Friday, May 30, 2008

What is Kerkorian up to?


He's upped his stake in Ford. He's wiling to pay $8.50 a share. Either he is going to slash and burn the company to profitability(harder than it sounds) or he's going to flip it to another buyer like the Chinese or Indians. Interesting thing about Ford, their problems are only in North America. Unfortunately, that's the biggest car market as of today. If you read their last earnings release they doubled their income in Europe and south America. They even earned a profit in Asia.

Ford's biggest strength is that they get more of their earnings from overseas than Chrysler or GM. Like everyone else, they're going to have to kill several brands while creating new cars that can deal with the reality of higher fuel prices, This doesn't mean manufacturing rectangles with wheels. Inexpensive and reliable don't equal boring. Unfortunately, this whole industry is bereft of ideas. The last game-changing one they had was the minivan. That was back in the 80s.

Tuesday, May 27, 2008

How well do you know your stocks?


Seems like a stupid question, doesn't it? I'm being totally serious though. Maybe you can know ROA and ROE and other profitability rations, but do you know how the company makes those numbers?

Actually what I'm asking is how well you know the company's represented by the stocks you own? If you're a technician or a momentum investor, feel free to tune me out. This may begin to sound an awful lot like the teacher from "Peanuts."

Have you done more than read the Yahoo! Finance summary? Have you even checked out their website? You need to know more than "they're a Chinese telecom company."

Who are the top management? Who's on the board? What sort of experience do they have?

Do you know how they make money? No, really I'm serious. This is a more complicated question than what do they sell? For instance, General Motors makes most of its money from financing the sale of cars. What are their best-selling products? What are their margins? What's the five-year trend? Are they growing or shrinking?

What's the business model? What are its strengths and weaknesses? Who are the competitors? What're they doing that's different? Who are the customers? Are they dependent on a small number of key companies or segments? What about suppliers? Does your company depend on one source for a key component? Is its supply tight?

These questions are all great starting points for understanding the business that you now own.

Friday, May 23, 2008

What did I tell you about Ford?


Last quarter, they were so happy to announce that they turned a surprise profit. I wrote about it last month. Now it seems that they are going back on their pledge to be profitable in 2009, much to everyone but my own surprise. I guess high gas prices do matter after all.

"In a statement, Ford said rising prices for commodities, particularly steel, and an accelerating consumer shift from larger trucks and sport-utility vehicles would make it impossible to meet a key milestone in its efforts to turn around its money-losing North American operations."

Weren't higher commodity price forseeable? Don't they have economists and purchase agents who help them figure this stuff out? We're they the last people to know that steel has gotten more expensive, and that high gas prices were causing people to shift away from the SUVs and large trucks that are the only things that Americans still want to buy from Ford? How many restructuring plans will there be? It seems that every 18 months, they're going back to the drawing board.

Still, some observers still think that Ford is the best off of the Big Three. In a sense, he's right. Ford is the least tied to North America of the big Three. Their dealer network is the smaller than the other two.

Is it a bird? Is it a plane? No. It's Kirk Kerkorian upping his stake in Ford.

Tuesday, May 20, 2008

Can the Fed prevent bubbles?


This is the hope of Federal Reserve Chairman Benjamin Bernanke. He has hired some old chums of his from Princeton to study the matter. Bubbles are inevitable and like the Bible says of the poor, will always be with us.

If I had to guess as to why a supposedly free-market economist would have an interest in acquiring such powers I would venture two guesses. One, Bernanke is a student of The Great Depression. This is the basis of his fervent anti-deflation bias, and the reason for his famous helicopter speech from 2002. For Bernanke, deflation is the anti-Christ. The second reason for this thinly-veiled power grab is that no matter how much economists believe in free markets, they are also humans who enjoy power and prestige. I have never known a government official to dislike power or influence(George Washington is the lone example I can think of).

Bernanke has not been alone in pursuing more power for The Fed. He has had helps from the highest office in the land. At the end of March, President Bush outlined a plan that would significantly overhaul the financial regulatory apparatus of the country, "the Fed would sit at the top with expanded responsibilities as the 'market stability regulator.' But the Fed would lose its current powers over bank holding companies."

Such a broad description as "market stability regulator" reminds me of the old Roman title of dictator. We shall see whether or not Bernanke is Caesar or Cincinnatus.

Friday, May 16, 2008

Yahoo!, Microsoft, Carl Icahn, and letters


I've never been that impressed with Carl Icahn. Well, at least not as impressed as one normally would be by a man worth many billions. I find his greenmail and activist shareholder ploys mere bullying. Pressuring companies into asset sales and/or buybacks is not as romantic and going in, rolling up your sleeves, and reversing a decline. Then came the coup de grace; I learned that he and his wife sing showtunes together. Unforgiveable.

His full frontal assault on Yahoo! is starting to change my opinion. Yahoo! has just the sort of self-satisfied, entrenched management that his Icahn avatar Gordon Gekko rails against in Wall Street. Yahoo!(YHOO) was trading at around $19/share before Microsoft(MSFT) made their offer(their finally offer of $33/share represented a 72% premium). Was Yahoo! negotiating in good faith? Jim Cramer thinks not. Icahn is very smart and tenacious. He has brought along heavyweights like Mark Cuban and John Paulson, fresh from his huge subprime score. He is hoping to throw out the board, get his slate of ten directors elected, and then lure back Microsoft.

This is like having the high school quarterback asking a not so popular girl to prom, her giving him the cold shoulder, then having her mom swoop in and try to make the date happen anyway.

One of the sillier aspects of the whole thing has been the absurdly polite/passive-aggressive letters that have been exchanged. Why in 2008 do investors issue these things? This is not business, not a Jane Austen novel. Here is the text of Ballmer's we're no longer interested in Yahoo! letter that he sent to Jerry Yang. I can almost hear Roxette's "It Must've Been Love" playing in the background. His outlining of just how silly it would be for Yahoo! to seek "strategic alternatives" with Google makes sense.

How about Icahn's letter to the Yahoo! Chairman Roy Bostock? I love that he says a number of shareholders have asked him to lead a proxy fight. Ah, Carl Icahn, the reluctant warrior. He's like Aragorn, he never wanted to be king, but fate had other plans.

This letter reminds of that early in The Godfather: Part II, when Connie comes to Michael for money when she wants to marry Merle Johnson. After basically calling her an unfit mother and a whore, he offers her a place in the compound and whatever she wants. Then he chilling says, "Connie, if you don't listen to me, and marry this man, you'll disappoint me."

Do you think Yahoo! will disappoint Icahn? They just might. Read the Yahoo! response to his letter.

Tuesday, May 13, 2008

Radio One


This is a bad company in a miserable industry. There is no turnaround plan. It's been run like a feudal enterprise by the founder and her son(they remind me of the Dillons, the mother and son conmen in The Grifters). It's not even worth a takeover bid.

Radio One(ROIA) is now trading for about $1. I went negative on the stock in August at $4. This company is the worst house in a bad neighborhood . It has been steadily mismanaged, yet all along the way, management has been very generous in granting themselves raises and bonuses despite poor execution.

They only add insult to injury when the CFO says, " Liggins's increased compensation reflects the fact that he has diversified the company's media portfolio... the package would provide incentive for Liggins to "maximize shareholder value."

Shouldn't the CEO of a company that his mother founded and of which he owns with her 7/8ths of the outstanding stock have more than enough reason to maximize shareholder value? When you're issuing a press release in order to explain away stock sales that make you look like rats fleeing a sinking ship, you've got problems.

Friday, May 9, 2008

Richard Russell


Richard Russell has been publishing The Dow Theory Letters since 1958 and is one of the dean's of sage investment advice. Some time ago, he wrote a great piece about the role compounding plays in the creation of wealth, acquiring wealth, the difference between the rich and the poor man, and the importance of action.

"For the average investor, you and me, we’re not geniuses so we have to have a financial plan. In view of this, I offer below a few rules and a few thoughts on investing that we must be aware of if we are serious about making money.

I. The Power of Compounding

Rule 1: Compounding. One of the most important lessons for living in the modern world is that to survive you’ve got to have money. But to live (survive) happily, you must have love, health (mental and physical), freedom, intellectual stimulation — and money. When I taught my kids about money, the first thing I taught them was the use of the "money bible." What’s the money bible? Simple, it’s a volume of the compounding interest tables.

Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately anybody can do it. To compound successfully you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. You need knowledge of the mathematical tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time.

But there are two catches in the compounding process. The first is obvious — compounding may involve sacrifice (you can’t spend it and still save it). Second, compounding is boring – b-o-r-i-n-g. Or I should say it’s boring until (after seven or eight years) the money starts to pour in. Then, believe me, compounding becomes very interesting. In fact, it becomes downright fascinating!

In order to emphasize the power of compounding, I am including the following extraordinary study, courtesy of Market Logic, of Ft. Lauderdale, FL 33306.

In this study we assume that investor B opens an IRA at age 19. For seven consecutive periods he puts $2,000 into his IRA at an average growth rate of 10% (7% interest plus growth). After seven years this fellow makes NO MORE contributions — he’s finished.

A second investor, A, makes no contributions until age 26 (this is the age when investor B was finished with his contributions). Then A continues faithfully to contribute $2,000 every year until he’s 65 (at the same theoretical 10% rate).

Now study the incredible results. B, who made his contributions earlier and who made only seven contributions, ends up with MORE money than A, who made 40 contributions but at a LATER TIME. The difference in the two is that B had seven more early years of compounding than A. Those seven early years were worth more than all of A’s 33 additional contributions.

This is a study that I suggest you show to your kids. It’s a study I’ve lived by, and I can tell you, "It works." You can work your compounding with muni-bonds, with a good money market fund, with T-bills, or say with five-year T-notes.


RULE 2: Don’t Lose Money.This may sound naive, but believe me it isn’t. If you want to be wealthy, you must not lose money; or I should say, you must not lose BIG money. Absurd rule, silly rule? Maybe, but MOST PEOPLE LOSE MONEY in disastrous investments, gambling, rotten business deals, greed, poor timing. Yes, after almost five decades of investing and talking to investors, I can tell you that most people definitely DO lose money, lose big-time — in the stock market, in options and futures, in real estate, in bad loans, in mindless gambling, and in their own businesses.

Rule 3: Rich Man, Poor Man.In the investment world the wealthy investor has one major advantage over the little guy, the stock market amateur, and the neophyte trader. The advantage that the wealthy investor enjoys is that HE DOESN’T NEED THE MARKETS. I can’t begin to tell you what a difference that makes, both in one’s mental attitude and in the way one actually handles one’s money.

The wealthy investor doesn’t need the markets, because he already has all the income he needs. He has money coming in via bonds, T-bills, money-market funds, stocks, and real estate. In other words, the wealthy investor never feels pressured to "make money" in the market.

The wealthy investor tends to be an expert on values. When bonds are cheap and bond yields are irresistibly high, he buys bonds. When stocks are on the bargain table and stock yields are attractive, he buys stocks. When real estate is a great value, he buys real estate. When great art or fine jewelry or gold is on the "giveaway" table, he buys art or diamonds or gold. In other words, the wealthy investor puts his money where the great values are.

And if no outstanding values are available, the wealthy investors waits. He can afford to wait. He has money coming in daily, weekly, monthly. The wealthy investor knows what he is looking for, and he doesn’t mind waiting months or even years for his next investment (they call that patience).

But what about the little guy? This fellow always feels pressured to "make money." And in return he’s always pressuring the market to "do something" for him. But sadly, the market isn’t interested. When the little guy isn’t buying stocks offering 1% or 2% yields, he’s off to Las Vegas or Atlantic City trying to beat the house at roulette. Or he’s spending 20 bucks a week on lottery tickets, or he’s "investing" in some crackpot scheme that his neighbor told him about (in strictest confidence, of course).

And because the little guy is trying to force the market to do something for him, he’s a guaranteed loser. The little guy doesn’t understand values, so he constantly overpays. He doesn’t comprehend the power of compounding, and he doesn’t understand money. He’s never heard the adage, "He who understands interest, earns it. He who doesn’t understand interest, pays it." The little guy is the typical American, and he’s deeply in debt.

The little guy is in hock up to his ears. As a result, he’s always sweating — sweating to make payments on his house, his refrigerator, his car, or his lawn mower. He’s impatient, and he feels perpetually put upon. He tells himself that he has to make money — fast. And he dreams of those "big, juicy mega-bucks." In the end, the little guy wastes his money in the market, or he loses his money gambling, or he dribbles it away on senseless schemes. In short, this "money-nerd" spends his life dashing up the financial down escalator.

But here’s the ironic part of it. If, from the beginning, the little guy had adopted a strict policy of never spending more than he made, if he had taken his extra savings and compounded it in intelligent, income-producing securities, then in due time he’d have money coming in daily, weekly, monthly, just like the rich man. The little guy would have become a financial winner, instead of a pathetic loser.

Rule 4: Values. The only time the average investor should stray outside the basic compounding system is when a given market offers outstanding value. I judge an investment to be a great value when it offers (a) safety, (b) an attractive return, and (c) a good chance of appreciating in price. At all other times, the compounding route is safer and probably a lot more profitable, at least in the long run.

II. Time

TIME: Here’s something they won’t tell you at your local brokerage office or in the "How to Beat the Market" books. All investing and speculation is basically an exercise in attempting to beat time.

"Russell, what are you talking about?"

Just what I said — when you try to pick the winning stock or when you try to sell out near the top of a bull market or when you try in-and-out trading, you may not realize it but what you’re doing is trying to beat time.

Time is the single most valuable asset you can ever have in your investment arsenal. The problem is that none of us has enough of it.

But let’s indulge in a bit of fantasy. Let’s say you have 200 years to live, 200 years in which to invest. Here’s what you could do. You could buy $20,000 worth of municipal bonds yielding, say, 5.5%.

At 5.5% money doubles in 13 years. So here’s your plan: each time your money doubles you add another $10,000. So at the end of 13 years you have $40,000 plus the $10,000 you’ve added, meaning that at the end of 13 years you have $50,000.

At the end of the next 13 years you have $100,000, you add $10,000, and then you have $110,000. You reinvest it all in 5.5% munis, and at the end of the next 13 years you have $220,000 and you add $10,000, making it $230,000.

At the end of the next 13 years you have $460,000 and you add $10,000, making it $470,000.

In 200 years there are 15.3 doubles. You do the math. By the end of the 200th year you wouldn’t know what to do with all your money. It would be coming out of your ears. And all with minimum risk.

So with enough time, you would be rich — guaranteed. You wouldn’t have to waste any time picking the right stock or the right group or the right mutual fund. You would just compound your way to riches, using your greatest asset: time.

There’s only one problem: in the real world you’re not going to live 200 years. But if you start young enough or if you start your kids early, you or they might have anywhere from 30 to 60 years of time ahead of you.

Because most people have run out of time, they spend endless hours and nervous energy trying to beat time, which, by the way, is really what investing is all about. Pick a stock that advances from 3 to 100, and if you’ve put enough money in that stock you’ll have beaten time. Or join a company that gives you a million options, and your option moves up from 3 to 25 and again you’ve beaten time.

How about this real example of beating time. John Walter joined AT&T, but after nine short months he was out of a job. The complaint was that Walter "lacked intellectual leadership." Walter got $26 million for that little stint in a severance package. That’s what you call really beating time. Of course, a few of us might have another word for it — and for AT&T.

III. Hope

HOPE: It’s human nature to be optimistic. It’s human nature to hope. Furthermore, hope is a component of a healthy state of mind. Hope is the opposite of negativity. Negativity in life can lead to anger, disappointment, and depression. After all, if the world is a negative place, what’s the point of living in it? To be negative is to be anti-life.

Ironically, it doesn’t work that way in the stock market. In the stock market hope is a hindrence, not a help. Once you take a position in a stock, you obviously want that stock to advance. But if the stock you bought is a real value, and you bought it right, you should be content to sit with that stock in the knowledge that over time its value will out without your help, without your hoping.

So in the case of this stock, you have value on your side — and all you need is patience. In the end, your patience will pay off with a higher price for your stock. Hope shouldn’t play any part in this process. You don’t need hope, because you bought the stock when it was a great value, and you bought it at the right time.

Any time you find yourself hoping in this business, the odds are that you are on the wrong path — or that you did something stupid that should be corrected.

Unfortunately, hope is a money-loser in the investment business. This is counterintuitive but true. Hope will keep you riding a stock that is headed down. Hope will keep you from taking a small loss and, instead, allow that small loss to develop into a large loss.

In the stock market hope gets in the way of reality, hope gets in the way of common sense. One of the first rules in investing is "don’t take the big loss." In order to do that, you’ve got to be willing to take a small loss.

If the stock market turns bearish, and you’re staying put with your whole position, and you’re HOPING that what you see is not really happening — then welcome to poverty city. In this situation, all your hoping isn’t going to save you or make you a penny. In fact, in this situation hope is the devil that bids you to sit — while your portfolio of stocks goes down the drain.

In the investing business my suggestion is that you avoid hope. Forget the siren, hope; instead, embrace cold, clear reality.

IV. Acting

ACTING: A few days ago a young subscriber asked me, "Russell, you’ve been dealing with the markets since the late 1940s. This is a strange question, but what is the most important lesson you’ve learned in all that time?"

I didn’t have to think too long. I told him, "The most important lesson I’ve learned comes from something Freud said. He said, ‘Thinking is rehearsing.’ What Freud meant was that thinking is no substitute for acting. In this world, in investing, in any field, there is no substitute for taking action."

This brings up another story which illustrates the same theme. J.P. Morgan was "Master of the Universe" back in the 1920s. One day a young man came up to Morgan and said, "Mr. Morgan, I’m sorry to bother you, but I own some stocks that have been acting poorly, and I’m very anxious about these stocks. In fact worrying about those stocks is starting to ruin my health. Yet, I still like the stocks. It’s a terrible dilemma. What do you think I should do, sir?"

Without hesitating Morgan said, "Young man, sell to the sleeping point."

The lesson is the same. There’s no substitute for acting. In the business of investing or the business of life, thinking is not going to do it for you. Thinking is just rehearsing. You must learn to act.

That’s the single most important lesson that I’ve learned in this business.

Again, and I’ve written about this episode before, a very wealthy and successful investor once said to me, "Russell, do you know why stockbrokers never become rich in this business?"

I confessed that I didn’t know. He explained, "They don’t get rich because they never believe their own bullshit."

Again, it’s the same lesson. If you want to make money (or get rich) in a bull market, thinking and talking isn’t going to do it. You’ve got to buy stocks. Brokers never do that. Do you know one broker who has?

A painful lesson: Back in 1991 when we had a perfect opportunity, we could have ended Saddam Hussein’s career, and we could have done it with ease. But those in command, for political reasons, didn’t want to face the adverse publicity of taking additional US casualties. So we stopped short, and Saddam was home free. We were afraid to act. And now we’re dealing with that failure to act with another and messier war.

In my own life many of the mistakes I’ve made have come because I forgot or ignored the "acting lesson." Thinking is rehearsing, and I was rehearsing instead of acting. Bad marriages, bad investments, lost opportunities, bad business decisions — all made worse because we fail for any number of reasons to act.

The reasons to act are almost always better than the reasons you can think up not to act. If you, my dear readers, can understand the meaning of what is expressed in this one sentence, then believe me, you’ve learned a most valuable lesson. It’s a lesson that has saved my life many times. And I mean literally, it’s a lesson that has saved my life."

Tuesday, May 6, 2008

The Fall of Zoe Cruz



This week's issue of New York has a great profile of the rise and fall of Zoe Cruz written by Joe Hagan. It's a long read, but well worth the trouble. Zoe Cruz spent 25 years at Morgan Stanley, the only place she'd worked since graduating from Harvard Business School in 1982. She rose from currency trader to president of the firm. In the end, she was fired by the person whom she thought was her most staunch ally, CEO John Mack.

The story illustrates just how much of a boys club Wall Street still is. It also shows just how much of a snake pit it is, especially at the highest levels. Most importantly, it shows that Wall Street, like any other place is both about results and politics. You need to be a master of both to get ot the top.

You'll have decide for yourself after reading it if Cruz was hired for a)being a woman, b)losing money, c)being hard to work for, or d)all of the above.

My answer is d.

The Wall Street Journal's take on the Cruz firing.

Friday, May 2, 2008

Investment advice from David Swensen


I've written before about how you can't hope to mimic Swensen's approach. He does offer solid advice to individuals about growing their wealth. There's no secret formula. It boils down to disciplined execution of the tried and true basics: diversification, re-balancing, don't try to time the market.