Articles of interest for the week ending March 28th, 2009

Here are some articles, in no particular order, you may find interesting:

• Self-proclaimed "Canada's Chinese Warren Buffett" goes down Madoff style (The Toronto Star): "Tang, who bills himself as "the Chinese Warren Buffett" and "the king of 1 per cent weekly returns," is a prominent figure in Toronto's mostly Mandarin-speaking mainland Chinese community...In late February, Tang sent a letter to his clients, apologizing for "the sin that I had committed" but insisted that he did not steal investors’ funds." Classic Ponzi scheme. We are going to see many more cockroaches--sorry for the harsh metaphor--come out into the light. I really hate to see many working-class people with very little wealth, in this case Chinese immigrants, lose everything :( BTW, I don't know anything about this guy but I am pretty sure that he isn't even a value investor so calling himself Warren Buffett is nothing more than a bait to attract non-investors.
  
• Wow, Lawrence Summers actually predicted the big bust...sort of (New York Times): Writing for the NYT, Robert Shiller repeats an event from the late 80's where Lawrence Summers submitted an economic paper detailing a fictional story that somewhat mimics the last decade. I'll take a look at it later when I get a chance but Shiller references this paper by Summers.
  
• [Highly Recommended] Value investor reference (ValueHuntr): I ran across a new blog called ValueHuntr and it's very good. It seems to deal with special situation investing but I want to highlight their excellent collection of shareholder letters, articles, and interviews by Benjamin Graham, Warren Buffett, and so forth. Most people may have run across most of them but there are some gems in there. I haven't seen some of the articles by Walter Schloss anywhere else before. I especially liked this lecture (I might cover this in more detail later on.) For those that haven't seen some of Graham's Forbes articles from the 30's, I would recommend those as well (it's remarkable how there are so many similarities between the last decade and the roaring 20's--I'll post more in the future). One of the important things to realize is that you have to find a method that works for you! Walter Schloss points out how he is different from Graham and Buffett. I see a lot of newbies blindly follow Buffett when, perhaps, someone like Graham or Schloss might suit them better. Or even non-value investors like George Soros or Jim Rogers may fit some people. To the horror of value investors, I would even go as far as to say that some prominent speculators and momentum investors may suit some people better. Value investing will beat all other methods and survive the longest but not everyone is cut out to be value investor...
  
• Where is the stock market bottom? (The Economist): A few ways of roughly gauging the stock market bottom are examind in the Buttonwood column. Needless to say, the market is not yet flashing an all-clear signal.
  
• What is going to happen to dividends? (Buttonwood's Notebook): (What I'm about to say is highly confusing and my writing is poor; it is a macro-only issue.) Buttonwood started a blog at The Economist recently and I find most of the topics quite interesting. Reading the linked blog entry--it's about stocks vs bonds but my thought is on a different point--it makes me wonder if we are witnessing a monumental shift. While no one was looking, something happened: dividend yields surpassed (government) bond yields. In the early part of the 20th centurty, dividend yields were higher than government bond yields. In the last 40 years, however, dividend yields were far lower than bond yields (refer to this article by Peter Bernstein suggested by a commentator for further historical comparison.) Buttonwood suggests that the behaviour in the last 40 years may have been because real dividend growth was strongly positive, whereas it wasn't in prior periods. My thought is this: did the market accept the low dividend yields because it was banking on dividend growth? I wonder. I am not into dividend stocks but I notice that many dividend-oriented investors snap up stocks even though the yield is quite low. This is almost as irrational as someone snapping up a bond that has a low yield. The dividend investors, in my observation, are clearly betting on sizeable growth in dividends. The question I have is, what happens if dividends don't grow? Or grow slowly? If that happens, will the dividend yield stay above bond yields? Something to think about. If dividends don't grow yet stay high then share prices may fall or stay low.
  
• [Recommended] Summary of principles from Contrarian Investment Strategies by David Dreman (part i) (part ii) (Old School Value): I can't remember if I linked to this before but if not, do check out the links summarizing the investment rules suggested by David Dreman in his book, Contrarian Investment Strategies. The most important thing I learned from his book is that contrarian stocks--he uses low P/E, low P/BV, low P/S, and high dividend yield--rise even when news is bad, while popular stocks fall even when news is good. This thinking is what gives me confidence to invest in distressed, out of favour, and ignored stocks. You don't necessarily need an overly rosy scenario for these stocks to do well.