Berkshire Hathaway Shuffled Positions

A flurry of news about BRK changing its holding came out during the last 2 weeks. BRK cut its holding in Pier One Imports (PIR), among others. It also increase holdings in Home Depot (HD), Anheuser-Busch (BUD), and Wal-Mart (WMT).

Nelson Yu of Yu Investments thinks that these moves are done by Lou Simpson. Here my thought on it:

• BUD is definitely Buffett purchase. Buffett always likes companies that make alcohol. If you examine the holdings that BRK has in its portfolio, you will find 3 or 4 alcohol companies. It's the closest thing to owning a company that sells addictive product without a guilty conscience. I have considered buying BUD back 6 months but determined that valuation was still a little too high for me. Then it came the news that Buffett was buying it. Since I owned BRK shares, that means I own it indirectly.
• WMT is one that got away from Buffett. I think Buffett is determined to own more. I think he started buying WMT in the 80's but the price went up too quick for him to load up. Unfortunately for him, Wall Street "discovered" WMT.
• HD is another classical value play that has to be a Buffett purchase. Buffett has been loading up a lot of real-estate related stocks (everything except home builders, well... Clayton Homes is an exception). With the weather being unpredictable for the next decade, I think HD has plenty of business coming
• PIR turned out to be a dud. I bought tiny amount before BRK announced it had accumulated 8 million shares. Being a small fry, I only bought $1,000 worth of PIR at less than $16/shr. PIR I believe is a Simpson purchase. At the time, PIR's business was starting to decline but the fundamental was still good. After I purchased it, its condition quickly deteriorated. I am holding to my share since I believe PIR will eventually turn around, and the shares generated some good chunk of dividend. BRK just released to the public that as of Sep, they had unloaded half of its holding in PIR. I am sure it was done with a loss.
  

Beating on Wal-Mart Again

I like to talk about Wal-Mart again. No, I am not going to re-affirm what I just said in an earlier post. Everybody should know how the stock price have moved since then.

What I want to get into is to explain some of the "head-scratchers" that sometimes baffle investors. On Monday, posted a 3.8 percent in profit growth year-over-year, and expects electronics and other general merchandise to propel it to a healthy holiday season. Income rose to $2.4 billion, or 57 cents per share, for the quarter ended Oct. 31 from $2.3 billion, or 54 cents per share, a year ago. The average analyst expected income per share was at 57 cents, so WMT's result come in-line with expectation. So why the heck is the stock price down?

Well, for starters, read the post I have written about WMT's valuation. Second, the fact that WMT stock price had a run up recently, I suspect, was largely due to a lot of investors were hoping the WMT will beat Wall Street estimates. So the fact that Wall Street's estimate is at 57 cents per share is irrelevant. It's what the investors perceive how much WMT should be earning to be the actual expectation. Markets responds to the difference between participants in the financial markets expect to be announced and what is announced (Jeremy J. Siegel, "Stocks For the Long Run"). It doesn't matter what the news is, good or bad. What's important is the difference. In our case, what was expected was Wal-Mart having a marvelous quarter and have quite an out-sized profit increase that blows the estimate away. The fact that it meets the expectation is perceived as "bad" news. The reason why investors only react to the difference is because the prices being traded heading into this news release already include the expected results.

This is a deadly blow to the "Efficient Market" enthusiasts. The Efficient Market theory assumes that every stock is trading at a price that reflect "all available information" and therefore the price reflects the real value of the stock. But in fact, the stocks are not traded a fair value according to all available information. It's also traded a delta, between the fair value and investor expectation. The raw emotion can sometimes drive a stock price swing wildly into either direction, away from what it should have been traded.

Small Cap Got Beat Up

I examined my portfolio a little tonight, and realized all my small caps got beat up. In the mean times, S&P600 small cap and Russell2000 small cap indices are doing just fine. That made me realized that I am not very good at evaluating small cap companines. In fact, most of my biggest winners are mid-cap companies. If I hadn't mess around with the small cap stocks, I would've been doing just as well as my money manager. I think from now on I am going to stick to what I do best.

One good thing come out of it is when I reshuffle my portfolio, at least I can off set some of the realized gain with the loss I accumulated in those losers. Of the small caps I will be holding on to are INTX, CORI, and DRIV

WMT

I got a little time to catch the 9:00PM EST showing of the Mad Money tonight. There was this one guy raved about how Cramer made him money on WMT during the "Lightening Round" segment. So, to truly appreciated what it was all about, let's take a look at the 2-year chart of WMT. It's hardly exciting. I did not turn on the technican analysis tools. But if I did, you will no doubt see the 200DMA is a definite down trend. The financial data of WMT backs that trend: Free Cash Flow was only $6.92B over the last 12 months, compared to $204.14B market cap. That's a 3.4% return. What it means is that, if you have 204.14B to blow, and you spend it to buy up the entire WMT chain, your yearly return is 3.4% for your investment. I think I can make that much return just by opening an ING Direct savings account, which I am currently earning 3.5%, FDIC insured, with no worry of losing capital. In other words, buying WMT is a sucky investment. WMT has been stuck in the mud for more than 5 years, and there is little evidence that the situation is going to change soon. You think the situation is bad, wait till you hear the rest of it. During the last recession, consumer confidence was unusually high. That meant consumer spent away. But much of those spending was done with credits. That's right, credit card debts are as high as ever and that made the credit card companies very rich. I know because I used to own a few of the credit companies until the middle of this year. With the highly likely recession coming and the consumer confidence reaching 5-year low, AND, a hugh credit crunch, retail is going to be in the dog house for a while.

The action that we are seeing for WMT for the last 2 months or so is a combination of a Christmas rally, and a broad range retail rebounce. It wasn't just WMT doing well in the last 2 months. TGT, LTD, PIR, etc... they all had 10%+- increase in share price. Again, taking into the broader context, it was much to get excited about.

I am glad the guy was happy as heck and made some serious money. I am dismay that Cramer taking credit that's not due. I feel bad if that guy didn't get out now. Remember the 3 deadly sins I mentioned earlier? The sin of Hope is definitely doing its work for that guy now.

No Competition

There is no competition.

I just checked my accounts that are managed by Mike (my money manager). The margin account is up 35% YTD, and the cash account (IRA) is up 10% YTD. My personal account is at around 7% YTD. While it beats S&P500 for the year (flat, YTD), it's way way short of what Mike can do. I am seriously thinking cutting my portfolio down half the size and allocated them to be managed by Mike. It's worth the hefty fee (they have their own seat in NYSE, and only charges trade commision fee, so there is no management fee. Trade commision are 2% of the trade value, buy or sell)

BTW, if anyone is interested in Mike service as well, he takes new clients by referal, and the miminum investment is 100K to start with.

Good Google Analysis

My bio clock still at Mountain Timezone, so I stayed up doing some reading/research. I came across this really excellent analysis on Google by Nelson Yu. I hope you enjoy it. I know I did. I have been eyeing DIS and DJ for quite a while... Perhaps I should dig up what I wrote about both 6 months ago...

The Three Deadly Sins In Investing

In another post I mentioned "three deadly sins in investing." Just in case anyone didn't know what they are, here is a reference:

The three deadly sins in investing play off three major emotions: fear, hope and greed. Fear has to do with selling too low - when prices plunge, you get alarmed and sell without re-evaluating your position. In such times, it is better to review whether your original reasons (i.e. sound company fundamentals) for investing in the security have changed. The market is fickle and, based on a piece of news or a short-term focus, it can irrationally oversell a stock so its price falls well below its intrinsic value. Selling when the price is low, which causes it to be undervalued, is a bad choice in the long run because the price may recover.

The second emotion is hope, which, if it is your only motivator, can spur you to buy stock based on its price appreciation in the past. Buying on the hope that what has happened in the past will happen in the future is precisely what occurred with internet plays in the late '90s - people bought nearly any tech stock, regardless of its fundamentals. It is important that you look less at the past return and more into the company's fundamentals to evaluate the investment's worth. Basing your investment decisions purely on hope may leave you with an overvalued stock, with which there is a higher chance of loss than gain.

The third emotion is greed. If you are under its influence, you may hold onto a position for too long, hoping for a few extra points. By holding out for that extra point or two, you could end up turning a large gain into a loss. During the internet boom investors who were already achieving double-digit gains held on to their positions hoping the price would inch up a few more points instead of scaling back the investment. Then when prices began to tank, many investors didn't budge and held out in the hopes that their stock would rally. Instead, their once large gains turned into significant losses.

From: http://www.investopedia.com/articles/pf/05/061005.asp

My Batting Order

All my doom and groom talk lately has to stop. I realize I focus too much on my failure and not much on success. This is made investing less fun than it should be. Even the great investor Peter Lynch was wrong 40% of the time when he ran Fidelity. All I need just some winners to wipe out the pain from the losers. So what are the winner? Here goes:

1. USG - on top of the list. I bought USG about 2 years ago. So far it has given me a 250% return, becoming one of the biggest holding in my portfolio. When I bought the stock, the price was at a ridiculous 95% discount to its intrinsic value. Today even at a much higher price, it's still an attractive buy. I also take comfort knowing that Warren Buffett got into USG at an average price twice as much as mine.
2. FAF - the title company also double my money since I bought it. I got in when it dipped on interest rate hike fear back in 2004.
3. FNF - another title company with a twist. FNF is the biggest competitor to FAF. Having both FAF and FNF is like having Pepsi and Coca Cola the same time. You can't go wrong with a duo-poly (as oppose to monopoly). Besides, FNF has an information service subdivision call Fidelity Information Service (FIS) has give FNF even a greater attractive growth in the future. FNF stock price hasn't move much since I bought it, but the special dividend and the recent spin-off of FNT (treated as dividend) gives me an 80% return since I bought the stock. Both FNF and FAF are both still at a discount to their intrinsic values
4. MHP - Not many people heard of or remember McGraw-Hill (remember your text books?) but I am sure everyone in the investment community knows two things, Stand & Poor, and the BusinessWeek. That's right, MHP is not just a sleepy publisher. In fact, book publishing is just small part of its business. MHP recent bought another high-margin, economic cycle-proof company, JD Edwards and associates. The company is being slowly transferred into a efficient profit machine and still is trading at a discount to its intrinsic value. So far MHP is up 33% since I bought 1 1/2 year ago. But since I bought a lot more MHP to begin with, it yield a lot of profit in terms of dollar amount
   
5. BER - I love insurance companies. I hate them when I have to file a claim, but love them as an investor. Where else can you have a business where people pay you to hold on to their money? While you hold on to the money, you are free to invest it anyway you want, unlike banks! The problem with owning insurance company is the business itself is a commodity. The consumers (insured) don't care which company their go for, as long it's big enough that it won't die, and has a good price (low premium). And there is the key, the insurers from time to time would trip over each other to compete on price. And they can only compete on price because every coverage policy is the same to them. BER is one of those rare one that has the discipline and ability to issue specialty policy that makes economic sense. The investment arm of the company is also absolutely one of the best in the industry. It's currently at a 40% return mark since I bought it a year ago.
6. SNP - Sinopec. Oil, China, what more should I add. Actually, there is more to it. SNP itself isn't as attractive, to my opinion as PTR, China petroleum. But since I already own PTR indirectly through Berkshire Hathaway, I turned my attention to SNP. SNP is the largest refiner in China, and runs a large amount of pipe lines. As the Asian economy poise to be grow at a rapid speed for years to come, all those Russian oil will find a way to get there. And guess where those pipelines are going to be? And who owns them? SNP is up 50% since I bought it more than 2 years ago. The stock price has moved as much as PTR, but then again, it doesn't hurt to have two winners in one folder

The list goes on and on, JNJ, PGR, CVH, KMP, my recent buys such as BBW, HIG, all show great profits and profit yields. The bottom line is, as you can see, I am a long term value investor base my buy decision on a 10 year horizon, not 10 days. This requires a lot of studying of the company. As long as you do that, at the end the efforts will pay off. All the losers that I unloaded are acquired in one form the other after a half-hearted analysis, and influenced by the 3 sins of investment.

Investment is fun, if you do it right.

Steady Beating

Talk about the bad news never stops.

Yesterday Intersections Inc.(INTX), a personal credit/identity theft tracking service company, reported good results for the 3rd quarter. Net income remained the same YOY from last year at 3.5 million. Some of the positive hightlights are:

• Total subscribers increased to approximately 3.4 million as of September 30, 2005, compared to approximately 3.2 million as of June 30, 2005, an increase of 7.4 percent. Subscriber additions in the third quarter of 2005 were approximately 770,000.
• Total revenue for the third quarter of 2005 was $42.6 million, including $3.8 million from American Background Information Services, Inc. ("ABI"), compared to $40.8 million, including $3.7 million from ABI, for the second quarter of 2005 and $38.6 million for the third quarter of 2004.
• Subscription revenue, net of marketing and commissions associated with subscription revenue, increased to $26.3 million for the third quarter of 2005 from $25.1 million for the second quarter of 2005, and from $21.8 million for the third quarter of 2004, increases of 4.8 percent and 20.7 percent, respectively.
  
• Pre-tax income was $5.8 million, or 13.6 percent of revenue, for the third quarter of 2005, compared to $5.2 million or 12.6 percent of revenue, for the second quarter of 2005 and $5.6 million, or 14.4 percent of revenue, for the third quarter of 2004.
• Cash flow provided by operations for the quarter ended September 30, 2005 was $4.2 million.

As we can see, in general, the company is growing nicely. Then it came the BOMB. American Express is ending its contract with INTX. The company is negotiating the process. According to the contract, INTX gets to keep the subscribers for 2 years after the end of the contract term. Apparently AMEX wants to re-negotiate the terms.

The panic sets, and the sell-off started. Personally, here are my thoughts

1. First, AMEX only represent 22% of INTX's revenue. Even if all the subscribers are gone, the drop should be no more than the 22% off.
   
   
2. Second, the matter hasn't been resovled. AMEX apparently wants to bring all the subscribers in the current contract into their own folder; except the contract says INTX get to keep these subscribers two years after the contract expires. I personally don't think AMEX has a case in the court, if it comes down to it. Bottomline is that it won't be a total lost, and chances are INTX will get to keep the subscribers for a significant length of time, if not 2 years.
   
   
3. Third, if you listen carefully to the earning Conference Call, the projected subscriber growth rate is at 23% annually, announced by the management. It means it would only take 1 year to get back to the current subscription level even if we lose all the subscribers from AMEX today.

We shall see. I got in from the last dip so it's not much pain for me except the profit is largely wiped out.

Jim Cramer and Mad Money

I finally was able to catch up on some of my reading this past Monday on the flight to Denver. I finished my businesses from a week ago which has the cover story about Jim Cramer and his Mad Money show on CNBC. In case I haven't mentioned before, I don't really give a crap about Cramer and his show. To me it's always just a show, it is there to help "the little guys" or anything. It is a show, and when it comes to a show, rating is more important than anything, including the Truth (Bill O'Reilly watchers should take note).

What really caught me by surprise was the advice that Cramer gives, in the side bar column. Here is the run down of the list:

1. Own the best of breed; don't own too many stocks
2. Don't buy all at once; arrogance is a sin
3. Cash and sitting on the sidelines are fine alternatives
4. Never subsidize losers with winners
5. Just because someone says it on TV doesn't make it so
6. When high-level people quit a company, something is wrong
7. Look for broken stocks, not broken companies
8. Bulls and Bears make money, pigs get slaughtered

Now, the last one is just cliche. It doesn't mean anything. But the first 7 items are real gems. For someone that I do not like too much because of the showsmanship, I have to, no choice but to admit, Cramer knows his s**t. I suppose it's the same way about how cooks react to Emeril and his cook show. Emeril know his stuff, it just that he makes a lot more money by doing a show than actually cooking.

Of the 8 in the list, I am just learning #2. I finally got my portfolio management methodology down. Basically, I found that it's more cost effective to buy in smaller batches to ease into a position than buying it all at once. #7 is the hardest to master, yet it's the one that makes you the money. The rest are very much self-explanatory.