The Market Falls – So What “The Essays of Warren Buffett”

Dear Fellows Value Investors,

All of us are looking how the finance stocks continue falling and everyone is wondering how deep the dust might be… Reading “The Essays of Warren Buffett” (Chapter II, Corporate Finance and Investing), you will feel free to overview the falling rates, but recover fast when panicking.

As you already know, Buffett learned a lot about Mr. Market from Ben Graham. His definitions are full of humors and that makes it easier for us to keep in our mind the main moods of the stock market (I cannot say it better J):…“the poor fellow has incurable emotional problems” (as per “The Essays of Warren Buffett”, by Lawrence Cunningham, p.68).

It feels:

- EUPHORIC = getting too optimistic and sees just those changes, possibilities, etc. of business and environment, which are suitable to his strategy => very high price

- DEPRESSED = getting too pessimistic, percepts just risks and problems of the environment => very low price)

- DOES NOT MIND BEING IGNORED: more balanced mood, waiting of you to accept his conditions (prices), as there is a seller and buyer at any rate, and both live on this kind of cooperation.

-

The rates, that Mr Market is offering us are challenging, but our perception shall be as of “interesting information”. We shall stay focused on analyzing first, so that we recognize the good business and good margin of safety, whenever Mr Market is offering us a “good price”.

“So smile when you read a headline that says, “investors lose as market falls”. Edit it in your mind to, “Disinfectors lose as market falls – but investors gain.” (p.71).

“When we own portions of outstanding businesses with outstanding managements, out favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hand on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds” (as per “The Essays of Warren Buffett”, by Lawrence Cunningham, p.80).

* All citations are from the book “The Essays of Warren Buffett”, by Lawrence Cunningham

Recommendations

Here are some bargains from the current market situation:
QQQQ - Nasdaq ETF
TS - Tenaris (steel tubulars maker for oil industry, trading at excellent discount)
JPM - JP Morgan managed to escaped the sub-prime mess
GE - General Electric trading off bottoms, global growth player with huge order book for jet engines and infrastruture projects. More than half of revenues coming from outside the US

SMH - Semiconductors holders trust ETF, trading at good discount to asset values

Also seeing bargins in the Oilfield service sectors but I refrain from recommeding individual stocks in this sector for obvious reasons. The OIH ETF looks good though

BAC Recovery above $40

Check out how BAC's recovered above $40 from $35 within few days.
The is a technical indicator of the crazy volatility which confirms that BAC is a strong value play trading temporarily at huge discount.
Mr Market is clearly not efficient as a weighing machine however it is a near-perfect short-term discounting machine. Here we see the shorters who timed the US govt and Fed interventions quickly covering up their positions in order not to get caught out knowing that BAC is poised to return back to fair value.
This stock will be back at $50 by end of the year. That's a nice 25% gain from current level plus 6% from the dividend. Total gain = 31%
Buy this stock now if it double-tests support again between $35 - $37. It won't trade this low for too long.

Note: The value investor should not use technical analysis without sound understanding of fundamental analysis

The sell-off continues despite the rate cut

The sell-off continues despite the rate cut....

View on current market situation

Guys,
Do not be scared by the current market volatility.
The US recession seems now fully priced in. According to Goldman Sachs economists the US is now fully in recession.
After January ending I think we should start seeing some reversal after the Fed cuts the rates and the oil price starts to recede. Do not sell or buy any oil stock
The Dow will be back at 14,000 by year end.

PFE showing relative strength despite volatility

Despite the Dow losing 1500 pts since August Pfizer seems to be showing relatively good strength. It's held up quite well in the recent turbulence. While I stopped charting and technical analysis long ago, I think it's worth looking at the fundamentals of this company again.
Despite the patent expiry issues the balance sheet is still strong and big pharma normally should not suffer heavily in a US recession as people will still buy drugs whether the economy is good or bad, plus they have a strong global presence. Healthcare is a major issue in current US presidential election debates and the Democrats look set at instituting some serious reforms in that sector once they start to progressively curtail spending in Iraq
This is a good defensive play currently yielding over 5%. Dividends have been paid since 1901.

Citigroup dividend cut

Finally the much-awaited cut will be done !
Now investors need to check their holding to see that Citigroup remains a value play.

From the earnings press release :
"The company, the largest banking group in the US, said revenues during the fourth quarter fell 70% from a year earlier to $7.2bn.....The firm also said that it would be cutting its dividend for the quarter by 41%, from 54 cents to 32 per share, as well as raising $14.5bn by selling securities, which includes the investment from GIC. "

I bought C at $44/shr and I am holding on to it no matter how low it goes.

Bank of America @ over 6% yield !!!

Guys did you see BAC trading below $40/share ?
Forget about the credit crunch and US recession, watch out it's starting to become a serious value play at 6.4% dividend yield as I predicted in my post on Dec 17th. No analyst has said anything to suggest a divident cut anytime soon. The Gordon-Shapiro basic DDM tells me this stock is worth over $54.
The company has a dominant position in U.S. retail banking, has a long and consistent history of paying dividends since 1903 (http://www.dividendinvestor.com/) and they already sold off their sub-prime mortgage unit.
Even during a recession people will still need banking services so anyhow BAC will make money
Warren Buffett added to his position when it traded in the $40's couple of months ago. If I had some extra cash I would certainly be buying if it falls below $39

Turbulent time, researche and education

Dear Tyumen Value Investors Fellows,

Happy New and prosperous 2008,

Looking into the turbulent start of the year and the uncertain times ahead we should invest time in researches and self development. Below are listed some of the books I think are useful as for the less experienced fellows and for the more advanced among us. I was reading some of the books and highly recommend them. Starting with the 3 mentors of Warren Buffett - Benjamin Graham, John Burr Williams, and Philip Fisher and ending up with Buffett himself, Peter Lynch and Joel Greenblatt:

1.) The Intelligent Investor, Benjamin Graham
2.) Security Analysis, Benjamin Graham
3.) The Interpretation of Financial Statements, Benjamin Graham
4.) The Theory of Investment Value, John Burr Williams
5.) Interests, Growth & Inflation, John Burr Williams
6.) Common Stocks and Uncommon Profits, Philip Fisher
7.) Essays of Warren Buffett, Lawrence Cunningham
8.) The Little Book that Beats the Market, Joel Greenblatt
9.) Beating the Street, Peter Lynch
10.) One Up On Wall Street, Peter Lynch
11.) The Warren Buffett Way, Robert Hagstrom

Any person seriously interested in value investing should start with "The Intelligent Investor" ( by far the best 15 USD you could ever invest in self development) and read it a few times. All other books are highly recommended and help to round up one's understanding of Value Investing.

Wish you lot of pleasure,

KE

Happy New Year 2008 !

This is wishing all our members and blog visitors a happy and prosperous 2008 !
Let's remember that there will be market turbulence ahead this year, the forecast for the US economy is still unclear but the value investor should not worry. Rather we should focus on
1. risk management, emphasis on preservation of principal
2. quality stock-picking. Focus on defensive plays, especially cash cows with little or no debt
3. portfolio balancing through diversification and position sizing.
I do not feel it's time to sell off, however I won't be adding to positions until there is some signs of stability and screaming bargains with good margins of safety.