How to Buy Dollar Bills for 50 Cents - Mark Boyar

Barrons did an interview with Mark Boyar in August last year. Mark Boyar runs a mutual fund, Boyar Value, that has beaten the S&P500 over the last 5 years. He approaches investing with mentality of buying dollar bills for 50 cents. Besides running a mutual fund, Mark also publishes investment research called Boyar Intrinsic Value which include an annual list of undervalued stocks called the Forgotten Forty. Stocks included in Forgotten Forty include Hannesbrands (HBI) and Liberty Media (LMCA). In the interview, Mark lists his current favourite stocks ideas that include Weight Watchers (WTW) that has decline 75% from its high to $21, Scotts Miracle-Gro (SMG) and Bank of America (BAC) which he thinks is worth $28.

To read the interview, click here

Cash Cushion Makes a Comeback

I read this article on last Wednesday's Business Times and thought that this is a great article to share with everyone. Given that the market has risen for the past 3-4 years, there are lesser and lesser bargains in the market. When there are lesser opportunity to invest money, probably a good way is to hold on to cash. Though the cash is not earning any returns while it sits idle, it would come in real handy when the market retreat and bargains start to surface

Below is the article from Norm Alster.

JITTERY investors see danger in every market thrust upward. For them, soaring stocks aren’t confirmation that the future looks bright. Sustained market gains seem more like evidence that optimism has been hijacked by delusion and greed, and due in time to be exposed and reversed.

With the Standard & Poor’s 500-stock index up almost 18 percent over the first nine months this year, the skeptical and fainthearted can choose from a bulging bag of protective hedges. They can short stocks individually or the market as a whole. Some inverse index funds and exchange-traded funds are leveraged to triple any move, providing outsize profits in a market slide, but enormous risks should the market keep marching higher.

Still, for most fund managers, there is a time-tested, less risky way to protect against overexposure to an overextended market. By holding cash instead of stocks in part of their portfolios, they can cushion any fall and save ammunition to buy again when stocks are cheaper.

Many fund managers have quietly been raising their cash positions. In their latest reporting periods, according to Morningstar, the average equity mutual fund held 9.7 percent in cash, up from 8.8 percent in the previous three-month period.

Some managers are sitting on much more cash than that. John Deysher, manager of the Pinnacle Value fund, has 44 percent of his portfolio in cash. But for managers like him, not being fully invested has a price. Though Pinnacle Value is up for the year, it has lagged behind the S.& P. 500. Mr. Deysher is unfazed.

For one thing, Pinnacle Value has outperformed the S.& P. 500 over the last decade. And Mr. Deysher would sooner lag behind the market than bend the buying discipline of the fund.

“Our job is to seek out fundamentally undervalued stocks, and if we can’t find any, we’ll let the cash build,” he said. “It’s been difficult for deep value investors like us,” he added. “There’s just not a lot of merchandise.”

For Mr. Deysher, capital preservation is paramount. “We’d really like to put the cash to work but not at the risk of potential capital loss,” he explained.

But Bruce Berkowitz, who manages several Fairholme funds, goes much further in outlining the merits of stockpiling cash.

“I believe holding above-average amounts of cash leads to above-average performance,” Mr. Berkowitz said. His Fairholme Allocation fund, which now holds 14.8 percent in cash, has outperformed, soaring almost 34 percent in the first nine months this year.

Having cash on hand can be the difference between getting in on the best buying opportunities, or missing out, Mr. Berkowitz reasons.

These opportunities typically arise when markets have sold off and many managers must sell to meet redemptions from fund shareholders. “Having that cash allows a portfolio manager to buy when most do not have the cash to make investments,” he said. It also allows a fund manager to meet redemptions without having to sell stocks that still have “huge performance potential.”

“Cash can be extremely valuable — especially when no one else has it,” Mr. Berkowitz said. “Cheap purchase prices are usually created when most funds are being forced to sell.”

A case in point: “All the companies I’ve invested in in the past three years were dramatically affected by the real estate bubble,” he said. Recoveries in the shares of the American International Group and Sears Holdings have produced big gains for the Fairholme funds.

But some question the value of trying to time market moves. “Evidence suggests that market timing is incredibly hard,” said Michael Abata, a manager of the Invesco Low Volatility Equity Yield fund. “If you can do it, it’s potentially powerful — but incredibly hard to do.”

Mr. Abata does not try. The Invesco fund now has less than 2 percent of its assets in cash. With investors buying and selling shares of a fund, that is close to being fully invested. The fund managed an advance of nearly 17 percent in the first three quarters of the year.

Though he does not hedge with cash, Mr. Abata is adjusting his strategy to the realities of a market that is becoming “increasingly expensive.” He is shifting portfolio weightings toward stocks that tend to have less volatility. He recently bought shares of AT&T and Verizon. He has reduced his position in First Solar, which tends to be a more volatile stock. What would Mr. Abata do if investors started bailing out of the fund during a sharp market correction? “If we were being redeemed, we’d sell off the less attractive holdings — those that don’t have as high an expected return,” he said.

Some mutual funds require fund managers to stay fully invested. Sometimes, large investors in a specific fund stipulate that the fund avoid holding cash, said Will Browne, a manager of the Tweedy, Browne Global Value fund. “There are certainly institutional accounts that give you money and say, ‘I want you to be fully invested.’ ”

But Mr. Browne, whose fund holds nearly 17 percent cash, said he “pushes hard” against such demands. He said he preferred to buy companies at prices that are lower than what an informed buyer would pay in an acquisition. If he cannot find them, he said, he is prepared to “lag behind” market returns for a while.

One fund manager who is still finding stocks to his taste is Richard S. Nackenson, of the Neuberger Berman Multi-Cap Opportunities fund. Mr. Nackenson has been nearly fully invested, retaining slightly more than 2 percent of assets in cash.

“We’re not required to be fully invested,” he explained. “We are choosing to be fully invested in this market because we’re finding high-conviction ideas. Many of these are companies that are showing growth in current and future cash flow.”

Such cash flow growth is appealing, as it can finance investor-friendly initiatives like dividend increases and share buybacks. Mr. Nackenson said he liked the free-cash-flow growth potential of Boeing, a long-term holding to which his fund has added shares recently.

Bargains seem to be in the beholder’s eyes. Unlike Mr. Nackenson, Kimball Brooker Jr. doesn’t see many now. The FirstEagle Overseas fund, of which he is a co-manager, has a hefty 23.1 percent of assets in cash. “We’re lagging the indices,” Mr. Brooker acknowledged, emphasizing that his first goal is “not to lose money.” “We’re just being very patient,” he said.

He sees most global markets as fully valued, a somewhat uncommon situation. “It’s unusual to have synchronous full valuation around the world,” he said.

Has Mr. Brooker heard complaints from disappointed investors? “Not yet,” he replied. “For the moment, 2008 and 2009 are still in the psyches of many investors,” he said. “There’s some appeal to a strategy that will protect them on the downside.”

Searching for Bargains from Warren Buffett's Portfolio

Stocks have moved a long way in five years, making it a challenge for the world’s best living investor to find undervalued situations. “[Stocks] are probably more or less fairly priced now. We don’t find bargains around,”Warren Buffett told CNBC last week. “But we don’t think things are way overvalued either. We’re having a hard time finding things to buy.” 

Perhaps Buffett will elect to purchase more of some of his current holdings. One such current holdings is Coke [KO]. Buffett has a 9% stake, or 400 million shares, which comprises 18% of his portfolio and makes him the company’s top shareholder. Buffett appeared at Coke’s annual meeting in April and said he would “never sell a share of Coke stock.” Coke shares have declined 2% over the past year, to a price of $37.77 on Thursday, which is 6.1% above their 52-week low of $35.58. Coke has recorded annual revenue growth of 10.9% and annual EBITDA growth of 9.6% rates over the past 10 years, and 13.8% and 9% respectively over the past five years. 

With the decline in price, Coke has also caught the attention of another value investor. David Winters, CEO of Wintergreen Advisors, explains why Coca-Cola is his favorite stock in the U.S. “You can get rich if you’re patient” he says in the video below.

Why People Don't Succeed in Value Investing

Jason Zweig writes “The Intelligent Investor” column on the Wall Street Journal’s Website (WSJ.com).  The edition of Benjamin Graham’s “The Intelligent Investor” book with Zweig’s commentary is considered to be the version to read. His post on "Value Stocks Are Hot—But Most Investors Will Burn Out" dated 18th February 2013 makes the most sense on why so many investors do not succeed when they take the value investing approach and I thought it would be good to share with readers

Some important excerpt from the article:

• "Most people aren't cut out for value investing, because human nature shrinks from pain," the money manager Jean-Marie Eveillard told me this past week. His words are a reminder thatmaking money on cheap stocks—the goal of every value investor—is harder than it sounds and can take years to play out 
• The fund industry has long marketed the chimera of "consistency," the idea that a great stock picker can always earn higher returns than the market. Investors who buy into this myth often sell in a panic as soon as the next crash proves that no stock picker can always outperform
• Summit Street Capital Management, an investment partnership in New York, recently analyzed a group of value investors with long records of superior returns and found that even the best underperformed one-third to 40% of the time. "It's hard not to get shaken out unless you understand that and have conviction," says Summit Street partner Jennifer Wallace
• To be a value investor, it isn't enough to buy cheap stocks or the funds that own them. You have to stick around until the market recognizes their worth. Mr. Eveillard, now 73 years old and an adviser to his old fund, is still finding bargains in Japan and among gold-mining stocks—but he is prepared to "suffer" until the market proves him right

Read also:

Top 5 Best US Value Mutual Fund
Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Richer (Amazon)

Top 10 Investment Books for Superinvestors

How Mohnish Pabrai uses Checklist Investing

Forbes recently published an article "How Mohnish Pabrai Crushed The Market By 1100% Since 2000"
which provides glimpse on how Mohnish Pabrai uses a checklist in his investment decisions.

Mohnish Pabrai’s long-only equity fund has returned a cumulative 517% net to investors vs. 43% for the S&P 500 Index since inception in 2000.  That’s outperformance of 474 percentage points or 1103 percent. 

Mohnish Pabrai

Pabrai is a classic value investor in the tradition of Warren Buffett, Charlie Munger, Seth Klarman and Joel Greenblat. I recently had an opportunity to hear him talk and thought I’d pass along some of my bright yellow highlighting.

How to start investing

For Pabrai, this yellow brick road begins with Warren Buffett’s annual letters to shareholders (totaling 730 pages, now conveniently available for your  Amazon Kindle for $2.99 cheap).  From there he recommends the Buffett biographies (mentioning the ones by Lowenstein  and Schroeder).  I might add, though he didn’t, that you could do worse than to read Pabrai’s own book, The Dhando Investor.

Like Buffett, Pabrai looks at a stock not as a piece of paper but as the ownership of a business.  He has no interest in a company that looks ten percent undervalued.  He is angling to make five times his money in a few years.  If he doesn’t think the opportunity is blindingly obvious, he passes.  This requires him to apply his X-Ray vision to the fundamentals, and weigh the downside risk (the margin of safety) vs. the upside potential (the moat) at a given price.  His mantra: Heads I win, tails I don’t lose much.

Next, Pabrai practices patience.  He takes Charlie Munger’s admonition to heart that money is made not in the buying or selling but in the waiting.  As far as I am aware, he has not made a single new investment in 2013.  He says that if he can find a couple of investment ideas a year, that’s plenty.  His current preference is to keep a cash store of between 10%-20%.  This seems like a tremendous drag for a fund posting numbers like his, but he is really biding his time for a distressed situation to come along when he can deploy this trove at the valuation he wants.  During the next crisis, when everyone is jamming the exits, he will go all in.

Once you start purchasing stocks, Pabrai says the next  step is to closely examine every trade that doesn’t work, and figure out what went wrong.  Let me pause right here, because this is key to his whole method.

There is nothing more tempting that to sweep mistakes under the rug.  Denial is one of our top defense mechanisms.  If you are lucky, these trades come to haunt your sleep like Marley’s ghost.  If you are unlucky, you repress them forever.

Due to his background in engineering, Pabrai does not gloss over mistakes.  Investing is a field where you can have a high error rate (buying something you shouldn’t have, selling something you shouldn’t have, not buying something you should have, not selling something you should have) and still be successful.  He takes as a given that mistakes are inevitable.  The point is to learn from them so they are not repeated.  A major portion of his annual meeting is devoted to publicly analyzing investments where he lost money for his partners.  Lately these errors are becoming harder to find, so he has been reduced to talking about investments that didn’t fare as well as expected.

The checklist

Pabrai was impressed by Atul Gawande’s Checklist Manifesto, which recounts how a technology seemingly as trivial as a checklist led to life-saving results in the airline cockpit and the operating room. He wondered whether it could work the same magic for investors.

He began by looking at the public record of the investors he admired and deconstructing the mistakes they made — cases where there were klaxons sounding even the great ones missed.  He cites the example of Berkshire Hathaway’s purchase of Dexter Shoes — a New England factory with a great product used by everyone with feet. It immediately got hacked to pieces by cheap foreign labor.  Hence, one checklist item: is this a business that can be negatively impacted by low-cost competition from abroad?

After this analysis, he came up with one hundred or so check boxes.  He keeps it proprietary, but claims that if we were to see it, we would think it was jejuneand throw it away.   I wonder.  In any event, the items are grouped into categories.   A lot of them have to do with leverage, for obvious reasons.  A second group relates to the durability of the business’s “moat” — how difficult it is for new entrants or competitors to duplicate their product or service.  A third set of questions examine the quality of the company’s management.  Is the company being intelligently run for the benefit of shareholders?  There is also a fourth set of miscellaneous items, such as unions and labor relations, or is the company operating with a tailwind that may be only temporary?

Yale economist Robert Shiller has noted that many of the biggest advances in financial risk control seem ridiculously modest today: the widespread availability  in the 19th century of cheap paper made from wood pulp instead of cloth, the typewriter, carbon paper, the standardized form, the filing cabinet — all these made substantial improvements in the reliability of business operations.

Pabrai can can tick most of the boxes in twenty minutes, but then it gets interesting, because he realizes there are some areas — often not top-of-mind — that need more research and clarification.  This is the biggest payback, because it forces a 360 degree look at risk.  The human animal gets into tunnel thinking once it likes an investment idea, and this usefully stops that momentum.  Since 2008, Pabrai also has started talking over his investment ideas with a peer prior to jumping in.

The checklist is doubly important for a concentrated fund like his, which might only contain ten tickers.  Since he is angling for big total returns, these are usually companies in some distress to begin with — either from their own misdeeds or due to macro factors.  So far, it has radically trimmed the downside tails, although it has yet to be tested in a crash landing.

Cloning 

For Pabrai, investing is not an originality contest.  He shamelessly appropriates the ideas of others.  For example, he lifted the structure of his fund directly from the Buffett partnerships of the 1950s.  His primary source of investment ideas?  The 13F SEC filings from other value managers he admires: Berkshire, Longleaf, Baupost, Greenlight, Pershing Square, Third Avenue, etc.  He cites the University of Nevada study by Martin and Puthenpackal showing how merely investing alongside Warren Buffett (after information about Berkshire’s buys and sells became public) managed to beat the market by 11% a year over a 31-year period.

It looks like Pabrai holds the world in a paper cup.  To make matters worse, he’s also charitable, and his Dakshana Foundation is one of the best charities on the planet.  While he makes it sound easy, remember that he has nerves of steel and when he does invest, he goes in with unshakable conviction.  He’s willing to reach out and grab a stock falling like a dagger and then to keep buying while it plummets into the abyss.  I remember seeing him in September 2008 when his fund was down 60% and the global financial system was coming off the rails.  These facts bounced off him like a pea-shooter.  His only concern was finding cash to buy stocks while they were still cheap.

Read also:

Classic Pabrai - A 2011 Half Hour Interview With Monish Pabrai and Steve Forbes
Stocks that Pabrai bought

How The Economic Machine Works by Ray Dalio

This is a great post from Ray Dalio on how the economy works which comprises of transactions and how credit is created. This gives insight into economic cycles. Ray Dalio is the hedge fund manager of Bridgewater Associates with $75 billion under management. I strongly recommend all readers to watch this video as this is 31 minutes well spent! This gives a simple insight and understanding of the economy.

Also check out, The Alpha Masters: Unlocking the Genius of the World’s Top Hedge Funds,where Dalio gave Maneet Ahuja exclusive access for a rare interview and profile of himself.

Top 5 Best US Value Mutual Fund

“The most important thing is Value” says Howard Marks in The Most Important Thing. Seeking out value, in my opinion, is the best way to generate better returns in the stock market. In my previous article (link to article), I have provided steps to find undervalued stocks.

Besides seeking out undervalued equity by looking at metrics of stocks, there are other alternatives. For readers who know that value investing is the best way to invest but might not have the time or interest to research on individual stocks, a mutual fund run by a value investor might be the next best option. In this article, I will explore the option of investing in a mutual fund. For investors who might not be able to invest in US Mutual Funds, by knowing the money manager who run the funds, we can adopt the strategy of following the gurus by buying into stocks where they have the highest conviction. Of course, the purchase can only be done after sufficient research on your own.

What is a mutual fund?

As defined on Investopedia, a mutual fund is an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds and other assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. An advantage of mutual fund is that it gives small investor access to diversified portfolio of equities managed by famed value investors. 

Below are stocks that are held by the top 5 money managers:

1. Oracle (ORCL)

2. BAC (Bank of America)

3. MBIA (MBI)

4. Research in Motion (BBRY)

5. Procter & Gamble (PG)

To read the rest of the article, click here

Noble Corp: A Value Play

The recent Deepwater Horizon disaster has not only affected the companies (BP, Transocean)directly associated with it but also has led to financial market reacting by punishing stock prices of company associated with oil and gas exploration in the Gulf of Mexico. Stocks such as Halliburton (HAL), Schlumberger (SLB), Noble Corp (NE)had fallen close to their 52 week low. In some cases, the massive sell-off could be due to deterioating fundamentals. However in this case, it seems that the market is over-reacting to the industrial accident and these oil related stocks maybe under pressure due to investors' confusion and uncertainty over the accidents and its repercussion on the industry.

The massive sell-off has provided value investor with an opportunity to evaluate and identify stocks where the market had over-reacted. A value play that could be identified is Noble Corporation (NE),one of the companies that provide equipment and services for oil and gas drillers in the Gulf.

Noble Corporation is a company that provides offshore contract drilling, engineering, and production management services to the oil and gas industry. Noble’s current fleet includes 62 mobile offshore drilling units comprised of 43 jackups, 13 semisubmersibles, 2 submersibles, and 4 drillships. The company currently has six semisubmersible rigs operating in deepwater locations of the Gulf of Mexico.

From the financials, revenue per share has been increasing from $3.30 in Year 2000 to 13.90 in Year 2009. Earnings per share has also been increasing from $0.61 to $6.42. The high operating margin and net margin illustrates Noble Corp's market position in the industry. Besides that it has also been able to generate high ROE. These solid financial condition had been achieved with decreasing debt-to-equity ratio. Noble is a capital intensive business but management has not relied excessively on debt to finance capital expenditures.



The company has also been generating significant free cash flow with increases in every year. This cash flow has been deployed mostly toward expansion of the fleet (newbuilds) or enhancements to the existing fleet. Beside strong investment in its fleet, Noble also places great emphasis on training its people in safety, operations, management and leadership program. Noble has delivered its best ever safety performance which is paramount in the aftermath of the Deepwater Horizon disaster.



Despites Noble's solid financial results, it does face certain impact to its revenue due to the recent six month moratorium on deepwater drilling. Noble derives its revenue from a diversified list of countries (United States, Benin, Brazil, Canada etc.) with Mexico accounting for 29% of its revenue in 2009. The bulk of the revenue is associated with deep water drilling activities. Noble currently has 6 rigs deployed in Gulf of Mexico and with the halt to drilling, these rigs might have to be left idle.

However, it is reasonable to believe that the halt in deep water driling will be a temporary measure. In the long run, the United States government will allow deepwater driling with tougher regulation. Noble Corporation appears to be well positioned with its diversified revenue stream and strong managment team to weather the temporary halt in drilling and grow its business. Moreover, it has also delivered solid financial result with minimal leverage in recent years. Using the cash flow and its financial, the intrinsic value of the company is at $113.79 which exist a huge margin of safety.