Sunday, December 9, 2012

Recent Comments

I received a couple of interesting comments this week on my blog and I thought I would take a few minutes to address them.

The first comment was, "Does it not bother you that these same US banks were bailed out at taxpayers expense only to give their bosses big bonuses, when these banks are the very ones that created the mess in the US economy?"

My short answer is No.  Here is my long answer. 

While I understand your hatred of the US banks, along with many other US citizens, I don't believe you are considering all of the facts.  Naturally everyone wants to look for someone or something to blame when things go wrong.  The US banks were not doubt a big player in the financial crisis, but they do not deserve all of the blame. 

Let's examine a few of your points a little closer. 

1) You said, “US banks were bailed out at taxpayers expense.”

FACT: No US bank was bailed out at taxpayers expense.

What exactly is an expense?  Here is a definition from Wikipedia. 

Wikipedia: In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense.

So yes, the US government did give the US banks money but every cent of the money was paid back with interest. This is not an expense.  Secondly, it was done to bring stability and confidence in the midst of a crisis. Lastly, some banks, like Wells Fargo, didn’t even want the money. 

So because the money was paid back (with interest), perhaps the question should be asked why did the US taxpayer profit at the banks expense?

2) You said, "only to give their bosses big bonuses."  

FACT:  It is a free country and the shareholders of each US bank are allowed to pay their managers whatever bonus they feel like. Why the Jealousy?

With that said, I do agree with you that some managers make too much money.  So, as a shareholder I often but not always exercise my right to vote against pay packages at the annual meeting. 

The problem Mr. and Mrs. Mutual Fund holder is that they do not directly own shares but the fund manager votes for the shares held in their funds.  Often these fund managers don't want to upset the apple cart of their own high wages so they vote along with whatever management says.  In my opinion Mr. and Mrs. Mutual Fund holder should also fire their fund manager but that's another post all together. 

3) Lastly you said, “these banks are the very ones that created the mess in the US economy.”

I agree that they did play a role but they are not the only factor.  Let's take a look at a few.

FACTS:

a) Every US citizen who refinanced their home and never paid back the money was a huge beneficiary, No?  Where is the morality of the citizens who collectively borrowed billions of dollars from the banks and never paid it back. 

b) The GSE’s (Fannie Mae & Freddie Mac) backed by politicians who pushed for the expansion of home ownership to marginal buyers helped create the housing bubble. 

c) Many speculators caused the huge run up in housing prices which then caused a 30% collapse in real estate.  This caused the banks, and every other financial institution to run into financial difficulty.

d) The federal government kept interest rates too low for too long thus contributing to the housing bubble.

So the blame game really isn’t as cut and dry as you make it out to be.

Another Angle

Perhaps we can look at it from another angle.

Does it bother you when someone loses their job and collects unemployment from the government? They are being bailed out by fellow taxpayers and beyond that they keep all the money for themselves.  This is truly an expense and the individual is never required to repay the money. 

So if you want to be consistent you much hate everyone that receives money from the government (elderly, children, disabled, etc), especially those individuals who never pay back the money. 

Another Reader Comment

Also, you should know that your blog is simply the best Canadian investing source on the web. Period. I like the no-BS, evidence based analytical style. This site is a great starting point for investments, I basically read your thesis, due my own due diligence which generally confirms what you are saying and I'm done. My only complaint is that there is just so little material. Not to put that on you, I'm sure this is something you do in your spare time but I could use more. Could you recommend any other similar sites?

Thanks for the kinds words.  I would like to put more material up but what is the point? 

This blog is free and I don't necessarily like giving away my best investment ideas.  I often discuss the rationale for very large companies when the discussion here will have little to no effect on the stock price.  For smaller companies where there could be any hint of competition in my bidding for price I will not disclose.  After the fact, I often will discuss the investment rationale here.  An example of this is my Peyto investment from earlier this year. 

Even with the large cap companies I know that any buying ahead of me can and will influence the price and that still bothers me a little.  I like getting the best price possible. 

I don't invest for the applause or the appreciation of others.  I do it for myself.  I write on this blog to meet like minded individuals, and to be honest they are hard to come by. 

As for other sites, I couldn't recommend one where I ever found a good investment idea.  I have read some but often the writer is only recycling the ideas of others.  This is crucial point and to quote Nathanial Branden, "there is profound distinction between those who fundamental orientation is to think for themselves and those who notion of thinking is to recycle the opinions of other people." 

Here is what I recommend if you want to find cheap stocks.  First check out any list of 52-week lows.  One I use is over at the Wall Street Journal (click here).  Do your homework and every once and a while you may find a good bargain on that list.  Be patient and hold your nose.  If it's on that list it will be hated by most everyone.

Secondly, I watch what other "value" investors are buying.  Dataroma.com is a good place.  Again use it as a starting point.  Often these professionals employ a number of analyst who can save you time when looking for value stocks.   

Lastly, find a good stock screener and look for excellent businesses selling below book value.  Book value is probably the single most important measure when investing.  The balance sheet is more important to the income statement, and understanding the link between them is important.  Book value is an important starting point when evaluating any security but you must understand it's makeup.  For those who invest that do not understand the importance of book value, I would suggest you read up on it. 

I will pay more than book value for some companies but the business returns must be bullet proof.  Remember investor goodwill is no different than balance sheet goodwill. 

2012 Year End

2012 is quickly coming to a close and the returns this year are solid.  As a summary, I made three purchases this year, two new securities and added to an existing position.  On the sell side, I sold out of one position completely this year.  Not a lot of action from this value investor.  I prefer to make myself rich instead of my broker. 

I laugh when others ask me if I "trade" stocks.  I prefer to "own" them and only "trade" them when someone offers pay me a fair to high price. 


Best Regards,

Kevin Graham

Disclosure: Long PEY. 

2 comments:

  1. Kevin,

    I generally agree with you in that the economic downturn of 2008 was caused by multiple factors including the banks, the GSEs and the Fed.

    That said, you're point #1 is incorrect.

    First off, the fact that an expense is reimbursed, with interest no less, doesn't lead to the necessary conclusion that it was never an expense. It's a non sequitur for you to suggest so. It could be that what we're dealing with here is - wait for it - a reimbursed expense.

    Secondly, since the US bailouts involved injections of new money into the US money supply, the transaction between the US Government and the banks is not an instance of a straightforward loan and repayment. Money is subject to the laws of supply and demand just like everything else. Whether immediate or not, the consequence of massive money injections and credit expansion that are untied to savings has been and will continue to be outlays - expenses if you will - of purchasing power experienced by all holders of US dollars, which includes US taxpayers.

    So, yes, the bailouts were in fact at taxpayers' expense.

    Cheers,

    Joel

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  2. I would like to add that the real expense to the US taxpayer is that the Fed has been buying assets from the banks on a continual basis, therefore there are two costs:

    1) the credit instruments which have defaulted (in the hands of the Fed, and not in the hands of the banks)
    2) the debasing on the USD via the introduction of new currency (more of anything makes that thing less valuable)


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