Thursday, February 26, 2015

oil prices?

After falling by more than half since last June, oil prices are not likely to recover to previous highs for a long time and the energy sector may remain under pressure for an extended period, possibly years, says Shinwoo Kim, a T. Rowe Price energy analyst.

Mr. Kim says a recovery in oil prices, which declined from over $100 per barrel last summer to the mid-$40s in January—"could take longer than people think. What's clear is that we're not going back to $100 oil. I think the new range will be around $50 to $70 a barrel."

One factor that may prolong the recovery is the surge in U.S. shale oil production from horizontal drilling and hydraulic fracturing, or fracking, as well as the slowdown in global economic growth, particularly in China.

"The productivity in U.S. production has really been surprising people massively on the upside," Mr. Kim says. "The U.S. has become the swing producer in global oil, more so than Saudi Arabia, which gave up that role when it decided not to cut production and to leave it up to the market to work it out.

"The Saudi decision was really the catalyst for lower oil prices," he adds. "It accelerated the oil price deflation, which was already in the works and would have happened over time."

Mr. Kim notes that U.S. oil production, after a multi-decade period of decline, has boomed in recent years to about 12 million barrels per day now, placing it among the world's largest oil producers, along with Saudi Arabia and Russia.

"Now, the problem is the U.S. will also respond to lower prices, so we won't grow at the same rate that we have, and that will be part of the natural correction mechanism. But I think the productivity gains that are still fairly early on in the U.S. will continue, and so oil prices will sort of be capped in the near term."

While cheaper oil prices have benefited the overall economy, they have posed a huge challenge for energy stocks, particularly oil and gas exploration and production (E&P) companies. The overall energy sector in the S&P 500 Index plunged about 18% over the second half of 2014 and almost 5% in January 2015.

Mr. Kim says it could take years before the sector fully recovers. "Some expect a sort of V-shaped recovery into the second half of this year," he says. "I think it will take much longer because we have a supply problem with oil, not just a demand problem. If it was just demand, we've seen cycles where the recoveries have been very quick. Oversupply takes much longer to fix."

As a result, Mr. Kim expects earnings of energy companies to be even worse than analysts have forecast. "Because it's a supply problem, I expect to see multiple levels of cuts," he says. "The service companies will probably get hit a little harder than the E&P companies, but I think we're just seeing the start of earnings revisions. I don't think we're done yet."

Irving Kahn

*** [2/26/15]

(Bloomberg) -- Irving Kahn, the Manhattan money manager whose astounding longevity enabled him to carry firsthand lessons from the Great Depression well into the 21st century, has died. He was 109.

He died on Feb. 24 at his apartment in Manhattan, his grandson, Andrew Kahn, said Thursday.

A studious, patient investor from a family whose durability drew the attention of scientists, Kahn was co-founder and chairman of Kahn Brothers Group Inc., a broker-dealer and investment adviser with about $1 billion under management.

Last year, at 108, he was still working three days a week, commuting one mile from his Upper East Side apartment to the firm’s midtown office. There, he shared his thoughts on investment positions with his son, Thomas Kahn, the firm’s president, and grandson Andrew, vice president and research analyst. The cold New York City winter kept Kahn away from the office the past several months, his grandson said.

“I prefer to be slow and steady,” Kahn said in a 2014 interview with the U.K. Telegraph. “I study companies and think about what they might return over, say, four or five years. If a stock goes down, I have time to weather the storm, maybe buy more at the lower price. If my arguments for the investment haven’t changed, then I should like the stock even more when it goes down.”

Kahn worked to stay mentally agile, reading three newspapers daily and watching C-SPAN, according to a 2011 article in New York magazine.

Among the memories he filed away was his work with Benjamin Graham, the stock picker and Columbia Business School professor whose belief in value investing influenced a generation of traders including Warren Buffett. Graham, who died in 1976, distinguished between investors, to whom he addressed his advice, with mere “speculators.”

Kahn assisted Graham and his co-author, David Dodd, in the research for “Security Analysis,” their seminal work on finding undervalued stocks and bonds, which was first published in 1934. In the book’s second edition, published in 1940, the authors credited Kahn for guiding a study on the significance of a stock’s relative price and earnings.

Irving Kahn was born in Manhattan on Dec. 19, 1905, to Saul Kahn, a salesman of electric fixtures, and his wife, Mamie. He graduated from DeWitt Clinton High School in the Bronx and attended City College for two years before dropping out to go into business.

In 1928, working as a clerk at the Wall Street brokerage Kuhn, Loeb & Co., Kahn heard about a trader named Graham who seemed to know how to outperform the market. Kahn visited Graham’s office at the New York Cotton Exchange, and an alliance was born.

“I learned from Ben Graham that one could study financial statements to find stocks that were a ‘dollar selling for 50 cents,’” Kahn told the Telegraph. “He called this the ‘margin of safety’ and it’s still the most important concept related to risk.”

In June 1929, Kahn sold short 50 shares of Magma Copper, betting $300 -- more than $4,000 in today’s dollars -- that the price would fall. Four months later, on Oct. 29, 1929, the market crashed. Kahn’s $300 investment would triple in value.

He had counted on a downturn, he later explained, because he was watching traders bid the price of stocks higher and higher.

“I wasn’t smart,” he said in a 2006 interview with National Public Radio, now known as NPR. “But even a dumb young kid could see these guys were gambling. They were all borrowing money and having a good time and being right for a few months, and after that, you know what happened.”

After trading closed for the day, he would ride the subway with Graham to Columbia and sit in on Graham’s investing classes. He became Graham’s part-time teaching assistant.

He scouted potential investments for Graham’s partnership, Graham-Newman, and worked on Graham’s “The Intelligent Investor” (1949).

When Graham retired from his investment partnership in 1956, he recommended Kahn to clients seeking a new adviser. By then Kahn was a partner at Abraham & Co., which was later bought by Lehman Brothers. With sons Alan and Thomas, he parted with Lehman in 1978 to open Kahn Brothers.

*** [12/17/05]

Who's Irving Kahn?

Irving Kahn works 8 hours a day, 5 days a week, at his Madison Avenue investment advisory firm. This would hardly be noteworthy, except for his age: 99 [now 100]. When scientists gave him a mental fitness exam two years ago, Kahn showed no signs of cognitive decline. "I don't seem to have that problem," Kahn says.

Kahn, the chairman of Kahn Brothers, a low-profile New York investment firm, might be Wall Street's oldest active investor. He's in the office every business day, reading scientific periodicals, annual reports and newspapers in search of undervalued stocks in the tradition of his friend and mentor, Benjamin Graham, widely considered the father of value investing.

***

[11/24/11] Except for the occasional doctor’s appointment or bad cold, Irving Kahn hasn’t skipped a day of work in more years than he can remember. And he can remember plenty of them: He’s 105.

It helps that he is wealthy enough to have full-time attendants. Also, perhaps, that he has always been a “low liver,” without flamboyant tastes, as his brown, pointy-collared shirt and brown patterned tie attest. He goes to bed at eight, gets up at seven, takes vitamins because his attendants tell him to. (He drew the line at Lipitor, though, when a doctor suggested it a few years back.) He wastes few gestures; as we speak, his hands remain elegantly folded on his desk.

Still, a man who at 105—he’ll be 106 on December 19—has never had a life-threatening disease, who takes no cholesterol or blood-pressure medications and can give himself a clean shave each morning (not to mention a “serious sponge bath with vigorous rubbing all around”), invites certain questions. Is there something about his habits that predisposed a long and healthy life? (He smoked for years.) Is there something about his attitude? (He thinks maybe.) Is there something about his genes? (He thinks not.) And here he cuts me off. He’s not interested in his longevity.

But scientists are.

*** [9/2/14 via trbaby]

Three days a week, Irving Kahn takes a taxi from his flat in Manhattan for the short ride to the offices of his investment firm, Kahn Brothers.

Nothing surprising about that, you might think. But Mr Kahn is 108 years old.

Many professional investors stress the importance of a long-term approach but few are in a position to speak about it with as much authority as Mr Kahn.

“One of my clearest memories is of my first trade, a short sale in a mining company, Magma Copper,” he remembered. “I borrowed money from an in-law who was certain I would lose it but was still kind enough to lend it. He said only a fool would bet against the bull market.” But by the time the Wall Street crash took hold in the autumn, Mr Kahn had nearly doubled his money. “This is a good example of how great enthusiasm in a company or industry is usually a sign of great risk,” he said.

But after Mr Kahn’s early success in the risky business of short-selling, his approach changed to one of finding solid companies that were undervalued by the stock market and then holding on to them. He also turned his back on borrowing money to invest (leverage). “I invested conservatively and tried to avoid leverage. Living a modest lifestyle didn’t hurt, either,” he said.

The catalyst for the change was his collaboration with Benjamin Graham, the inventor of “value investing”.

Mr Kahn said: “In the Thirties Ben Graham and others developed security analysis and the concept of value investing, which has been the focus of my life ever since. Value investing was the blueprint for analytical investing, as opposed to speculation.”

Graham was a lecturer at Columbia University in New York, where his pupils included Warren Buffett, and Mr Kahn was his teaching assistant. “They’d take the subway to Columbia together,” said Tom Kahn, Irving Kahn’s son, who also works for the family investment firm.

He added: “There are always good companies that are overpriced. A disciplined investor avoids them. As Warren Buffett has correctly said, a good investor has the opposite temperament to that prevailing in the market. Throughout all the crashes, sticking to value investing helped me to preserve and grow my capital.

“Investors must remember that their first job is to preserve their capital. After they’ve dealt with that, they can approach the second job, seeking a return on that capital.”

The market today
Mr Kahn said he was finding few bargains in today’s markets, in which America’s benchmark S&P 500 index has hit repeated record highs.

“I try not to pontificate about the market, but I can say that my son and I find very few instances of value when we look at the market today. That is usually a sign of widespread speculation,” he said.

“But no one knows when the tide will turn. Those who are leveraged, trade short-term and have bought at a high prices will be exposed to permanent loss of capital. I prefer to be slow and steady. I study companies and think about what they might return over, say, four or five years. If a stock goes down, I have time to weather the storm, maybe buy more at the lower price. If my arguments for the investment haven’t changed, then I should like the stock even more when it goes down.”

He explained how investment decisions are reached at Kahn Brothers. “Tom runs the firm and my grandson Andrew is one of our analysts. The three of us and our team enjoy debating the merits of companies. Sometimes we have different opinions, which makes it interesting.

“We basically look for value where others have missed it. Our ideas have to be different from the prevailing views of the market. When investors flee, we look for reasonable purchases that will be fruitful over many years. Our goal has always been to seek reasonable returns over a very long period of time. I don’t know why anyone would look at a short time horizon. In my life, I invested over decades. Looking for short-term gains doesn’t aid this process.”

“You must have the discipline and temperament to resist your impulses. Human beings have precisely the wrong instincts when it comes to the markets. If you recognise this, you can resist the urge to buy into a rally and sell into a decline. It’s also helpful to remember the power of compounding. You don’t need to stretch for returns to grow your capital over the course of your life.”

Wednesday, February 25, 2015

are we headed toward a bubble?

Could the market really be headed toward a bubble?

To find out, Cramer compared the market then versus now to see if the situations are alike. First, there is the market leader, Apple. Cisco was the leader back in in 2000, with a market cap of $550 million. Apple now has a $736 billion market cap.

Yet anyone who follows Cramer knows that he values stocks by looking at their price-to-earnings multiple. While the average stock is trading at just 18 times earnings currently, Apple now sells at approximately 15 times earnings.

In the last bubble, Cramer argues that Cisco sold at about 80 times earnings. That is a huge difference!

Monday, February 16, 2015

Cokeefe

This guy (I assume it's a guy) posted an article on gurufocus boasting 303% performance in the past six years or 25% compounded.  He claims to have beat the S&P 500 by 157% or an average of 22% a year.

 2009  2010  2011  2012  2013   2014
Return 74.22% 58.65%  50.31% 24.62%  43.05%  18.67%
+/- S&P 500  47.76% 43.59%  35.25% 8.66% 10.66%   3.25%

How did he do it?

"I approach investing as an owner of the companies that I am buying. This impacts how I buy and hold stocks.

I evaluate buying marketable equity shares of companies in much the same way I would evaluate a business for acquisition entirely. I want the business to be (a) easy to understand, (b) run by able and honest managers, (c) with an enduring competitive advantage (moat) and favorable long-term prospects, and (d) at an attractive price (discount to its intrinsic value which is the discounted value of the cash that can be taken out of the business during its remaining life).

There is a tremendous advantage of being an individual investor. Portions of outstanding businesses sometimes sell in the securities markets at very large discounts from the prices they would command in negotiated transactions involving selling the entire business. Consequently, bargains in business ownership, which are typically not available directly through corporate acquisition, can be obtained indirectly through stock ownership.

In terms of selling I don't. I want to own these superstar companies as long possible. This also removes the concern over guessing about what is happening, or might happen, with the overall economy. In other words, if you owned 100% of a great company generating incredible returns on invested capital, you would not sell simply because there is an economic problem in Europe. With that said, why sell partial ownership shares of solid companies if there is a problem with the overall economy? The only thing that I worry about, after buying partial ownership of great companies, is whether the aforementioned reasons for buying are preserved. I only sell if the company no longer provides excellent economics or is run by able and honest management.

It took me several years to learn how to properly value a business. You cannot simply go by Earnings per Share (EPS) because the quality and sources of the earnings can be quite different amongst companies. My favorite metric is Return on Invested Capital (ROIC). It measures how much each dollar re-invested can produce in earnings. For example, a 24% ROIC will tell you that for every $1.00 the company re-invests it has produced 24 cents of earnings.

Patience, discipline, and emotional intelligence (self-awareness) are the main factors in investing on your own. Most investors are their own worst enemies – buying and selling too often, ignoring the boundaries of their mental horsepower. Individual investors tend to buy with the herd after prices are already highly inflated and sell in a panic when the market drops. Instead, focus on buying great companies with the aforementioned qualities when the market price is publicly trading at a discount to its intrinsic value. This is where the individual investor has a huge advantage over the professional; most fund managers don’t have the leeway to patiently wait for exceptional opportunities.

***

Sounds good to me, but contributor Dr. Paul Price is skeptical because his return sounds too good to be true.

Call me skeptical.

You have no profile on view and no link(s) to any website or newsletter. This is the first article you have published here on GuruFocus.

There is not a single example of the stocks you own or owned. Your claimed results would have been statistically improbable or impossible to achieve in a diversified portfolio with any substantial size.

If what you detailed is true you likley had a very small starting amount of capital, stayed incredibly concentrated, highly levered or some combination of all those factors. Or... it could all be made up.

Unless you show some supporting data, nobody reading your article has any reason to believe the gains which you claim to have accomplished were real.

***

Cokeefe then supplied a link to a previous (and nearly the same) article which provides more information on his holdings.

Here were author's 21 holdings:

Visa
Gilead
National Oilwell Varco
Ebix
Fiat Chrysler
Cummins
Syntel
Walgreen
Netease
Microsoft
Illinois Toolworks
American Tower
Apple
HDFC
Blackrock
eBay
Intercontinental Exchange
Intel
Total
Intuitive Surgical
Citigroup

And here's his current portfolio at Morningstar.  The one change is that he sold Fiat Chrysler and bought Biglari Holdings.  Interesting to see a slight variance between the year-by-year performance at the two sites.  That wouldn't make sense unless it adjusts your performance if you bought or sold a holding (which also wouldn't make sense.)  And a wide variance in the 2010 and 2011 returns in the gurufocus article vs. the valuewalk article.

So let's take him at his word and say he never sold any of these stocks (even though he just sold Fiat Chrysler) and bought all of them five years ago (unlikely, but let's just say he did).  Let's see how well they performed.

                                                 2010    2011   2012    2013   2014
Visa (V)                                  -18.93   45.21  50.27   47.82  18.50
Gilead (GILD)                          -16.25   12.94  79.45 104.49  25.51
National Oilwell Varco (NOV)     53.46    1.77    1.25    17.69  -6.32
Ebix (EBIX)                               45.42   -6.46 -26.20   -8.28  17.54
Cummins (CMI)                       141.79 -18.78  25.15   32.18    4.26
Syntel (SYNT)                           27.64  -1.65   19.99   69.59  -1.09
Walgreen (WBA)                        7.80  -13.09  14.97   58.39  34.93
Netease (NTES)                        -3.90   24.07  -5.17    87.16  29.27
Microsoft (MSFT)                     -6.63    -4.55    6.09   43.69  27.24
Illinois Tool Works (ITW)          13.98   -9.91   33.35   40.90  14.78
American Tower (AMT)            19.51   16.89   30.26    4.72   25.60
Apple (AAPL)                           53.07   25.56   32.71    7.64   40.03
Averages                                  26.42    6.00   21.84   42.17  19.19

Reported                                   50.31  33.55   24.62    43.05  17.91
S&P                                          15.06    2.11   16.00    32.39  13.69

I just chose the first twelve stocks because I was lazy but wanted to include AAPL which has had a nice five year run.  And I'll use the valuewalk figures for the reported return instead of the gurufocus figures.

Looking at the results, my first observation is that the averages did indeed beat the S&P 500 every year and by a significant margin.  The second observation is that 2012-2014 averages were in the ballpark of the reported returns, but the 2010 and 2011 averages did not come close.

To reconcile this, one would have to assume that he didn't own all the stocks during those years.  2011 is hard to reconcile though as Visa was the only stock of the twelve I looked at, that beat the reported average.

I suppose his portfolio could possibly be legitimate if one assumes he didn't own very many stocks during 2010 and 2011 and he just happened happened to own the right few stocks during those years (and probably owned some stocks that I didn't include above).

If legitimate, I would think that his portfolio will probably drift more toward the average as time goes on.  But still his philosophy seems sound and he will probably do fine.

Sunday, February 15, 2015

300-point days: good or bad?

If you’re bullish on stocks, root against a huge gain in the Dow today.

When the Dow Jones Industrial Average screamed higher by 305 points Tuesday, reclaiming a nice slug of January’s losses, it was the second one-day spurt of more than 300 points in 2015, and the third in two months.

It’s tempting to see these buying frenzies as evidence of underlying market health -- signs of powerful demand for stocks unleashed as soon as unnerving distractions like crashing oil prices or European debt negotiations recede.

Yet such quicksilver jumps aren’t what long-term market optimists should wish to see very often. They tend to appear in a skittish tape in a climate of low investor conviction, and result not from big investors being caught wrong-footed by a stray headline or sudden price blips.

More generally, big gains in the market in a single day are not particularly representative of how strong bull-market advances work. Across all of market history, large single-day moves either up or down tend to be clustered in bear markets, near market bottoms and, to a lesser degree, near market tops.

The meat of a long market advance typically looks like a long upward grid of smallish successive gains and brief, trivial pullbacks, reminiscent of the New England Patriots monotonous attack of disciplined short passes rather than Hail Mary downfield gambits.

The relentless rally of 2013 is an ideal example of the gentle glide path of a well-scripted advance. On the way to a 30% rise in the Standard & Poor’s 500 that year, there were a few month-long stretches when the index failed to move as much as 1% in a day.

Monday, February 09, 2015

$9.8 billion to charity

America's 50 top givers in 2014 donated $9.8 billion to charity, up 27.5 percent from the top 50 gifts in 2013, according to a new report.

Bill Gates was the top giver last year, according to the Philanthropy 50, assembled by the Chronicle of Philanthropy. Gates and his wife, Melinda, made a gift of $1.5 billion in Microsoft stock to the Bill and Melinda Gates Foundation.

[and here I thought he didn't own any more MSFT / no, not yet]

Ranking second was Ralph Wilson, late owner of the Buffalo Bills football team, who made a bequest of $1 billion to the Ralph C. Wilson Foundation in Detroit, which will aid charities in New York and Michigan.

Ranking third was Ted Stanley, founder of collectible company MBI, with a gift of $652.4 million to the Broad Institute and other groups to fund mental-health research.
The report also showed a surge in giving by new tech titans. There were 12 tech donors on the list, twice the number in 2012 and more than the 11 donors from finance.

Among the top tech givers were Jan Koum, the WhatsApp founder who gave $556 million to the Silicon Valley Community Foundation. Facebook billionaire Sean Parker gave $550 million to his own foundation and the Donor Advised Fund at Fidelity.

GoPro founder Nick Woodman and his wife, Jill, gave $500 million to the Silicon Valley Community Foundation, while Google guys Sergey Brin and Larry Page gave $382.8 million and $177.3 million, respectively, to different foundations.

***

Why isn't Buffett on the list?  He gave $2.8 billion to the Gate Foundation last year.

Thursday, February 05, 2015

rules of thumb failed in 2014

There are plenty of handy guidelines for playing the stock market based on historical patterns and observed seasonal rhythms.

In 2014, it would have been best to ignore them. Close adherence to the calendar-based wisdom would have caused investors to miss much of the year’s upside and likely would have put them in the wrong kind of stocks for the rally that followed the October low.

The January Indicator
January is packed with supposed clues and patterns worth tracking. The January Indicator says that when stock indexes are down for the first month of the year, the rest of the year tends to be unusually weak.

In 2014, stocks dropped right from the start, with the Standard & Poor’s 500 shedding 3.6% in January. The January Indicator would have suggested the remainder of the year would be a relatively tough stretch. In fact, to date the S&P 500 is up 12.6% since Jan. 31 -- better than even the average year when January rose.

Sell in May and Go Away
This couplet is drawn from the fact that the vast majority of equity-market returns across more than a century were accrued between Nov. 1 and April 30.

Well, this year the S&P rose more than 7% from May through October -- the majority of this year’s upside -- with a maximum loss of 1.1% at the October low.

The Worst Two Months of the Presidential Cycle
Largely overlapping this year with the “sell in May” period, the second and third quarters of a midterm election year have been, over time, the worst of the four-year election/market cycle.

Oh well. This year, the “worst two quarters” had the market up 7%.

Wednesday, February 04, 2015

Ronald Read

BRATTLEBORO, Vt. (AP) - A man who sometimes held his coat together with safety pins and had a long-time habit of foraging for firewood also had a knack for picking stocks - a talent that became public after his death when he bequeathed $6 million to his local library and hospital.

The investments made by Ronald Read, a former gas station employee and janitor who died in June at age 92, "grew substantially" over the years, said his attorney Laurie Rowell.

Read, who was known for his flannel shirt and baseball cap, gave no hint of the size of his fortune.
"He was unbelievably frugal," Rowell said Wednesday. When Read visited her office, "sometimes he parked so far away so he wouldn't have to pay the meter."

The bequest of $4.8 million to the Brattleboro Memorial Hospital and $1.2 million to the town's Brooks Memorial Library were the largest each institution has ever received. Read also made a number of smaller bequests.

"It's pretty incredible. This is not something that happens on a regular basis," said the hospital's development director, Gina Pattison.

Stepson Phillip Brown, of Somersworth, New Hampshire, told the Brattleboro Reformer he visited Read every few months, more often as Read's health declined. The only indication Brown had of Read's investments was his regular reading of the Wall Street Journal.

"I was tremendously surprised," Brown said of Read's hidden wealth. "He was a hard worker, but I don't think anybody had an idea that he was a multimillionaire."

***

Most of Read's investments were found in a safe deposit box, Read's attorney, Laurie Rowell, told CNBC. Those investments included AT&T, Bank of America, CVS, Deere, GE and General Motors.


"He only invested in what he knew and what paid dividends. That was important to him," she said in an interview with "Closing Bell."

Financial expert Chris Hogan, a strategist with Ramsey Solutions, applauded Read's diligence and believes others can follow his example.




"It's a matter of living a certain way, keeping your lifestyle under control and being committed," he said.

Sunday, February 01, 2015

How does Buffett do it?

From November 1976 to the end of 2011, Warren Buffett delivered an average annual return of 19% in excess of the Treasury bill rate, as measured by shares of his publicly traded conglomerate, Berkshire Hathaway (BRK.A, BRK.B), versus a 6.1% average excess return for the stock market. In addition, Berkshire’s Sharpe ratio — a measure of return per unit of risk — is higher than all U.S. stocks that have been traded for more than 30 years from 1926 to 2011, as well as all U.S. mutual funds in existence for more than three decades.

So how does he do it?

If a newly published paper is any guide, the answer is pretty straightforward. According to “Buffett’s Alpha,” authored by AQR Capital Management‘s Andrea Frazzini, David Kabiller, CFA, and Lasse Pedersen, who also teaches finance at the NYU Stern School of Business, Buffett buys low-risk, cheap, and high-quality stocks; he employs modest leverage to magnify returns; and he sticks to his investment discipline even during rough periods in the markets that would force investors with less conviction or capital “into a fire sale or a career shift,” as the authors put it.

[via Warren Buffett International Fan Club]