Graham. I think the best book on investing ever written is “The Intelligent Investor”, by Ben Graham. Ben wrote “Investment is most intelligent when it is most businesslike.” I learned from Ben that the key to successful investing was the purchase of shares in good businesses when market prices were at a large discount from underlying business values. Ben identified this "margin of safety" in bargain purchasing as the cornerstone of intelligent investing. He wrote: "Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety." Years after reading that, I still think those are the right three words. And, the failure of investors to heed this simple message caused them staggering losses.

Our equity-investing strategy remains little changed from what it was years ago: "We select our marketable equity securities in much the way we would evaluate a business for acquisition in its entirety. We want the business to be one (a) that we can understand; (b) with favorable long-term prospects; (c) operated by honest and competent people; and (d) available at a very attractive price." We have seen cause to make only one change in this creed: Because of both market conditions and our size, we now substitute "an attractive price" for "a very attractive price."

But how, you will ask, does one decide what's "attractive"? In answering this question, most analysts feel they must choose between two approaches customarily thought to be in opposition:

"value" and "growth."

Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing. We view that as fuzzy thinking (in which, it must be confessed, I myself engaged some years ago). In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.

In addition, we think the very term "value investing" is redundant. What is "investing" if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value - in the hope that it can soon be sold for a still-higher price - should be labeled speculation (which is neither illegal, immoral nor - in our view - financially fattening).

Whether appropriate or not, the term "value investing" is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics - a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield - are in no way inconsistent with a "value" purchase.

Similarly, business growth, per se, tells us little about value. It's true that growth often has a positive impact on value, sometimes one of spectacular proportions. But such an effect is far from certain. For example, investors have regularly poured money into the domestic airline business to finance profitless (or worse) growth. For these investors, it would have been far better if Orville had failed to get off the ground at Kitty Hawk: The more the industry has grown, the worse the disaster for owners.

Growth benefits investors only when the business in point can invest at incremental returns that are enticing - in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor.

In The Theory of Investment Value, written over 50 years ago, John Burr Williams set forth the equation for value, which we condense here: The value of any stock, bond or business today is determined by the cash inflows and outflows - discounted at an appropriate interest rate - that can be expected to occur during the remaining life of the asset. Note that the formula is the same for stocks as for bonds. Even so, there is an important, and difficult to deal with, difference between the two: A bond has a coupon and maturity date that define future cash flows; but in the case of equities, the investment analyst must himself estimate the future "coupons." Furthermore, the quality of management affects the bond coupon only rarely - chiefly when management is so inept or dishonest that payment of interest is suspended. In contrast, the ability of management can dramatically affect the equity "coupons."

The investment shown by the discounted-flows-of-cash calculation to be the cheapest is the one that the investor should purchase - irrespective of whether the business grows or doesn't, displays volatility or smoothness in its earnings, or carries a high price or low in relation to its current earnings and book value. Moreover, though the value equation has usually shown equities to be cheaper than bonds, that result is not inevitable:

When bonds are calculated to be the more attractive investment, they should be bought.

Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return. The worst business to own is one that must, or will, do the opposite - that is, consistently employ ever-greater amounts of capital at very low rates of return. Unfortunately, the first type of business is very hard to find: Most high-return businesses need relatively little capital. Shareholders of such a business usually will benefit if it pays out most of its earnings in dividends or makes significant stock repurchases.

Though the mathematical calculations required to evaluate equities are not difficult, an analyst - even one who is experienced and intelligent - can easily go wrong in estimating future "coupons." At Berkshire, we attempt to deal with this problem in two ways. First, we try to stick to businesses we believe we understand. That means they must be relatively simple and stable in character. If a business is complex or subject to constant change, we're not smart enough to predict future cash flows. Incidentally, that shortcoming doesn't bother us. What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know. An investor needs to do very few things right as long as he or she avoids big mistakes.

Second, and equally important, we insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we're not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success.

Now, we believe that it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Charlie understood this early; I was a slow learner. When buying companies or common stocks, we look for first-class businesses accompanied by first-class managements. We know that time is the friend of the wonderful business, the enemy of the mediocre.

We have a corporate policy of reinvesting earnings for growth, diversity and strength, which has the incidental effect of minimizing the current imposition of explicit taxes on our owners. However, you can be subjected to the implicit inflation tax, and when you wish to transfer your investment in Berkshire into another form of investment, or into consumption, you also will face explicit taxes. Probably no business in America changed hands in 1946 at book value that the buyer believed lacked the ability to earn more than 1% on book. But investors with bond-buying habits eagerly made economic commitments throughout the year on just that basis. Similar conditions prevailed for the next two decades as bond investors happily signed up for twenty or thirty years on terms outrageously inadequate by business standards.

An investor cannot obtain superior profits from stocks by simply committing to a specific investment category or style. He can earn them only by carefully evaluating facts and continuously exercising discipline. Investing in arbitrage situations, per se, is no better a strategy than selecting a portfolio by throwing darts.

Common stocks are the most fun. When conditions are right that is, when companies with good economics and good management sell well below intrinsic business value - stocks sometimes provide grand-slam home runs. We often find no equities that come close to meeting our tests. We do not predict markets, we think of the business. We have no idea - and never have had - whether the market is going to go up, down, or sideways in the near- or intermediate term future.

The bond universes were dissimilar in several vital respects. For openers, the manager of a fallen angel almost invariably yearned to regain investment-grade status and worked toward that goal. The junk-bond operator was usually an entirely different breed. Behaving much as a heroin user might, he devoted his energies not to finding a cure for his debt-ridden condition, but rather to finding another fix. Additionally, the fiduciary sensitivities of the executives managing the typical fallen angel were often more finely developed than were those of the junk-bond-issuing financiopath. Wall Street's enthusiasm for an idea was proportional not to its merit, but rather to the revenue it would produce. Mountains of junk bonds were sold by those who didn't care to those who didn't think - and there was no shortage of either.

So how should Berkshire's over-performance in the market last year be viewed? Clearly, Berkshire was selling at a higher percentage of intrinsic value at the end of 1993 than was the case at the beginning of the year. On the other hand, in a world of 6% or 7% long-term interest rates, Berkshire's market price was not inappropriate if Charlie Munger and I can attain our long-standing goal of increasing Berkshire's per-share intrinsic value at an average annual rate of 15%. We have not retreated from this goal. We again emphasize that the growth in our capital base makes 15% an ever-more difficult target to hit.

The true investor welcomes volatility. Ben Graham explained why in Chapter 8 of The Intelligent Investor. There he introduced "Mr. Market," an obliging fellow who shows up every day to either buy from you or sell to you, whichever you wish. The more manic-depressive this chap is, the greater the opportunities available to the investor. That's true because a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses. It is impossible to see how the availability of such prices can be thought of as increasing the hazards for an investor who is totally free to either ignore the market or exploit its folly.

In assessing risk, a beta purist will disdain examining what a company produces, what its competitors are doing, or how much borrowed money the business employs. In contrast, we'll happily forgo knowing the price history and instead will seek whatever information will further our understanding of the company's business. After we buy a stock, consequently, we would not be disturbed if markets closed for a year or two.

In our opinion, the real risk that an investor must assess is whether his aggregate after-tax receipts from an investment (including those he receives on sale) will, over his prospective holding period, give him at least as much purchasing power as he had to begin with, plus a modest rate of interest on that initial stake. Though this risk cannot be calculated with engineering precision, it can in some cases be judged with a degree of accuracy that is useful. The primary factors bearing upon this evaluation are:

1) The certainty with which the long-term economic characteristics of the business can be evaluated;

2) The certainty with which management can be evaluated, both as to its ability to realize the full potential of the business and to wisely employ its cash flows;

3) The certainty with which management can be counted on to channel the rewards from the business to the shareholders rather than to itself;

4) The purchase price of the business;

5) The levels of taxation and inflation that will be experienced and that will determine the degree by which an investor's purchasing-power return is reduced from his gross return.

These factors will probably strike many analysts as unbearably fuzzy, since they cannot be extracted from a database of any kind. Is it really so difficult to conclude that Coca-Cola and Gillette possess far less business risk over the long term than any computer company or retailer? Worldwide, Coke sells about 44% of all soft drinks, and Gillette has more than a 60% share (in value) of the blade market. Leaving aside chewing gum, in which Wrigley is dominant, I know of no other significant businesses in which the leading company has long enjoyed such global power.

Obviously, every investor will make mistakes. By confining himself to a relatively few, easy-to-understand cases, a reasonably intelligent, informed and diligent person can judge investment risks with a useful degree of accuracy.

In many industries, Charlie and I can't determine whether we are dealing with a "pet rock" or a "Barbie." We couldn't solve this problem, moreover, even if we were to spend years intensely studying those industries. Sometimes our own intellectual shortcomings would stand in the way of understanding, and in other cases the nature of the industry would be the roadblock. For example, a business that must deal with fast-moving technology is not going to lend itself to reliable evaluations of its long-term economics. Did we foresee thirty years ago what would transpire in the television-manufacturing or computer industries? Of course not. (Nor did most of the investors and corporate managers who enthusiastically entered those industries.) Why, then, should Charlie and I now think we can predict the future of other rapidly-evolving businesses? We'll stick instead with the easy cases. Why search for a needle buried in a haystack when one is sitting in plain sight?

Some investment strategies - for instance, our efforts in arbitrage over the years - require wide diversification. If significant risk exists in a single transaction, overall risk should be reduced by making that purchase one of many mutually- independent commitments. Thus, you may consciously purchase a risky investment - one that indeed has a significant possibility of causing loss or injury - if you believe that your gain, weighted for probabilities, considerably exceeds your loss, comparably weighted, and if you can commit to a number of similar, but unrelated opportunities. Most venture capitalists employ this strategy. Should you choose to pursue this course, you should adopt the outlook of the casino that owns a roulette wheel, which will want to see lots of action because it is favored by probabilities, but will refuse to accept a single, huge bet.

Another situation requiring wide diversification occurs when an investor who does not understand the economics of specific businesses nevertheless believes it in his interest to be a long-term owner of American industry. That investor should both own a large number of equities and space out his purchases. By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when "dumb" money acknowledges its limitations, it ceases to be dumb.

On the other hand, if you are a know-something investor, able to understand business economics and to find five to ten sensibly-priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk. I cannot understand why an investor of that sort elects to put money into a business that is his 20th favorite rather than simply adding that money to his top choices - the businesses he understands best and that present the least risk, along with the greatest profit potential.

Charlie and I make few predictions. One we will confidently offer, however, is that the future performance of Berkshire won't come close to matching the performance of the past. The problem is not that what has worked in the past will cease to work in the future. To the contrary, we believe that our formula - the purchase at sensible prices of businesses that have good underlying economics and are run by honest and able people - is certain to produce reasonable success. We expect, therefore, to keep on doing well. However, a fat wallet is the enemy of superior investment results. And Berkshire in 1994 has a net worth of $11.9 billion compared to about $22 million when Charlie and I began to manage the company. Though there are as many good businesses as ever, it is useless for us to make purchases that are inconsequential in relation to Berkshire's capital. (As Charlie regularly reminds me, "If something is not worth doing at all, it's not worth doing well.") We now consider a security for purchase only if we believe we can deploy at least $100 million in it. Given that minimum, Berkshire's investment universe has shrunk dramatically.

Nevertheless, we will stick with the approach that got us here and try not to relax our standards. Ted Williams, in “The Story of My Life”, explains why: "My argument is, to be a good hitter, you've got to get a good ball to hit. It's the first rule in the book. If I have to bite at stuff that is out of my happy zone, I'm not a .344 hitter. I might only be a .250 hitter." Charlie and I agree and will try to wait for opportunities that are well within our own "happy zone."

We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.

But, surprise - none of these blockbuster events made the slightest dent in Ben Graham's investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.

A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results.

What we promise you - along with more modest gains - is that during your ownership of Berkshire, you will fare just as Charlie and I do. If you suffer, we will suffer; if we prosper, so will you. And we will not break this bond by introducing compensation arrangements that give us a greater participation in the upside than the downside.

We further promise you that our personal fortunes will remain overwhelmingly concentrated in Berkshire shares: We will not ask you to invest with us and then put our own money elsewhere. In addition, Berkshire dominates both the investment portfolios of most members of our families and of a great many friends who belonged to partnerships that Charlie and I ran in the 1960's. We could not be more motivated to do our best.

Luckily, we have a good base from which to work. In 1984, Berkshire's insurance companies held securities having a value of $1.7 billion, or about $1,500 per Berkshire share. Leaving aside all income and capital gains from those securities, Berkshire's pre-tax earnings that year were only about $6 million. We had earnings, yes, from our various manufacturing, retailing and service businesses, but they were almost entirely offset by the combination of underwriting losses in our insurance business, corporate overhead and interest expense.

During the decade, employment has grown from 5,000 to 22,000 (including eleven people at World Headquarters). We achieved our gains through the efforts of a superb corps of operating managers who get extraordinary results from some ordinary-appearing businesses. Casey Stengel described managing a baseball team as "getting paid for home runs other fellows hit." That's my formula at Berkshire, also.

The businesses in which we have partial interests are equally important to Berkshire's success. A few statistics will illustrate their significance: In 1994, Coca-Cola sold about 280 billion 8-ounce servings and earned a little less than a penny on each. But pennies add up. Through Berkshire's 7.8% ownership of Coke, we have an economic interest in 21 billion of its servings, which produce "soft-drink earnings" for us of nearly $200 million. Similarly, by way of its Gillette stock, Berkshire has a 7% share of the world's razor and blade market (measured by revenues, not by units), a proportion according us about $250 million of sales in 1994. And, at Wells Fargo, a $53 billion bank, our 13% ownership translates into a $7 billion "Berkshire Bank" that earned about $100 million during 1994.

It's far better to own a significant portion of the Hope diamond than 100% of a rhinestone, and the companies just mentioned easily qualify as rare gems. Best of all, we aren't limited to simply a few of this breed, but instead possess a growing collection.

Bursa Malaysia Lack Support of Local Investors

The Star Biz ran the following article:

And fellow blogger Sal of Malaysia Finance , wrote a piece here: Foot-In-Mouth Disease

And one of the following comments posted in his reply was:

  • But then why did a master of the universe exercised and started selling his bursa shares from a year ago when bursa was at 4 bucks?even as recent as last november, he sold at below 7

So I decided to some stock check:

Changes in Director's Interest (S135) - Yusli bin Mohamed Yusoff

Reported in Nov 2006. Sold at 6.90. Bursa last traded at 10.90.

And this posting is interesting: Changes in Director's Interest (S135) - Yusli bin Mohamed Yusoff

How now, Brown Cow?

Changes in the Wind

Although I am a investor, I enjoy very much reading some technical articles. Put it this way, I bare no grudge against folks who trade nor do I bare any grudge against the usage of technical analysis.

Anyway, one of my favourite are those written by Tim Wood. He used to have his editorials published on Fridays on FSO. I do not know why but he no longer does. However, I found his editorial on the
Safe Haven website.

The following is recent write-up: The Trend is still up, Sentiment is High, but Change is in the Wind

Like to post some quotes he made.

  • Let me begin by saying that according to Dow theory, the trend is still positive. But, at the same time the ongoing non-confirmation between the Industrials and the Transports continues to warn of an approaching top.
  • We have just completed the 222nd consecutive week with this reading either at or above the 50% level. When this indicator is at the 50% level it means that there are just as many bulls as there are bears. When this indicator is at 75% it is telling us that there are 3 times as many bulls as there are bears. The point here is that optimism among investors ebb and flow with market cycles.
  • So, it is a fact that most people are the most bullish at or near a top and that most people are the most bearish at or near a bottom. Please understand that just as with non-confirmations sentiment data does not yield buy and sell signals, but rather serve as an indication of the overall environment.
  • The danger here, as I see it, is that we now have far too many people on one side of the boat. When the decline into the 4-year cycle low does begin and this sentiment begins to shift, the heard will run to the other side, it's only human nature. With this level of consistent/persistent bullishness there is an awful lot of weight that will be running to the other side, which could exacerbate the move into the 4-year cycle low.
  • Another reason that there is so little fear amongst the public is that the market is now in its 7th consecutive month without a meaningful correction.
  • No doubt about it, the price advance out of the summer low remains intact as of this writing and I do respect the current trend. But, at the same time, the "over the horizon" piece of the equation continues to tell me that storm clouds are in fact still gathering and I also must respect that fact as well.
  • This sort of reminds me of an e-mail I received in which a subscriber asked me why I didn't give my turn point on oil when it topped. Fact is, I did give the signal right near the top way back in August. Trouble was, she heard what he wanted to hear at the time and that was $100 oil, not $50 oil. There was a refusal to believe the technical indicators. When I showed this documentation to the subscriber she did not remember it. Nor did she remember when I said that the rally out of the lows this past fall would be a counter trend bounce. Point being, people become opinionated and conditioned to think as a heard. Virtually no one is expecting anything but higher stock prices and I can count on less than one hand the people that I know who are in agreement that the 4-year cycle low still lies ahead. Yes, if you know what your looking at, the evidence of risk is fairly clear. Yet, I find it very interesting that so many are so complacent at this juncture. But then again, that's the nature of the markets, so this really does make perfect sense.

The Issue of Liquidity

Read this section of Michael Hartman's editorial posted on FSO Market Wrap: Big Debt Sales in Focus This Week


Tons of Global Liquidity

From many articles I read, it appears we are awash in global liquidity. Analysts and talking heads on TV continue their banter on whether or not the Fed will cut rates or raise interest rates in the coming year. The interest rate determines the cost of money but remember, it is the supply of money that creates inflation. Unless we see a housing crash, the Fed will not lower rates. As rates remain steady, the Fed is trying to orchestrate a soft landing for real estate while keeping bond and stock prices inflated. In our world of pure fiat funny-money, new money is created by being “borrowed” into existence. Have a look at Doug Noland’s Credit Bubble Bulletin at the Prudent Bear from two weeks ago and you can get a much better idea of just how much money has been “borrowed” into existence over the last year. Please note the lines that Mr. Noland underlined:

Bank Credit declined $5.3 billion during the week (of 1/3) to $8.291 TN. Bank Credit expanded $803 billion, or 10.7%, over the past 52 weeks. For the week, Securities Credit fell $9.9 billion. Loans & Leases gained $4.6 billion to a record $6.080 TN. Commercial & Industrial (C&I) Loans expanded 12.9% over the past year. For the week, C&I loans rose $3.7 billion, while Real Estate loans declined $5.0 billion. Bank Real Estate loans were up 13.9% over the past year. For the week, Consumer loans added $2.2 billion, and Securities loans increased $5.5 billion. Other loans dipped $1.6 billion. On the liability side, (previous M3) Large Time Deposits surged $21.5 billion.

M2 (narrow) “money” jumped $28.9 billion (3wk gain of $75bn) to a record $7.073 TN (week of 1/1). Narrow “money” expanded $376 billion, or 5.6%, over the past year. M2 has expanded at a 9.0% pace during the past 20 weeks. For the week, Currency increased $2.2 billion, while Demand & Checkable Deposits declined $13.3 billion. Savings Deposits surged $32.4 billion, and Small Denominated Deposits added $1.1 billion. Retail Money Fund assets increased $6.5 billion.

Total Money Market Fund Assets, as reported by the Investment Company Institute, dipped $1.9 billion last week to $2.390 Trillion. Money Fund Assets increased $326 billion over 52 weeks, or 15.8%. Money Fund Assets have expanded at a 23.2% rate over the past 20 weeks.

Total Commercial Paper dipped $1.5 billion last week to $1.990 Trillion. Total CP has increased $300 billion, or 17.7%, over the past 52 weeks. Total CP has expanded at a 22% pace over the past 20 weeks.

Fed Foreign Holdings of Treasury, Agency Debt increased $7.2 billion last week (ended 1/10) to a record $1.770 Trillion. Custody” holdings were up $239 billion y-o-y, or 15.6%. Federal Reserve Credit dropped $14.9 billion to $844.5 billion. Fed Credit was up $28.7 billion y-o-y, or 3.5%.

International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $770 billion y-o-y (18.8%) to a record $4.858 Trillion.

Another very worthy article about the excess of global liquidity came from Cliff Droke at the beginning of the year. The article is linked here and titled “Liquidity and the Global Bull Market of 2007.” If nothing else, check the article to see his chart of MZM Money Stock from the Federal Reserve Bank of St. Louis. I don’t agree with Mr. Droke on all accounts, but he makes some good points about the implications of the excess global liquidity. The chart of money stock says it all…inflation is baked in the cake!

The excess liquidity has got to go somewhere, and in the very near-term the money is being herded toward the Treasury complex. We have to refinance our old debt that is coming due and borrow enough additional money to finance the current deficits.