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".