Hudson City Bancorp (CAPS pick and analysis)

February 7, 2011 § 4 Comments

This is also a study in: when checklists don’t work. Bum bum buuuuuuh.
So I’ve spent some time figuring out my personal checklist in order to minimize losses and hopefully teach myself some patience, wisdom and prudence. And I really like my checklist. Even just having it down on paper and being able to reference it has been a great learning experience (and has made me go “what was I thinking!” on a bunch of old positions I had.)

But there are times when a checklist breaks down. And for me, that is currently with an industry I like moving forward: small bank stocks. I’ll admit, I don’t know how to properly read bank balance sheets in order to see if they are super risky or just ok. For these reasons alone I am staying away from Citi and BOA and JP Morgan and all of the other big investment banks. They don’t have a great management track record to say the least; they don’t seem to care about making their business sustainable. Heck, they wouldn’t throw water on a burning puppy if it meant a few cents off their EPS.

But there are banks out there I do like, and I think it is an industry that is going to do really well in the future. Small banks. Narrowly focussed banks. Banks that don’t do much more than take on deposits, loan out money, do mortgages and so on (you know, things I can understand) as opposed to taking your money, hiding some toxic assets in it, calling it a Colateralized Debt Obligation and selling it to some poor schmucks, or groups of schmucks, or worse yet, pension plans (read: old people) and taking them for a ride.

One of the banks I’m looking at (and will be adding to CAPS) is a bank that has been getting tanked recently and is near their 52-week low (which is usually a trigger for me to look into them.)

But like I said: my checklist doesn’t accommodate banks. Banks don’t have inventories. You can’t really do a NCAV or a NNWC screen on em. I don’t even know if calculating their CROIC even means what I think it means!

But let’s look at reasons why I do like em:
1. CROIC (if it even works) is sitting around 7%. Not great. But when I do a DCF using 80% of CROIC as the growth rate, I get a value of about $20/share. It’s sitting at $11.17.
2. P/E of around 10 confirms the potential cheapness of it
3. Management is awesome. They didn’t go for all the craziness of the housing boom. They in fact shunned the “cheap” growth they could have got by altering their underwriting standards. That means they didn’t take on NINJA loans (No Income No Job or Assets). They hoarded cash during the boom and managed to keep their dividend secure during the crisis. That to me is stunning.
4. The dividend. 5.5% with a payout ratio at around 50%. That payout ratio is high, but I am confident management can hold it together.
5. Have an above 6 in Piotroski Score (but I’m unsure if that is helpful for banks)
6. Look to be growing, and are in a sector I like.
7. Probably aren’t evil.

Reasons I don’t like them:
1. I don’t know the industry all that well, and definitely not well enough to spot problems before they are baked into the price
2. Dividend cut could happen
3. Are in a competitive industry and when big banks recover, they could dilute the potency of the small banks.
4. The margin of safety may not be high enough. The Graham Intrinsic Value Discount has a pretty thin margin of safety, while the DCF is just under 50%.
All that being said, I put the intrinsic value of the bank around $20. Add in to that the 5.5% divided and I will probably buy it if it goes south of $11 again. Heck, the good management alone is enough for me to want in. I’m cool with paying a fair price for a stellar company. But since this bank looks a little (not a lot) cheap, plus that dividend as an added margin of safety…well.

Hit up your thoughts in the comments.


That's a lot of red...


Specialists vs Generalists

February 4, 2011 § Leave a comment

One of the things that I find really fascinating and also hilarious (and, if thought about too much, super scary) is when 24-hour news stations have nothing to report on, so they try to find some interesting new story that in reality isn’t all that interesting and actually not really new. But they find it anyway and put it up with the crazy fast moving news graphic. And then they have that expert—-who has apparently dedicated his entire life to the study of this particular story—-flown in to put it all into perspective for us. (The one that made me realize that this was bonkers was when I was doing my MA in Theology and CNN had this week long news story on the fact that there are more than 4 gospels written and one was even about Judas being a good guy! And it was this big crazy deal! The end of the Bible! Except for the fact that any MA student in theology, antiquity, medieval history or religious studies has read all of these much later gnostic gospels and this is, in fact, not new or news. Oh well.)

Now, this isn’t to put down 24 hour news networks. I’m sure there is some benefit to them and we may figure out that benefit one day. But this all-too-common occurrence has significance for the value investor. That significance is that our society places an exorbitant amount of value on the specialist—-the dude who’s spent years of his life studying the significance of some minute cross-section of human understanding, in order to increase our collective understanding of that thing. And these specialists are super important: I come from a family of PhD’s and I’ve seen both the dedication needed and rewards for being the expert in a field. (In fact here is a cool lil cartoon about why PhD’s are totally necessary.) But in placing so much weight on the word of the specialist, we set up a value-drawing mechanism that is silly when you actually sit and think about it. Or to put it in another way, when we place so much weight on the authority of specialists, something else is smuggled in that I don’t think we actually want. And that thing is an attitude and a belief system that I think the true value investor needs to shy away from and be comfortable in dismissing.

So what is that thing? Well, it is the belief that the more detailed you can get in your data, the more precise you can be in your conclusions and therefore you’ll make better decisions.

On the outset the correlation between data and precision seems to be pretty linear. More data = better decisions. Only a fool would jump in his car with 30 min before his flight on a 20 min drive to the airport without looking at the traffic report. If you know one route is slower, you take the other one.

But this reasoning does not continue ad infinitum. There comes that point on the spectrum where the data begins to be irrelevant, a time-suck or so small in significance that it doesn’t affect the situation. Accumulating this data is meaningless and wont (or, perhaps, shouldn’t) alter your decision and may make you screw up the whole process. Just because you’ve spent 30 min figuring something out, it doesn’t make it any more right or wrong or authoritative than the thing you figured out in 30 seconds.

Now we generally act with common sense in our everyday lives. No one, upon seeing that route A to the airport is bumper to bumper, collects data about their car’s fuel efficiency ratios regarding route B. Route B may be longer or more hilly or the escarpment may cause a wind-tunnel effect drag on your vehicle, but route A will cause you to miss your flight. We filter out the little details with the big trump.

But for whatever reason, we don’t do this with the market. My guess is because when we were kids we were told a lot about chaos system and all watched the little cartoon of the butterfly flapping his wings in some exotic country and producing a hurricane in Saskatchewan or whatever. And a lot of ink has been spilled about how that same butterfly flapping will cause Exxon Mobil’s revenue to go up 2.6%, on average for the next 10 years (adjusted for inflation.) And people make market decisions based on this stuff. And it’s crazy.

And as people lose money by doing this and as technology gets better and faster, we reason that we haven’t been beating the market because we haven’t got detailed enough. So there is now a race-to-the-bottom-of-things in order to corner the market and be able to make the proper correlations between the flapping and the ticker symbols. And people pour lots of money into faster trading platforms, or will throw money at MIT math PhD grads in hopes that these people who have dedicated their life to cutting edge probability math will, by means of their special insight, unlock the hidden mysteries of the chaotic system and you are bathed in a money shower. So you got the guy who’s an expert on butterfly flapping in the commodities sector and one in energy stocks and an expert on this circumstance and that circumstance in hopes that their combined power will somehow give you an edge. And it doesn’t work because of the misplaced correlation. More data does not equal precise conclusions.

So what is a value investor to do? Well, one thing is to get real comfortable with mystery. And what I mean by mystery is that grey zone between the seeming randomness of the incredibly tiny and the general order that we have around us. If you keep going smaller and smaller, down past the atom and all the way into the quarks and tiny half particles, physics tells us that when we get that low, everything is random movement and we can’t really figure out how all this random movement of particles holds an atom together and brings order to the world around us. Have you ever tried to have a conversation with a die-hard materialist? He’s talking about the randomness of particles and how because of this randomness we can’t really know anything for certain, except you know for certain that he’s a crappy lunch companion. There’s a gap that is too big for us to compute between the random/small and the big and predictable. There may be a correlation, but we can’t figure it out and it probably wont be a factor in the real/macro world until it is no longer small, but big and more easily discernible. In other words, don’t worry about a butterfly flapping in New Jersey. But if 65 million butterflies are flapping in New Jersey at once, I’m not taking a plane out of LaGuardia. Or, as Buffet said, look for one foot hurdles to step over, not seven foot hurdles to try to beat.

And the best way to do this is to try to increase your general knowledge of all things. Be a specialist, but don’t think that going super deep into one aspect is going to magically shed light on other things. It’s like putting a cardboard tube on the end of your flashlight. No, I think the true value investor has to be comfortable with the whole range of human experience. The best value investor is not a craftsman, perfectly sculpting a portfolio, but a great editor, cutting out the things that don’t need to be there and boiling decisions down to the essential (and statistically higher probable) elements. And don’t sweat the fact that you can’t know everything about everything. You will be far better off knowing a bit about tons of stuff rather than a lot about a small section. If anything, being a generalist will keep you safe from the man-with-a-hammer syndrome. The MWAH syndrome is that to a man with a hammer (ie: the thing he is a specialist about) every problem begins to look like a nail. (I’m looking at you Paul Krugman.) But if to you every problem is a nail, when you meet a screw you are, well, screwed. But if you can call a nail a nail and a screw a screw, you wont panic when something new and unforeseen enters into your investment life. No panic and steadiness is good. Strive for that.

So value investors should learn about as much as they can. And not just in the business world either. They should learn how metaphors illuminate aspects of human experience; they should learn about math and probability. They should learn about psychology and how people act differently in groups vs how they act on their own. They should definitely read history and primary sources from antiquity. (Basically, they should read Art of Manliness.) That well rounded, wide range of insight to draw from should be the thing we as value investors really strive to develop. Not just for making wise choices in the market, but for building up character in general and being a better man.

But as long as there are people putting all of their eggs into the specialist basket, there will be market discrepancies that should provide lots of one-foot hurdles. Happy jumping!

I am long XOM

Methodology: Part 3. Don’t Be Stupid

January 18, 2011 § Leave a comment

This is my series on how I decide to buy what I buy
Part 1. Part 2.

Ok, so we got the “is it selling cheap” down and the “what is the intrinsic value” down and we have talked about margin of safety and all those good things. But it’s still not time to buy. Being wise about your investments is more to do with keeping your emotions in check and making sure that you aren’t doing really stupid things because of any kind of psychological reasons then it is making sure everything fits into a numbers box.

This is probably why I am more inherently attracted to Charlie Munger than I am Warren Buffett. Sure Buffett is the granddaddy can-do-crazy-math-in-his-head super investor, but Charlie Munger is good ol fashioned don’t-be-a-one-legged-man-at-an-ass-kicking-contest common sense kinda guy. In fact the best thing I have yet to read on investment has come from a lecture he gave at Harvard in 1995 called The Psychology of Human Misjudgment.

So I think the most important thing you can do once you think something may be a good investment is to have this emotional check list that you go through. Give the investment some time. Think it over. Ask questions. Plot out the best case, good/likely case and worst case scenario and see if you could live with the worst. Be really honest about whether you are doing this because it would be risky not to as opposed to any number of outside factors, like herd mentality or whether you say things like “man I’ve put so much time into this. It’s gotta pay off. I’ve worked so hard.” No. Be zealous about staying as objective and conscientious to the context as possible.

I separate my questions into two chunks. Chunk one is more technical stuff:
-is there stable market share? As in, is there enough ways that they can get money and do what they do
-are they dominant or secondary in their industry
-do they have a strong brand? Is the brand being factored in to the price. Are you ok with that? (think Apple. Or Netflix. Or Coke.)
-do they use the power of the network/social media. Can they fit into a world dominated by google/twitter/facebook. Or does it not matter to their industry.
-Do they change fast. If yes, that’s bad. Don’t give yourself big hurdles to clear.
-Can they change their price, or are they in a dead heat with competition
-Do they have a moat beyond a brand identity?
-Do they have high inside ownership (I love inside ownership. Nice for them to have skin in the game. This is why I love Nordstrom as a company. Too bad they are always so freaking fairly priced. Man I should have bough in 08. Huge regret. Good lesson to learn. Trust your checklist.)

The second grouping of questions is…um…slightly less technical.
-Are you being stupid?
-Are you overconfident?
-Dividend? If not, justify your buy
-Is your margin of safety high enough?
-Are you buying for your own reasons, or because of someone else?
-Are you relying too much on past performance? (Just because they have a ROE of 20% for 5 years or have grown x amount of time in no way means they are a good buy.)
-Have you daydreamed about what living with the worst case scenario would be like?
-Is the stock falling or fallen. Remember the National Bank of Greece
-is this a concept stock or are they actually doing something. Don’t fall for the TSLA foil. (hey-o! see what I did there?)
-can you hold this for 3 years? Cuz you should. Now obviously, true value could be realized in 3 days, at which point you would sell. But it usually takes about 3 years for all the shoes to drop. Their hitherto unseen awesomeness is either revealed or you are revealed for not doing your homework.

The psychology of human misjudgement is something I am going to dedicate my investing life to. The emotional side of things is that important. Right now what I’m fighting against is the “omigosh the market is crazy rising! Buy buy buy!” Mix that with my youthful exuberance and my bias feelings of “hey, I’m the protagonist of this story. Of COURSE my portfolio is going to be awesome!” and you’ve got a recipe for crappy returns and buying things too expensive. So that explains why all is quiet on the CAPS front for me these days.

And I hope to update my emotional/common sense checklist every once and a while. I’ll let you know as I do.

*I don’t own anything I mentioned. Especially TSLA. Sell some cars, then we’ll talk.

Methodology: Part 2. Intrinsic Value

January 5, 2011 § Leave a comment

This is my series on how I decide to buy what I buy.
Part 1. Part 3.

Ok, so in the first part of this methodology survey we looked at some of my favourite metrics and the tests that businesses need to pass in order for me to consider them a good business qua business and also at a potentially a good value.

The second part of my methodology is to now really home in on that intrinsic value and see if I want to buy it at the price that is being offered.

Now, intrinsic value is not math. I mean, there is a lot of math involved, but there is no exact number you can reach. You can reach a ballpark figure, and if you have a big enough margin of safety, you don’t have to be perfect, just close. If you’ve calculated the intrinsic value of Graemecorp to be $25.50 a share and it is trading at $21 you don’t want to buy because you–like me–are probably wrong. Accept it. Respect the complexity.

Now, if Graemecorp is trading at $8 you may want to start thinking about buying. But the calculation of $25.50 that you reach is not infallible, no matter how much work you put into it.

But how do I determine intrinsic value? Well, its tricky, because the methodology is going to vary for different companies in different circumstances. Getting a good idea for fair value of a shipping company (which generally trades close to book value and low P/E) is going to be way different than for a venerable company like Johnson and Johnson, who has such a consistent history that you can feel comfortable if they are quite over book or have a higher P/E. So, sorry, you can’t just plug in a bunch of numbers into some sort of divine formula and get the perfect intrinsic value number. It’s an art!

So what I try to look for are floors and ceilings. A good floor to look for is what is called the liquidation value of a business, or in other words, what the business would be worth if you sold ever last paperclip, pencil and cleared out the inventory. (What this doesn’t take into effect is the value of the future profitability of the business.)

Two good numbers to give you a potential liquidation value are the Net Current Asset Value (NCAV) which is simply the Current Assets – Total Liabilities. If the number is positive and if the per share price of the NCAV is higher than what is on the market, man you may have a good thing on your hands (note: often times the NCAV is positive is the company has a ton of cash on hand. Cash on hand is very good, but if it is just sitting there not doing much, not being reinvested nor being paid out in a dividend, you may question whether you want to pay for money to be sitting around.

The second good number you can find is the Net Net Working Capital. This was Benjamin Graham’s (go read him now) pet figure. It is perhaps the best detailed number you can find for a liquidation value.

NNWC = Cash + Short Term Investments + (0.75 * account receivables) + (0.5 * inventory) – liabilities

The logic of this formula is that if you are liquidating a company, you wont be paying full price for account receivables or inventory, so these are some pretty conservative haircuts Graham uses to measure the value. Again, if the per share price is below this, then the business is worth looking into. If you feel that they wont go bankrupt, then you may have a good pick on your hands.

Now, that being all said, these are floors for me. If prices are below these floors (rare) then they are falling into a “special interest” category and should be looked at further. It could be awesome, but it could be deadly and the company is in serious trouble.

But once you have a good ballpark on liquidation value, you can now start looking for a good ceiling. For me, a good ceiling is what the company is worth when skies are blue and all they need to worry about is not screwing up. They don’t need to be heroes; they just need to run a healthy business. If they still look cheap after passing this test, then we’re really sitting on something nice.

So what I run are two different valuation tests: the Discount Cash Flow (using a normalized CROIC as my growth rate) and the Ben Graham Intrinsic Value calculation. To get a great handle on the DCF, read about it here. (Fun fact: I didn’t know you could find really easy DCF calculation tools online, so I did a whole spreadsheet exactly like the one on Investopedia. It was a disaster. Total unmitigated disaster. I didn’t know a thing about Cash Flow. I think I valued Coke at like $17 a share. That was a grumpy evening.)

With a DCF there are two big numbers you need to make a decision about: the growth rate and the discount rate. For me the growth rate is pretty easy: you can either choose the 10 year average of revenue growth, EPS growth, FCF growth etc. But what I like to use is the 10 year average CROIC rate (with a bit of a haircut for safety). So I use a 80% of the 10 year CROIC average for my growth rate. My reasoning is that CROIC really tells you about the worth of a company and not just what the company says they’ve done.

Now the discount value is a bit tricky. Investment banks churn out crazy greek numerical values and something that is called a Weight Average Cost of Capital (or WACC) in order to find the number that you will discount future earnings by. But for me it’s simple (common theme eh?). I tend to use a discount value between 12% and 15% because it is insanely high. But seeing as I would be really happy with an annual 12-15% appreciation on my invested money, this is a further built in margin of safety. I also look at a DCF model using the average 30 year corporate bond rate (around 6%) just to see the ballpark range I’m playing with.

The second valuation I run is the Graham Intrinsic Value metric. Ben Graham talked about this a lot in his book and Jae Jun over at Oldschool Value has a great updated version of the formula that he uses (and that I stole!)

So let’s recap. I now have:

a NNWC value
a NCAV value
a DCF using CROIC and with a discount value
a Graham Intrinsic Value calculation.

So now I have a pretty good idea of my floor (NNWC, NCAV and a book value per share) and my ceiling (DCF) with my Graham value somewhere in the middle. All things being equal, my intrinsic value should be closer to my ceiling than my floor, so if I want to get good value I need to buy at a healthy discount of my ceiling. So I look for a 50% off of the DCF and I try to practice what Graham preaches with a 66% off of his intrinsic value calculation but it’s rare to find something like this.

So that’s my check list! You can see the breakdown here:

Yes, this is a screen shot of a spread sheet. Fancy eh?

Now, all this being said, each business and each circumstance around the business is unique and they are all treated differently. These are just my checklists, but there are instances where the company doesn’t pass the checklist, but still seem an attractive buy. And also there are companies that pass the checklist, but I don’t jump in because I’m not gung-ho about the business model. So in order to compensate for this, I have a bunch of questions/emotional checks and balances that I ask myself in order to see if I’m being a smarty-pants or actually being wise.

More of that in post 3

Methodology: Part 1. The Checklist

January 4, 2011 § 2 Comments

This is my series on how I decide to buy what I buy.
Part 2, Part 3

I gave myself a couple of investing challenges this past week. Not so much New Years resolutions, as more a guideline of good habits (and breaking bad ones) that I want to implement into my financial life. One of the bad habits to break was to stop playing around with leveraged commodity ETF’s, my favourites being (which follows crude oil prices) and (which follows copper.) They are definitely not value plays and therefore I shouldn’t be playing around with them. But having the type of disposition I have (being pretty calm when people go nuts about something) means that I do pretty well with tracking crude oil hysteria and price jumps.

But it’s not a science and I shouldn’t get into the habit of playing with it too much. And they fall way out of my investing worldview bubble, so I should just cut them out. You know…sometime. (Note: Yeah, so writing this out has made me rethink the whole short-term commodity trading and I realized I’m playing with fire. Sold all my positions in (had none in Made some money, but it’s guilt money! Lesson learned: do not stray from your worldview.)

But a good habit I’m implementing is to actually formalize my checklist and have the businesses I invest in pass my criteria. The checklist is designed to look for devaluation in price, gauge financial health, ballpark intrinsic value and have all the info at my fingertips so I can make a decision.

Now, there are plenty of awesome spreadsheets out there that can do all of this for you. The best one I’ve ever encountered is put together by Jae Jun at He’s been tinkering with that sucker for a while now, and it is so worth the price he charges for it. If you want to save some time, go there and get it.

Now, there are two negative things that happens when you buy a ready made checklist. The first is that you are following what the author deems to be important (Jae sidesteps that problem by putting every freaking thing you could ever want in it!) The second, and more serious consequence is that you never learn how to do this stuff yourself. So that’s why I decided to clack out my own spreadsheet of the metrics that I use to gauge intrinsic value.

So lets talk about the process!

For me, investing is about one simple concept: each stock represents a business (this in itself can be a revelatory idea for some people) and that business is worth something. The money they generate, the monetary value that they can produce by means of their product, service and combined intelligence is worth something in a dollar sense (aside: magic happens when the value created is monetary and a social value to the world. But that’s another blogpost). I as an investor am trying to figure out what that money is worth, what it will be worth in the future, and how much of it in the future the business will generate.

Then when you have that all important figure, you go and see if the market is selling the stock at a greatly reduced price to what you deem the intrinsic value of the business to be. Basically, you are trying to buy a dollar for 50c. (Props to Joe Ponzio).

So I am trying to do 2 things:
1. See if the market is potentially undervaluing a business.
2. Find a fair value for that business and compare my price to the market.

Part 1 is below. Part 2 will be in post 2.

So what I do is give a company tests to pass trying to determine if the market is under-valuing them and to gauge financial health. If they pass the tests then I try to figure out a good price (pretending that I wanted to buy the whole company for myself.)

These tests they need to pass. And warning: we’re gonna get technical now, so if you are a new investor–a mere youngling in the world, you’re gonna have to look these puppies up on Investopedia.


ROE  >15% for the past ten years. I look at the average. This shows me what sort of return they are generating. It shows that they can at at the very worst manipulate their EPS every year, or, hey, at the best are actually adding value! But this number is not to be trusted. So that’s why he’s first. (Think of it this way: if you sold a TV with a year guarantee that if they hated the TV after a year they could return it for a refund, you as the TV salesman could report that sold TV as earnings this year. But if they return it and you have to pay them back, well, you can still call it earnings for your EPS, but just have the money flowing out in another section of your balance sheet. Sneaky eh!? So be careful with this one.)

P/E <10 A good indicator that the market is undervaluing the business. Again, be careful as different industries tend to trade at different P/E ballparks. But as far as I am concerned, once you start moving north of 10, 12, 14 you are getting into non-value zone.

FCF growth >10% for the past 10 years. You can’t argue with cash. Sure you can manipulate earnings, but not the movement of cash.

Assets > 1 and a half liabilities. Nice to know the outhouse isn’t overflowing.

Debt to equity ratio under 1. Debt can kill a business just as fast as it can kill a grad student.

FCF to debt > 10%. Good to see that they can manage the debt they do have.

CROIC growth >13% over the past 10 yrs. You can read more about CROIC here and here. If a business can generate a cash return on their invested capital, well, you’re gonna want to play for that team!

If a business passes these tests, man they are worth a closer look to see what sort of price you’d like to pay for em.

I’ll show you how I try to find that intrinsic value in post 2.

CAPS pick hamper: BAM, NBG, MSFT, NE, NFLX (short)

December 22, 2010 § Leave a comment

Yeah! More CAPS picks! I love doing these. For me it’s the beginning of formulating potential investment theses while also setting up a track record for myself. Sometimes they actually result in my real portfolio buys. But most of these are just values that I see. It’s somewhere between a watchlist and a real portfolio.

Ok, first on the list is Brookfield Asset Management, or BAM. I’ve picked them purely because they have a fantastic management team that did a lot of buying of property during the financial crisis. You know, that time when the price of property basically plummeted. I’m convinced they at least got some good deals and will be rewarded for it. Plus their ticker is BAM! So fun. BAM! Picked em up at $31.37 (which sucks because I’ve been thinking about them and wondering if I should buy them when they were back at $20. Bah! I’m suck a purchasing-chicken! Actually, that is probably a good thing.)

Next is National Bank of Greece. Picked em up at $1.76. You can read all about my NBG misadventures (and reasons for buying) here.

Third is Microsoft (MSFT). People think Microsoft’s days are numbered and. I think a bit differently. I think Microsoft’s sexy days are behind it. It’s still got a pretty good moat. For example, I can’t buy Jae Jun’s (from Old School Value) awesome spreadsheets simply because I’m on a Mac and his excel files are for Windows. It remains to be seen if Google’s Chrome computers will eat into the marketshare, but for now I see Microsoft being destined to be the unsexy but stable computing company out there. The fact that they have a dividend that seems to be growing at a steady rate leads me to believe that they understand that they aren’t seen as the hot sexy tech darling anymore and want to move into the venerable blue chip company category. Fine by me. I love dividends!

Still rather expensive from a P/B standpoint and from a P/E standpoint, and I have yet to run any DCF or CROIC numbers on them. In other words, I haven’t done any legwork to see if I want them for my portfolio, but they are definitely CAPS worthy. Picked em up at $27.95

Third up is Noble Corp (NE). This one is pretty easy. They are a drilling company who (like anything with the word “oil” associated with it) got hammered during the BP spill. People are concerned that government regulation is going to hurt the oil industry. Which is, if you know anything about the oil industry and the political sphere, crazy talk. Plus NE got some new South American contracts too. Ariba ariba! Picked em up at $34.99.

Lastly I have a short to report. I’m not a huge fan of shorts in my real portfolio (actually, since I have a Canadian TFSA, I can’t short.) And I swear I decided to short them before Whitney Tilson published this. (Fun fact: I once applied to be a personal assistant to Whitney Tilson as I both love value investing and education reform, plus he could take me in as his apprentice and mold me into a little market guru, poised to take over the kingdom one day, like a Simba-Mufasa thing except without the wildebeest trampling, but I never heard back from his secretary.)

Anyway, Netflix is an amazing business, having manhandled Blockbuster in the whole movie rental deathmatch. But they are now moving into Hulu, Apple and free streaming (who doesn’t Megavideo? Honestly!) country. They could compete for sure, but at a 68 P/E they are being priced as if they can cure one legged puppies.

Lil brudder

Not about the size of the dog in the fight...

But they can’t. Netflix is no help to Lil Brudder. Sure they are here to stay, but their monopoly days are over. They now have to compete with the battleship, the car, the dog, the top-hat and (the crappy piece I always get) the iron. Good luck to em, but they’re not staying that expensive. I don’t know when everyone else will figure it out (another reason to not love shorts) but I’m confident in time the numbers will show that $180 is bonkers.

(Oh, and Mr. Tilson, if you’re still looking, I’m a fantastic PA and a good candidate for mentorship. And it won’t get all Obi Wan/Vader either.)

Full Disclosure: No position in BAM, MSFT or NFLX. Long on NE and NBG

Being Smart-Stupid with the Greeks

December 22, 2010 § Leave a comment

When you are investing you can both be smart and stupid at the same time. It’s kinda like being an idiot-savant but with less games of chess. But you can’t be both wise and foolish. I learned/still learning this the hard way.

I’m a bit of a crisis guy. I like when things get all crazy, people get all squirrely and big irrationalities begin to form (people bailing on good positioned businesses, a crisis being touted as zombie apocalypse etc.) I like them because the irrationalities (and therefore opportunities) are easier to see then opportunities buried in the numbers. Mainly it’s a laziness/time issue. It’s a lot easier to see that BP is undervalued at $26 as its pumping dinosaur-juice into the gulf and people are setting up fake twitter accounts then it is to see that (for example) Microsoft is constantly increasing its dividend while trading at a fairly low valuation. The only thing you need to keep in check is your emotions. (Edit: I also like crises because I’m a young investor and that’s all I’ve ever known!)

And that is where the “stupid” of the “smart-stupid” comes from. Emotion. Getting jacked up about this potentially exciting and profitable devaluation and jumping in at way the wrong time. Thinking “hey, everyone is being irrational and way underselling this guy; I’d better get in while they’re getting out” while not waiting for people to stop being irrational and selling. I am learning this the…uh…very real way from my position in National Bank of Greece (NBG).

Warren Buffet famously said about market crashes, that when the tide goes out you get to see who was swimming naked. One of the big wet shiny bums from this crisis was the bad boys of the EU–the so called PIIGS (Portugal, Ireland, Italy, Greece and Spain.) These were the countries who either fudged their books, borrowed more than they could sustain, or, in Greece’s case, did all of that including an entire population paying their taxes with shrugs and grins. Michael Lewis did a fantastic piece about it for Vanity Fair.

Unlike the American credit crisis–which was mainly bank led–the European Sovereign Debt Crisis was more of a government led crisis. Now, obviously, when the money dried up and the skinny dipping Europeans were revealed in the bright sunlight of shame, stock prices reacted. Bank shares dropped like crazy. And when things dropped like crazy, I took notice. The National Bank of Greece was on my radar pretty quick. When it was down about 60% (from about $8 to $3) I decided to buy.

Let us travel back in time to speak with Then-Graeme about his investing thesis:

Now-Graeme: So, Graeme, what is your reasoning for buying NBG at this time?

Then-Graeme: Man, this bank is taking a pounding and it’s kinda not really their fault. They’ve even managed to pass a stress test and creepy-China has even said they will prop up Greece. When sanity returns, this bank should be the best bank in Greece.

It must be said that Then-Graeme was still pretty new at this whole thing and he didn’t know how to value a financial institution. Actually, Now-Graeme has that problem too. But still, I felt it was a good thesis then.

(And it still is now, as far as I am concerned. But currently that’s not really the point.)

This is where my good friend stupid comes in. I felt that I needed to be part of the action. Needed to get my position in the game. My thesis was sound for an investment, but I ignored the very important “when sanity returns” part of Then-Graeme’s reasoning. So I bought in the summer around $3 but the craziness has continued (with Ireland) and NBG is now sitting at a very frowny $1.74. Brutal. I mean, heck, if I held off and bought now I could have had double the shares. But instead I have a big red double digit percentage looking at me every time I log in to Yahoo! Finance.

So you can have a thesis you believe in (The Smart) but act before you’re ready/before you’ve thought it through/before the craziness is over (The Stupid) and that costs you in the end. It just remains to be seen if the Stupid or the Smart will win in the end. I’m fairly confident that $3 was a good buy price, but $1.74 makes me sad because it is a stellar buy price. Now the biggest decision on my plate is whether to put more money into the position or seek out better value plays (or hold on to the cash.)

What you can’t have both at once is Wise and Foolish (the bad kind. Not the awesome kind.) What I am in constant search for is to build up the wise and tear down the foolish. But you only learn this by doing it yourself (or, you know, read blogs.)


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