Wisdom Shared: Irving Kahn (107 Years and Counting)

Posted on July 11, 2012 | Leave a comment

http://www.businessweek.com/articles/2012-04-12/how-to-play-the-market-irving-kahn

No two recoveries are alike. When I came to Wall Street in 1928, I thought the market was crazy. It hit the brakes in ’29. You have to be careful to distinguish between one recovery and the other. You stick to value, to Benjamin Graham, the man who wrote the bible for the market. It’s a mistake to believe you can do more, I warn you. John Maynard Keynes was one of the most famous economists in history. He was a genius, but he failed as a macro investor. It was hard to believe at the time. But when he became a bottom-up value guy, well, he became very successful. With value investing, you don’t have to bend the truth to accommodate periods with derivatives and manias. Value investing will almost always be right.

I’ve seen a lot of recoveries. I saw crash, recovery, World War II. A lot of economic decline and recovery. What’s different about this time is the huge amount of quote-unquote information. So many people watch financial TV—at bars, in the barber shop. This superfluity of information, all this static in the air.

There’s a huge number of people trading for themselves. You couldn’t do this before 1975, when commissions were fixed by law. It’s a hyperactivity that I never saw in the ’40s, ’50s, and ’60s. A commission used to cost you a hell of a lot; you couldn’t buy and sell the same thing 16 times a day.

You say you feel a recovery? Your feelings don’t count. The economy, the market: They don’t care about your feelings. Leave your feelings out of it. Buy the out-of-favor, the unpopular. Nobody can predict the market. Take that premise to heart and look to invest in dollar bills selling for 50¢. If you’re going to do your own research and investing, think value. Think downside risk. Think total return, with dividends tiding you over. We’re in a period of extraordinarily low rates—be careful with fixed income. Stay away from options. Look for securities to hold for three to five years with downside protection. You hope you’re in a recovery, but you don’t know for certain. The recovery could stall. Protect yourself. — As told to Roben Farzad

Kahn Brothers Portfolio:http://www.gurufocus.com/StockBuy.php?GuruName=Irving+Kahn

 

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An On-Going Liquidation of Stocks; The Future of Hydrocarbons in the US

Posted on July 11, 2012 | 1 comment

http://blog.haysadvisory.com/

Hydrocarbons

As depressing as our political and economic future seems, there is always hope: Manhattan Project on Hydrocarbons and the Future

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The Fatal Conceit and the Federal Reserve’s Operation Twist; Healthcare Explained

Posted on July 11, 2012 | 12 comments

The Fatal Conceit of the Fed’s central planning:

http://blogs.cfainstitute.org/investor/2012/07/04/take-15-fatal-conceit-what-the-fed-imagines-it-can-design/

Gary Brinson, CFA, discusses the impact that the Federal Reserve’s prolonged low-rate environment is having on plan sponsors. He argues that we are observing Hayek’s fatal conceit in which a handful of people in the government imagine they can redesign markets and do better than markets themselves can.

Editor: Obviously an analyst who studies a company with a large pension will be looking hard at the plan sponsor’s assumptions regarding future returns. Perhaps assumptions are much too rosy and a hit to future earnings (normalized earnings should be lowered) will be coming.

The Fed is Twisted

More on the failure of the Fed’s operation twist. The Fed’s suppression of rates through purchasing government debt and adding reserves to the banking system hurts savers–Grandma receives $0 on her retirement savings–and savings is what is needed to increase production and services to increase wealth.

http://mises.org/daily/6102/Yet-Another-Operation-Twist

A fall in interest rates cannot grow the economy. All that it can produce is a misallocation of real savings. As a rule, an artificial lowering of interest rates (which is accompanied by the central bank’s monetary pumping — increasing commercial banks’ reserves) boosts the demand for lending; and this, as a rule, causes banks to expand credit “out of thin air.”

This in turn sets in motion the diversion of real savings, or real funding, from wealth-generating activities to non-wealth-generating activities.

……For those commentators who hold that an artificial lowering of interest rates could grow the economy, we must reiterate that an interest rate is just an indicator, as it were. In a free market, it would mirror consumer preferences regarding the consumption of present goods versus future goods. For instance, when consumers raise their preferences toward future goods relative to present goods, this is manifested by a decline in interest rates.

Conversely, an increase in the relative preference toward present goods leads to the increase in interest rates.

As a rule, all other things being equal, an increase in the pool of real funding tends to be associated with an increase in the preference toward future goods — i.e., a decline in interest rates. Note, however, that movement in interest rates has nothing to do with the generation of real wealth as such. The key for that is the increase in the capital goods. What makes this increase in turn possible is the expanding pool of real savings.

In a market economy, interest rates instruct entrepreneurs (in accordance with consumer time preferences) where to channel their capital. A policy that artificially lowers interest rates only sends misleading signals to businesses, thereby resulting in the misallocation of real funding.

If a lowering of interest rates could have created economic growth, as the popular thinking has it, then it makes sense to keep interest rates at zero for a long time.

The fact that we have already had such an experiment, which so far failed, should alert various supporters of low-interest-rate policies that something is completely wrong with the idea that a central bank can grow an economy.

By now it should be realized that the artificial lowering of interest rates can only divert real funding from wealth-generating activities toward unproductive activities, thereby diminishing the ability of wealth generators to grow the economy.

We can conclude that the latest policy of the Fed not only is not going to help the economy but, on the contrary, is going to make things much worse. What is needed now is the curtailment of the Fed’s ability to pursue loose monetary policies. The less the Fed does, the better it is going to be for the economy.

….So far, in June, banks excess cash reserves stood at $1.49 trillion against $1.461 trillion in May. This means that if the pool of real savings is in trouble (which is quite likely), the Fed will have difficulty stimulating economic activity — i.e., generating illusory economic growth.

Even establishment economist see the futility of the Fed’s money manipulation, though they do not call for its shut-down.

http://scottgrannis.blogspot.com/2012/07/meltzer-monetary-policy-is-not-problem.html

What if the Fed throws a QE3 and nobody comes: http://www.hussmanfunds.com/wmc/wmc120709.htm

Yes, a fractional reserve banking system that allows Ponzi finance whereby a bank can lend out your Demand Deposit many times over–how can a bank and YOU have title to the same property at the same time?–helps cause booms and busts. (All detailed here:http://mises.org/books/desoto.pdf). And The cartelization of the banking system and manipulation of the money supply further exacerbates the misallocation of capital. Note that the booms and busts have been longer and more severe than the pre-20th Century Panics before the Fed was born in 1913 (http://mises.org/books/fed.pdf).  The argument against the classical gold standard and the lack of central planning was the chaos of the bank panics of the 1800s, the Panics of 1819, 1837, 1857, 1876, etc. However, those panics were caused by banks not having to back each loan with 100% of their own capital. Banks pyramid off of their deposit base, speculating with their depositor’s capital.

Healthcare Explained

But the real cause of our economic pain is the continued growth in government coercion to prop up America’s growing entitlements. The Healthcare mandate (tax) is one of our biggest disasters. View a seven-minute cartoon explaining why our healthcare system will collapse economically. Healthcare explained:   http://mjperry.blogspot.com/2012/07/healthcare-explained.html

The best way to understand the problems of ObamaCare is through purchasing bananas. When you go to buy a bunch of bananas do you ask how much they cost? Of course. But when you go to the Doctor’s office, do you ask how much the medical procedure costs? No. Therein lies the problem with exploding healthcare costs. The consumer spends more time considering the purchase of a $2 bunch of bananas than they do a $2,000 medical procedure because the insurance company (third-party) payer is in between the patient and the Doctor. The consumer does not bargain to lower costs, thus costs explode.

…….My rant has ended.

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Leaps-Perhaps Time to Pull Out Another Tool from Your Arsenal.

Posted on July 10, 2012 | 14 comments

Time to Consider LEAPS

Low interest rates and low volatility mean LEAPs MAY be a cheap, non-recourse loan for owning a growing business or a way to lower your over-all exposure without giving up returns.

Rising interest rates and volatility (all else being equal) will raise the price of your leap. If you believe a company will grow its intrinsic value 10% to 15% in the next 18 months to two years then leaps may be an attractive tool. Option traders’ models do not do as well as the cone of uncertainty increases (the time period until expiration is beyond a year).

A refresher on options:Options_Guide but the Bible on options is Options As a Strategic Investment by Lawrence G. McMillan. See Chapter 25, Leaps.

Lecture by a Great Value Investor on using Leaps:  Lecture-8-on-LEAPS         A MUST READ.

Application of Leaps

This blog discusses using Leaps for Cisco during 2011. http://www.valuewalk.com/2011/07/cisco-leaps-opportunity-lifetime/

I am not recommending that you agree, but follow the logic.

If you are new to investing then stay away, but for some, NOW may be a time to use this tool with the right company at the right price.

Good luck and be careful not to over-use options. Options, when you are successful, can become as addictive as crack–who doesn’t like making 10 times your money?

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Keynes, The Stock Market Investor

Posted on July 10, 2012 | Leave a comment

Background

Keynes’ famous Chapter 12 on speculation and the stock market (suggested reading by W. Buffett): Long-Term Expectations http://www.marxists.org/reference/subject/economics/keynes/general-theory/ch12.htm

Relevance for today: A CDO Manager finds himself living in Chapter 12 of Keynes’ Chapter 12 of Keynes’ General Theory

Barry Ritholtz reprints a scary e-mail from a friend in the collaterized debt obligation business (don’t you have a friend in the CDO business?):

I was talking to CDO managers in mid-’05 that were saying how rich sub-prime MBS was and how wrong everyone was for buying that stuff at the spreads they were. To a man, they all agreed they were paying too much for the risk, they all believed that HPA [ED: home price appreciation] was going negative soon. But, sadly, they had to buy the stuff because they needed to accumulate collateral for their CDO issuance. F*&%, we all knew we were overpaying, even back in 2005. We knew it was essentially a bet that home price appreciation was going to continue at levels that couldn’t be sustained. No way that could keep going on.

So why did they keep buying?

The answer is quite simple: DEAL FEES. I gotta keep buying collateral, in order to keep issuing these transactions as a CDO manager. Its my job: I gotta keep accumulating collateral, and I gotta issue the liability against that collateral.

This is an important element of what’s called the “limits of arbitrage” (Andrei Shleifer and Robert Vishny, Journal of Finance, March 1997) or “career risk” (Jeremy Grantham, in various investor letters) explanation for why markets get so crazy sometimes. Brad DeLong has pushed this argument lately in his blog, and I’d like to second his endorsement: The smart professionals we rely on to keep market prices sane (or “efficient”) sometimes face career incentives that make it almost impossible for them to act on their own rational judgments. The most famous and eloquent account of this can be found in Chapter 12 of John Maynard Keynes’s General Theory of Employment, Interest and Money:

Investment based on genuine long-term expectation is so difficult to-day as to be scarcely practicable. He who attempts it must surely lead much more laborious days and run greater risks than he who tries to guess better than the crowd how the crowd will behave; and, given equal intelligence, he may make more disastrous mistakes. There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable. It needs more intelligence to defeat the forces of time and our ignorance of the future than to beat the gun. Moreover, life is not long enough; — human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate. The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll. Furthermore, an investor who proposes to ignore near-term market fluctuations needs greater resources for safety and must not operate on so large a scale, if at all, with borrowed money — a further reason for the higher return from the pastime to a given stock of intelligence and resources. Finally it is the long-term investor, he who most promotes the public interest, who will in practice come in for most criticism, wherever investment funds are managed by committees or boards or banks. For it is in the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.

Read more: http://business.time.com/2007/08/24/a_cdo_manager_finds_himself_li/#ixzz20DMkgM8H

A Great Investor

Keynes is considered one of the best all-time investors. Two academics analyze Keynes’ investment performance–link here:

Keynes as an investor.

Every 100 pounds Sterling would have grown to 1,675 – 22 years later.  The same money invested in an index of UK stocks would have grown to 424 sterling. This during a period encompassing the Great Crash of 19129, the Great Depression, and the Second World War.

Keynes recognized the potential of an asset class no one wanted to invest in, equities. He took advantage of the many inefficiencies by concentrating in companies he knew best with bottom-up company-specific research. He focused his efforts and concentrated his positions. That approach sometimes left him taking a beating, suffering a 23% loss in 1938 when the stock market was down only 8.6%.

Keynes had a very rate quality. He never lost intellectual confidence needed to make contrarian investments. But he could see when he had made a mistake, deal with it, and modify his behaviour. Ironically, he ignored his macro-economic policies and forecasts which current economic policy makers can’t seem to do even after years of devastating effects.

A summary of the above academic paper is presented below.

Abstract: Keynes made a major contribution to the development of professional asset management. Combining archival research with modern investment analysis, we evaluate John Maynard Keynes’s investment philosophy, strategies, and trading record, principally in the context of the King’s College, Cambridge endowment. His portfolios were idiosyncratic and his approach unconventional. He was a leader among institutional investors in making a substantial allocation to the new asset class, equities. Furthermore, we decipher a radical change in Keynes’s approach to investment which was to the considerable benefit of subsequent performance. Overall, Keynes’s experiences in managing the endowment remain of great relevance to investors today.

Conclusion: This study of Keynes’ stock market investing offers both a reappraisal of his investment performance and an assessment of his contribution to professional asset management. The King’s College endowment permitted Keynes to give full expression to his investment abilities. We provide the first detailed analysis of his investment ability in terms of his management of the King’s portfolios. Previous studies had claimed that Keynes’s performance for his college was stellar. Our results, however, qualify this view. According to our event time analysis, the changing pattern of cumulative returns around his buy and sell decisions before and after the difficult early 1930s, provides evidence to substantiate Keynes’s own claims that he fundamentally overhauled his investment approach.

Essentially, he switched from a macro market-timing approach to bottom-up stock-picking. Furthermore, Keynes’s experience at King’s foreshadowed important developments in modern investment practice on several dimensions.

Firstly, his strategic allocation to equities was path-breaking. Not until the second half of the twentieth century did institutional fund managers follow his lead. His aggressive purchase of equities pushed the common stock weighting of the whole endowment’s security portfolio over 50% by the 1940s. This was as dramatic and far-sighted a change in the investment landscape as the shift to alternative assets in more recent times.

Secondly, his willingness to take a variety of risks in the King’s portfolio and to depart dramatically both from the market and institutional consensus exemplifies the opportunity available to long-term investors such as endowments to be unconventional in their portfolio choices.

Thirdly, the contrast between the receptive environment at King’s and the conditions he faced at other institutions reminds us of how critical, conditional on possessing investment talent, is the right organizational set-up. Talent alone is not enough. Equally, his achievements underscore the main finding of Lerner, Schoar, and Wang (2008) in their analysis, two generations later, of the leading Ivy League endowments that such idiosyncratic investment approaches are very difficult for the vast majority of managers to replicate.

Editor of CSInvesting: I may think of Keynesian Economics as daft (http://archive.mises.org/5833/the-failure-of-the-new-economics/), but we can all learn from this investor.

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Ride the Rodeo

Posted on July 6, 2012 | Leave a comment

Ride the Rodeo of Manipulated Monetary Control

…with a madman at the Fed, ONE of the reasons our economy reacts…..

More here………http://www.economicpolicyjournal.com/2012/07/bernankes-economic-rodeo-ride.html

Escape the Deception

http://lewrockwell.com/roberts/roberts353.html

Have a Great Weekend/Holiday and See you Next Week!  Excellent posts on learning–Thanks to all the contributions.

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How I View Portfolio Management vs. Modern Portfolio Theory (“MPT”)

Posted on July 5, 2012 | Leave a comment

How I see Portfolio Management

By Alvaro Guzman de Lazaro Mateos at Bestinver.

A good read. KNOW WHAT YOU ARE BUYING is Rule 1. But what does this really mean?

BUY CHEAP is Rule 2. And do you want to make EASY money or HARD money? Chicago Slim would opt for easy. How about you?

Advice from a value Investor _Best Inver Asset Management

Modern Portfolio Theory

A good web-site for relatively unbiased research on personal finances: www.aier.org

No, I don’t believe in MPT but this is a thorough review for beginners:modern-portfolio-theory

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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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Microsoft’s Write-offs: What Lessons Can We Learn?

Posted on July 3, 2012 | 14 comments

Microsoft Takes $6.2 Billion Charge, Slows Internet Hopes

Published: Monday, 2 Jul 2012 |

By: Reuters

I was shocked: http://www.youtube.com/watch?v=HqVBKO_QM3o

Lessons to be learned

There are several lessons:

  • First, this is an example of why you must discount/haircut the value of the EXCESS CASH on Microsoft’s balance sheet.
  • Second, the importance of the ability of management to invest outside their circle of competence; in other words, how management allocates capital.
  • Finally, what strategic logic did Microsoft violate? Hint: Google has 65% of the search market.

Hint: If I wanted a job at Microsoft or an investment bank servicing technology companies, I would do an intensive analysis showing why there would almost always be failure due to faulty strategic logic. You may not get the job, but I guarantee you would do better than submitting countless resumes.  Say you saved MSFT $6 billion plus the money that could have been earned on that amount–what percentage would be fair compensation? Not a bad payday.

Microsoft admitted its largest acquisition in the Internet sector was effectively worthless and wiped out any profit for the last quarter, as it announced a $6.2 billion charge to write down the value of an online advertising agency it bought five years ago.

The announcement came as a surprise, but did not shock investors, who had largely forgotten Microsoft’s [MSFT30.56 -0.03(-0.1%) ] purchase of aQuantive in 2007, which was initially expected to boost Microsoft’s online advertising revenue and rival Google Inc’s [GOOG580.47 0.40(+0.07%)] purchase of DoubleClick.

The company’s shares dipped slightly to $30.35 in after-hours trading, after closing at $30.56 in regular Nasdaq trading.

Microsoft said in a statement that “the acquisition did not accelerate growth to the degree anticipated, contributing to the write-down.”  

Editor: Discuss MSFT’s flawed strategic logic.

The world’s largest software company bought aQuantive for $6.3 billion in cash in an attempt to catch rival Google Inc. in the race for revenues from search-related advertising. It was Microsoft’s biggest acquisition at the time, exceeded only by its purchase of Skype for $8.5 billion last year. But it never proved a success and aQuantive’s top executives soon left Microsoft.

As a result of its annual assessment of goodwill – the amount paid for a company above its net assets – Microsoft said on Monday it would take a non-cash charge of $6.2 billion, indicating the aQuantive acquisition is now worthless.

The charge will likely wipe out any profit for the company’s fiscal fourth quarter. Wall Street was expecting Microsoft to report fiscal fourth-quarter net profit of about $5.25 billion, or 62 cents a share, on July 19.

In addition to the write-down, Microsoft said its expectations for future growth and profitability at its online services unit – which includes the Bing search engine and MSN Internet portal – are “lower than previous estimates.” 

Again, through your lens of strategic logic what obvious flaw did management make and WILL make again if it doesn’t understand what?

The company did not say what those previous estimates were, as it does not publish financial forecasts.

Microsoft’s online services division is the biggest drag on its earnings, currently losing about $500 million a quarter as the company invests heavily in Bing in an attempt to catch market leader Google. The unit has lost more than $5 billion in the last three years alone. Even though its market share has been rising, Bing has not reached critical mass required to make the product profitable.

Before rolling out Bing in June 2009, Microsoft’s Windows search engine had 8 percent of the U.S. Internet search market, compared with Yahoo’s 20 percent and Google’s 65 percent.     

In the three years since then, Bing has almost doubled its market share to 15 percent, but that has been mostly at the expense of Yahoo, which has had its share whittled down to 13 percent. Google now has almost 67 percent, according to research firm Comscore.

Another article:

http://www.montrealgazette.com/business/Microsoft+writes+admits+aQuantive+acquisition+worthless/6873661/story.html

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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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