Friday, October 29, 2010

Current Investment Ideas

I was recently asked by a family member for some investments to diversify into.  Here is a list of some of the opportunities I offered, which I believe represent decent value at this time. 

In Canada:

Fairfax Financial (TSE - FFH)
Manulife Financial (TSE/NYSE-MFC)
Peyto Energy Trust (TSE - PEY.un)
Hardwoods Inc. (TSE - HWD.un)

In USA:

Wells Fargo - (NYSE - WFC)
Bank of America (NYSE - BAC)
General Electic (NYSE - GE)
Johnson & Johnson (NYSE - JNJ)
Kraft Foods (NYSE - KFT)

Many will be familiar with these names, except possibly the Canadian companies.  I have a few others that are under investigation, but more reading and study is required.  They are generally smaller and carry greater risks.  I also see some value in select large cap companies.  This is mainly because they many of them have had severe P/E multiple contraction over the past 10 years.  Walmart is one example whose share price has been flat while it's P/E has gone from 39 to 12.5 over that period.  Investors are growing impatient and the don't care that the underlying earnings of Walmart continue to grow. 

All of these companies listed above have outstanding long term economics, strong ROE's & returns on total capital, and many have unique competitive advantages.  I believe that all of these companies are trading at reasonable prices and some at outstanding prices.  It's definitely a head scratcher that a company such as Fairfax trades just above book value per share.  They have compounded book value at 26% for 25 years now.  Their handling of the credit crisis is nothing short of remarkable, and I would have no problem entrusting my capital to Prem Watsa.  Prem Watsa understands value investing and is slowly building a fortress in Fairfax Financial. 

I would recommend these all as long term investments, but you will have to be patient.  Buy them and forget about them for at least several years.  Check your yearly statements and watch them grow.  As Warren Buffett has said, "I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years."

Accumulating cash at this time wouldn't be a bad option either. 

I have already posted on Hardwoods.  Click Here.  It is really only an opportunity for individual investors because it's thinly traded.  Volume has slowed, but to a patient investor you can pick some up here and there.  Couple of weeks ago the volume was very good (and so were the prices). 


Have a great weekend. 

Kevin

Disclosure:  I own positions PEY.un, HWD.un, WFC, & GE.  I also own BAC warrants.

Always consult unbiased help to assist when selecting stocks to purchase.  As Warren Buffett once said, "The market like the Lord helps those who help themselves, the market unlike the Lord does not forgive those who know not what they do."

Why the Peak in Peak Oil is a Myth

Many of those who have energy investments will no doubt have an opinion on peak oil. For those not familiar with the theory, here is a brief outline of the premises that the peak oil crowd put forward. First, the world has a finite amount of oil and we have consumed approximately 2/5ths of that know resource. Further to this they believe peak oil can be represented as a bell cure, of which once we have reached the maximum petroleum extraction rate we will enter an era of sharp production decline. They also believe that we are getting close to this peak in worldwide production and that even with flat demand the price for crude oil will continue to rise.

Since I typically question conventional wisdom, I often asked myself the following questions? Who says peak oil is a bell curve, and how do we know that we have used 2/5ths of a known resource? These things are spoken as if they are matter of fact. Are we close to the maximum possible production rate? Perhaps I could offer some competing ideas that will rock the boat.

To read the rest of the post, click here:
http://www.gurufocus.com/news.php?id=110844

Monday, October 25, 2010

The Absolute last post on Petrobank

This is my absolute last post regarding Petrobank to Devin on gurufocus.com. 

The second half of the post is about value investing for those who don't care for the details on Petrobank.
--------------------------------------

I quote again:

1) Mr. Graham missed two thirds of their Bakken assets. The 2P number which is all Mr. Graham used in his valuation work is derived only on wells drilled to date. Petrobakken has 1,050 drilling locations in the Bakken. The 2P number that you used is based on 348 wells drilled. That is 33% of their Bakken assets. The Bakken of course is a well known play, and these drilling locations are in the known to be in productive Bakken acreage. These are ultra low risk drilling locations. By ignoring them Mr. Graham is ignoring 67% of the value of Petrobakken’s Bakken properties.

I am going to explain this as clearly as I know possible. I will break it down.

The 2P number which is all Mr. Graham used in his valuation work is derived only on wells drilled to date.

And

The 2P number that you used is based on 348 wells drilled.


This is FALSE. THIS IS NOT TRUE.
The 2P number I quoted includes all 384 wells you said have been drilled (I will take your word for this). Beyond, that they have booked 297 PUDs. These wells have not been drilled. This will be drilled in 2010, 2011 and 2012. Beyond that they have booked 180 probable wells. These wells have not been drilled. This will be drilled in 2010, 2011, and 2012, but more likely in the later timeframe.

Summary

348 wells already drilled + 297 PUDs (not drilled)+ 180 probables (not drilled) = 825 wells.

Please read the report and confirm this for yourself. Don't take my word for it.

I appreciate your new tone and I will try to be more civil as well. Next statement (from your last comment).

I think your valuation of this company is way off and I think that is fairly obvious to most readers. Stop trying to focus on whether the reserve report says 477 wells or 384 wells and apply common sense.

You thought my valuation was incorrect because you weren't aware that 477 undrilled wells have already been booked. Secondly, why should I stop using reason and apply common sense. I am trying to breakdown what the value is and isn't. Since the 2P reserves does include 477 undrilled wells then my analysis is the best we both have to go on. Can't you see that. You seem to imply that common sense is some sort of sixth sense where we percieve the value. Economics are economics.

I can tell that the prices I'm paying for PMG and PBN are at the worst fair and very likely a nice discounts.

Thanks for the admission of fair value. I will also go on the record and state that I believe the company is fairly valued. That said, they are trading at fairly significant premiums to the 2P reserve value so the wells they are currently drilling must perform better than what they forecasted.

You also state the Petrominerales has made a significant discover, which is why they are trading where they are. I will take your word on it, I will ready what the reserve report says next year to confirm it as so. So at best PBN & PBG are trading at fair value but are at a 50% premium to reserves value so they better deliver the goods. I just don't have that much faith in the company.

As for the heavy oil and THAI, you need to be very careful with the contingent resources. THAI is unproven and the heavy oil business is tough and in many cases borderline economic. It is very capital intensive compared to conventional wells.

With all that said, this is not a value investment by no means. A lot of expectations are already built into the prices so I don't see the value.

Back in 2001 you could buy oil and gas company's by the handful for 2P reserve value. Some could be had for just proven producing value (just the wells on production). Companies that operated in less politically unstable regions traded at steep discounts because of the additional risk. Someday they will trade at those levels again. Resources and gold have been the hot stocks lately.

Markets overshoot and then undershoot. Everyday the Market votes on the value of these companies but in the long term the Market will weigh the real value in these companies by the cash they produce. They better deliver.

The biggest reason it is hard to value the company is because PBG cannot control oil prices. Nobody knows where oil will be 3 years from now. Now for Walmart, I can reasonable guess what their earnings will be 3-4 years from now because they are very predictable. Degree of difficulty doesn't pay in investing, pick something simple and easier to value. This is what Buffett calls jumping a 1 ft bar, and recognizing what you know vs what you don't know (circle of competence).

As you know, I have already offered one original value idea on my blog. It's trading at 4x normalized earnings, and bleeds free cashflow. Hardwoods is a very simple company that has been selling wood for 70 years. I will bet on a company like that any day of the week than one that is so difficult to predict. Feel free to pick it apart. I would like to know if I am missing something.

I am moving on because I have to read the Kraft annual report. Been meaning to read it for a while.

Good luck with PBG!

Kevin

Petrobank - This guy won't stop

Devin won't give up over on gurufocus.com 

He said the following:

"1) Because you looked only at one number (PV10) you gave roughly 2/3rds of Petrobakken's land base exactly zero value. 2P reserves are booked on 348 out of 1,050 drilling locations. See page 11 in the link below:"

This is not true.  Here is my latest response.
-----------------------------------------------------

You just won’t quit will you?

Now your comments further expose your ignorance. Did you or did you not read the reserve report before you wrote your masterpiece on PBG?

Now, let’s go back to the reserve report again. PBN has book ~300 PUDs in the Bakken/Mississippian formations. Those are proven undeveloped wells that have not been drilled as of the report. As for probable reserves they have booked another 180 wells in the Bakken/Mississippian formations (135 Bakken, 45 other Mississippian).

Let me quote the reserves report again for you so you can read it.

“The Sproule Report has assigned proved undeveloped reserves to 207 net light oil well locations in the Bakken properties in southeast Saskatchewan. In addition, the Sproule Report has assigned proved undeveloped reserves to 90 net light oil locations in the Conventional properties located in southeast Saskatchewan and Manitoba”

“The Sproule Report has assigned probable undeveloped reserves to 135 net locations in the Bakken properties in southeast Saskatchewan. In addition, the Sproule Report has assigned probable undeveloped reserves to 45 net light oil locations in the Conventional properties located in southeast Saskatchewan and Manitoba.”
Now, I will do the math since you seem to be fairly poor at reading. The total is 477 wells already booked that will take them out to the end of 2012. The probable locations are step out and carry greater uncertainty. Again, all of this is all in the reserve report. I shouldn’t have to explain this to you. You seem to think the Bakken is something else based on what you heard in the news. Why do you continue to think that they haven’t booked any of their 1000+ wells?

Now you can continue to think that I am some sort of amateur, go ahead. You can believe that along with your $80 price target on PBG. Arguing from ignorance is a sure fire way to lose any debate.



Regards,

Kevin

Sunday, October 24, 2010

Response To The Critique of My Petrobank Analysis

This is my response to the recent article by Devin Shire in response to my article on Petrobank. 

You be the judge. 

The entire article can be found here:

http://www.gurufocus.com/news.php?id=110226

A nice gentleman named Mr. Graham that I don’t know was kind enough to write a very critical article of my analysis of Petrobank.

No where was I “very critical” of your analysis. All I said was that you presented an interesting, “heads I win huge, tails I win big.” That is a huge statement and better have substance behind it.

Since Mr. Graham can’t be bothered to look at these “other assets” of Petrobakken let me save him some time. Because unlike Mr. Graham I actually do bother to research companies before I write articles. Here is what was missed.


1) Mr. Graham missed two thirds of their Bakken assets. The 2P number which is all Mr. Graham used in his valuation work is derived only on wells drilled to date. Petrobakken has 1,050 drilling locations in the Bakken. The 2P number that you used is based on 348 wells drilled. That is 33% of their Bakken assets. The Bakken of course is a well known play, and these drilling locations are in the known to be in productive Bakken acreage. These are ultra low risk drilling locations. By ignoring them Mr. Graham is ignoring 67% of the value of Petrobakken’s Bakken properties.

This is not true. The 2P number does include drilling locations to be drilled over the next few years. In fact, the 1P number may also contain Proved Undeveloped reserves or PUDs. These are generally wells that are going to be drilled over the next 12 months located next to proven producing wells. I am not missing 2/3rd of their Bakken assets. Please read the reserve report before you demonstrate your ignorance.

Let me again quote from the reserve report that Mr. Shire has now demonstrated for us has not read.

"The Sproule Report has assigned proved undeveloped reserves to 207 net light oil well locations in the Bakken properties in southeast Saskatchewan. In addition, the Sproule Report has assigned proved undeveloped reserves to 90 net light oil locations in the Conventional properties located in southeast Saskatchewan and Manitoba."

Now that is approximately 300 wells that will be drilled to the end of 2012 that are already booked as reserves.

Oops… Now is Mr. Shire telling the truth or is he just using deception to promote his book?

Let me get Mr. Graham up to speed. Petrobakken this year aggressively acquired land in the middle of what is turning into a highly productive Alberta Cardium play (listen to the recent PWE investor day) In fact Petrobakken is now the 3rd largest holder of Cardium acreage. In total they have 120,000 net acres and over 500 drilling locations. Petrobakken has zero dollars of reserves booked on these properties (because they are just starting drilling) so Mr. Graham has not given Petrobakken a dime of credit for these properties in his analysis.


Wow, Mr Shire seems to know the value of these wells before they are even drilled. Just because you have land doesn’t prove it is going to be productive, let alone be even close to the most productive area of the formation. This is pure fantasy until the wells are drilled and economics proven.

At this point I’m tempted to stop. Mr. Graham has missed the majority of Petrobakken’s asset value in his brief analysis. His analysis does not appear to have been performed by someone familiar with this industries and certainly no familiarity with companies such as Petrobakken or other Bakken holders like Crescent Point.

No please don’t stop, I haven’t missed the majority of the value in my analysis. I am far more familiar with this industry than you would like.

Mr. Graham, those “other assets” that you can’t be bothered to analyze is where us value investors (and honestly anyone who follows the industry or reads the newspapers in Saskatchewan) knows hundreds of millions of dollars of asset lie.

You be the judge. Who has read the engineering report and who’s been reading newspapers? Mr. Shire doesn't seem to understand which wells are and aren't on the books.

That is it. 690 million barrels of oil (and that is at May River alone and excludes Kerrobert and . Mr. Graham figures the value is $367 million. Petrobank provides a PV10 estimate of these assets in their presentation of about $3.3 billion.

Now this shows a significant problem with how Mr. Shire determines the value of, well, anything. Just go look in the companies overhyped investor presentation and repeat it’s contents.

First, I don’t figure that the value is $367 million. That is the value the engineering report gave to the probable reserves. Call Sproule and discuss your issues with them.

Secondly, this creates another problem with inexperienced investors. Let me explain with an example. Connacher (TSE-CLL) is another oil & gas company that was touting the exact same thing a few years ago. They had this huge value of oil sand assets. The ignorant investors simple took the total value of from the investor presentation and divided the shares outstanding and came up huge value per share. The only problem was coming up with the billion plus dollars to get the project on production. Obviously it was going to take a huge amount of debt or equity to get the project off the ground. Obviously the faithful didn’t want to hear what I had to say, apparently Mr. Shire doesn’t either.

Some many investors fail to realize that heavy oil and oil sands are very capital intensive and return generally haven’t been that good. The only exception was back when oil was $130.

Beyond this Mr. Shire states that I am missing a bunch of speculative assets, such as land and “highly prospective” properties. Ok, maybe I am. As I said before if Mr. Shire wants to call this value investing, go ahead, perhaps he needs a new definition.

I am really over having to explain myself Mr. Shire. I have written enough here to prove who knows what they are talking about and who don’t have a clue. If I ever write a book it will be called “defying economic gravity.” Everyone tries to do it but eventually they come crashing back to reality.

Regards,
Kevin

Saturday, October 23, 2010

Removed from Devin Shire's Blog

This was my comment on Devin Shires Blog

It has since been removed. 

Come on Devin you can't be serious?

I know you will probably remove this response so I will be sure to post it on my blog anyway. 

First there is so much bunk in this article the readers can try to determine truth from fantasy.  You seem to know a lot about me and how I analyzed this company.  Again more speculation. 

Let me respond to your summary of points I am missing in my valuation. 

1) Ignoring undeveloped acreage.  Please inform me of the value, or should I say please speculate on the value. 

2) Petrominerales’ portfolio of highly prospective properties.  Again please inform me of the value, or as you said "prospective" properties. 

3) Heavy oil assets yet to be booked as reserves.  Again, please inform me of the (specutive) value...

4) Shell and Baytex.  Here you are half correct, they are partners but PBG owns the THAI technology.  That is not what I said.  I said Shell and Baytex knows how well the joint wells are performing and decided to sell.  Why did they sell, I offered my opinion lets have yours. 

As a value investor, you seem to be doing a fair bit of speculating on 1, 2, & 3 above.  If you want to call that value investing go ahead, but you need a new definition. 

Regards,
Kevin

Please note: I did not attack your analysis in my post but simply presented the facts.  Stop the childish attacks of my character and stick to the facts.

Petrobank Energy (PBEGF) – A Terrible Risk/Reward Scenario

I just submitted this article on gurufocus.  After reading some over-hyped analysis by a guy named Devin Shire, I decided to dig in and do some analysis myself.  The stock option pricing were quite a revelation, and it seems to be shaking things up over there.  You can check it out here:

http://www.gurufocus.com/news.php?id=110201

Wednesday, October 20, 2010

Blog Introduction

I just want to welcome all value investors to this blog.  I hope you find it a valueable source of fresh, and refreshing content.  I don't intend to rehash the investment days news, because frankly I don't care if the markets went up or down. 

My plan is to publish one original investment idea on this blog per month, with other value investing insights inbetween.  If I cannot find a value investment idea I will let you know. 

I should add this caution.  If the market continues to rise it will become very difficult.  Currently I only see some value in large cap US stocks and some select small to mid Canadian companies.  Of the large cap US stocks it wouldn't bother me either way if I purchased or not.  They are not stand out values but many are companies with strong franchises.  They would be companies to own for the rest of your life. 

I will also update periodically on how the investment ideas that I post perform.  A full lookback will be performed and posted annually.  Anything shorter is a waste of time. 

I do work full time (Professional Engineer), have a family, and have some other responsibilities but I will strive to keep the content here top notch.  Investing is a deep passion of mine, I would love to manage investments for a living.  I do keep my living expense at a minimal, and I am likely one of the few people out there who don't have cable TV.  I prefer having more time to read (about investing, 10-K's, and 10-Q's).  If I can, I will make the switch as soon as I have passive income that will cover expenses.  Like Buffett has said, not doing what you love is like saving up sex for old age. 

That said I do have fairly decent investment funds for my age and I do find it fun working with the funds I do have.  I also advise some family members as well. 

If you have a similar value blog/website feel free to drop me a line. 

Regards,
Kevin Graham

Tuesday, October 19, 2010

Buffett on Gold

This is taken from the following article:

http://money.cnn.com/2010/10/18/pf/investing/buffett_ben_stein.fortune/index.htm

My first question, as I sit there on the couch in his office, is: "What about gold? Is this a classic bubble or what?"


"Look," he says, with his usual confident laugh. "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"


Okay, so gold is not a screaming buy to Buffett. What should a typical upper-middle-class person in the U.S. buy to prepare for retirement?


"Equities," Buffett answers without a moment's hesitation.

It is remarkable how Buffett has a simple way of putting things.  I have recently been recommending anyone who owns gold to sell.

I know some value investors have have large gold holdings, but my question is how do you know if gold is over or undervalued?  Demand is high because of the poor state of the economy, but that can change quickly. 

If I were to take a guess, I think gold may have some more room to run.  My theory is that demand will grow because everywhere I turn I hear about gold.  It's on TV, radio, papers, home parties, and recently booths in the mall buying gold jewelry.

Gold is becoming a little too speculative for this value investor.  If I can't value it, it gets tossed.

Saturday, October 16, 2010

Investment Philosophy of Walter J Schloss

I came across this a few years ago.  It is the investment philosophy of Walter J Schloss, a contemporary of Buffett and worked with him at Ben Graham’s investment firm.  I will comment on his points in a future post.  Please note there are some spelling mistakes and they are not errors from being transcribed. 

Enjoy!

Walter and Edwin Schloss Associates L.P

Factors needed to make money in the stock market

  1. Price is the most important factor to use in relation to value.
  2. Try to establish the value of the company.  Remember that a share of stock represents a part of a business and is not just a piece of paper. 
  3. Use book value as a starting point to try and establish the value of the enterprise.  Be sure that debt does not equal 100% of the equity.  (Capital and surplus for the common stock)
  4. Have patience.  Stocks don’t go up immediately.
  5. Don’t buy on tips or for a quick move.  Let the professionals do that, if they can.  Don’t sell on bad news.
  6. Don’t be afraid to be a loner but be sure that you are correct in your judgment.  You can’t be 100% certain but try to look for weaknesses in your thinking.  Buy on a scale and sell on a scale up. 
  7. Have the courage of your convictions once you have made a decision.
  8. Have a philosophy of investment and try to follow it.  The above is a way that I’ve found successful.
  9. Don’t be in too much of a hurry to sell.  If the stock reaches a price that you think is a fair one, then you can sell but often because a stock goes up say 50%, people say sell it and button up your profit.  Before selling try to reevaluate the company again and see where the stock sells in relation to it’s book value.  Be aware of the level of the stock market.  Are yields low and P-E ratios high.  If the stock market historically high.  Are people very optimistic etc?
  10. When buying a stock, I find it helpful to buy near the low of the past few years.  A stock may go as high as 125 and then decline to 60 and you think it is attractive.  3 years before the stock sold at 20 which shows that there is some vulnerability in it.
  11. Try to buy assets at a discount than to buy earnings.  Earnings can change dramatically in a short time.  Usually assets change slowly.  One has to know much more about a company if one buys earnings. 
  12. Listen to suggestions from people you respect.  This doesn’t mean you have to accept them.  Remember it’s your money and generally it is harder to keep money than make it.  Once you lose a lot of money it is hard to make it back.
  13. Try not to let your emotions affect your judgment.  Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks. 
  14. Remember the work compounding.  For example, if you can make 12% a year and reinvest the moneyback, you will double your money in 6 yrs, taxes excluded.  Remember the rule of 72.  Your rate of return into 72 will tell you the number of years to double your money.
  15. Prefer stocks over bonds.  Bonds will limit your gains and inflation will reduce your purchasing power.
  16. Be careful of leverage.  It can go against your.
WJS

Monday, October 11, 2010

Hardwoods Income Fund - A bargain?

Lets kick things off with a case study, Hardwoods Distribution Income Fund (TSX-HWD.un).  According to Buffett your investment idea should be very simple and should be explained without any difficult math, discounted cash flow analysis, etc.  I will give the short Buffett version, and a much longer explanation of this investment.  So here goes:

The Short Version

Hardwoods has fallen on hard times through the recession.  Despite the losses from bad debts (customers who didn’t pay) and writing off of goodwill, the company's core business hasn't changed at all.  Sales have fallen from $360 million per year in 2006 to $200 million in 2010.  The company's Net Profit margin as percent of sales historically has ranged from between 3.2% to 4.9% in normal times, with 3.8% being the most common.  Once operating conditions return to some level of normalcy, probably next year, the company will earn around $6.4 - $7.8 million.  If we divide this by number of shares outstanding (14.4 million), the company will earn between $0.44-$0.54 per share. 

Now we go look at the share price and it currently trades at $2.06.  That means the company is selling for around 4 times it's annual profit in a year.  I should add that this multiple is based on the new lower level of sales and assuming the lower end of the profit margin, conservative yet reasonable assumptions. 

Clearly buying this company with an earnings yield of 25% you will do just fine in the long term.  If we apply a conservative earnings multiple of 8.5 times, Hardwoods is easily worth approximately $4.25/sh.

Long Version

Hardwoods Inc is a Vancouver based wholesale lumber distributor.  Their many areas of focus is Western Canada, and Western US states.  It has been in business for something like 70 years.  The former owners (Sauder family) have a long history in the lumber industry.  The business is amazingly simple, they buy hardwood lumber and sheet goods and resell them for a profit.  Looking back over their filings since 2004 their gross margins have ranged between 18-19% (percent of sales).  So basically that is their markup on the products they sell.  Out of the gross profit they have to pay all of their overhead, salaries, and other cost such as bad debts.  The company requires very little maintenance capital and it leases much of there facilities. 

Looking back to the period from 2004 to 2007 the company, at the end of the day, earned a Net Profit (percent of sales) of between 3.2% and 4.9%.  In 2005 & 2007 the company's net profit was 3.8%. 

During the period that followed 2007 the company has struggled with debt covenants, and bad debts.  Obviously being tied to the housing market caused a dramatic drop in sales and bad debts.  The company was loaded with debt before going public in 2004.  Beside this, the company has written off all the goodwill it had on its books creating large losses in the process. 

Despite tough operating conditions the company has paid off substantially all of their debt during this period and the losses associated with bad debts are subsiding.

Sales have fallen from $360 million in 2006 to around $200 million in 2010.  The bad debts of the recession are nearly behind them and once again this company will be a cash cow.  Applying the conservative net profit margin of 3.2% and 3.8%, the company will earn somewhere between $0.44/sh and $0.54/sh.  At the current share price of $2.06 the shares are trading at roughly 4 times normalized earnings. 

As above, applying a conservative valuation of 8.5 times normal earning this company is easily worth somewhere around $4.25/sh.  It's trading for approximately 50% of it intrinsic value.  It's like getting a dollar bill for 50 cents. 

No catalyst required, the company just isn't followed by analysts, is small and thinly traded.  It is a pure Graham-Buffett investment. 

Is Hardwoods a bargain?  You bet.

I should add that the company is currently an income trust and will likely convert back to a corporation before the end of the year.  The company is thinly traded however volume seems to be picking up as of late.  This makes it opportune for individual investors.  You will have to be patient but even paying $3 would be a fair price. 

So in summary, this is simple value investing case study.  It is a simple company trading at a steep discount to intrinsic value.  The odd are heavily stacked in your favor that this no-brainer will be an investment success.  This won't make you money tomorrow, but two years from now it will be trading higher than today. 

Price is what you pay, value is what you get - Charlie Munger

Disclosure - long HWD.un at time of writing

Sunday, October 10, 2010

Are You a Value Investor?

I guess it's finally to start the blogging about a topic I am a little more than passionate about.  If you are like me, you've likely spent some time reading various blogs and find alot of keystokes but very little relating to value investing.  We'll hopefully I can change that. 

To start things off, I do want to start with a little quiz to see if you are truly a value investor.  While I don't claim to be an expert, I have read almost everything written about Warren Buffett and his mentor Ben Graham (no relation).  What I find interesting is that much of what Buffett preaches is repeated but not followed.  I have checked out hundreds of websites on value investing and then when you check out their stock picks things just don't add up.  You will find almost everything under the sun being justified as a value investment and every company has a huge moat.  The truth is there are very few companies with a moat, and I would go further saying any company under a billion dollars in annual sales has no moat whatsoever!

Before we start off on that topic it is time for our quiz.  Some may question what many of these have to do with value investing, if you find yourself asking this your not a value investor.


1.  Have you ever read Ben Graham's book "The Intelligent Investor", from start to finish?  If you have skimmed chapters 8 and 20 that doesn't count.

2.  Have you ever read Ben Graham & David Dodds's book "Security Analysis", from start to finish?

3.  Have you held at least one investment for more than 5 years?

4.  Have you held at least one investment for more than 10 years?

5.  Do you find yourself reading annual reports (or a lot of reading in general) in your spare time or do you go to gurufocus.com for your investment ideas?

6.  Do you read every annual and quarterly report of all stocks in your portfolio?

7.  Have you ever found some interesting facts buried in an annual or quarterly report?

8.  Do you use excel to determine if a stock is over or undervalued? 

9.  Have you ever had an original idea, or have you found all of your investment ideas from others?

10.  Have you ever felt upset because stock prices are increasing?


While I could go on, I think that will separate the sheep from the goats.  The answers are yes to every question except number 8.  If you score over 5 you may be a value investor, if you score over 8 you are definitely a value investor and you will definitely enjoy this blog.

I know some of you will read the above questions and will know exactly what I am talking about and others will not.  I invite those who do relate to the questions above to stick around, while the rest of you will likely find it boring.  While I will post investment idea they may be few and far between.  More often than not inactivity will be my choice.  I will also use this blog to go on an occasional rant similar to what you will hear from Charlie Munger. 

For those who can relate to what I have posted please feel free to comment or email.  I would love to hear from you.