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November 2008



You hear that BEEP BEEP Sound ?

November 18, 2008 – Comments (3) | RELATED TICKERS: BRK-B , BRK-A is the sound of the truck backing up.

Berkshire Hathaway, Buffett's company (Brk.b or Brk.a) is currently selling at historical low levels.

Way back in 1999/2000, at the height of the internet boom, no one wanted to buy Berkshire Hathaway because it was considered old world, and Brk was selling at very low levels. How low ? Well, share price by itself is not a good yardstick, it has to be measured in relation to another metric, the common ones are Price to Earnings, Price to sales or Price to Book. For many value investors, Price to Earnings & Price to Book are favorites, but for financial companies, Book value is a more conservative measurement. Way back in 1999, Brk was selling at a P/Book of 1.5.

The P/Book value has not seen that levels since this year, where the current book value is 1.2. Imagine, you can buy Berkshire Hathway for near book value and you get the world's best stock picker for free.   [more]



Article: The death of Value Investing

November 17, 2008 – Comments (0)


well researched but flawed article, my nitpicks are

(a) it paints the value investors with a common broad stroke
(b) it is early days yet and the investing horizon isn't long enough to be conclusive
(c) a weaker point but compared with most hedge funds, these value funds are performing relatively better
(d) Lastly, BennyG failed in 1929 crash, hence he focused on safety first, and not the other way round as suggested by author.

Article culled from Alpha Magazine, and later Breaking (free trial available).

The death of value investing

By Edward Chancellor

Inefficient market: Value investors deny that the market is efficient. In their view, stock prices are subject to irrational waves of optimism and pessimism. That's mostly true. But just sometimes, the market's mood isn't too far off. A value trap appears when a falling share price correctly anticipates a company's deteriorating fundamentals. Over the last year, some of America's best investors have been misled by apparently cheap prices into buying financial stocks. The worst may not be over. If the economy goes into a deep recession, investors could face the greatest value trap since the Great Depression.

As a group, value investors have many attractive qualities. They are contrarian and stoical, knowing that successful investing requires long-suffering patience. They also have fewer illusions than most, modestly acknowledging that they can't forecast the twists and turns of the economy. Instead, value investors adopt a bottom-up approach, valuing each company on its own merits. They like to think of themselves as owners rather than speculators and tend to operate with longer time horizons.

.... Mentions BennyG's Security Analysis Book and looking for value via Book Value, concept of mr. Market, mentions Buffett ...............

The crash of the technology bubble provided value investors with their finest hour. In the late 1990s bull market, they avoided growth companies like the plague and instead piled into those out-of-favour stocks which met their stringent valuation criteria. This was a painful strategy before the bubble burst, but afterwards it paid off handsomely. The current bear market, however, has produced rather different results. Many value investors have lost heavily, unwitting collateral damage of the credit crunch.

........ snipped... mentions early half where Value Investors missed out on the easy credit fueled stock market as well as P.E.......

Furthermore, the credit crisis is revealing a profound weakness in the value discipline Graham maintained that analysis should be "concerned primarily with values which are supported by facts and not with those which depend largely upon expectations." The housing bubble, however, changed many facts. But some of the world's leading investors appeared not to have noticed. First, several prominent names piled into housing stocks when they were selling at around book value. This proved a disastrous move as falling land prices and slowing sales generated massive losses for homebuilders. Then, some of the same investors charged into banks, figuring they were cheap. That also turned out to be a poor idea.


But the market isn't rational, says Societe Generale strategist James Montier, a prominent exponent of value investing. In a recent report, Montier takes issue with Fama and French. Value has outperformed the market in every economic downturn since 1975, says Montier. "Much as fans of the Efficient Market Hypothesis would love us all to believe that value tends to underperform because it is riskier, there is virtually no evidence that this is the case the risk-based explanations of the value premium are as hollow and meaningless as the rest of EMH".

The trouble with this analysis is there has been no truly devastating economic downturn during the study period. Value stocks tend to be found among smaller, more cyclical companies. When the hundred-year flood arrives, such stocks are likely to be hardest hit. Graham recommended buying stocks which were priced in the market at less than their net current assets (calculated as cash and working capital less all liabilities). Montier recently published a list of current stocks which met Graham's deep value criteria. Yet many of the names on this list look like potential value traps, vulnerable to both the continuing credit crisis and an economic downturn. For instance, the list includes several homebuilders, an Irish credit insurer, and a British technology firm which has already entered into administration.

........Mentions Grahams' failure in the 1929 stock market which saw a loss of 70% of capital by 1933. Author uses this as proof that P/S ratios don't work>

The credit bust is bringing fundamental changes to the economy at a mind-numbing speed. Investors have been drawn into one value trap after another. As the credit crisis continues and the global economy worsens, things could get a lot worse for Graham's disciples. In the three-quarter of a century since the Great Depression, value investors have earned a generous premium for investing in smaller and more cyclical stocks. Now they are paying the price.  [more]



Blast from the Past: Hard Times come to the Hedge Funds

November 13, 2008 – Comments (0)

"Bears should have had a fine time in the 1969 market. But some followers of the hedhe concept got clobbered on their shorts while being murdered on their longs. Worse than that, the SEC is moving in as Hard Times come to the Hedge Funds" by Carol J. Loomis  [more]



Where are you on this scale ?

November 12, 2008 – Comments (5)

Where are you on this scale ?

1. Denial

2. Anger

3. Bargaining

4. Depression

5. Acceptance




Cheeky post: Why China Stock market hasn't bottomed yet

November 11, 2008 – Comments (0) | RELATED TICKERS: CHINA.DL

Recommendations: 0


This is my cheeky 2 cents worth, flame away :)  [more]



Second best quote from Seth Klarman

November 11, 2008 – Comments (0)

"So the question is not, Are people smart, are people sophisticated, do they have clever ways of looking at things, are they looking in the right areas? The question is, Are there periods when none of that matters because their human natures get the best of them ? "
-- Seth Klarman, Alpha Magazine, june 2008



BennyG and his NCAV screen (Margin of Safety)

November 11, 2008 – Comments (1) | RELATED TICKERS: LKI.DL2




My 2 minutes scratch & sniff on Moody's (MCO)

November 06, 2008 – Comments (0) | RELATED TICKERS: MCO

(Disclaimer: I already own a chunk of the stock, and I am trying to rationalise whether this is a stock to buy, sell or hold)



Best quote so far comes from Seth Klarman

November 04, 2008 – Comments (0)

Copied from Redfield, Blonsky & Co website

"A fall from 70 to 20 and fall from 100 to 20, would feel almost exactly the same. At some point being too early becomes indistinguishable from being wrong."

As I look into my sea of red ink in my portfolio, these words resonate. I am thinking to myself, boy, this is going to be a long investment horizon.

raytoei  [more]



Moral Hazard and the Lehman Minibonds saga

November 03, 2008 – Comments (0)

Moral Hazard is an economic term to describe the repeated bad behavior of companies (or individuals) because they can be bailed out. A recent example are the banks JPM, BAC and C which were deemed "too large to fail", and as an example of the moral hazard it created, the banks used the money to gobble up smaller regional banks.

A storm has been brewing since early October in Singapore and Hong Kong where investors of the structured products, aka Mini-bonds were told that because of the Lehman Bros failure, their investment would be wiped out. What is interesting about this case is that it appeared that what was sold to the investors as a safe investment for their nest eggs were not asset backed bonds but toxic derivatives in the form of Credit Default Swaps, the investors were providing a collective insurance against companies defaulting. Their upsides were limited, around 5% a year, while the downside was a total wipe-out if any of the 6 banks listed went into default. Most of the investors were retirees who were sold these products by aggressive relationship managers or/and bank tellers who had privy to their account information whenever these retirees went to update the pass book at the branches. What is interesting is that the relationship managers probably did not understand the products they were selling, and many investors thought that they had diversification in the mini-bond as the product brochures listed six-banks whom the Mini-bond was insuring against a default.

I mentioned Moral Hazard here because the HK and SGP government are under a lot of pressure to bail the investors out. HK seems to be doing better because the Govt made the bank settle with the investors. In SG, the process is very conflicted because the investors had to endure a long process with the banks who are obviously trying to disprove mis-representation by their relationship managers. To complicate things further, only investors aged 62 and above with a primary school education (age 12) were eligible for a full refund. This resulted in pretty ugly scenes (see and ).

I think the Govt is in a bind, if it plays too heavy a hand in settling this issue, it creates a moral hazard with future crisis, however, if it doesnt appear to intervene, this creates a backlash, especially in a Confucius-oriented society.

While the Asian savings rate is the highest in the world (between 20 ~ 40% of disposable income goes to savings), Asians (me included) aren't very good at where to park the money. Some say the interest rates here too low (eg. Fixed deposit is <2% while CPI is 7.7%) , resulting in higher risk taking. In my opinion, our parents do not teach us how to invest, and talking about money is taboo at the dining table, as a result, the risk-reward ratio isn't calculated properly (me included). Asian investors are starting to learn that financial planners do not necessary have the investors interest at heart.

raytoei   [more]

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