Articles for the week ending April 4th of 2009

Some reading material...

• Stability breeds instability (The Economist): Buttonwood writes, "Stable economies sow the seeds of their own destruction. That sounds like Karl Marx but it is the basic insight of Hyman Minsky, an economist of the mid-20th century whose reputation is being revived. Minsky argued that the financial system played a big role in exaggerating the economic cycle, one that was understated by conventional theory." There are two out-of-favour economists that are gaining importance. One, of course, is Keynes; the other is Minksy (Fisher is also getting some play due to his seemingly forgotten debt-deflation theory.) The article is interesting but I'm still in the camp that believes that bubbles are generally difficult to identify ahead of time and combat successfully. Real estate bubbles are probably the easiest to identify but there are many other key ones, such as commodity bubbles, "new technology" bubbles, stock market bubbles, and bond bubbles, that seem impossible to identify. For example, there are many who have claimed that US Treasuries were in a bubble as far back as the early 2000's. Yet they have been completely wrong for almot 8 years now, and it's still not clear if it's a bubble or is simply the result of real deflationary forces.
  
• The rich go into reverse (The Economist): This article presents a view I have held for a while. Namely, the current economic crisis will hurt the wealthy far more than any crisis in the last 30 years, and will likely shrink the gap between the rich and the poor. The present, in some respects, seems eerily similar to the Roaring 20's. Although the Great Depression hit everyone hard, I believe the gap between the rich and the poor shrunk considerably from the 30's to the 50's.
  
• Chou Funds annual report with some commentary (Controlled Greed): ControlledGreed links to Chou Funds' annual report. For those not familiar, Francis Chou is an investor that runs value mutual funds in Canada. He is probably as close to a success story of a no-name amateur investor becoming successful than anyone else out there. If any of us--youself or me--ever become successful in investing, it will resemble Francis Chou. A lot of amateurs look at Warren Buffett, Edward Lampert, Seth Klarman, John Paulson, Martin Whitman, and so forth, but these guys are professionals who work in the field 9 to 5 and some even have analyst teams reporting to them. We are unlikely to resemble them until we become experts or do a full-time job of investing. Controlled Greed also points out how, in a rare move for mutual funds, Francis Chou is refunding all the fees he earned since he opened his funds in 2003... As for his commentary, nothing earth-shattering in there--at least in my eyes. He did very poorly last year, partly because he started hedging the US$ exposure at the worst possible time. Chou also seems to have made some errors with his bonds since they were down a lot. Yes, some of them are distressed or near-distressed bonds but poor selection is lethal when it comes to bonds.
  
• Peter Shiff interviews Marc Faber (Lew Rockwell, via Controlled Greed): I thought the world will blow up if Marc Faber and Peter Shiff ever had a discussion together but I guess I was wrong ;) Although I don't agree with the econopolitical views of these two, I have generally been influenced, and even shared certain views, of Marc Faber. Presently, however, I diverge from Marc Faber when it comes to a major call: inflation. Marc Faber's inflationist view is close to the consensus of the stock market (but likely not the bond market) and hence isn't contrarian any more.
  
• Anyone into the Kondratieff Wave stuff? (The Globe & Mail): There is a short Q&A with Ian Gordan, who has been attempting to use Kondratieff wave for investing, for a while now. Marc Faber is also a big believer in the wave. I came to the conclusion that the wave, like most technical analysis, is next to useless. I remember Ian Gordan, as well as several other bears, claiming back in 2004 or thereabouts that everything was going to fall off a cliff due to the Kondratieff Wave. Well, it never really unfolded quite like anyone forecast.
  
• Earnings are not what they seem (ValueHuntr): ValueHuntr picks up a story from Bloomberg (it's not clear if he/she wrote it or is quoting a Bloomberg article) talking about something called the comprehensive income, which paints a more bearish picture than the reported income (this is what one normally sees.) I am not accounting-oriented like most value investors or fundamental analysts are, so I try to downplay differences in how earnings are repored over time. There are many different measures and it is inevitable that they will all change over time. (This is just like how a modern balance sheet is quite different from one 40 years ago. Right now, companies, particularly technology, pharmaceuticals, biotech, and branded consumer staples, have a lot of value listed under intangibles than in the distant past.) Since I am more macro-oriented, I tend to look at measures like profit margins to figure out if corporate earnings are high. Instead of trying to figure out where corporate earnings are going to be, or whether the reported numbers are "too high" or "too low", it's easier to look at profit margins. But such macro measures miss the turns and only provides a rough sense.
  
• Overview on the present state of the semiconductor industry (The Economist): There was a time when I mistakenly thought that semiconductors were a growth industry. Good thing I never invested in anythying with that mindset. It didn't take long for me to realize that semiconductors were a commodity that was influenced more by supply & demand than even some old-school commodities like oil (which is manipulated by the OPEC cartel.) If you are interested in investing in a semiconductor company, and are a newbie to the industry, this is a good read.
  
• [Highly Recommended] Tweedy Browne historical analysis of various investing techniques (Tweedy Browne via Greenbackd): Haven't read this latest update yet but I believe I read their prior study from a decade(?) ago (unless I'm mixing up some other report with this.) This 60-page report summarizes various academic and professional studies on value investing and contrarian techniques such as buying low price-to-book-value stocks, high dividend stocks, stocks that had worst performance, stocks with insider buying, and so on. If you are a newbie, like I am, this is a must-read (you don't have to read the whole thing but at least read the strategies that interest you.) It will give you some ideas on the effectiveness of various strategies and allow you to pursue historically-proven strategies that suits your personality and skill level.