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    « June 2008 | Main | August 2008 »

    July 30, 2008

    Reader Email: "I Don't Think I Would Find Them on My Own"

    I received this email yesterday:


    I've been a off and on regular at your site for the past couple of years and wanted to let you know that I appreciate all the articles and links you provide your readers. I don't think I would find them on my own. Today when I went to your site and linked through to the article on Prem Watsa (who I am a real fan of), I thought it was about time to send to a small contribution, so I clicked on the Paypal button and did!

    Keep up the good work.


    Reading emails like Jonathan's have been among the most enjoyable experiences I've had blogging. And, the icing on the cake is that I received his email during a very hectic day. One of those days when you're being pulled in many different directions at once and when changes needed to be made with projects I thought had been put to bed.

    And just when I wanted to pull my hair out, I got Jonathan's email and it immediately put a positive spin on the day.

    There is no shortage of things to read on the Internet. That a small number of people find Controlled Greed worthy of their time at all is gratifying. Thanks to Jonathan and all of you for reading.

    July 29, 2008

    Pondering Sir John's Approach at Templeton Growth Fund AGM

    For reasons previously mentioned and linked to, the heyday of the Templeton Growth Fund is long gone. But the fund's annual meeting was held in Toronto last week, which is the subject (along with that of the Templeton approach) of Jonathan Chevreau's Financial Post column today. Here's an interesting bit:

    Market cycles require time to work themselves out. The average holding period for retail investors has fallen under a year to as little as six months -- quite a contrast to the five-year Templeton time horizon. In the question-and-answer session, one advisor said Sir John also used a 10-year horizon. Franklin Templeton president Don Reed replied that Sir John had personally given his blessings to the five-year perspective. Price/earnings ratios are at 20-year lows, Myers says. Hot markets such as Brazil, China and Canada are expensive in comparison to better-valued markets in Europe, Japan and the United States.

    And another:

    The four sectors with attractive price/earnings ratios relative to the MSCI world index are media, pharmaceuticals, information technology and telecommunications. No surprise, then, that the fund's top 10 holdings include such stocks as General Electric, Merck & Co., Glaxo-SmithKline PLC, Microsoft, Oracle, ING Group NV or Vivendi. But Myers is "still standing on the sidelines" for U. S. financial stocks, "ready to pounce" once the firm's analysts decide the time is right.

    Chevreau correctly points out that even with the "Growth" in the name, the Templeton Growth Fund is a value fund. But it's not and never has been a deep value fund -- such as the Cundill funds are.

    John Templeton always paid much more attention to price-earnings ratios. In fact, I've read interviews with him where he said P/E was the most important thing to him. This can be contrasted by folks like Tim McElvaine, mentioned recently here. I read an address he gave to some investors once where he called what he did as (and I'm working from memory here) "buying on the assets and selling on the earnings."

    Truthfully, the McElvaine-style deep-value approach appeals to me. Primarily because I'm not all that smart. And the idea of buying cheap assets and then just waiting seems so doable.  Buy and just add patience and you've got the recipe for profitable investments. Maybe the cheap assets will rise as investors see the value. Maybe the company gets taken private. Or taken over. You get the idea.

    Of course, the question is what we're buying really cheap? Time will render that verdict.

    July 28, 2008

    Rare Prem Watsa Interview: "We Talk If We Have Anything to Say"

    Diane Francis of the Financial Post in Canada conducts a rare interview with Prem Watsa, Chairman of Fairfax Financial Holdings (FFH/NYSE). As you doubtlessly know if you read this blog, Watsa keeps a very low profile nearly all of the time. So any time he agrees to field a few questions is a treat for those of us looking for wisdom from a truly successful investor.

    In fact, she asked Watsa why he was talking now:

    “We put our heads down and worked hard and have gotten results. Once in a while we will talk if we have anything to say.”

    Watsa says he started worrying about the credit markets back in 2003, and the impact for housing, auto loans credit cards. If that rings a bell, it should. Among the John Templeton articles I've linked to since his recent death was one in which he was visited in 2003 -- and Templeton was concerned about the housing market.

    That those two great minds were thinking alike isn't too surprising, since Templeton has been a big influence on Watsa:

    “I met with him, beginning in 1978, every year and would go down to see him in his Lyford Cay home in the Bahamas. He was a long term investor and was very prescient about markets. Like him, I take the long term view, buy the best and short the worst.”

    The biggest thing making me nervous for holding stocks the next few years is when I read Watsa say this:

    “You have to be worried a few years ahead of time, then take long term views and positions. History shows that there are 100-year storms and 50-year ones. In 1929, a 100-year storm, only 10% survived the market crash and it was only those who were negative in 1925 and did something about it. Back in 2003, there were signs this would happen.”

    Followed by this:

    “The 100-year is a Depression. The 50-year is what happened to Japan in 1989 to 2003. We don’t know yet.”

    Meaning he doesn't know what this is we're in with regards to the markets. The linked article is worth printing out and reading in its entirety. And then re-reading.

    Festival of Stocks at Gannon On Investing

    The latest edition of the Festival of Stocks is being hosted this week by Geoff Gannon of Gannon On Investing. Geoff tells me he's including my post from last week linking Jim Grant's Wall Street Journal piece on the absence of public outrage over recent government bailouts.

    There will be loads more stuff of interest, so be sure to stop by Geoff's blog when you get a chance.

    And, for those of you arriving here via the Festival, welcome and take a look around and see if this is to your liking. Controlled Greed is about my adventures as a stock picker, and other things of interest to me along the value investing journey.

    These are lean times for many of us in terms of stock performance. Yet there are bargains out there. And if investors have the courage to establish positions now and stand up to the economic headwinds blowing hard at times, I believe we'll be rewarded rather significantly a couple of years from now. Just remember, there are no guarantees.

    If you like what you see here, why not subscribe to this site's feed right now?

    July 25, 2008

    Five for Friday (and the Weekend)

    This is the last weekend in July, and the days are already getting shorter. The thing I like most about summer is the longer days. Winters wouldn't be so bad if there was more daylight. But I'm getting ahead of myself. We've still got the dog days of August to go yet. And here are five items you might wish to check out over the next couple of days.

    • I was waiting to see what Jerry Flint would write in Forbes after Rick Wagoner's recent news conference on General Motors (GM/NYSE). Flint writes something said here several times -- that GM's operations outside the US and Canada are performing very well. Europe is iffy but, as he says, not without hope. Flint playfully suggests GM spin off its North American operations. Then says the company is doing that pretty much now anyway, pointing out the company employed 468,000 hourly workers in the US in 1979, and now has 76,000 as it enters 2009. It's been obvious for some time now that GM's future lies in Asia, Latin America and other emerging markets. I don't like that, but it is what it is.
    • During the Gannon On Investing Blogger's Roundtable, I mentioned Munich Re as a non-bank financial that I didn't own but found attractive. Then sure enough, like clockwork, Munich Re announces "substantial" write downs on stock investments and lowers its profit forecast. Sick man that I am, this actually arouses my inner contrary indicator. Before today, Munich Re traded for a bit above hard book value and was thought to have very little exposure to the credit crunch. I haven't checked yet, but if the stock was to trade below book it might be a great buy. Of course, the risk is that today's write downs are the start of a trend. (I'll add for those of you interested that the company doesn't trade on any major US exchange and last I checked there are no ADRs trading OTC.)
    • This Bloomberg report finds Templeton emerging markets guru Mark Mobius in Toronto, where he says he's finding bargains in China and India -- and still likes Brazil and Russia. The article includes opinions from some others, notably Jim Rogers and Marc Faber. Rogers reportedly says he hasn't sold any Chinese equities bought since 1999.
    • I guess I'm a loyal Starbucks customer, in that I buy a bag of its ground House Blend in my local grocery store every week. I stop in a Starbucks coffee shop about, oh, two or three times a month at the most. And then I get whatever regular coffee they have that day. I don't know how much impact regular coffee drinkers have on their balance sheet -- do they make their money on those fancy beverages? Anyway, Matthew Lynn considers the decline of the Starbucks empire in The Spectator, and wonders if coffee is the bull market drink. Perhaps, but I don't recall Starbucks having these problems earlier this decade. I suspect it was just one of those growth stocks that can no longer grow like it did, and has entered a mature phase, which includes closing non-performing outlets.
    • If you're planning a business or vacation trip, check out John T. Reed's packing list. I remember forgetting to take my razor on my first business trip, even though I went over in my mind countless times what NOT to forget. Luckily, the motel gift shop was open when I rushed down from my room to the lobby to by a razor after unpacking that night. And this was years before the cool look of not shaving for a few days got popular (though I'd never recommend that look the first time you meet a client or prospective client in person). It's surprising how long Reed's list is.

    Well, that's it. Have a great weekend. And with the days getting shorter, hopefully the lights won't go out completely in the world's stock markets.

    July 24, 2008

    A Reminder That Time May Lag, Yet Value Ultimately Wins Out

    Something I forgot to mention in my previous post about Tim McElvaine is him quoting Chris Davis' grandfather, founder of the Davis Select Funds:

    "You make most of your money during a bear market; you just don't realize it at the time."

    That should certainly strike a chord in you and me. As McElvaine says in the same June 30 letter to partners, "we make our money on the purchase." I've heard real estate investors say something similar -- "I make my money on the purchase, not the sale."

    Now, as McElvaine writes -- and virtually every value investor knows these days -- just because you buy a stock at a good price doesn't mean it won't be selling for a great (read: lower) price after you own it. The risk is that maybe you misjudged the price and the margin of safety. But if not, this is where we separate the men from the boys (and I should add the women from the girls). We invest with conviction and weather the headwinds. If we're right, the value ultimately gets realized by the market and we've scored a winning investment.

    Over time, that is.

    Time can move painfully slow. That's always been the case in testing the patience of investors. And the Internet just multiples that effect many times over. Gone are the days when an investor waited to check stock prices in the tables in the morning paper. And looked at their brokerage statement arriving in their mailbox once a month.

    Now you can check stock quotes constantly, look at your brokerage account online and trade it anytime you want, and even sign up for news updates about any stock to be emailed to you as they happen.

    Don't get me wrong, I love all that stuff. I do try to stay away from it all except for at most a couple times a day (it's part of my personal approach to time management). But sometimes a news event will happen and it later seems like it occurred a month ago -- then I discover it actually happened last week. As in a few days ago. So I think we can count on the Internet to make riding out this Bear with patience a more trying task. At least for me.

    I was reminded on value investors being early on things when reading Jonathan Davis' (no relation to Chris Davis as far as I know) appreciation of John Templeton in the Financial Times the other day:

    Many widely held opinions about Mr Templeton’s investment record turn out to have been oversimplifications. For example, while he is famous for buying into the Japanese stock market in the 1960s when no other investors would touch it, less well known is that he sold out many years before the Tokyo market peaked in 1989 – a decision that caused him a lot of soul-searching thereafter.

    And this bit about meeting Sir John 5 years ago:

    When Mr Nairn and I visited him in his office in the Bahamas in June 2003, for example, he deflected our questions about the stock market to tell us that his major concern was the emerging “bubble” in real estate. “In most nations in the world, real estate prices are way above the cost of reproducing the building, and that’s dangerous. This is a very big bubble because the amount of money in real estate is several times as big as it is in stocks.”

    Several years can seem like several lifetimes, especially in the Internet Age. Yet they're just a blink of an eye in history and markets.

    July 22, 2008

    Tim McElvaine Doesn't Just Talk The Talk, He Walks The Walk

    If you're a regular and longtime reader of Controlled Greed, you're familiar with Tim McElvaine. His a value manager based in British Columbia, Canada, and he worked for Peter Cundill for more than 10 years.

    McElvaine sometimes takes a while to post his fund reports and letters to investors on his website. But I noticed the other day some new stuff has been posted -- which make for some great reading. I bring to your attention the three items posted at the top (for the year 2008) and the 2007 annual report posted below that.

    Like every other value investor, McElvaine has had a rough year so far. In fact, he freely admits to having had a rough 12 months.

    He runs two investment vehicles -- The McElvaine Investment Trust and The McElvaine Limited Partnership. The L.P. used to be a Cundill private partnership he's taken over and is in the process of folding into the Trust (which he laments is taking longer than anticipated due to regulatory authorities and red tape). That has nothing to do with his results, I'm just setting the table to let you know what his firm does. Like Francis Chou, McElvaine's offerings are only available to Canadian residents.

    McElvaine eats his own cooking. And by gargantuan mouthfuls, at that.

    His personal investments in his Trust, L.P. and stocks held in those account for 98.2% of his personal investments. And if other family holdings, such as a trust set up for his six children, are included, it would be even more.

    Like I said, McElvaine used to work for Cundill, and that's when I first heard of him back in the early 1990s. Over the years, from what I can tell, Cundill funds tend to invest in up to 30 names. Read over McElvaine's reports and you'll see he runs a much more focused portfolio, with the top 6 or 7 holdings accounting for virtually the entire portfolio value. This probably causes more volatility. But, hey, the guy's riding with you, after all. Be sure to look at Appendix B in the annual report. He includes the letter from the package he mails out to potential partners. I love item five: "In the words of Sonny & Cher, 'you got me babe.'"

    Which brings up something else you'll appreciate. The fact that you can tell he doesn't take himself too seriously. (And, no, this is a recent trend. I've been reading this guy a while and he's the same when his returns are shooting through the roof.) Humility is a trait of great value investors, and McElvaine continues that tradition.

    Finally, on the subject of great value investors, McElvaine recently visited Peter Cundill in London, England. And he posts his "Thank You, Peter Cundill" letter on his site at the top of the list of reports. It's actually written to McElvaine's partners, and gives insight into Cundill the man as well as expressing appreciative words for his former boss and mentor. Great stuff.

    Comrade Bob Stashes the Cash -- After Trashing a Nation

    Reading reports on the agreement signed by Robert Mugabe and Morgan Tsvangirai in Harare, Zimbabwe yesterday is double disappointing. Firstly, because the "solution" as announced has all the earmarks of being a sham. And that's because the opposition in Zimbabwe will likely have no power.

    And, that's entirely apart from reporting done by Africa Confidential that Mugabe and his henchmen are stashing tens of millions of US Dollars in offshore accounts.

    But this story is much, much sadder on a larger scale -- both in human and historical terms.

    Two books I've read recently are Mukiwa: A White Boy in Africa and When a Crocodile Eats the Sun: A Memoir of Africa, both memoirs by Peter Godwin. He grew up in the former Rhodesia and, while I guess you could say he tells his story from a White African point of view, he strives to be fair and freely and without hesitation writes of failures he saw in the former rule under Ian Smith. In fact, Godwin's family believed in majority rule, though most whites in the country overwhelmingly didn't. At least not for much too long.

    Mukiwa: A White Boy in Africa starts around 1964, with some of his earliest memories and talks of growing up in Rhodesia, his serving in a para-military police unit during the Rhodesian War, and his role in the new Zimbabwe -- when as a news reporter he helped uncover Mugabe's genocide against the Matabele tribe. Comrade Bob had formed a special military unit, trained by North Korea, that murdered as many as 20,000 men, women and children. Mukiwa goes up to the early 1980s and was published in the mid-1990s.

    When a Crocodile Eats the Sun: A Memoir of Africa was written a couple of years ago, and covers events in Zimbabwe up to that point. The book also deals with his father slowly dying, and offers up some discoveries about his own heritage that I won't spoil for you. Godwin's parents emigrated to then-Rhodesia from Britain after World War II. That they love the place, and the people, is attested to by the fact they've stayed there through thick and thin. At the book's end, his mom is staying. It's a moving story.

    The main feeling I take away from reading these books, especially with recent news from the place, is that Mugabe's rule has been a tragedy. And tragedy is such an overused word. Majority rule had to come, and should have come. Yet, with 1980 being the height of the Cold War, seeing a pro-Communist like Mugabe taking the reigns of power planted the seeds of failure. His ideology and corruption proved to be a Molotov cocktail blowing up the economy.

    The Survivor's Club: The Closed-End Funds That Have Seen It All

    Among the articles in the current Barron's catching my eye is from 2004. That's right, twenty-oh-four. It's linked from Barron's piece on J&W Seligman, a money management firm dating back to the Civil War, selling out to Ameriprize Financial.

    Seligman's most famous fund is Tri-Continental, the closed-end fund launched in August 1929 -- just three months before the crash. That's where Barron's links back to their October 2004 article on the closed-ends surviving the 1929 crash, including Tri-Continental:

    According to the Securities and Exchange Commission, some 770 investment trusts, as they were then known, were spawned in the years leading up to the crash, including 265 in 1929 alone. That autumn, 75 years ago, Herbert Hoover sat in the White House, the Philadelphia Athletics captured the World Series and the Dow Jones Industrial Average began its relentless slide, culminating in the bloodbath of Black Tuesday, Oct. 29, 1929. By the time the Dow finally touched bottom in July 1932, it had plunged 89% from its September 1929 high.

    Only 46 of the 770 investment trusts survived to 1932.

    Among those around today (according to the article) are Central Securities, Adams Express and General American Investors, as well as Tri-Continental.

    Starting in 1974 (another rough time), these and other closed-end fund managers formed what they've dubbed the Survivor's Club -- meeting for lunch every three months to discuss the common challenges and experiences of running these investment vehicles.

    I've never owned any of the funds mentioned in this article. But I do think closed-ends can play a role in my portfolio. In the past, I've bought single country closed-ends with success (though my Korean one dived big time during the Asian crisis but eventually came back strong). My last experience was with Central Fund of Canada, which holds gold and silver bullion. I bought it earlier this decade when gold was going for about $270 an ounce. I sold it -- and too soon, as happens with us value players.

    But back to the linked article. Reading about those surviving Depressions (and as they were known before that, Panics) can be instructive for us in the market today. With fortitude and maybe some luck, we can survive whatever Mr. Market has in store for this year. And the one after that. And the one after that.

    July 21, 2008

    Gannon On Investing's Blogger Roundtable

    I participated in the Blogger Roundtable hosted by Geoff Gannon of Gannon On Investing. Geoff interviewed four of his favorite bloggers simultaneously via email. They include Jon of Cheap Stocks, George of Fat Pitch Financials, Bill Rempel and yours truly.

    I am flattered that I was invited to take part in this, especially when considering who my fellow Roundtable participants were. And, if I do say so myself, I think the four of us offer up a good mix of views. Cheap Stocks, Fat Pitch Financials and Controlled Greed are all in the value investing family of blogs. Yet I think there are differences subtle and not-so-subtle detectable to anyone familiar with them. You know, like there are many pews in the value investing church. Plus, Bill is more of a trader, so his views mix things up even more.

    Reading this earlier today, the only thing I'd amend is when Bill asked about the cause of rising oil prices, and I made my remark about speculators. They may play a role in rising oil prices, but I think their negative portrayal by politicians and talking heads is way overdone.

    Anyway, it was a lot of fun and it will be interesting to look back at Geoff's Blogger's Roundtable a year or two from now and see how we've all faired.

    If you enjoy this, you might wish to read the "20 Questions" interview I did with Gannon On Investing in February 2007.


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