Quest for financial independance ...

The wisdom of Sir John Templeton
To keep investing you have to change your ideas all the time.

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Size matters ...
If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that. - Warren Buffet'99

What Warren is telling us here is a small investor has a real advantage over the big money. He even has the statistics to back this claim. However, a little contradictory is his own performance at Berkshire and till now it still looks like it is killing the Dow.

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Wait for the kill.
Always put your new investment ideas on a watch list, or take a small position before rushing in. If it’s a truly great bargain, there’s no need to hurry. - John Templeton
This is very important. Warren Buffet has enforced this idea in his own way. It is important to wait for atleast two quarters. Shoot the fish in the barrel, when the water has ran out. This gives an interesting spin on the risk. Its absolute zero risk. Its just a no-brainer, the idea as well as the principle. The invest idea should be so obvious and so risk free at this point that you can't make a mistake. The value just pops up at you and there is no "downside risk".

Price is what you pay, value is what you get. - Benjamin Graham
Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results. - Warren Buffet
I like to go for cinches. I like to shoot fish in a barrel. But I like to do it after the water has run out. - Warren Buffet
This price consciousness is very important. When all the speculation has run out, the negative psentiment will drain the water out so much that a value investor can make a killing.

You only find out who is swimming naked when the tide goes out. - Warren Buffet
This is also a very important idea. However, it could not be translated to time. As it happens when opportunities appear and if you have been waiting for quite some time, it might become very difficult to wait for the opportunity to become even fatter, because of fear of it vanishing or becoming thinner.

It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. - Warren Buffet
Even better, buy a wonderful company at a wonderful price.


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NRF - Northstar Realty - REIT
Do numbers tell a story ?
- $11 earned per share and every $1 of long term investment has helped retire atleast $2 of debt, even in this difficult environment.
- The company is doing a good job of retaining earnings.
- Also it has a good portfolio investments.

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FITB - 5/3 BankCorp - Regional Bank
2008 Annual scorecard:
1. $1.1B of Preferred Stock to private investors
2. $3.4B of Preferred Stock to US Treasury
3. Dividend cut will save $1B a year fro 2009
4. $4.6B of provision expense - big bath charge - if no losses occur, it could be used to retire both 1. and 2. Preferred
5. $965M goodwill impairment charge - another big bath charge
6. Net losses as a % of loans and leases = 3.23%
7. Consumer credit charge offs = 2.08%
8. Commercial credit charge offs = 3.99%
9. Most losses coming from Michigan and Florida.
10. $1.1B Acquisition of First Chartered - $31/share - Animal spirit or prudent buying ?
11. fredom Bank receivership through FDIC - $257M in deposits.

"The Bancorp does not originate subprime mortgage loans, does not hold credit default swaps and does not hold asset-backed securities backed by subprime mortgage loans in its securities
portfolio."

2007 Annual scorecard:
1. Net losses as a % of loans and leases = 0.61%
2. Consumer credit charge offs = 0.84%
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ACAS - American Capital Strategies
The company is seeing significant insider buying. In my opinion, it would do better by becoming a holding company. The company boasts of paying dividend returns which exceeded the market returns. A better use of those returns would have been to pay back debt and investing the retained earnings to improve value. The dividends are really suspect here and most portion of the dividends may have come from additional-paid-in-capital.

For what it is worth ?

- S&P cut GE's credit ratings from "AAA" to AA. Do you believe the credit ratings anymore ? Before AIG went in the hands of Fed, it was "AAA".

- Moody's came up with the "The Bottom Rung" - list of companies on the verge of default.

- According to some sources, what we have for the last 3-days is so called "relief" rally. Does this mean the system is cured of all the "gases" it had built over the years ? Well as long as we have Cramer's who advocate of "selling into the rally" and "protect yourself against the nightly risk" this will fizzle out. More macro view is given by http://www.forbes.com/2009/03/11/recession-depression-bear-market-equities-opinions-columnists-nouriel-roubini.html?feed=rss_news Nouriel Roubini here. And I agree with that view. If past or "rearview mirror" is any index into the future this year will be filled with a lot of "bear rallys", until things stabilize for good. So if you are a net buyer of stocks best to hold your horses and wait for the kill. Remember the bottom has not reached till the point people are just afraid to see into the valley anymore. This includes the media and all the talking heads on tv.

- ACAS seems to be picking up steam and I have turned a bull on ACAS after reviewig their 10-K.

Why ACAS is not a good prospective investment ? -

I like this constructive debate about ACAS as a good investment. Jadedconsumer posted an argument against some of my arguments posted here and as a comment on his blog.

Here is simple question I would like to ask people who think ACAS as long term investment - ACAS cash flow from operations was $2.76 in 2007 and it paid $3.72 in dividends. How can a company which had an inflow of $2.76 from its busineess activities pay more in dividends ? Well by selling portfolio investments at a profit. But cash flow from investments is well negative. So we did not get the difference in cash from investements. That means it has to come from cash flow from financing activities. And there lies the proof of money flowing from Jane-to-John. There lies the point and there lies the beauty :-)

Investment Fables

As Peter Lynch often says, companies will cut the flowers and water the weeds – when a company is in trouble it often sells the crown jewels.
- Case in point Citigroup's sale of Smith Barney to Morgan Stanley. So is Smith Barney a crown jewel ?

“The difficulty lies not in the new ideas but in escaping from the old ones”

Why ACAS is not a good long time investment ?

The jadedconsumer is fan of ACAS and has some compelling analysis of why ACAS is good long term value. I respectfully disagree with his views. Here is my take on ACAS.

I was considering buying when the stock looked cheap on valuation measures like P/NAV etc. Here is why I did not and will not invest. Let me be also clear that I would also like to invest for the long term i.e. forever if possible. If you look at the source of equity for ACAS, most of it comes from share issuance and if you examine equity over a number of years it can be proven that ACAS used the famous strategy "WEB" has warned against - taking money from "Jane" and giving it to "John" for a number of years and last few years more seems to be coming from earnings than Jane's contribution, still Jane's contribution trumps actual earnings contribution. Also ACAS is more like an REIT which has to pay out 90% of what it "earns" and the remaining 10% is not enough to finance its portfolio companies so it has to go to the "Jane" time and again to raise equity to keep with the 1:1 debt covenant. So although the debt-to-equity looks below one, most of it is Jane's contribution. So although it sounds attractive, its not a good proposition. For a long term investor - today when I want to invest, the dividend for last 10 years is history and is worth nothing and the next dividends which will come from what the underlying business will earn has more meaning. But only 10% has been retained and most years what has been paid came from "Jane". So your investment jadedconsumer's thesis ACAS as a long term investment is flawed. However I must agree that if you stay in it for 2-3, you are likely to profit from "price speculation" rather than "value appreciation". Most appreciation will come not from a sound investment thesis but from the speculative aspects. So the question becomes just because you profit on the price (1-day, 2-3 years), does it make a favorable long term investment in terms of investment in a value producing underlying business ?

Daily Potpourri

- LEH raised $3b in preferred stock offering today
- WB sold $3b stock in January
- BAC sold $12b stock in January
- UBS may write down $11b after $17b last quarter $15.6b from Singapore investors
Will ask investors for approval to raise $16b
- MER may write down $4.5b in CDO writedowns $19b last quarter Sold $11.6b in securities
- JPM may write down $2.5b

Daily Potpourri

- German watchdog eyes $600b in losses from banks

- BAC, Citigroup, WB, WFC may be forced to cut dividend

- GS estimates total $460b write-downs. We have seen upto $120b till now. $340b more to come. It may take more than 2 quarters for that to come off completely.

- WB sold $3b stock in January
- BAC sold $12b stock in January
- UBS may write down $11b after $17b last quarter $15.6b from Singapore investors Will ask investors for approval to raise $16b
- MER may write down $4.5b in CDO writedowns $19b last quarter Sold $11.6b in securities
- JPM may write down $2.5b

Since November Wall Street banks have raised $81b from various places.

- Japanese have started to sell-off overseas assets. It may be an indication of what is to come on Wall Street in the coming months.

- Wall Street cheered Lehman's earnings, but there are questions about its balance sheet.
- Citi analyst says firm has "ample liquidity." Isn't it ironic?

- Too much complacency for a market low. This is one of the best articles I read today. And here is a quote from it that puts 65-years of market experience in perspective -

“Historically, I have found that when people are still looking across the valley to the recovery, then we haven't had the worst of the bear market yet. It's when they stop looking over the valley and stare into the abyss that you begin to have an appropriate level of fear needed to form a real lasting market bottom.”