Victoria Contrarian Investing Club Google Groups

Just a reminder-- I'm blogging quite a bit less now since I started the Google Group "VictoriaContrarianInvesting" in February of this year.

If you're interested in joining up with like-minded beginner (mostly) value investors, send me an email at lporayko@gmail.com and I'll send you an invitation back. All of our discussions are kept on the VCIC website for future reference. There is a files section where I upload selected investing gems. When I have time, I throw together an informal newsletter with one or two stocks that I've been studying-- mostly for further discussion.

Most of us are not interested in "hot stocks" or buying the latest trend (gold?) so if that's your bent, you probably will find it frustrating. It's my experience that your brain is either wired to be a value investor or you are destined to follow the crowd as a momentum investor. This is why certain value gurus like Bruce Berkowitz, Warren Buffett and Seth Klarman (my 3 favourites, can you tell?) are so open about their analysis techniques and even concerning the stocks that they've bought recently.

From Klarman's "Margin of Safety":

"You may be wondering, as several of my friends have, why I would write a book that could encourage more people to become value investors. Don't I run the risk of encouraging increased competition, thereby reducing my own investment returns? Perhaps, but I do not believe this will happen. For one thing, value investing is not being discussed here for the first time. While I have tried to build the case for it somewhat differently from my predecessors and while my precise philosophy may vary from that of other value investors, a number of these
views have been expressed before, notably by Benjamin Graham and David Dodd, who more than fifty years ago wrote Security Analysis, regarded by many as the bible of value investing.

That single work has illuminated the way for generations of value investors. More recently Graham wrote The Intelligent Investor, a less academic description of the value-investment process. Warren Buffett, the chairman of Berkshire Hathaway, Inc., and a student of Graham, is regarded as today's most successful
value investor. He has written countless articles and shareholder and partnership letters that together articulate his value-investment philosophy coherently and brilliantly. Investors who have failed to heed such wise counsel are unlikely to listen to me."

People can make money using either approach. I think that you make a mistake when you develop "style drift" away from what suits you best, but that's a different whole discussion. I also think that momentum investing is too difficult for me. I'm just not smart enough to figure out group psychology, particularly on that scale. I'll leave that to George Soros, who obviously can.

I plan to track the performance of all the stocks that we discuss in a spread sheet every 6 months. Clearly, the best way to learn is to get continuous feedback- on our objective performance as well as from level headed colleagues that you respect.

l

Insider Ownership helps... or does it?

One of my hypotheses for buying Seaboard SEB and Columbia Sportswear COLM was that a very high insider ownership (about 70% for each of them) would provide the following attractive investment features:

• a strong incentive for management to align its interests with the minority shareholders
• a limit to the downside of the share price during general market downturns as insiders tend to hold on to their shares when they are considered cheap and sell them when they are expensive (or they really need the money)

These advantages are offset by the potential for a complacent management that doesn't have to worry about activist shareholders stirring things up. When a company outgrows the skills and experience of the founders that are reluctant to give up control of the company, that bodes poorly for the business' prospects. The other downside is a legacy curse: rampant nepotism in family owned companies often leads to bad governance as children or grandchildren of the founders do not possess the gifts to lead a company forward, yet they maintain control. Wrigley was a prime example of this issue you need to watch for.

SEB has mostly tracked the major indices pretty well-- particularly since Dec '08. It's price action doesn't support my hypothesis very well. On the other hand, COLM has definitely outperformed the markets. These are both family businesses that I believe are well run. I do wish SEB's executives were a bit more forthcoming with information, though. This is probably one of the main reasons it has been sidelined by Wall St.

Obviously looking at just 2 companies with a high degree of insider ownership over the short term is not even close to conclusive. I was impressed how well their stock prices held up compared to the rest of my portfolio and that's why I decided to look into it further.

Read this interesting and thought provoking study from Oxford that shows 9% excess returns v.s. the S&P 500 for firms where the CEO owns 10% of the outstanding shares or greater. This may indicate that choosing selected stocks with high insider ownership may also increase the upside potential in addition to limiting the downside.

IMHO, it's one of many important factors to consider when you're doing your research.

l

As I've mentioned before, I'm slowly raising cash in order to exploit upcoming opportunities... I'm anticipating a large correction in the next 6-9 months. The market has become irrationally exuberant once again.

My estimate for AEO's intrinsic value is around $15-20/share, so I plan to sell it into strength.

SPLS, a company with management that I've admired and owned for the longer term, is also approaching my guess for its intrinsic value of around $25/share. I'll sell it too soon. I wouldn't hesitate to buy it back again at <$15/share.

Targets I'm monitoring closely, all trading at least 30% above my entry position:

Y (I already own some)
CVL.UN
BDI.UN
PDLI
FACT (I already own some)
PFE
URI
KMX (own it, want more!)
BBEP
BBSI (I already own some)
COP

There are others as well. Yes, I know that many of the above are ideas shamelessly stolen from the revered (for excellent reasons) Mr. Klarman and Mr. Berkowitz. Imitation is definitely the most sincere form of flattery. I also believe that I deeply understand their investment thesis in these companies and my conviction to own them comes along with that understanding.