I liquidated positions on UNG

the big rally is arrived and now i see overbought gas but still can extend in area 18.00 USD UNG where I will liquidated another 1% holding.

http://investingformula.blogspot.com

Mohnish Pabrai, The Dhando Investor: The Low-Risk Value Method to High Returns. Wiley, 2007.

(Apologies to those who have already read or reviewed this book.)

Written by a self-described shameless copycat of Buffett, I found this book a good introduction to qualitative analysis. It is a very easy read and details several examples of undervalued securities. On the analysis side, he discusses such topics as moats and competitive advantage; on the investment side he discusses portfolio allocation (bet big and infrequently) and the discipline of selling. He does use numbers in this book, but the emphasis is on the concepts, not the numbers. 2 minor points: "Arbitrage" in this book seems to refer to a type of competitive advantage. He mentions DCF models to the extent that you can understand his valuation examples, but to actually use DCF or other models you'd probably have to read up on them from another source. All in all, recommended.

This weekend I finished reading "Crash Proof: How to Profit from the Coming Economic Collapse" by Peter D. Schiff.

The main point of the book was to illustrate the dire economic situation in the United States - it is bad, really bad.   An over-levered economy that produces very little, the United States will eventually see a collapse in its dollar, mass- to hyper-inflation, a recession, higher interest rates, and possibly even a nation-wide default on its debt.  Read the book to find out how to protect yourself from this.

Meanwhile, here is a list of potential catalysts Mr. Schiff thinks could start the financial Armageddon:

• The real estate bubble, already losing air, could pop first, sending the economy quickly into recession, which could cause a run on the dollar, force up long-term interest rates, create hyperinflation, and fore defaults, refinancing, or other settlements with respect to personal and national debt.
• It could begin with a run on the dollar that forces up interest rates, that pricks the housing bubble and sets the series of events in motion.
• An expanded war or a confluence of natural disasters could overwhelm the federal budget, starting the process of financial cataclysm.
• Overleveraged consumers might finally run out of credit, stop spending, and, heaven forbid, start saving.  That would push the economy into recession, triggering a run on the dollar and pushing interest rates even higher, thus pricking the housing bubble and leading to unthinkable stagflation.
• Some derivative-led chain of defaults or a major blowup among hedge funds may be the catalyst.
• Foreign central banks could start selling dollars.
• One of the series of record-high current account deficits could cause panic, causing foreign investors to stop buying U.S. Treasury and mortgage-backed securities.
• China might finally pull the plug on its currency peg, allowing the dollar to go down the drain.
• Inflation could get so out of control that it forces the Fed to raise rates high enough to cause a recession and prick the housing bubble.
• A surge in the price of gold could lead to a run on the dollar.
• An oil shock could overwhelm the economy's ability to pay.
• Insolvency at Fannie Mae, Freddie Mac, or the Pension Benefit Guaranty Corporation could create an international crisis of confidence in the country's ability to make good on its financial promises.
• A high enough rise in short-term interest rates could cause some form of default by the U.S. government, raising questions about full faith and credit.

Today I finished reading "Extraordinary Popular Delusions and the Madness of Crowds & Confusion de Confusiones" by Martin S. Fridson.  The book is a combination of two old classics: "Extraordinary Popular Delusions and the Madness of Crowds" by Charles Mackay (1841) and "Confusion de Confusiones" by Joseph de la Vega (1688).

Both books are classics because they illustrate how nothing has really changed in over 200 years despite our large modern-day stock markets and fast computer technology.

In Madness of Crowds, you read about how crazy things got with the Mississippi Scheme, the South-Sea Bubble, and Tulipomania.  At first those stories seemed quite unbelievable; but then I realized they sound eerily similar to the Tech Bubble of the 1990s and the current stock mania going on in China.  All of them, it should be noted, ended in disaster.  So if history is any indicator, China will too.

Confusion de Confusiones, in contrast, described the general stock market in Amsterdam during the 1600s.  Although shares got traded manually, their markets had pretty much all the same modern financial devices: daily quotes, margin, options, long positions, short positions, and even bucket shops.  They also had the concept of bulls, bears, arbitrage, speculators, investors, manipulators, and cartels.  Fortunes were made, dreams were shattered, and guaranteed someone was always cheating.  What's new?

Bernard Baruch, Bill Gross, Ken Fisher, and countless other legendary investors have made references to these two books.  I think it’s safe to say that pretty much every renowned investor - past and present - has read them.  And so should you.  Those who forget history, after all, are doomed to repeat it.

Christopher Browne's "The Little Book of Value Investing" is another one of those books I wish existed when I first started learning about stocks.  With so many gems to be found, I strongly encourage you to read the entire book - at least twice.

Below are some notes I took...









Price and Value

p. xiv

Since the game is about price and value - that is, paying less than what you are getting - it is not surprising that value investors tend toward beaten-down securities whose prices have been falling.  They are the mirror image of momentum investors, who get excited as prices rise.  As Christopher Browne explains, "Buy stocks as you would groceries - when they are on sale."

Insider Buying, Stock Buybacks, Large Investors, and Activist Investors

p. 60

Not only does this conclusion make perfect sense, once again extensive research bears it out.  Stocks bought by insiders outperform the market by at least a two-to-one margin, and this applies around the world (unfortunately, only a few countries outside the United States require company insiders to report their stock purchases and sales).  Insider buying of stocks selling at low multiples of earnings or below asset value is even better.  Consistent purchases by insiders is an even better indication - with below-book-value stocks.  And, you guessed it, stocks with high valuations and insider selling tend to underperform by a wide margin.

There is another way that corporate insiders can send a signal that better times may be ahead.  When the board of directors of a company decides to buy back its stock in the open market, it may well be a sign that they believe the shares are undervalued and do not adequately reflect the future prospects for growth.  They feel that the best return on corporate cash is by buying up their own shares in the marketplace.  If they are correct and are buying the shares at a discount to what they are worth, then per share value for other shareholders increases.  Any share buybacks done below book value will increase the per share book value of the remaining shares.  With so many potential benefits from a share buyback, it makes sense to look closely at companies announcing stock buybacks that appear to be cheap relative to earnings or assets.

Corporate insiders, whether spending their own or the corporation's money, usually make a significant statement when they buy shares in the companies they run.  Insiders are usually investors, not traders.  They tend to buy for the long term, not the short term.  Many research studies verify that insider buying and share buybacks tend to occur in stocks with a low price compared with earnings, a low price-to-book value, and a price that has fallen quite a bit.  In other words, insider purchases are often a signal to the kinds of companies we seek for the shelves of our value investing store because they often have the other traits that make them strong candidates.

There is another type of insider that we should look for.  Investors who accumulate 5 percent or more of a company's shares must file with the Securities and Exchange Commission and make public information about their holdings.  They must also state whether they bought the shares purely as an investment or if they intend to lobby for changes or seek control of the company.  Many of these large investors have successful track records, and it's worth noticing if they have a large position in a stock that appears undervalued.  Knowing that very successful investors are interested is a reason for us also to take a look.

The activist investors who are looking to influence or change management are also worth tracking.  Shares of Six Flags Amusement Parks posted large gains after the owner of the Washington Redskins, Daniel Snyder, expressed an interest in the theme park operator.  Time Warner, Wendy's, and HJ Heinz have all come under pressure from outside investors to improve results and increase returns for shareholders.  Not all the activist investors are successful, but their presence offers us one more screen for value opportunities.  They act as another influence on the management of an undervalued stock to increase value or risk losing their jobs.  If the stock is already selling at a low price to earnings or assets, then the precence of a successful activist may give us a strong reason to take a look.

Sometimes the only thing standing in the way of a cheap stock and a profit for an investor is a catalyst that can make the market take notice.  Both insider buying and activist investors can provide the push that makes the market realize a stock is a good value.


p. 112

Does the company plan to buy back stock?  I look to see if the company announced a buyback and check the quarter-over-quarter shares outstanding to see if it is actually buying stock.  Not all announcements of intention to buy back stock are implemented.  Further, many buybacks are done just to offset stock and option grants.  I want to see if there will be a real reduction of shares outstanding.

What are the insiders doing?  Are insiders (company management) buying?  Are they selling?  I have talked about the positive impact of insider buying but selling is not always a negative.  Sometimes people sell for personal reasons: They may need to pay for a one-time expense such as a new home, college education, a wedding.  They may be diversifying their estate, or paying a divorce settlement.  Look for patterns.  An occasional sale by an insider may mean nothing; consistent sales by many officers and directors are a clear indication that management thinks the marketplace has put too high a value on the company, and they are getting out while the getting is good.

Too Much Debt

p. 79

The first and most toxic reason that stocks become cheap is too much debt.  In good times, companies with decent cash flow may borrow large amounts of money on the theory that if they continue to grow, they can meet the interest and principal payments in the future.  Unfortunately, the future is knowable, and companies with too much debt have a much smaller chance of surviving an economic downturn.  In recent years, companies in telecommunication and cable assumed that the good times would last forever.  However, as technology changed and prices dropped due to increased competition, it became more and more difficult for them to meet those mounting interest bills.  In one of Ben Graham's last interviews, he explained that he used a simple yardstick to measure health.  A company should own twice as much as it owes.  This philosophy has helped me avoid companies that owe too much to survive.

A value investor's regular reading should always include David Dreman articles.  Two years ago I read his book "Contrarian Investment Strategies: The Next Generation" and I remember being so impressed.  Had I read his book earlier, it would have saved me a lot of experimenting (with real money).

Much of the knowledge on value investing sites today, including my own blog, can be found in Dreman's book.  For not only does Dreman expound 30 years of Wall Street experience, he has engaged in a great deal of independent research.  Everything he writes about is backed up with exhaustive statistical data.  In addition, you will discover insights on psychology nobody else really talks about.  And you will learn - in depth - about four of the most important investing tools:  the Price/Earnings, Price/Book, Price/Cash Flow, and Price/Dividend ratios.

Although those ratios seem commonplace nowadays, every investor needs to understand how they got here.  What their history is.  What each ratio truly means.  And why they will continue to work in all market environments.  Without understanding these basics, and David Dreman's pioneering research, I find it hard to imagine anyone beating the market over the long run.

by Hillary Rosenberg

Hardcover: 416 pages

Publisher: John Wiley & Sons; Rev Ed edition (February 1, 2001)

Language: English

ISBN-10: 0471361895

ISBN-13: 978-0471361893

As the railroad bankruptcies had,the REIT disasters drew new investors into the vulture community.Among them was Samuel Zell-a man who would later become known as ,,the grave dancer,,. Late in the day ,Carl Icahn,then arbitrageur and soon to become corporate raider turned up in this market-page 12.........

Donald Trump can thank vulture investors for saving his casinos.......Two vulture investors came to the casinos rescue-though hardly driven by altruistic notions.Carl Icahn became a heavy investor in Taj Mahal bonds and in a critical moment came to Trumps aid.....-page 269....If Trump missed an October 15 Taj bond payment,as most of the bondholders believed he would,he would have a thirty-day grace period he could pay up before bondholders could file to force Taj into bankruptcy.......-page 271 .......

For a multimillionaire,Martin Whitman is suprisingly spartan.In 1992,he was driving a seven-year old cherry red Honda Prelude (licence plate Chaptr11) and lived in a Central Park West apartment decorated  as his partner Kirk Rhein once described it , ,,like the apartment of an untenered professor. ,, The briefcase he carried,in the words of his partner Jim Heffernan,looked like it was ,,covered with some kind of carpet.,, In recent years hes taken to wearing sneakers to work,even with a suit,although around the office he will often wander around in his socks.At one meeting with representatives of the Columbian University endowment,Whitman started out by removing his shoes,revealing huge holes in his socks. ,, And Im not talking just a little hole he overlooked when he was putting them on in the morning, ,, Heffernan said. There was more hole than sock! ,, -page 42 :-) :-)


This book has incredible amount of detailed examples of Chapter 11 or other bankruptcy investing . The rationale behind them is easily understood .

This book is one of my favorite. Enjoy the book and happy investing !

Hardcover: 448 pages

Publisher: J. Ross Publishing (November 2004)

Language: English

ISBN-10: 1932159185

ISBN-13: 978-1932159189

As you can see five star rating on Amazon has its reason. In my opinion this book is great source for all Vulture Investors !!!!!

Instead of the usual book review, I will apply what I learned from reading Joel Greenblatt’s You Can Be A Stock Market Genius to everybody’s new favorite IPO: Tim Hortons (THI).

After the IPO was announced in July 2005, like most everyone on the planet, all I could think about was whether I should buy Tim Hortons stock.  Not once, however, did I seriously consider the value unlocked in Wendy’s (WEN) stock.  Thanks to Greenblatt, I will know next time.




Wendy’s International is primarily engaged in the business of operating, developing, and franchising fast-food restaurants.  These include Wendy’s restaurants, Tim Hortons, Baja Fresh, and Café Express.

The company's July 2005 8-K filing announced many significant items:

• Plans to sell 15%-18% of Tim Hortons in Initial Public Offering
• Board authorizes an additional $1 billion for share repurchase
• The Company plans to use the cash [from the IPO] primarily to repurchase common shares of its stock.
• At year-end 2004, Wendy’s owned 217 U.S. sites where it leases real estate to franchises.  The company intends to pursue the sale of this real estate to franchisees or third party investors, where feasible.

Looking at the 2004 proxy, operating earnings for Tim Horton’s was $247 million and Wendy’s $272 million.  Operating earnings, of course, is equal to income, before income taxes and interest.  If we subtract taxes and interest, assuming a total rate of 50%, Tim’s net income for 2004 was $124 million and Wendy’s $136 million.  What’s the correct P/E multiple?  Well Starbucks (SBUX) has a P/E of 55 and McDonalds (MCD) 17.  Now anybody who’s ever been at Tim Hortons in the morning will know from the lineups out the door that business is great – but it’s no Starbucks.  Neither is Wendy’s as popular as McDonalds.  So let’s be conservative and use 15 for Tim’s and 10 for Wendy’s.

	Earnings	P/E	Estimated Capitalization
Tim Hortons	$124 million	15	$1,860 million
Wendy’s	$136 million	10	$1,360 million
			$3,220 million

In July 2005, Wendy’s stock was selling at $45.  With 114 million shares outstanding, that’s a market capitalization of $5,130 million.  That leaves just $1,910 million ($5,130 - $3,220) for the Baja Fresh chain, Café Express chain, the goodwill and brand names, and all the real estate.  Did I say real estate?  Up above one of the items announced was that Wendy’s will attempt to sell 217 properties.  To me, that says they have real estate and want to make the public aware that they are willing to trade for cash.  Looking on the balance sheet, Wendy’s net fixed assets have been depreciated to $2,349 million.  Subtract $600 million in long-term debt and you have $1,749 million.

Some readers might be wondering if the real estate is really worth that much?  I found two important items from the properties section of the 10-K:

The restaurants are built to Company specifications as to exterior style and interior decor. The majority are free-standing, one-story brick buildings, substantially uniform in design and appearance, constructed on sites of approximately 40,000 square feet, with parking for approximately 45 cars. Some restaurants, located in downtown areas or shopping malls, are of a store-front type and vary according to available locations but generally retain the standard sign and interior decor.

At January 2, 2005, the Company and its franchisees operated 6,671 Wendy’s restaurants. Of the 1,487 company operated Wendy’s restaurants, the Company owned the land and building for 686 restaurants, owned the building and held long-term land leases for 542 restaurants and held leases covering land and building for 259 restaurants.

Now I’m no real estate expert, nor have I consulted one, but I’m going to assume the total land and building values for each of those 1,200 sites are worth at least $1.7 billion or the depreciated value on paper.  (Actually I’m lying.  I think they are worth a whole lot more!)

Tim Hortons earnings:         $1,860 million
Wendy’s earnings:             $1,360 million
Real Estate (minus debt):     $1,749 million
TOTAL:                        $4,969 million  

WEN July 2005 Market Cap:     $5,130 million

$5,130 - $4,969 =               $161 million 

Just $161 million left for the two other chains, the brand names, and the franchising system?  Hmmm….  Are you starting to get the picture?  The sum of the parts are worth much more than the stock market value.  After all, I was being overly conservative with the P/E multiples and real estate values. (Try recalculating with less conservative numbers.)

And if you believed any of the above estimates were too conservative, you would have known to buy Wendy’s stock.  But wait, there’s more!  The announcements also said that they would use the cash from selling Tim Hortons to repurchase $1 billion in shares.  If you believed that, $5 billion minus $1 billion leaves the market cap at $4 billion.  Either way you sliced it, Wendy’s looked cheap in July 2005.

On Friday Wendy’s stock closed at $62.93.  That’s a 40% increase from $45 on the July 2005 announcement date.  Even if you had taken your time to do research, you could still have bought the stock for the same price two months later in September 2005.

What about now?  There is no doubt the easy money has been made already.  But Tim Hortons closed Friday up 20% at a P/E of 27.60, which is significantly higher than our conservative estimates above.  Don’t forget Wendy’s still owns 80% of Tim Hortons.  


I’ll let you figure out the rest.

Admittedly, I was skeptical at first.  When you hear about a simple, low risk "Magic Formula", a "Little Book" that claims to easily beat the market, a magicformulainvesting.com website, and an author that can boast 40% annualized returns, the it’s-too-good-to-be-true bells start going off in your head.

But to my surprise, Joel Greenblatt’s The Little Book That Beats the Market did not disappoint.  It was so good, not to mention funny, that I finished it the first day!  I only wish more investing books were as short, concise, and entertaining.  Joel is an excellent writer, who communicates his ideas very clearly.  Crystal clear in fact.  He has the ability to explain the complicated in simple, child-like terms.  For example, I finally learned something no other book has ever been able to teach me:  How to invest Buffett-style.

The reason I don’t invest like Warren Buffett, despite having read everything he’s ever written and most things written about him, is because I didn’t understand the numbers.  Buffett never gives any precise formulas.  He loosely talks about good businesses with moats, reasonable prices, high return on capital employed, lifetime cashflows, good management, and other qualitative (hard to measure) factors.  But as soon as you introduce "quality" into your stock picks, you are investing more-or-less based on your own judgment.  And my judgment stinks.  I know my limits and I know I’m not as smart as Buffett.  I can’t make those qualitative calls and be able to sleep at night when a stock drops 25%.  For that I require solid calculations.

Now the Little Book, on the other hand, is something I can use.  Greenblatt explains exactly how to buy good companies at bargain prices, which is what Buffett does.  Greenblatt explains the Magic Formula, why it works, the historical evidence, the risks, the psychology, and, most importantly, the numbers.  At the end of the book, and in the appendix, he even gives step-by-step instructions how to do the calculations.  Few investing books provide such clear, practical, instructions.  (The only other ones I can think of are The Intelligent Investor and John Neff on Investing.)

A word of caution, however.  You will still need to have a strong understanding of Ben Graham’s value investing principles in order to fully appreciate the Magic Formula.  The Little Book is not a substitute for Graham, it is an extension.  It is the next level.  The formula is basically two variables: Return on Capital and Earnings Yield.   To the untrained investor, this might seem too easy.  But I assure you there is a lot packed in there.