Worst Mergers of the Decade. Deals from Hell. Attack on Michael Porter’s Strategy

Posted on November 26, 2012 | Leave a comment

Never let a tragedy go to waste. Study Success but also Failure

H.P. Takes $8.8bn Charge on ‘Accounting Improprieties’ at Autonomy

A Pro Weighs in on Autonomy’s Financial Statements: http://brontecapital.blogspot.com/2012/11/hewlett-packard-and-autonomy-notes-from.html

Historical Perspective on How HP Lost Its Way: http://tech.fortune.cnn.com/2012/05/08/500-hp-apotheker/?iid=EL

Here are 10 of the worst large mergers of the past decade.

Advanced Micro Devices Inc. Acquiring graphics chip maker ATI did nothing for AMD, and the company has been in a steady state of leadership change and decline almost ever since. AMD shares were around $20 in mid-2006, and they are now under $2.00.

Alcatel-Lucent S.A. (NYSE: ALU). France’s Alcatel acquired Lucent, and things have just slid lower and lower. The stock is now under $1.00.

Alpha Natural Resources Inc. (NYSE: ANR) announced its plan to buy Massey Energy at the end of January of 2011. The Alpha Natural Resources share price was above $50 when this deal was announced. Shares are down to around $7 now.

Bank of America Corp. (NYSE: BAC) may have won when it acquired Merrill Lynch, but by acquiring Countrywide it shot itself in the foot.

Boston Scientific Corp. (NYSE: BSX) paid more than $27 billion to acquire Guidant in 2006. All that Boston Scientific has to show for the huge undertaking is a group of very unhappy and depressed shareholders. This stock was $35 at the start of 2005 and its peak was around $45 shortly before that. Its shares slid long before the Great Recession to less than $15 in 2008 as the problems were mounting. Now Boston Scientific is close to a $5 stock with only a $7.2 billion market value, and it carries more debt than it has in physical assets.

Microsoft Corp. (NASDAQ: MSFT) really was supposed to get a lot more out of its aQuantive acquisition from 2007. On the surface it seemed like a great fit. In the summer of 2012 Microsoft announced that it was taking a $6.2 billion goodwill write-down tied mostly to this $6.3 billion merger.

Sears Holdings Corp. (NASDAQ: SHLD) is the amalgamation of two troubled retailers after Eddie Lampert married Sears and Kmart in 2005.

Sprint Nextel Corp. (NYSE: S) was originally just Sprint and Nextel before the late 2004 deal was announced. The deal did not formally close until August of 2005. If you adjust for payouts and the like, Sprint shares were around $22 before the merger and were around $23 when the deal closed in August 2005. This stock was dead money for years, and then by early 2008 it had fallen to less than $10 per share

Symantec Corp. (NASDAQ: SYMC) seemed to have a match made in heaven when it acquired Veritas Software. This married a storage giant right into a security giant. The problem is that this merger destroyed what had been a massive growth engine when Symantec shares already had started to falter.

The Wendy’s Company (NASDAQ: WEN) made a monumental error by becoming Wendy’s/Arby’s. Arby’s went to Triarc in 2005 and then became Wendy’s/Arby’s in 2008.

Worth reading in more detail: http://247wallst.com/2012/11/21/the-other-10-worst-big-mergers-of-the-past-10-years/

Book Recommendation: Deals from Hell, M&Q Lessons That Rise Above the Ashes by Robert F Bruner.

The detailed case studies consist of the following:
– Merger of the Pennsylvania and New York Central Railroads, 1968.
– Leveraged buyout of Revco Drug Stores, 1986.
– Acquisition of Columbia Pictures by Sony Corporation, 1989.
– Acquisition of NCR Corporation by AT&T Corporation, 1991.
– Renault’s proposed merger with Volvo, 1993.
– Acquisition of Snapple by Quaker Oats, 1994.
– Mattel’s acquisition of The Learning Company, 1999.
– Merger of AOL and Time Warner, 2001.
– Dynegy’s proposed merger with Enron, 2001.
– Acquisition program of Tyco International 2002.
Each case study of failure is accompanied by one or more comparison cases that vary in some instructive way.

First Chapter and Table of Contents:Deals from Hell

If you can avoid a merger failure or spot bad management to avoid you capital being misallocated then the $10 or $20 for this book is cheap. Also from the author: http://faculty.darden.virginia.edu/brunerb/

Criticism of Michael Porter’s Strategy. Can You Predict Sustainable Competitive Advantage?

A review of Porter’s Five Forces Industry Analysis:Five forces industry analysis

Thanks to a reader who says, “I don’t agree with all the premises of this author who criticizes Michael Porter’s Five Forces. Does Coke adapt to consumer preferences? Perhaps a little, but Coke’s competitive advantage seems sustainable while the author says there is no such thing.

Excerpt: No basis in fact or logic

There was just one snag. What was the intellectual basis of this now vast enterprise of locating sustainable competitive advantage? As Stewart notes, it was “lacking any foundation in fact or logic.” Except where the (advantage) was generated by government regulation, sustainable competitive advantage simply doesn’t exist.

Porter might have pursued sustainable business models. Or he might have pursued ways to achieve above-average profits. But sustainable above-average profits that can be deduced from the structure of the sector? Here we are in the realm of unicorns and phlogiston. Ironically, like the search for the Holy Grail, the fact that the goal is so mysterious and elusive ironically drove executives onward to continue the quest.

Hype, spin, impenetrable prose and abstruse mathematics, along with talk of “rigorous analysis”, “tough-minded decisions” and “hard choices” all combined to hide the fact that there was no evidence that sustainable competitive advantage could be created in advance by studying the structure of an industry.

Although Porter’s conceptual framework could help explain excess profits in retrospect, it was almost useless in predicting them in prospect. As Stewart points out, “The strategists’ theories are 100 percent accurate in hindsight. Yet, when casting their theories into the future, the strategists as a group perform abysmally. Although Porter himself wisely avoids forecasting, those who wish to avail themselves of his framework do not have the luxury of doing so. The point is not that the strategists lack clairvoyance; it’s that their theories aren’t really theories— they are ‘just-so’ stories whose only real contribution is to make sense of the past, not to predict the future.”

Full Article here: http://www.forbes.com/sites/stevedenning/2012/11/20/what-killed-michael-porters-monitor-group-the-one-force-that-really-matters/

For a detailed compilation of articles on this subject of strategy go here: Porters Five Forces of Any Value

P.S.: PRICE INFLATION 

The latest Federal reserve data continues to show accelerating money supply (M2) growth. For the period starting  Aug. 20, 2012 to November 12, 2012 the chained  13 week average for these periods, shows annualized non-seasonally adjusted M2 growing at  8.4%.

 

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Chanos and HP; More Case Studies and HAPPY THANKSGIVING!

Posted on November 21, 2012 | 11 comments

Jim Chanos: Hewlett-Packard Is ‘Ultimate Value Trap’

Published: Wednesday, 18 Jul 2012 | 1:22 PM ET
Jim Chanos is short Hewlett-Packard.the company as “the ultimate value trap,” Chanos said he is short Hewlett-Packard during the “best idea” panel at the CNBC and Institutional Investor Delivering Alpha conference.

Chanos, president and founder of Kynikos Associates, said Hewlett-Packard [HPQ 11.6914 -1.6086 (-12.09%) ] has been hiding the true costs of its R&D through acquisitions. Once the costs of these acquisitions are taken into account, revenues and cash flow at the company are “basically flat,” Chanos said.

This means that investors looking simply at metrics such as price to earnings may mistakenly view HP as “cheap,” or a “value” investment opportunity, according to Chanos.

What’s more, the personal computing business is in decline, Chanos said. The growth of tablets and smart phones will continue to eat away at PC sales, Chanos predicted.

“People will still buy PCs. It just won’t be a very profitable business,” Chanos said.

Chanos said his analysis could be applied to several other technology companies. He mentioned that he had previously discussed shorting Dell, but the decline in the stock has made him “less excited about that idea.”

How Jim Chanos Spotted the HP Scandal

Published: Tuesday, 20 Nov 2012 | 10:17 AM ET

By: John Carney
Senior Editor, CNBC.com

While many investors were caught off-guard Tuesday morning by the giant, allegedly fraud-ridden write-down by Hewlett-Packard of the value of Autonomy, hedge fund manager Jim Chanos wasn’t one of them.

(Read more: Hewlett-Packard Walloped by Charge Relating to Fraud)

Chanos, the founder of Kynikos (greek for “cynic”) Associates said HP was one of the companies he regarded as “the ultimate value trap” in a presentation delivered in July at the Delivering Alpha Conference sponsored by CNBC and Institutional Investor.

(Read more: Jim Chanos: Hewlett-Packard Is ‘Ultimate Value Trap’)

Chanos related the story of why he began to consider shorting HP [HPQ 11.69 -1.61 (-12.11%) ] . He had been short Automony, the British cloud-based business software and data company. When HP bought the company at a hefty premium, this raised a red flag for Chanos. What’s more, Chanos pointed out, several top Autonomy executives left the company shortly after the acquisition.

Although some investors believed that HP was cheap enough to be considered a “value stock” because its price-to-earnings ratio was relatively low compared to competitors, Chanos said that HP appeared to be masking the true costs of its basic R&D costs with spending through acquisitions. If those costs were expensed as operating costs rather than capitalized as acquisitions, then revenues and cash flow at HP were basically flat, Chanos said.

Chanos said that the attempt to grow through acquisitions—HP had done $37 billion in acquisitions over the last four to five years—had not paid off for HP and that its core businesses were struggling. The personal computing market, in particular, was under assault from mobile technology, with people increasingly abandoning laptops for tablets. The company was engaged in “value destruction through acquisition,” Chanos said.

Chanos, who rose to fame after short-selling Enron prior to that company’s downfall, was led to short HP because of the acquisition of Autonomy, a deal which HP now says was tainted with billions of dollars of fraud. Another very prescient call by Chanos. by CNBC Senior Editor John Carney

See Autonomy Annual Report–What did HP’s Team Miss?JaarverslagCOM_Autonomy_2010

Here is what one pro says…….http://brontecapital.blogspot.com/2012/11/hewlett-packard-and-autonomy-notes-from.html

HAPPY THANKSGIVING!

More Case Studies and Valuation Articles:

CASE STUDIES
Earnings Quality CS
View this folder

 

 

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An Accounting Pro on Financial Statement Analysis

Posted on November 20, 2012 | 2 comments

Expecting to invest successfully in a company like the one discussed in the prior post http://wp.me/p2OaYY-1ub would be like expecting to win at this game (turn up the volume):

One trick that has helped me when analyzing a company for the first time is to go right to the back of the financial statements and look at the figures before I read what the CEO has to say. Be careful of hearing the story before you look hard at the numbers. Accounting is a rules based system that management can use (legally) to obscure economic reality from those who do not connect the numbers. Practice will help.

Let’s hear what a Pro (a reader, AGEDWISDOM) has to say:

This post should be a supplement to a two-year course in learning how to invest http://wp.me/p2OaYY-1u1

***
Purpose of this Article

When beginning the journey of value investing, one of the more technical questions that every non-accountant or non-finance personnel might face is the dreaded necessity to interpret financial statements. This post is a primer to get you started on the path to financial statement analysis. Rather than trying to read 50 books on accounting and getting hopelessly lost, this article can serve as a map in times of distress (or when you want to rip your hair off) in trying to interpret some arcane financial statements. Let’s get started, shall we?

Who am I?

Suffice to say, I am an accountant trained in the British tradition somewhere in Asia which means I’m more used to IFRS (accounting standards for mostly the rest of the world) as opposed to those trained in the US. With the convergence of accounting standards worldwide, there’s not that great a disparity between accounting standards between countries anymore. I have worked as an auditor for some years, so you can have some comfort in what I say. But as the saying goes, “Listen to everyone but judge for yourself”

Questions, questions and more questions

When you start your journey with value investing, you’ll be asking yourself many questions but the basic three might likely be:

1. How important is financial statement analysis to value investing?
Very. For those of you that have been following John’s blog, you can see a common thread in many of his posts. And that is, the X-Files motto (cue in the theme song…), “Trust No-one”. At the risk of sounding cliché, the financial statements is literally the last bastion of objectivity in the reporting of financial results.

What I mean by this is that if you rely on secondary sources, you’ll very likely run into people with interests or bias that may misinterpret the results for you. A prime example would be financial newspapers. Since most of these papers are owned by large conglomerates, they tend to report on the positive sides of things and keep the less savory things hidden. Prime example might be the recent Facebook IPO.

2. Is there a formula, models or a short-cut to interpreting financial statements?
No. There’s a very good reason for this.

Short-cuts, instant results… I’m too busy (ugh! typical mentality these days…) Whatever short-cuts or formulas that you intend to use… my advice, better BEWARE! You see, although financial statements is the so-called last bastion of objectivity, this doesn’t mean that the bastion is under daily assault by aggressive CEO’s and their Financial Controllers that do their darn best to try to present a pretty picture when it’s anything but. These CEO’s know whatever beautiful models that the analyst use. In the hands of a capable accountant, it’s entirely possible to subvert or render certain models useless.

Look in layman’s terms – it’s pretty simple. Let’s say my criteria for a value investing book is based Graham’s Security Analysis. Now, I find that I want to buy other good value investing books… but I want to know FAST… I want SHORTCUTS. I don’t actually want to ask other people or skim through the book (too busy, you see…), so using Graham’s book as a sample, the book must be:

1. Over 600 pages long
2. Be prohibitively expensive.
3. Have some foreword by prominent value investors of the day

Now, if a million other value investors use this so-called short cut as criteria to buy books on value investing, what will likely happen is that some publisher will start churning out huge amounts of titles to cater for these short-cuts… So, the publisher will in a sense pervert whatever models or indicators that you are using. These books could be utter rubbish, for all you know.

Hope I’m clear.

3. Why is it so mind-boggling, so arcane, so supercalifragilisticexpialidocious?
Elementary, my dear! It’s designed to be that way silly. We need to have some barriers of entry don’t we? Otherwise, a lot of professionally trained people would be out of a job.

Seriously though, the financial reporting world is much like an arms race. On one hand, you have the accounting profession trying to report results objectively and consistently. Unfortunately, on the other side, you have very aggressive, highly intelligent and extremely well paid consultants, accountants and investment bankers that find very creative ways to report profits in both good times and bad. Guess who’s winning the war?

As such, financial statements are becoming more and more complex, especially for those companies listed on the stock exchange.

Your job as a value investor is to attempt to separate the wheat from the chaff and attempt to weed out the distortions and look at the company’s results in an objective view so that you can access the value of the company.

The Journey

My advice on learning accounting is less reading, more doing. What do I mean by that? Financial statement analysis is a language on its’ own. Granted, it’s a more esoteric form of language but it’s still a language – the language of finance. You don’t learn a language by reading it but by applying it!

So, start small. Take baby steps. Grab a hold of financial statements of companies you are intimate with. These could be companies you are currently working in, or those you used to work for. It could be the financial statements of your relatives’ business. Something, anything…

Get 3-5 years’ worth of financial statements. Go through these financial statements and see what you can glean out of it. Find out how much you do know or don’t. Then, get a good book on financial statement analysis that you like and use it to help you analyze the financial statements further.

Write a short report summarizing what you think happened to the company during the 3-5 years. Was the sales improving? Are margins improving? Are profits improving? Are cash flows improving? More importantly, why, why, why? After that, talk to the person in-charge of the business and see whether your understanding of the business from interpreting the financial statements was correct or wrong. This will help you sharpen your skills when you tackle listed companies later on.

The Bottom-Up Approach

I am a firm believer of starting from the bottom up. Try to understand the nuts and bolts of interpreting financial statements especially the cash flow statement. No point trying to analyze the financial statements of a huge multinational with operations spanning several countries with hundreds of businesses and subsidiaries that run into several hundreds pages when you haven’t even tried your hand at something simple, yes?

Yes, you can start with a top-down approach later on… but always try to start with something small and build up on it.

Books, what Books?

Rather than starting with books, I suggest simple exam questions of accountancy bodies that try to test students abilities to interpret financial statements. That way, you get to try to speak in the language of finance and see how good you really are at it. There’s an added benefit of not dozing off whilst reading those books on accountancy…. phew… some are great (at putting people to sleep 🙂

Conclusion

So, there you have it. My 5 cents view on accounting. Hope it’s a useful guess post. Take it for what you will and hopefully, some of you find some value to it. Good luck!

—

Also, http://www.oldschoolvalue.com/blog/book-reviews/basics-of-understanding-financial-statements-3/

GMO 3Q 2012: JG_LetterALL_11-12 (2)

Understanding Equity Returns: BI_Explaining_Equity_Returns_812

Retail Stocks (Buffett and Beyond): Buffett and Beyond November+2012

 

 

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Case Study on Earnings Quality-HBS

Posted on November 19, 2012 | 10 comments

John Chew shared a folder with you via YouSendIt.
Earnings Quality CS (You can only download contents from this folder)
View this folder

Click on the above link to download the HBS Case Study. Can you determine the earnings quality? Please answer concisely the two questions on page 6. The prizes will be awarded by the end of the week. Good luck.

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Two Year Investing Course for Beginners…

Posted on November 19, 2012 | 3 comments

 

I am not affiliated with the poster/blog below but thought beginners should be aware of one way to start.

Simple Ideas to Help You Become A Smarter Investor
A 2-Year Course to Become a Smarter, Independent Investor 19 Nov 2012 12:05 am | Vishal KhandelwalA reader, who joined the Safal Niveshak tribe recently, sent an email to me a part of which I am reproducing below…

I am just getting started into the world of investment and just like you I am also a strong believer of the fact that wealth is created over period of time and you need to have patience and time on your side if you really want to create wealth in equities.

But I am struggling to get my fundamentals right so that I can do my own research as well as understand the research article penned by people like you. I hope I will be able to educate myself with your help. Any suggestions here are highly welcome.

This is a question that has been raised by several other tribesmen in the past – “I am new to investing and would like to become a sensible, long-term, value investor. But where do I start?”

If this question bothers you as well, here is my small attempt to dispel some of your doubts on where and how you can start your journey to become a smarter, independent investor.

Take this 2-Year course in smart, independent investing I have penned down a 2-year course for startup investors, who really want to answer the question – “Where do I start?”

I am not offering this course via Safal Niveshak. Instead, you need take this course – call it a roadmap – on your own.

What you will read below is not cast in stone, and you are free to create your own roadmap to investing success. These are, in fact, just some guidelines that can help you in case you lose your way somewhere in your journey.

Treat is as a 2-year self-study course in investing that can benefit you tremendously for your lifetime. You are of course free to complete the course in more than two years, but then procrastination sometimes costs use heavy. This is especially true when it comes to investing.

By the way, before I move on to the course details and the steps you must take to see it through, here are some steps you must take prior to even investing your first rupee in the stock market.

  1. Spend less money than you earn. In simple words, save money.
  2. Pay off any high cost debt you have (like car loan, or personal loan).
  3. Create an emergency fund and buy mediclaim.
  4. Buy term insurance, especially if you have dependents.
  5. Prepare a simple asset allocation. Download my guide on asset allocation to know how you can do so.
  6. Start investing in the stock market by identifying 3-5 good equity mutual funds, and then start SIPs in them. Download my guide on identifying winning mutual funds. This step is basically to test the waters by getting your feet wet – getting the flavor of how stock markets perform by hand-holding some smart money managers.

Also, before sharing the course details with you, I am assuming certain things:

  • You are willing to do the hard work to become an independent investor.
  • You believe in the power of compounding and know the importance of dollar cost averaging.
  • You are open to making mistakes as an investor and not repeating those mistakes.
  • You are open to learn from the mistakes of fellow investors, as you appreciate that you won’t live long to make them all.
  • You are willing to switch off all the noise that can distract you as an investor – block those business channels and forget the password to unblock them.

Now, since you are fine with these assumptions, let me share the details of the 2-year course (you can call it “Value Investing for Smart People 2.0”) that can help you become a smarter, independent investor.

Here’re the step-by-step details of this course that is spread over a 24-month period…

Months 1-2 Step 1: Sign up for my Value Investing Course. It’s free!

Step 2: Buy, borrow, rent (but please don’t steal!) these books for your primary stage of reading, and read them from start to end. Also, make your notes.

  • The Intelligent Investor by Benjamin Graham
  • One Up on Wall Street by Peter Lynch
  • As a Man Thinketh by James Allen

Months 3-7 Step 3: Here’s your reading list (secondary stage) for the next five months:

  • Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay
  • Margin of Safety by Seth Klarman
  • Your Money and Your Brain by Jason Zweig
  • Common Stocks and Uncommon Profits by Philip Fisher
  • Warren Buffett Letters (these are available free of cost, here + read my reviews)
  • Essays of Warren Buffett by Lawrence Cunningham

Step 4: Pick up the latest annual reports of a few companies you like, and read them from front to back. Watch this video to know what sections of an annual report you must read.

Months 8-12 Step 5: Here’s your reading list (higher secondary stage) for the next five months. These books will help you create a better mental framework towards investing:

  • Aesop Fables (Morals like “appearances are deceptive’ and ‘look before you leap’ are so important in investing)
  • Influence: The Psychology of Persuasion by Robert Cialdini
  • Poor Charlie’s Almanack by Peter Kaufman
  • The Black Swan by Nassim Nicholas Taleb
  • Prof. Sanjay Bakshi’s Blog

Months 13-20 Step 6: You are nearing your graduation as a sensible and independent investment thinker. Congratulations!

Here’s your reading list for the graduation stage, which will help you learn how to analyze and value businesses and identify the best among them:

  • The Little Book that Builds Wealth by Pat Dorsey
  • Warren Buffett and the Interpretation of Financial Statements by Mary Buffett & David Clark
  • Financial Shenanigans by Howard Schilit
  • Quality of Earnings by Thornton L. O’glove
  • The Little Book of Valuation by Aswath Damodaran
  • A Few Lessons for Investors and Managers by Peter Bevelin

Months 21-24 Step 7: Memorize this:

“I am an investor; I am not a speculator. As an investor, I will:

  • Buy stock in simple, strong, sustainable businesses, and expect to be rewarded over time through stock price appreciation and dividends.
  • Focus on the value of the businesses, and not stock prices. I will ignore daily stock price movements by not keeping an online portfolio tracker and switching off all business channels.
  • Not try to time the market. I know that ‘time in’ the  market, and not ‘timing’ the market, is important.
  • Buy to hold. Not buy and forget, but buy-review-hold. My intention will be to buy a stock without any plans of divorcing it.
  • Spread out my risks. I will prepare an asset-allocation plan for my equity investments, and review it from time to time.
  • Stay strong, think long.

Step 8: Prepare your investment philosophy based on what you’ve learnt over the past 20 months. Yes, you do need a written investment philosophy that will help you remain disciplined.

Step 9: Print the Investment Owner’s Oath, fill it, and stick it in front of your work desk so that you look at it every day.

Step 10: Pray. Prayer can help you think clearly and make fewer mistakes. It reduces anxiety and stress – two of the biggest killers of investment returns. Reduced stress can help you make better investing decisions.

Finally, open a brokerage account (any big broker will do, till you don’t listen to his advice), pray again, and start investing in stocks.

Huh, this is hard work! Welcome to reality! At Safal Niveshak, call it my sadism, but I want to see you do the hard work to make your money really work for you.

But, believe me, as you go through this course, you will realize that this is NOT extraordinary stuff. As Warren Buffett says that in investing, “…it is not necessary to do extraordinary things to get extraordinary results.”

Some of you might also wonder – “But this is just reading, reading, and reading. How much can one read?”

For you, here is what Charlie Munger has to say, “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero. You’d be amazed at how much Warren [Buffett] reads — at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”

So, if you want to become a simpler, smarter, and independent investor (well, you have no other choice if you want your investments to work for you), this is one course you would like to follow.

This will help you sharpen the saw before you actually hit the tree!

You have my best wishes!

Note: If you are in Ahmedabad on 8th December 2012, you may want to register for my “Art of Investing Workshop”. Click here to register.

Related posts:

  1. The ‘Willpower Trick’ to Become a Smarter Investor
  2. The Best Strategy for a New Investor
  3. New Investor? Know these 6 Things for a Safe Investment

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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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Why Bad Multiples Happen to Good Companies (Corporate Finance)

Posted on November 16, 2012 | Leave a comment

 

We “Deserve” a Higher Multiple

Executives who worry that their multiple should be higher than the one the market currently awards them. “We have great growth plans,” they say, or “We’re the best company in the industry, so we should have a substantially higher earnings multiple.” Their logic isn’t necessarily wrong. Finance theory does suggest that companies with higher expected growth and returns on capital should have higher multiples. And the theory held true when we analyzed large samples of companies across the economy.

However, within mature industries, our analysis showed that regardless of performance, multiples vary little among true peers. Companies may occasionally outperform their competitors, but industry-wide trends show a convergence of growth and returns that is so striking as to make it difficult for investors, on average, to predict which companies will do so. As a result, a company’s multiples are largely uncontrollable. Managers would be better off focusing instead on growth and return on capital, which they can influence. Doing so will improve the company’s share price, even if it doesn’t result in a multiple higher than those of its peers.

In This Article

Read it here:Why Bad Multiples Happen to Good Companies

Thanks to all who suggested other learning blogs.

HAVE A GREAT WEEKEND

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Learning from Blogs

Posted on November 15, 2012 | 12 comments

Suggestions?

I like www.greenbackd.com but new posts are few and far between.

http://brooklyninvestor.blogspot.com/

http://www.grahamanddoddsville.net/

www.marketfolly.com

www.valueinvestorsclub.com  I study the ones with high volume high recommendations–not to find ideas but to seek wisdom.

http://www.frankvoisin.com/    An entrepreneur with common sense as an investor.

http://covestreetcapital.com/Blog/?p=731 Reading material. Good for them for sharing.

Your suggestions don’t have to be of blogs that are active, just those that you think others can learn from.

 

 

 

 

 

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Not Bullish–Individuals Have a Change of Heart

Posted on November 15, 2012 | Leave a comment

Sentiment Survey Past Results

http://www.aaii.com/sentimentsurvey

Change from last week:

Bullish: -9.7 Neutral: +0.8 Bearish: +8.9

Long-Term Average:Bullish: 39% Neutral: 31% Bearish: 30%
Reported Date Bullish Neutral Bearish
November 15: 28.82% 22.35% 48.82%
November 8: 38.50% 21.60% 39.91%
November 1: 35.74% 23.28% 40.98%
October 25: 29.25% 27.67% 43.08%
October 18: 28.66% 26.79% 44.55%
October 11: 30.58% 30.58% 38.85%
October 4: 33.86% 32.91% 33.23%
September 27: 36.10% 27.44% 36.46%
September 20: 37.50% 28.72% 33.78%
September 13: 36.46% 30.56% 32.99%
September 6: 33.06% 33.88% 33.06%
August 30: 34.72% 32.64% 32.64%
August 23: 41.96% 32.17% 25.87%
August 16: 36.84% 35.09% 28.07%
August 9: 36.47% 36.18% 27.35%
August 3: 30.45% 34.63% 34.93%
July 26: 28.12% 28.75% 43.13%
July 19: 22.19% 36.02% 41.79%
July 12: 30.23% 35.05% 34.73%
July 5: 32.64% 34.03% 33.33%
June 28: 28.67% 26.96% 44.37%
June 21: 32.89% 31.23% 35.88%

The sentiment survey measures the percentage of individual investors who are bullish, bearish, and neutral.

Perspective: The difference from bullish and bearish sentiment percentages is 20%. That figure has occurred only 7.8% of the time since 1987. The biggest bullish spread (62%) occurred on Jan. 6th, 2000 and on November 9th 2000 it was + 54%. The most bearish spread was -54% on October 19th, 1990 and -51% on March 5th, 2009.  So individual investors have soured on the market, but they are not at an extreme.

 

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Finding Value. More on JCP. Dell at 2xs Earnings?

Posted on November 14, 2012 | 15 comments

How to find value (Video Lecture) http://youtu.be/MxgGHJ2K0xQ   Basic, but a good review. To download the presentation go here: http://www.asx.com.au/resources/asx-podcasts-2012.htm  http://rogermontgomery.com/about/

Century Management Valuation Video http://centman.com/insights/2012/11/jim-brilliant-play-all-3236/

More on JCP 

Michael Price: http://www.businessweek.com/news/2012-09-21/price-bullish-on-j-dot-c-dot-penney-on-pent-up-demand-tom-keene  In the video Price mentions $15 per share of real estate value. (Don’t take that on faith.)

AckmanJCP and a recent review of the last quarter from an intelligent investor http://www.gurufocus.com/news/196924/jc-penney–my-thoughts-on-q3 (He refers to the Ackman presentation.)

JCP Tilson Analysis

My take: Turn off the price news and just look at the business as if you owned it. It is a tale of two cities (Dickens). The old JCP (which is the majority of sales/profits) is sliding faster than expected as the typical/traditional customer is confused, while the new JCP is doing well. In the long run this is good news but in the short run the news is worse.

Ron Johnson had this to say about the future of Penney’s on the conference call: “It’s really becoming a tale of two companies… one is J.C. Penney, a promotional department store; the other is jcp, which is a start-up, which is a specialty department store. And it turns out what’s good for one isn’t necessarily good for the other – and that’s why we’ve seen this year, J.C. Penney has performed tougher than we’ve expected… but the good news is jcp is much better than we imagined. As we wind down J.C. Penney over the next 36 months, my job is to deliver as best it can and generate as much cash as possible to fund the new jcp.”

Will management just do the same thing if sales keep dropping at the same rate? Probably they will look to sell some of their real estate while being more aggressive on a simple discount plan.

Yes, I agree with a reader that JCP is a “special situation” or transformation. You have a good vs. bad business here. But you also have hard assets of decent real estate and a balance sheet that isn’t too indebted so there may be replacement value for the real estate. However, retail is a very difficult business. More “value” investors hit the rocks in this industry than in any other except financial.  Be very careful to get a rediculous price or stay away. It is hard to buy a lot of JCP when you have CSCO, INTC and other franchises at decent prices.

However, institutions who have owned this stock probably want out so expect continuous pressure and volatility with the stock price which is good for patient buyers. There might be an opportunity to see JCP trade at its real estate value with little or no value imputed to the new JCP.  But if you are confused or uncertain of the value or the risk/reward, then walk away. Learn from the outcome.

The main lesson to be gleaned is to focus on the numbers and what the company is trying to do not the pundits.  Let’s revisit in 2014.

Southeastern 3 Q 2012: Longleaf_09_30_12

Few stocks detracted from returns. Dell fell 21% over the last three months, and the stock’s 33% decline in 2012 made it the primary detractor to the Fund’s performance for both periods.

The primary challenge over the last two quarters was a larger than-expected decline in End User Computing (EUC) revenue due to several pressures. Tablets and other mobility devices displaced notebooks more rapidly than anticipated; demand in India and China shrunk, where Lenovo aggressively priced to take share in these geographies; and commercial purchases slowed because of general economic weakness and the anticipated release of Windows 8. In spite of the decline in notebooks and PCs, margins held up in EUC, a testament to the company’s successful cost cutting and variable cost structure.

Far more importantly, the growing, higher margin Enterprise Solutions and Services (ESS) business had strong networking and server growth with servers gaining market share. While ESS represents about one-third of revenues, it constitutes over half of profits and a far higher share of our appraisal. The company’s transformation to a solutions-based company is well underway and leverages Dell’s direct distribution advantage of over 20,000 employees responsible for customer relationships with small and mid-size businesses. Interestingly, IBM successfully refocused its business over a ten year period starting in the early 1990’s from mainframe hardware to multifaceted technology solutions for large-scale customers. The head of IBM’s mergers and acquisitions was Dave Johnson, who joined Dell in 2009 to lead its strategy to enhance solutions offerings and has purchased a number of companies and products that have grown through Dell’s expansive distribution.

VALUATION: If we assume that EUC continues its rapid decline and has no value, we appraise the remaining ESS business at over twice the current stock price. With adjusted cash earnings of $2.00/share and an enterprise value of less than $3.50/share (share price minus net cash and DFS), the stock trades at less than a 2X adjusted P/E for a growing business (ESS) with good margins and an owner/operator as CEO who is focused on growing value per share.

Wow, I am skeptical Dell is that cheap. The question to ask is: “Does ESS have a competitive advantage? Because only then will growth matter.

 

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