For the busy professionals that want to get up-to-date with world events

http://talkingissues.com/

Here is the audio version of the Economist. This is a great great tool that I use when I am commuting from point A to point B. I look forward to listen to it when I receive the new issue.

The articles are well read and the information provided is first class. You will get access to it if you are already a subscriber for the printed version, but could also purchase it for 8 dollar an issue. I would have to say that's the best 8 dollar you could spent on anything.

2009 Annual Letter from Bill Gates

http://www.gatesfoundation.org/annual-letter/Pages/2009-bill-gates-annual-letter.aspx

This is the first annual letter from Mr. Bill Gates after he took full-time position at Bill & Melinda Gates Foundation. The foundation's philanthropic effort is very admirable, and Mr. Gates added a brief commentary on the latest economic crises. It's no surprise him and Mr. Buffett are great friends. Their outlooks on the market are similar in many ways.

Warren recently sent me an excerpt from John Maynard Keynes’ essay “The Great Slump of 1930,” which applies to this crisis as well:

"This is a nightmare, which will pass away with the morning. For the resources of nature and men’s devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life—high, I mean, compared with, say, twenty years ago—and will soon learn to afford a standard higher still. We were not previously deceived. But today we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time—perhaps for a long time."

History is hind sight 20/20 but nevertheless a great source of learning. Living standard improved at a drastic rate in the last century and will continue to do in a peaceful world. Even with the dot.com bust in 2003, many technologies developed during that time frame have totally changed the way we interact with the world today, and that is just merely six years ago. I fully echo what Mr. Gates wrote that although short-term volatility is unknown, there is high possibility that we will be better off in a longer horizon such as five to ten years.

If you take a longer timeframe, such as five to ten years, I am very optimistic that these problems will be behind us. A key reason for this is that innovation in every field—from software and materials science to genetics and energy generation—is moving forward at a pace that can bring real progress in solving big problems. These innovations will help improve the world and reinvigorate the world economy.

Seth Klarman stated in his book "Margin of Safety" that aside from sticking to value investing approach, it is also important to identify growth catalysts to realized a company's intrinsic value. Mr. Gates has offered a great starting point for investors who are seeking to invest in the next leading industry such as software, materials science, genetics and energy generation. Given the current market condition, there are plenty opportunities to find companies within these industries at a much attractive price based on fundamental valuations.

Buying on IPO, a more miss than hit?

IPO Scorecard: Update On Selected Initial Stock Offerings

January 22, 2009: 03:14 PM ET

Company                      Symbol  Percent  Current   Offer  Date
Grand Canyon Education       LOPE       66%   $19.90  $12.00  20-Nov
IPC The Hospitalist Co.      IPCM        6%   $16.99  $16.00  24-Jan
Hatteras Financial Corp      HTS         5%   $25.24  $24.00  25-Apr
Visa Inc.                    V           2%   $44.97  $44.00  19-Mar
Heritage-Crystal Clean       HCCI       -4%   $11.06  $11.50  12-Mar
American Water Works         AWK        -5%   $20.51  $21.50  22-Apr
Western Gas Partners         WES       -10%   $14.85  $16.50  8-May
Pioneer Southwest Energy     PSE       -18%   $15.56  $19.00  30-Apr
Energy Recovery              ERII      -19%    $6.86   $8.50  2-Jul
RiskMetrics Group            RMG       -28%   $12.61  $17.50  24-Jan
Intrepid Potash              IPI       -34%   $21.07  $32.00  21-Apr
Fifth Street Finance         FSC       -55%    $6.34  $14.12  11-Jun
Real Goods Solar             RSOL      -59%    $4.06  $10.00  8-May
ATA Inc.                     ATAI      -61%    $3.70   $9.50  28-Jan
RackSpace Hosting Inc.       RAX       -61%    $4.84  $12.50  7-Aug
Navios Maritime Acquisition  NM        -64%    $3.64  $10.00  25-Jun
Cascal NV                    HOO       -64%    $4.33  $12.00  28-Jan
Safe Bunkers Inc.            SB        -65%    $6.64  $19.00  28-May
RHI Entertainment            RHIE      -66%    $4.79  $14.00  17-Jun
Pansoft Company              PSOF      -71%    $2.05   $7.00  9-Sep
Bioheart Inc.                BHRT      -85%    $0.79   $5.25  19-Feb

Here is a list of the IPOs in 2008 from Dow Jones news wire. IPO, Initial Public Offering, is a form of financing for company to get money (the other is through debt financing). The company tends go on a public listed exchange after the IPO, and its share will trade on these secondary market. IPO allows interested investors to own the company first hand.

I always kick myself from the Google IPO thinking it is way too expensive, and the stock price left me in dust. However, is buying IPO a wise thing to do? Underwriters, the people who are responsible for drafting up the offering, tend to work in a way like a real estate agent on the sell side. They are trying to figure out the maximum price they could offer before tickling off the investors.

More often or not, institution investors that invested in the early stages of the company are waiting to unload their shares as soon as the company goes public. Bargains are usually found on the market, but rarely when it goes to the market.

The Country Obama Inherits

Here are some stats from WSJ at the start for Obama and some past presidents after inauguration. It's interesting to note that the consumer confidence index is at an all time low. The only silver lining in for consumers is the gasoline price is much lower now (was $3.41 gallon in 2008)

Investing Versus Speculation, which is which?

I have to admit I am still learning to stay away from being one of the Speculators.

It is not an easy task, since the boundary between speculation and investing is quite blurry.

So what's speculation? Again borrowing from Seth Klarman's script, "speculators buy and sell securities based on whether they believe those securities will next rise or fall in price". And, "their judgment regarding future price movements is based, not on fundamentals, but on a prediction of the behavior of others."

Speculators are a dominated force in today's market, and they are obsessed with predicting and guessing where stock is going the next moment. I am not saying speculators are bad, as there are many investment professionals who speculates and performed very well with their predictions. However, one important thing to remember is the results are short-term orientated. The speculators might be right today, but the earning is simply a deposit for what they might lose in the future if their predictions are no long valid, it's even more true if leverage is involved.

On the other hand, Investors "believe that over the long run security prices tend to reflect fundamental developments involving the underlying businesses". But how long is long-run? No one really knows, it can be 5, 10, or 25 years. With today's world, who is going to wait that long when everyone else is seeking instant gratification?

The human behavior of greed has driven major players on the market such as hedge funds, institutional funds, mutual funds, etc to become speculators which focus on beating the next quarterly result because that will attract new assets to invest in them.

We would think Internet would bring more validity towards the Efficient Market Hypothesis because the information are clear and readily available. In fact, we are seeing quite the opposite in 2008 with substantial volatility in all asset classes. It is very difficult for people to stay rational, especially during a panic time. Also, people's interpretation and predictions will always differ, with more information comes more predictions. Finally, the consensus prediction does not make itself correct, but these are a story for another day.

To be an investor is not as simple as one would think...

My recent readings on investment

Margin of Safety by Seth Klarman

MIT Remarks October 20, 2007 Seth A. Klarman

Notes To The Book “Margin Of Safety” Author: Seth Klarman 1991

Who is Seth? From NYT "Manager Frets Over the Market, but Still Outdoes It" mentioned by Mr. Faber on Seeking Alpha.

Mr. Klarman’s record has generated intense loyalty from investors. Since he began Baupost in 1983, it has posted an average annual total return of 19.55 percent, according to data provided by the hedge fund group. Declines have been posted in only 11 of the total 97 quarters since Baupost’s debut.

In 2006, Baupost’s portfolio held an array of assets, including United States, European, Asian and Canadian equities, which accounted for 17.1 percent of the portfolio; debt and real estate, which each made up 10 percent; and 4.7 percent in private equity funds. And there was that big dollop of cash.

“Seth has a remarkable record, and even more so when you realize that he has achieved it by holding significant amounts of cash,” said Jack R. Meyer, who until 2005 ran Harvard’s endowment, which has been a longtime investor in Baupost.

“In other words, his risk-adjusted numbers are spectacular. What is unusual is the high return and the high cash levels,” added Mr. Meyer, who now runs the investment fund Convexity Capital.

News-wire from multiple sources on retailing and Coach Inc.

“The company had forecast second-quarter sales would rise to about $1.05 billion. Analysts surveyed by FactSet Research estimated 75 cents a share on revenue of $1.05 billion. Coach also said it won't provide per-share guidance for the second half of the year in light of the uncertain environment. Coach will release final results on Jan. 21.”

“North American comparable-store sales declined 13%. That would be the first negative same-store sales Coach reported since the first quarter 2002, according to Credit Suisse analyst Paul Lejuez. Lejuez estimated negative same-store sales for the remainder of fiscal 2009 and 2010. He projected sales at stores open at least a year could drop as much as 24% in the third quarter and as much as 25% in the fourth quarter.”

"With the holiday season over, in this environment, we question what will drive consumers to shop at the mall," Lejuez said. "While this is an issue facing most mall-based retailers, we view Coach as particularly at risk because its products are higher ticket and more discretionary."


Store Change *
Abercrombie & Fitch - 24%
Costco - 4
Gap - 14
Macy's - 4
Neiman Marcus - 27.5
Nordstrom - 10.6
Saks - 19.8
Sears - 7.8
Target - 4.1
TJX Cos. - 5
Wal-Mart + 1.7
* Compares sales at stores open at least a year with December 2008

“TABLE-U.S. Dec ICSC retail sales down 1.7 pct vs year ago”
http://uk.reuters.com/article/marketsNewsUS/idUKNYC00122720090108

“ICSC Chain Store Sales Index Year/Year % Change”
http://holiday.icsc.org/2008/hw08_06chain_store_sales_index.pdf

“ISIC Traditional” Holiday Season Spending”
http://holiday.icsc.org/2008/hw08_05traditional_season_spending.pdf

Fun Facts:
The average number of gifts wrapped per mall for the 2006 holiday season was: 2,640
The average number of gifts wrapped per mall for the 2007 holiday season was: 1,050

Conclusion:

It’s interesting to note we have a shorter holiday shopping season in 2008 (27 days) as oppose to 2005-2007 (30, 31, 32 days). Coupled with bad snow storm across the North American continent, the retail sale decrease is dire, but consumer spending is not the only factor. Coach’s outlook is worrisome on how it will balance between sale and promotion going forward. However, Coach is still bringing in substantial cash-flow with little debts to worry.

The Aftermath of Financial Crises - Are we there yet?

Interesting little history: "The Aftermath of Financial Crises"

http://ws1.ad.economics.harvard.edu/faculty/rogoff/files/Aftermath.pdf

All the major postwar banking crises in the developed world, the average Real House Peak-to-trough Price Declines and Years Duration of Downturn were -35.5% and 6 years. So far in U.S. (Ongoing) we are looking at -28% and 1.5 year duration. The price decline is already more than twice that was in the U.S. during the Great Depression.

Equity on average dropped -55.9% with a shorter duration of 3.5 years of downturn cycle.

Similar to the S&P 500 Historical P/E chart, the percentage of asset price decline and other economic factors during the banking crises also suggest that we still have obstacles ahead. However, I do believe we have experience the worse, and it's time for a little sense of optimism. Stock market usually starts to climb up before the real estate and unemployment recovery. I don't believe a V-shaped bounce would occur, instead it will be a slow yet steady recovering.

Now it's the time to put dollar-cost-averaging into practice (you buy a set amount of dollar or shares within a duration). More importantly, use this strategy on companies that will come out as strong survivors. It's time to look at your investment statement and do a physical check-ups.

Project: Research notes on Chinese companies listed on the US stock exchanges

I believe China is a region that any investor must consider investing for the next decade and beyond. Jim Rogers, the famous American investor, mentioned in winter 2008 that he added more positions in China and, for the first time, invested in Taiwan. There are currently over 80 Chinese companies listed publicly in the United States and hundreds on the Hong Kong and Shanghai exchanges. I believe many of them have yet to attract North American investors' attention.

Equity investment and research is my passion, and I look forward to every opportunity to be further involved. I am planning to publish research notes on Chinese companies that I believe have strong potential.

Stay tuned!

Happy new year!

Buffett Has ‘Nowhere to Hide’ Amid Berkshire’s Plunge - (Bloomberg)

I find it most amusing in the article that "...Just six of 1,591 U.S. stock mutual funds with at least $250 million in assets made money for investors last year, according to data compiled by Bloomberg."

Many people participate in this game because it is so easy to be involved, but professional money managers that really shine are probably less than the number of professional NBA basketball players.

It just strengthen my believe that nothing is absolute about investment. And to be a great money manager, it requires dedicated work, good coaching, and natural talent like any outstanding sports player.

I would also recommend the book "The Snowball: Warren Buffett and the Business of Life". In the book, it shows that his success is a result of his dedication and hard work since his early ages.

Buffett Has ‘Nowhere to Hide’ Amid Berkshire’s Plunge

Indexes have fallen so much, is it boxing day to buy index ETFs?

This is a P/E ratio chart from MarketGauge by DataView, LLC, a site that provide varies charts and summary on the stock market data.

We can see S&P 500 has been trading at some P/E ratio that has been above the long-term average ratio for the last 8+ years.

The current index reflects a reversion back to mean, where P/E ratio is starting to trade within a respectable range.

Although Exchange Traded Fund (ETF) is a great vehicle for investment, it can be filled with bad apples and a few good ones. Even in today's market, there are still companies in the S&P 500 or other indexes where price doesn't meet with value. Nevertheless, ETFs are a great starting point to find some outstanding companies in today's business world.

Many outstanding businesses have fallen below 10 P/E. If you can figure out a predictable future for them, a basket of those companies will serve you much better in the long run. It would be naive to think we are in a market where everything is on a clearance sale, but certainly more bargains than ever than the last 8+ years.