Shai Dardashti is conducting a very interesting and useful survey -- please participate, it only takes a minute.

Here are the responses received to date:

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An email from our managing editor to Steve Jobs:

Dear Steve,

My five year-old son Mark was diagnosed with leukemia in April and has been in chemotherapy ever since.  He started a new regimen of dexamethasone and had another bone marrow sample removed this morning.  My wife and I were dreading this day because Mark had enjoyed a lull in his treatment over the past couple of weeks.  Upon returning from the hospital this afternoon, our still sore son told me, “Today was the best day because it was iPad day.”

The day we turned hospital days into “iPad days”, Mark started experiencing the cancer as a little more than a nuisance.  For that, we thank you.

Warmly,

John Mihaljevic

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The Super- investor Issue (Feb. 2011)	Cheap Large-Caps (Jan. 2011)	Value in Banks? (Oct. 2010)	Graham-style Deep Value (Apr. 2010)	The "Magic Formula" 100 (Nov. 2008)

Review features of The Manual of Ideas.

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Would you like to share your best investment idea with some of the world's top value fund managers? Would you like to add the title of Inaugural Winner of The Manual of Ideas Prize to your list of accomplishments? Would you like to win $1,000?

The Manual of Ideas is now accepting submissions for The Manual of Ideas Prize, a contest for the best one-page investment write-up on a stock idea that has not yet been covered in The Manual of Ideas (see a list of excluded companies). The author of the winning submission will receive $1,000. Winners will be selected by The Manual of Ideas research team. The deadline for your submission is April 15, 2011. No purchase is required in order to participate.

Here is what you need to do:

1. Choose a public company that is not already covered by The Manual of Ideas. The company must have a market value of at least $50 million as of March 15, 2011 and must be traded on one of the following stock exchanges: Nasdaq, NYSE or American Stock Exchange.
2. Use this template for your one-page write-up. Here are a few examples of what a finished one-pager might look like: example one, example two, example three.
3. Create a valuation table in Excel (do not use macros). The valuation table should show three valuation scenarios: conservative, base case, and aggressive. Here are two examples of what a finished valuation table might look like: example one, example two.
4. Send the one-pager (Word file) and the valuation table (Excel file) to John Mihaljevic at editor-at-manualofideas-dot-com. Include your name, company or university affiliation, and contact information in your email. The deadline for your submission is 11:59pm EST on April 15, 2011.
5. That's it! We will review the submissions and announce the winner on May 2, 2011. The winner will receive $1,000 sent by PayPal to his or her email address.
   

By sending your submission to editor-at-manualofideas-dot-com, you agree to the following contest rules:

1. You have not plagiarized anyone else's content in the writing of your one-pager.
2. You own the copyright for the content you are submitting to us. (It is okay if you have previously published all or a portion of the content, provided that you retain the copyright.)
3. You give us a non-exclusive, royalty-free, perpetual license to use the content you send us in any way. We will consider publishing high-quality write-ups in The Manual of Ideas. We will not compensate you for such publication, except that we may, in our sole discretion, pay you $100 for a published one-pager.
4. You agree to let us publish your name and affiliation in the case that you are selected as the winner of the $1,000 prize.
5. The $1,000 prize will be awarded if at least ten eligible write-ups are submitted. An eligible write-up is a write-up that fills the one-page template referenced above and that meets basic criteria for information accuracy. Only one write-up may be submitted per person.
   
6. This contest is being run by BeyondProxy LLC, the publisher of The Manual of Ideas. Direct any questions to info-at-manualofideas-dot-com.
7. We may change the terms of this contest at any time without prior notice.

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We are pleased to invite you to apply for access to The Manual of Ideas Members Area. You'll enjoy the following benefits when you join the exclusive members area:

• Access our recent research report, entitled "2010 Losers, 2011 Winners?"
• Participate in member discussions of ideas and other investment topics
• Network with Guy Spier, Paul Sonkin, Vitaliy Katsenelson and other respected investors
• Benefit from hand-picked resources, including must-see video content
• Browse an archive of The Manual of Ideas

Apply for your FREE membership.

Membership is selective. Please take the time to complete the brief application form as completely as possible. Please note that membership is a privilege and is subject to continued approval by BeyondProxy LLC, the publisher of The Manual of Ideas.

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The following is the table of contents of the latest issue of the acclaimed monthly Portfolio Manager's Review, entitled The Superinvestor Report, published on August 27, 2010 and spanning 174 pages. To learn more or subscribe, click here.

EDITOR’S COMMENTARY 5

EXCLUSIVE INTERVIEW WITH KEN SHUBIN STEIN 9

50+ PORTFOLIOS WITH SIGNAL VALUE™ 14
AKRE CAPITAL (CHUCK AKRE) 15
APPALOOSA (DAVID TEPPER) 16
BARES CAPITAL (BRIAN BARES) 17
BAUPOST (SETH KLARMAN) 18
BERKSHIRE HATHAWAY (WARREN BUFFETT) 19
BLUE RIDGE (JOHN GRIFFIN) 20
BP CAPITAL (BOONE PICKENS) 21
BRAVE WARRIOR (GLENN GREENBERG) 22
BREEDEN CAPITAL (RICHARD BREEDEN) 23
CENTAUR CAPITAL (ZEKE ASHTON) 24
CHILDREN’S INVESTMENT (CHRIS HOHN) 25
CHOU ASSOCIATES (FRANCIS CHOU) 26
CLARIUM (PETER THIEL) 27
EAGLE (BOYKIN CURRY) 28
EDINBURGH PARTNERS (SANDY NAIRN) 29
ESL INVESTMENTS (EDDIE LAMPERT) 30
FAIRFAX (PREM WATSA) 31
FAIRHOLME (BRUCE BERKOWITZ) 32
FIRST PACIFIC (BOB RODRIGUEZ AND STEVEN ROMICK) 33
GATES CAPITAL (JEFF GATES) 34
GLENVIEW (LARRY ROBBINS) 35
GREENLIGHT (DAVID EINHORN) 36
GRUSS (HOWARD GUBERMAN) 37
H PARTNERS (REHAN JAFFER) 38
HARBINGER (PHIL FALCONE) 39
HAWKSHAW (KIAN GHAZI) 40
ICAHN CAPITAL (CARL ICAHN) 41
KLEINHEINZ CAPITAL (JOHN KLEINHEINZ) 42
LANE FIVE (LISA RAPUANO) 43
LEUCADIA (IAN CUMMING AND JOE STEINBERG) 44
LONE PINE (STEVE MANDEL) 45
MARKEL GAYNER (TOM GAYNER) 46
MAVERICK (LEE AINSLE) 47
MHR (MARK RACHESKY) 48
MSD CAPITAL (GLENN FUHRMAN AND JOHN PHELAN) 49
PABRAI FUNDS (MOHNISH PABRAI) 50
PAULSON & CO. (JOHN PAULSON) 51
PENNANT (ALAN FOURNIER) 52
PERSHING SQUARE (BILL ACKMAN) 53
SAGEVIEW (ED GILHULY AND SCOTT STUART) 54
SCOUT (JAMES CRICHTON) 55
SECOND CURVE (TOM BROWN) 56
SHUMWAY CAPITAL (CHRIS SHUMWAY) 57
SOUTHEASTERN (MASON HAWKINS) 58
THIRD POINT (DAN LOEB) 59
TIGER GLOBAL (CHASE COLEMAN) 60
VIKING GLOBAL (ANDREAS HALVORSEN) 61
WEITZ FUNDS (WALLY WEITZ) 62
WEST COAST (LANCE HELFERT AND PAUL ORFALEA) 63
WINTERGREEN (DAVID WINTERS) 64
WL ROSS & CO. (WILBUR ROSS) 65

NEW OR INCREASED SUPERINVESTOR HOLDINGS 66
AFRICAN BARRICK GOLD (UK: ABG) – GREENLIGHT 66
AON CORP. (AON) – BREEDEN, FPA, SOUTHEASTERN, WEITZ 70
BALLY TECHNOLOGIES (BYI) – BREEDEN 74
CHESAPEAKE ENERGY (CHK) – BP CAPITAL, ICAHN, SOUTHEASTERN 78
ENSCO (ESV) – BLUE RIDGE, EAGLE, GREENLIGHT, ICAHN 82
ESTEE LAUDER (EL) – LONE PINE, VIKING 86
GAMESTOP (GME) – CENTAUR 90
MBIA (MBI) – FAIRFAX, FAIRHOLME 94
NALCO HOLDING (NLC) – BERKSHIRE, MSD 98
NCR CORP. (NCR) – GREENLIGHT 102
SERVICE CORP. INTERNATIONAL (SCI) – SOUTHEASTERN 106
TEVA PHARMA (TEVA) – BLUE RIDGE, EAGLE, MARKEL, MAVERICK 110
TREE.COM (TREE) – SECOND CURVE, WEITZ 114
VODAFONE (VOD) – CENTAUR, EAGLE, FPA, KLEINHEINZ, SOUTHEASTERN 118
XERIUM TECHNOLOGIES (XRM) – THIRD POINT 122

UNCHANGED OR OFFSETTING SUPERINVESTOR HOLDINGS 126
AAPLE (AAPL) – BLUE RIDGE, GREENLIGHT, KLEINHEINZ, LONE PINE 126
GOOGLE (GOOG) – BRAVE WARRIOR, GLENVIEW, MAVERICK, VIKING 130
LIBERTY INTERACTIVE (LINTA) – EAGLE, SOUTHEASTERN, THIRD POINT, WEITZ 134
SUPERMEDIA (SPMD) – APPALOOSA, FAIRFAX, PAULSON 138
TRAVELCENTERS OF AMERICA (TA) – BARES, LEUCADIA 142

SNAPSHOT OF 100 SUPERINVESTOR HOLDINGS 146
IN ALPHABETICAL ORDER 146
BY MARKET VALUE 148
BY SECTOR 150
STOCK PRICE PERFORMANCE 152
FREE CASH FLOW 154
P/E MULTIPLES 156
PERCENTILE RANK WITHIN INDUSTRY 158
LATEST EARNINGS SURPRISES 160

FAVORITE STOCK SCREENS FOR VALUE INVESTORS 162
“MAGIC FORMULA,” BASED ON TRAILING OPERATING INCOME 163
“MAGIC FORMULA,” BASED ON THIS YEAR’S EPS ESTIMATES 164
“MAGIC FORMULA,” BASED ON NEXT YEAR’S EPS ESTIMATES 165
CONTRARIAN: BIGGEST YTD LOSERS (DELEVERAGED & PROFITABLE) 166
VALUE WITH CATALYST: CHEAP REPURCHASERS OF STOCK 167
PROFITABLE DIVIDEND PAYORS WITH DECENT BALANCE SHEETS 168
DEEP VALUE: LOTS OF REVENUE, LOW ENTERPRISE VALUE 169
DEEP VALUE: NEGLECTED GROSS PROFITEERS 170
ACTIVIST TARGETS: POTENTIAL SALES, LIQUIDATIONS OR RECAPS 171

THIS MONTH’S TOP 10 WEB LINKS 172

To learn more or subscribe, click here.

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View FREE excerpt of Portfolio Manager's Review (pdf).

Members, log in to view the full 118-page report (as always, you will also receive a bound book by Priority or International Mail).

Learn about becoming a member.

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We are pleased to announce a content partnership with Plan Maestro of the value-oriented investment blog Variant Perceptions. The latter regularly features high-quality content and analysis for those looking to improve their investment skill and identify potential opportunities. As part of the content partnership, we will republish selected Variant Perceptions content we find particularly valuable to our readers and members.

To kick off the partnership, we are publishing in several posts (see below) a series entitled "Charting Banking," a great resource for those considering investments in the battered banking sector.

"Charting Banking" Series:

• Introduction
• Part I: Interest Spread
  
• Part II: Net Interest Margin
  
• Part III: Funding
  

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A new issue of Portfolio Manager's Review, the flagship monthly publication of The Manual of Ideas has just been published. The 116-page report, entitled "The Brand Value Issue," features 100 public companies with substantial brand value. The acclaimed research team of The Manual of Ideas profiles and analyzes 20 companies, while five companies are highlighted as potential timely investment opportunities.

Among the Top 5 is a company whose brand value alone may exceed the recent enterprise value of the entire company. Also included in the Top 5 is a company that may have suffered near-term brand impairment due to highly publicized quality issues but whose long-term value The Manual of Ideas research team judges to be compelling.

View the 100 companies mentioned in "The Brand Value Issue."

Log in to download the full report or subscribe to gain full access.

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On January 12, 2010, Google announced that the company would re-evaluate its approach to doing business in China after the discovery of cyber attacks that appeared to target human rights activists.  While Google did not directly accuse the Chinese government of complicity in the attack, the company clearly stated that it is no longer willing to censor search results.  At a time when nearly every major company in the United States is trying to expand opportunities in China, Google has decided to buck the trend with a very controversial move that could result in a major setback for the business.  What could Google’s executives have been thinking when they made a decision that was sure to cause a political uproar?

Richard L. Brandt’s latest book, Inside Larry & Sergey’s Brain, presents a portrait of Larry Page and Sergey Brin that helps the reader understand what may have motivated the company to initially enter China by accepting some level of censorship.  Although the book was published prior to Google’s recent announcement, we can draw some important insights regarding the way Google’s founders think about the issue of doing business in China.  Perhaps more importantly, the book also allows the reader to glimpse into the psyche of the founders and draw some conclusions regarding entrepreneurship in general.  For anyone investing in early stage companies, the insights are invaluable.

Mr. Brandt’s book is not as well known as  Googled:  The End of the World as We Know It which we reviewed in November.  However, one can argue that Mr. Brandt succeeds in providing a more vivid background of both founders and he also makes a better effort to draw links between their core values and a number of decisions that were made which may appear “crazy” at first but actually led to Google’s stunning success.  It is easy to see in retrospect how conventional thinking could have destroyed Google’s ambitions at several points during the  early years.  The fact that Mr. Brin and Mr. Page stuck to their core values made all the difference.

Can Idealism Coexist with Good Business Sense?

Google’s idealism is hardly a well kept secret.  In fact, the idealism of the founders has often been mocked as disingenuous by outside observers.  However, Mr. Brandt clearly shows how Mr. Brin and Mr. Page kept Google on course with an idealistic view of the world that ultimately provided the differentiation required to succeed.

Perhaps the most important example was Google’s insistence to not permit advertisers to purchase ranking in search results and to keep all advertisements clearly distinct from search results.  Google could have easily maximized short term profitability in the early years by taking a less idealistic approach (as all their competitors did).  It must have been incredibly tempting to do so.  The founders did not come from wealthy families and were facing pressure to produce profits.  However, ultimately the decision to consider the needs of the search user first trumped short term profitability but led to the trust required for the company to gain traction in numerous other initiatives.

Pros and Cons of Entering China

Google’s founders struggled with the question of censorship for several years before deciding to accept restrictions in exchange for being permitted to enter China.  Mr. Brandt’s chapter on China asserts that the founders never lost sight of their determination to contribute to positive change within Chinese society.  The question was whether engagement, even with restrictions, could improve the free exchange of information within the country.  Google was the first search engine to insist on at least notifying users if the results of a query were censored.  This fact alone helped to expose the actions of government to restrict the information citizens are permitted to see.

It is difficult to maintain cynicism regarding Google’s intentions for China after the company announced a willingness to exit the country if the government continues to require censorship.  While some subsequent statements made by Google’s CEO Eric Schmidt appeared to soften Google’s stance to some extent, the company seems committed to follow through on the statements made on January 12.  At this point in time, the decision seems likely to cost Google some profits but so did the earlier decision to refuse to allow advertisers to influence search ranking.  Google may be making a long term profit maximizing move if the new policy builds trust in China and the government eventually is forced to back down.

Genius, Hard Work, and Entrepreneurship

Sergey Brin and Larry Page have IQs that are obviously off the charts.  They were also willing to work extremely hard and found a way to start Google with very little capital.  They started out of a garage and used second hand and improvised furniture.  They were able to secure venture capital funding and attracted other talented people to join the company.

But while IQ, hard work, and guts are required elements associated with any successful startup, these attributes alone are not sufficient to ensure success.  Silicon Valley’s history is full of startups that failed despite all of the wonderful qualities that Mr. Brin and Mr. Page brought to Google.  What made Google such a stunning success is what may have been initially viewed by outsiders as insanity on the part of the founders.  However, the unconventional thinking that failed to maximize profitability in the short run directly led to Google’s stunning rise.

Controversy Will Continue

Google will continue to be controversial in the future.  We recently asked whether Google’s recent re-pricing of employee stock options meant that the company’s “Don’t Be Evil” pledge does not apply to stockholders.  Apple CEO Steve Jobs recently declared that Google’s “Don’t Be Evil” mantra is “bullshit”.  Google is often accused of expanding well beyond search particularly with its emphasis on offering applications for cloud computing.  Will the company use dominance over search to gain unfair advantage in new ventures?

Mr. Brandt provides an important service to those who are interested in moving past simplistic sound bites and gaining a better understanding of what makes Sergey Brin and Larry Page tick.  One gets the distinct sense that these men will be rocking the boat in the technology world for decades to come.

The author of this post is a private investor and writer focused on applying value investing techniques to find securities trading well below intrinsic business value. He is a Manual of Ideas contributor and editor of The Rational Walk.

Disclosure:  The author of this book review does not have a position in Google. Richard L. Brandt provided The Rational Walk with a copy of his book.

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Corporate governance is a subject attracting much rhetoric and little change. With governance failures responsible in large part for corporate disasters, new and old, we find Robert Monks' commentary on the subject, and his efforts to change the status quo, a beacon of hope. Shareholder activist and corporate governance advisor Robert Monks recently gave a speech at Harvard Law School about the state of corporate governance. The entire speech was recorded (including the Q&A with students). Please click here to view the video.

We found the following passages from Mr. Monks' speech especially illuminating:

• Three quarters of registered shareholders are fiduciary institutions.
• We can no longer blindly accept the received wisdom as to the roles and responsibilities of owners, directors and CEOs. Categories simply do not perform as advertised.
• It is naïve to think and act as if the current arrangement of power is not satisfactory to many who hold it. Our efforts will be a struggle for reallocation of that power.
• The core problem has been the disappearance of any practical or legal respect for the fiduciary standards that ensure a beneficiary of the loyal competence of the person responsible for managing his property. We have tolerated conflicts of interest throughout the commercial system with the result of enriching service providers and impoverishing beneficiaries. Worse, this regulatory neglect has placed the conscientious fiduciary at a competitive disadvantage.
• Is there genuine commitment to an ownership based governance system? [It must be said that no such commitment exists at present.] This commitment will need be made by government. If so:
  
• There must be effective enforcement of existing law so as to require fiduciaries to take appropriate action to protect and enhance the value of portfolio securities, and
• There must be arrangement for financing “activism” either as an appropriate corporate expense or as a designated portion of the investment management fees.
  
• Peter Drucker has long raised the question as to whether the current standard of board functioning is so unsatisfactory as to require structural change. - “Whenever an institution malfunctions as consistently as boards of directors have in nearly every major fiasco of the last forty or fifty years it is futile to blame men.  It is the institution that malfunctions.”  In the years subsequent to Drucker’s characterization, the inability of any portion of the governance structure to deal effectively with holding top management to account - the “smoking gun” being executive compensation - compels the conclusion of continuing systemic board failure. If the shareholder cannot hold the CEO accountable for his compensation, he has no right to assume that he exercises effective accountability in any other area. 

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The 124-page report, published on January 20th, is entitled "Best Ideas For 2010." The report contains a snapshot of 100 potential investments, of which 30 are profiled and analyzed by The Manual of Ideas research team. Finally, ten companies are selected as the top ideas for 2010.

Read the report now | Subscribe

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Subscribe to the bi-weekly 10x45 Bargain Hunter for $99/year.

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Portfolio Manager's Review, December 31, 2009
— 2009 Losers, 2010 Winners?

View by section:
Editor's Commentary — John Mihaljevic highlights five investment ideas
Superinvestor Update — Tracking portfolio moves of top investors
Survey of 2009 Losers — Screening for stock price decliners
Top Five Investment Ideas — Profiling five interesting opportunities
Other 2009 Losers — Profiling other potential opportunities

Read the report now | Subscribe

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The holidays are as good a time as any to reflect on past achievements and look to the future. It is also a time of giving.

Most of our readers and members have been lucky in terms of where and when they were born and which talents they were endowed with at birth. We have all worked hard to develop those talents and improve our lot in life. We recognize there are many individuals who have worked just as hard yet have been unable to achieve even a modicum of success. Many struggle just to make ends meet, and many fail to succeed even at providing the basics for themselves and their children. Thank you in advance for helping those less fortunate in any way you can.

Here is a brief gift giving guide provided by Charity Navigator:

Roundtable Discussion

The drop in giving last year was the biggest in the 54 years that Giving USA has tracked the data --- leaving no doubt that the recession is having a negative impact on contributions. In Part 1 of our roundtable discussion, we asked ten nonprofit professionals to tell us how their charities are coping in these challenging times. In Part 2, we asked the executives to describe the characteristics of high performing charities.  

Read the Transcript

Giving Facts

• Most U.S. SNAP (Supplemental Nutrition Assistance Program, also known as the food stamp program) participants are children (49%) or the elderly (9%). In 2008, 28.4 million people participated each month in the SNAP program.
• Americans carry an average of $8,329 in credit card debt per household. American consumers owed a grand total of $1.9773 trillion dollars (not including mortgage debt) in October 2003.
• 39% of the organizations evaluated by Charity Navigator have accumulated at least a year's worth of working capital to fall back on during economic downturns, down 10% from the year before.
• Approximately 40% of the world's population survives on less than $2 per day.
• Among organizations working to meet people's basic needs, including food, shelter and clothing, more than half report that they are underfunded or severely underfunded for 2009.
• Worldwide, 2.6 billion people do not have access to basic sanitation, and more than one billion people lack a clean and safe water supply.

View More Facts

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Graphic designer Stefan Sagmeister talks about why he takes a sabbatical from work every seven years. Not a bad concept, but a tough one to implement, especially for investors.

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Norwegian Yara International is the #1 global producer of ammonia, nitrates and NPK. The company plays a critical role in food production for a growing world population.

If you did come across companies such as Yara, Mosaic, Agrium, and Potash, but never properly understood what they do or how wheat, rice and corn are linked to products such as Urea, DAP and MOP, the below link should also prove a helpful introductory guide.

Please click here for an 83-page fertilizer industry primer published by Yara in November 2009.

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Have you heard about The Manual of Ideas but are not quite sure what we do? Here is a quick look at the most recently published issues of our key subscription-based publications. Find out for yourself why our research team and our publications have won industry-wide acclaim in less than a year following the publication of our inaugural issue.

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The latest issue of the monthly Downside Protection Report was published today, November 30th. Inside, editor John Mihaljevic presents his top two monthly stock picks, including a Jacksonville, Florida-based provider of ATM management services and a Canadian gold mining company with key assets located in EU member state Bulgaria.

The ATM management company highlighted in the report is experiencing strong profitability and has ample opportunities for organic growth, yet the shares trade at well below ten times earnings. The company has a strong management team, which appears poised to capitalize on opportunities to gain market share while expanding profit margins. This micro-cap company remains undiscovered by Wall Street and institutional investors, but that should not last long given management's strong execution.

The Canadian gold mining company featured in the report still trades for less than tangible book value despite a strong balance sheet with no net debt and a solid asset base. The company already has a large producing gold/copper mine -- the largest mine of its kind in Europe -- and is likely to double or triple annual production over the next several years. With the company trading at a discount to comparables based on current production alone, the shares offer a compelling risk-reward trade-off, in our view.

Start your 30-day FREE trial of Downside Protection Report and read the current issue now.

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The latest issue of the monthly European Value Report was published on November 27th. Inside, the acclaimed Manual of Ideas research team, which includes an on-the-ground presence in Europe, presents the team's top two monthly European investments.

One of the companies highlighted in the latest report is Dutch-based food producer and distributor Wessanen (WES NA). Writes the MOI research team: "Although the revelation of financial reporting “irregularities” at a U.S. subsidiary in June is only one of many problems the company faces, it has certainly led to more investors “throwing in the towel”. Wessanen’s shares are down by about 15% year-to-date and 60% over the last three years. With a new CEO, the announced exit of loss-making North American operations (representing nearly two-thirds of total revenue), and focus on a profitable European branded business, we think shares do not properly reflect the company’s potential for strategic change."

Start your 30-day FREE trial of European Value Report and read the current issue now.

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The latest issue of the bi-weekly 10x45 Bargain Hunter was published on November 28th. As always, the report shows the Top 45 results for 10 essential stock screens for value-oriented investors. The screens include the following:

1. "Magic Formula," based on Trailing Financials — Companies with high returns on capital employed, trading at high trailing EBIT-to-enterprise value yield
   
2. "Magic Formula," based on This Year's EPS Estimates — Companies with high returns on capital employed, trading at high earnings yields (based on this FY EPS estimates)
   
3. "Magic Formula," based on Next Year's EPS Estimates — Companies with high returns on capital employed, trading at high earnings yields (based on next FY EPS estimates)
   
4. Contrarian: Shunned by the market, but not by insiders — Companies close to 52-week lows, with consistent insider buying and no selling
   
5. Contrarian: Biggest Losers (deleveraged & profitable) — Non-financial companies with no net debt, positive analyst estimates for next year's EPS, and large YTD price drop
   
6. Value with Catalyst: Cheap Repurchasers of Stock — Companies that may be creating value by reducing their shares outstanding at relatively cheap prices
   
7. Profitable Dividend Payors with Decent Balance Sheets — Dividend-paying companies with no net debt and EPS estimates in excess of 75% of the indicated annual dividend
   
8. Deep Value: Lots of Revenue, Low Enterprise Value — Companies that trade at low multiples of net revenue
   
9. Deep Value: Neglected Gross Profiteers — Companies that trade at low multiples of gross profit
   
10. Activist Targets: Potential Sales, Liquidations or Recaps — Companies that may unlock value through a corporate event
    

Subscribe to 10x45 Bargain Hunter and read it now.

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The latest issue of the monthly Portfolio Manager's Review was published on November 20th. The "Superinvestor Issue" includes a proprietary review of the top holdings of more than twenty top investors. Also inside is a discussion of five superinvestor companies that offer compelling value, as judged by the Manual of Ideas research team.

The report also includes an interview with micro-cap value investor and Columbia Business School professor Paul Sonkin. In the interview, Sonkin discusses the secrets to success in microcap investing and outlines the thesis behind some of his top investment picks. Sonkin also cites his favorite books for investors: Hermann Simon's Hidden Champions, Ben Graham's The Intelligent Investor, and Paul Strebel's In the Shadows of Wall Street.

Superinvestor portfolios highlighted in the report include:

• William Ackman, Pershing Square
• Zeke Ashton, Centaur
• Brian Bares, Bares Capital
• Bruce Berkowitz, Fairholme
• Warren Buffett, Berkshire Hathaway
• Ian Cumming & Joe Steinberg, Leucadia
• David Einhorn, Greenlight
• Glenn Greenberg, Chieftain
• Brian Gaines, Springhouse
• Tom Gayner, Markel Gayner
• Mason Hawkins, Southeastern
• Chris Hohn, Children’s Investment Fund
• Carl Icahn, Icahn
• Seth Klarman, Baupost
• Eddie Lampert, RBS (ESL)
• Dan Loeb, Third Point
• Steve Mandel, Lone Pine
• Mohnish Pabrai, Pabrai Funds
• Rich Pzena, Pzena Investment
• Kenneth Shubin Stein, Spencer Capital
• Prem Watsa, Fairfax Financial
• Wally Weitz, Weitz Funds
• Marty Whitman, Third Avenue

Companies mentioned in the report include Abbott Labs, Aetna, Alcatel-Lucent, Alleghany, Allegheny Energy, Alliance One, Allstate, AmeriCredit, ATP Oil & Gas, Baldwin & Lyons, Becton Dickinson, Boeing, BreitBurn Energy, Brookfield Asset Management, Brookfield Properties, CA, Campbell Soup, Capital Southwest, CapitalSource, Cardinal Health, CarMax, Chesapeake Energy, Citigroup, Columbia Banking, Contango Oil & Gas, Crosstex Energy, dELiA*s, Dell, DENTSPLY, Diageo, Dillard's, DineEquity, DIRECTV, Domtar, DreamWorks Animation, Enzon Pharma, Fair Isaac, Fairfax Financial, Forest City Enterprises, Forest Labs, Gastar Exploration, General Electric, Hartford Financial, Heritage-Crystal, Hertz, Humana, Huntsman, International Assets, International Coal, Investors Title, ITC Holdings, J.C. Penney, Jefferies Group, John Bean Tech, Johnson & Johnson, Kraft Foods, Leucadia National, Level 3 Comms, Lockheed Martin, Markel, McDonald's, MI Developments, Microsoft, MTS Systems, Multimedia Games, News Corp., Northrop Grumman, Omnicom, Orange 21, Overstock.com, Paychex, Pfizer, Pioneer Natural, Pool Corp., Resource America, RSC Holdings, Sears Holdings, Spirit AeroSystems, St. Joe, Syneron Medical, Theravance, Thomas Properties Group, TravelCenters, tw telecom, Tyco Electronics, United America Indemnity, United Parcel Svc, USG, Viad, ViaSat, Wal-Mart, Walt Disney, WellCare, Wells Fargo, Wendy's Arby's, Yum! Brands, Zenith National, Zoran, and more.

Subscribe to Portfolio Manager's Review and read it now.

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The latest issue of the quarterly Equities and Tobin's Q report was published on September 21st. The full issue is available for FREE download.

Learn more about Equities and Tobin's Q and don't miss the next quarterly issue, expected to be published in mid-December.

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Read an excerpt of the latest issue of Portfolio Manager's Review, entitled "The Superinvestor Issue." The report, published on November 20th, includes a proprietary review of the top holdings of more than twenty top investors. Also inside is a discussion of five superinvestor companies that offer compelling value, as judged by the Manual of Ideas research team.

The report also includes an interview with micro-cap value investor and Columbia Business School professor Paul Sonkin. In the interview, Sonkin discusses the secrets to success in microcap investing and outlines the thesis behind some of his top investment picks. Sonkin also cites his favorite books for investors: Hermann Simon's Hidden Champions, Ben Graham's The Intelligent Investor, and Paul Strebel's In the Shadows of Wall Street.

Superinvestor portfolios highlighted in the report include:

• William Ackman, Pershing Square
• Zeke Ashton, Centaur
• Brian Bares, Bares Capital
• Bruce Berkowitz, Fairholme
• Warren Buffett, Berkshire Hathaway
• Ian Cumming & Joe Steinberg, Leucadia
• David Einhorn, Greenlight
• Glenn Greenberg, Chieftain
• Brian Gaines, Springhouse
• Tom Gayner, Markel Gayner
• Mason Hawkins, Southeastern
• Chris Hohn, Children’s Investment Fund
• Carl Icahn, Icahn
• Seth Klarman, Baupost
• Eddie Lampert, RBS (ESL)
• Dan Loeb, Third Point
• Steve Mandel, Lone Pine
• Mohnish Pabrai, Pabrai Funds
• Rich Pzena, Pzena Investment
• Kenneth Shubin Stein, Spencer Capital
• Prem Watsa, Fairfax Financial
• Wally Weitz, Weitz Funds
• Marty Whitman, Third Avenue

Companies mentioned in the report include Abbott Labs, Aetna, Alcatel-Lucent, Alleghany, Allegheny Energy, Alliance One, Allstate, AmeriCredit, ATP Oil & Gas, Baldwin & Lyons, Becton Dickinson, Boeing, BreitBurn Energy, Brookfield Asset Management, Brookfield Properties, CA, Campbell Soup, Capital Southwest, CapitalSource, Cardinal Health, CarMax, Chesapeake Energy, Citigroup, Columbia Banking, Contango Oil & Gas, Crosstex Energy, dELiA*s, Dell, DENTSPLY, Diageo, Dillard's, DineEquity, DIRECTV, Domtar, DreamWorks Animation, Enzon Pharma, Fair Isaac, Fairfax Financial, Forest City Enterprises, Forest Labs, Gastar Exploration, General Electric, Hartford Financial, Heritage-Crystal, Hertz, Humana, Huntsman, International Assets, International Coal, Investors Title, ITC Holdings, J.C. Penney, Jefferies Group, John Bean Tech, Johnson & Johnson, Kraft Foods, Leucadia National, Level 3 Comms, Lockheed Martin, Markel, McDonald's, MI Developments, Microsoft, MTS Systems, Multimedia Games, News Corp., Northrop Grumman, Omnicom, Orange 21, Overstock.com, Paychex, Pfizer, Pioneer Natural, Pool Corp., Resource America, RSC Holdings, Sears Holdings, Spirit AeroSystems, St. Joe, Syneron Medical, Theravance, Thomas Properties Group, TravelCenters, tw telecom, Tyco Electronics, United America Indemnity, United Parcel Svc, USG, Viad, ViaSat, Wal-Mart, Walt Disney, WellCare, Wells Fargo, Wendy's Arby's, Yum! Brands, Zenith National, Zoran, and more.

Learn more about Portfolio Manager's Review.

Subscribers, log in to download the full report.

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Miguel Barbosa of Simoleon Sense has posted an interview with Greenbackd, one of our favorite blogs for value-oriented investors. Excerpt:

Q: How did your (academic) background prepare you to invest in activist and liquidation oriented investments?

A: I’m an ex lawyer, so I read filings like a lawyer, which means I’m always trying to find the seemingly innocuous note that reverses the headline position. I also think of the company as a creature separate from its business. Buffett-style investors desire a “wonderful business at a fair price.” To me, that’s only half the story. A company with a broken business model or no business model can be a great investment, for example, if an activist can get on the board or persuade management to take the cash burning business to the woodshed and salvage some of the value on the balance sheet. SOAP and AVGN are good examples of this phenomenon. They were both examples of what I call “activism by defenestration”: management were the ones who threw the business out of a window, but at the pointy end of an activist campaign.

Read the entire interview with Greenbackd.

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The new monthly investment idea-oriented publication European Value Report launched earlier this month. The report is researched and edited by the acclaimed research team of The Manual of Ideas, with an on-the-ground presence in London and analysts fluent in several European languages.

Read the inaugural issue of European Value Report.

The introductory subscription offer for European Value Report expires at midnight today. Learn how you can take advantage of this special offer now.

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A new issue of the bi-weekly 10x45 Bargain Hunter stock screening report is now available. The report features 10 essential stock screens for value-oriented investors, with each screen containing up to 45 companies.

New companies joining the various screen results this week include Air Transport (ATSG), AT&T (T), Bristol Myers Squibb (BMY), Buckle (BKE), Burger King (BKC), Cass Information (CASS), Cubist Pharma (CBST), Digital River (DRIV), Dell (DELL), DPL (DPL), KONAMI (KNM), Lenovo (LNVGY), Lihua International (LIWA), Nokia (NOK), RadioShack (RSH), SinoHub (SIHI), Synaptics (SYNA), Tyson Foods (TSN), and Verizon (VZ).

Click here to view the latest issue of 10x45 Bargain Hunter.

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We are pleased to present the inaugural issue of European Value Report, a new publication of The Manual of Ideas. Each month, European Value Report will bring subscribers the top two investment ideas in Europe, as selected by our acclaimed research team.

Special offer: Subscribe by October 19th and take $100 OFF the annual rate of $299. If you are an existing Manual of Ideas paid subscriber, take another $100 OFF for total savings of $200 per year.

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I returned, and saw under the sun, that the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favor to men of skill; but time and chance happeneth to them all. --Ecclestiastes 9:11

Nice guys finish last. --Leo Durocher

The NYT has a long and detailed case study of the Simmons Bedding Company, which was owned by a series of private equity companies in recent years.  As a new student of the art and science of private equity manager selection, I read the piece with great relish.

The fundamental message of the article to someone in my position is that anyone evaluating a private equity fund must be able to disaggregate the returns of that fund, to isolate the various components that together form the "35% IRR" or whatever large number a fund uses to advertise its great success.

Not all of these components are created equal, and the private equity manager selector must judge which of these can ultimately be attributed to manager skill, which to luck, and which to simple greed that comes at a social cost.  All three seem to have been on display in the Simmons saga.

Starting, like Dante, in private equity hell and moving heavenward, the practice of PE firms paying themselves management fees for running the companies they buy, or success fees for selling them, represents the least "worthy" form of private equity returns, the equivalent of a major stockholder/CEO of a company voting to give himself an enormous raise.  I can't morally object to a PE firm, which is after all a fiduciary to its limited partners, engaging in this if it can get away with it, but this component of a PE fund's return should be given the least value when evaluating a PE manager. 

(This wouldn't be an Investor's Consigliere post without a Buffett anecdote, so here it is:  In 1996 Buffett sat on the board of Gillette when it purchased Duracell, the well-known battery maker.  Kohlberg Kravis and Roberts, the buyout firm that owned 34% of Duracell at the time, demanded an "investment banking" fee of $20 million for its work on the deal, even though it was more properly the seller, not the banker (Morgan Stanley was).  Now my adoration of Warren Buffett is second to no one's, but I think even he would confess that throughout his long career as a board member, he's been something of a . . . wimp, holding his tongue even when he wanted to object to certain practices.  In this case, however, KKR's demand so offended him that even though he favored the merger, he abstained from voting on it as a form of silent protest.  End of anecdote.)

The next level up, call it PE Purgatory, are all the practices that come under the general heading of replacing equity with debt, which include the dividend recapitalizations mentioned in the article as well as the initial underwriting of deals.  George Orwell, who had a lot to say about capitalism and human nature, pointed out that when the powerful call something X, they're often trying to hide that fact that X is really the X's opposite.  Warren Buffett, another student of capitalism and human nature, has written that "private equity" isn't about equity at all, but rather about its opposite: debt.  

The common denominator in these types of transactions is that, in exchange for some present benefit for the private equity buyer/owner (either leverage for its equity or, in the case of a dividend recapitalization, cash up front), the burden of the company's future success or failure shifts from owners to debt holders.  It's complicated for a manager selector to evaluate the "worthiness" of these transactions, as they can involve manager skill, luck, and pure greed, or some combination of the three.  For instance, A PE manager that is able to finance a deal with low-interest PIK bonds at a time when such bonds have willing buyers can be

a) skillful, in the sense of protecting its equity from future cash flow problems in the business,

b) lucky, in the sense of being in the right place at the right time (e.g. NYC during a credit bubble), and/or

c) egregiously greedy, in the sense of having the chutzpah to sell something (as an insider) that it would never itself buy.

From the perspective of the manager selector, skill is always good.  Lucky is good too, certainly better than unlucky, except for two problems: a) a PE fund that can only prosper when conditions are completely favorable won't outperform over the long term, and b) lucky people have a tendency to confuse their good luck with skill.  Egregious greed is almost always bad, and not for moral reasons, which each investor must work out for itself.  My objection to egregious greed is practical: it creates negative karma--not for the next life, but for the next deals.  A PE fund that foists crappy debt on gullible bondholders once won't often get a chance to repeat the feat.  A fund that borrows too much and must resort to mass layoffs to avoid bankruptcy will find its union pension fund LPs less than willing to invest in its next fund.  

There is also a very subtle psychological downside to playing this game of replacing equity with debt, often in ever increasing proportions as in the case of Simmons.  John Maynard Keynes famously described modern securities markets as

so to speak, a game of Snap, of Old Maid, of Musical Chairs--a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops.  These games can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops some of the players will find themselves unseated.

Modern private equity can be looked at similarly, although in this case the Old Maid being passed around is the inevitable (and it is inevitable) losses that will afflict bondholders and equity holders when rosy business expectations that prevailed on the days securities were sold don't pan out.  Many PE players have had great success at this game, but it occurs to me that those who play it may forget that if you choose to play, no matter how good you are one day it will be you holding the Old Maid at the end of the game, or you without a seat when the music stops.  In that sense then, to even play the game is to lose it sometimes.

Finally, we come to Private Equity Paradise, the noblest and most worthy components of PE returns, and the purest measures of manager skill.  They are the ability to buy assets at bargain prices, and the ability to effect real and lasting operational improvements in the companies purchased.  A manager selector fortunate enough to invest in a fund that derives most of its returns from these components will feel as Dante did when he saw Beatrice, either for the first time (take it away, Ridley Scott) or when they reunited in heaven (take it away, Signore Alighieri).  Ultimately, nothing justifies the existence of the PE industry (and the fees it charges), either for its investors or as a social institution, but these two factors.

Having rambled at length on this subject, I must confess that I've never known of any PE fund that has tried to disaggregate the components of its returns like this.  If someone reading this works in the industry and has seen it done, please let me know.  Nor do I think it would be possible for someone from the outside looking in to attempt such a disaggregation with any precision.  Therefore, I suppose, we as manager selectors must console ourselves with the various qualitative efforts we can make to penetrate the essence of a given fund's returns.

The author of this post is Nadav Manham, president of Elera Advisors LLC, an investment advisory company focused on value-oriented manager selection. Mr. Manham is a Manual of Ideas contributor and editor of The Investor's Consigliere.

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We are pleased to provide an excerpt of the latest issue of Portfolio Manager's Review, the acclaimed monthly publication for serious investors. In the new "Magic Formula Issue," The Manual of Ideas research team takes a look at 100 companies scoring high on the dual criteria laid out by superinvestor Joel Greenblatt. We profile 30 companies and highlight the Top 3 investment opportunities.

The report also includes an exclusive interview with up-and-coming fund manager Brian Gaines of Springhouse, an investment fund that was seeded by Joel Greenblatt's Gotham Partnership and has achieved annualized net returns of 17% since inception in 2002.

The following is the editor's commentary in the latest issue of Portfolio Manager's Review:

The "magic formula" has been good to us. Last November, we published a report profiling 100 companies that scored high in terms of "cheapness" and "goodness," based on criteria laid out in Joel Greenblatt’s The Little Book That Beats The Market. We highlighted ten of the 100 profiled companies as particularly attractive in the context of the “magic formula” screening methodology.

Not only have those ten selections trounced the broader market indices and other magic formula stocks, but the reception of the inaugural report set us on an exciting path of growth. Some of the world’s top investors now rely on Portfolio Manager’s Review in their idea generation processes.

Performance of Top 10 "Magic Formula" Stocks Featured in Inaugural Portfolio Manager’s Review (published on November 20, 2008)*

In this issue, we profile 30 magic formula stocks—companies whose operating income is high relative to both enterprise value and capital employed in the business. The list of companies scoring high on these dual criteria has changed considerably since late last year, so it’s once again time to look for new opportunities.

As we worked our way through the latest screen results, we found, perhaps not surprisingly, that today's magic formula selections as a group are less compelling than stocks passing the magic formula screen in November 2008. Prospective returns from the companies in this issue should be materially lower than the historical returns shown in the table above. Nonetheless, the companies highlighted herein strike us as quite a bit more interesting than the average S&P 500 stock. As a result, magic formula stocks remain a "must-consider" group.

The following three companies deserve closer attention:

Company A (name disclosed in Portfolio Manager's Review) is an Asian online gaming company with a strong balance sheet, trading at an attractive 15% trailing EBIT-to-EV yield. While the company has disappointed growth investors’ aggressive expectations this year, EPS is projected to increase from $0.40 in 2009 to $0.62 in 2010. With the stock at $5.18 per share, the company is selling at less than 10x earnings (even without adjusting for net cash). The company retains ample growth opportunities and appears well-positioned to exploit monetization platforms such as Everest Poker, a leading global poker site. The shares offer a compelling risk-reward tradeoff, in our view.

Company B (name disclosed in Portfolio Manager's Review) is a niche player providing database management software to small and medium-sized businesses. The company has a strong balance sheet, with close to one-half of market value in net cash. Insiders own almost 20%, with aggressive share repurchases signaling a high regard for shareholder value. The company landed its biggest deal in history earlier this year and is expected to grow earnings, yet the shares trade at a 14% EBIT-to-EV yield. With ample opportunities for incremental value creation, both operationally and financially, we view Company B as meaningfully underpriced.

Company C (name disclosed in Portfolio Manager's Review) is one of the leading defense contractors in the country, with revenue diversified across a variety of programs. The shares trade at a 15% EBIT-to-EV yield—quite low for a strong player in a market with high barriers to entry. EPS is estimated to increase from $4.78 in 2009 to $5.06 in 2010, putting the shares at less than ten times earnings. While investors may be worried about the trajectory of the government’s defense spending, we continue to live in an uncertain world that should demand considerable military expenditures for a long time to come (unfortunately).

We also draw your attention to the following five magic formula stocks: Company D (name disclosed in Portfolio Manager's Review) is a drug maker owned by Bruce Berkowitz. The company has a 2012 patent expiration issue, but the shares may be too cheap to ignore at eight times forward earnings (unadjusted for almost $3 billion of net cash). Company E (name disclosed in Portfolio Manager's Review) essentially trades at an enterprise value of zero, yet owns a global cement plant engineering business with material normalized earning power. Company F (name disclosed in Portfolio Manager's Review) may be the cheapest large-cap pharma stock, trading at delevered multiples of eight times 2009E earnings and seven times 2010E earnings. Bruce Berkowitz, David Einhorn and Dan Loeb hold substantial investments in the company. Company G (name disclosed in Portfolio Manager's Review) is a niche services firm that helps retailers, wholesalers and the government save money by auditing transactions and recovering overpayments. While the company’s retail customers may be reluctant to engage any service providers, Company G provides high ROI to customers. The shares appear overly cheap at an EBIT-to-EV yield of 22%. Company H (name disclosed in Portfolio Manager's Review) is one of the leaders in the somewhat insular electronic design automation (EDA) software industry, which serves the global semiconductor sector. Long-term growth opportunities and a relatively wide moat for a technology company make the shares a potential bargain at 11% trailing EBIT-to-EV and 13x forward earnings.

Some of the world's most successful investment managers rely on Portfolio Manager's Review in their idea generation processes. Shouldn't you? Subscribe today.

Past performance is no guarantee of future results. For full terms of use, visit http://www.manualofideas.com/terms.html

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The Manual of Ideas has just published a new quarterly issue of Equities and Tobin's Q — Evaluating the Market Outlook in the Context of a Century of History. The report is authored by John Mihaljevic, CFA, managing editor of The Manual of Ideas and former research assistant to Professor James Tobin.

Find out what Tobin's Q is saying about the U.S. equity market outlook at this critical juncture — subscribe to Equities and Tobin's Q today.

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Yale President Richard Levin sent the following endowment update to Yale alumni this afternoon:

We explained in our messages to the community last December and February that we did not want to overreact to the downturn in financial markets by making reductions that might later prove unnecessary if markets recovered quickly.  Thus, the budget reductions we undertook eliminated most, but not all, of the deficits previously forecast for the years ahead. These forecasts assumed that the June 30, 2009, value of our endowment would be $17 billion.  Although the publicly traded portion of our endowment declined no further in value between December and June 30, we continued to incur losses in the value of our illiquid investments in private equity and real estate.  The precise final results for the 2008-09 fiscal year are still being compiled and will be announced later this month, but it is clear that we will report a June 30 value of the endowment of approximately $16 billion.  Only a small fraction of our endowment is invested in publicly traded securities, so the recent stock market rebound has not had a substantial effect on that number.  The bulk of our endowment remains invested in illiquid assets, which have not begun to recover their value.

Clearly, the Yale endowment continues to suffer from the illiquid nature of many of its investments. However, illiquidity should not be mistaken for lack of value. The marking up of privately held investments typically follows the marking up of assets in public markets. Recent gains in the stock market make it likely that Yale's private investments will be marked up over time as well. When it's all said and done, Yale endowment manager David Swensen should once again be regarded as a gaint among his peers. We'll keep you posted.

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Special offer: Subscribe to Portfolio Manager's Review by August 31st and receive the bi-weekly 10x45 Bargain Hunter and the monthly Downside Protection Report FREE.

Existing Downside Protection Report subscribers: Upgrade to Portfolio Manager's Review (simply complete regular sign-up process) and never make another subscription payment for Downside Protection Report again (10x45 Bargain Hunter included at no charge).

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Take advantage of special offer -- subscribe to Portfolio Manager's Review. (valid thru August 31st)

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Learn more about Portfolio Manager's Review.

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The current issue of the 10x45 Bargain Hunter stock screening report, published on August 9th, includes a table of the Top 45 "Magic Formula" Stocks, based on current consensus analyst estimates of next year's earnings per share. This "Magic Formula" screen is based on a methodology advocated by "superinvestor" Joel Greenblatt, author of The Little Book That Beats The Market.

In a slight departure from the screen popularized by Greenblatt on the website MagicFormulaInvesting.com, the 10x45 Bargain Hunter screen featured below screens for stocks based on next year's earnings rather than earnings for the trailing twelve months. The use of forward earnings may be advantageous, as a screen based on trailing earnings would likely include many companies whose recent performance has been strong but whose prospects are weak. On the other hand, a screen based on forward EPS runs the risk of including companies with "stale" analyst estimates of such earnings, i.e., companies whose earnings estimates may have to be revised downward. Nonetheless, we find the screen shown below to be a useful tool for value-oriented investors seeking to uncover "good" companies trading at low prices.

The current screen results include companies such as GigaMedia (GIGM), Centene (CNC), Pre-Paid Legal (PPD), Endo Pharma (ENDP), and Edison International (EIX). Some of the companies on the list have been perennial "magic formula" selections, however, possibly indicating that the respective companies have only limited opportunities for reinvestment of capital at high rates of return. Such companies may deserve to trade at low multiples of earnings.

Of particular interest may be companies that joined the list in the past two weeks (highlighted in olive green below). These recent additions include PRG-Schultz (PRGX),Sepracor (SEPR), Sempra Energy (SRE), Southern Union (SUG), Permian Basin (PBT), APAC Customer (APAC), and American Oriental (AOB).

As always, we note that the following screen results are merely a place to start your search for investment ideas. This is particularly true for so-called magic formula stocks, which rarely enjoy much in the way of asset-based downside protection.

10x45 Bargain Hunter is a proprietary stock screening report published bi-weekly by The Manual of Ideas. Each issue includes ten proprietary stock screens featuring 45 stocks each. Click here for more information.

Disclosure: No positions.

Posted by manualofideas at 05:07 PM | Permalink | Comments (0)

There are many online sources of information, but few are as well-written and useful as Simoleon Sense. Edited by Miguel Barbosa, Simoleon Sense is a repository of worldly wisdom for anyone interested in investing or economics. We highly recommend visiting Simoleon Sense and signing up for the free Weekly Wisdom Newsletter (see upper right of homepage).

Click here to visit Simoleon Sense.

Posted by manualofideas at 08:10 PM | Permalink | Comments (0)

Yale economist and financial commentator Robert Shiller, author of Irrational Exuberance, deserves credit for predicting the bursting of the housing bubble. Shiller has frequently lamented the increasingly speculative nature of U.S. housing -- and rightfully so. Most recently, in a Bloomberg interview on August 5th, Shiller pointed out that the U.S. housing market has become more speculative and more unpredictable over the past decade. Despite Shiller's criticism of the speculative nature of residential housing, Shiller recently moved to capitalize on this trend via two newly launched exchange-traded vehicles.

Robert Shiller has been a driving force behind two exchange-traded vehicles launched on June 30th: MacroShares Major Metro Housing Up (UMM) and MacroShares Major Housing Down (DMM). Shiller is co-founder of MacroMarkets, a private company that is behind the MacroShares products, which essentially represent leveraged bets on housing prices, as tracked by the S&P/Case-Shiller Composite-10 Home Price Index. With an annual expense ratio of 1.25%, the vehicles are not exactly Vanguard-style low-cost index-tracking devices. The hefty expense ratio has come under intense scrutiny recently, but Shiller has defended it in an interview with TheStreet.com.

How do UMM and DMM actually work? They hold no shares of home builders such as Centex (CTX), DR Horton (DHI), Lennar (LEN), or MDC Holdings (MDC). They also don't own any actual houses. Instead, it appears that "investors" buying into UMM are essentially betting against "investors" in DMM. When one set of speculators wins, the other loses, and value is transferred from one vehicle to the other.

We commend Shiller for lamenting the speculative nature of housing, as the latter has contributed greatly to the recent bust. We also don't fault MacroMarkets for cashing in on demand for products that allow investors to speculate on housing prices. However, we find it ironic that Shiller would endorse the launch of vehicles whose ultimate effect may be to make the U.S. housing market even more speculative than it is already. Perhaps Shiller's stance toward housing speculators simply reflects the old adage, "If you can't beat 'em, join 'em."

Disclosure: No positions.

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The Manual of Ideas has just published a new, 107-page monthly issue of Portfolio Manager's Review, the acclaimed idea-oriented publication for serious investors. The new issue, entitled Businesses with Pricing Power and Low Capital Intensity, is part of an ongoing inflation protection series.

SPECIAL OFFER: When you subscribe to Portfolio Manager's Review by August 5th, you will receive the above issue for FREE. Your paid subscription will start with the upcoming Superinvestor Issue, to be published in mid to late August and to focus on the top ideas of more than 20 top value investors.
Learn how to subscribe.

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Have a great weekend!

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At a time when California’s economic and political foundation appears to be in tatters, it is easy to overlook how the state has often been on the leading edge of cultural changes in American society.  Californians need no introduction to the success of In-N-Out Burger, a relatively small and privately held fast food chain that until recently had a presence mainly in Southern California.  In-N-Out Burger’s founder invented the fast food drive through, a cultural milestone that changed the landscape of America.

Stacy Perman has written a new book entitled In-N-Out Burger: A Behind-the-Counter Look at the Fast-Food Chain That Breaks All the Rules and she speaks about the book and the company in the video embedded at the bottom of this article.  I plan to read the book and provide a review on this site in the near future.

Why should investors really care about the business success of a small and privately held fast food company on the west coast?  Primarily because the patterns and practices demonstrated in this business have resulted in the development of a formidable moat.  Since the development of an enduring moat is a rare accomplishment, it is useful to examine whether there are any patterns  that can predict the potential for moat creation in advance.

Anyone who has been to an In-N-Out location knows that the restaurants are spotlessly clean, always busy, and staffed by friendly employees serving simple and fresh food.  The only comparable business that I know of within the fast food industry is Chick-Fil-A which is also privately owned and appears to have a similar operating philosophy and devotion to simple food served by friendly employees in spotless restaurants.  These concepts seem so simple, yet they are powerful differentiating factors for two restaurant chains that have developed almost cult-like followings among their customers.

The video below shows the first ten minutes of the fifty minute video.  Be sure to click the “Watch Full Program” button at the bottom right of the video to view the rest of the program.

The author of this post, Ravi Nagarajan, is a private investor and writer focused on applying value investing techniques to find securities trading well below intrinsic business value. He is a Manual of Ideas contributor and editor of The Rational Walk.

Posted by manualofideas at 08:07 PM | Permalink | Comments (0)

Top activist investors typically look for companies that can unlock significant shareholder value through a specific corporate event, such as a sale, liquidation or recapitalization.

Activists scour the investment landscape for companies that are not controlled, i.e., firms in which senior executives and directors have a relatively small percentage of the overall shareholder vote. This allows aggressive outside investors to pressure corporate incumbents to take the actions required to bring about positive change. If insiders refuse to maximize shareholder value, skilled activists may be able to remove them through a proxy contest or an outright acquisition of the company via an unsolicited tender offer.

We routinely monitor the acitivities of top activist investors, such as Bill Ackman's Pershing Square Capital Management, Dan Loeb's Third Point, David Einhorn's Greenlight Capital, Chris Hohn's Children's Investment Fund, Carl Icahn's Icahn Partners, and Eddie Lampert's ESL Investments. We have also developed a proprietary stock screening methodology that seeks to identify companies ripe for activist shareholder involvement. Such companies typically trade at low multiples of tangible book value, have significant net cashholdings, and have insider ownership of less than 20% of the total voting power.

Several of the companies shown in the following table are already a target of activist investors. These companies include Trident Microsystems (TRID), Facet Biotech (FACT), Adaptec (ADPT), and Nabi Biopharma (NABI).

Investing in companies that may be targeted by activist investors can be a profitable investment strategy. Two weeks ago, our proprietary activist stock screen was topped by QLT (QLTI), a company trading at a significant discount to its holdings of net cash.  As of last Friday, QLT shares had appreciated by roughly 50%. Despite the jump, the shares still trade for less than "net net" current assets and are yet again in the top five screen results.

The company topping the latest screen results is Silicon Graphics (SGI), a leader in large-scale clustered computing, high-performance storage, and data center enablement and services. SGI trades at a negative enterprise value, with "net net" current assets equal to 142% of recent market value. While the simple fact that SGI scores well on our activist screen is no guarantee of strong future investment performance, the shares may represent a good place to look for potential outperformance. As always, do your own due diligence prior to investing.

10x45 Bargain Hunter is a proprietary stock screening report published bi-weekly by The Manual of Ideas. Each issue includes ten proprietary stock screens featuring 45 stocks each. Click here for more information.

Special offer: Get a FREE subscription to 10x45 Bargain Hunter (26 issues) when you subscribe to the acclaimed investment newsletter, Downside Protection Report. Learn more.

Disclosure: No positions.

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The acclaimed monthly investment newsletter of the Manual of Ideas is now available for the month of July.

Downside Protection Report features the latest top two stock picks by John Mihaljevic, CFA, editor of the report. In the new issue, Mihaljevic highlights two companies judged to have strong downside protection and above-average upside potential.

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Wondering how Mihaljevic's picks have performed since launch of the report in December 2008?

Past performance is no indicator of future results. For terms of use, visit http://www.manualofideas.com/terms.html

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Value Stock Screen: Biggest Losers in 2009 (deleveraged & profitable companies), July 11, 2009
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Download the free issue here.

It's always nice to see one's analytical work validated by the unfolding of real-life events. We're pleased that we could bring our subscribers Gravity Co. (GRVY) as an idea before the market realized that the company had turned solidly profitable.

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Disclosure: Long GRVY, HNR.

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A new issue of the acclaimed monthly investing newsletter, Downside Protection Report, is now available.

Each month, John Mihaljevic, CFA, managing editor of The Manual of Ideas, presents two stock picks that are judged to have strong downside protection and above-average appreciation potential.

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Magic Formula Stock Screen, Based on Next FY EPS Estimates

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Not only of interest to Molson Coors Brewing Company (NYSE: TAP) investors...

(click to enlarge)

Source: WallStats.com.

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Our partners Wesley R. Gray of the University of Chicago and Andrew E. Kern of the University of Missouri present:

June 2009 — Empirical Finance Research Newsletter on The Asset Growth Effect in Stock Returns, a paper by Michael J. Cooper, Huseyin Gulen and Michael Schill

Abstract: We document a strong negative relationship between the growth of total firm assets and subsequent firm stock returns using a broad sample of U.S. stocks. Over the past 40 years, low asset growth stocks have maintained a return premium of 20% per year over high asset growth stocks. The asset growth return premium begins in January following the measurement year and persists for up to five years. The firm asset growth rate maintains an economically and statistically important ability to forecast returns in both large capitalization and small capitalization stocks. In the cross-section of stock returns, the asset growth rate maintains large explanatory power with respect to other previously documented determinants of the cross-section of returns (i.e., size, prior returns, book-to-market ratios). We conclude that risk-based explanations have some difficulty in explaining such a large and consistent return premium.

Conclusions: This is a remarkably simple investment strategy, yet sometimes in investing it is the simplest strategies that make the most sense. Although the results in this paper are outstanding, they are not all that surprising. An analysis of the tables suggests that the returns here are likely driven by exposure to small stocks and value stocks, which we already know outperform over long periods. However these results appear to go above and beyond those which might be explained by size and value factors. Nevertheless, the simplicity and remarkable consistency in annual outperformance for this strategy suggest it should be part of any quantitative investor's toolbox.

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...including our top two monthly stock picks.

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By Ravi Nagarajan.

I was first introduced to the writings of Benjamin Graham shortly after graduating from college with a finance degree in 1995.  I picked up a copy of The Intelligent Investor and found the investment philosophy very compelling and in stark contrast to most of the books I read as part of my finance coursework.

Perhaps because I ended up working in the technology sector for many years and was part of that culture, I did not entirely take value investing to heart during the late 1990s and invested in technology stocks such as Intel that Graham would never have touched.  I felt like a genius when my position in Intel tripled in just a few years, yet I kept coming back to the ideas Graham wrote about in The Intelligent Investor. I eventually came to the conclusion that I was just speculating rather than investing.

Fortunately, during this timeframe, I also read Warren Buffett’s shareholder letters and by early 2000, I liquidated my Intel shares and purchased Berkshire Hathaway stock with the proceeds.  This was not due to any brilliance on my part and entirely due to the insights provided by Buffett and Graham that I finally decided to put into practice.

Security Analysis:  1934 Edition

I am not sure why it took several years for me to decide to read Security Analysis when I should have pursued this right after reading the Intelligent Investor.  In early 2000, I finally decided to read the book and purchased a reproduction of the 1934 edition.  I have to admit that while I found the “Survey and Approach” material in Part I very compelling, I started to get the impression that I was dealing with an outdated book by the time I started reading about fixed income securities and railroad bonds.  In retrospect, it would have been better to read a later edition of Security Analysis that contained Graham’s experience of the full impact of the Great Depression.  I found the book useful but considered The Intelligent Investor to be a far more relevant text for today’s security analyst.

Security Analysis:  Sixth Edition

The Sixth Edition of Security Analysis was published in 2008 and is based on Graham’s Second Edition which was published in 1940.  I have read most of this new edition and the experience is far different from reading the 1934 reproduction.  The editors of the sixth edition have succeeded in keeping the text of Graham’s work completely intact while adding a significant amount of new content that adds context to the book that is very helpful to modern day readers.  The fact that Graham’s own text was written in 1940 rather than 1934 allows the reader to benefit from Graham’s observations throughout the Great Depression period which is invaluable in today’s environment.

The foreword, preface, and introductions to each section add great value as well.  Warren Buffett provides a brief introduction and tribute to Graham’s impact on his own career, while Seth Klarman and James Grant provide the preface and introduction which places the importance of Graham’s work in context for modern readers.  Each of the seven sections of Graham’s text includes an introduction.  I found Roger Lowenstein’s introduction to Part I, Bruce Berkowitz’s comments on Part IV, and Bruce Greenwald’s analysis of Part VI to be particularly insightful, although all of the introductions are well worth careful study.

Graham’s Insights are Relevant Today

Anyone who takes the time to carefully read this book will soon discard the notion that a 75 year old textbook would have little to add to the toolkit of a modern security analyst.  If an investor does nothing more than read Part I, it is highly unlikely that he or she will be susceptible to the pitfalls that could result in a large permanent loss of capital.  Many investors will be surprised to read that Graham would consider much of what they do to be “speculative” based on Chapter 4.  Graham sets a very high bar in terms of what it means to be an investor rather than a speculator.

I found the material in Part VI covering balance sheet analysis particularly useful in my attempts to identify bargain priced securities.  Graham’s concept of purchasing stocks under net current asset value has become a viable activity for the security analyst in the current bear market.  However, it is hardly sufficient to create a computer screen for such securities and to place trades.  One needs to approach the activity with the skeptical eye that Graham would have used to search for hidden pitfalls and other dangers.  I have found that the search for stocks that truly meet Graham’s criteria is a tiny fraction of what comes up in simplistic screens.

Anyone who thinks that the outrageous accounting scandals of recent years are new innovations will realize that there is nothing new under the sun after reading Graham’s account of income statement manipulation in Part V.  Chapter 32 and 33 contain several examples of blatant accounting manipulation that would probably embarrass even the most unrepentant modern day white collar criminal (well, maybe not … these people typically have no shame).  For example, read about Park and Tilford’s accounting in 1929 and 1930 that included such innovations as charging current advertising expenses to goodwill without any disclosure to stockholders in an attempt to inflate reported earnings.  Graham’s advice to examine reported net income in conjunction with a comparative analysis of the balance sheets at the start and end of the reporting period still holds true today.

Timeless Concepts Lightly Followed

Despite the timeless quality of Graham’s insights in Security Analysis and The Intelligent Investor, practitioners who follow this approach are still in the minority today.  Part of this is due to the fact that most investors are ill suited for the profession due to temperament that is overly impacted by the need to obtain peer approval and to see immediate results.  For example, it was considered very cool to own Intel and other technology stocks (particularly dot com stocks) in the late 1990s, and very stodgy and old fashioned to invest in a company like Berkshire Hathaway.  Human nature probably guarantees that investors who are able to follow Graham’s approach will continue to be in the minority in the future as well.

Ravi Nagarajan is a private investor and writer focused on applying value investing techniques to find securities trading well below intrinsic business value. He is a Manual of Ideas contributor and editor of The Rational Walk.

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We are pleased to bring you a FREE excerpt from 10x45 Bargain Hunter, the bi-weekly stock screening report of The Manual of Ideas. Each issue of 10x45 Bargain Hunter contains 10 stock screens showing 45 companies each. The report is based on screening techniques utilized by value-oriented investors. Annual subscription rate: $99 (26 issues).

Sample Stock Screen: Value with Catalyst: Cheap Repurchasers of Stock

Click here to download the screen results in PDF format.

View this stock screen in PDF format.

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Randolph B. Cohen of Harvard Business School, Christopher K. Polk of the London School of Economics and Bernhard Silli recently published a paper entitled, Best Ideas. Here is the abstract:

We examine the performance of stocks that represent managers' "Best Ideas." We find that the stock that active managers display the most conviction towards ex-ante, outperforms the market, as well as the other stocks in those managers' portfolios, by approximately one to four percent per quarter depending on the benchmark employed. The results for managers' other high-conviction investments (e.g. top five stocks) are also strong. The other stocks managers hold do not exhibit significant outperformance. This leads us to two conclusions. First, the U.S. stock market does not appear to be efficiently priced, since even the typical active mutual fund manager is able to identify stocks that outperform by economically and statistically large amounts. Second, consistent with the view of Berk and Green (2004), the organization of the money management industry appears to make it optimal for managers to introduce stocks into their portfolio that are not outperformers. We argue that investors would benefit if managers held more concentrated portfolios.

Download the paper entitled Best Ideas.

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By Nadav Manham

In January I linked to a WSJ interview with David Swensen in which he attacked hedge funds of funds.  Here is the relevant excerpt:

In last Monday's FT, Paul Isaac, the CIO of fund of funds company Cadogan Management, answered Swensen's accusations.  Cadogan has a good track record, and a reputation for being a "non-mainstream" FoF company, down to its choice of office location near the Flatiron building.  When the Madoff news hit, Cadogan put out a statement that it had successfully avoided any exposure, something many of its peers did not do (avoid exposure I mean, not put out a release). Isaac spoke at the 2003 Grant's Spring Conference, so he is a legitimate spokesman for his industry, not just any geek off the street.

Go read the Swensen interview, then read Isaac's rebuttal, then come back and we're going to have a little trial, with moi as judge and jury.  I used to evaluate litigation for a living (actually I was the guy who helped the guy who evaluated litigation for a living) so I'm a trained professional at this, sort of.

Oh, I almost forgot: I went to Yale and am a proud alumnus, consider Swensen my manager selector role model, and, um, I interviewed at Cadogan once, with an emphasis on the "once."  So think of me as the uglier version of this guy.  If this were any state except New Jersey, I'd no doubt have to recuse myself from this trial.  Fortunately, I happen to be from New Jersey.   So let's begin:

First let's summarize Swensen's case against funds of funds.  FoFs are a cancer because :

1)  They facilitate the flow of ignorant capital, as unsophisticated investors who can't pick managers themselves cannot pick manager selectors either.

2)  They charge an extra layer of fees and deliver nothing in return for it.

3)  Fund of fund money is unreliable, therefore the best hedge fund managers don't want it, and you can't be successful investing in hedge funds unless you invest in the best.

Issac does not address these assertions in order.  Instead his first rebuttal one is a clever one:

Yes, but . . . we need first to define our terms (it's remarkable how many legal battles turn on differing definitions of a single term).  Per Isaac, a fund of funds is simply a pool of capital that maintains a staff to research, vet, select and monitor investments in a number of hedge funds.  By that definition, Yale's endowment is a fund of funds, as is Cadogan, as is a family office that invests in a number of hedge funds, etc. 

But is Isaac's definition of a "fund of funds" the same as Swensen's?  No it is not.  Let's go to Swensen's own words on the subject, from pages 309-310 of the new edition of Pioneering Portfolio Management. This section of the book is called "USE OF INTERMEDIARIES," and the relevant excerpt is as follows (my emphasis added):

Isaac's definition of a fund of funds turns on WHAT it does.  Swensen's definition turns on FOR WHOM and WHY it does it.  Per Swensen, a FoF is defined by its role as agent, a paid intermediary that performs a task (manager selection) on behalf of a principal (an investment fiduciary) who is unwilling or unable to do it by itself.  By Swensen's definition, Yale's endowment is not a fund of funds, as Yale performs manager selection entirely in-house, without the use of any agents, and commits substantial time, energy and resources to do so.  Cadogan, on the other hand, most certainly is.  When you and I and the world think of what a fund of funds is, we think of the Swensen definition, not the Isaac definition.  All of Swensen's problems with FoFs stem from his (and our) definition of it as an agent, so Isaac creates a straw man by creating his own definition.  

Round 1 to Swensen.

Isaac's next argument is that hedge funds of funds can add substantial value to their end-clients:

Those "remarkable" numbers certainly sing a seductive siren song, don't they?  But tie yourself to the mast and let your consigliere set you right:

1)  Isaac's second sentence is a non-sequitur.  Extrapolating from Swensen's common-sense definition, a fund of funds adds value not by outperforming equity markets via investment in hedge funds.  A fund of funds adds value by outperforming (after fees) what a fiduciary could do on its own by investing in hedge funds directly.  Isaac is arguing the wrong thing. 

2)  Isaac errs by invoking an INDEX of FoFs to justify the ACTIVE investment fund of funds industry.  That such a thing as the HFRI Composite FoHF Index even exists is strong evidence that it's possible for a fiduciary to construct a hedge fund portfolio WITHOUT having to pay an intermediary a lot of money to do it for you, and belies Isaac's claim that "index investments in alpha generating strategies are in their infancy and have yet to prove themselves".  Just do your best to replicate the index.  You won't do it perfectly, but you don't have to in order to benefit from saving 1 and 10.  What Isaac should have argued is that there are many funds of funds like Cadogan that add value by exceeding the performance of the index.  That he did not is telling.  That Yale does (see page 23 of the pdf, aka page 21 of the report) is also telling.

Round 2 to Swensen.

Isaac's next two arguments concern Madoff.  Here is the first one:

I believe the legal term for this argument is "WTF?"  Given what they charged and their purported expertise, the correct number of funds of funds that should have invested in Madoff is precisely zero.  The correct number of "quality" funds of funds should have been less than zero--they should have led the fight to unmask him.  The actual number was way higher than zero, AND included some of the leading names in the industry (Bramdean, Fairfield Greenwich, Maxam, UBP, EIM, Merkin, etc.). I can't see how the fund of funds industry distinguished itself in the Madoff affair.  I can only see the opposite.

Round 3 to Swensen. 

Here is the second Madoff-related argument:

Several things come to mind when I consider this argument.  I could, for instance, recall how many Jewish/Chinese/Armenian/etc. tax collectors died at the hands of angry peasants while providing a layer of protection for the reputation for the rulers who were reluctant to put themselves in the spotlight by collecting taxes directly.  I could even point out how the Pharisees of Judaea were an important tool for their Roman overlords who could not afford to put themselves in the spotlight and required a layer of protection for their reputations when it came to dealing with a certain itinerant rabble rouser.  But I won't, because I'm not an expert in those subjects and am sure to say something incorrect.  It will suffice simply to point out that you should always look through, and that the imposition of a middleman does not absolve an investor of any of its fiduciary or ethical obligations. 

Round 4 to Swensen.

How does Isaac respond to Swensen's assertion that FoFs represent unreliable capital, and that therefore the best hedge fund managers shun them?  He responds as follows:

There is no common definition of a “best” hedge fund. Certainly, more than 10 per cent of all managers can be potential parts of a given portfolio when the goal, and not just the components, define the objective. The ability to substitute managers, rather than being wedded to an underlying manager, can be useful for FoHF managers seeking to represent their investors’ interests.

Isaac is correct that FoF managers should be judged on their portfolios as a whole rather on the the performance of their component parts, and that theoretically it's possible for a hedge fund portfolio that consists of less-than-top-decile funds to combine in such a way as to produce an attractive portfolio return.  But the combination of the typical 2 and 20 charged by the underlying hedge fund, and the typical 1 and 20 charged by the FoF, makes it almost impossible for the end user to get a value-added product unless both layers are in the top tier of what they do.

Round 5 is a tie.

Regarding Swensen's assertion that fund of funds fees are unjustified, Isaac correctly points out that "the fees charges by FoHF's vary," and that "They key is to find value for fees paid."  I believe Swensen would reply that empirically, most FoFs fail to provide value for money.  2008 is good evidence for that.  It's hard enough to beat the market via direct active investing; doing it via an extra layer of fees is even harder.  Also, it's generally true that the lower the fee charged by a FoF, the more closely it resembles one of the "index investments in alpha generating strategies" that Isaac derides.

Round 6 goes to Swensen on points.

Finally, as the recipient of a Jesuit education (thank you Dr. Stewart!), as the descendant of a distinguished family of talmudic scholars, as a former copy editor, and as an admirer of George Orwell, I must point out this example of Mr. Isaac's tortured language:

Strip out all the double negatives and you'll find that Isaac meant the opposite of what is written, i.e. the idea that only Mr. Swensen should invest in active vehicles is condescending and limiting.  Giving Isaac the benefit of the doubt that the sentence was just a typo, it still misstates Swensen's position.  Swensen's position is that those who wish to invest in active vehicles should not hire agents to do so on their behalf, but rather must devote the time, energy and resources to do it themselves.  Be a principal, not an agent.

Final round to Swensen. 

Overall verdict: David Swensen.  Go Bulldogs.

P.S.  In a future post I hope to play devil's advocate regarding Swensen and his record.  Is it really as good as his drooling idolators (I'm wiping my mouth as I write) assume?  Stay tuned.

The author of this post is Nadav Manham, president of Elera Advisors LLC, an investment advisory company focused on value-oriented manager selection. Mr. Manham is a Manual of Ideas contributor and editor of The Investor's Consigliere.

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We are pleased to make available a FREE copy of our exclusive interview with Tom Gayner of Markel when you join our FREE Ideas & Wisdom email list.

Visit the Manual of Ideas homepage. Then enter your email address in the box on the left-hand side of the page. Once you join the list, you will receive an email with a link to the interview.

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Latest Stock Screen Results: Dividend Payors with Decent Balance Sheets

Click here to download the latest screen results.

1. USA Mobility / USMO
2. Westpac Banking / WBK
3. Embotelladora Andina / AKO.A
4. NGP Capital / NGPC
5. BBVA Banco Frances / BFR
6. Permian Basin / PBT
7. Nam Tai Electronics / NTE
8. TICC Capital / TICC
9. Reed Elsevier / ENL
10. Am. Capital Agency / AGNC
11. BP Prudhoe Bay / BPT
12. San Juan Basin / SJT
13. RRSat Global Comms / RRST
14. Fifth Street Finance / FSC
15. Anworth Mortgage / ANH
16. HSBC Holdings / HBC
17. Banco Santander / STD
18. Roche Holding / RHHBY
19. United Overseas Bank / UOVEY
20. World Wrestling Ent. / WWE
21. Societe Generale / SCGLY
22. AXA / AXA
23. Garmin / GRMN
24. Principal Financial / PFG
25. Pioneer Southwest / PSE
26. Blackstone Group / BX
27. Consolidated Water / CWCO
28. CNOOC / CEO
29. Rolls-Royce / RYCEY
30. Corporate Executive / EXBD
31. Sabine Royalty Trust / SBR
32. Pfizer / PFE
33. Integrys Energy / TEG
34. NY Community Bancorp / NYB
35. National Penn Banc / NPBC
36. China Mobile / CHL
37. First Merchants / FRME
38. Gushan Environmental / GU
39. TrustCo Bank Corp NY / TRST
40. TCF Financial Corp. / TCB
41. Lincoln National / LNC
42. Intel / INTC
43. Williams Pipeline / WMZ
44. MainSource Financial / MSFG
45. American Software / AMSWA

View this stock screen in PDF format.

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(click to enlarge)

Source: WallStats.com.

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Damien Park of Hedge Fund Solutions and Matteo Tonello of The Conference Board have published a paper on shareholder activism. Download it for free at SSRN.

Snapshot:

With corporate valuation declining and an economic and political environment favorable to change, the 2009 proxy season is witnessing a new wave of investor demands. In particular, due to the liquidity problems facing many corporations, there is a clear shift from the financial-oriented activism campaign aiming at cash extractions to new initiatives pursuing strategic, operational, and governance-related corrections.

The economic downturn has created extraordinary upheavals across global markets and severely penalized stock prices: Today, financial markets supply a number of undervalued companies and investment opportunities, as many businesses maintain relatively strong balance sheets and healthy long-term earnings potentials. The paper argues that it is in the interest of corporate boards to act proactively, understand shareholder intentions, and correct vulnerabilities so as to avoid becoming the target of activists. It also offers practical suggestions on how to design an action plan and respond to negative publicity campaigns mounted by disgruntled investors. Several current examples as well as a detailed table of cases from the 2009 proxy season are included.

Damien Park runs the Official Activist Investing Blog and publishes research on companies targeted by activist investors. View a sample report on Consolidated Tomoka Land Co. (NYSE: CTO).

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The Manual of Ideas

In the report, the Manual of Ideas research team lists 100 companies passing a deep value screen modeled after the balance sheet-driven valuation approach practiced by the late Ben Graham, author of The Intelligent Investor and widely regarded as the "father of security analysis." The report analyzes 30 public companies and selects the Top 5 timely deep value investment opportunities.

Click here to preview the 135-page report.

To view the full report, purchase a one-year subscription to Portfolio Manager's Review for $999 (12 issues) or buy the single report for $199. Subscribers, log into the members-only area.

About Ben Graham's Approach to Equity Investing

Graham's value-oriented approach has outperformed other approaches to investment selection over long periods of time. Perhaps the most famous disciple of Ben Graham is none other than Berkshire Hathaway (NYSE: BRK.A, BRK.B) chairman Warren Buffett. For more information on Graham's investment approach, read a recent article by Mark Hulbert, a Forbes piece on Ben Graham's timeless investment principles or a Ben Graham-style critique of the efficient market hypothesis.

Companies Included in the Report

Companies mentioned in the report include A.C. Moore Arts (Nasdaq: ACMR), ACADIA Pharma (Nasdaq: ACAD), Acorn International (NYSE: ATV), Actions Semiconductor (Nasdaq: ACTS), Adaptec (Nasdaq: ADPT), Anadigics (Nasdaq: ANAD), Arctic Cat (Nasdaq: ACAT), Ascent Media (Nasdaq: ASCMA), Audiovox (Nasdaq: VOXX), AuthenTec (Nasdaq: AUTH), Avanex (Nasdaq: AVNX), Avigen (Nasdaq: AVGN), Axcelis Technologies (Nasdaq: ACLS), BE Semiconductor (OTC: BESIY), Benchmark Electron. (NYSE: BHE), BioForm Medical (Nasdaq: BFRM), Bookham (Nasdaq: BKHM), Cascade Microtech (Nasdaq: CSCD), CCA Industries (AMEX: CAW), CE Franklin (Nasdaq: CFK), Clarus Corp. (OTC: CLRS), Communications Systems (Nasdaq: JCS), Comverse Technology (OTC: CMVT), Crocs (Nasdaq: CROX), Cutera (Nasdaq: CUTR), Cynosure (Nasdaq: CYNO), Dot Hill Systems (Nasdaq: HILL), Electro Scientific (Nasdaq: ESIO), Facet Biotech (Nasdaq: FACT), Flexsteel Industries (Nasdaq: FLXS), Footstar (OTC: FTAR), Fuqi International (Nasdaq: FUQI), Gencor Industries (Nasdaq: GENC), Gravity (Nasdaq: GRVY), GTSI (Nasdaq: GTSI), Gushan Environmental (NYSE: GU), Hardinge (Nasdaq: HDNG), Harvest Natural (NYSE: HNR), Heelys (Nasdaq: HLYS), Himax Technologies (Nasdaq: HIMX), Horsehead (Nasdaq: ZINC), Hudson Highland (Nasdaq: HHGP), Hurray! (Nasdaq: HRAY), Hutchison Telecom (NYSE: HTX), Ikanos Comms (Nasdaq: IKAN), Imation (NYSE: IMN), Ingram Micro (NYSE: IM), Integrated Silicon (Nasdaq: ISSI), Intellon (Nasdaq: ITLN), iPass (Nasdaq: IPAS), KHD Humboldt Wedag (NYSE: KHD), K-Swiss (Nasdaq: KSWS), L.S. Starrett (NYSE: SCX), LeapFrog (NYSE: LF), Linktone (Nasdaq: LTON), LookSmart (Nasdaq: LOOK), MarineMax (NYSE: HZO), Mattson Technology (Nasdaq: MTSN), MEMSIC (Nasdaq: MEMS), ModusLink Global (Nasdaq: MLNK), Movado Group (NYSE: MOV), Nam Tai Electronics (NYSE: NTE), Natuzzi (NYSE: NTZ), Noah Education (NYSE: NED), Northstar Neuroscience (Nasdaq: NSTR), Nu Horizons (Nasdaq: NUHC), Opnext (Nasdaq: OPXT), PC Connection (Nasdaq: PCCC), PDF Solutions (Nasdaq: PDFS), PDI (Nasdaq: PDII), Pomeroy IT Solutions (Nasdaq: PMRY), QLT (Nasdaq: QLTI), Rackable Systems (Nasdaq: RACK), Rewards Network (Nasdaq: DINE), Rocky Brands (Nasdaq: RCKY), Rudolph Technologies (Nasdaq: RTEC), Schuff International (OTC: SHFK), Sierra Wireless (Nasdaq: SWIR), Skechers (NYSE: SKX), SMART Modular (Nasdaq: SMOD), Soapstone Networks (Nasdaq: SOAP), Superior Uniform (Nasdaq: SGC), Syneron Medical (Nasdaq: ELOS), Tech Data (Nasdaq: TECD), The9 Limited (Nasdaq: NCTY), TheStreet.com (Nasdaq: TSCM), TomoTherapy (Nasdaq: TOMO), Trans World (Nasdaq: TWMC), Trident Microsystems (Nasdaq: TRID), Tuesday Morning (Nasdaq: TUES), Ultra Clean Holdings (Nasdaq: UCTT), Universal Stainless (Nasdaq: USAP), Volt Information (NYSE: VOL), Voltaire (Nasdaq: VOLT), Voyager Learning (OTC: VLCY), West Marine (Nasdaq: WMAR), Xyratex (Nasdaq: XRTX), Zapata (NYSE: ZAP), Zygo (Nasdaq: ZIGO), and more.

Note: 30 of the above companies are profiled in the report, with five companies selected as the top investment opportunities. We also highlight the next ten stocks that appear to have investment merit and deserve closer scrutiny.

Posted by manualofideas at 01:43 PM | Permalink | Comments (0)

"Magic Formula" investing is based on a simple yet powerful way of searching for undervalued stocks. According to Joel Greenblatt’s The Little Book That Beats The Market, portfolios of stocks selected quantitatively based on MFI criteria have handily outperformed the S&P 500 over the past couple of decades.

Why We Like Magic Formula Investing

Advocated by "super investor" Joel Greenblatt. Greenblatt invented MFI as a do-it-yourself version of the approach he has espoused while amassing one of the most impressive investment track records of all time. While reliable data on Greenblatt's complete track record is not available, some estimates put his annualized returns over the past couple of decades at well north of 20%. From 1985-1994, Greenblatt managed the Gotham Partners hedge fund, reporting annualized returns of 50% (after expenses, before performance fees). Gotham returned all outside capital in January 1995.

Simple. The MFI screen ranks companies based on only two variables: "cheapness" (pre-tax unlevered earnings yield) and "goodness" (return on capital employed). The two rankings are given equal weight in the final compilation of the MFI Top 100. This simple process stands in stark contrast to most quantitative screening methods, which rely on multiple variables and are difficult to replicate.

Makes sense. Few investors would prefer a bad business to a good one, and few would purposely ignore the price they pay for a stock. MFI seeks out good companies that are available at good prices. The result is a list of businesses that offer both a high earnings yield and a relatively high probability that capital reinvested in the business will generate high returns. It makes intuitive sense that such stocks should outperform.

Latest "Magic Formula" Stock Screen Results (based on this year's EPS estimates)

Click here to download the latest screen results.

1. MCG Capital / MCGC
2. Torchmark / TMK
3. Web.com / WWWW
4. Allied Capital / ALD
5. World Acceptance / WRLD
6. Walter Industries / WLT
7. Unum Group / UNM
8. EarthLink / ELNK
9. Protective Life / PL
10. Innophos / IPHS
11. Endo Pharma / ENDP
12. Phoenix Companies / PNX
13. Prospect Capital / PSEC
14. FirstEnergy / FE
15. Molina Healthcare / MOH
16. CNA Surety / SUR
17. Terra Industries / TRA
18. Southern Union / SUG
19. Portland General / POR
20. Pepco Holdings / POM
21. Humana / HUM
22. CF Industries / CF
23. Ness Technologies / NSTC
24. Entergy / ETR
25. Cal-Maine Foods / CALM
26. Joy Global / JOYG
27. 3Com / COMS
28. American Oriental / AOB
29. Energen / EGN
30. Hercules Technology / HTGC
31. TECO Energy / TE
32. Caraco Pharma / CPD
33. True Religion / TRLG
34. American Capital / ACAS
35. NetScout Systems / NTCT
36. GameStop / GME
37. UniSource Energy / UNS
38. Fuqi International / FUQI
39. A-Power Energy / APWR
40. Harleysville Group / HGIC
41. Continucare / CNU
42. CenterPoint Energy / CNP
43. Sepracor / SEPR
44. AgFeed Industries / FEED
45. China-Biotics / CHBT

View this stock screen in PDF format.

Learn more about 10x45 Bargain Hunter.

Disclosure: No positions.

Posted by manualofideas at 07:27 PM | Permalink | Comments (0)

Finally self-styled investment prophet Nassim Taleb is hearing some criticism from various corners. He recently wrote an opinion piece for the Financial Times entitled Ten Principles for a Black Swan-Proof World. A few folks responded, including Felix Salmon, Connor Clarke and, most notably Charles Davi, who laments The Unbearable Lightness of Nassim Taleb. (Thanks to the blog SimoleonSense for bringing us this discussion.)

While we enjoyed Taleb's original book, Fooled by Randomness, in which he discussed the illusion of causality and aptly invoked "black swans," did he really need to put out another book to expound on those black swans? Of course, by the time the second book became an option, black swans had become fashionable in the world of finance, so why not ring the register one more time?

One doesn't need to read Taleb's Ten Principles for a Black-Swan Proof World to wonder how in the world one can black-swan proof anything by following a list. After all, black swans are not literally little black animals swimming on lakes. They are unpredictable, out-of-the-ordinary events, or what the former defense secretary might call "unknown unknowns." To have the father of the black swan theory essentially say that we can do away with black swans by following a recipe flies in the face of everything he has asserted about black swans. His recipe destroys the credibility of his entire previous train of thought.

(Not) to pile on, we observe that Taleb the investment manager appeared to be advocating losing a bit of money in your investments in normal times, presumably by buying out-of-the-money put options and the like. Then the "black swan" would come and you would make a killing -- or certainly enough to retire to a tropical island and to never be seen on the talk show circuit again. Unfortunately, there have been a few sightings of Taleb the investment manager here, here, here, here, here, here and here (no, those are not tropical islands). If he is not tanning in the Caribbean following the biggest black swan since the Great Depression, then what kind of black swan will it take? Or are we simply dealing with another author whose 15 minutes of fame have been stretched a bit too far?

Posted by manualofideas at 10:45 AM | Permalink | Comments (0)

Corporate law firm Schulte Roth & Zabel LLP writes in a client update:

"In response to no-action requests by Eastbourne Capital Management LLC (“ECM”) and certain entities affiliated with Carl Icahn (the “Icahn Funds”) (collectively, the “Dissident Shareholders”), the staff in the Division of Corporate Finance of the SEC (the “Commission Staff”) granted no-action relief under the “short slate rule”1 permitting the Dissident Shareholders to not only solicit votes for their own nominees, but also to seek authority to vote for nominees of an unrelated dissident. The Commission Staff strictly conditioned this relief on the Dissident Shareholder’s representations that they have not, and would not, agree to act or act as a “group” as determined under Section 13(d)(3) and in Regulation 13D-G. The Commission Staff’s response also indicates that, to exercise this right, the dissident may not actively recommend the election of each other’s nominees, but may only state their intention to vote for each other’s nominees, except to the extent otherwise stated in the Dissident Shareholder’s respective proxy cards."

The client brief concludes:

"The Commission Staff’s grant of relief to ECM and the Icahn Funds will further enable soliciting stockholders who are seeking to elect a short slate to “round out” their slate with candidates from the full selection of nominees, even those proposed by another dissident. This new interpretation will allow activists to pursue their goal of achieving better shareholder representation, will allow shareholders to vote for the directors of their choice, and will keep management slates from gaining an advantage when there are multiple dissident slates nominated by unrelated shareholders. Going forward, this scenario may become more common in the activist community. However, activist investors must be careful not to run afoul of the Commission Staff’s response by acting as a group or otherwise engaging in any activities that would be deemed to cause the formation of a “group” as determined under Section 13(d)(3) and in Regulation 13D-G."

Bottom line: Shareholders may have an easier time circumventing companies' poison pill provisions when it comes to forcing change at the Board level, as long as there is more than one activist investor involved in a particular situation.

Posted by manualofideas at 03:29 PM | Permalink | Comments (1)

Our partners Wesley R. Gray of the University of Chicago and Andrew E. Kern of the University of Missouri present:

April 2009 (current issue) — Empirical Finance Research Newsletter on Post-Earnings-Announcement Drift: Delayed Price Response or Risk Premium?, a paper by Victor L. Bernard and Jacob K. Thomas

Abstract: The Post-Earnings-Announcement-Drift ("PEAD" for short) is one of the oldest and most persistent anomalies in the accounting literature, and traces its roots to a paper by Ball and Brown from 1968. The paper surveyed here, Bernard and Thomas (1989), is one of the most definitive. As its name suggests, PEAD is the tendency of stocks that beat earnings expectations to continue to drift upwards for about two months after the announcement, or likewise for stocks that miss earnings to continue to drift downwards. The abnormal returns associated with the drift are substantial. Even though the phenomenon has been known for several decades now, it is fair to say that not only has the phenomenon persisted but that its cause is still unresolved as well. This paper contributes to that debate.

Conclusions: The post-earnings-announcement-drift is a good phenomenon to exploit because it has been so persistent over time. Today's researchers remain puzzled as to how something like this can endure in light of tremendous competition among investors. The fact PEAD hasn't changed since it was first discovered in 1968 should serve as reassurance that a strategy based on this strategy will remain profitable into the future.

Posted by manualofideas at 09:12 PM | Permalink | Comments (0)

 The author of this post is hedge fund manager Nick Gogerty.

The dog  illustration shows metrics that may be important to wiener dog specialists. I look at a dog, smile and walk on. A specialist sees a whole set of parameters I don't.  I usually look at the tail.  Dogs smile by wagging their tails, so if the dog is happy, I am happy.

Hedge Fund Metrics

The business of running a hedge fund is getting tougher on the performance side and the day to day office routine. Due diligence requests are up, redemptions are coming in and the staff is upset that the high water mark is receding faster than AIG's popularity.  It can feel a bit like being the captain of the nautilus in 20,000 leagues under the sea.  

Something else to look out for if you are a hedge fund manager. Inflation.

Many hedge funds don't think much about inflation at the business level and assume the quant guys will come up with a strategy or the trend following commodity approach you just started applying will cover it.

The problem is that if inflation comes back you are going to get hit with a metric shock at the business level and the market level.  Many funds promised to deliver whatever would get people to buy them.  Fund allocators, family offices, pension funds, seeders etc.  would ask for relative returns or absolute returns.  The benchmarks would be set and everyone would be on their merry way until the quarter or year end review.

 The metric shifts with the fashions of finance.  Those who thought relative performance to equities would keep them high and dry are surprised that 1,500 bps of alpha over a -30% S&P index is met with redemption calls instead of a pat on the back. 

Because most investors in hedge funds bought the feel good story and didn't understand the process driving the returns, they are heading for the hills. 

The metric of absolute positive returns has now come into fashion.  Alpha shmalfa, liquidity, absolute returns and transparency are the watch words of the day. 

Inflation Metric Surprise

So if you run a hedge fund here is something to think about from a business perspective, Inflation.  Rarely will your allocators or investors mention real vs. nominal returns in today's conversations.  That could change, yesterday's 15% absolute return with 1.0 Sharpe may not make such a bold statement if inflation spikes in the US greater than 10%.   Historical Sharpe ratios could be viewed through the lens of CPI instead of t-bills if inflation returns.  You may want to run the figures now to see how others could be looking at your returns when they fire up the Barra type tools for their annual CYA process reviews.  Co-variance using CPI or another inflation metric could become an important factor (pun intended) in your business.

From a fund business perspective the smart FoF's or hedge fund manager may wish to consider an inflation linked exposure today before things get crowded.  If inflation rears its head, the returns of hedge funds may start to look less appealing in a relative context.  A stable 15% return looks pretty risky in a high inflation environment if the process driving returns isn't understood and that 15% is invariant with respect to inflation.

Read more at Gogerty.com.

Posted by manualofideas at 08:51 AM | Permalink | Comments (0)

According to this article about Deutsche Bank's annual Alternative Investment Survey, over 50% of hedge fund investors will only invest in funds with $1 billion or more in assets under management:

“There is a magic number where economies of scale really kick in,” Mr. Ang adds. “It’s at about $2 billion to $3 billion. With funds smaller than that, it’s much harder to get significant rewards.”

I disagree with Professor Ang, and with any hedge fund investor that limits itself to $1 billion+ funds.  Taking Professor Ang's points in turn:

1)  Why are big funds in a better position to have good risk management?  What does he mean by good risk management?  If he means larger funds are more able to hire dedicated risk managers, I think that's more likely to provide only the appearance of risk management rather than the reality, as Ken Akoundi explains in detail.  The ultimate guarantor of good risk management is when the investment process is joined at the hip with the risk management process, which is usually truest when one very competent person is doing both. 

2)  Bigger funds can borrow more cheaply than smaller funds.  With "advantages" like this, it seems to me, you don't need disadvantages. 

3)  Bigger funds are more likely to have a track record.  Yes, but fund size is a very lazy heuristic to use to screen for track records.  If you the hedge fund investor wish to confine yourself to funds with longer track records--a legitimate aim--the way to do that is to screen for funds with longer track records, not to use fund size as a proxy for track record. 

4)  Larger hedge funds benefit more from economies of scale.  Yes, but the benefits of these economies of scale accrue to the hedge fund itself, not to the hedge fund investors.  If anything, hedge fund investors face diseconomies of scale as the size of their funds grows:

      a)  As a fund grows its universe of opportunities shrinks.

      b)  If a fund grows by adding new investors, those investors are less likely to share the investing philosophy and expectations of the original partners.

      c)  Because of a) and b), larger funds are more likely to experience unfavorable style drift.

The author of this post is Nadav Manham, president of Elera Advisors LLC, an investment advisory company focused on value-oriented manager selection. Mr. Manham is also editor of The Investor's Consigliere.

Posted by manualofideas at 11:15 AM | Permalink | Comments (0)

The Manual of Ideas has just launched a new bi-weekly screening service, the 10x45 Bargain Hunter.

Get more information and download a FREE sample report.

Posted by manualofideas at 02:22 AM | Permalink | Comments (0)

The Manual of Ideas is pleased to make its flagship research publication, Portfolio Manager's Review, more accessible to investors worldwide. 

Portfolio Manager's Review is highly acclaimed by some of the most well-known and widely respected value-oriented investors in the U.S. and internationally.  The Review is now published monthly and available via online subscription.

Learn about becoming a subscriber.

Posted by manualofideas at 01:25 AM | Permalink | Comments (0)

Marc Faber may be best known for his newsletter, GloomBoomDoom Report, and his frequent appearances on Bloomberg TV and other financial outlets. Unlike other TV "talking heads," Faber knows what he's talking about and is not afraid to say it. Lately, he has been an outspoken critic of the Fed's easy-money policies and deficit spending that will, according to Faber, lead to a bout of hyperinflation and debasement of the dollar (and other paper currencies, for that matter). Faber is also author of Tomorrow's Gold.

The following are the top six investment books recommended by Marc Faber:

• The Economics of Inflation, by Constantino Bresciani Turroni, Bocconi 1931 (says Faber: "This book explains the impact of hyperinflation on real estate prices, wages, stock prices, etc and why hyperinflation does create life-time buying opportunities. This is the best book ever written about the mechanics of inflation and the problems and opportunities in hyperinflationary times.")
• Works of Jules Vernes, by Jules Vernes (says Faber: "Jules Vernes did not just extrapolate past trends into the future, but made bold predictions, considered at the time to be fantasies of a lunatic. Yet, all his predictions were realized and, therefore, I consider Jules Vernes to be the greatest forecaster of all times.")
• The Alchemist, by Paulo Coelho, Harper 1994 (says Faber: "It is a remarkable tale about the most magical of all journeys: The quest to fulfill one's own destiny. The shepherd's boy Santiago joins the ranks of Candid and Marco Polo by taking the reader on a adventures journey full of hardship, which he overcomes with perseverance and the conviction that in order to fulfill one's dream nothing is an obstacle. The book will make you understand more about yourself and the world of business and investments.")
• A History of Interest Rates, by Sidney Homer, New Jersey 1977 (says Faber: "This book was edited by Henry Kaufman and is the bible of credit markets. Online traders will not find any "hot tips" in this monumental work, but the student of financial markets will use it as a reference for putting current trends into a historical perspective.")
• Booms and Depressions, by Irving Fisher, Binghampton 1932 (says Faber: "In this book Fisher explains the causes of the stock market boom of the late 1920s and why the boom came to an abrupt end. Fisher's account of the events around the 1929 crash is particularly relevant to the present as there are so many similarities to the present economic environment.")
• The Stock Market Crash and After, by Irving Fisher, New York 1930 (says Faber: "Written in November 1929, this book captures the mood of the time extremely well. The book's last sentence is particularly noteworthy: "For the immediate future, at least, the outlook is bright." A few months later this century's greatest depression got underway.")

More about Marc Faber (from GloomBoomDoom.com):

Dr Marc Faber was born in Zurich, Switzerland. He went to school in Geneva and Zurich and finished high school with the Matura. He studied Economics at the University of Zurich and, at the age of 24, obtained a PhD in Economics magna cum laude.

Between 1970 and 1978, Dr Faber worked for White Weld & Company Limited in New York, Zurich and Hong Kong.

Since 1973, he has lived in Hong Kong. From 1978 to February 1990, he was the Managing Director of Drexel Burnham Lambert (HK) Ltd. In June 1990, he set up his own business, MARC FABER LIMITED which acts as an investment advisor and fund manager.

Dr Faber publishes a widely read monthly investment newsletter "The Gloom Boom & Doom Report" report which highlights unusual investment opportunities, and is the author of several books including “TOMORROW'S GOLD – Asia's Age of Discovery” which was first published in 2002 and highlights future investment opportunities around the world. “TOMORROW'S GOLD” was for several weeks on Amazon's best seller list and is being translated into Japanese, Chinese, Korean, Thai and German. Dr. Faber is also a regular contributor to several leading financial publications around the world.

A book on Dr Faber, "RIDING THE MILLENNIAL STORM", by Nury Vittachi, was published in 1998.

A regular speaker at various investment seminars, Dr Faber is well known for his "contrarian" investment approach.

He is also associated with a variety of funds and is a member of the Board of Directors of numerous companies

Posted by manualofideas at 03:13 PM | Permalink | Comments (0)

The FT reports on how the Mittelstand, the hard-to-define group of small to medium-sized businesses that all English-speaking media are required to describe as the "backbone" of the German economy, is coping with the economic downturn.  Here is the money quote for me:

As a result, the engineering company wants to make use of lowly asset valuations to buy rivals and broaden its product pipeline, a counter-cyclical investment pattern typical of many a German family company - and one that highly indebted, private equity owned groups can now only dream of.

The financial conservatism of the Mittelstand is legendary.  That doesn't mean it's true, but if it is I wonder why.  Some hypotheses, starting with my least favorite:

1)  Financial conservatism is inherent in the German character.  I discount this--much of the underwater real estate in Miami Beach is owned by Germans.  Plus it's always a mistake to attribute too much to "national character."  Ten years ago Iceland had one national character, one year ago it had another, and today it has still another.

2)  The Mittelstand doesn't need high debt because it can earn returns on capital comparable to companies outside Germany without it.  I also discount this, unless there is some magic to being a car-parts supplier in Germany that automatically makes it a great business.

3)  Some regulatory or tax difference that I don't know about.

4)  Survivorship bias plus lessons learned.  German business had a pretty rough 20th century: two World Wars, hyperinflation, the partition of the country.  Those that survived tended to be financially conservative, and learned to think in terms of being able to survive calamity. 

5)  The tendency of Mittelstand companies to be family-owned, often in their second or third generation, creates a tendency to think long-term and to avoid catastrophe risk.  Conversely, ownership by outside shareholders creates a tendency to think shorter term.  The longer your time horizon, the more you have to think about catastrophe risk because its cumulative probability gets surprisingly high.  If you finance your company such that it only has a 1% of going bankrupt in any one year, the likeihood you make it five years without going bust is 95.1%.  Most hedge fund managers would take those odds over that time horizon.  But if you have to make it 50 years, your likelihood of doing so with the same financing structure falls to less than 40%.

To the extent these last two hypotheses are valid, there are two lessons for investors, especially American family offices.  The first is that nations rise and fall.  The second is that you must take care that the money managers with whom you invest have the same time horizon and approach to catastrophe risk as you do.

The author of this post is Nadav Manham, president of Elera Advisors LLC, an investment advisory company focused on value-oriented manager selection. Mr. Manham is also editor of The Investor's Consigliere.

Posted by manualofideas at 11:13 AM | Permalink | Comments (0)

The March issue of Empirical Finance Research Newsletter has been published. We're pleased to bring it to you absolutely FREE in partnership with Wes Gray and Andy Kern of Empirical Finance, LLC. This month's newsletter includes the results of a stock screen that should not be missed.

March 2009 — Empirical Finance Research Newsletter on Information in Balance Sheets for Future Stock Returns: Evidence from Net Operating Assets, a paper by Georgios Papanastasopoulos, Dimitrios Thomakos and Tao Wang

Abstract:<