In his presentation he referenced some stats from a Blackstar Funds paper on the Russell 3000 index between years 1983-2006.

Russell 3000 stats 1983-2006

39% of stocks were unprofitable investments

18.5% of stocks lost at least 75% of their value

64% of stocks underperformed the Russell 3000

25% of stocks were responsible for all of the market’s gains

Well obviously an enterprising investor after reading this would be diligently researching looking for the %25. If you only invest in those companies you are sure to outperform the market. Well not always…

What a difference a day makes

The paper also gives us a sampling of some of the best performing stocks during that time period and their performance after the peak:

Thoughts

It would be interesting to see of the %25 that made up %100 of the gain in 1983-2006, how many companies would still be worth owning today. Looking at that list there are a couple. Of course there are some that would have resulted in a permanent loss of capital and some that are not permanent losses yet but for which the immediate future is not bright. Lets take a quick look at a couple…

GE

If you had bought GE on 01/03/83 at its closing price of 91.75, split adjusted (48:1) each share would be worth around $670 today. I figure thats about %8.3 compounded annual gain. If you had sold that share before the market drop you would have approximately 3x that amount somewhere around %12.5 compounded annually. Not including dividend payments. While GE is a mess today, its fair to say you could of done worse things than buying a share of GE in 1983.

MSFT

If you had bought MSFT when they went public on 03/13/86 at $28, split adjusted (288:1) each share would be worth around $8000 today. Around %29.3 compounded annually. Not including dividend payments.

Conclusion

This data reinforces a couple of points that I sometimes temporarily forget.

1. If you own a sub par company because it was undervalued when you bought it, sell it when it reaches intrinsic value and take your profit. There is no reason to hold it afterwards because it is likely to fall into the %64 that under perform the market. If you sell it and move on to the next value you will be on your way to out performing the market.

2. Paying a little bit of a premium for a a great business with a great moat and great management can pay off big time.

3. I think people should really call “buy and hold” “due diligence, buy and due diligence hold, rinse repeat”.

http://www.cs.princeton.edu/~rongge/derivative.pdf

Computational Complexity and Information Asymmetry in Financial Products

(Working paper)

Sanjeev Arora∗ Boaz Barak∗ Markus Brunnermeier† Rong Ge∗

October 19, 2009
Abstract

Traditional economics argues that financial derivatives, like CDOs and CDSs, ameliorate the
negative costs imposed by asymmetric information. This is because securitization via derivatives
allows the informed party to find buyers for less information-sensitive part of the cash flow
stream of an asset (e.g., a mortgage) and retain the remainder. In this paper we show that this
viewpoint may need to be revised once computational complexity is brought into the picture.
Using methods from theoretical computer science this paper shows that derivatives can actually
amplify the costs of asymmetric information instead of reducing them. Note that computational
complexity is only a small departure from full rationality since even highly sophisticated investors
are boundedly rational due to a lack of requisite computational resources.

See also the webpage http://www.cs.princeton.edu/~rongge/derivativeFAQ.html for
an informal discussion on the relevance of this paper to derivative pricing in practice.

Lynch’s investment style varies quite a bit from the traditional super value investors. Lynch seems more likely to invest in public offerings or companies that have little operating history if he feels they have potential for serious growth. Lynch is willing to take a little risk on situations where there is some uncertainty so some people might call him a “growth” investor. That being said I try to ignore categorizing investors into buckets like “growth” and “value”. Instead I categorize them into two buckets “good” and “not so good”. Looking at his record Lynch falls in the “good” bucket. I can’t imagine how much work it must be to manage a fund with billions of dollars in assets, over 1000 positions and on top of it providing returns that outperform the market.

One point that Lynch makes again and again is that you should always use whatever edge you have over Wall Street. If you work in in a particular industry and have a finger on its heart beat, you have an edge over people sitting in front of a Bloomberg terminal all day who may invest or trade in that sector. In the book Lynch mentions examples of great companies that he identified before Wall Street simply by being a typical consumer. Lynch also mentions some of his follies, such as the sandwich shop he ate lunch at that made a public offering. He bought in because he felt he had an edge on predicting the success of their business. They found out the hard way that their sandwich shop format did not go over well in other cities as the expense of the shareholders who bought the stock offering.

I walked away from Lynch’s book thinking primarily about one thing. What unconventional research tools are available to investors? When I say unconventional I mean anything that gives you information a typical investor or money manager might not get from the annual reports or SEC filings. Here are a few examples of some unconventional and some more conventional but under utilized tools that might help give you an edge.

The Phone

This is not really unconventional, but I think underutilized. I personally have not exercised this option as much as I would like to but I think after reading Lynch’s book I probably will.

Email

Same the idea here. There was a risk arbitrage situation I was interested in and I was trying to get a little more information about when the company expected to complete the transaction. I emailed investor relations at the company supposedly making the purchase and my email to their investor relations address bounced because the person who answered that address was no longer with the company. While this doesn’t give me any information about the merger it could be an indication of how much or little effort they put into informing shareholders. On the flip side I have emailed investor relations at other companies and gotten immediate responses from an actual human being, sometimes with decent answers to my questions! That is always a good sign.

Web stats

In my previous post about IGOI I mentioned that I went to a local retailer to see what their in store marketing and placement looked like. Another bit of research I did was related to their online store. In their conference call from last quarter the CEO mentioned that they are engaging in a more direct to customer marketing campaign. They launched a new online store where customers can buy product directly from the company cutting out the middle man and resulting in higher margins for IGO. When I heard that I decided to go to Alexa and see what they said about traffic going to the IGO website.

Here is what they had to say:

The one thing this tells me is that traffic to their online store is not growing. For a company attempting to reach customers directly I don’t find this encouraging. Another thing I looked at is their online advertising. If I do a google search for IGO, I see an sponsored link for IGO’s website. They are paying to show advertisements for people who search for “igo” even though their site is the first organic (non advertisement) search result. Now if I do a search for “universal laptop power supply” I don’t see an ad for IGO. I refresh a couple of times, still no IGO ad. This makes me wonder if they have a handle on their online advertising campaign. Next I do a search for “netbook power supply” and first time I don’t see an IGO ad, I refresh and I start seeing their ads. At least they are going after netbook customers, but I still get the feeling that if they are really trying to reach more customers directly their online advertising strategy might need some refinement. Any one of these things on their own don’t provide a ton of data, but as you start to add them up you can start to draw a picture of how well the company is aligned with their mission. It is possible that they are just gearing up their online business, in which case now that I have this information I can monitor it accordingly and this can give me an edge on how the company is doing. We already know that they are loosing their biggest customer (Targus) and they need to make revenue up some where. If their Alexa stats start growing this might be an indication that they are on the right track.

Street View

In some cases Google Street View can be a good tool for checking out the company headquarters of smaller companies. Is it a fancy building? Is it a dump? Does it even exist? Unfortunately street view only works in major US cities and this information in a lot of cases could be of minimal use, but you never know what you may find.

Here is the Vaxgen (VXGN) office (I liquidation situation I had a position in):

View Larger Map

Here is a Berkshire Hathaway in Omaha, Nebraska:

View Larger Map

LinkedIn

LinkedIn is a professional social network. Facebook for corporate America. One of the ideas I had for LinkedIn was using it as a tool research company management. If a CEO or other executive is on LinkedIn there is a good chance his or her employment history is on their profile. Are their previous companies still around or did they run them into the ground? This could be a good starting point for finding out more about executives in small companies.

Obviously these tools on their own will not tell you what stocks to buy or sell. However they can potentially provide some value when used in conjunction with your normal investment research.

Also worthy to note:

In exchange for providing free subscriptions, Zacks requests that articles that quote or are based on Zacks Premium data cite the source via a link to Zacks’ website.

Here is a collection of on line tools that I find my self using regularly:

1. Shortsqueeze.com: I have never sold a stock short, however knowing up to date information about short volume can be really handy when researching stocks.

2. Insidercow.com: So far the best site I have found for sifting through insider activity.

3. MergerInvesting.com – Pending Mergers : The pending merger list on this site is a good starting point to see what deals are going on.

4. Big Charts Historical Quotes: A really simple interface for historical quotes, just enter the symbol and the date.

5. CEFA Close Ended Fund Association: Great site for information on close ended funds. I have just started looking into close ended funds for potential value ideas. This site has been very helpful.

Please feel free to comment on any sites/tools that you use. It would be nice to have a fairly complete list.

It has been exciting times since then and while I really wish I had started earlier, to be honest I feel very lucky to have started in a time when stocks are cheap and Mr. Market is manic.

I figured I would disclose a few of the positions I have which have done pretty well. Of course I also have some positions which have been flat or lost value to date, but the gains out pace the losses and I think in the long run most of the losers will be winners.

Value Vision (VVTV): Multiple entries with an average price of $0.563
Current gain of 428.27%

I initially discovered VVTV by reading OldSchoolValue, there was some concern about the off balance sheet commitments they had which no longer made it a net-net, but the stock was so beaten down that I actually increased my position even after that news. So far that has paid off but Value Vision is far from out of the woods. I have been seriously considering exiting this position lately.

Ford Preferred Series S (F.PR.S or F-S): Purchase price of $6.17 current gain of 353.91%

These are shares of a trust that holds Ford bonds. While they are preferred shares, the shares are of the trust not Ford. So in the event of liquidation you are essentially a bond holder. The coupon is 6.5% on $50 face value. The coupon payment is in arrears, meaning they are currently not paying it and previous coupon payments are owed with interest. Who ever holds the shares when they pay the owed coupons will get all payments regardless of how long you have owned it. Upon maturity (2032) the holder would get face value $50. When I first found these they were trading at $4 a share but I had already invested all my excess cash. By the time I was ready they were up to about $6.
I decided I would stop buying if the price went over $10 which it did very quickly after it was obvious Ford was not going bankrupt in the near future. Today they are trading at $29 which is little over 0.50 cents on the dollar.

If you are not a professional investor, if your goal is not to manage money in such a way to get signifigantly better return than the rest of the world, then I believe in extreme diversification. I believe that maybe 98, 99 or maybe more than 99 percent of people who invest should extensively diversifiy and not trade. So that leads them to an index fund type of decision with very low cost. Because all they are going to do is own a part of America and they have made a decision that owning part of America is worth while. I don’t quarel with that at all and that is the way they should approach it… Unless they want to bring an intensity to the game and make a decision to start evaluating businesses. Once your in the business of evaluating businesses and you decide that you are going to bring the effort and intensity… and time involved to get that job done, Then I think that diversification is a terrible mistake…

If you really know businesses you probably shouldn’t own more than six of them, if you can identify six wonderfull businesses , that is all the diversification you need. You are going to make alot of money and I guarantee you that going into a 7th one instead of putting more money into your first one has got to be a terrible mistake. Very few people have gotten rich on their 7th best idea, but alot of people have gotten rich on their best idea.

But to quote Buffett again…

A public-opinion poll is no substitute for thought.

Regardless of what experts or friends say. Ultimately you have to decide whats best for you. You are the one that has to sleep at night with your investment decisions.

The board also passed a resolution recommending that the company’s shareholders approve amendments to Microsoft’s articles of incorporation to give shareholders representing 25 percent or more of outstanding shares the right to call special shareholder meetings.

The ability of shareholders to call special shareholder meetings is increasingly considered an important shareholder right,” said John Seethoff, vice president and deputy general counsel for Microsoft. “Proposing this new policy is another example of our ongoing commitment to maintaining strong corporate governance principles and practices.

This will be voted on by shareholders in November.

A pro-shareholder move like this from Microsoft’s board is not all that surprising. Considering that Bill Gates is good friends with Warren Buffett and serves on the board of Berkshire Hathaway, you would think that the Microsoft board would have a pro-shareholder bent to it. But at the end of the day even Bill Gates will not be calling any special meetings on his own. At around 733 million shares he is the largest shareholder ringing in just above 8%. The largest institutional investor is just under 4%.

My first impression of this was that it is a more of PR move to say “See we care about our shareholders!”. In reality if the management of the company were to start failing its shareholders it is quite possible that larger shareholders could band together or reach out to rally the support of a group representing %25. All in all I think its a good move and I like the fact that the board of directors decided to propose this resolution.

Disclosure: I own shares of MSFT at the time of this writing.

While they are all good this post was inspired by reading “How to Fund a Startup”. I think this essay is very informative on a couple of different levels.

Value investors are generally not interested in Initial Public Offerings of startups, for good reasons. I still think its important though to understand the process that most startups go through in their quest to get acquired or go public. Not to say that either of those two are the goal of all startups but in a lot of cases that is the exit plan. Its also interesting to note just how early on the differences between company managers and investors start to manifest. Of course in these early stages the founders usually do have a major stake so they are of course shareholders as well but not always “investors” meaning they do not have as much capital in play.

A great quote from the essay:

I don’t mean to suggest that our investors were nothing but a drag on us. They were helpful in negotiating deals, for example. I mean more that conflicts with investors are particularly nasty. Competitors punch you in the jaw, but investors have you by the balls.

I find this comical because in a lot of cases after the company has gone public and the original investors have cashed out the tables can be turned rather quickly to a situation where people running the company can have the investors “by the balls”.

My interest in companies and the market is the key motivator behind my investments. The financial pay off is almost secondary but I won’t lie making money is part of the game.  I don’t invest to lose money  However there are some investments I make purely because I want to own a small piece of certain companies . I like being somewhere and seeing there products or signs and thinking “I own a little chunk of that”.  So the point of this post is to describe how I currently buy little pieces of companies just for the sake of having a position and not nessecarily for financial reward.

Currently I use a Sharebuilder account for that.  I mention them not as a promotion but to describe how I use them because their service is somewhat unique.  Primarily with scheduled investments they only charge a $4 commision, you can invest an even dollar amount once a week and you can get fractional shares. 

Let’s take MVL (Marvel Entertainment) as an example. When I first saw that Marvel was publicly traded I thought that it would be really cool to own a piece of the comic book and movie industry. It spoke to the little kid in me. However I know little about those industries. I know very little about Marvel as a company and even after doing some research I might find it does not meet my criteria for buying stocks. But it is still a good company and the fact remains that I want to own it

That is where sharebuilder comes in.  A basic sharebuilder account is free and with the right promo code they will give you $50 4-6 weeks after your first transaction. So you open a free account make one purchase and you get $50, sweet. On top of that for the first month you can try their premium subscription free of charge which gives you 6 free scheduled investments, even better. To top it off you can schedule the premium trial to end at the end of the month so you don’t have to worry about forgetting to end the trial and then getting charged the re-occuring monthly fee. 

For the cost of eating out one night I can buy a share or two of Marvel paying a very low or in the case of a new account free comission and relish in the thought that I own part of a comic book company.

For my normal larger more researched investments I use a full featured online broker with standard comissions and real time trades. I use Sharebuilder to satisfy my desire to own little pieces of America that don’t always satsify my standard investing criteria. 

This is by no means a recomendation to follow my lead.  I am sure some people might think that buying a stock just for the sake of owning that company even in tiny positions is a bad idea. These are all personal preferences and you should always think for yourself when looking at any investment option regardless of the dollar amount.

A few other things worth noting about Sharebuilder:

1. You can setup dividend re-investment (I believe its turned on by default).

2. Scheduled investments happen every Tuesday morning and must be scheduled by the Monday before at 5pm. So you the price you pay for share is not known when you schedule the purchase.

3. Sharebuilder sells fractional shares. So if a stock you want to own is a little out of your price range, for example a Berkshire Hathaway (BRK.B) B share you can purchase a fraction of this share and add to your position over time eventually getting an entire share.