Sunday, July 18, 2010 5 comments ++[ CLICK TO COMMENT ]++

After a long absence... Articles of interest

It's about time I did another list of articles... Haven't posted a list of insightful articles in a long time so this is to catch up on some stuff... As usual, not in any particular order...

  • The curse of being too successful: Can John Paulson handle bigger portfolios? (Fortune): John Paulson has been one of the most successful investors in the last few years; actually he was very good in the past too but it wasn't as bold or spectacular as his bet against subprime mortgages. Now that he is successful and has one of the biggest hedge funds in the world, can he adapt his strategies to handle all this capital? As an example, this Fortune article points out how he is unable to exit his AngloGold Ashanti (AU) position with apparently no takers for his stake.
  • IEA downgrades oil demand growth forecast (Financial Times; h/t Infectious Greed): I don't usually pay much attention to these analysts but this time it's worth noting. The interesting thing this time around is that they are forecasting oil demand to grow only 1.3mmbd in 2011 versus the 1.8mmbd in 2010 even though the world economy is expected to grow from 4.1% in 2010 to 4.3%. This indicates how the 'oil to da moon' view is likely to be turn out to be wrong. You just can't project high present growth far into the future. If this trend continues, where oil growth is below GDP growth, it may further solidify the bear market in oil (assuming oil hit a peak in 2008, which I suspect is a multi-decade peak.)
  • (Highly Recommended) Analyzing companies using Value Line data (The Rational Walk): Ravi Nagarajan provides an overview of the Value Line stock report, along with items that investors should be paying attention to. For those not familiar, Value Line reports are perhaps the best in the industry with 10+ years of summarized historical data. I don't subscribe to that service and instead rely on the freely-available Morningstar online reports (unfortunately, the 10-year reports are not free at Morningstar anymore :( although you still have 5 years.) GuruFocus also provides 10-year data so that's another source you can use. I highly recommend this article to newbies, even if you don't use Value Line.
  • Structural changes in China likely mean weaker corporate profits (Toro's Running of the Bulls): Although I don't share the consensus view, the vast majority of investors, politicians, economists, and others are starting to believe that major structural changes in China are unfolding. In particular, many believe the renminbi has been set loose, on a path towards it strengthening against the US$; and that Chinese labour is earning, through hard struggles, higher wages. I don't put much weight in either of these because I believe China has overcapacity in manufacturing/real estate/fixed assets and just don't see the consensus scenario unfold until those problems are worked out. In any case, one should always consider what happens if they are wrong so I'm giving some thought to what Toro is saying in this post. To cut to the point, to quote the author, Toro, "This cannot be overstated enough – if the cost structures of global corporations are rising, as accelerating wages in China and a higher RMB implies, there will be headwinds for corporate profitability growth, and gains to the owners of capital will be lower." The next question I would ask is: who are the big losers? You might want to run through your portfolio and consider various scenarios. For instance, I think a company like Wal-mart would be hurt more than ExxonMobil. Of course, some companies will adapt and maybe even shift their business to cheaper areas within China or elsewhere; but some won't be able to.
  • (Highly Recommended) Analyzing restaurants (The Street Capitalist): Tariq Ali writes an excellent article on his method for analyzing restaurants. I haven't read the whole article yet but it's well-written and covers a lot of issues fundamental investors can use for other industries.
  • Odd-lot tender offer for Fidelity National Information Services (Value Uncovered): Adam does a good job in uncovering an opportunity for small investors. If you just started out investing and your portfolio is tiny, you may want to investigate this deal. Generally you can use multiple brokerage accounts with these tender offers (but don't rely on me and you should do your own homework.) So if you have 2 or 3 different accounts, you may be able to generate a somewhat reasonable profit. I may take a position in this, although the potential return is a bit too small for my liking (would prefer the max potential to be closer to 20% than the current 10%.) One also needs to spend some time thinking about the downside here, especially if the stock price collapses over the next few weeks.
  • (Recommended) Geoff Gannon Value Investor Questions Podcast #14 - What are the 4 most important numbers to know about a stock? (Value Investor Questions podcast by Geoff Gannon): Geoff Gannon has been releasing some interesting (audio) podcasts and this one deals with 4 numbers that he considers as very important. Investors are all different so you may consider other metrics as being more important but it's still worth hearing Gannon's thinking. I like how he, in this podcast, uses the analogy of a murder investigation to illustrate how the investigation can be tainted depending on the initial decisions you make.
  • (Recommended) Geoff Gannon Value Investor Questions Podcast #17 - Should You Put a Discount on a Stock With a Seasonal Business? (Value Investor Questions podcast by Geoff Gannon):  This podcast covers the issue of whether one should be discounting a seasonable business.
  • Parallels between John Law's Mississippi bubble and the present (Buttonwood): I think Buttonwood is too extreme in suggesting that the pro-stimulus crowd is behaving similarly to John Law. Nevertheless, I think some of the parallels that he/she brings up is kind of scary. It does seem, in some superflous sense, that policymakers took some steps during the crisis that were similar to John Law's actions.
  • Behind the scenes look at IKEA (Report on Business magazine): Always interesting to see how businesses are run.
  • Infographic of Canada's mining industry (Report on Business magazine): A quick look at the mining industry in Canada
  • "The Time We Have Is Growing Short" (Paul Volker for The New York Review of Books): Paul Volker, considered by some to be the greatest American central banker, laments the lack of interest in fixing the serious problems by policymakers. It's kind of too bad that governments did very little during the crisis to fix the problems. Barack Obama, in particular, had a clean slate and could have taken bold actions like FDR did. Instead, we end up with half-attempts at fixing problems. I have a really bad feeling that we haven't seen the final chapter, and we may see another financial crisis unfold.
  • "The Crisis & the Euro" (George Soros for The New York Review of Books): The man who broke the Bank of England definitely knows a thing or two about  the global economy. In this essay, George Soros presents his view on what is happening with the Euro and why governments are making a mistake.
  • (Recommended for those not familiar with the financial crisis) Review of Michael Lewis' book, Big Short (The New York Review of Books): Haven't read the book and probably won't get around to it for a long time, so this review provides enough meat for the time being. Big Short covers the story behind the short-sellers who profitted from the real estate bust.
  • (Recommended for those macro-oriented) Review of various economic sources - This Time Is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth S. Rogoff; World Economic Outlook, April 2009: Crisis and Recovery by the International Monetary Fund; World Economic Outlook, October 2009: Sustaining the Recovery by the International Monetary Fund (Paul Krugman and Robin Wells for The New York Review of Books): Paul Krugman and Robin Wells try to predict the economy in the near-future based on their interpretation of various economic publications. Needless to say, it's very difficult to have any confidence in how the economy will play out.
  • (not investing-related) Can science explain religion? Review of Evolution of God (The New York Review of Books): Likely controversial in the eyes of theists, this article reviews a book by Robert Wright that tries to map out how religion has evolved over time. The author of the book tries to explain religion through evolutionary psychology and game theory.

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5 Response to After a long absence... Articles of interest

July 20, 2010 at 7:06 PM


Parker Bohn
July 22, 2010 at 12:49 AM

Thanks for the list.

Re: Morningstar.  It appears (at least for now) that a direct link to the URL still gets you 10 year data.

For instance

Sivaram Velauthapillai
July 22, 2010 at 12:46 PM

Nice find... wonder how long you can access the data that way... hopefully it'll last forever ;)

July 27, 2010 at 12:04 AM

Thanks for the shout-out @

Please be aware that the odd-lot provision in the FIS tender offer will only allow 1 brokerage account.

Also, I think the downside risk in this transaction is particularly limited - shares were trading around $25 before the rumors about the potential buyout.  FIS is a large-cap profitable business, unlike some of these special situations investments that occur in illiquid, micro-cap, or unknown stocks.

Sivaram Velauthapillai
July 27, 2010 at 9:29 AM

You have a nice up-and-coming site. Lots of ideas. I suggested this before and it's your call but you should enable user comments, if possible (not sure if your blogging platform supports comments.) I remember looking at some of your picks a while ago and wanted to leave some comments...

I am not familiar with FIS but if it is a stable large-cap business, the risk is lower. However, do keep in mind that one risk in a situation like this is that the price may fall. Let's say the price falls 10% just because the broad market is selling off. After all, the stock was as low as $22ish early this year. What will happen to the buyout? Will it be at a lower price? Will it be cancelled? And so on.

Overall, I agree with you that this looks like a low risk situation. But I still think one should think about the worst case and consider various scenarios.

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