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      « July 2005 | Main | September 2005 »

      August 31, 2005

      If Merck Is A "Supercharged Money Fund" -- What's GM?

      In this week's Barron's (subscription required), Kahn Brothers' president Thomas Graham Kahn is bullish on Merck. He views the company as a "supercharged money fund" with a high dividend yield of 5.5%.

      Let me quickly say a couple of things:

      First, I am NOT being critical of Kahn and his bullishness on Merck -- his family runs one of the truly great value money management firms. (A lot of us talk about Benjamin Graham, the elder Kahn actually knew the man.)

      And second, I wrote here last Friday that I may be making a mistake by not buying Merck. Or Pfizer. I may still purchase them at some point, but that's not the point of this posting.

      I'm just wondering: If Merck is a "supercharged money fund" with a 5.5% dividend yield, what does that make General Motors -- which has a dividend yield of 5.88% (according to

      Like I said, just wondering.

      August 30, 2005

      Dumb And Dumber

      For a long term investor, I don't know which would be more foolish -- selling a stock in the expectation of it being hurt by Hurricane Katrina or buying a stock thinking it will benefit from the natural disaster.

      For one thing, these events impact local economies. They can be tragic for those in the communities hit, but they rarely hurt the national economy in any significant way. Hugo Dixon, editor of the BreakingViews column in The Wall Street Journal Europe (subscription required), points out this morning:

      "Even the 1992 Hurricane Andrew, which caused the biggest insurance losses in the last 35 years, according to Swiss Re, took only 0.2% off U.S. gross domestic product. That doesn't make a big macroeconomic difference."

      That means it's not going to make a big difference in the balance sheets of companies such as Home Depot. The oil service companies have already enjoyed huge share price increases over the past couple of years. How much more they can go up working on damaged oil rigs in the Gulf of Mexico seems doubtful.

      To be sure, many local companies can be hurt. Or benefit greatly from increased business during the eventual reconstruction. But how many of these local firms are publicly traded? Very few, if any.

      Oh, and as an investor in Fairfax Financial Holdings (FFH/NYSE), the property and casualty insurance company with significant reinsurance operations, I guess I should comment on the potential impact Katrina may have on the insurance industry.

      My hunch is: not much over the long haul. Selling insurance stocks proved to be the wrong move for investors after September 11, 2001. It probably will be this time, too. The industry is well capitalized overall.

      August 26, 2005

      Random Thoughts On Friday Afternoon

      Some odds 'n ends for our consideration:

      General Motors
      There's been so much noise concerning GM lately you'd think none of their vehicles had mufflers. The recent credit downgrade was a non-event. The company extending its "employee discounts for everyone" campaign can be read a couple of ways. Either the company hasn't been as successful in clearing out old inventory as hoped, or it's willing to do whatever it takes to keep market share in North America from eroding. Maybe both.

      I think concessions from the UAW over health care benefits are definitely in the cards. How much fight the union puts up is the only question.

      Bottom line? GM was recommended on this site at $26.75 per share on April 29 (click on the company name in the "Current Holdings" menu at the right to read the original rationale). It's up nicely since then -- and don't forget that fat dividend we're collecting while all this stuff gets sorted out.

      Liberty Media
      You may have read that Liberty bought a 25.4% stake in Expedia, the online travel agency recently spun off from Barry Diller's IAC/InterActiveCorp. The interesting thing is that because of Liberty owning both the class A and B shares of Expedia, John Malone now controls 54.7% of the voting power of the company.

      I'm not certain how this plays in Malone's plans to take Liberty from being a holding company to being an operating one. But I will repeat what I said about Liberty being a bargain. If someone had their portfolio in cash and asked what I'd do in their shoes, the first thing I'd do is put 4% to 5% of the money in L.

      Discovery Holding Company

      Well, darn. Discovery has been trading above $15 a share for a while now. As readers of this site know, it was spun off from Liberty Media at $15. I was hoping it would sink in price -- perhaps to $11.25 or thereabouts. That would have been comparable to the drop Liberty Global suffered after its spin off last year.

      Discovery actually broke below $14 for a bit, then went back up. John Malone bought roughly $15 million worth of Discovery (if memory serves) when it was trading between $14 and $15.

      Maybe I missed something here. Certainly Malone knows more about the company and its prospects than yours truly. I'll be keeping an eye on this stock, that's for sure.

      Merck And Company
      The drugs are something I can't quite get a feel for. My "hunch" is that buyers of Merck and Pfizer will eventually be rewarded over the years to come. Especially if the dividends of these companies stay intact. And yet. And yet. I haven't pulled the trigger.

      The fact is, I feel much better putting my money in a stock like USA Mobility, bought earlier this week. And I think a lot of professional money managers would, too. But USA Mobility is a $700 million company -- and I bet that's too small a market cap for a lot of fund managers.

      And that's another subject.

      What's Appropriate Portfolio Diversification?

      A reader emailed wondering why I consider a fully invested portfolio to be one with 20-25 stocks. It's a good question.

      My answer comes in 2 parts.

      First, the 20-25 range is a ballpark figure. I could see myself holding 30 stocks, but not much more than that. I just don't think I could effectively keep up with more than 30 different companies.

      Second, the 20-25 range fits my personal comfort level. I just wouldn't feel good having my entire portfolio spread over, say, a dozen stocks. Just as some others couldn't feel they were properly diversified holding 25.

      It's interesting to note that various top-notch value managers have different approaches to portfolio diversification.

      Seth Klarman of the Baupost Group wrote in his excellent 1991 book Margin of Safety (sadly now out-of-print) that a properly diversified portfolio could hold as few as 10 or 15 stocks. Mason Hawkins and Staley Cates of the Longleaf Partners Fund say they're fully invested with 20. And the guys at Tweedy Browne typically have as many as 100 positions in a portfolio.

      Put simply, there's no magic number.

      You just have to develop a feel of what's right for you.

      August 25, 2005

      Measuring Your Portfolio Results

      I read this Forbes' column by David Dreman on MaoXian's site the other day (who I think got it from VInvesting) and it's good stuff. Dreman talks about indexes such as the S&P 500 being "misleading" benchmarks for people to use in measuring investing performance.

      Dreman makes an excellent case, though I'm surprised he didn't mention using a fixed-result benchmark such as that of Southeastern Asset Management (the folks running the Longleaf funds). Their benchmark is the rate of inflation plus 10%.

      Back in the go-go days of the tech bubble, such a result would be held up as laughable on CNBC. But the more I think about it, the more appealing it is.

      For one thing, reality and time have taught us that achieving a portfolio return of inflation plus 10% consistently over the LONG TERM isn't easy.

      And here's something else to consider:

      Let's say the S&P 500 (or whatever index we wanted to use) lost 9% one year and our portfolio lost 8%. Well, you and I "beat" the S&P 500 -- but we'd hardly be delighted.

      9 And Counting

      With the purchase of USA Mobility (USMO/NASDAQ), the CG portfolio has 9 positions. I've posted several times previously that I believe a fully invested portfolio would have 20-25 positions.

      We're not there yet. But we're making progress, slowly.

      There hasn't been an abundance of things to buy in this market. Proof of that fact is venerable value managers such as Southeastern Asset Management and Tweedy Browne closing their mutual funds to new investors. They can't find enough to do with their cash. And I can't, either (though my cash amount is certainly much, much less!).

      Still, when CG was launched at the end of April, I was hoping to have more individual holdings by now. But the past few months have been weird. Stocks tend not to be absurdly cheap or expensive. It seems most are trading at fair value.

      I'm cautiously optimistic about our 9 holdings. It's still way too soon to know how profitable they will turn out to be. Or how many could even turn out to be mistakes. Yet I'm heartened that (so far) we haven't had any "blow ups" in the portfolio.

      I'm checking out a couple more things to buy. Thanks for staying tuned.

      August 24, 2005

      Buying USA Mobility

      I purchased stock in USA Mobility (USMO/NASDAQ) yesterday. The shares closed at $26.34.

      USA Mobility is a paging company formed in the merger of Arch Wireless and Metrocall in 2004. The stock hit a high of $39.75 last March, but sank as low as 24.02 in May. It has a market cap of $726 million and there are less than 30 million shares outstanding. It trades at 1.24 times book and at 1.16 times sales.

      The company is not popular on Wall Street because the use of pagers has plunged due to the increasing use of cell phones. Still, there is a market for pagers because they are superior to cell phones in an important way -- they penetrate deep into buildings. They're also cheaper. The main users of pagers today are medical professionals, fire departments, the military and U.S. government agencies.

      In Barron's midyear roundtable, Meryl Witmer of Eagle Capital pointed out a growth potential for the underused paging network. For example, a pager-type device could be installed on electric meters and send monthly messages to a utility company, eliminating the need for highly-paid union workers going from house to house in neighborhoods to read meters. She notes the use of such devices is just beginning.

      USA Mobility's management is committed to returning cash to shareholders. The company paid off the remaining portion of its $140 million bank debt on Monday -- only 9 months after being created by the merger. In early August, the company announced it will pay a special one-time dividend near the end of the year. That's all it has said officially, but I am betting the company will pay out all (or nearly all) of its free cash for the next several years.

      What could go wrong with this pick? Basically, that pager use declines faster than anticipated and revenue declines are so massive the balance sheet gets trashed. I don't think that will happen. When the company announced results for the second quarter of 2005, it reported significant improvement in subscriber losses and revenue declines. It had an impressive $5.15 in free cash flow per share as of 6/30/05.

      But that's just one quarter. I could still always be wrong over the course of time. So, as always, do your own due diligence before buying.

      PLEASE NOTE: Remember that USA Mobility has less than 30 million shares outstanding. So be sure to use a price limit if you place an order.

      August 23, 2005

      3i Group Aims To More Than Double Asian Investments In 2005

      3i Group PLC is looking to more than double its investments in Asia this year, with focus on a couple of energy plays in the region. This from an interview Reuters (registration may be required) conducted with 3i's Mark Thornton in Singapore:

      "'In Southeast Asia, we're seeing one or two very interesting opportunities in the energy sector',"Mark Thornton, 3i's managing director and Asia co-head told Reuters in an interview.

      "'Southeast Asia has a lot of natural resources. In the current climate, we are seeing increasing demand for energy and oil prices remain attractive'," he said, adding that there was less competition in Southeast Asia than in North Asia, where a large number of funds are scouring for deals."

      On a couple of side notes, 3i has been fulfilling its promise of buying back shares and the company recently announced its first deal in India. The company recently opened offices in India and mainland China (its had an office in Hong Kong for a while).

      3i Group was first mentioned on this site in May. You can read my rationale for owning the stock by clicking on the company's name in the "Current Holdings" menu at the right. Note the stock is up a bit since then, I'm holding it and not increasing my stake, and it trades in London. (There is no ADR but shares do trade over-the-counter in the US.)

      Basically, I viewed 3i as attractive in May because it was undervalued and its management is committed to shareholders.

      First, the company is reducing its number of investments -- paying out money to shareholders and buying back stock as it does.

      Second, the company has a competitive advantage doing small-to-mid size deals across the UK and Continental Europe.

      Those 2 factors alone were enough to justify purchasing the stock based on conservative estimates of its value. Management's potential success in doing deals in Asia -- particularly mainland China and India, but the rest of the region as well -- could be had for free.

      New Order Placed

      I placed a new order yesterday after the market closed. It's to purchase stock in a company in the wireless communications industry. This will be a brand new position in the portfolio.

      If the order closes today, you'll read my rationale for owning the company later today, this evening or tomorrow morning.

      August 20, 2005

      Templeton Makes Sure His Foundation Stays True

      As you can imagine, Sir John Templeton is a hero of mine. No surprise there. He's a legendary value investor, the first to popularize international investing, and this is a value investing website.

      But whether or not you or I agree with his religious views, this article from ChristianityToday is worth reading. It's about the steps Templeton has taken to ensure his foundation, which has $1 billion in assets, stays true to his wishes after he's gone. The foundation is run by his son, John "Jack" Templeton, a 65-year-old surgeon.

      "Sir John is brilliantly insightful about human nature, but also skeptical. He worries that the Templeton Foundation will end up in the hands of unsympathetic progeny. 'Father's hot-button issue is donor intent. Foundations are too often taken in a radical direction,' Jack says.

      "The foundation's charter and bylaws spell out the future in detail. First, the officers of the foundation must read Sir John's books. 'You must read his articles and books to know the mind of the donor,' Jack says. Every five years, three independent analysts will conduct a review to see if the officers are making grants consistent with Templeton's intent. If they find that Jack is giving 9 percent of the grants to causes inconsistent with his father's intent, he has one year to bring the grants back into line. If not, Jack and his top two people will be fired."

      It's no secret that many foundations stray from their founders' intentions. So look for other wealthy individuals and families to follow Sir John's example. (Of course, I wish I had the "problem" of making sure a billion bucks was spent correctly.)


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