I spend a lot of time thinking about my actions trying to determine if I made the right or wrong decision and if I made wrong decision, what lesson I need to take from the experience to apply to future endeavors. So of course one of the questions I asked myself is did I sell too early?

One thing I try to remind myself of in situations like this is “What the market does after you open or close a position really has no bearing on the quality of your decision.” While I would like to take credit for that thought, I imagine it was probably inspired by something I read from someone much wiser and with more experience under their belt. In essence what I am trying to say is that especially in the short term you should not use the market to judge your decisions. Even though the market values VVTV at over $7 and IGOI at over $4, that is not an indication on the quality of my decision to sell at cheaper prices.

Why? The answer really boils down to my investment philosophy. I started investing because I felt I strongly identified with the value investing framework. It makes sense to me and I feel confident that if applied with discipline it can lead to superior performance. While there are many interpretations of the value investing framework, one of the core tenets of value investing is the “Margin of Safety”. Buffett’s early investment style was influenced by his mentor Ben Graham. His style today is probably influenced by many people, two of which are Phil Fisher and his long time partner at Berkshire Charlie Munger. As his style has evolved the margin of safety is still a key component.

I entered both of these positions because I felt they provided adequate margins of safety trading at good discounts to their liquidation value and in both cases the companies had the chance turn around their business as an ongoing concern. So far they have both been making good progress and the market is treating them nicely for that progress. However lets not forget that these are not fantastic businesses with strong moats. So in my case, I bought them at discount to their value dead and got a premium because things worked out well. If only all situations could work out that way!

Both of these companies have a chance of success however once the margin of safety is gone there is nothing to backstop the value. Both of these companies have to execute with little or no error to continue on the upward path they are on. In this case the value the market puts on their progress is of no concern to me, what is of concern is the companies strength and the margin of safety I have if I hold.

Buffett has said that the best businesses are ones that can be run by a ham sandwich, because someday a ham sandwich will run them. I did not enter these positions because of their great business, I entered them because the market was selling them a large discount. They were Graham style cigar butts.

In the event that they enjoy great success long term the shares will appreciate accordingly, however in the event that they fail there is a higher risk of capital loss than I am comfortable with. Unlike companies with strong moats they can’t afford to make mistakes for a year or two. They must do a lot of things right.

So in conclusion when thinking about selling stocks do not think about the market. Think about the business and the margin of safety it offers at its current price. If you do that you will probably be right more often than you are wrong.

Disclosure: No positions in the stocks mentioned in this article.

As most of the readers probably know the main difference between American style and European style options contracts is when they can be exercised by the buyer. European style options can only be exercised on the expiration date where as American style options can be exercised any time before expiration.

Why might it be that this difference exists? Samuel proposes one answer:

The London buyer of options is accustomed to “trade
against his options” to a much greater extent than the
New Yorker, and trading of this character calls for quite
complicated calculations that would puzzle and confuse
the average American stock speculator who wants a sim-
ple, rather than a complicated proposition, and who prefer-
ably always demands a quick, rather than a slow decision.
The English stock speculator apparently is slower, more
patient and willing to work harder to secure a profit than
his American contemporary, who despises small profits, and has a world-wide reputation among financiers for his
failure to give proper regard to his interest account.

• 16.55% Biglari Holdings (BH) – This a combination of SNS stock I purchased in between $10-$15 per share (pre reverse split) and stock I received from the WEST transaction. Performance here has been great, although I really struggle with what I will call the “shenanigans” of Sardar Biglari and what appears to be his obsession with BRK fast track, except of course on the CEO compensation front. I have recently thought about exiting or at least reducing exposure here, but I have been defaulting to “Lethargy, bordering on sloth”.
• 14.11% Istar Financial Preferred Series G (SFI-G) – Istar is a distressed REIT focused on commercial real estate lending. I also own a common position (SFI) in addition to these preferred shares, but 14.11% represents just the prefs. Istar ran into trouble because of NPLs. I bought these when the company was almost left for dead ($2-$5 per share) during the peak of the market panic. To date they have kept paying the dividend and they have been slowly but surely digging themselves out the hole they are in. I expect 2011 to be a big year for Istar but I have to monitor this position closely as things could change pretty quick. Par on these is $25, so at 18 today the upside is getting smaller but the yield has been great. Dividends on this position have pretty much covered my cost basis.
• 11.8% Premier Exhibitions (PRXI) Like BH, I think PRXI needs no introduction in value investing blogging community. I entered PRXI around January of 2010, currently up almost 50% on this position. With PRXI, you either believe the Titanic assets are undervalued or you don’t. I fall in the former camp. If the PPS gets over $2 I will start thinking about selling.
• 11.54% Contango Oil and Gas(MCF) I once told someone that if Kenneth Peak ran a toothpick manufacturer I would buy stock in it. While thats a little bit of an exaggeration, its not far from the truth. I own MCF not because I have some thoughts about the movement of natural gas prices, but because MCF is very well run low cost producer with a great track record for creating value.
• 9.84% Labranche & Co. (LAB) Labranche is financial firm that has been around forever but has seen much better days. It is worth more dead than alive, I suspect in 2011 we will see something happen here that will return a value to shareholders higher than today’s prices. My guess is going private or winding down the business. In the interim the discount to cash and investments, the high insider ownership, and the ability for the company to buy back shares on the cheap is what keeps me hanging out here. I consider this heads I win,  tails I don’t loose much scenario.

So there are the largest 5 positions out of 20 which makes up around 63% of my total holdings.  I don’t follow any portfolio allocation strategies so my position sizes are a result of the either the growth of a smaller position or a result of the available dry powder when I find an investment.

There were over 40 submissions and I arbitrarily picked 23 as the limit. I am quite impressed with the variety in the topics. I am mostly value focused so it was interesting to read some articles that I probably would never come across in my RSS reader normally.

So here they are the 23 selections for Feb. 1st 2010 edition of the “Festival of Stocks”:

Brokers

Options Express – Online Brokerage Review at DoughRoller
A review of Options Express an online discount brokerage
Stocks:

Currency

Think your lek can kick my colón? Get riyal. at Control Your Cash
A post on currency trading and what it means to bet on one currency against another.
Stocks:

Debt

Lending Club Risks and Costs at Index Investing: The Oblivious Investor
A comparison of Lending Club notes to a simple high-yield bond ETF. (Doesn’t exactly make Lending Club look great.)
Stocks:

Dividends

Realty Income – Dividen Stock Analysis at Dividend Growth Investor
Analysis of Realty Income, a stock that pays a monthly dividend.
Stocks: O

Raven Industries Inc. (RAVN) Dividend Stock Analysis at Dividends Value
Raven Industries Inc. manufacturer provides electronic precision-agriculture products, reinforced plastic sheeting, electronics manufacturing services, specialty aeronautics, and sewn products. Linked here is a detailed analysis and commentary.
Stocks: RAVN

5 MAGIC FORMULA STOCKS FOR A LONG-TERM DIVIDEND INVESTOR at MagicDiligence.com
5 dividend stocks found using Joel Greenblatt’s Magic Formula
Stocks: RAI,LLY,HI,LO,UNTD

MFI STOCK REVIEW: REYNOLDS AMERICAN INC (RAI) at MagicDiligence.com
Reynolds American is a maker of popular cigarette brands like Camel and snuff brands such as Kodiak. The investment’s main attraction is a big, stable 7% dividend yield, but is this enough over a one year target holding period?
Stocks: RAI

S&P500 Dividend Aristocrats at Blueprint for Financial Prosperity

A quick summary of the S&P 500 Dividend Aristocrats

Stocks:

ETF

Emerging Markets Stock ETF (VWO) at Best Mutual Funds Now
The Emerging Markets Stock ETF or VWO has investments in the emerging large-cap markets
Stocks: VWO

Wildcatters Exploration & Production ETF at ETF Base
Review and background on a newly launched Wildcatter Exploration and Production ETF – expect wild volatility and huge gains if gas/oil move upward.
Stocks: WCAT

Darwin’s Inverse Leveraged Short ETF Strategy – Incredible Results Outlined at Darwin’s Finance
This post covers a strategy where you short two opposing leveraged ETFs.
Stocks: ERX,ERY,FAS,FAZ,GLL,UGL

Time For A Real Estate ETF? at ETFdb
An overview of REIT ETFs
Stocks: VNQ,IYR,ICF,RWR,FTY,FRI,IFNA

The Gold ETF Situation at Personal Finance Analyst
Description of the Gold ETF and what the current status of Gold is today.
Stocks: GLD

M&A

Kraft to Take Over Cadbury – A Sweet Deal? at American Consumer News
An investigation into Krafts takeover of Cadbury.
Stocks: KFT,CBY

Mutual Funds

Vanguard Review at Foreigner’s Finances
A review of the mutual fund company. Included in the review is information on fees, site design, the company, and what type ofinvestor will work best with Vanguard.
Stocks:

Options

Options Strategy #2: Protective Put at The Financial Blogger
Using puts to protect your positions.
Stocks:

Small Cap

Graphite India Ltd – Good Small Cap Stock for Long Term Holding at TIPBlog.in
A long term small cap idea, Graphite India Limited
Stocks: GRAPHITE

Strategy

New Trade: Long Google-GOOG/Short Baidu-BID at Intelligent Speculator
A paired trade with Google and Baidu
Stocks: GOOG,BID

Are You a Bear or a Bull? Or a BeaBu? at BeaBu.com

Stocks:

Location: Itex headquarters, Bellevue, WA

Attendance: 12 or 13 people including the ITEX board and company operators.

A representative of the Polonitza Group was in attendance, to see who the Polonitza Group represents view this 13D filling. The Polonitza Group among others includes David Polonitza who according to this letter has been an ITEX holder since 2004. Most of the questions were asked by The Polonitza Group. Some specific questions that were asked:

What was the reason for removing from the company by laws the ability for shareholders to call a special meeting? Is there any plan to re-instate this in the future?

They essentially said that this was done as a result of the WEST situation and at the recommendation of the counsel that was helping them during that time period. They believe it is in the interest of shareholders because it prevents management from getting blindsided with issues that have to suddenly take them away from running the business. They also noted that there processes for shareholders to voice concerns and have items brought up at the annual meeting. In addition they noted that they are always available to communicate with shareholders.

It sounded like they have no plans of reinstating the provision to call a special meeting however they did solicit feedback.

Steve White thought the bylaws were amended two years ago, but the Polonitza Group noted that this happened in the past year or at least not publicly disclosed until the past year.

I have yet to go through and track down the filling where the bylaw change is mentioned.

The Polonitza group voiced concerns over the lack of perceived independence in the board and compensation committee. As a publicly company they do not feel ITEX is doing enough to maintain proper independence on the board. They would like to see someone on the board that does not have existing relationships with the board members and they would like that entity to be a shareholder who has a reasonable position in ITEX. The Polonitza group offered up any of its members to sit on the board with no compensation required. It should also be noted that while The Polonitza Group expressed concerns about the lack of independence on the compensation committee they did state that they feel Steve White is properly compensated if not undercompensated.

The board in general tried to emphasize that while they have working relationships they are not very close friends and maintain independent thoughts and ideas.

They wanted to express that felt the board is more independent than the Polonitza Group was implying. They mentioned that while they have known each other and worked with each other for quite some time, they do not frequent each other’s houses or family events.

The Polonitza Group expressed concerns about the track record of return on capital deployed recently by ITEX. They also noted that the having an independent board member with capital allocation experience could be beneficial.

Steve mentioned that ITEX expects to see future returns on capital they have deployed.

The Polonitza Group asked if they would comment on the performance of the “SuperTrader” exchange launched by Idearc Media which is powered by ITEX.

Steve said that they are not disclosing details on this at the moment. I believe he did note that they expect it could be around 10% of revenue.

The Polonitza Group asked if the Idearc Media’s bankruptcy has any effect on deal between Idearc and ITEX, and if they expect that Idearc would attempt to renegotiate or back out.

Steve said that Idearc has been a great partner, they have always paid invoices quickly and after entering bankruptcy they had a small outstanding balance which they have assured ITEX will be paid as soon as they emerge from the bankruptcy. There was no indication that Idearc plans to renegotiate or back out of the deal.

The Polonitza Group asked if the company has thought about paying a dividend in the future.

Steve asked the shareholders for their thoughts on this. I happen to be the first one asked and was caught a little off guard. My response was that I would not opposed to the idea of returning some of the cash back to share holders, however I want to the company to maintain a strong position and be able to take advantage of opportunities to reinvest earnings at decent rates of return should opportunities become available. Most of the shareholders agreed with my statement, The Polonitza Group specifically said they were not interested in dividends being paid, specifically they pointed out the double taxation that happens when you receive dividends in taxable account, meaning the company is taxed on earnings and then the shareholder is taxed as well on the portion of earnings that gets distributed in the form a dividend.

During the dividend discussion the Polonitza Group brought up capital allocation and stated that they believe ITEX would be a good candidate for a holding company structure where the business units return free cash flow up to the parent level and the parent level manages the deployment of capital.

One shareholder asked about a $500,000 bad debt expense recorded on the balance sheet.

This was attributed to unpaid accounts receivable, Steve mentioned that they have an extremely low percentage of monies that go uncollected. I believe the number was 2%. They also mentioned that no commission gets paid until money is received. He also mentioned that franchisees are empowered to collect this money from members which attributes to the high recovery rate.

The Polonitza Group asked the board to comment on the lack of insider purchases by the board during the market turmoil which left ITEX selling at extremely cheap prices.

The board gave some reasons for not buying, Eric Best said he was very tied up in his startup “Mercent”, and was not necessarily financially comfortable or able to deploy cash for stock purchases during these times. Steve commented that he already has a large position in ITEX and stock purchases generally don’t cross his mind. Another board member pointed out that no one on the board has sold any stock in years. The Polonitza Group pointed out that Eric was the last to sell, Steve pointed out that he bought the shares Eric sold.

The Polonitza Group said that they understand people have personal reasons for not buying stocks during this time period, but they noted that even some smaller purchase by the board would go a long way. I pointed out that when ITEX was selling at bargain basement prices and no insiders were buying this is generally interpreted in a negative light because people will often take this as a sign that management does not think the stock is a good deal.

The Polonitza Group expressed that they felt ITEX should have been buying back stock when the stock was cheap and said they felt stock buy backs would yield better returns then their acquisitions.

Steve mentioned that they have the ability to buy back stock without the need for seeking approval, I believe the number was up to 2 million but I can’t be certain. Steve mentioned that thought it might be better to leave stock in the market for investors who want to buy more ITEX instead of reducing the liquidity of the stock and making it less available.

One of the ITEX folks, not sure if he a board member or the CFO mentioned that he has tried to find compelling evidence that stock buy backs provide any benefit or value to shareholders and he said most reports he found say they do not work. Myself and the Polonitza group both commented on the fact that most companies buy back stock at a price that is too high to provide value to their shareholders. It should be a very simple exercise for them to determine at what prices they should consider buying back stock.

That’s all I can remember for now. If I think of anything else I will update it.

Disclosure:
I own ITEX stock at the time of this writing.

The Wall St. Journal and Make Magazine posted stories about frequent fliers who found a nifty arbitrage transaction. The US Mint was offering free shipping on $1 Native American and Presidential coins which are sold at face value. By charging this purchase on a credit card that provides frequent flier miles you are buying a dollar for a dollar and getting the miles for free. The Journal article states that one person claims to have purchased over $800,000 of the coins using multiple credit cards and bank accounts. People would order the coins in boxes of 250 and take them straight to the bank to deposit in their checking account and pay back their credit card company.

I was reading this Fat Pitch Financials post and saw mention of Bristol Myers (BMY) offering their remaining ownership of Mead Johnson (MJN) in exchange for BMY shares.

Bristol Myers did a public offering of MJN earlier this year and the stock has risen nicely since then. Mead Johnson was started in 1905 and aqquired by Bristol Myers in the 1960s.

Quick info about MJN

From their website:

We are Mead Johnson Nutrition — a global leader in infant and children’s nutrition.
We are best known for our Enfamil® and Enfalac® families of infant formulas as well as for our regional children’s nutritional products, including Enfagrow®, Enfapro®, Enfakid®, EnfaSchool®, and Sustagen® in Asia, and Choco Milk® and Cal-C-Tose® in Mexico and Latin America.

I like Mead Johnson because its a boring steady business. Infant formula, while it will probably change in the future is not going away and families are likely to stick with known recognized brands for their children. I think brand recognition in infant formula is a good competive advantage.

The flip side of this of course is that something as serious as infant formula requires the company does not tarnish is brand by producing bad products. It is likely that a recovering from a massive problem with its product could put the company in dire straits. As an investor you should realize the potential risk of things like this regardless of how likely or unlikely they are. There has been one instance of Melamine being found in MJN and others infant formula.

Info about the deal

Bristol Myers owns the majority of MJN (they sold some in a public offering this year). There is a tender offer being made in which BMY will provide up to 0.6313 shares of MJN for each share of BMY tendered. The actual ratio will be determined by an average price over a couple of trading days, in which they will provide $1.11 worth of MJN for each share of BMY (not to exceed to the 0.6313 number). The original tender was supposed to expire Dec. 14th 2009 at midnight. A recent SEC filling indicates they have extended the offer:

From the filling:

Bristol-Myers Squibb and Mead Johnson Announce Amendment and Extension of Exchange Offer
(NEW YORK, December 4, 2009) — Bristol-Myers Squibb Company (NYSE: BMY) and Mead Johnson Nutrition Company (NYSE: MJN) today announced that Bristol-Myers Squibb Company (“BMS”) has amended and extended its offer to exchange up to 170.0 million shares of common stock of Mead Johnson Nutrition Company (“MJN”) for outstanding shares of BMS common stock that are validly tendered and not validly withdrawn at an exchange ratio determined by a formula described in a registration statement filed by MJN on Form S-4 (Reg No. 333-163126).
BMS is amending the offer by:

•Increasing the upper limit on the exchange ratio to 0.6313 shares of MJN common stock per share of BMS common stock from 0.6027 shares of MJN common stock per share of BMS common stock; however, the final exchange ratio may be less than the upper limit;

•Extending the exchange offer’s expiration to 12:00 midnight, New York City time, on December 17, 2009, unless extended or terminated, from December 14, 2009; and

•Amending the current expected three-day period over which the final exchange ratio will be determined to December 11, 14 and 15, 2009 (which previously was expected to be December 8, 9 and 10, 2009).

The final exchange ratio will be announced by press release by 9:00 a.m., New York City time, on the trading day immediately preceding the expiration date. BMS and MJN currently expect to issue that press release by December 16, 2009, unless the exchange offer is extended or terminated.
As of December 3, 2009, approximately 1,055,000 shares of BMS common stock have been tendered.

Some Risks

Potential Kicker for BMY holders

Value?

A quick look at the DCF valuation using the OldSchoolValue.com spreadsheet prices it at about $20 fair value assuming 5% growth and 9% discount rate. It currently trades somewhere around $41 a share. One thing to keep in mind here is that due to the fact that MJN is only recently public there is very much historical data about the their growth. If I was really interested in this situation I might research Bristol Myers annual reports for more information. For sake of argument I picked %5 as a somewhat conservative growth rate.

Overall it seems like MJN is still a bit overpriced even if you take into account that you could get %10 discount via the tender offer, unless there is something that can indicate they will grow free cash flow at a high rate.

However if you look at this from an arbitrage perspective it is a potential 10% profit with a very short time frame. This assumes the market continues to value MJN at current levels or higher. If you want more information on this deal I would suggest following the link at the bottom of this post for the online webcast of the conference call.

What about BMY?

On the flip side BMY appears to be undervalued. I pulled it up on the spreadsheet and with %25 MOS (good moat), 9% discount and 0% growth it shows a 27.87 per share value and buy price of $21 to get a margin of safety of %25. If you bump the growth up to 3% the numbers start looking reasonable. The question is will they grow FCF? Well here are some things to keep in mind:

1. They are divesting themselves of all non-core units (hence the MJN spin off) so they will be more focused on their biopharma products. This has been a long standing plan that they have been following through on.

2. Shares that will be retired in the MJN tender will reduce their dividend payout. In the conference call BMY said that the dividend reduction will be larger than loss of dividends they currently get on their MJN shares.

3. Over the past 10 years FCF has been a bit of a roller coaster, but from 2006 to 2008 it has been growing which might mean that management has their act together more and their plan for focusing on biopharma is working.

Useful Links:

Bristol Myers Investor Relations

Listen the to MJN split off conference call

Most recent related SEC filling at the time writing

Summary

I think MJN is overpriced and BMY could warrant further investigation. That being said I might take a small position in MJN to go through the exchange process as a learning experience so I know what to expect in future opportunities.

Disclosure

This is not a recommendation to buy or sell securities or a replacement for your own investment research and due diligence. I have no positions in MJN or BMY at the time of this writing.

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”.