Compounding Life

As I mentioned in my earlier post I recently read One Up On Wall Street : How To Use What You Already Know To Make Money In The Market by Peter Lynch. Peter Lynch took over the Fidelity Magellan Fund in 1977 when it had $18 million in assets. When he stepped down from managing the fund in 1990 he achieved an averaged %29.2 return and the funds assets sat at $14 billion in assets.

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.

I attended the Berkshire Hathaway annual meeting this year, at the meeting you get to hear Warren and Charlie (mostly Warren) answer questions for about 5 hours. The Monday after was the Wesco Financial annual meeting which is all Charlie’s show. I didn’t attend but the Motley Fool has some good notes in this article.

Charlie Munger is a wealth of knowledge and thought. As a lot of people say, he doesn’t talk very much but when he does listen up.

Disclosure: I own shares of WFC and BRK.B at the time of this writing.

Lately I have been reading the quarterly and annual reports from the “Oak Value Fund”. Not because I am interested in investing in their fund but because they are well written reports that summarize the market weather from the perspective of a value investor and they go into good details about their holdings and their reasons for buying or selling their positions.  

The Oak Value reports are reminiscent of the Berkshire Hathaway annual letter to shareholders but offer yet another perspective because they do not buy entire companies and they will open and close positions more often.

I reiterate, I have no intentions of investing in this fund nor do I make any recommendation that any one else does. I just feel there is some good reading in their reports.  One interesting note is that OAKVX is a fairly small fund with only around 58 million is assets.

Burlington Northern Santa Fe has been getting some attention because Buffet has been steadily increasing his position. This past week another  purchase of approximately 4 million shares was reported:

NATIONAL INDEMNITY CO  10% owner 1,800,000 $62.19 $1.11946E8 7.1889E7

NATIONAL INDEMNITY CO  10% owner 681,000        $63.43 $4.31969E7 7.257E7

NATIONAL INDEMNITY CO  10% owner 1,882,000 $61.65 $1.16031E8 7.4452E7

It should be noted that National Indemnity is a Berkshire Hathaway company.  It’s an Omaha based insurance company that Buffet purchased on behalf of Berkshire. If memory serves correct I believe this was one of first insurance companies he purchased and hence the beginning of his “float”  investing career.  The story of Buffett and National Indemnity is covered in some detail in “The Snowball” which I would highly reccomend reading.

The only reason I bring this up is because when reading information about insider purchases and sales you have to keep in mind that it might not always be clear who is purchasing the stock. In this case someone not familiar with Berkshire and it’s history of  buying BNI stock might not realize who is actually making the purchase.  As far as insider information goes InsiderCrow is the best site I have found so far for that info but please let me know if you have any others you use. Insider filings are available from the SEC site, but the search functionality on InsiderCrow is far better.

Back to BNI. Well I think there are two major things to consider:

1. Rail is the cheapest way to move goods across the country. When people start spending money again and gas prices work their way back up (both of which will happen eventually, nay sayers be damned) railroads will be in high demand.

2. Moat. This is a no brainer. When it come to moats railroads have it locked down. The threat to their competitive advantage (Moat) is that a cheaper way to move goods comes along.  

Riding on Coattails

Warren Buffett has talked about “riding on coattails”. Well here is a situation where it may be possible to ride on his.  We know what Berkshire has paid for all of its BNI stock.  So we can come up with an idea of what he considers to be a “fair” price. One thing to keep in mind is that in some cases he bought the stock on “puts” which means he collected a premium for taking on the obligation to buy the stock at a certain price.  In these cases he technically paid less than the price reported because that does not reflect the discount for the premium. 

With recent purchases its obvious he thinks its a good deal in the low 60’s and coincidentally it has also recently hit its 52 week low. But am I saying mimic what he does blindly? No.

 The thing I like about this situation is that I can research BNI on my own, come up with my own valuation for the stock, my own opinion and then compare it to someone elses. This someone else just happens to be far more knowledgable then I am. I am not saying buy a stock just because Buffet buys it.

In alot of cases Buffet gets deals that we can’t. With GE and GS he got high interest perferred shares with lots of consequences in his favor. Those are unique and should not be read as “Buffet is buying GE stock!”. While he is technically buying GE stock he is getting alot more reward and protection than anyone buying their common stock. In this case he is buying BNI common stock without any special deals.  

Risks and other thoughts

There are some things to take in consideration when looking at BNI from the perspective of a personal investor:

1. Buffett has to make large investments. There are great companies selling for great prices right now, alot that will probably make you more money than BNI but they are too small for large investors. This is where you have an advantage over Buffet. BNI is a good long term play but for someone who is not managing billions of dollars there are probably better oportunities. 

2. Buyout. It is possible that Buffett is working his way to a complete purchase of BNI for Berkshire Hathaway. If this happens sooner rather than later you will not get the same return and if it were to happen within a year of your purchase date you could pay higher taxes on your gains. Keep in mind there has been no talk of a buyout, but I think its something to consider. 

Personal thoughts

As I mentioned in a previous post, I look at investing as far more than a vehicle for income. I personally like BNI because I live in South Seattle close to alot of rail activity so I constantly get a personal real life view of my holdings and I derive much joy from that.

I am unabashed fan of Warren Buffett and I really enjoyed watching this video of him speaking to a MBA class at University of Florida.  Its a little over an hour but its time well spent.  

The video is from 2000, but like all of his advice its timeless. One the things mentioned in the talk that really stuck out in my mind is the following in reference to the failure of Long Term Capital:

 

 

To make money they didnt have and didnt need they risked what they did have and what they did need.

 

He goes on to make an example with someone who has 100 million dollars. If this person can earn 10% a year on his 100 million dollars without leverage at almost no risk, or take some risk and leverage his 100 million dollars to make a 20% return this person would be crazy to risk losing their 100 million for an additional 10%. Especially because they already have 100 million bucks, how is the additional 10% going to make their life that much better? It isn’t it. But the downside if they loose is obvious, they no longer have any money.

The google video link above is for the whole 1 hour talk, its also on youtube broken up in smaller chunks.

Other Warren Buffett videos:

Warren Buffett talks Business

Charlie Rose Interview