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Value Investing (within an Austrian context)

C.J. Maloney reviews the book, Applied Value Investing: The Practical Application of Benjamin Graham and Warren Buffett's Valuation Principles to Acquisitions, Catastrophe Pricing and Business Execution, by Joseph Calandro, Jr.

Maloney points out something those of us sympathetic to the Austrian School of economics know all too well. Namely, that followers of Austrian economics can easily feel like perma-bears (or be accused of such, see comments made about folks like Jim Grant over the years), with urges to stockpile guns and gold and head for the hills. Yes, I'm exaggerating. But only to make a point that is largely true.

About the book and Mr. Calandro, Maloney writes:

He laments that many investment how-to guides "give great advice on what to do, but they do not tell you how to do it" (p. xix).

Mr. Calandro set out to remedy that shortfall and created a book that stands out from the crowd. To all those college kids who have ever asked me if I apply my "macro" beliefs to my investment methodology, I strongly suggest you pick up what Mr. Calandro has to offer. It is well written and worthwhile.

Coming in at an easy-breezy 230 pages, the bulk of the book is devoted to the use of the Graham-Dodd methodology to analyze a number of large-scale equity investments, among them Edward Lampert's 2004 acquisition of Sears and Warren Buffett's GEICO and Gen Re acquisitions. It is Buffett's investment acumen more than anyone else's that Mr. Calandro admires. Calandro shares the man's faith in the usefulness of the Graham-Dodd approach (which says it is possible to outperform the market over the long run) versus the "efficient market theory" (EMT, which states that you cannot).

I note that the book's cover carries an endorsement from none other than Seth Klarman of the Baupost Group. Probably worth checking out.

Bolton Risking Reputation in China?

This lengthy piece in the Financial Times thinks so. Regular readers will recall several posts on this blog concerning Anthony Bolton, one of the best fund managers in the UK. He wrote the book, Investing Against the Tide: Lessons From a Life Running Money.

And now he's postponing a planned retirement to move to Hong Kong and setup a China-focused investment fund.

Mr Bolton insists he has the skills and experience to deliver for his investors. During his tenure, the special situations fund successfully invested in Chinese companies, including some “A shares” – Chinese-listed and largely restricted to local investors. During his regular visits in the past five years, he also has gained experience of working with Chinese management.

He points out that he decided against investing in Gome, the electronics retailer, after meetings with executives left him uncomfortable with its management and accounting. The company was seen as a sure bet on growth in consumer demand but, since the arrest of Gome’s founder a year ago on insider trading and bribery charges, its Hong Kong-listed shares now trade at roughly one-sixth of their price at the start of 2008.

Mr Bolton will benefit from Fidelity’s established research and analyst presence in Hong Kong. Its China Focus fund, with stocks worth $4bn, is managed by Martha Wang, a Mandarin speaker with 16 years’ experience researching Chinese companies. Indeed, many of Fidelity’s 30 Asian regional analysts and 18 portfolio managers speak the language. Some will accompany Mr Bolton to meetings with company managements, providing not only translation but local intelligence.

The strategy and size of Mr Bolton’s fund is yet to be decided. He does say, however, that it will make larger bets than Fidelity’s existing China funds and will be run according to his style, characterised by bottom-up investing with contrarian calls.

As well as his stock-picking skills, Mr Bolton says he will bring a fresh perspective and an ability to spot emerging trends in new industries given his experience of developing European markets in the 1980s and beyond. Chinese companies in services and pharmaceuticals, for example, are expected to benefit from policies to support domestic consumption, develop new industries and promote a greener economy.

“The spotlight is on me and I have to outperform,” he says. “I am keen to get started, and we’ll see what happens.”

John Dizard Examines His 2009 FT Columns

John Dizard's weekly Financial Times columns are a reliable treat. In his latest, he reviews himself and freely admits mistakes along with things he's gotten right. One of his "hits" was investing in North Korean debt -- which amazingly you can do here in the US.

But of topics touched on that impact my portfolio is -- no surprise -- gold:

My second error, or set of errors, was to attempt to pick short-term tops and bottoms in the secular gold market rally.

I have been a long-term gold bull for more than five years but keep trying to moderate that bullishness with cautious execution of entry and exit points.

That's hard to do, but it's easy to get whipsawed by overtrading.

Now I will compound the error by saying that we will probably continue with this correction in gold, but when it gets back below $1,000 an ounce, buy it for the longer term.

The major part of demand increase will come not from gold replacing currencies in official reserves, even if the Indian and Chinese governments buy more of the metal.

Rather, the price pressure is from a steadily growing mass of retail buyers around the world who put less trust in all currencies.

As you know, I agree we're in a longer term bull market for gold. And I agree we're in a correction phase, though I have no idea if gold will sink back below $1,000 or not. I don't try to cut things that fine.

Check out the entire Dizard column if you subscribe to FT.com.

Five for the Weekend #73 -- Happy New Year Edition

Depending where you are around the globe, 2009 is either history or soon to be. Like Christmas last week, the holiday falls so that it will be a long weekend for most. And here are five items you might wish to check out as we kick off 2010.

• I don't want to close out the year without noting the passing of Christopher Browne, who died at the age of 62 from a heart attack this month. Browne was one of the partners of legendary value investing firm Tweedy, Browne in New York. Reading interviews with him in the pages of publications like Forbes in the last half of the 1980s and 1990s played a huge role in my development as an investor. Jason Zweig wrote a fine remembrance of the man in The Wall Street Journal. Rest in peace, Mr. Browne.

• Peter Brimelow covers the world of investment newsletters for MarketWatch. His latest column ranks the top ten performing letters of 2009. Equities Special Situations comes in first, racking up a gain of 174%. The rest include famous names like Harry Schultz and Ruff Times.

• Rachel Benepe manages the First Eagle Gold Fund, and she recently appeared on CNBC to discuss her firm's "gold as insurance" approach. The interview lasts five minutes. It took place on 12/22 with gold into its current correction (or what I believe is a correction). She said gold-as-insurance makes sense now more than ever. No argument from me.

• Niall Ferguson is always worth reading. And earlier this week he penned an essay on China -- "The Decade the World Tilted East" -- in the Financial Times (freely available on RealClearMarkets.com). This is lengthy, and you probably should print it out and read it.

• Finally, here's a consideration of the three rules of human conduct -- iron, silver and gold. No, we're not talking metals here. The linked piece was written by a man named Wayne Jackson in 1998, based on a course developed by T.B. Larimore (who died in 1929). Committing ourselves to living by the Golden Rule would be a great way to start 2010.

I wish all of you the best of health, happiness and prosperity in 2010 and beyond. Thanks for reading the blog, especially those of you who have been reading since Controlled Greed started in 2005 and haven't lost patience with my infrequent postings over the past year or so. But I suspect we'll have more to do in the coming months, so stay tuned. In the meantime, happy New Year.

Barron's Interviews Bearing Asset Management

Kevin Duffy and Bill Laggner of Bearing Asset Management sit down for a Q&A with Barron's in this week's issue. They've done quite well since opening up shop in 2002, averaging more than 18% annually.

Duffy has this to say about capitalism:

Capitalism is primarily attacked by two groups: utopians who wish to impose a more "compassionate" system, and political capitalists who want to enjoy the fruits of success without bearing the pain of failure. They use the coercion of the state to gain privileges, at the expense of everyone else.

As a country we've become less tolerant of economic failure. The result has been a series of interventions, such as meddling in the credit markets, promoting homeownership and creating a variety of safety nets for investors. Each crisis leads to an even greater crisis. The solution is always greater doses of intervention. So the system becomes increasingly unstable. The interventionists never see the bust coming, then blame it on "capitalism."

And when asked about the "little guy," he replies:

The little guy actually has been crushed. Nobody is asking where this money is coming from. And the money has to essentially flow into the political economy at the expense of the real economy. The little guy is always going to be the last one in the soup line. So he will get a bone tossed to him, like cash for clunkers. But if you are Goldman Sachs or if you have got essentially the red bat-phone to Washington, D.C., you are first in line.

Laggner adds:

AIG made sure its creditors received 100 cents on the dollar. Essentially you have the socialization of risk, but the survivors are still highly leveraged. There is still a multi-trillion dollar shadow banking system that FASB [the Financial Accounting Standards Board] wants to address next year. The central planners have already spent $3.15 trillion on various bailouts, credit backstops, guarantees, etc., and given approximately $17.5 trillion of government commitments, etc., while allowing many of these institutions to remain in place, with the same people running them.

Anyone familiar with Jim Grant talking about "the democratization of credit, the socialization of risk" years ago will find that sentiment echoing throughout this interview.

The pair give their longs (including gold -- oh boy!) and shorts. Read the entire thing if you subscribe to Barron's.

Five for the Weekend #72 -- Christmas Edition

With markets closing early today, and Christmas Friday, most of us are enjoying a very long weekend. So here are five items you might check out between now and Monday. Hopefully one or two of these little chestnuts will add just a little to your holiday cheer. Let's see.

• Jim Grant and the gang at Grant's Interest Rate Observer are giving away their first annual "Grant's Winter Resort & Ski" issue -- a compilation of vintage articles from 2009. It's 33 pages of great stuff, and you can download it from Grant's homepage here.

• Here's a good profile of Joe Lewis, the billionaire who lost a lot with his Bear Stearns investment, but has otherwise racked up huge sums with his currency bets and real estate developments. The 72-year-old started out in London as an "East End geezer" to living in Lyford Cay.

• Paul Kangas is stepping down from hosting the Nightly Business Report on PBS. I discovered NBR in the mid-1980s, the same time I started watching Wall Street Week with Louis Rukeyser. The Miami Herald has a good profile of Kangas. I especially liked the story of Kangas being in the Coast Guard when JFK was killed. His admiral told him when the news broke, "Call my stock broker, immediately." He describes how the move made $600,000.

• Randall Forsyth writes on Barron's Online about what he learned in 2009. And then speculates what we all may find in 2010: "The Federal Reserve is widely expected to begin tightening monetary policy, which may mean relearning the lessons of 1937, when reversing easy money led to the second down-leg of the Depression. Meantime, risk perceptions, as encompassed in the VIX, have continued to fall. That implies a large level of complacency. In which case, cash -- the worst asset class of 2009 -- might end up the winner of 2010."

• Now for some fun. The Mark Steyn Christmas Show is two hours of great conversation and holiday music. I'm not big on Steyn's views on interventionist foreign policy. But he's a fine writer, true wit, and possesses vast knowledge of musicals and old standards. He also pens the best obits of anyone these days (a skill little appreciated in the US, I'm afraid). And he used to write The Spectator's movie reviews (why he no longer does is beyond me). Anyway, enjoy.

I wish all of you a very Merry Christmas and happy holiday. And I hope this season can be a time of great joy and fellowship for all those you care about. Take care and thanks for reading.

Five for the Weekend #71

We're bracing for a snowstorm in my neck of the woods. So here are five items you might wish to review, whether your weekend involves being snowed in or enjoying the sun somewhere around the globe.

• This is from October, so it's not breaking news. But I came across this short video interview with Meryl Witmer of Eagle Capital Partners at a Barron's conference. She discusses two stock picks, one of which is E*Trade. Witmer, as readers of this blog know, is a member of Barron's annual Roundtables -- and the next one is right around the corner.

• Hong Kong-based David Webb has posted his annual Christmas Pick. Except this year he doesn't, writing that the picks aren't what his corporate governance site about. What he does write about is the possibility of setting up a closed-end fund, describing why the tax laws in HK make it unattractive at this time. This is a good article, and if you've just heard of Webb, you'll like checking out his past stock picks from the past decade.

• Matt McLennan, who took over from Jean-Marie Eveillard running the First Eagle Funds, recently gave an interview with the Wall Street Transcript. He discusses investing in Japan and the rest of Asia. And, of course, answers questions about the fund's owning gold. To get the link, go here and scroll down.

• Prem Watsa of Fairfax Financial (FFH) was interviewed by the Financial Post in Canada earlier this month. Asked if the worst is over: "80% of the economy [the private sector] is de-leveraging. 20% is government stimulus. Companies are operating at 65% of capacity or utilization rate. Unemployment is rising. If in six to 12 months' time, the stimulus and bailouts don't work, and we are at zero interest rates, what then? We had 20 years of good, meaning no recession to speak of, and only one year of bad. We are not worried about inflation, just the opposite. If wages start to go up, there will be inflation. But there is lack of demand. That's the problem."

• I've posted several links to stories on China's investment in Africa. Here Africa-Asia Confidential runs a feature story about Chinese involvement in a Liberian mine project.

And that's it. Have a great weekend.

BCE Rings Up Another Dividend Hike and Share Buyback

Some very good -- and unexpected -- news came today for BCE Inc. (BCE) shareholders:

BCE is hiking its annual dividend by 7% to $1.74 a share for 2010, has launched a bid to buy back up to $500-million worth of shares, and will trim annual costs by making an up-front $500-million contribution to its pension plan.

This is the company's third dividend increase since last December.

CEO George Cope said, "BCE is committed to delivering attractive ongoing returns to our shareholders and has done so through consistent and sustainable dividend increases and share buybacks since December 2008."

Sitting here in the US, I like receiving payouts from a Canadian outfit like BCE. The longer term trend of the US dollar looks to be going down (though nothing goes in a straight line). And a commodity based currency like the Canadian dollar should appreciate in value against its American counterpart over time.

Five for the Weekend #70

Well, 2009 is coming to a close. It will be interesting to see if 2010 is when the bear market finishes its work. What do I mean by that? Simply that as bad as the bear was earlier this year, we never saw the market-wide single-digit P/E ratios and fat yields typically seen in secular bear markets. And, if you believe as I do that we're in a bull rally within a secular bear market, that is something to keep in mind.

Here are five items you might check out over the next couple of days.

• Listening to Bloomberg radio out of Asia late last night, I heard that Mark Mobius has a blog. And he does! Mobius is Templeton's emerging markets guru, and John Templeton was certainly ahead of the curve in starting Templeton's emerging markets closed-end fund with Mobius in 1986 or thereabouts (here in the US anyway). Mobius has since been managing something like 30 different funds with many billions in assets, and that's probably hampered performance in many ways. The blog looks interesting, but "corporate blogs" are often less-appealing -- and for all sorts of regulatory reasons we shouldn't expect stock picks.

• Speaking of Bloomberg, this profile of investor Bob Rodriguez recently appeared on their website. Rodriguez is a value guy with First Pacific Advisors, and the fund he manages for FPA is known to have very high cash balances at times. In fact, he's averaged 30% cash since 1998 (the average for funds has been 4%). “People told me, ‘You are not paid to manage cash,’ ” he said in a telephone interview from his home in Zephyr Cove, Nevada, where he moved three years ago from California. “I am paid to exercise my best judgment. If you don’t like it, you can leave.”

• Martin Wolf wrote in the Financial Times this week about China's exchange rate policy: China’s exchange rate regime and structural policies are, indeed, of concern to the world. So, too, are the policies of other significant powers. What would happen if the deficit countries did slash spending relative to incomes while their trading partners were determined to sustain their own excess of output over incomes and export the difference? Answer: a depression. What would happen if deficit countries sustained domestic demand with massive and open-ended fiscal deficits? Answer: a wave of fiscal crises. Neither answer is acceptable; we need co-operative adjustment. Without it, protectionism in deficit countries is inevitable. We are watching a slow-motion train wreck. We must stop it before it is too late.

• Sticking with the FT and China, David Pilling has a must-read piece about Chinese investment in Africa: A few years ago, Lukas Lundin, a mining executive, rode his motorbike 8,000 miles from Cairo to Cape Town. His journey, which took just five weeks, meandered through 10 countries, including Sudan, Ethiopia, Malawi, Zambia and Botswana. He was amazed to discover that 85 per cent of the roads he travelled were tarred and of high quality. Many had been built by Chinese companies.

• I've long enjoyed the "High Life" columns Taki pens for The Spectator. They aren't investment-related pieces so they don't find themselves getting linked to my blog. But here's his take on the Dubai debacle: One of the most intriguing aspects of the Dubai debacle is how genius status is conferred upon business gambits by the creeps who descended to that crappy little place down south hoping to sell sand to the Bedouins. Many of them were Iranians and Pakistanis, and not a small number were Lebanese, all as honest as the day is long on 21 December in Helsinki. What they all did do was pay the poor Philippine and Pakistani workforce below-survival wages, confiscate their passports in cahoots with the Dubai authorities, and work them to death. So, it couldn’t happen to nicer people and I hope they eat lotsa sand (and they can also drink it if they like). They’ve held workers hostage for a very long time and in conditions far worse than those in Guantanamo — without the water boarding — so don’t cry for the Dubai Brothers as yet.

Have a great weekend, folks!

Buying Geeknet Inc.

Today I established a new position in the portfolio, buying shares in Geeknet Inc. (LNUX) at $1.30 each, which is where they ended the day.  Geeknet changed its name from SourceForge, Inc. in early November.

Geeknet is a network of community-driven media and e-commerce websites. It is a small company -- market capitalization is less than $80 million and there are approximately 60 million shares outstanding. The stock price is 1.7 times book value and there is no dividend. The current ratio is more than 5-to-1 and the quick ratio is more than 4-to-1. There is very little debt and about 50 cents a share in cash.

Geeknet has reported negative free cash flow, yet insiders have been aggressively buying the company’s stock for the past several months.

My hunch -- note the word, “hunch” -- is that the company may be taken private, or sold to another, larger outfit like Amazon. Of course, there is always the possibility that insiders have been adding to their stakes simply because they like the long-term prospects for the company. And insider buying alone doesn’t guarantee anything.

Anyone thinking about this absolutely needs to do their own due diligence. I’m in -- and could always end up with egg on my face.