This month has been a bit hectic. For one, school is in full swing. While my schedule is not as hectic as other times, I still have my fair share of homework and projects to take care of. I also have to start to prepare for what I am going to do post-graduation. Secondly, I have become a regular contributor at Gurufocus.com.  I have been a regular forum participant for almost 3 years now and I thought their new writers program would allow me to gain some exposure. I’m also using Gurufocus as a place to write about individual stocks. Whether it be here or Value Investing Pro, I have tried to do my best from talking about individual stocks. For one, I like to keep my best ideas for myself.  Secondly, I find value investing to be more about the process of waiting for fat pitches than looking at every stock.

Value Investing Pro

One thing that I have gained from Gurufocus is a tick up in traffic over at Value Investing Pro. With the extra traffic, I also re-gained my motivation for blogging on a regular basis again. I was becoming a  bit unmotivated with my blogs and traffic was seriously starting to tail off.  Anyway, the extra traffic has re-motivated me to get these puppies updated on a regular basis and with that has come a surge in subscribers through RSS and my Youtube Channel. I have big plans for Value Investing Pro, which will probably happen around July of next year. I want traffic to stabilize a bit and I have some smaller projects to launch before I start launching the major fireworks.

Joel Greenblatt Week

Last week was unofficially Joel Greenblatt week. There were two great appearances which are must sees if you follow the magic formula system like I do. Check out both appearances below.

Joel Greenblatt On CNBC

Joel Greenblatt On Bloomberg

Value Investing Stocks: Where are they?

One thing I like about a rising stock market is the % gains. But, I also hate the fact bargains are a bit tougher to find. I have found a couple in the mega caps, but the true fish are in the microcap arena where most mutual funds are simply too big too fish there. While the  market’s run up is nice, I’m becoming very cautious. For one, I’m looking around my neighborhood and I honestly don’t see signs of a recovery. Secondly,  I believe the market has risen too much, too soon. If the market does fall, I’m sitting on some cash, about 25%. Not so much because I’m fearful of a falling market, but I simply haven’t found too many ideas. As a matter of fact, in the past 3 months, i have found 1 bargain that I would seriously put money into.

Warren Buffett U

A while back, and I seriously mean a while back, I started a Warren Buffett site. I simply lost motivation, but now “im feelin it”. I’m restarting things this week. So if you’re interested in Warren Buffett head on over at Warren Buffett U. I  was even going to restart the site’s Youtube Channel but uploading the same thing to two different channels becomes a hassle.  I follow Warren Buffett on a daily basis so I don;t have anything to lose. I have the domain so why not give a try for at least 3 months. If the site gains traction, I will continue updating, if it doesn’t o’well, I can’t say I didn’ t try. That’s pretty much how I got started in this online business, I throw stuff at the wall and I see what sticks.  I still have work to do their, but you get an idea of how the site will look.

When and If

If there is one thing I have never relied on is market timing. For one, I straight out suck at it. Every “guru” out there claims he or she could figure out when to jump in or out of the market, but very few, if any, individuals have done so in the past, and very few if any will do so in the future. So, knowing that I’m no good at market timing, I do my best to buy a company’s stock at a discount.

I’d rather be approximately right than precisely wrong.” Warren Buffet

The next obvious question will be, how do I know what a stock is worth so I know I am getting a discount?  The most common way of valuing a company is by doing a discounted cash flow analysis or DCF.  Over the years individuals and corporations have developed complex discounted cash flow spreadsheet’s that try to pinpoint exactly what a company is worth. In my opinion, this is baloney. For one, you are trying to predict the future and something will go wrong and that’s why I rarely rely on a DCF. If I do, a pen and paper will do the trick.

• Sidenote: Google “Free Discounted Cash Flow Calculator” and you will find some good ones

Ok  dummy, what do you use? Free Cash Flow Yield and Earnings Yield (Magic Formula Investing)

Formulas:

Free Cash Flow Yield: FCF/ Price

Earnings Yield: EBITDA/ EV

Are we overvalued?

I primarily uses the following tool gauge whether the market it undervalued. One, (image below), tells me its still a great time to purchase stocks despite the recent rally. This is a great way to know where we are in the long term scheme of things.

Take It On A Case By Case Basis

Due to higher priorities, I have narrowed down the stock screens I use every weekend. I still continue to screen for the magic formula every week. I am now getting a handful of companies to analyze and the best “Tip” I can give you is take it slowly and more importantly be patient. Some stocks have doubled/tripled off their lows and thus might be fully valued. At the same time, just because a stock has doubled, doesn’t mean it cannot be a bargain. Take company ‘Blue Widgets” which you figure could be worth somewhere between $30-$42. In March, it could have been trading at $10 and currently trades at $20. Would you purchase it? What are the alternatives?  Why is it going to be wroth $30? What if it goes down, will I buy more?  Are other companies in the sector equally undervalued?

The Good Ol’ Value Traps

If one thing is certain during market run-ups , is that bargains become scarce and we are left with value traps. There 1001 ways to define a value trap, but my definition is “there is no catalyst”. For example, newspapers currently do not have a catalyst that will overcome free online readership.Or, there is no reason for me to purchase a CD when digital music is available. Two value traps: UNTD and ELNK, which both appeared on the magic formula screen this week.

United Online is an Internet service provider (ISP). You might be familiar with Classmates.com or Netzero. The stock has not gone anywhere in the past 3-5 years. Quite frankly, with the company not having any broadband strategy , I see no reason why its stock will go up. And here’s the deal, DSL is quickly becoming a thing of the past with internet providers such as Verizon / Time Warner Cable offering faster and faster speeds at lower and lower prices.

The same could be said for ELNK”

ELNK) has reassessed its strategic direction and eschewed investment in its municipal Wi-Fi network and wireless phone business. The progression from dialup Internet access to broadband has inherently rendered the dialup segment a declining industry with no growth prospects.”- Morningstar

Value Investing Fund

I’m starting a Value Investing Fund from scratch. I’m hoping to create some kind of track record as graduation is in the near future. I’m in no financial position to be purchasing stocks, so I’m hoping this gives me an extra pinch of help when applying for a job. It’s going to be fun, and I hope someone learns one thing.

Paul Sonkin Video

Peter Lynch and Sir John Templeton

In this video, Lynch covers some of his rules for successful stock market investing as described in his books.

1. Stock price usually follows a companies profits
2. Buy what you know (at the right price)
3. Timing is tough

Peter Lynch On The Stock Market

I do not know the exact date of this video, but that’s irrelevant in my opinion. It’s good to have knowledge on the history of the stock market and how to manage a portfolio during market downturns, such as knowing which kind of stocks to own, what to do with market
surprises,etc.. This video covers some of the basics.

Peter Lynch On Bottom Fishing

A couple of words on bottom fishing:  Good luck!!!!

Anyone know the name of the other individual in the third video? If you do, congrats you are a stock market junkie

If you have been following the blog throughout the year, I can easily slice the year in half and show the public two different ways of managing an investment portfolio.

1st half

The first half of the year was almost 100% automated with stocks chosen from the magic formula website. The only prerequisite that I required was that a company have a healthy balance sheet and some earnings. Sprinkle in a couple of non-magic formula stocks and WHALA! we have a portfolio that was ahead of the S&P 500 by a couple of percentage points.

2nd half

I had more time on my hands so I made a decision to move to a more researched and focused portfolio.Keep in mind this is at the exact time markets are selling off. I made big bets and lost big. I will go into details in another post, but to keep it short and simple, I made big bets and lost big.

WHY!!!!

Why did I lose big? The stocks appeared cheap. One of the lessons I have learned this year that will stick with me for the rest of my investment career can be best described by Warren Buffett’s obesity quote:

You don’t need to know if a person weights 250 or 400 pounds to see that they are fat- Warren Buffett

I see this happening all over the  blogosphere. A blogger finds a stock, reads a couple of 10-Q’s, 10-K’s, conference call,etc… The blogger then does a DCF trying to pinpoint growth and discount rates. The stock plummets and then he/she is left scratching his/her head as to why the stock is falling considering the amount of analysis in the growth and discount rates used.  The analysis and growth rates are sometimes right, but sometimes if one in fact looks up and away from the DCF models, one will notice the stock is indeed a fat pitch or not. Below Batman and Robin explain what I mean.

Charlie Munger (Berkshire Hathaway’s vice chairman) said, “Warren talks about these discounted cash flows. I’ve never seen him do one.”

“It’s true,” replied Buffett. “If (the value of a company) doesn’t just scream out at you, it’s too close.”

Be greedy when other are fearful and be fearful when others are greedy

This has been a tough peice of advice to follow due to everyone running for the same exit and the mass media covering the markets around the clock. When I asked my brother if he is willing to put some money to work he respectfully declined due to all the “bad” news he has been hearing. Warren Buffett seems to have the same belief as me ( or is it vice versa?) as companies will experience a slowdown in earnings but will be fine years from now.

These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Now, I have read most of the Warren Buffett books out there. Most of them had the same information on them, but Snowball blows all the other Warren Buffett books away. Think you have read everything about Warren Buffett, think again. Snowball is filled with tons of new information. Granted, I have read through the first 8 chapters. Unlike some amazon reviewers, I am taking my time and soaking the information.

The Presentation

The book is HUGE (900+ pages). The paper quality is not that great but who cares!

Some early chapter information

I wont give too much away but from the top of my head here are some talking points.

• Warren Buffett’s 1999 Sun Valley speech  at the height of the tech bubble. Warren reiterates Ben Graham’s idea of stocks being a voting machine in the short term and a weighing maching in the long term.
• Early Buffett family history
• Warren Buffett’s childhood struggles with his moms “blowups”
• Warren’s fascination with numbers and the creation of the “bathtub game”
• Warren trying to get his neighbor to invest 10K in his partnership.

There is a ton of information in the early chapters. I cannot wait to continue reading this book.  I checked out the Amazon.com reviews today and 19 out of 19 have rated this book 5 starts ( out of a 5 star rating system). I would give this book a 10 out of 5. Its that good!

Link: http://www.charlierose.com/shows/2008/10/01/1/an-exclusive-conversation-with-warren-buffett

Its been a long time coming. A book about Warren Buffett in which Buffett played a major role in. The book officially went on sale yesterday Sept. 29th and early reviews say its as good as advertised. 4 reviews have been written on Amazon.com. All 4 reviewers gave the book a 5 out 5. Caution though, unless these individuals received early copies, I would not trust a review  posted on the same day, especially for a book thats 976 pages long. Here is what amazon reviewer “Jordan Calonego” had to say about Buffett’s Snowball:

Alice Schroeder has done a wonderful job parsing the incredibly interesting and complex life of one of the world’s true, living legends.

This should become the tome to site for all things Buffett. It is thorough, examining his family history, his father’s career, and details of his youthful adventures; which in many instances, went well over the moral line he now teaches people to steer away from. The hardships suffered by close family members of the financial, psychological, and personal variety are honestly portrayed through the biography, as are details of the complex relationships he has had with women throughout his life.

For students of business and investment, the book details clearly the growth of his business knowledge early on and the success of his many investment partnerships. Alice details the countless problems he experienced once owning Berkshire Hathaway and the businesses that were later rolled in to create the present Berkshire. The details of his many acquisitions highlight his unique intelligence, as well as the intellect of his contemporaries, who in-fact were first to discover many of the corporate gems he acquired over the years. His collaboration with other investment managers proved vital to his success, contrary to much of what has been said elsewhere. Lastly, flaws are exposed in his investment acumen numerous times with regard to operations of target companies, and his early judgment in management teams. The very fact that he has been so successful, even given these errors, is testament to his unique abilities as a businessman.

The book highlights Buffett’s amazing focus and zest for life. His relationships and personal experiences, which have never been exposed in any detail, have led to the unique character of Warren Buffett. His development into a great human being and quest to create something enduring in Berkshire, the Foundations, and his many “students”, is wonderfully explained in this thoroughly enjoyable biography.

Diversification

Before moving on, let me clarify one thing; there is nothing wrong with diversification. I have had a diversified portfolio ( 15+ stocks in my book) for a while now as my time for researching stocks was limited. There are plenty of value investors who diversify and outperform the market by a good margin. Walter Schloss comes to mind.

Some well known concentrators

• Warren Buffett/Charlie Munger – While Berkshire holds a great number of stocks, the majority of the stock portfolio is invested in big bets such as Coca Cola (KO), American Express (AXP), Washington Post (WPO) and prior to that  GEICO just to name a few. It was Buffett’s sidekick Charlie Munger who turned Buffett into a more concentrated portfolio.
• Peter Lynch- The worlds greatest mutual fund manager held hundreds and sometimes thousands of stocks at a time. But as he confesses in his book(s), Peter Lynch had a couple of big bets and a ton of small bets so he could keep up with a company’s “story”
• Eddie Lampert- Once considered the next Warren Buffett as the price of Sears Holdings approached $200, Lampert made the majority of his wealth by betting big on the merger of k-Mart/Sears. I believe his cost basis is $1(I might be wrong on this) as he merged the two companies when K-Mart filed for bankruptcy.
• Joel Greenblatt- Probably never believed in diversification. Reading both of his books, Greenblatt constantly advocates making few but big bets. Before I get bombarded with e-mails about the magic formula strategy and diversification, Greenblatt does make seveal points as to hold 5-8 well researched stocks for greater returns. For those individuals who want to put their portfolio on auto pilot, follow the magic formula as layed out in the book.
• David Dreman- Also advocates a diversified portfolio in his books. But, he made good money by placing big bets in Fannie Mae (prior to its recent  drop he bought below $5) and Altria

Pitfalls of concentration

• A more volatile portfolio.
• A blowup in the portfolio will be a major setback against the market
• You have to be VERY patient

Tools for concentrarion

• Time
• Time
• Time
• Knowledge
• oh yeah, patience

Quotes

I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over. – Warren Buffett

Put all your eggs in the one basket and — WATCH THAT BASKET.
Pudd’nhead Wilson, Pudd’nhead Wilson’s Calendar, Chap. 15

The week’s top value investing story comes via collegeanalysts.com and it deals with Warren Buffett mentioning he has been buying either Wells Fargo (WFC) or American Express (AXP). I would put my money on Wells Fargo. At one point during the year, Wells Fargo traded at about 8 times normalized earnings. Also, Buffett is very high on its CEO Mr. John G. Stumpf and if I am not mistaken quoted him in the latest Berkshire Hathaway letter. Finally, I believe Buffett has increased his holdings in Wells Fargo, but I have to look into that. Now without further to do, here are the weeks top value investing news.

Is Buffett Buying American Express (AXP)?

On CNBC last week, Buffett revealed he is buying more stock in either American Express or Wells Fargo. Here is the argument for the former.

The Natural Contrarian’s Way to Get Poor Quick

Scott Fraser calls himself The Natural Contrarian and a proven master of contrarian strategies. The only contrary thing about this type of investing and marketing is that it goes against all investing basics. Let’s see how this contrarian technique holds up against the logical contrarian

The “Missing” Berkshire Hathaway Letters (1969-1976)

There is a conspicuous gap between the last Buffett Partnership letter, written in 1969, and the first Berkshire Hathaway letter posted on the company’s website, written in 1978. This article unearths some of these missing letters.

New High Yield Dividend Stock: DCP Midstream Partners LP (DPM)

Looking through the 52 week stock lows the other day for some ideas for a new stock purchase I came across a couple of natural gas pipeline companies that had come down in price over the past few months. I looked over several other pipeline companies and found that most were down over the past six months, some were down over 40% so far this year. Here’s what if found…

The Day the Newspapers Died

Jeff Matthews considers last Saturday the day that newspapers died. If you have been considering newspaper stocks, be sure to think about this post first.