Monday, February 27, 2006

Discussions on "Is Google Overvalued at $377? Feb 25, 2006"

There are interesting comments / discussions generated at Berkshire Hathaway Shareholders' Board. If you are interesting in the discussion about Google, please visit:

Learning is the key to success,

Dah Hui Lau (David)

Saturday, February 25, 2006

Is Google Overvalued at $377? Feb 25, 2006

There is no doubt that Google is an interesting company. Google has superior technical staffs, Internet advertising is growing dramatically at the expense of television and newspaper advertising and Google has dominant market share in the search business.

So, what is so great about this company?

Net income:
It is growing its earning at a very, very high rate. Net income increased by over 200% from $399M (2004) to $1297M (TTM). Very impressive indeed.

Gross Margin (TTM): 57.2%
Net Margin (TTM): 24.7%
ROA (TTM): 21%
ROE (TTM): 23%

Without doubt, Google is a strong and admirable company. Bill Miller, one of the legendary investment managers, believed that Google is undervalued and Google should be valued above $200B, which are 2X current value. (Jan 20, 2006; money.CNN).

But, is it a good buy?

There are a couple of ways to value Google.

Google Valuation, Method 1:
Comparison between other Online / Internet companies:

Price/Sale Ratio
Google = 21X
Yahoo = 9.7X
IACI = 1.3X

Google = 75X
Yahoo = 26X
IACI = 11.7X

Even by relative comparison, Google seems excessively priced; it has 2X higher valuation than Yahoo and more than 19X higher than IAC/InterActive Corp, based on price/sale ratio.

Google’s Valuation, Method 2:
Fundamental analysis on Income statement, Balance Sheet, Cash Flow Statement, etc.

Market Cap = $111B (Feb 24, 2006)

Enterprise Value (TTM)
= Market Cap + Total debt (interest paying) – Cash
= $111B + $0.55B - $7.6B
= $104B

Free Cash Flow (TTM)
= Net operating Cash Flow – Net Investing Cash Flow (excluding acquisitions)
= $2.17B - $0.65B
= $1.5B

Enterprise Value / Free Cash Flow
= $104B / $1.5B
= 69X

Earning yield (TTM)
= Operating Income / Enterprise Value
= $1.75B / $104B
= 1.7%

By simple fundamental analysis, Google seems to be excessively valued.

Google’s Valuation, Method 3:
Relative comparison to other similar sized companies.

One of the companies that I want to compare Google to is Berkshire Hathaway.

Market Cap:
Google = $111B
Berkshire = $133B

Price/Sale Ratio
Google = 21X
Berkshire = 1.8X

Google = 75X
Berkshire = 20X

Price/Book (TTM)
Google = 12X
Berkshire = 1.5X

Sales / Revenue (TTM)
Google = $5.3B
Berkshire = $76B

Net income (TTM)
Google = $1.3B
Berkshire = $6.7B

Berkshire has sales / revenue of 14X bigger than Google;
Berkshire has net income of 5X bigger than Google;
Yet, Berkshire only has 20% higher market value than Google.

In conclusion:

By three methods of simple comparisons / analysis, Google seems to be overvalued. Therefore, it is not surprising that Google’s value plunged from $475 (Jan 11, 2006) to $377 (Feb 24, 2006) in a matter of 7 weeks, wiping Google value by $29B! Yep, that’s right, $29B loss in 7 weeks!!

Warren Buffett and Charlie Munger, two of the great investors of our time, sum it up the best.....

Charlie Munger said “Buying great businesses at advantageous prices is very tough." (May 8, 2001)

Warren Buffet said “The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price.” Also, “It is more important to say "no" to an opportunity, than to say "yes".”

All the best,
Dah Hui Lau (David)

Black & Decker (BDK) at $83; Feb 25, 2006

To read my comment on Black & Decker in Value Investing Forum, please visit:

All the best,
Dah Hui Lau (David)

Friday, February 24, 2006

What is your expectation of long term BRK performance; Feb 16, 2006

An interesting question is what is the long-term expectation of Berkshire Hathaway return?

To read my brief view of BRK performance, visit:

All the best,

Dah Hui Lau (David)

Movie Gallery (MOVI); Feb 24, 2006

MOVI has shareholder's equity of $334M is and market cap $108M. Is it a bargain or not?

To see my comments on Movie Gallery (MOVI) on Value Investing Forum, please visit:

All the best,
Dah Hui Lau (David)

Whitney Tilson Interview by Bloomberg; Feb 23, 2006

Whitney Tilson appearance on Bloomberg, proclaiming why he loves big caps and why it is a good time to invest in companies like McDonalds, Wal Mart, Berkshire Hathaway, and Anheuser Busch.

All the best,

Dah Hui Lau (David)

Practice Makes Permanent; Feb 23, 2006

It is fairly easy for Jonathan, a 5-year-old kid taking his tennis lessons every weekend to improve than it is for Roger Federer. I think the reason lies in the transition of thought process associated with the game from System 2 to System 1, a concept well explained by Daniel Kahneman and Amos Tversky.

All the best,

Dah Hui Lau (David)

Thursday, February 23, 2006

The Price of Victory; Feb 22, 2006

BOB OLSTEIN IS a numbers kind of guy. He has built a great reputation by digging into corporate accounting. His own bottom line: He holds himself strictly accountable to his investors.

Barron's: Give us some investing principles to live by.

Bob Olstein: "If you want to succeed in this business, don't be afraid to be wrong some of the time. The only thing that counts out there is paying the right price. If you pay the wrong price for a good company, you may have a bad stock."

What keeps you up at night?

"The biggest fear that you have, that gives you cold sweats, is to ride a stock (like Pier 1 (PIR1), which I recently sold) from 14 to 9 and then sell it when it's at its low for the last four years and worry that the stock is going to come bouncing back."

All the best,

Dah Hui Lau (David)

Wednesday, February 22, 2006

2005 Chuong Investment Management Partner Letter

The partnership achieved a -3.6% return in 2005 compared to a 3.0% return by the S&P500 index. This marks the second occasion in which the partnership underperformed the S&P500 index. The Dow Jones Industrial Index and Nasdaq posted a -0.65% and 1.37% return in 2005 respectively. Both performances by the Dow and Nasdaq beat the partnership in 2005.

All the best,
Dah Hui Lau (David)

Tuesday, February 21, 2006

My 10 Stocks for 2006; Feb 2006

by James K. Glassman, Kiplinger’s Personal Finance, March 2006

Call it smarts or just plain good luck, but the performance of my annual list of stocks gets better and better. Most years since 1995 (I took a hiatus for three years), I've offered readers of The Washington Post and now Kiplinger's Personal Finance ten stock picks, culled from the choices of experts whose opinions I value. The list for 2005 was my personal best, returning 23%, including reinvested dividends, compared with just 5% for the benchmark Standard & Poor's 500-stock index. My 2004 list beat the S&P by 11 percentage points, my 2003 list by seven. It's time to test my good luck (or skill) once more.

All the best,

Dah Hui Lau (David)

Meeting with Irwin Michael, Part 1; Feb 20, 2006

Last Thursday I went to a presentation by Irwin Michael, portfolio manager of ABC Funds. His flagship fund, the ABC Fundamental Value Fund, has an impressive 15-year 18.76% compounded rate of return. And the purpose of this meeting was to outline plans for his newest fund - the ABC Dirt-Cheap Stock Fund - launching April 1, 2006.

Thank you Theo for this wonderful article.

All the best,

Dah Hui Lau (David)

Graham Stock Gainers; Feb 15, 2006

Over the past five years I've used Benjamin Graham's time-tested strategy for defensive investors to uncover undervalued U.S. stocks. So far, the results have been breathtaking.

The performance of each year's Graham stocks, the performance of the S&P500 (as tracked by the SPY exchange-traded fund) and the difference between the two is shown in Table 1. You can see that the Graham stocks have solidly beaten the S&P500 each year*. In fact, an investor who bought each year's Graham stocks, sold, and then bought the next crop of stocks would have gained 369% (or 38% annually**) whereas a buy and hold investment in SPY units would have actually lost 5%.

All the best,

Dah Hui Lau (David)

Pfizer, Chubb Are Among 10 Stocks for Long Haul: John Dorfman; Feb 21, 2006

From a few dozen candidates, I used judgment to pick my 10 stocks. I tried to strike a balance among industries, and between large companies and medium-sized ones.

All the best,

Dah Hui Lau (David)

Martin Whitman's "Cowardly" Safe-And-Cheap Way To Invest; Feb 21, 2006

By Brian Zen,

"We're such cowards!" said Martin Whitman, the 82-year-old legendary superinvestor, at a seminar organized by New York Society of Security Analysts ( on February 16, 2006, "We only want to be the senior-most creditors in distressed situations. We only want to be the adequately secured lenders in Europe and overseas. We don't want to be subordinate to any of the asbestos or tobacco liabilities..." And he brilliantly calls himself the "safe and cheap" investor......

All the best,

Dah Hui Lau (David)

Monday, February 20, 2006

Irwin Michael's Interview on ABC Dirt-Cheap Stock Fund; Feb 13, 2006

Recently canadian value investor Irwin Michael was interviewed on ROB TV on the ABC Dirt-Cheap Stock Fund.

Thank you Vinvesting for the link.

All the best,
Dah Hui Lau (David)

Saturday, February 18, 2006

Exclusive Insights from Marty Whitman's NYSSA talk! Feb 16, 2006

Where does safe and cheap come from?

From his background in the worlds of shareholder litigation and bankruptcy reorganization. In a reorg., he seeks to own the most senior security that will participate in the reorganization. But in an extremely well-capitalized going concern, it is the common stock that is the most senior security..........

To read more, go to Shai's blog, who shares generously with us.

Thank you Shai and your friend also.

All the best,
Dah Hui Lau (David)

Friday, February 17, 2006

easyGroup Brand Manual

The 8 easyGroup brand values
  1. Great value
  2. Taking on the big boys
  3. For the many, not the few
  4. Relentless innovation
  5. Keep it simple
  6. Enterpeneurial
  7. Making a difference in people’s lives
  8. Honest, open and fun

Good read,

Dah Hui Lau (David)

The Value Investor; Dec 31, 2004

Arnold Van Den Berg thinks that the current stock market is way overvalued. He has been selling stocks and accumulating cash, and waiting for buying opportunities. He used the example of the stock market from 1965 to 1982 to show that investors who adhered to the “buy and hold forever” strategy, as well as those who believed that buying an index was the only way to go regardless of the fundamentals, made virtually no money. He argues that for those investors who bought and sold individual stocks based on fundamentals, discipline, and value, there were numerous opportunities to make great profits during this same period.

This is a great newsletter (72 pages) from one of the superinvestors.

Thank you GuruFocus for this wonderful link.

All the best,
Dah Hui Lau (David)

Wednesday, February 15, 2006

MGIC Investment Corporation; MTG Feb 10, 2006

Current Price: $63.00
Current PE: 9.3
Current Market Cap: $5.7B
Current Price/ Book: 1.33

History of MGIC Investment Corporation:

In the late 1950s, the national population was growing with the Baby Boom, and everyone expected to have a chicken in every pot and a car in every garage. But before the garage and the car came a home. The average cost of a home at that time was $20,000 and average yearly income was $4,545. Putting the required 20% down payment on a home was difficult.

In 1957, Max Karl, a real estate attorney in Milwaukee, Wisconsin, observed the struggles that people had with saving for a down payment on a home. He also understood the risks that mortgage originators faced in lending the money to potential home buyers. He was frustrated with the process of closing loans with 100% government guarantees, which he believed was rife with red tape and bureaucracy. Why not create a private company that insured only the top portion of a mortgage, rather than 100% of the mortgage? This could be a less costly and easier way to provide low-down payment financing to borrowers with less than a 20% down payment.

Mr. Karl took his idea to a group of investors, many of whom were Savings & Loan executives. This group, along with his family and friends (even his barber!) contributed $250,000 in capital, and he founded the Mortgage Guaranty Insurance Corporation or MGIC.

Today, as average home prices rise across the country, saving for a down payment is still difficult. But nearly 50 years since MGIC was founded, we’re still here, working with mortgage lenders and helping people afford homes with low down payment loans. [Obtained from MGIC Investment Corp's website]

What I like about MTG:

  • Superior Net Margin. Improving margin over last 2 years.

    Year Net Profit Margin (%)
    12/05 41.1
    12/04 31.9
    12/03 28.2
    12/02 40.2
    12/01 47.1
    12/00 48.8
    12/99 47.2
    12/98 39.7
    12/97 37.3
    12/96 34.6

  • Good ROE and ROA. Improving ROE and ROA over last 3 years.

    Year ROE ROA
    12/05 15.0 9.8
    12/04 13.4 8.7
    12/03 13.0 8.3
    12/02 18.5 11.9
    12/01 21.2 14.0
    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

  • 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

  • Current Price/ Book Value = 1.33. This is the 2nd lowest price/ book value in the last 10 years.

    Year Price/ Book
    12/05 NA
    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

  • Improving persistency (percentage of insurance remaining in force from one year prior).

    Year Persistency (%)
    12/05 61.3
    12/04 60.2
    12/03 47.1

  • Significant shares repurchase. Outstanding shares are reduced by 23% over last 9 years.

    Year Shares Outstanding
    12/05 90.7 Mil
    12/04 96.3 Mil
    12/03 98.4 Mil
    12/02 100.3 Mil
    12/01 106.1 Mil
    12/00 106.8 Mil
    12/99 105.8 Mil
    12/98 109.0 Mil
    12/97 106.5 Mil
    12/96 117.9 Mil

  • The most efficient PMI Company with the lowest expense ratio.
  • MGIC has one of the largest market shares in the very concentrated private mortgage insurance industry--consistently 20%-25%.
  • MGIC has the oldest and most detailed mortgage-history database, which adds a considerable advantage in underwriting skill.
  • Compounding housing prices support ongoing premium revenue increases. U.S. house prices haven't fallen nationally since 1952, although there have been several temporary regional declines.
  • Collectively, directors and officers own about 1.85% of MGIC.
  • Holdings of superinvestors: Bill Miller (Legg Mason Value Fund; 2.34% of assets); Bill Nygren (Oakmark I Fund; 1.71% of assets).

What I dislike about MTG:

  • MGIC's moat is shrinking as lenders flex their increasingly powerful muscles to recapture part of MGIC's premiums.
  • Unlike mortgage interest, private mortgage insurance isn't tax-deductible. This makes competing products like 80-10-10 (80% first mortgage, 10% second mortgage, and 10% down payment) loans more attractive.
  • Alternatives to private mortgage insurance include:
  • lenders structuring mortgage originations to avoid private mortgage insurance, 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 to as 80-10-10, 80-15-5 or 80-20 loans, respectively) rather than a first mortgage with a 90%, 95% or 100% loan-to-value ratio,
  • investors holding mortgages in portfolio and self-insuring,
  • investors using credit enhancements other than private mortgage insurance or using other credit enhancements in conjunction with reduced levels of private mortgage insurance coverage, and
  • lenders using government mortgage insurance programs, including those of the Federal Housing Administration and the Veterans Administration.
  • Government-sponsored entities (GSEs) Fannie Mae FNM and Freddie Mac FRE control more than 40% of the mortgage market, which lets them dictate terms to mortgage insurers.
  • GSEs need more capital to back loans insured by AA-rated insurers like MGIC than loans insured by AAA-insurers like United Guaranty Corporation AIG. This permanently disadvantages MGIC.
  • Increasing default rate, year after year.

    Year Percentage of default (%)
    12/05 6.58
    12/04 6.05
    12/03 5.57
    12/02 4.45
    12/01 3.46
    12/00 2.58
    12/99 2.17

  • Significant insiders selling. CEO (Culver Curt) sold shares worth $2.4M on Feb3, 2006.

Feel free to email me if you have any comments, thoughts, criticisms, etc....

All the best,

Dah Hui Lau (David)

Money really doesn't buy happiness; Feb 13, 2006

"Money doesn't actually buy happiness and that's what was shown very clearly for the nearly 23,000 people we've interviewed so far," she told ABC radio.

Thanks Shai for the wonderful link.
All the best,
Dah Hui Lau (David)

Monday, February 06, 2006

Eddie Lampert: The best investor of his generation; Feb 6, 2006

He walked away from Goldman, racked up better returns than Buffett...and talked kidnappers into letting him go.

By Patricia Sellers, FORTUNE editor at large
February 6, 2006

All the best,
Dah Hui Lau (David)

Sunday, February 05, 2006

What does "prosperity" mean to you?

When I ask this question, people respond in terms of a better lifestyle, home, car, or vacation; a secure retirement; funding college education; etc. But these responses describe how we consume prosperity. I believe we can’t consume prosperity unless we produce prosperity.

All the best,
Dah Hui Lau (David)

How To Choose a Money Manager

Choosing a professional money manager has much in common with choosing professionals in other fields. As in selecting a lawyer or accountant, it is difficult to judge basic competence and integrity without a lengthy professional history or personal relationship. Therefore an investor must rely on references from existing clients or other professionals.

All the best,
Dah Hui Lau (David)

Friday, February 03, 2006

Tom Stanley: Miles Ahead of the Crowd; Feb 1, 2006

Tom Stanley is easily one of the top money managers around. His Resolute Growth Fund’s 33% ten-year performance is the best of any fund in North America, possibly even the world. A $10,000 investment in Resolute Growth ten years ago is now worth $173,187.

So why have you not heard of Tom Stanley before? Probably because Mr. Stanley shuns the media to avoid distraction from his ultimate purpose – making money for his unitholders. Despite his phenomenal track record, for instance, I was only able to uncover a handful of articles written about him over the past decade.

All the best,
Dah Hui Lau (David)

Size Matters; Feb 1, 2006

The Kelly Criterion and the Importance of Money Management

Very, very good article,
Dah Hui Lau (David)