Saturday, December 23, 2006

Merry Xmas and Happy New Year

Dear readers,

Merry Xmas and Happy New Year to all of you!

May year 2007 be a great year.

Best wishes,
David Lau

Triage & Investing

Triage article is a very good article about prioritising patients to treat.

It gives you an overview of how battlefield medicine works. This principle is also applied to emergency medicine. Imagine you were in accident and emergency department. If you were to suffer heart attack, you want to be treated straight away and not waiting for your queue. If you were to suffer minor cuts, you could wait to be treated.

Triage in fact is equivalent to time management. Do the really important stuffs first that can make an impact.

So how does triage apply to investing?

Warren Buffett said to be a great investor, you have to study all listed companies to find the hidden gems; starting from alphabet A to Z.

However, this may not be the most efficient way.

You have to apply "triage" principle to stock analysis too. You should screen for companies that are hitting 52 weeks low, and these are the companies to analyse first. The other effective way is to study the most recent filings of great investors, i.e Mohnish Pabrai. For example, recent filing showed that Mohnish Pabrai invested over 11.5% of CryptoLogic shares. As he is a great manager and with such a significant investment, it should be the top priority to analyse why he bought so much. If you study CryptoLogic now and think is it worth a lot more, you could buy the company now without paying excessively.

Happy investing,

Friday, December 22, 2006

How To Read The Bible #1

Err.. this is not about investment, but technique of reading the bible.

Charlie Munger said that multidisciplinary approach to investing is vital. And, I believe that the technique of reading bible could be applied to reading annual reports more efficiently.

This preacher said you don't have to read from page 1 to finish.

Bible consists of a collection of 66 literatures and one should read bible like reading short story book.

Likewise, to read annual report, you don't have to start from page 1. I always start from the balance sheet, income statement and cashflow statement, and then jumping to relevant notes first.

Having said that, Warren Buffett said good investor should at the end, read the whole annual report in order not to miss things out.

It is worth watching this short video clip of 6 mins: How to read the Bible.

Thank you Terence Tan for sharing,

CryptoLogic; CRYP Interesting Development

Resigning William Hill for further 3 years is a great news to CRYP. This will increase credibility of CRYP.

One of the most significant happenings to CryptoLogic is that Mohnish Pabrai, a great investment manager, has purchased significant amount of CryptoLogic shares. The total amount of CryptoLogic shares that are owned by his funds, and his personal holding is over 11.5% of shares outstanding!

Wow, Mohnish Pabrai is definitely thinking CRYP is undervalued.

If you have any comments on CryptoLogic, please send me an email.

Best wishes,

Fortune Magazine's 10 Stocks to Own for 2007 holdings

Pls visit: Stockpckr.

Thursday, December 21, 2006

Lau Model Porfolio

11 June 2007

Dear readers,

I hope most of you have read the Little Book That Beats the Market by Joel Greenblatt.

If you haven't, please get a copy asap and read it a couple of times. I have personally read it many times, and have come to conclusion that for most investors, Magic Formula Investing, which is only based on simple combination of earning yield and return on invested capital, is the best way to beat the market over the long run.

Thank you Joel Greenblatt for your generous sharing on MFI.

I truly agreed with Mike Price, who said that this book is one of the most important books ever written in the last 50 years.

Therefore, I have discontinued Lau Model Portfolio to track companies as investors are much much better off following the advice by Joel Greenblatt.




I am creating a model portfolio, which I would name it as Lau Model Porfolio, to track all the companies that I think are undervalued and worth investing.

The purpose of this portfolio is to help investors monitor the undervalued companies.

Lau Model Portfolio:

  1. MGIC Investment Corp; MTG at $63.00 Feb 10, 2006
  2. Gannett Co; GCI at $61.26 March 14, 2006
  3. Gannett Co; GCI at $56.00 April 19, 2006
  4. Intel Corp; INTC at $19.60 March 29, 2006
  5. Berkshire Hathaway; BRK.A $90,000 April 6, 2006
  6. Microsoft; MSFT $24.15 April 29, 2006
  7. Dell; DELL $24.20 May 18, 2006
  8. K-Swiss; KSWS $26.50 June 1, 2006
  9. MGIC Investment Corp; MTG at $58.44 Sept 4, 2006
  10. CryptoLogic; CRYP at $20.00 Nov 20, 2006
  11. Wal Mart; WMT at $46.50 Dec 18, 2006

I believe that the above companies are undervalued at the price mentioned, and should offer a market-beating returns over a long-term period. If you were to invest in the above companies, do your due diligence.

Remember, only invest if you know what you are doing.

Happy investing,
Dah Hui Lau (David)

Previous recommended companies, but not anymore:

  1. PartyGaming; PRTY Recommended at $2.10 June 29, 2006; dropped out from Lau Model Portfolio at $0.49 Dec 1, 2006. A plunge of over 76% in less than 6 months. Massive change in valuation and risk. For further details or analyis, email me.
  2. The Buckle; BKE at recommended at $35.10 Sept 11, 2006; recommended sale on Dec 21, 2006 at $40.50 to realize profit. An increase of over 40% in less than 4 months.

Question by anonymous investor:

Is time a factor in your decision to buy an investment?

Time is a crucial factor in buying decision. We only invest when the time is right, in other words, we only invest when Mr. Market is pessimistic and offer good companies at bargain or great price.

Question by anonymous investor:

What would you do if the stock does not move in a designated time frame, would you sell and find something else? Worst case, if the stock goes down, what is your risk tolerance levels.

Time is great friend to good companies. As time passes, good companies will not only survive the temporary setbacks, but will strive and increase its shareholders value. When Mr. Market realises this, it may bid the price of the stock up. How long it takes for Mr. Market to respond is beyond my prediction. We are long-term investors and will wait for the good returns to unfold, between 3 to 5 years. Having said that, we would monitor the underlying fundamental of the companies and reassess the companies from time to time to make sure we have not made mistakes at the first place.

If the stock goes down, we would reassess the companies to make sure its moat is intake and the “events” that cause the stocks to dive are temporary rather than permanent. If we believe that we are right, we would take advantage of the price drop to increase our holdings.

If we made mistakes in judging the companies, and if we found out at later date that the companies are not as sustainable as we thought, we would sell the companies.

The Buckle Inc; BKE at $49.50

BKE has surged from $35.10 on Sept 11 to $49.50 on Dec 20; an increase of 41% in less than 4 months.

Mr. Market seems to be over-excited on BKE now. It is a good time to take a profit.

Merry Xmas and Happy New Year!

Warren Buffett & Washington Post

Good article written by Max Olson into reverse engineering of Buffett purchase of WPO.

To read further: Gannon Guest Column.

Keep on learning!

Warren Buffett: On Maxim Cover!

To view: Maxim.


CryptoLogic; CRYP, Discussion on MSN BRK Board

There is interesting discussions and thinkings on CRYP.

To investigate further: MSN BRK Board.

If you are interested in my analysis on CRYP, please send me an email. If you have particular insight in CRYP, do send me an email too. I appreciate everyone's contribution.


Warren Buffett: Investment Manager of 2006

Gurufocus poll nominated Warren Buffett as the Investment Manager of 2006.

This is so predictable! :)

To read further:


Monday, December 18, 2006

Wal Mart; WMT, at $46.50 A Strong Buy

Wal Mart is an excellent company selling at a wonderful price. This is a truly Warren Buffett-type company. At current price of $46.50, it is definitely a strong buy.


Saturday, December 16, 2006

Berkshire Hathaway: Biggest Increase of Net Worth in US history!

Warren Buffett, chairman of Berkshire Hathaway Inc., says he expects the diversified holding company to increase its net worth this year by a record $14 billion.

Mr. Buffett said the increase in net worth, which he said would translate into strong growth in Berkshire's book value, could be the biggest of any U.S. company, barring any disasters over the next few weeks that could hurt 2006 earnings in Berkshire's lucrative reinsurance business.




Friday, December 01, 2006

PartyGaming: The significant setback

I have re-evaluated my PartyGaming position and concluded that PartyGaming poses significant risks in many forms.

I have therefore dropped PartyGaming off my Lau Model Portfolio as it is too risky.

If you would like to see my calculation of why PartyGaming is considered overvalued, send me an email.



Monday, November 27, 2006

Warren Buffett CEO: Al Ueltschi Video Interview with Robert Miles

Al Ueltschi shares his 75 years of contributing to the development and timeline of aviation - from Lindbergh crossing the Atlantic solo in an airplane, to learning to fly an open cockpit bi-wing airplane, to flying the founder of Pan Am and his distinguished guests, to developing safe ground based simulated pilot training, to using aviation to help solve worldwide blindness, and to selling his company to Warren Buffett.

Click on and then click on "watch video interview" after Al Ueltschi's name. After watching the video, you may want to meet and greet Al Ueltschi and hear his keynote address on "The History and Future of Aviation. " Simply register to attend the 4th Annual Value Investor Conference in Los Angeles on May 7 & 8.

Thank you Robert Miles for sharing!


Thursday, November 23, 2006

Happy Thanksgiving Day!

Happy Thanksgiving Day to everyone!

Best wishes,

Stockpickr: Collections of Great Investors holdings at Stockpickr

  1. Arnold Van Den Berg Holdings Stockpickr
  2. Baupost Group holdings
  3. Bill Miller Holdings Stockpickr
  4. Bill Ngyren Holdings Stockpickr
  5. Blue Ridge Capital Holdings Stockpickr
  6. Brian Rogers Holdings Stockpickr
  7. Bruce Sherman Holdings Stockpickr
  8. Carl Icahn Holdings Stockpickr
  9. Charles de Vaulx Holdings Stockpickr
  10. Charlie Munger Holdings Stockpickr
  11. Dodge & Cox Stock (DODGX) Holdings Stockpickr
  12. Edward Lampert Holdings Stockpickr
  13. Edward Owens Holdings Stockpickr
  14. Fairholme FAIRX Holdings Stockpickr
  15. Glenn Greenberg Holdings Stockpickr
  16. Greenlight Capital Holdings Stockpickr
  17. Heartland Value Holdings Stockpickr
  18. Joel Greenblatt Holdings Stockpickr
  19. John Keeley Holdings Stockpickr
  20. Ken Fisher Value Holdings Stockpickr
  21. Leucadia Holdings Stockpickr
  22. Lone Pine Capital Holdings Stockpickr
  23. Marty Whitman Holdings Stockpickr
  24. Mason Hawkins Holdings Stockpickr
  25. Maverick Capital Holdings Stockpickr
  26. Michael Price Holdings Stockpickr
  27. Mohnish Pabrai Holdings Stockpickr
  28. Pershing Square Capital Holdings Stockpickr
  29. Pzena Investment Management Holdings Stockpickr
  30. Robert Olstein Holdings Stockpickr
  31. Robert Rodriguez Holdings Stockpickr
  32. Ronald Muhlenkamp Holdings Stockpickr
  33. Ron Baron Holdings Stockpickr
  34. Ruane Cunniff Holdings Stockpickr
  35. Second Curve Capital Holdings Stockpickr
  36. Springhouse Capital Holdings Stockpickr
  37. Traxis Partners Holdings Stockpickr
  38. Tweedy Browne Holdings Stockpickr
  39. Wallace Weitz Holdings Stockpickr
  40. Whitney Tilson Holdings Stockpickr

Worst Dow Stocks of the 21st Century

The Worst Dow Stocks of the 21st Century – The Dow Jones Industrials Average is at all-time highs, but here is a list of the 20 stocks in the index that have had negative returns over the past 7 years, despite earnings having doubled for almost all of them.

Please visit: Stockpickr.

Monday, November 20, 2006

CryptoLogic Inc. (CRYP) at $20.00

Dah Hui Lau (David) Conclusions:

"CryptoLogic is an interesting, cash-generative, cash-rich company in an expanding business (online gambling). It is reasonably priced because of many uncertainties i.e. change of CEO and headquarters, massive one-time charges this year and next year. Over a 5 years period, CryptoLogic seems like a good investment."

If you are interested in my analysis, send me an email.

All the best,


Berkshire Hathaway Intrinsic Value

What is Berkshire Hathaway Intrinsic Value?

Please visit: BRK Intrinsic Value Calculator.

Thank you Futile France for the link.


Friday, November 17, 2006

Comprehensive collections of Warren Buffett's resources

Thank you Value-Stock-Plus!


Milton Friedman: Influential Economist Has Died in California, at Age 94

Nobel Prize winner Milton Friedman, one of the most influential economists of the last century and a free-market champion, died today. He was 94.

Mr. Friedman was awarded the Nobel Prize in 1976. He long championed the cause of political and economic freedom and the links between the two. He originated, or was associated with, many breakthroughs in economics since the 1950s. He is best known for explaining the role of the money supply in economic and inflation fluctuations. He also developed, with this year's Nobel Prize winner in economics, Edmund Phelps, the theory in the 1960s that policy makers couldn't achieve a permanent tradeoff between lower unemployment and higher inflation, and that efforts to do so would simply result in the same unemployment rate and higher inflation, a view that holds sway at major central banks today, including the Fed.

To read the complete article.

Thursday, November 16, 2006

Bill Gates: Cascade investment vehicle shows strong influence of Buffett value style

'I've seen a migration of Bill Gates's investing mentality towards Mr. Buffett's over the years.' Timothy Vick, author of "How to Pick Stocks Like Warren Buffett"

To read the complete article.

Wednesday, November 15, 2006

Joel Greenblatt Buys Aeropostale Inc., Sells Lear Corp., Live Nation, Inc.

Famed investor Joel Greenblatt buys Aeropostale Inc., sells Lear Corp., Live Nation, Inc. during the 3-months ended 09/30/2006, according to the most recent filings of his investment company, Gotham Capital.

To read the complete article.

Mohnish Pabrai's Holdings: Sept 30, 2006

There are new names on the list:

FNF: Fidelity Nat'l Financial
LEA: Lear Corp.
DFC: Delta Financial Corp.

He sold all of his BRK.

To look at Mohnish Pabrai's holdings.

Thank you berkshiremystery for the wonderful link.

Dah Hui Lau (David)

Who is the Next Buffett?

Watch this short interview with Bruce Berkowitz, portfolio manager of Fairholme Capital Management, regarding "Who is the Next Buffett?": .

What Boards Look for in a CEO

So what are the ingredients that determine the winners from the losers?

The basic attributes that separate the best candidates from the rest are:

  1. Intellectual prowess: Don't underestimate the importance of sheer gray matter.
  2. Having a well-founded point of view: Boards look for someone to stake out a sensible position with firmness.
  3. Superior communications skills: This is the ability to unlock that gray matter and articulate that point of view in a clear and compelling way.
  4. Values: There must be a strong match between what the individual stands for, and what the directors and the company stands for.
  5. Executive presence: This is the intangible ability to inspire confidence in a group setting.

To read the complete article.

Happy learning,


The Dodge & Cox Mystique

In its 76-year history, Dodge & Cox has launched precisely four mutual funds. The firm doesn't advertise and has no marketing department. Yet investors are so taken with its funds that it has had to shut half of its tiny lineup to new customers to stanch the flood of money.

Obviously, results attract customers, and Dodge & Cox's results have been marvelous. D&C Stock, the biggest fund, with assets of $57 billion, has clipped Standard & Poor's 500-stock index seven straight years (including the first eight months of 2006). Over the past 15 years, its annual return of 15% tops the S&P 500 by an average of four percentage points per year. D&C Income, which invests mostly in high-quality, medium-term taxable bonds, has outpaced its average peer in 16 of the past 17 years. Balanced, the oldest fund, dating to 1931, has been in the top 20% of similar funds in each of the past six years. And International has surpassed its average rival in each of its five years of existence. (International and Income are the only funds that are open to new customers.)

What's behind the success of Dodge & Cox?

To read the complete article.

The greatest money manager of our time

What do ant colonies, novels and river systems have to do with making money? Ask Bill Miller, the man who's topped the market 15 years running. Fortune managing editor Andy Serwer reports.

To read the complete article.

Thank you Fu Lu for the wonderful link.


Friday, November 10, 2006

Tom Brown: Compucredit a Buy

From: Reuters.


Tom Brown, who heads the $500 million hedge fund Second Curve Capital, said on that his best investment idea now is CompuCredit Corp., a subprime lender and credit card issuer.

Brown, who is an alumnus of Julian Richardson's Tiger Management hedge fund and who runs the Web site, said CompuCredit is trading at six times estimates of 2008 earnings, and has $700 million of "excess liquidity" on its balance sheet, which it could use to make acquisitions or buy back stock.

Brown, who only invests in financial stocks, said Capital One Financial Corp. and First Marblehead Corp. are also among his top holdings. Brown said his holdings are giving his three funds "a great year," and added: "We're up over 40 percent in one of our funds."


Bill Ackman: Borders Group a Buy

From: Bloomberg.


Activist investor Bill Ackman said he purchased an 11 percent stake in Borders Group Inc., the second- largest U.S. bookstore company, sending the shares up the most in 10 months.

``The stock's cheap in our opinion, and the company seems to agree,'' Ackman said today at the Value Investing Congress in New York. Borders, based in Ann Arbor, Michigan, has ``one of the most aggressive share-repurchase programs I've ever seen.''

Borders shares may be worth $36 within the next 18 months, Ackman said. The stock rose $2.11, or 9.8 percent, to $23.65 at 4:16 p.m. in trading on the New York Stock Exchange, its biggest gain since January.

``They need to fix it or get rid of'' the international and mall business, Ackman said. ``I think management understands that. The reason why it's a passive investment is because we like what management is doing.''

The company had 62 million shares outstanding as of Aug. 25, an 11 percent decline from the 70.3 million shares it had a year earlier. The company authorized the repurchase of as much as $250 million of its shares in February 2005.


Mohnish Pabrai: Pinnacle Airlines Corp a Buy

From: Bloomberg.


Shares of Pinnacle Airlines Corp., whose sole customer is bankrupt Northwest Airlines Corp., were recommended by Mohnish Pabrai at the Value Investing Congress in New York.

``The next two years are going to be very good for the airline industry,'' said Pabrai, who manages $330 million at Pabrai Investment Funds in Irvine, California.

If the company were liquidated, it would fetch $9.55 a share, he said. That provides a ``floor'' for the stock price, Pabrai added.

Monday, November 06, 2006

Whitney Tilson: Opportunity to sample the treats



When it comes to owning stocks of the best-known businesses in the world, value investors usually feel like children looking through the window of the candy store, unable to afford the treats inside because they refuse to pay the prices such high-quality franchises typically bear. But a rare opportunity appeared over the past year for value investors to go inside the store and sample the treats.

First, buying low price-to-book stocks has produced superior returns over extended periods of time but there have also been periods of significant underperformance. Second, the average time in which growth stocks dominated was 37 months, whereas when value stocks returned to favour, they remained in favour for an average of 76 months. Interestingly, 76 months from the beginning of the latest value cycle in March 2000 took us to the middle of this year, which is when large-cap growth stocks started to outperform and traditional low price-to-book stocks started to underperform.


David Winters: The Fat, Slow Pitch

From Forbes:


The award for the most perplexing career move of 2005 goes to David J. Winters, formerly chief executive officer and chief investment officer of Franklin Mutual Advisers. Winters resigned from that $35 billion fund behemoth in order to found his own mutual fund. Repeat: mutual fund, not hedge fund. He calls his creation Wintergreen.

Ask him the question most often put to hedge fund jockeys by jumpy institutional investors: "What's your edge?" And he replies, "We're long-term investors."

Imperial Tobacco Group, whose stock is available in London as well as New York, is an example of what Winters means by fat and slow. He can hardly contain himself in describing this British cigarette manufacturer, which operates beyond the reach of the U.S. courts. "Ten years ago they were spun off from Hanson, and since then the rates of return are just wild," Winter says. "The compound rates of return have just been spectacular. They've taken it from being a domestic U.K. business to being a very global organization. And they've done a series of really intelligent acquisitions. They now buy back their own stock. They pay nice dividends. Excellent corporate governance and accounting." All this for the equivalent of 14 times the 2007 earnings estimate.

Newspaper publisher Gannett, for example, was trading at 12 times trailing net income, the lowest multiple in 15 years. "Wall Street loves companies that are growing at 35% a year," Winters said at the time, "but it has real trouble looking at companies that are either in decline or have some of the characteristics of a liquidation. The same thing was true when I invested in the steel industry a couple of years ago."


Sunday, November 05, 2006

Berkshire Hathaway 3Qtr Results

As expected, Berkshire Hathaway has a blow out 3rd quarter! Wow!

Please read further: BRK.

I'm a happy shareholder! :)

Whitney Tilson: Berkshire Hathaway Still Selling At a Discount!

Whitney Tilson, who has one of the best funds in USA this year, has written a great article about undervaluation of Berkshire!

Thank you Whitney for this great analysis.

To read the complete article.


Dah Hui Lau (David)

Sunday, October 29, 2006

CNBC: Exclusive: A Day with Warren Buffett

Thank you Fu Lu for this excellent link.

To view the CNBC interview with Warren Buffett.

There is an advertisement before the interview.

Dah Hui Lau (David)

Friday, October 27, 2006

WSJ: Ten Questions: Michael Steinhardt

Michael Steinhardt, one of the world's first and most-successful hedge-fund managers, says he barely recognizes the industry he helped create nearly 40 years ago.

Mr. Steinhardt founded Steinhardt Fine Berkowitz in 1967 when he was 26 years old. In the next three decades his fund, later renamed Steinhardt Partners, boasted average annual returns of nearly 25%. What about private-equity investments, which are becoming increasingly popular with hedge funds and require investors to lock up their investments for longer periods of time, as much as three years?

Mr. Steinhardt: Private equity, now that's a big danger, I think. People always had the opportunity to get out of my fund at the end of the year. I never had to lock up people for more than a year. If you're giving somebody money for a longer period of time than that, you are forking over a serious right. And I don't think you should do it so widely. And those hedge fund managers investing in private equity who have very little experience in that area probably won't perform too well. How much of your own money is in hedge funds, relative to other investments?

Mr. Steinhardt: I have most of my equity in hedge funds, usually with people whom I've know for a long time, in many cases with people who used to work with me. My objective is to create a portfolio which under almost no circumstances will lose money and under the best circumstances would make about 20% a year. Over the 10 years that I've been doing this, I've achieved a low double-digit return. In other words, I do not try to hit home runs in my present portfolio.

To read the complete article.

Microsoft powers ahead: 11% increase in Revenue

Source: WSJ.


Microsoft's profit and revenue both rose 11% in its fiscal first quarter.

"Office 2007 and Vista actually should be a catalyst for growth not in those two divisions but also a catalyst in the server and tools division," said Steve Ballmer, Microsoft's chief executive, in an interview this week. "We get to sell a whole different sort of combined business value."


It is interesting to note that more and more super-investors from the value group started to invest in Microsoft. Arnold Van Den Berg and Charles de Vaulx have significant holdings in Microsoft; 8.45% and 5.24% of portfolio respectively. Even deep value investor, Marty Whitman, has a small position in MSFT.

MSFT stock price has increased nicely over the last few months. Having said that, there are more potential ahead.

To listen to Whitney Tilson's view on MSFT: Whitney Tilson's Interview.

Happy learning,

Dah Hui Lau (David)

Thursday, October 26, 2006

Home Price Drop Is Largest in 35 Years

The median price of a new home plunged in September by the largest amount in more than 35 years, even as the pace of sales rebounded for a second month.

The Commerce Department reported that the median price for a new home sold in September was $217,100, a drop of 9.7 percent from September 2005. It was the lowest median price for a new home since September 2004 and the sharpest year-over-year decline since December 1970. The weakness in new home prices was even sharper than a 2.5 percent fall in the price of existing homes last month, which had been the biggest drop on record.

To read the complete article.

Tuesday, October 24, 2006

Berkshire: Cheapest most-expensive stock

At $100,000 a share, billionaire Warren Buffett's Berkshire Hathaway Inc. could be the cheapest most-expensive stock around.

Yesterday, Berkshire shares closed at a high of $100,000, representing a gain of 13% so far this year. The stock is up 5,555 times since May 10, 1965, the day Mr. Buffett took control of the former textile company and the stock closed at $18 a share.

To read the complete article.

Wal-Mart Scales Back Expansion


The world's biggest retailer said yesterday that it plans to ratchet down its expansion rate next year and slash its capital spending. Wal-Mart executives, meanwhile, hinted that some of the money previously devoted to expansion might be put to use buying back stock.

Yesterday's announcement sent Wal-Mart's shares climbing more than 5% during the day before closing up $1.91, or $3.9%, at $51.28 in 4 p.m. New York Stock Exchange composite trading, a new 52-week high.

In recent years, Wal-Mart has expanded the square footage of its global portfolio of stores at a consistent 8% clip, translating this year into as many as 615 new stores, including 332 to 340 in the U.S. That relentless expansion, coupled with the appeal of Wal-Mart's low prices, has made Wal-Mart one of the most dominant retailers in history, accounting for 2% of the nation's gross domestic product.

Yesterday, Wal-Mart said it is reining in its expansion rate next year to 7.5% globally and 7% domestically. The company, which is based in Bentonville, Ark., announced at its annual conference for investors that it intends to open 625 to 660 stores in 2007, including as many as 330 U.S. outlets. Wal-Mart currently operates nearly 4,000 stores in the U.S. and more than 2,700 abroad.


Buffett always seems to be able to buy companies at their lows at the right time!

Monday, October 23, 2006

Ford Posts $5.8 Billion Loss

$5.8 billion loss!! That is over 1/3 of Ford current market cap.


Ford Co., in the midst of a massive restructuring of its North American operations, on Monday reported a preliminary third-quarter net loss of $5.8 billion, or $3.08 a share, representing the company's largest quarterly loss since 1992.

The auto maker also said it will restate earnings results dating back to 2001 to correct the accounting for certain transactions entered into to hedge interest-rate risk.


To read further:


Source: Yahoo Finance.

Price per share: $7.90
Market Cap (intraday): 14.86B
Enterprise Value (23-Oct-06)3: 145.03B
Price/Sales (ttm): 0.09
Price/Book (mrq): 1.09
Enterprise Value/Revenue (ttm)3: 0.85
Enterprise Value/EBITDA (ttm)3: 13.065

Profit Margin (ttm): -0.92%

Return on Assets (ttm): -0.52%
Return on Equity (ttm): -9.51%


Companies with poor net margin, poor ROE and ROA and capital intensive should be avoided.

Happy investing,

Dah Hui Lau (David)

Wintergreen Fund

David J. Winters says he wants his associates at Wintergreen Advisers in Mountain Lakes to be so content that they "tap-dance to work."

His new fund, Wintergreen (WGRNX), started last October, is up slightly more than 9 percent.

What makes his new fund different?

It enjoys the best of two worlds, he explains. It has the transparency of a traditional mutual fund along with adherence to the SEC regulations that help keep managers honest.

He also has the tools of hedge funds: the ability to go anywhere for things to buy, to engage in short-selling (which he has done only on a small scale), arbitrage, hedging currencies and so forth. "We can do essentially everything a hedge fund can do -- except leveraging." (Borrowing to invest.)

In short, his fund is flexible. It's also global: Almost half of the assets are invested in foreign companies.

How many stocks does his fund own?

About 30, and he expects to keep the number down -- to focus on his best bets.

What advice would he give to all the people I meet who are afraid to invest in the stock market?

Buy one share of Berkshire Hathaway B, selling for about $3,300, which is "a fine collection of companies, managed by one of the smartest men on the planet, Warren Buffett."

To read the complete article.

Sunday, October 22, 2006

Warren Buffett and Lloyd’s of London

“I don’t think we can make a killing,” Mr. Buffett said in an interview yesterday. “We could take a big loss. Nobody knows in this kind of thing. We’re taking on everything Lloyd’s wrote before 1992.

Lloyd’s, a collection of 66 insurance companies known as syndicates that was started by Edward Lloyd in his coffee house overlooking the Thames River in 1688, went into a tailspin in the late 1980’s as it faced enormous claims for man-made and natural disasters. Annual losses reached a peak of $12 billion in 1992. It has been profitable since 2002, except for a modest loss of more than $100 million from hurricanes and other catastrophes in 2005.

To read the complete article.

Friday, October 20, 2006

Google Net Soars

It is amazing what Google can do!

From WSJ.


Google Inc. said third-quarter profit nearly doubled and revenue soared 70%, as international operations and the Internet company's own sites boosted its online-advertising sales.


Well done Google. Keep it up!
Dah Hui Lau (David)

Thursday, October 19, 2006

Pfizer (PFE): Potential Purchase?

From WSJ:


Pfizer, which had previously forecast modest revenue growth, said it now sees little change in 2007 and 2008 due to a strengthening U.S. dollar and European "access and pricing" issues. The company said it is trying to cut costs above the $4 billion annual savings already envisioned through the Adapting to Scale program. Pfizer also said it will buy back up to $10 billion in shares in 2007.

"Pfizer needs to be realistic about its operating environment, embrace necessary changes and turn them to our advantage, for the benefit of our shareholders and everyone with a stake in our future," said Chief Executive Officer Jeffrey B. Kindler.

The company said it expects its restructuring program to yield savings of about $2.5 billion this year, $500 million ahead of earlier projections.

U.S. sales of cholesterol buster Lipitor rose 19% to $2.07 billion from $1.74 billion, helped by higher prices and the new Medicare drug plan. Global sales of Lipitor, the world's top-selling drug, rose 15% to $3.32 billion from $2.9 billion.


From: Yahoo Finance.


Price per share: $28.29

Market Cap (intraday): 206.28B
Enterprise Value (19-Oct-06)3: 199.52B
Trailing P/E (ttm, intraday): 19.18
Forward P/E (fye 31-Dec-07) 1: 13.41
PEG Ratio (5 yr expected): 4.06
Price/Sales (ttm): 4.00
Price/Book (mrq): 2.99
Enterprise Value/Revenue (ttm)3: 3.90
Enterprise Value/EBITDA (ttm)3: 9.09

Profit Margin (ttm): 21.19%

Return on Assets (ttm): 9.19%
Return on Equity (ttm): 16.23%


Why is Pfizer a potential purchase?

  1. Many super-investors own Pfizer (Tweedy Browne, Marty Whitman, Arnold Van Den Berg, Bill Miller, etc.) Please visit: GuruFocus.
  2. Management is doing the right things of cutting costs, buying back shares, and increasing dividends.

Happy investing,

Dah Hui Lau (David)

Coca Cola: Potential Purchase?

From: WSJ


The Atlanta beverage giant said Thursday that third-quarter net income increased to $1.46 billion, or 62 cents a share, compared with $1.28 billion, or 54 cents a share, in the year-earlier period, when per-share results were dragged down three cents by an asset write-down and tax change.

Revenue climbed 6.9% to $6.45 billion from $6.04 billion.

Coke repurchased $1.2 billion of its stock year-to-date and currently intends to repurchase a total of $2.0 billion to $2.5 billion of its stock for the full year.

Enviga, a new green-tea beverage that Coke says burns calories, will be rolled out in the New York-Philadelphia region Nov. 6, with a national launch in February.


From: Yahoo Finance


Price per share: $44.92

Market Cap (intraday): 105.13B
Enterprise Value (19-Oct-06)3: 103.77B
Trailing P/E (ttm, intraday): 20.90
Forward P/E (fye 31-Dec-07) 1: 17.88
PEG Ratio (5 yr expected): 2.40
Price/Sales (ttm): 4.42
Price/Book (mrq): 6.01
Enterprise Value/Revenue (ttm)3: 4.46
Enterprise Value/EBITDA (ttm)3: 13.383

Profit Margin (ttm): 21.85%

Return on Assets (ttm): 14.24%
Return on Equity (ttm): 30.41%


Why is Coca Cola a potential purchase?

  1. Results are improving.
  2. Management is doing the right thing of buying back shares.
  3. Berkshire Hathaway is the largest shareholder.
  4. It is an "inevitable" company.

How do you enjoy Coca Cola fortune?

  1. You could enjoy a can or cans of Coke. :)
  2. Invest in its company.
  3. Invest in Berkshire Hathaway!

Happy investing,

Dah Hui Lau (David)

Muhammad Yunus: Nobel Peace Prize winner

From WSJ:


In giving Bangladeshi economist Muhammad Yunus the Nobel Peace Prize on Friday for financing the business aspirations of "millions of small people," the award's judges made a clear attempt to draw a connection between poverty and conflict.

"Every single individual on earth has both the potential and the right to live a decent life," the Norwegian Nobel Committee said. "Across cultures and civilizations, Yunus and Grameen Bank have shown that even the poorest of the poor can work to bring about their own development."

"Eradication of poverty can give you real peace," the 66-year-old Mr. Yunus told reporters in the Bangladeshi capital, Dhaka, according to Reuters.


To help and learn more about Grameen Foundation: Grameen Foundation.

Well done Mr. Yunus,

Dah Hui Lau (David)

Wednesday, October 18, 2006

Rumination on 3Qtr Results: MGIC Investment Corp (MTG)

MGIC Investment Corporation reported net income for the quarter ended September 30, 2006 of $130.0 million, compared with the $142.4 million for the same quarter a year ago, a decrease of 8.7%. Diluted earnings per share was $1.55 for the quarter ending September 30, 2006, compared to $1.55 for the same quarter a year ago. PR Newswire Business.


It is interesting to note that book value per share increased from $47.31 to $50.85 from Dec 05 to Sept 06; an increase of 7.48%.

Thus, MTG is on track to achieve better book value per share growth than I have conservatively predicted (8.5% per annum) in my previous analysis.

Management has been doing great job at buying back shares.


To read my previous analysis on MTG.

Thursday, October 12, 2006

Five Lessons From Playing Poker

An interesting article from Motley Fool.

Here are the few simple lessons from poker that I think we can apply to investing.

1) Be selective
2) Be Disciplined
3) Control your emotions
4) Understand how each opportunity has a different value
5) Walk away when it's going against you


To read the complete Motley Fool's article.

PartyGaming drops out of FTSE 100

More pressure selling on PartyGaming to follow as it lost its prestigious FTSE 100 place.


Internet poker group PartyGaming is to lose its coveted place in the FTSE 100 index following the collapse of its shares in the online gaming rout last week.


To read the complete article.

Happy investing,
Dah Hui Lau (David)

Tuesday, October 10, 2006

Warren Buffett CEO: Kevin Clayton Video Interview with Robert Miles

Thank you Robert Miles for this excellent interview.


You may be interested in an up close and personal online video interview with Kevin Clayton, CEO of Clayton Homes, the largest manufacturer of factory built homes in the United States and a wholly owned subsidiary of Warren Buffett's Berkshire Hathaway.

Kevin Clayton discusses all aspects of his business from getting started, to taking over from his father, and to selling to Warren Buffett.

This video may help you understand the qualitative aspects that Warren Buffett may consider when making an investment.

See if you agree that this interview may actually showcase one of the possible candidates who may eventually succeed Warren Buffett as CEO of Berkshire Hathaway.

To view this video (free for a limited time): Google Video.
Viewing time is 57 minutes




Friday, October 06, 2006

Historic Moment for Berkshire Hathaway Share Price: $100,000

News from MarketWatch


The most expensive stock in the U.S. passed a unique plateau Thursday, as the price for a Class A share of Warren Buffett's Berkshire Hathaway Inc. (BRKA, BRKB) briefly surpassed $100,000.


It seems like people started to notice Berkshire Hathaway's undervaluation!

All the best,

PartyGaming's Meltdown and Lessons Learnt

News from International Herald Tribune (Oct 3, 2006)


Congress passed legislation over the weekend that would make it a crime to use credit cards or online payment systems for Internet betting. As a result, several online-gambling companies said Monday that they planned to stop doing business with customers in the United States — by far the largest market for Internet gambling.

PartyGaming, which generates 78 percent of its revenue in the United States, said it would suspend all “real money” transactions with United States-based customers if President Bush signs the bill into law, as is expected within the next two weeks.


Without doubt, PartyGaming's shares have plunged significantly; dropping over 60% in one day. Stopping online transactions for online gambling would literally abolish PartyGaming's lucrative revenue from US customers and would shrink its revenue by over 75%!

As I have recommended PartyGaming Company for my Lau Model Portfolio, I believe that it would be useful to bring it up for discussion and reflection. As Buffett said, always learn your mistakes and the mistakes of others and most importantly, do not repeat them!

When I first evaluated PartyGaming, I was very enticed by its huge growth potential. PartyGaming is the market leader in online poker and online casino. It is 3 times bigger than the next online poker competitor. Also, it uses in-house software, understands the needs for excellent customer services, introducing more games like PartyGammon, targeting non-US customers, etc.

As I mentioned before, the biggest risk that PartyGaming faces is the "illegal status of online gambling" in US. Initially, I judged that it was a low probability event as

1) It is hard to regulate

2) It doesn't make sense to make online gambling but sparing other gambling like horse betting

3) US has tried on numerous occassions to ban online gambling but to no avail

4) It is legalised in UK and US as a "UK partner" should be on the same side as UK

5) World Trade Organisation ruled last year that US laws on online gambling contravened its rules.

Now, it seems that online gambling in US is in jeopardy. It is very highly likely that online gambling would not be able to survive in US as they enact the ban on online credit cards transactions for online gambling.

So, what have I learnt from this meltdown.

1) Margin of Safety: It is paramount to calculate margin of safety prior to investing. In this particular case, as I have minimised the risk of PartyGaming, margin of safety that I have calculated was not sufficient to cover the severe plunge of PartyGaming shares price.

2) Diversification: When I said diversification, I don't mean buying 100 stocks. :) If you are an experienced investor, Joel Greenblatt mentioned that 6-8 stocks would be a sufficient diversification of portfolio.

3) Cost averaging down: If you are confident in the company's future, cost averaging down will create a superior return in the long run. Our famous Bill Miller emphasized that he always buys more in the company that he invests. Nobody knows where is the bottom, and by averaging down, you will get to own the companies that you like at a very attractive price. Even Warren Buffett doesn't know when is the bottom.

My current view on PartyGaming:


PartyGaming is a well-run, cash-generative company and a great market leader in online poker and online casino. Despite losing significant amount on revenue from US market, it will still grow big and strong over the years. It has great potential in non-US market. Personally, I'm going to cost average down.

I believe that current uncertainty and pessimism creates great buying opportunity!


Further suggested reading:

1) Guardian Limited: Online gaming firms consider legal challenge to US ban

2) Former New Jersey Attorney General doesn't see online gambling legislation lasting

IMPORTANT: Due your own due dilligence prior to investing.

Happy learning and growing,

Dah Hui Lau (David)

Thursday, October 05, 2006

Thought on Portfolio Construction

Successful investing is not just about identifying what stocks to buy, but also involves constructing a safe, solid portfolio to outperform the benchmark i.e. S&P500.

Below is correspondence between myself and two other value investors from India.

Email 1 from Mayank Sharma

I was thinking about the best way to beat an Index. This idea ( Wild one at that ) has been in my mind for a week now.

A certain part of the portfolio is invested in the index ( Let's say an equal number of shares of all the companies in the BSE 500 ) And a certain part in Value opportunities.

The ratio can be 1:1.

Upside -

a) You copy the index to some extent and thus dont perform too badly in relation to it. ( Depends on the ratio again )

b) You can best the index using value investing methods of stock selection ( you wont beat it my much overall, but you'll still beat it )


Email 2 from myself


The best way to beat the index is through value investing as you know.

It doesn't make sense to invest a portion of your money in the index. I'm sure you want to beat the index handsomely and not just tracking it.

As long as you are sufficiently diversified with at least 6-8 stocks, you will do well over the long-term. It is extremely hard to beat the index year in and year out, like Bill Miller. Super-investors like Charlie Munger, Tweedy Browne, Lou Simpson are great investors, but on average, lose to the index 1 in 3 years. But, their compound returns were much more superior than the index.

The most important thing is to outperform the index in the long-run and it doesn't matter to underperform once in a while.


Email 3 from Koushik Sekhar


What you suggest is being done rampantly by many mutual funds at least in India and I am sure in other parts of the world too ! It has got another name - "closet indexing" where they claim to be managing the money but in effect they are only closet indexing. Of course the ratio they use is perhaps 80% index and 20 % cheap shares !

I think this is a short cut for those who have severe short term performance pressures and those who dont really want to underperform the index in any period and in return are willing to give up large outperformances of the index in most periods.

By putting the entire fund in the same cheaper/value shares they will surely do better in the long term but they risk underperforming in some periods.

Why would any sane private value investor not accountable to the wrong type of committees or customers who want "action" want to become a closet indexer ? In effect, to the extent you track the index you will give up the advantage of being a value investor. Suppose you are 80% index and 20% value you are only a 20% value investor !

I am attaching a report by Tweedy which compared the performance of champion value investors who have beaten the market over 10 -15 years by a very large amount. See p 6-7 for the section titled as follows

Is Underperforming an Index 30% to 40% of the Time a Normal Part of Long-Run Investment Success? What we learned from an examination of the year-by-year results for nine value-oriented investment managers with index beating long-term records.

There is one striking feature - up to 33% of the time some of them have underperformed the index. Also when they underperform the margin of underperformance is low but when they outperform they really outperform. See Charlie Munger's record with his penchant for severe concentration.


Email 4 from Mayank Sharma

I am not departing from the value approach but was trying to figure out different techniques.

Now, I at least know what closet Indexing is. It's actually a very shrewd way of keeping very nifty customers. I guess, most of the closet indexing would be carried out by open ended mutual funds. This way they would make sure that they can claim that they beat the index for x number of years continuously and attract more funds.

And the document Superinvestors of grahamsville and doddsville by Warren buffett just proves your point.

This also has to do with the loss aversion principle. There is a paper on loss aversion by Nassim Taleb. I read it a long time back but I remember he talks about asymmetric payoffs and people's dislike for it. I love the way he makes money. He entire investing philosophy is based on taking small losses for periods whose duration is unknown and then getting a big payoff because of the occurence of one event ( maybe a change in the level of the index because of an unexpected event)

Happy learning,

Dah Hui Lau (David)

P.S. Send me an email of our thought on portfolio construction.

Munger on Human Misjudgments

Behavioural finance is a vital subject that need to be learnt and understood to be a great investor.

Excerpt from Motley Fool's article by Whitney Tilson


Charlie Munger gave an insightful speech a few years ago at Harvard Law School on "24 Standard Causes of Human Misjudgment." The message has powerful implications for investors. Whitney Tilson summarizes some of the key points......

Bias from consistency and commitment tendencyMunger explains this bias with the following analogy: "The human mind is a lot like the human egg, and the human egg has a shut-off device. When one sperm gets in, it shuts down so the next one can't get in." In other words, once people make a decision (to buy a stock, for example), it becomes extremely unlikely that they will reverse this decision, especially if they have publicly committed to it........

Big-shot businessmen get into these waves of social proof. Do you remember some years ago, when one oil company bought a fertilizer company, and every other major oil company practically ran out and bought a fertilizer company? And there was no more damned reason for all these oil companies to buy fertilizer companies, but they didn't know exactly what to do, and if Exxon was doing it, it was good enough for Mobil, and vice versa. I think they're all gone now, but it was a total disaster....


To read the complete article.

Happy learning,


Charles de Vaulx interview

Bloomberg's interview (Sept 14, 2006)

Thank you NumquamPerdo1 of MSN BRK Shareholders' board for this wonderful link.

Happy learning,
Dah Hui Lau (David)

Sunday, October 01, 2006

Amaranth: Speculating and Trading don't Work

Amaranth plans to liquidate all of its positions, after the struggling hedge-fund firm and Citigroup called off asset-sale talks.

Amaranth, on the heels of losing $6 billion mostly from energy trading, had already sold some investments and handed its troubled energy portfolio to J.P. Morgan Chase and hedge-fund Citadel Investments. The firm said it will suspend investor redemptions for Sept. 30 and Oct. 31, according to a letter the firm sent to investors, a move aimed at giving Amaranth more time to sell some of its more illiquid positions that may be harder to exit.

To read WSJ articles:

In the long run, trading KILLS! The best thing to do is to learn what works in investing. So, please read...

What has Worked in Investing by Tweedy, Browne Company LLC.

Happy investing,

Dah Hui Lau (David)

Motley Fool: Insider Holdings

"Insider ownership, especially in smaller companies, is one positive indicator in the quest for tomorrow's multibaggers."

To read Motley Fool article.

Also, do read: Superior Stock Return by having "Founders Keepers".

Wednesday, September 27, 2006

Exxon, Berkshire, K-Swiss Pass My 15-15 Screen: John Dorfman

Exxon Mobil Corp., Berkshire Hathaway Inc. and K-Swiss Inc. all pass a simple but important test.

Their earnings have been growing at a pace of at least 15 percent annually the past five years. Even so, their shares are inexpensive, selling for less than 15 times the past four quarters' earnings.

To read further: Bloomberg.

It is good to know that John Dorfman likes my recommended shares: Berkshire Hathaway and K-Swiss.

Happy learning,

Dah Hui Lau (David)

Sunday, September 24, 2006

Warren Buffett's car sells for $73,200 on eBay

An eBay bidder bought Warren Buffett's Lincoln Town Car for $73 200 on Friday, almost five times the 2001 vehicle's worth. Along with the car, the winner will get Buffett's "THRIFTY" license plate and an engraved plaque bearing the investor's signature. Buffett also will pick up the winner at the Omaha airport when he or she comes to claim the car.

The winning bid was submitted by "billzanker".

To read the complete article.

Saturday, September 23, 2006

The 400 Richest Americans

This list of 400 richest Americans have been published.

Source: Forbes.

Investing Mistakes

There are great discussions on MSN BRK Shareholders' board on investing mistakes and what to avoid.

Thank you for sharing,

Thursday, September 21, 2006

SmartMoney: What Would Warren Buy?

THESE ARE SCARY TIMES on Wall Street. There's fear of inflation. Fear of Middle East tumult. Fear of slowing economic growth. But savvy investors have a different view: They call it Buffett Time.......

Berkshire Hathaway
......Based on his estimate of profit growth at the various companies in the conglomerate, plus Berkshire's $42 billion cash hoard, Tilson believes the stock is undervalued by 30%. That's what we call a margin of safety.......

......As they have with the other megabanks, investors have dismissed HSBC as stodgy and boring. But Buffett acolytes know that a conservative culture and straightforward style usually lead to lasting returns. "There are no glossy photographs in their annual report," Winters says.....

American Express
.....AmEx also has a wealthier customer base than Visa, MasterCard and Discover, and a virtual lock on the corporate sector. "If you are going to do any business with corporations, you really need to accept the American Express card," says Greenblatt......

.....UPS has been developing its extensive logistics network, which includes every address in the United States, for nearly 100 years, and it's expanding around the world. "It's basically a proxy on global trade," Auxier says......

Scotts Miracle-Gro
.......Scotts's stable of brands is impeccable. Each one is the leader in its category, with a collective market share of more than 50%.........

Mohawk Industries
........A mainstay of Buffett's investment strategy is to buy simple businesses that make things people can easily understand. A prime example is Mohawk Industries, which has a duopoly on the flooring business alongside Buffett holding Shaw Industries........

......Based on 7% to 9% in new-store growth and 1% to 3% in same-store sales, Tilson estimates Wal-Mart can deliver about 10% sales growth over the next five years and 12% annual earnings-per-share growth. Last year Wal-Mart earned $11.2 billion, or $2.68 per share, on sales of $316 billion. At 14 times earnings estimates — near its lowest P/E in a decade — Wal-Mart stock might just be as much of a bargain as its merchandise........

To read the complete article.

Sunday, September 17, 2006

The battle of the billionaires

You don't become a billionaire by making a lot of bad bets. But two of the world's richest men are now on opposite sides of a wager that may see one of them lose a fair chunk of change.

The two men: Warren Buffett, whose mastery of value investing has helped him accumulate more than $40 billion, and Carl Icahn, the corporate raider who has earned more than $8 billion with astute and aggressive stock plays.

To read the complete article.

To follow this discussion on MSN BRK Shareholders' board.

So, who is right?


Saturday, September 16, 2006

My personal view on Dell

A friend of mine asked me recently what do I think of Dell now....and this is my reply...

Regarding Dell, there are so many bad news that come out already. Batteries recalls, SEC subpoena, etc. I would presume that the price that we see now is as depressed as it could be. Most importantly, Dell's moat is still intact. Dell's situation now seems a bit like Geico in the past or American Express with the salad oil scandal. Some similarity. In fact, Dell is much better position and financially stronger in comparison with Geico or American Express. Rationally speaking HP or IBM or Acer could not take away all Dell's market share. Impossible. Plus, Dell now realized that they need to beef up its customer services and thus, invested $150M to do just that. Dell also realized that price is not the only focus by customers and the experience and personalised service. As long as Dell acknowledges its mistakes and improves on them, it would be a very formidable company.

The most important question is whether to invest in Dell or not. The biggest risk is their turnaround take too long. As importantly, as a small investor is may be more profitable to concentrate digging for smaller caps with potentially higher returns. Dell is almost a $50B company and it is very hard to triple in size in comparison with a company with $1B size.

In my opinion, Dell is a good buy for big institutional investors i.e. Mason Hawkins who manages billions of funds. As for private investors, we should search for the next hidden gems. Having said that, I recommended Dell on my blog because I truly believe that it is a market beating company in the next few years. I also want to inform you that I do not own any Dell shares, but my position may change if price plunges! :)

All the best,

Columbia Greenwald Class Lectures.

Recording of Bruce Greenwald's Columbia GSB guest lectures with Michael Price, Glenn Greenberg, Tom Russo and others.

To visit the archive.

Thank you bonechip of MSN BRK Shareholders' board for the excellent link.

Happy learning,

Wednesday, September 13, 2006

Investment success like the masters

George Soros and Warren Buffett are the world's most successful investors. Can ordinary investors learn anything from their investment habits? John McCrone finds out.

To read the complete article.

Happy learning,

Monday, September 11, 2006

The Buckle Inc. (BKE) at $35.10

Step 1: Do you understand The Buckle Inc.’s business?
Incorporated in Nebraska in 1948, the Company commenced business under the name Mills Clothing, Inc., a conventional men's clothing store with only one location. In 1967, a second store, under the trade name Brass Buckle, was purchased. In the early 1970s, the store image changed to that of a jeans store with a wide selection of denims and shirts. The first branch store was opened in Columbus, Nebraska, in 1976. In 1977, the Company began selling young women's apparel as well and opened its first mall store. The Company has experienced significant growth over the past ten years, growing from 164 stores at the start of 1996 to 338 stores by the close of fiscal 2005. The Company changed its corporate name to The Buckle, Inc. on April 23, 1991.

The Buckle, Inc. is a retailer of medium to better−priced casual apparel, footwear and accessories for fashion conscious young men and women. The Company markets a wide selection of mostly brand name casual apparel including denims, other casual bottoms, tops, sportswear, outerwear, accessories and footwear. The Company emphasizes personalized attention to its customers and provides customer services such as free alterations, free gift−wrapping, easy layaways, The Buckle private label credit card and a frequent shopper program.

Most stores are located in regional, high−traffic shopping malls, and this is the Company's strategy for future expansion. All of the Company's central office functions, including purchasing, pricing, advertising and distribution, are controlled from its headquarters and distribution center in Kearney, Nebraska.

Throughout the years many changes have occurred in fashion, retail, and within the company but one constant has driven Buckle’s success…..the mission "to create the most enjoyable shopping experience possible for our guests".

The Company provides merchandise designed to appeal to the fashion conscious 12 to 24−year old. Denim is a significant contributor to total sales (42.7% of fiscal 2005 net sales) and is a key to the Company's merchandising strategy. The percentage of net sales contributed by denim has increased from 36.2% (2003) to 42.7% (2005).

The average store is approximately 4,900 square feet (of which the Company estimates an average of approximately 80% is selling space), and stores range in size from 2,600 square feet to 8,475 square feet.

The top four members of this buying team combined, have over 90 years of experience with the Company. The experience and leadership within the buying team contributes significantly to the Company's success by enabling the buying team to react quickly to changes in fashion and by providing extensive knowledge of sources for branded and private label goods.

As of April 11, 2006, the Company operated 341 stores in 38 states, including 4 stores opened and 1 closed during fiscal 2006. The existing stores are in 4 downtown locations, 11 strip centers, 16 lifestyle centers and 310 shopping malls. The Company anticipates opening approximately 17 new stores in fiscal 2006. For fiscal 2006, nine of the new stores are expected to be located in higher traffic shopping malls and eight of the new stores are expected to be located in lifestyle centers.

As of January 28, 2006, the Company had approximately 6,500 employees − approximately 1,227 of whom were full−time. The Company has an experienced management team and substantially all of the management team, from store managers through senior management, commenced work for the Company on the sales floor. None of the Company's employees are represented by a union.

Step 2: What are the potential risks of owning BKE?
The men's and women's apparel industries are highly competitive with fashion, selection, quality, price, location, store environment and service being the principal competitive factors.

The Company's success is largely dependent upon its ability to gauge the fashion tastes of its customers and to provide merchandise that satisfies customer demand in a timely manner. The Company's failure to anticipate, identify or react appropriately and timely to the changes in fashion trends would reduce the Company's net sales and profitability. Misjudgments or unanticipated fashion changes could have a negative impact on the Company's image with its customers, which would also reduce the Company's net sales and profitability.

Many of the Company's competitors are considerably larger and have substantially greater financial, marketing and other resources than the Company, and there is no assurance that the Company will be able to compete successfully with them in the future. Furthermore, while the Company believes it competes effectively for favorable site locations and lease terms, competition for prime locations within a mall is intense.

The distribution function for all of the Company's stores is handled from a single facility in Kearney, Nebraska. Any significant interruption in the operation of the distribution facility due to natural disasters, system failures or other unforeseen causes would impede the distribution of merchandise to the stores.

Net working Capital (NWC) / Sales has been increasing slowly over the years. Other competitors such as Abercrombie & Fitch (ANF) (11.4%), American Eagle Outfitters (AEOS) (4.4%) and Limited Brands (LTD) (8.3%) have better NWC / Sales.

Year Net Working Capital / Sales (%)
01/06 12.5
01/05 12.2
01/04 12.0
01/03 12.0
01/02 11.7
01/01 10.9
01/00 11.4
01/99 10.8
01/98 10.2
02/97 11.2

Inventory increased by 32% over the last quarter from $68.7M to $90.9M. However, in comparison to 2nd Quarter last year, the inventory level was actually lowered ($100.9M 2nd Qtr 2005).

Step 3: Insider Holdings
Insiders hold significant amount of stocks, approximately 55%. The Chairman and founder’s son, Daniel Hirschfeld, holds 9.4M of shares, which are equivalent to about 48% of the company. Dennis Nelson, who is the Chief Executive Officer, owns approximately 1.79M shares or about 5% of the shares outstanding.

It has been shown that companies with significant insider holdings, especially with the presence of founders, flare better over long term.

Step 4: Is BKE a good Company?
A good company is a company that has high return on invested capital (ROIC) and performs consistently over a long period of time. Looking at BKE, it is an excellent company despite in an extremely competitive industry. Net income compounded at 16% and 8.3% for 9 years (1997 – 2006) and 5 years (2001 – 2006) respectively.

Year Sales (m) Net Income (m)
01/06 501.1 51.91
01/05 470.94 43.23
01/04 422.82 33.68
01/03 401.06 32.08
01/02 387.64 32.64
01/01 393.25 34.8
01/00 375.53 34.03
01/99 337.92 34.03
01/98 267.92 23.33
02/97 206.39 13.62

Return on equity (ROE) and return on asset (ROA) are good.

Year ROE(%) ROA (%)
01/06 17.3 13.9
01/05 13.0 10.7
01/04 11.5 9.5
01/03 12.3 10.1
01/02 14.0 12.3
01/01 17.9 15.1
01/00 22.9 18.8
01/99 23.3 18.3
01/98 21.6 16.1
02/97 17.5 13.4

Net profit margin is impressive with most current one over 10%.

Year Net Profit Margin (%)
01/06 10.4
01/05 9.2
01/04 8.0
01/03 8.0
01/02 8.4
01/01 8.8
01/00 10.0
01/99 10.1
01/98 8.7
02/97 6.0

BKE has solid balance sheet; net cash/equivalent of $123M on April 2006. It is a great cash machine; earning free cash flow of $50.5M (2006), $55.9M (2005) and $37.6M (2004).

Step 5: Is BKE management shareholders-orientated?
Of course BKE management is shareholders-orientated, especially when founder’s son and current Chairman, Daniel Hirschfeld, owns approximately 48% of the company. Dividend payments almost tripled in 2 years from $4.3M (2004) to $11.8M (2006). BKE has also repurchased significant amount of shares last year; totally $82.4M, which is more than 10% of its market capitalisation.

BKE is led by dedicated management; Daniel Hirschfeld has been with the company since 1965 while Dennis Nelson (President and CEO) has been with the company for over 30 years. He began as a part-time salesman while he was a college student and continued full time after graduation. He has helped lead the company to over 300 stores and is actively involved in all phases of the company’s operations. Executive Vice President, Jim Shada has been with the company 25 years. Kari Smith, Vice-President of Sales, has been with the company for 25 years.

Step 6: Does BKE have a Moat?
Unfortunately, no.

Step 7: Does any superinvestor invest in BKE?
Third Avenue Management LLC holds 1.5% of the company.

Step 8: Is BKE undervalued?

Method 1 (EV/(EBIDTA – MainCapex):
Price per share = $35.10
Enterprise Value (EV) = $563M
EBIDTA – Maintenance Capital Expenditure (EBIDTA – MainCapex) = $54.3M

Thus, EV/(EBIDTA – MainCapex) = 10.4X

Method 2 (Adjusted FCF yield vs. Treasury yield (30 years):
Free Cash Flow (FCF) = $50.5M
Adjusted FCF = $48M
Adjusted FCF is calculated by deducting after tax interest income from FCF.

Thus, adjusted FCF / EV yield = 8.5%
Treasury yield (30 years) = 4.92%

The Buckle Inc (BKE) is an interesting retailer with excellent management, solid balance sheet and undervalued. Current pessimism over sales, net profit margin and comparable sales declines provides opportunity for long-term value investors to invest.

To conclude, let me quote our famous investor, Warren Buffett… “The most common cause of low prices is pessimism -- some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.”

Happy investing,
Dah Hui Lau (David)

Is online gambling now definitely illegal in the US?

The simple answer is: sports betting has always been illegal, but the situation with other parts of online gambling – such as casino gaming and poker – is still unclear.

The relevant legislation is the 1961 Interstate Wire Act. It is clear that sports betting via phone lines, which includes the internet, is illegal. Only one person – Jay Cohen, former president of World Sports Exchange – has been convicted for running an online gambling company and it’s notable that the company concerned was an online bookmaker. Sportingbet, similarly, is primarily a bookie but it does offer casino and poker gaming. It is harder to make the case that these products are illegal under the Wire Act. The US Department of Justice has stated that it regards online gambling as illegal.

The important thing to note is that the law has not changed: the Wire Act still applies. A Bill to ban explicitly all online gambling is being discussed in Congress but may not become law. All that is happening is that different states are applying the Wire Act in different ways.

To read full the full article TimesOnline.

Happy learning,


Intel: Fat to Lean

"Intel Corp. said it will cut 10,500 jobs, or about 10% of its work force, as part of the most significant restructuring at the chip giant since the 1980s."

"Intel said the restructuring moves, which include sales of underperforming business units, should generate $2 billion in cost savings in 2007 -- a figure that it expects to increase to $3 billion in savings annually. The company, which also expects to save $1 billion on capital spending, put severance costs at $200 million by next year." (From

Although slashing jobs are extremely bad for people who are involved, it is a necessary way of improving efficiency, complacency and focus.

To read my previous analysis on Intel: Part 1; Part 2.

Happy investing,


Friday, September 08, 2006

Zacks Buy List: K-Swiss (KSWS) Strong Buy listed K-Swiss as one of its four strong buys, which is not surprising to me. K-Swiss is an excellent company with excellent management, generating tons of free cash flow.

This is what said about KSWS.....

"K-Swiss, Inc., a Zacks #1 Rank stock, topped the Street's earnings estimate for 10 consecutive quarters, most recently by 28.9%. The company increased revenues, expanded gross margins and grew profits for the past five years. KSWS has a price-to-book ratio of 3.0, compared to 5.1 for the market."

At current attractive price, KSWS is an good buy!

Happy investing,

Thursday, September 07, 2006

Berkshire Hathaway Intrinsic Value of $160K per share

There is an interesting article on Motley Fool website written by johannesclimacus, who explained why Berkshire's intrinsic value could actually be $160K per share or even higher.

Good read.

To read the Motley Fool article.

Cheers to all Berkshire's shareholders!

PartyGaming Plunging Price

Now I understand why Partygaming share price plunged despite great earning results... that's because Chairman of Sportingbet was detained in US. This is a very big news.

Partygaming is a very high risk company and do your due diligence prior to investing.

Dah Hui Lau (David)

Partygaming 1Qtr Results

Online gaming group PartyGaming reported a 47 percent increase in its first-half core profit.

The owner of the PartyPoker and PartyCasino Web sites said first-half underlying earnings before interest, tax, depreciation and amortisation (EBITDA) rose to $380 million (202 million pounds) from $257.7 million a year earlier.

The only thing that bewilders me is that having announced such an excellent results, the share plunged more than 10% today! What is Mr. Market thinking?!? Is it because the results were in line with expectation rather than over the expectation? One should be glad that Mr. Market is bipolar and therefore, patient investors could have an opportunity to invest into the companies that one likes.

To read my previous analysis on Partgaming.

Happy investing,

Dah Hui Lau (David)

Tuesday, September 05, 2006

MGIC Investment Corp (MTG) at $58.44

Step 1: Do you understand MTG’s business?
MGIC Investment Corporation is a holding company, which through its wholly owned subsidiary, Mortgage Guaranty Insurance Corporation (MGIC), provides private mortgage insurance (PrivateMI) in the United States to the home mortgage lending industry.

Mortgage insurance was invented by Max Karl, an attorney in Milwaukee, Wisconsin. He observed the struggles that people had with saving for a down payment, and understood the risks that mortgage originators faced in lending that money. He created MGIC and mortgage insurance in an effort to help people become homeowners faster by sharing some of the risk with the mortgage lenders.

What is PrivateMI? PrivateMI is a financial guaranty that reduces or eliminates loss to a lender in the event a borrower defaults on a home loan and the mortgage is foreclosed. In effect, MGIC shares the risk of lending money to a borrower. In essence, PrivateMI aims to make homeownership more affordable.

PrivateMI covers residential first mortgage loans and expands home ownership opportunities by enabling people to purchase homes with less than 20% down payments. PrivateMI also facilitates the sale of low down payment and other mortgage loans in the secondary mortgage market, including to the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Fannie Mae and Freddie Mac are collectively referred to as the GSE. In addition, to mortgage insurance on first liens, the Company, through other subsidiaries, provides lenders with various underwriting and other services and products related to home mortgage lending.

Step 2: What are the potential risks of owning MTG?
There are alternative or cheaper ways to buy a home rather than using PrivateMI. One of the most popular alternatives is piggyback loans, such as a first mortgage with an 80% loan-to-value ratio and a second mortgage with a 10%, 15% or 20% loan-to-value ratio (referred as 80-10-10, 80-15-5 or 80-20 loans, respectively). Unlike mortgage interest, PrivateMI isn't tax-deductible. This makes competing products like 80-10-10 loans more attractive.

Deterioration in domestic economic conditions generally increases the likelihood that borrowers will not have sufficient income to pay their mortgages and can also adversely affect housing values.

Competitions not only from other PrivateMI companies, but also with mortgage lenders through captive reinsurance transactions. [Lenders have established captives--private insurers--to reinsure MGIC's portfolio. Here's the catch: To win mortgage insurance business from these lenders, MGIC must cede as much as 40% of its insurance premium to the captive in return for protection against large losses. But lenders flexed their muscles and established a loss rate well above historical levels, so they will most likely never be contractually obliged to help MGIC pay a claim. The net result is that the most profitable part of MGIC's margins has been recaptured by its lender clients. The percentage of premiums the firm cedes has more than doubled since 2000 and now exceeds 10%. What's worse, more than 45% of MGIC's insurance portfolio is now subject to some type of this premium transfer, and we fear the percentage could climb. In our opinion, MGIC's margins are at least 15% lower as a consequence--and may never recover.] (From Morningstar)

Changes in the business practices of Fannie Mae and Freddie Mac could reduce the company’s revenues or increase its losses i.e. level of PrivateMI required, whether preference given to mortgage insurer with “AAA” rating etc. Fannie Mae and Freddie Mac control more than 40% of the mortgage market, which lets them dictate terms to mortgage insurers.

Net premiums written could be adversely affected if the Department of Housing and Urban Development (HUD) reproposes and adopts a regulation under the Real Estate Settlement Procedures Act (RESPA) that is equivalent to a proposed regulation that was withdrawn in 2004. HUD regulations under RESPA prohibit paying lenders for the referral of settlement services, including mortgage insurance, and prohibit lenders from receiving such payments. In July 2002, HUD proposed a regulation that would exclude from these anti-referral fee provisions settlement services included in a package of settlement services offered to a borrower at a guaranteed price. HUD withdrew this proposed regulation in March 2004. Under the proposed regulation, if mortgage insurance were required on a loan, the package must include any mortgage insurance premium paid at settlement. Although certain state insurance regulations prohibit an insurer’s payment of referral fees, had this regulation been adopted in this form, the Company’s revenues could have been adversely affected to the extent that lenders offered such packages and received value from the Company in excess of what they could have received were the antireferral fee provisions of RESPA to apply and if such state regulations were not applied to prohibit such payments.

Increasing default rate year after year is a worrying sign. Percentage of default has climbed from 2.17% (1999) to 6.58% (2005).

Step 3: Insider Holdings
Collectively, directors and officers own about 1.14% of MTG, a $65 million investment. Plus, the CEO and directors must own shares exceeding 5 times the value of their annual cash compensation. Even better, return on equity is the primary metric in the managers' cash bonus plan. (From Morningstar)

The negative point is that there were significant insiders selling. CEO (Culver Curt) sold shares worth $2.4M on Feb3, 2006.

Step 4: Is MTG a good Company?
MGIC has one of the largest market shares in the very concentrated private mortgage insurance industry, consistently 20%-25%. It was 22.9% in 2005. (From Morningstar)

MTG has excellent return on equity (ROE) and return on assets (ROA) over a long period of time. Although ROE and ROA have been declined over the years, the current ROE and ROA are still impressive.

12/05 15.1 9.9
12/04 13.4 8.7
12/03 13.0 8.3
12/02 18.5 11.9
12/01 21.0 13.9
12/00 22.0 14.0
12/99 26.5 15.1
12/98 23.5 12.6
12/97 21.8 12.4
12/96 18.9 11.6

Likewise, net profit margin is superior. MTG consistently earns one of the highest net margins in the S&P 500.

Year Net Profit Margin (%)
12/05 41.1
12/04 34.3
12/03 29.3
12/02 42.4
12/01 48.4
12/00 48.8
12/99 47.2
12/98 39.7
12/97 37.3
12/96 34.6

MTG’s current loss reserve (June 2006) stood at $1.09B, which is almost double the losses paid in 2005 ($612M). Its loss reserve has been increasing steadily over the year from $681M (1998) to $1.09B. In comparison to its competitors, PMI Group and Triad Guaranty Insurance have less than 1.5 times and 1.1 times loss reserve to its losses paid respectively. MTG is more conservative and better reserved than its competitors.

Step 5: Does MTG management shareholders-orientated?
I would let Culver Curt, the CEO, to speak for himself….

“Last year I wrote that we needed to maintain our discipline and not succumb to the “top of market” environment that existed at the time and chase short-term benefits. Rather we needed to stay focused on creating long-term, sustainable value for all of our constituencies. That was the objective then and it remains the same today.” (From 2005 Annual Report by Culver Curt)

Outstanding shares have been reduced by 23% over last 9 years from 118M (1996) to 90.7M (2005). Over the last 6 months, the management has repurchased additional 3M shares.

Also, as mentioned before, ROE is the primary metric in the managers’ cash bonus plan.

Step 6: Does MTG have a Moat?
No. However, MTG has the oldest and most detailed mortgage history database, which adds a considerable advantage in underwriting skill. Lenders prefer to be insured by successful underwriters. (From Morningstar)

Step 7: Does any superinvestor invest in MTG?
Bill Miller and Bill Nygren own MTG, but only as a small percentage of their portfolio; less than 2%.

Step 8: Is MTG undervalued?
Yes. I will clarify these using three simple valuation methods.

Valuation Method 1 (Liquidation Value) (December 2005):
Total investment portfolio = $5,486M
Cash = $4.6M
Accrued investment income = $66.3M
Reinsurance recoverable = $14.7M
Prepaid reinsurance income = $9.6M
Premiums receivable = $91.5M
Investment in Sherman Business = $158.6M (Explained in part 1)
Investment in C-BASS = $555M (Explained in part 2)
Total Liabilities = $2,193M
Total (Liquidation Value) = $4,193.3M

Market Cap = $4,980M

At current price of $58.44, MTG is selling at 1.19X liquidation value, which is very cheap indeed.

Part 1:
Sherman business value on MTG’s balance sheet was recorded on equity basis. However, Sherman true intrinsic value is higher than stated on its balance sheet. Asta Funding (ASFI), which has similar business model to Sherman, is valued over 3X book value. To be conservative, I would value Sherman business at 2X book value as it has significant leverage in comparison with Asta Funding. Total assets: Equity for Sherman and Asta Funding are 4.14 and 1.24 respectively.

Equity value in Sherman business = $79.3M

Estimated intrinsic value = $79.3M X 2
= $158.6M

Part 2:
C-BASS business value on MTG’s balance sheet was recorded on equity basis. However, C-BASS true intrinsic value is higher than stated on its balance sheet. In 2005, MTG’s share of pretax income was $111M on $362.6M investment in C-BASS. It would be impossible to find a business that has pretax return of over 30%. Therefore, to be conservative, I would value C-BASS business at 5X pretax income.

Estimated intrinsic value = $111M X 5
= $555M

Valuation Method 2:
Price/Book ratio: 1.2. This is the lowest price/ book value in the last 10 years.

Year Price/ Book
12/05 1.40
12/04 1.60
12/03 1.48
12/02 1.22
12/01 2.17
12/00 2.92
12/99 3.58
12/98 2.65
12/97 4.76
12/96 3.28

The average Price/Book ratios for the last 10 years and 5 years are 2.5 and 1.57 respectively.

Book value/ Share compounds at 15.4% over the last 5 years; and 11.8% over the last 3 years; and 9.9% over last year.

Year Book Value/ Share
12/05 $47.31
12/04 $43.05
12/03 $38.58
12/02 $33.87
12/01 $28.47
12/00 $23.07
12/99 $16.79
12/98 $15.05
12/97 $13.96
12/96 $11.59

Let say the MTG could grow its book value at 8.5% over the next 3 years and its price/book ratio is 1.5 at the end of third year, its share price would therefore be $90.60, which is about 55% increase from current price of $58.44. This is a conservative assumption and if it could grow its book value at higher rate or is priced at higher price/book ratio, its potential upside would be higher.

Valuation Method 3:
MTG price to earning ratio (PE) is 8X. This is half of the S&P500 PE.

MTG is a simple to understand business, leader in PrivateMI, good management in place and undervalued. Although it does not have “Coke” competitive moat, it is a good investment with minimal risk of total investment loss.

P.S. To read my previous analysis on MTG in Feb 10, 2006.

Happy investing,
Dah Hui Lau (David)