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Five for the Weekend #51

Busy, busy, buy with blogging almost non-existent. But I am able to lift my head above water long enough (barely) to offer up five items you might wish to checkout over the next couple of days.

• FT.com has a good interview with John Malone of Liberty Media. Asked if he's optimistic about the economy, Malone says: "No. I think this is going to be a long slog, there's just way too much debt in the west." As you know, I hold the three Liberty Media tracking stocks and count them as a single position in the portfolio.

• Portfolio holding Fairfax Financial (FFH) reported great results this week. From The Globe and Mail: "While not nearly the doomsayer he was before the financial crisis, Mr. Watsa is not about to win any awards for optimism these days. 'Our take is that you have to watch it very carefully because the worry is that in six months, a year, the economy might not recover,' he said." I've sold enough of FFH over time to get my original investment out. It's a free ride for me.

• Peter Brimelow writes on MarketWatch about two newsletters with good long-time track records that are suddenly gone. One because the editor is in poor health, and the other because the editor died at a young age. Sad news on both accounts, and a reminder of putting investing in its proper perspective.

• Even more sad news is that Chris Browne, a great value investor, is stepping down from day-to-day activities at venerable value shop Tweedy Browne because of recent health issues. He apparently has gotten over the hump with regards to the health stuff. We wish him and family the best.

• Amity Shlaes penned a column for Bloomberg this week that gets the hearts of us fringe-cooks who endorse a true you-know-what: "Others advocate a new gold standard, which would make the movement of money more automatic, even to the point of “free banking.” Such a system would have no central government bank. The market, not Washington, would determine the survival or death of financial institutions. It’s not a new idea: George Selgin of West Virginia University wrote a book about how British manufacturers in the early 19th century successfully challenged the Crown for control of their country’s money."

Have a great weekend.

Microsoft, Cash Cushion

As I post this on Tuesday night (US east coast time), news reports are that Microsoft (MSFT) is on the verge of a search deal with Yahoo. Previously, though, the big news with MSFT was it reporting disappointing earnings for the last quarter. That hasn't hurt me so far, because I bought Microsoft below $19 and it remains in the low $20s.

Probably the best thing said about Microsoft (or most useful, IMHO) came in Alan Abelson's weekly Barron's column (scroll down):

Last week, as you're no doubt aware, Microsoft reported sharply lower quarterly earnings (they were off 29%) and the first full year of lower sales (by 3%) since it went public back in 1986. Besides the recession, results were hurt by a variety of things, a bum market for computers and the resultant shrinkage in demand for software not least among them.

We checked in with Roundtable worthy Fred Hickey, who has been favorably disposed toward Microsoft (even while wary of techs as a group). Fred still feels friendly toward the stock, because he thinks some of the new products slated to hit the market this year, particularly Windows 7, shape up as pretty hot stuff. But, he says, patience is critical because the next quarter or two could prove bumpy going.

What we especially like about Microsoft is that it's a mighty cash generator and, slump or no slump, its trove of the lovely green stuff over the past 12 months ended June 30 grew to a formidable $31.4 billion, from $23.7 billion. Nice comfortable cushion, come what may.

I'm not gonna say Microsoft is a screaming buy, because I doubt that it is. But it does demonstrate the fortunes of getting into a stock at a good price. And it having the finances to weather storms.

Five for the Weekend #50 -- NOT!

No installment of Five for the Weekend this week. I'm just too swamped with non-blogging duties.

In fact, you may have noticed that I haven't posted anything for a week -- probably the first time that's happened since starting this blog in 2005. Things have been hectic and busy in my real job. I'm self-employed, and, as much as I love this site, it doesn't pay the bills and put food on the table. So the money-generating activities take first priority.

In the meantime, you might check out Eric King's King World News site. This weekend features part II of an interview with Jean-Marie Eveillard -- who is truly one of the great all-time value managers. And interesting because he likes gold bullion and mining stocks to greater and lesser degrees over time. In part I of his talk with King, Eveillard said he's currently holding 10% of his portfolio in gold.

Hopefully, normal blogging will resume next week. Have a great weekend until then.

Five for the Weekend #49

Let's get to it -- five items for your review between now and the start of next week.

• The big geopolitical news is the terrorist bombings in Jakarta. Kerry Collison is an Australian novelist and analyst who lived in Indonesia for a long time. His blog is a good one-stop source for news on this event, as well as broader Asian news.

• Anthony Bolton writes in the Financial Times about appreciating the role short sellers play: "It’s time short sellers were viewed in the board room and by regulators not as the devil incarnate but as a potential mine of information that could help forestall a repeat of last year’s near-death experience." I've never shorted anything in my life -- and have gone up against shorts in the past with stocks like Fairfax Financial -- but I'd never ban short selling for any reason.

• There are no shortage of reinsurance companies around, apparently. And especially in Bermuda. This Bloomberg report expects consolidation: Montpelier, Aspen and Endurance are among reinsurers in Bermuda that have a market value of $1 billion to $2 billion, according to Bloomberg data. More deals may emerge within five months, Paisan said. "Capital is king, more so today than it ever has been," he said. "There seems to be that imaginary threshold of $3 billion. You need more than that to be a viable longer-term player in the industry."

• Real estate writer John T. Reed pens occasional columns for his website free of charge. Interesting guy (which is to say I frequently, but nowhere near always, agree with him). Here's a piece where he considers the massive US debt burden.

• Personal finance columnist Jane Bryant Quinn writes on Bloomberg about the various options the average investor has for adding a "commodity hedge" to his or her portfolio. I'm not big on personal finance columnists in general, but Quinn is the real deal who has proven herself over time.

And with that -- have a great weekend.

In Praise of Active Portfolio Management

As you know if you're a regular reader of Controlled Greed, I'm managing my own portfolio. The stocks I report buying on this blog are spread across my regular brokerage account and two retirement accounts. It's the majority of my liquid net worth and not some theoretical model portfolio, or some side money that doesn't really impact my finances.

I do this because I'm confident I can match or beat the S&P 500 over the long term. What is less certain, much less, is if I can perform at the benchmark of inflation plus 10%.

Why do it then? Because I find value investing intellectually challenging, rewarding in a variety of ways, and, well, a lot of fun. (I think having fun is incredibly important, BTW.)

Tom Stevenson writes in the Daily Telegraph and argues for active fund management:

So why should things be different now for active fund managers and why should investors think twice before running to the apparent safety of a passive or exchange traded fund (ETF)?

One reason is that active investors tend to do well when there is a big difference between the returns of the best-performing and the worst-performing stocks. Over the past 20 years there have been two periods when there has been a big gap between the market's winners and its losers – during the 1990 recession and again during the latter stages of the tech stock boom. In both cases, the best fund managers shot the lights out. The good news is that the difference is as high as it has been for 10 years and so, therefore, are the rewards for getting it right.

If there really is such as thing as stock-picking skill, then it's likely to be most obvious when the benefits of picking winners are greatest. During the period between 2003 and 2007, although markets rose steadily, there wasn't so much difference between the best- and worst-performing stocks and the difference between the tracker fund and the star stock-picker was far less clear.

Read the whole thing.

“In my lifetime, I haven’t seen opportunity like now”

That's a quote from Marty Whitman in The New York Times. More:

Like many value managers, Mr. Whitman’s fund has benefited from a snapback rally in financial stocks — his financial investments are located in Hong Kong. These stocks, which make up 39 percent of the fund’s $4.5 billion in assets, were down 60 percent last year even though the companies remained profitable. In the first half of this year, the stocks were up from 14 percent to 46 percent, yet they still sell at discounts to net asset value of 25 to 30 percent, according to Mr. Whitman.

The fund also has benefited from performing loans that Mr. Whitman bought in the first quarter of 2009, when they had yields to maturity of 25 percent or more. Since then, yields on his loan investments have come down to around 20 percent, but that’s still attractive, he said.

Mr. Whitman also sees opportunities in energy stocks.

In the third quarter of last year, Third Avenue Value increased its investment in EnCana, a Canadian oil and natural gas exploration company, and Nabors Industries, a gas and oil drilling company based in Bermuda, on whose board Mr. Whitman has served since 1991. Both stocks currently sell for under 10 times earnings.

And more from Whitman at the article's end:

Mr. Whitman, along with other investment managers, has tweaked the stock-picking process in response to last year’s events — he now looks for companies that do not need to turn to the capital markets repeatedly for cash. But he remains fatalistic about markets like that of 2008. “I don’t think anyone can predict when a catastrophic market will hit,” he said. “No question if 2008 recurs, we’ll still look bad."

Portfolio Performance 6/30/09

Through the first half of 2009, the portfolio gained +3.2%. This compares with the S&P 500 being up +1.8% over the same time. It is nice beating the S&P 500, but these gains are nothing to write home about because they lag a benchmark I like: the rate of inflation plus 10%.

I also think these gains could be erased going forward, since my holdings have certainly benefited from the bull rally in what remains a bear market. I could easily see a down year when all is said and done.

Here's where the portfolio stand as of June 30:

DirecTV Group              10.0%
King Pharmaceuticals      6.8%
Microsoft                        6.2%
Cheung Kong ADR           5.9%
Fairfax Financial            5.9%
EGI Financial                  5.5%
NipponKoa Insurance       5.5%
Foot Locker                    5.4%
Superior Industries          5.3%
Liberty Media
    (3 tracking stocks)      5.1%
Capital Southwest           4.7%
BCE                                4.4%
3i Group                         1.1%
Media General              Under 1%

Cash approximately 27.7%

Some notes. These figures are not audited, just me and my calculator. So if I'm off a bit, sorry.

The portfolio stretches over three accounts: my regular brokerage account and two retirement accounts. Most of my liquid net worth is in the positions above. The "Controlled Greed portfolio" isn't some little portfolio on the side. It is real money. Unless I lose it all, that is. ;-)

You'll notice DirecTV Group is by far my largest holding. It is even larger when we consider that DTV is also a major part of one of Liberty Media's tracking stocks. I may well be making a mistake by letting this position remain as is without scaling back and taking some profits. We'll see.

Fairfax Financial is a nice-sized holding. Remember that I've sold enough of this stock a while back to get my original capital out of it. The holding is a free ride.

The portfolio holds enough cash to establish 5 new positions at some point. I don't know when that will be.

I'm content with all the holdings, except for Media General and 3i Group. MEG has been a disastrous investment and represents money lost. 3i Group may fall into that category as well. Yet we'll have to see what the private equity firm does when the market comes back to make that call.

Let's see what the second half of 2009 has in store.

Five for the Weekend #48

Been more of a hectic week than busy one for yours truly. No big surprise there -- I've found over the years that the weeks before and after a holiday can be that way. Nothing can be done about that, we just work through it and work through it until normalcy  returns. Sort of like working through a bear market. In the meantime, here are five items you might wish to check out.

• Big news is that Warren Buffett thinks we might need a second stimulus. I bow to no person in my admiration for Buffett. His "Superinvestors of Graham and Doddsville" hit me like a load of bricks when I read it in 1986. I've benefited from his wisdom, think he's the greatest investor of the post-WWII era, and believe he's a great CEO. Yet, as you've read me say before, I would much rather be ruled by the late Howard Buffett than his sainted son.

• Regular Controlled Greed readers know I've long admired the investment approach taken by Jonathan of the Cheap Stocks blog. He digs for companies with hidden assets -- usually real estate but sometimes other types of "stuff." This week he announced buying a net-net, one that's a play on its stash of diamonds. You know, the things many say are a girl's best friend.

• Paul Ingrassia has written some great columns about Detroit in general and GM in particular in The Wall Street Journal. Here's his latest: "I'd like to be optimistic that General Motors will survive and thrive -- not with anything approaching its dominance of yore, but with a new effectiveness that the company has lacked for about 30 years. In truth, whether GM will last is hard to say. We're in uncharted territory. But its survival is up to the company and all its employees, including UAW members. Let's hope they make the most of their second chance." NOTE: This is on RealClearMarkets.com so it should be available even if you don't subscribe to WSJ.com.

• John Malone said this week that media companies must find a way to charge for their content on the internet. He made news by saying it may be too late for some outfits. Regular readers know I hold the three Liberty Media tracking stocks, as well as DirecTV Group (DTV) that Malone effectively controls. He's an interesting guy.

• This is an excellent -- and very long, so you might want to bookmark it -- article by Bloomberg about the death of Thailand's King Bhumibol and potential ramifications of his passing. It even has some interesting bits about Marc Faber, who lives in Thailand: "Even at 8 p.m. on a Saturday, the bar girls far outnumber customers at Bar Linda, Faber’s favored watering hole. 'A few months ago, this place would have been packed by now,' he says, gesturing down the row of near-empty bars." Great read.

Have a great weekend!

3i Group Halves Debt, Remains Cautious

Private equity outfit 3i Group PLC (III/LN) reports making progress:

"Our focus in the first quarter was on strengthening the balance sheet," Chief Executive Michael Queen said in a statement.

"A substantial increase in liquidity and the reduction in net debt provide further resilience in what remains a fragile environment."

Private equity firms have seen the value of their investments slump as falling revenues and shaky outlooks hit company valuations. And new deals have come to a virtual halt as debt to fund them has dried up.

3i has shrunk to the point of being one of my portfolio's smaller positions. But I'm not quite ready to place it in the permanent loss of capital category like I have Media General (MEG). The company could make a nice comeback when the economy turns around.

That said, I didn't take advantage of 3i's recent rights offering, which was dilutive to existing shareholders.

Correction to previous post

I meant to say I am NOT itching to buy more Asian stocks. Nothing against them, but I think several North American stocks could become bargains and managements tend to be more shareholder friendly in these parts.

I need an editor at times. ;-)