Clarke Inc. CKI: new presentation and review of current portfolio

see the presentation here: Sept 2008 update

Cheap ETFs

My preference is for DIA but if you want to hunt for value in sectors see below.

Cheap ETFs

The investing world's "Great One" makes his moves

Exactly how much we've fallen

Watch BAM closely over the next week

As you're probably aware, in the USA and Europe short selling has been banned by the SEC for 799 financial sector companies. This is a temporary measure due to expire in 10 days.

Let's ignore the wisdom or folly of this move for a moment. Who are we to question the thoughts of giants? lol.

Brookfield Asset Management BAM and Brookfield Properties BPO are conspicuously absent from this list. I've written quite a few blog posts about BAM in the past and it remains one of my favourite long term holdings. Marty Whitman has described BAM as a company that he is "extremely bullish on". Tom Gayner, Chris Davis and recently Ken Fisher are adding to their stakes. Insider buying is steady and the insiders own about 17% of the company. Most of BAM's investments are not attributable back to the parent company so it is very well capitalized. It's a bit curious that BPO is not covered by the SEC edict as it doesn't even trade on the TSX. BAM owns 40% of BPO's shares (last time I read the financial report anyway). BPO owns premium Manhattan real estate (i.e. part of the World Financial centre) amongst other stuff. Its share price has been hammered as traders worry about leaseholders such as Merrill Lynch who may default/terminate the juicy payments.

Unfortunately, BAM has not been cheap and I've been looking for an opportunity to add to my position. The long term survival of this company is not in question here-- it's the contraction of the capital markets reducing opportunities for the type of investments BAM specializes in and a reduction in value of their considerable real estate and lumber stand holdings eating into their intermediate term profitablity. I wonder that if the short interest rises in the next few days (bored traders?) it might create an opportunity to own more of one the best managed companies in the world.

For the best presentation of the bull case for BAM, take a look at the Sept 08 webcast for Investor's Day.

For a sense of important balance, I need to include some of the bear concerns, well summarized here.

I'd buy below $25 enthusiastically and hold for the very long term.

l

The markets are boring these days, eh?

9 industrial sectors (not just financials) are demonstrating volatility comparable to a roller coaster ride.

The credit crisis, housing slump, bank liquidity crisis/deleveraging phenomenon seemed to be an isolated domestic US problem a year ago and time has proven that rot is global in scope. It's ironic that the US is one of the few developed countries in the world that has shown GDP growth recently despite the trifecta of grief.

When the markets move, opportunities arise that come along only once or twice in a generation. IMHO, the key principles to invest wisely when blood is still fresh on Wall St. and Bay St are:

• think like a business owner. If you wouldn't want to be the owner of the whole company (if you could afford it and had the ability to manage it), why would you want a partial share?
• buy what you understand. Particularly with respect to the quarterly and annual financial reports and with special attention to the "Notes" section at the back of the report . They are usually confusing for a reason. Put these shadowy companies in the "Too hard" pile like I should have done with AIG. Read BBSI's reports and you will follow them easily. Even a very complicated company like BAM can be methodically worked through, section by section, by almost anyone even if they are not a CFA. HHULF.PK (Hamburger Hafen Logistik) is extraordinarily simple and clearly laid out in their publications--- and these have been translated into english from german!!
  
• make sure the management has "skin in the game" (i.e. significant insider ownership >10% IMO) to assure that their decisions are aligned with your interests. The management's behaviour should be rational and independent of the "institutional imperative". One of the advantages of owning a business with a high degree of insider ownership is that most insiders cannot (due to company or SEC rules) or will not trade their stock for short term gains and this builds a bottom into the share price. It also acts as a partial protective shield against "bear raids" like what happened recently to Bear Stearns, Lehman and AIG. It's hard to manipulate the stock when you can't buy a large portion of the float. Examples: SEB, COLM, BRK, BBSI, BAM.
• try to buy the best balance sheet in the business v.s. competitors. It's easy to say you want companies with no debt and lots of cash on hand; however, in many cyclical industries this is not an efficient use of working capital. Just make sure that when the unexpected happens, your company will be the last one (or one of the last) standing and positioned to wrest away market share from the much weakened competition when the dust settles.
• focus on boring businesses in slowly changing industries with predictable cash flows and high barriers to entry for potential future competition i.e. insurance companies like Markel MKL, booze manufacturers like Diageo DEO.
• do your scuttlebutt (non-quantitiative research)-- go to the mall, talk to customers and to salesmen. My wife and I have done this with AEO: watching the stores full of teenagers, buying up their products while the rest of the mall is barren.
• watch for companies that have great fundamentals but a poor short term outlook or are irrationally hated by investors i.e. Cemex CX is currently priced as if another highway, bridge or apartment block will never be built in North America or Europe. Everyone hates DELL and simply won't hear any of the upside now that it is a different company than when it was a growth stock.
• when looking at such metrics as ROE, use 5 year averages as these numbers can easily be distorted by short term, non-repeatable events in one quarter or two. i.e. LYG, AXP have astounding 5 yr ROEs in the 30's.
• buy the asset managers not the mutual funds themselves. i.e. AGF, BAM, LM
• holding companies often have unlocked value, high insider ownership and are managed for the long term i.e. IVSBF.PK, POW.TO, TYIDF.PK
• choose to delve into the areas where hundreds of thousands of brilliant minds are not. I don't invest in oil or gold stocks because a lot of very smart people with far greater resources than I are spending 24/7 trying to figure out what the catalyst will be that will push commodity prices such as these up or down. What's the chance you'll get an edge on these guys? Pretty nominal, IMHO. The way the market works is that once the "smart money" has it figured out, the market follows seconds later and becomes priced into the stock ahead of time through the influence of futures/forwards/warrants exchanges. Instead of competing with these guys, take it easy on yourself and choose stocks that are extraordinarily boring, not traded on the NA exchanges, thinly traded and/or not covered much by NA analysts. These equities are conveniently often the same ones that have high insider ownership. Examples: Seaboard Corp SEB, Hamburger Hafen Und Logistik HHULF.PK, Investor AB IVSBF.PK, Toyota Industries TYIDF.PK
• Watch for consensus and bargain guru stocks for new ideas. Don't blindly follow them-- instead consider them an elite stock filter. My favourite (free) resource for this is gurufocus.com.
• Watch what the insiders are doing. Selling is of uncertain circumstance but large scale insider buying should be noticed and factored into your buying decision making. I use Yahoo's financial page for the US stocks and canadianinsider.com for the Canadian equities.
  

Happy hunting and enjoy the process. If you don't, buy ETFs, using dollar cost averaging, rebalancing once or twice and year and then forget about it. My favourite undervalued ETF is DIA "The DOW Diamonds" at <$110/share.

This too, will pass

Whitman's glass-half-full take on market:
'There are great values out there now,' says octogenarian founder of Third Avenue Management
Article
Comments

SHIRLEY WON
From Thursday's Globe and Mail
September 18, 2008 at 8:46 AM EDT
TORONTO — Marty Whitman, the octogenarian dean of deep-value investing, sees great bargains to be snapped up from the current stock market meltdown.
"It's a great time," enthused the 83-year-old founder of New York-based Third Avenue Management LLC before speaking yesterday at a conference organized by AIC Ltd.
"We can't try to pick the bottom, but it seems to me that there are great values out there now, just like in 1974," the firm's co-chief investment officer said in an interview.
The stock market crash of 1973-74, which affected all the major stock markets around the world, lasted 694 days before bottoming out.
"Everything went down every day, and if you bought, you hit a lot of 10-baggers," recalled Mr. Whitman. "I hope that we do it with a lot of what we are doing now."
Mr. Whitman, who buys stocks he considers to be "safe and cheap," still oversees the firm's flagship mutual fund, Third Avenue Value, in the United States.
The former Wall Street analyst with a background in distressed investments didn't start his fund company until 1990 at 65, an age when most people retire. As of Aug. 31, his global fund has posted an average annual return of 14.4 per cent since inception.
His colleague, Ian Lapey, who is in his early 40s and is the designated successor to Mr. Whitman, runs the similarly managed AIC Global Focused Fund sold in Canada.
With the U.S. government bailing out American International Group Inc., and Lehman Brothers Holdings Inc. filing for bankruptcy protection this week, Mr. Whitman described the unfolding events as "the most severe financial crisis" that he has seen.
It's worse than the U.S. savings and loans crisis in the 1980s, Asian currency crisis of 1997 and the collapse of hedge fund Long-Term Capital Management and the Russian default crisis in 1998, he said.
But, he said: "This too shall pass."
Mr. Whitman buys companies that are very well financed; whose stocks are priced at a substantial discount to net asset value (NAV), and where the businesses can grow their NAV by at least 10 per cent compounded a year over the next five to 10 years.
"If the value is compelling enough and the businesses have staying power, we just buy and don't worry about the market," Mr. Whitman said.
"Our turnover is about 10 to 15 per cent a year at most, and the majority of our exits are companies that get taken over rather than a sale."
Some financials he has been buying lately include Power Corp. of Canada, caught in the downdraft, and U.S. securities like bond insurer Ambac Financial Group Inc., Bank of New York Mellon, and MBIA Insurance Corp.'s 14-per-cent surplus notes.
"We are extremely big on Brookfield Asset Management," he added. "It's very well financed, brilliantly managed by Bruce Flatt and his team. We are also big on the oil sands. We like Suncor, EnCana and Nabors Industries, whose subsidiary Nabors Canada is the largest land drilling company in the world."
He has also been picking up more shares of Toyota Industries Corp., a long-time favourite. And he has been accumulating more stock in Hong Kong-based Henderson Land Development Corp. Ltd., Hang Lung Group Ltd. and Hutchison Whampoa Ltd.
"All of these [Hong Kong] companies have a huge presence in mainland China," he said. "If we are going to be wrong about these investments, it's going to be for political - not economic - reasons."
While legendary value investor John Templeton - who died in July at age 95 - retired from the mutual fund business by age 80, Mr. Whitman intends to keep working.
"If I can't be a tennis pro - and I can't - I might as well just keep doing this as long as I am able to," quipped Mr. Whitman, an avid tennis player. "Just show me the door when I really get too old. So far, there is no sign."

Another look at AIG

A taste of the mind boggling complexity here. Still "too hard" for me. I've sold 80% of my stake.

AIG is in the spotlight of the market right now and all the best and brightest analysts/investors are trying to figure it out. What's the chance that you and I can beat them? Pretty slim. I prefer to focus on neglected issues where it's easier (possible) to get an edge over the crowd. 20 analysts follow AIG and put every public minuscule bit of information under a microscope. In stark contrast, Seaboard SEB has 1 lonely analyst following it, mostly because it's mid cap, 70% insider owned and has extremely opaque governance. Scuttlebutt can pay off in the Seaboards of the investing world.

Guru focus: Should you pay attention to the Value Gurus?

Short answer: Yes, with a caveat or two. Don't fly blindly-- try to buy companies at lower price than your guru did and make sure you understand why he/she recognized what the market was missing such that it mispriced the stock. Unfortunately, this requires a lot of homework... I spend quite a bit of time focusing on the gurus that I admire and seem to think like me (I guess I think like them, lol). I can't get my head around the machinations of Ken Heebner, George Soros and Bill Ackman, for example. OTOH, Seth Klarman, Bruce Berkowitz, WEB, Dodge and Cox, Marty Whitman, Ron Baron, Mason Hawkins, Jean-Marie Eveillard, Ian Cumming, John Rogers, Chris Davis and Monish Pabrai all capture my interest immediately.

I think that Guru stock picks are an excellent starting point for your research. If the gurus you respect are almost all buying a company and the insiders are buying it too then it sure is compelling to scour the financial reports to find what they have seen that Wall St. has overlooked.

Model Portfolios Performance Review: How should you follow the Gurus?

September-11-2008

It has been a very tough year in the market. The S&P500 is down about 15% as of Sept. 10. Here we like to review the performances of our model portfolios. Each model portfolio consists of the top 25 stocks top ranked with its criteria. How did the model portfolios do in such a market?

All four model portfolios were rebalanced on Jan. 2, based on the close prices of Dec. 31, 2007 . Although all four model portfolios are down for this year, but they all outperformanced the S&P500.


The Most Weighted Portfolio consists of the 25 stocks with the highest combined weightings from the portfolios of the 25 selected Gurus. This portfolio gained 22% in 2006, without counting dividend. It lost 2% in 2007, compared with S&P500’s gain of about 3%. So far this year it is down 11.55%, compared with S&P500’s 16.09%. Since inception in Jan. 2006, the portfolio gained about 6%, while the S&P500 lost 3% during the same period. All numbers do not include dividends.

This portfolio had 40% of turnover at the 2007 rebalance.


It has been widely reported that Gurus are underperforming. However, buying the stocks with the highest combined weightings outperformed the market by about 9% so far in less than 3 years. The portfolio of 25 stocks shows similar volatility as the S&P500.


The Broadest Owned Portfolio consists of stocks that are most popular among Gurus. The rank is based on the number of the gurus that hold the stock. If this number is the same, the stocks that the gurus hold in higher positions (percentage to portfolio) are ranked higher. The portfolio is updated every 12 months.

This portfolio gained 15.8% in price in 2006, outperforming S&P500 by more than 4%. However, like the Most Weighted Portfolio, it lagged the market in 2007 by losing 6%. So far in 2008, it made up the bigger loss, and outperformed the market by 7%. Overall since inception in Jan. 2006, it did better than the market by about 1%.

The Consensus Picks Portfolio consists of the consensus picks by the 25 selected Gurus. The rank is based on the number of the gurus that have bought the stock over the past 6 months. If this number is the same, the stocks that the gurus bought in higher positions (percentage to portfolio) are ranked higher.

The Consensus Picks portfolio gained about 10% during 2007, outperforming the SP500 by more than 6%. Again so far it did better than the market by 7% this year. Since inception in May 2006, it gained 4.37%, relative to the loss of 1.95% by the S&P500. Maybe the Gurus are not doing very well, but their consensus picks are doing ok.

Guru Bargains 25 is the best performing portfolio in 2007, it gained 15.4%, beating SP500 by wide margins. This portfolio consists of stocks that have declined since Gurus bought. Is it telling us that buying stocks at lower prices that Gurus have paid has great rewards? If we believe in value, it should.

The Guru Bargain portfolio did poorly in 2006. We did things differently for 2007. First of all, we did not use the portfolios of all the Gurus in our database to make the portfolios. We selected a subgroup of 25 Gurus who have very conservative approach and the lowest turnovers. Then we limit the market cap of the stocks to be above $4 billion. These requirements made the portfolio much less volatile, and changed the results dramatically.

The rebalance of this year replaced almost all of the stocks but AMD. So far in 2008, it is about even with the market. This portfolio is more volatile than the market. If you see the current Guru Bargains here: http://www.gurufocus.com/Guru_bargins.php

G&M: Canadian insider buying spikes

Read Globe and Mail Report on Biz here.