Category Archives: Investing Careers

Readers’ Questions

Posted on March 21, 2013 | 4 comments

Flasher

In the second decade of the twenty-first century, America is faltering under the weight of a dual crisis. Its public sector teeters on the ragged edge of political dysfunction and fiscal collapse. At the same time, its private enterprise foundation has morphed into a speculative casino which swindles the masses and enriches the few. These lamentable conditions are the Janus-faces of crony capitalism–a mutant regime which now threatens to cripple the nation’s bedrock institutions of political democracy and the free market economy.

….Once the Fed plunged into the prosperity management business under Greenspan and Bernanke, however, the subordination of public policy to the pecuniary needs of Wall Street became inexorable. No other outcome was logically possible given Wall Street’s crucial role as a policy transmission mechanism and the predicate that rising stock prices would generate a wealth effect and thereby levitate the national economy. — David A. Stockman (former Budget Director under Reagan and a former Partner of Blackstone Group) from The Great Deformation, The Corruption of Capitalism in America.

READERS QUESTIONS

Reader Question #1:  What Accounting Books Do You Suggest? I want to improve my intermediate level of understanding so I am ready for my investment analyst internship.

My reply: http://www.barnesandnoble.com/s/?category_id=394924

Buy and work through the problem sets. Accounting problems must be done rather than reading texts because then the concepts will sink in.

Also, to combine that with analyzing financial statements, read http://seekingalpha.com/article/1019951-book-review-what-s-behind-the-numbers

Interview of the writer: http://www.businessinsider.com/whats-behind-the-numbers-a-chat-with-john-del-vecchio-2012-10

Companion website for the book: http://deljacobs.com/

Also, look at: http://www.footnoted.com/report

http://www.accountingobserver.com/PublicBlog/tabid/54/Default.aspx

http://www.offwallstreet.com/research.html Go download several research reports then obtain the particular annual report and study the numbers. Do you agree with the analyst’s report on the company? Study cases.

Financial Shenanigans by Schillit. His books are great for practicing your financial statement skills to undercover weaknesses and strengths.

Also, view short seller blogs like www.brontecapital.com

Reader Question #2: How to begin?

My reply: Investing for beginners:

Obtain a few of these books on the cheap to get a perspective. Then find an industry like beer, soda or trash hauling (one that you can easily understand) and order the annual reports, then pick a company and go through the numbers with your books at your side to look up what you don’t understand. Go back and forth and note your questions. Try to find answers for those questions.

http://www.fwallstreet.com/intro/

http://www.classicvalueinvestors.com/

Wall Street on Sale by Timothy Vick (A good book but perhaps out of print?)

The Little Book of Value Investing by Christopher Browne

The Little Book that Builds Wealth by Pat Dorsey (A good intro to franchises)

Reader’s Question #3: How Do you Invest in Gold Mining Stocks?

My reply: Very carefully………….

GOLD

Dr. Ron Paul was interviewed by Fox after the U.S. Federal Reserve confirmed it will continue its QE program highlights the importance of gold as money.

On July 13, 2011, when Dr. Paul was a U.S. Congressman he asked U.S. Fed Chairman, Ben Bernanke, “Do you think gold is money?” and Bernanke replied, “No, it’s a precious metal.”

Dr. Paul countered, “Even though it’s been used for 6,000 years?” But Bernanke denied gold was money and said, “No, it’s an asset. Just like T-Bill’s are not money.”

The Fox News interviewer then commented, “Cyprus has taught us that governments can confiscate money that you’ve earned or even paid taxes on. Rampant quantitative easing and price fixing by governments may prop up the stock markets but it doesn’t keep unemployment down. The U.S. Fed is going to continue its QE program which is good for gold.”

goldcore_bloomberg_chart4_21-03-13

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First, I do not want this subsection to be more than 35% of my portfolio, then I want 12 to 15 companies for maximum specific company risk diversification, then I have a range of low cost producers like Yumana, Eldorado then Streamers (Royalty Companies) like Royal Gold and Silver Wheaton, then more obscure, smaller companies that are beginning their production.

I suggest visiting www.goldstockanalyst.com Listen to all the audios and videos. Read: GSA_2012_User_Guide and GSA_sanfranpresentation  

Also, a book, Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks by Adrian Day

Go to www.kitco.com and listen to the investors, miners and analysts of the mining industry.

From GSA:

Investors must choose from two major groups: Explorers, of which probably 1,000 are publicly owned and Producers, of which only about 50 trade in North American stock markets.

To this latter group, we can add near-Producers, miners that have taken a deposit through the bankable feasibility stage and an independent engineering firm’s analysis has shown that:

1)      drill holes are close-enough spaced to have high confidence about the ore grades in-between the holes and thus justify the Proven and Probable Reserves (P+P) classification, and

2)      that the capital investment required to put the site into production will yield a profit, or economic return. Just as an independent auditor’s sign-off on a company’s financial statement is critical for investors, so too is an independent engineering firm’s sign-off on the deposit’s economics, and it’s required by the US SEC for a miner to be able to call its ounces in the ground P+P Reserves.

Gold Stock Analyst only follows producers and near-producers as they are the only miners with data confirmed by 3rd parties and thus have solid numbers that can be analyzed.

The Gold mining industry is unique. All the miners produce exactly the same final output, ounces of Gold. Unlike Coke and Pepsi, they spend nothing trying to tell consumers that their Gold is the best. The miners simply accept the current Gold price when they sell. With all ounces the same, and selling for the same price, one might think the stock prices would reflect similar valuations for Miner A’s ounces versus Miner B’s ounces. But, in fact, the stock market is not efficient and the valuations can vary widely. This gives an opportunity for investors.

The gold stock analyst uses three filters:

  1. Market Cap/oz P + P Reserves
  2. Mkt.. Cap/Oz Production
  3. Operating Cash Flow Multiple

Essentially, you can use his filters to pick your own gold and silver stocks. I monitor some of the well-known gold and value investors like Sprott, First Eagle Fund, Van Eck, Tocqueville and note some of their holdings, then I run the numbers and compare. I want to buy the cheapest ozs of gold (producing or in the ground) that I can with management that has been successful before and with a decent balance sheet or highly probably access to the capital markets.  Many junior gold mining companies are going to go bust due to the prior boom creating over-capacity (too many mining promoters or two guys and a mule with pick and shovel) and to tight financing conditions today. Great conditions for those companies that survive.

By the way, here is one gold bug who will not hire MBAs:

http://www.kitco.com/news/video/show/on-the-spot/55/2012-10-25/There-Will-Be-Panic-Into-Gold-Casey-Research   (see 4 minute 30 second mark)

Interviewer: Do they need a good degree to work at your shop (www.caseyresearch.com)?

Doug Casey, “We don’t care if someone has an MBA or college. We don’t care whether they went to college. We ask, “Do they have good character, intelligence, diligence, are they hard working and do they want to improve themselves? I don’t see how a college degree has anything to do with that, especially what they are teaching today—gender studies, etc. If someone comes to work for us today with an MBA, we look at them and say, What’s going on in your head that you allocated $100,000 and two years of your life to get more theory instead of doing in the real world.

….be careful.

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Posted in Accounting, Investing Careers, Special Situations

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Rethinking a Business Major

Posted on February 16, 2013 | 3 comments
from Farnam Street

Melissa Korn reporting in the Wall Street Journal:

“The biggest complaint,” writes Korn is that “undergraduate degrees focus too much on the nuts and bolts of finance and accounting and don’t develop enough critical thinking and problem-solving skills through long essays, in-class debates and other hallmarks of liberal-arts courses. Companies say they need flexible thinkers with innovative ideas and a broad knowledge base derived from exposure to multiple disciplines.”

That gap in my own knowledge was one of the reasons I started Farnam Street.

Robert Hagstrom, author of Investing: The Last Liberal Art, adds: comments

At first, you might think the “art of achieving worldly wisdom” is an elective you can do without. After all, there is simply not enough time to read all that is required before the next day’s opening bell, and besides, what passes for reading today is more about adding information and less about gaining knowledge. But don’t despair. In the words of Charlie Munger, “we don’t have to raise everyone’s skill in celestial mechanics to that of Laplace and also ask everyone to achieve a similar level in all other knowledge.” Remember, as he explains, “it turns out that the truly big ideas in each discipline, learned only in essence, carry most of the freight.”  Furthermore, attaining broad multidisciplinary skills does not require us to lengthen the already-expensive commitment to college education. We all know individuals who achieved a massive multidisciplinary synthesis of knowledge without having to sign up for another four-year college degree.

According to Munger, the key to true learning and lasting success is learning to think based on a “latticework” of mental models. Building the latticework can be difficult, but once done, it can be applied to a wide range of problems.  “Worldly wisdom is mostly very, very simple,” Munger told the Harvard audience. “There are a relatively small number of disciplines and a relatively small number of truly big  ideas. And it’s a lot of fun to figure out. Even better, the fun never stops. Furthermore, there’s a lot of money in it, as I can testify from my own personal experience.”


Original Article: http://feedproxy.google.com/~r/68131/~3/lZyZWLHicRM/

Sign up for a Mental Models Course from Munger 🙂http://open.salon.com/blog/simoleonsense/2012/02/02/attention

_munger_fansa_top_tier_class_on_mental_models_i_recommend_you_sign_up_its_free

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Improving Your Skills as an Investor (Reading about Apple), Indian Investor

Posted on January 25, 2013 | 1 comment

Service Call

Reading Skills: Apple Case Study

Besides reading about great investors or pouring over your finance text books, you should broaden your perspective and read about industries and business founders. This reading–if done critically–will develop a more nuanced analysis of investments. I don’t know if AAPL is a buy or sell, it is in my too hard pile, but I found the two posts below from The Brooklyn Investor very informative. Do not underestimate the power of a genius. This case offers you a way to see how one investor applied his reading for greater understanding. A broad perspective of the world will help your investing. Remember that if you read the same sources, think the same way, then your returns will be at best average.

Comparing Apple’s leadership to Polaroid’s Founder

Interview with an Indian Investor

chetan_parikh

http://www.safalniveshak.com/value-investing-chetan-parikh-way-part-1/

http://www.safalniveshak.com/value-investing-chetan-parikh-way-part-2/

PS: Money Supply Aggregates are humming along at about a 11% clip. Bernanke is on fast cruise control.

MONEY SUPPLY GROWTH RATE HITS CRUISING ALTITUDE (www.economicpolicyjournal.com)
For the third week in a row, 13-week chained money supply (M2-nonseasonally adjusted)has come in at 11.4%. We, thus, may have hit a cruising altitude as far as annualized money printing.
Here’s the climb over recent weeks.
5.1%, 5.6%, 6.6%, 7.1%, 7.5%, 7.8%, 8.2%, 8.4%, 8.7%, 9.0%,
9.3%, 9.6%, 9.9%, 10.7% 11.4% 11.4% 11.4%

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Jim Cramer or Experts vs. Chimps? Who Wins?

Posted on November 18, 2012 | 2 comments

You can never hear this lesson enough–beware of experts. In the end, no one knows the future. In fact, market gurus or experts have a greater than even chance of being wrong than a coin toss. Skip those odds and save yourself a lot of time.

Jon Stewart Puts CNBC on Trial. Cramer is roasted.

For a more detailed video of CNBC’s expert predictions (11 minutes) with more of Jon Stewarts’ savage commentary: http://youtu.be/N3LCZ3wTDoQ

Stewart is really going after CNBC’s promotional stock hyping while masquerading as a knowledgeable news source. Jim Cramer is part of the market ecology just like his famous predecessor, Gerald M. Loeb, the author of The Battle for Stock Market Survival (1935). Loeb, whom Forbes once tagged “the most quoted man on Wall Street,” became synonymous with the Hutton brokerage firm in the 1950s–and, not coincidentally, a flamboyant method of trading that generated brokerage commissions.  Meanwhile, his visibility in the press was, as it often is, mistaken for respectability.

Despite all the ink that was spilled about him (and Cramer, today), there is no real contribution there of enduring value.  Separate what is fundamental and new, or for that matter fundamental and old, from the kind of superficial sales-driven froth that Loeb and his PR machine have delivered. Loeb was the personification of the saying that” you can’t believe everything you read.” (Source: 100 Minds That Made The Market by Ken Fisher).

Research on Cramer’s Calls: Market Madness The Case of Mad Money

Schwager Chapter 1

—

More proof that Chimps could pick stocks better (at least 50% randomly choosing stocks that will do better or worse) than “experts.”

Louis Rukeyser Shelves Elves Missed Market Trends Tinkering didn’t improve index’s track record for calling market’s direction.(MUTUAL FUNDS)

Investor’s Business Daily

November 01, 2001 Byline: KEN HOOVER

Louis Rukeyser, host of the popular “Wall Street Week” TV show, has quietly shelved his Elves Index, which was made up of his panel of experts’ stock market forecasts.

On Sept. 14, in the aftermath of the World Trade Center attack, he told his audience he was going to “give our elves a rest for a while.” He hasn’t mentioned them in weeks. And he declined to be interviewed on the subject.

He’s doing viewers a big favor. The index had a terrible track record. The elves said buy when they should have said sell, and vice-versa.

They were giddy with optimism as stocks crumbled the past two years. Maybe their darkest hour came in 1999 when an elf was indicted by a federal grand jury.

There’s a lesson here for investors. Pay no attention to experts, even if they are handpicked by the venerated Rukeyser. Sure, his show has helped PBS viewers gain an understanding of the arcane world of the stock market for three decades. But all investors need to learn to separate fact from opinion. And be especially leery if there’s a consensus about the market’s direction from Wall Street’s best minds. Chances are the market will go in the opposite direction.

“As far as I’m concerned, the experts are nothing more than the herd,” said Don Hayes, a money manager who closely follows market psychology. “Most people get their current market opinion from current market news. And news looks backward. The market is always looking forward six to 12 months.”

Rukeyser’s index worked like this: Each of 10 panelists voted on the Dow’s direction. A bullish vote counted +1. A bearish vote was -1. Zero was neutral. A +5 reading was supposed to be a buy signal. A -5 was a sell signal.

This system went against decades of research about market psychology. Several widely watched and reliable market indicators are built around the principle that markets are likely to do the opposite of consensus opinion.

After The Fact

The elves index started in 1989. It was reading +3 on July 27, 1990. That was a market top. It read -4 on Oct. 12, 1990. That was a market bottom. It gave its lowest reading ever, -6, on April 1, 1994.

That was after a nasty correction. The problem was the correction was almost over. The elves stood at -5 on Nov. 25, 1994, just as a powerful advance was about to begin.

The index was working just like any other contrarian sentiment indicator. Some market strategists started watching it that way.

The elves never gave another negative reading after May 1995. Rukeyser tinkered with the elves’ makeup, adding bullish votes. In May 1996, he purged five elves, replacing them with new blood.

That moved the index from +1 to +6, just in time for a correction that made some elves nervous. It fell back to +3.

On July 31, 1998, just as the market was starting to sink into a quick but painful bear market, the elves were a chipper +6. A 21% Dow plunge moved them down only to +3.

Rukeyser gave the elves another bullish boost just as the bubble was about to burst. In November 1999, he expelled long-time bear Gail Dudack. She was replaced with pension-fund manager Alan Bond.

Bond voted with the bulls, pushing the index to an all-time high of +7. A few weeks later it reached +8. If Dudack had stayed, she would have finally been right a four months later.

Bond was on the panel only five weeks. He was indicted on charges of taking $6 million in kickbacks. Last August while awaiting trial, he was arrested on new fraud charges. Trials are pending.

Nurock’s Record

As the market peaked in March 2000, the elves were bullish at +7. For 11 weeks during the worst bear market in a generation, the elves gave readings of +9. Late last year, Rukeyser started a parallel index for the Nasdaq. Its readings differed little from that of the Dow.

Before Rukeyser had the elves, he had Robert Nurock, who cobbled together 10 technical indicators into a composite that actually had a decent record, according to a study by technical analyst Arthur Merrill.

From 1974 to the end of 1986, the index correctly forecast the Dow’s direction 26 months in advance 79.5% of the time. That’s according to Merrill’s study, which was reported in the book “The Encyclopedia of Technical Market Indicators,” by Robert Colby and Thomas Meyers.

Nurock and Rukeyser parted company after the 1987 crash.

THINK FOR YOURSELF AND FOR THINE OWNSELF BE TRUE.

 

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Posted in Humor & Entertainment, Investing Careers, Investing Gurus, Investor Psychology, Risk Management, YOU

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Hollywood Course on Wall Street–Better than any MBA!?

Posted on September 8, 2012 | Leave a comment

Working on Wall Street–Margin Call: http://youtu.be/0rqofLr9HE0

The way to make money on Wall Street- Margin Call: http://youtu.be/xOO1NY6ctYU

You are getting fired-Margin Call: http://youtu.be/2f2kGHcdJYU

Danny Devito as Ben Graham in Other People’s Money, “Show me the numbers.” http://youtu.be/yypj-aYtp9c

Danny Devito as “Larry the Liquidator” says, “I’m NOT your best friend, I am your ONLY friend” http://youtu.be/p7rvupKipmY

Boiler Room: “RECO!” http://youtu.be/4zakyg3thfY You could do a thesis on all the psychological ploys used to make this sale.  Also, http://youtu.be/izOIOvguncU  Always be closing!

Wall Street: “Because it’s wreckable.”http://youtu.be/2Mr4mjeZ2ko

Trading Places: Learning about commodities: http://youtu.be/7EjdC0pjo1A

Valuation Study in Trading Places, “Well, in Philadelphia, it is worth 50 bucks: http://youtu.be/jLo7tHDHgOc

Auction market: http://youtu.be/uZ94J09IsHA

Trading Soybeans (How would you like to do THAT all day?) http://youtu.be/XZEBz01t5vg

In those short clips you will grasp more than many beginning MBAs of how the world works.  Good luck!

Appendix: Comment: A movie like this is not a sign of a Bull Market. The movie reflects and/or caters to the Public’s disgust with Wall Street.

| SATURDAY, SEPTEMBER 8, 2012

Wall Street Meets Hollywood. Greed Ensues.

By MARTIN FRIDSON | MORE ARTICLES BY AUTHOR

A review of the new Richard Gere vehicle, Arbitrage, in which a wealthy hedge-fund manager is—surprise—the villain. Suggestion to the filmmakers: Check the dictionary before you title your next movie.

“Arbitrage—buying low and selling high—depends on a person’s ability to determine the true value of any given market,” reads the program note for the Sundance Film Festival, where writer-director Nicholas Jarecki’s movie Arbitrage was screened to rousing acclaim in January.

From the start, then, someone got the definition wrong. Whoever wrote that program note apparently believes arbitrage—simultaneously buying and selling the same asset at difference prices—is just another form of value investing (“buying low and selling high”).

Call me a purist, but if you pay good money to watch a movie called Arbitrage, you should get to see a little of it. Arbitrage depicts nobody in the act of arbitrage. Not that this would be the first time title and content diverge. At least the hedge-fund manager in Arbitrage does engage in hedging (laying off risk), unlike some real-life firms that call themselves hedge funds without actually hedging.

image

If Arbitrage were a bond, it would make investment grade, but just barely.

Richard Gere stars as Robert Miller, a successful hedge-fund manager who illegally covers up a $400 million loss, then attempts to escape the consequences by selling his company. The sale becomes more difficult when he commits another crime in the course of a bit of wife-cheating with a sexy art dealer. That leads to a second coverup and to a breach with his adoring and idealistic daughter, who is also the firm’s chief investment officer.

Compared with other films on finance worth seeing—admittedly, a short list—Arbitrage fails to give the stock market a pivotal role. Director Oliver Stone’s Wall Street, which features Michael Douglas as takeover artist Gordon Gekko, creates tension with a takeover battle. That film also shows protagonist Charlie Sheen breaking the insider-trading laws instead of just telling the audience about it.

In Boiler Room, the most engrossing action consists of penny-stock salesmen conning their victims. By contrast, Gere’s Robert Miller has already committed his financial crime by the time the action begins.

It might be objected that Arbitrage would lose the average moviegoer by dwelling on the details of securities transactions. But the excellent finance film Margin Call, which does depict margin calls, manages to convey the essential facts about complex derivatives to a general audience. By declining the challenge of portraying finance on-screen, Arbitrage becomes a film as much about its peripheral subjects—police work, the art world, and philanthropy—as the stock market.

BEYOND BEING MISNAMED, the film lacks one key ingredient of the most enduring investment-oriented movies: an instantly quotable line. Wall Street had “Greed is good.” The cult favorite Boiler Room had “You got a cannoli you can stick in your mouth?”—followed by a rejoinder that is not printable in a family magazine. The best Arbitrage can offer is this response to the observation that it’s a cold world: “You’d better get a warm coat.”

The Bottom Line

In addition to being a thriller with few thrills, Arbitrage even bungles the meaning of its title. Wait for this one to come to cable.

But hey, this is a movie: Whether or not Arbitrage holds up as a finance film, is it a decent popcorn picture that spins a suspenseful yarn? It benefits from some good acting. Richard Gere is more than adequate in the lead. Susan Sarandon, already experienced at playing Gere’s long-suffering wife (in Shall We Dance?), again fulfills that duty with finesse. Tim Roth and Nate Parker shine in supporting roles. CNBC’s Maria Bartiromo plays Maria Bartiromo in a cameo that adds luster to the proceedings.

Key plot twists are at times cleverly foreshadowed. Characters reveal unexpected depth as they confront not-so-easy moral choices. A tearful embrace that occurs at a funeral is a powerful use of dramatic irony, and the story’s resolution denies viewers any smug satisfaction that all’s well that ends well.

But these individual touches are too infrequent. If Arbitrage were a bond, it would make investment grade, but just barely.

This shortfall raises the question of why Arbitrage garnered such raves at Sundance, even spurring talk of an Oscar for Richard Gere. The critics’ huzzahs are hard to explain on purely cinematic grounds. As an exploration of family betrayal, Arbitrage is no more than workmanlike. Unlike the best thrillers, it will leave most stomachs unknotted.

THE SUNDANCE CRITICS WERE probably won over by writer-director Jarecki’s choice of a fashionable political theme, the 1% versus the 99%. And you can never go wrong in Hollywood by making the businessman the villain.

Gere’s Robert Miller stands a good chance of prevailing over the law-enforcement system, thanks to his immense wealth, unlike the working-class youth he draws into his crime, played by Nate Parker. The detective, played by Tim Roth, who pursues Miller openly complains that he is in an unfair fight if he must pursue such a privileged perpetrator without having license to fake the evidence. To compound the corruption at the top, we learn that Miller cut corners even in the supposedly lawful phase of building his fortune.

Arbitrage will be released in theatres Friday, Sept. 14. Will media critics also be seduced by the film’s populist theme, or will they judge it according to more rigorous standards of movie-making? That question is as suspenseful as anything you’re likely to see in Arbitrage.

MARTIN FRIDSON is the global credit strategist and CEO of FridsonVision.  He reviewed the film version of Atlas Shrugged last year.

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Buffett’s Alpha, A Research Paper on Buffett’s Returns.

Posted on August 29, 2012 | 2 comments

1959: The following ad appeared in the Miami News on January 19, 1959, 19 days after Castro came to power.
1961: Victorious Castro bans elections

Cuba’s prime minister, Dr Fidel Castro, has proclaimed Cuba a socialist nation and abolished elections.

Hundreds of thousands of Cubans attending a May Day parade in the capital Havana roared with approval when their leader announced: “The revolution has no time for elections. There is no more democratic government in Latin America than the revolutionary government.”   –BBC Report

Lesson: Be skeptical of those in power, especially Tyrants.

Buffett’s Alpha: Buffett’s_Alpha_-_Frazzini,_Kabiller_and_Pedersen

Thanks to a reader.

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Leon Cooperman

Posted on July 17, 2012 | 4 comments

Play Video

Cooperman’s discussion of a Great Capital Allocator, Henry Singleton of Teledyne:Teledyne and Henry Singleton a CS of a Great Capital Allocator

June 28 (Bloomberg) — Leon Cooperman, chief executive officer of hedge fund Omega Advisors Inc., talks about his investment strategy, stock picks and the outlook for global economies. The story is featured in the August issue of Bloomberg Markets magazine. (Source: Bloomberg)

“The market is very sick,” Cooperman says. That’s not necessarily bad news for Cooperman, 69, a blustery billionaire from the South Bronx who first made his name as a stock picker during 25 years as an analyst atGoldman Sachs Group Inc. (GS) “We have to take advantage,” he says. “What’s ridiculously priced now?”

Omega, which currently invests its $6 billion in assets mainly in U.S. stocks, has returned an average of 13.3 percent annually since Cooperman founded it in 1991, compared with 11.4 percent for other equity-oriented funds, according to Chicago- based Hedge Fund Research Inc., Bloomberg Markets magazine reports in its August issue.

For more than 40 years, Cooperman has earned a reputation for consistently ferreting out the most-discounted stocks — no matter what the overall market conditions.

“He’s not doing anything terribly fancy; he’s looking for stocks that are undervalued,” says Robert S. Salomon Jr., 75, an Omega client whose grandfather co-founded Salomon Brothers. “He’s had some great success in finding them.” Adds John Whitehead, 90, who was co-chairman of Goldman during Cooperman’s time there, “He’s been around a long time and seen bad markets and good markets, and he’s survived them all successfully.”

Euro Fears

Markets on this particular day in May are being buffeted by fears about the future of the euro region, the possibility of U.S. tax cuts expiring at the end of 2012 and slowing growth in China. After the Standard & Poor’s 500 Index tumbled 6 percent in May, some money managers bet that the market would fall further. John Burbank, who runs the $3.4 billion Passport Capital LLC hedge fund, told Bloomberg News that he’s shorting stocks because he expects the U.S. and much of the rest of the world to fall back into a recession.

Cooperman is more sanguine about the future. As of June 11, his fund was up 6 percent this year–compared with 1.03 percent for hedge funds globally. He says stocks offer the best opportunities for investors, particularly in the U.S., where there are no signs of a recession. Banks are more profitable, household debt has declined and companies are increasing capital spending.

Stocks Undervalued

Yet stocks have remained undervalued, he says, because of economic troubles and uncertainty over the U.S. presidential election. TheS&P 500 (SPX) is trading at a price-earnings ratio of 12.5 compared with an average of 15 during the past 50 years.

“Stocks are the best house in the financial asset neighborhood,” Cooperman says, before adding a caveat: “It’s not clear whether it’s a good neighborhood or a bad neighborhood.”

Filling a large room in Cooperman’s investing house today is student loan providerSLM Corp. (SLM), better known asSallie Mae. With total educational debt in the U.S. ballooning to $904 billion as of March 31 from $241 billion a decade earlier, according to theFederal Reserve Bank of New York, some commentators have talked about a looming student-debt crisis.

Cooperman sees an opportunity. Sallie Mae throws off lots of cash, he says. Some 80 percent of its loans outstanding consist of government-backed debt issued before 2010, when Congress mandated that the government make certain college loans directly rather than subcontracting them to Sallie Mae. Since then, Sallie Mae has been expanding its private lending business, charging free-market rates that can run as high as 12.88 percent.

‘Kids Have to Borrow’

Cooperman started buying Sallie Mae in December 2007, after a $25 billion buyout deal with J.C. Flowers & Co.,JPMorgan Chase & Co. (JPM) andBank of America Corp. collapsed amid the credit crisis, sending its shares plummeting. On April 21, 2011, the company announced that it would reinstate its dividend, sending the shares up 13 percent to $16.13. Cooperman paid an average of $7.36. SLM closed at $15.20 on Wednesday, and Omega predicts that it will rise as high as $22. Omega is the eighth-largest owner of the company, with a 3.51 percent stake.

“Ultimately, it’ll work,” Cooperman says of SLM. “Lots of kids have to borrow money; their parents have to cosign the loans. It’s a profitable business.”

JPMorgan Loss

Not all of his bets work out. Omega had considered JPMorgan Chief Executive OfficerJamie Dimon the best in the industry, and the bank’s management had been aggressively repurchasing stock. Omega started buying shares of the New York bank in 2009 at an average cost of $37.14.

JPMorgan disclosed on May 10 that it had a $2 billion trading loss because of riskier-than-expected credit securities. Omega sold about two-thirds of its position the next day, taking a loss: The shares tumbled 9 percent on May 11, closing at $36.96. They traded at $36.78 yesterday.

At Omega’s staff meeting in May, one of the portfolio managers suggests that JPMorgan shares may now be ridiculously cheap. Cooperman launches into a tirade about how Dimon has been unfairly pilloried by Representative Barney Frank and other critics. “I’m incensed by some of the sh– you’re reading,” Cooperman tells his managers. He says he’ll hold on to his remaining shares as a vote of confidence in Dimon. Cooperman, a self-described workaholic, says there’s no magic formula to finding good stocks.

Sailing and Research

“With an average IQ and a strong work ethic, you can go far,” he says, adding that he sees himself as proof of that. “I don’t have a lot of outside interests. I don’t do well with leisure. I like a structured life.”

 

Cooperman expects stocks to return 7 to 8 percent in the future, below their historic 10 percent returns.

Barry Rosenstein, co-founder of the $3 billion Jana Partners LLC hedge fund in New York, admires Cooperman’s work ethic. Rosenstein was a teenager when he first met the fund manager at a sailing club on the Jersey Shore of which both were members. Cooperman would show up with a stack of annual reports, disappear onto his boat and read them all weekend, Rosenstein, 53, recalls.

“If Bruce Springsteen is the hardest-working man in rock ’n’ roll, Lee is the hardest-working man in the investment business,” he says. Cooperman was one of the first to invest in Jana when Rosenstein founded it in 2001.

Share Buybacks

As he scours reports and quizzes executives on earnings calls and at conferences, Cooperman is trying to discover stocks that have a low price-earnings ratio, lots of cash and decent yields and that are trading for less than their net assets are worth. He also looks for what he calls smart managers who own big stakes in their companies and for firms that buy back their own shares cheaply.

While he was at Goldman, one such hit was what’s now called Teledyne Technologies Inc. (TDY), whose founder, Henry Singleton, made acquisitions using the company’s stock when its price was high. When the share price went down, Singleton bought back shares repeatedly. Under Singleton, Teledyne expanded its defense, aerospace and industrial businesses. Cooperman recommended the stock in 1968, and for the following two decades, it generated a 23 percent annual return. Cooperman displays a framed 1982 letter in his office fromWarren Buffett congratulating him on his analysis of Teledyne.

Betting on Apple

One of Cooperman’s largest holdings today is Apple Inc. (AAPL), which Omega portfolio manager Barry Stewart says he likes because of its $110 billion cash hoard. Apple’s prospects for growth are strong, he says, with the market booming for its iPhone smartphones, MacBook computers and iPad tablets.

Cooperman pounced on the stock at an average of $376 a share starting in July 2010, around the timeConsumer Reports said a faulty iPhone 4 antenna could cause the phone to lose its signal. The problem proved to be a hiccup, and Apple shares have since risen to $574.60. Stewart projects that the stock will go as high as $710 in the next year.

Stewart is also betting that growing demand for 3G and 4G mobile phones made by Apple and others such as Samsung Electronics Co. will boost the fortunes ofQualcomm Inc. (QCOM), the largest producer of semiconductor chips for the devices. Omega began buying Qualcomm last August at an average price of $53. The shares traded at $54.91 on Wednesday, and Stewart says they could rise as high as $85 in the next 12 months.

Smart Management

One of Cooperman’s worst-performing holdings this year is McMoRan Exploration Co. (MMR), an oil-and-gas drilling company whose price plunged about 40 percent from a high of $14.55 on Dec. 30 after an equipment malfunction caused delays at one of its wells in the Gulf of Mexico. Cooperman is still enthusiastic about its prospects because it meets his requirement of smart management.

James “Jim Bob” Moffett, the New Orleans-based company’s CEO, is also chairman ofFreeport-McMoRan Copper & Gold Inc. (FCX), the world’s largest publicly traded copper producer, and has a track record of making deals in far-flung places. McMoRan formed a joint venture with Chevron Corp. (CVX) to drill for oil in Louisiana. Omega paid $10 on average for the shares, which traded at $12.30 on Wednesday. If the company strikes oil, Omega predicts that the stock could reach $25 to $30 within 18 months.

When a company considers its own stock a bargain, Cooperman wants in too. That was the case withAmerican International Group Inc. (AIG), the New York-based insurer majority owned by the U.S. government after its 2008 bailout. CEO Robert Benmosche has bought back shares from the U.S. Treasury and repaid funds tied to AIG’s government bailout.

When a company considers its own stock a bargain, Cooperman wants in too. That was the case withAmerican International Group Inc. (AIG), the New York-based insurer majority owned by the U.S. government after its 2008 bailout. CEO Robert Benmosche has bought back shares from the U.S. Treasury and repaid funds tied to AIG’s government bailout.

Lane Bryant

The company bought $3 billion of its stock in March, and $15 billion of planned asset sales should fuel more buybacks, Omega portfolio manager Mahmood Reza says. Omega bought the shares this year for an average of $30.47 and anticipates that the price could rise to $53 by the end of 2013. They traded at $30.82 on Wednesday.

Cooperman also hunts for takeover candidates. Omega zeroed in on Charming Shoppes Inc., the owner of plus-size-clothing retailer Lane Bryant, after visiting the company’s executives. The company’s cash exceeded debt and had the potential for higher profitability as part of a bigger group.

He started buying the shares at less than $3 each last year and added to his position after David Jaffe, CEO ofAscena Retail Group Inc. (ASNA), formerly known as Dress Barn Inc., told a conference that he was interested in buying companies. Omega amassed a 13 percent stake in Charming Shoppes. In May of this year, Ascena agreed to buy the company for $7.35 a share.

Azerbaijan Deal

In 1998, Cooperman bet big on emerging markets — and lost. The misstep was compounded by Omega’s investment of more than $100 million with Czech financierViktor Kozeny in a plan to take over Azerbaijan’s state oil company. New York state prosecutors accuse Kozeny, who now lives in the Bahamas, of stealing Cooperman’s investment, while U.S. prosecutors say Kozeny led a multibillion-dollar bribery scheme in connection with the Azeri deal.

In 2007, Omega paid $500,000 to the U.S. to resolve the – bribery investigation. Omega didn’t admit wrongdoing while it accepted legal responsibility for the actions of an employee who admitted joining Kozeny’s bribery scheme. Kozeny denies wrongdoing.

In all, Omega lost a total of $500 million, or 13 percent of its total assets in 1998, after which Cooperman fired almost the entire emerging-markets team. (He later recovered some of the money.) He says the episode was the worst chapter of his life.

Goldman Career

The younger of two sons of Polish immigrants, Cooperman bagged fruit and changed tires to make money as a teenager in the Bronx. He learned how to analyze securities from the late Roger Murray, a professor at Columbia Business School. Another professor’s recommendation earned Cooperman a job as a research analyst at Goldman.

Cooperman’s office is filled with mementos of his years at Goldman, for which he still manages an undisclosed amount of money. A framed copy of the company’s business principles is displayed in Cooperman’s office, near a curled-up whip — a gift from Goldman salesmen after he completed a 30-city, 20-day roadshow to market a stock fund in 1990. After years in research, Cooperman founded Goldman Sachs Asset Management in 1989.

Despite being a billionaire, Cooperman, who has three grandchildren, says he has no plans to retire soon. “He’s the first one in the office, the last one out,” says Tomas Arlia, head of hedge funds at GE Asset Management Inc., which has had money with Omega since its inception. “He loves what he does.”

A piece of paper taped to his computer monitor reminds Cooperman of the simple investing rules that have helped Omega weather market storms for the past two decades: “Buy low, sell high, cut your losses, let your profits run.”

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Weekend Viewing and Reading

Posted on July 13, 2012 | Leave a comment

Viewing

Bubble Film (Documentary Trailer):

http://thebubblefilm.com/

The characters in the documentary: Jim Grant, Jim Rogers, and many more… http://thebubblefilm.com/downloads/presskit.pdf

More here: http://www.tomwoods.com/

Who killed Kennedy?

I am not a conspiracy theorist (because the govt. is not competent to pull it off, but this is interesting.

http://www.economicpolicyjournal.com/2012/07/on-robert-wenzel-show-who-killed-jfk.html

Investing Students

Good articles here for students: http://www.oldschoolvalue.com/

Model of valuing stocks the Buffett way: http://www.aaii.com/computerized-investing/article/valuing-stocks-the-warren-buffett-way

How Morningstar measures moats http://news.morningstar.com/articlenet/article.aspx?id=91441&

One hundred things I have learned while investing (good read): http://www.fool.com/investing/general/2012/06/29/the-100-things-ive-learned-in-investing.aspx

SEARCHING

An investment search process: http://www.jonesvillalta.com/process.php#anchor4

Valuation Models:Copy of Villalta_WebTool_APV and Copy of Villalta_WebTool_FCFE  (see if these make sense to you or ignore)

Screening

http://blog.iii.co.uk/introducing-the-human-screen/

Investing and Lessons Learned

Investing articles: http://www.gannonandhoangoninvesting.com/

Videos

Analysts presenting to HF managers:

Watch MBAs present their value investing ideas to Pershing Square’s Bill Ackman at Columbia GBS: several videos links–just scroll down http://www7.gsb.columbia.edu/valueinvesting/events/pershing

More recordings/videos: Investment Lectures: (2012)http://www7.gsb.columbia.edu/valueinvesting/coursesfaculty/recordings

And even more…… http://www.bengrahaminvesting.ca/Resources/videos.htm

Shale oil

After decades of rising prices, hostile foreign suppliers and warnings that Americans will have to bicycle to work, the world faces the possibility of vast amounts of cheap, plentiful fuel. And the source for much of this new supply? The U.S.

“If this is true, this could be another dominant American century,” said Brian Wesbury, chief economist at First Trust Advisors, money managers in Wheaton, Ill.

U.S. natural-gas production is growing 4% to 5% a year, driven by sharply higher shale gas output. Shale gas production is forecast at 7.609 trillion cubic feet this year, up 11.6% from 2011 and 12 times the 2004 level.

http://news.investors.com/article/617867/201207111856/natural-gas-shale-output-promises-big-economic-benefits.htm?p=full

Are you a chimp? http://www.youtube.com/watch?v=u_9tZ3aPCFo&feature=relmfu

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A Reader Asks What is the Best Way to Learn Using the Resources Here.

Posted on July 5, 2012 | 23 comments

How Best to Learn?

An intelligent reader and I have had an exchange on how to approach using the resources on this blog to learn most efficiently. There are many resources on this blog and in the Value Valut–just email me at aldridge56@aol.com to request a key)–but the orgainization can be improved upon.

Ben Graham was right when he said a conservative investor can do better than average through using a disciplined, rational approach here: http://www.grahaminvestor.com/

Benjamin Graham always tried to buy stocks that were trading at a discount to their Net Current Asset Value. In other words he buy stocks that were undervalued and hold them until they became fully valued.

“The determining trait of the enterprising investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades, an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort in the form of a better average return than that realized by the passive investor.” Ben Graham in “The Intelligent Investor”, 1949.

The problem is how difficult it is to perform much better than average. You have to expand your skills and circle of competence while keeping the costs of your learning to a minimum.

I will be traveling the next few day (until Tuesday), but I will think carefully on my answer to his question. Other readers, please feel free to offer your experiences, thoughts and suggestions. The quality of readership here is outstanding.

Dialogue

Hi John,

Just a quick question regarding your suggested learning methodology.

I am currently working through your lectures (blog and Value Vault) and there are a number of useful book recommendations. Would you suggest reading the books before moving on, to appreciate and understand the subsequent lectures? e.g. In lecture two, you quote, “The professor (Joel Greenblatt in his Special Situations Investing Class at Columbia GBS) stressed studying carefully the essays of Warren Buffett.”

I do have the book and was wondering whether to take a break from the lectures and study the book, then return to the lectures. Given you’ve been through the learning process already, what would you recommend?

I’d be very interested to hear your thoughts. Keep up the good work, it is really appreciated.

—

My reply: Dear Reader please tell me about your background, how you became interested in investing and how YOU think is the best way to learn.

What drives your interest in investing? Then I can better frame my answer.

THANKS.

—

That is a very good question and I’ll try to be as clear and honest as possible.

Background: I am from the UK, 42 years old, married, with one child.

Job: Sales & Marketing Director for a small Manufacturing Company selling custom robotics/automation machines/systems to pharmaceutical and petro/chemical industries.

Professional Background: I am a Chartered Mechanical Engineer.

Education: 2001 – First Class Honours Degree in Mechanical Engineering.

2006 – MBA from XXXXX Business School.

2010 – MSc module Valuation with Professor Glen Arnold at Salford University (10 week semester). Glen is author of “Value Investing” and other related investing/corporate finance titles (FT Pearson).

2012 – Professional Certificate in Accounting (Open University). This was a distance learning course done over two years in financial accounting (year 1) and management accounting (year 2).

Background: Hard to say how I started out, but I invested in Thatcher’s UK privatisation initiatives in the mid 80s. I made a small amount of money on this purchase of UK utility company British Gas and I was hooked. I was 16 years old.

Since then I had limited free capital due to mortgage, pension and so on. About seven years ago, I became interested again and read “The Motley Fool Investment Guide” on investing which basically advocated index/mutual funds. I did this for a couple of years, invested mainly in Fidelity funds, UK, China, India, US index funds and by sheer good fortune sold out near the top of the market to buy a house (May 2007). Shortly after I had a brief spell spread betting (futures), with limited success, actually no success! I wanted to get rich quick and attended numerous trading seminars in London. I shorted one of the worst hit UK banks (RBS) during the banking crisis and still lost money because of the volatility (and my ineptitude). Imagine losing money shorting Lehman! It was that bad.

I managed to stay out of the market for 2008 and started to reinvest in 2009, mainly FTSE100 companies that are mostly popular (by volume e.g. Vodafone, Royal Bank Scotland) but with no analysis or reason to invest other than a ‘gut feel’ that they would go up! They did, but so did everything else…I later sold once I became interested or aware of small cap value.

I’ve read (once only) many classic investment books (Graham, Dreman, Lynch, Greenwald, Glen Arnold, Montier, Shefrin, Buffett partnership letters, Greenblatt, Pabrai etc.). As you know there are many references in these books to the accounting numbers and having read them I realized I didn’t know that much about accounting despite my MBA education. As a side note, I did the part-time Executive MBA and it was way too hurried to absorb the vast amount of information, so my finance learning was minimal. I oculd calculate WACC, CAPM etc., but didn’t understand the context. And so I decided to embark on an accounting distance learning course which I recently passed a couple of months ago.

After reading these books and several biographies on Buffett, I became more and more interested in the value philosophy (low P/E, P/BV etc.). I stumbled across various value oriented blogs such as Richard Beddard in the UK, Geoff Gannon and your own blog. Since reading these blogs I started to follow the UK small cap scene. (John Chew Small-caps have the tendency to be more over-or-undervalued for liquidity and informational reasons). The reasons for this philosophy are mainly based on Buffett’s early days, Greenwald, Beddard and Glen Arnold’s teachings. I can also relate to the idea that they are under researched, too small for the institutions and are a lot easier to understand.

So far my learning process has evolved from trying to understand quantitative financial analysis through books and working my way backwards, i.e. if I don’t understand something in a book or on a blog, I know I have to educate myself rather than think I know what I’m doing. I’d like to think I recognize my behavioral failings e.g. overconfidence, which I hear a lot in investing. My current thinking is to learn financial statement analysis first, along with valuation and then I can focus on the qualitative factors such as competitive advantage etc.

I believe that to buy a company cheap, you should know its intrinsic value and so I have become more interested in valuation and the teachings of Damodaran. I have just started to look at his Spring 2012 lectures. At the same time I saw his course mentioned in your first lecture. Not long after reading your first lecture, my question occurred to me, i.e. if John is recommending these resources – does he suggest that the reader works through those recommendations first before proceeding with the lectures. I realize that if you read and did everything you posted, it would take a lifetime, so although I am definitely not looking for shortcuts, I would appreciate advice on the case study approach to learning. My intention is to work through the lectures and stop at the point a book is recommended. However there are about five or six books mentioned in lecture one alone. I’ve just started, Essays of Warren Buffett by Cunningham. I also understand there is no substitute for getting your hands dirty and reading the financial reports of the companies you’ve either screened or shortlisted for some reason. I suppose I’m at the stage where I’m not sure what ratios are important, profitability vs financial strength etc. Do I look at a company qualitatively first or do I screen based on PBV, P/E, Yield, ROIC, ROE, EV/EBITDA etc.? I’m conscious that I need to avoid value traps, so maybe look at F-Score, Z-Score, solvency.

I realize you can never stop learning, but I just need some direction from a person who’s been there already. Once I have the right approach in mind, I will study and ultimately learn from my mistakes akin to Kolb’s experiential learning theory.

What drives my interest in Investing?

I suppose this could be answered with a quote from the Guy Thomas book, Free Capital:-

“Wouldn’t life be better if you were free of the daily grind – the conventional job and boss – and instead succeeded or failed purely on the merits of your own investment choices? Free Capital is a window into this world.” Guy Thomas – Free Capital.

That quote would sum it up for me. I can cope with not being rich, but being free would be pretty good! In addition, I actually love the game of investing and the intellectual challenge interests me enormously. I read investing books for fun, much to my wife’s disapproval!

I hope the above gives you enough to answer my original question and thank you for your time and help.

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Great News for us: Why Analysts May Stop Covering INDIVIDUAL Stocks

Posted on July 3, 2012 | 2 comments

 

 

Why Analysts May Stop Covering Individual Stocks

Published: Monday, 2 Jul 2012 | 1:51 PM ET

By: John Melloy Executive Producer, Fast Money & Halftime

With markets continuing to move in lockstep to every headline out of Europe, China or the Fed, the days of individual stock analysts may finally be numbered.

“There is an old saying about analysts among the gray hairs of Wall Street: ‘In a bull market, you don’t need them, in a bear market, they’ll kill you,’” said Nick Colas, chief market strategist at ConvergEx Group. “And in a flat market, it seems, both apply.”

After a 12 percent surge in the first quarter, the S&P 500 then gave up all those gains in the second quarter as another seemed to be in jeopardy.

While the market   is back up on the year after a rebound in June, fears of a China Slowdown, an ornery German leadership and an uncertain November Election continue to   overhang the market.

With most stocks moving on these big picture headlines, rather than their   individual merits, it’s made the job of a single-stock number cruncher that   much more difficult.

“In this type of situation, it doesn’t make sense to spend time analyzing   details of specific companies when most movements are lockstep with the   prevailing risk appetite,” said James Iuorio, managing director at TJM   Institutional Services. “This type of trade should continue as global markets   work their way through unusually large event risk.”

Analysts have had seismic headwinds against them for more than a decade now: from the stock-research scandal in the early 2000s, to the boom-bust nature of the market turning off baby boomers, to the explosion in hedge funds , to the ETF-ization of the marketplace.

“The nail went through the industry’s heart years ago as Wall Street research morphed away from variant and hard hitting analysis to maintenance research,” said Doug Kass of Seabreeze Partners. “(Former New York Governor Elliot) Spitzer’s legislation was the catalyst for the exodus of many of the better sell-siders into the hedge fund industry and then the Great Recession of 2008-09 uncovered their worthlessness.”

To be sure, many investors said that markets can’t move forever on the whims of central banks. At some point in the future, individual stock picking and research is bound to matter again.

The question is, how long will that take? Investment banks and boutique firms can’t keep low-margin research businesses going forever, especially with the proliferation of free content on the Internet.

“The impact of the internet is not given its fair due in this issue,” said Enis Taner, global macro editor for RiskReversal.com. “Universal access to stock-specific content and research has made the brokerage shop’s analyst research much more commoditized. In my personal investing, I much prefer reading the direct sec.gov 10Q or 10K release of the company than the filtered research of the stock analyst.”

Sounds like a CSInvesting reader, doesn’t it?

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