Here's an interesting investing question -- would you risk $300 million of your own money to buy an "old economy" stock with a business that's going downhill thanks to the Internet?
That's what Sam Zell, a real estate mogul, did recently by buying the Tribune Company, owner of the LA Times.
At what point are troubled companies a true "value" investment and when are they low-priced for good reason?
Newspapers are losing readership and advertising dollars to the Internet. This is due to a number of factors -- online news sources are more up to date and convenient. People's demand for local news isn't really great enough to justify an extensive staff of reporters for local news, and they can't afford to send reporters all over the world as in the old days.
I believe that's it's also partly because major newspapers in this countries are secretly aiming to destroy this country, and many intelligent people realize that they're anti-American, though few realize how consciously many newspaper editors and reporters are actively working to bring down freedom and capitalism.
But that's also true of TV journalism, which is not so much on the decline, though I think eventually it will go down the tubes. CNN and Fox will supply all national and international news and the local news teams will cover fires, car crashes and mayor news conferences.
Yet many businesses have been on the decline for years, but still manage to make money, such as railroads. Maybe Zell has a plan to revolutionize the newspaper industry as Nucor did for steel at a time when every other U.S. steel company was losing to competition in Germany, Japan and South Korea.
It can be better to pay a low price for a declining but still viable business than a high price for an expanding business.
declining industry investing
declining industry investing
Friday, April 6, 2007
Thursday, April 5, 2007
Was Enron truly ever viable?
as Enron ever a viable, long term company? I'm thinking about that because I just read a history of the company from its beginnings as a merger between two oil pipeline companies through the bankruptcy.
At one point early in its history, Enron's top executives decided to make it a modern company, and it expanded enormously. Not just in supplying energy, but in trading it the way Wall Street firms trade options. They even hired some traders from a major bank to come and teach their people how to make trades.
Within a few years, Enron was trading electricity, natural gas, the weather, paper pulp, metals -- almost anything except the sheer paper assets or ordinary exchange-traded commodities which are what we normally think of as "trading." They were making markets in these things, plus financing projects.
The author describes Enron in the nineties as certainly being a very innovative company. They were enormously selective in who they hired, picking only the brightest and most ambitious, and fostered a culture of entrepreneurialism. If you worked for Enron, you had wide freedom to think up your own project and then network among others for support, both financial and material. If you could get the project going, it was yours. If you succeeded you were a hero. If not, try again. The ability to make mistakes and learn from them is attractive. Though it's doubtful that the company as a whole did learn from mistakes, since people came and went so much.
Can a corporation continue indefinitely going hither and thither without any overall purpose or control? There were a few years Enron felt it could trade and profit from any market at all. This also helped lead to losses. Yet they did not enforce trade size limits on their traders, so unless they found truly inefficient markets to trade, there was always substantial risk of overtrading. Always traders to commit you to positions too large is NOT "managing" risk. (Just ask Barings Banks - a hundreds years British institution that allowed one trader in Hong Kong to drive it out of business.)
What lead to their ultimate downfall was applying that mindset of financial manipulations to their own accounting and financial systems. So they "managed" their ever-growing debt as they "managed" risk -- and ultimately couldn't sustain it.
What if a well-managed company positioned to exploit market inefficiencies in energy and with sufficient internal controls and honest, conservative accounting and a long-range vision everybody understands and follows . . . in short, what Enron lacked . . . could they make the same business work?
I don't know, but as an investor I much prefer an "old economy" type of company that sells a well-established and in-demand product or service for a profit. Although I don't think the efficient market hypothesis applies to closed markets such as electricity, I always question the ability of traders to beat the market on a sustained, long term basis.
I suspect that supplying people and businesses with needed and desired goods and services is a better business model.
Enron viability
Enron viability
At one point early in its history, Enron's top executives decided to make it a modern company, and it expanded enormously. Not just in supplying energy, but in trading it the way Wall Street firms trade options. They even hired some traders from a major bank to come and teach their people how to make trades.
Within a few years, Enron was trading electricity, natural gas, the weather, paper pulp, metals -- almost anything except the sheer paper assets or ordinary exchange-traded commodities which are what we normally think of as "trading." They were making markets in these things, plus financing projects.
The author describes Enron in the nineties as certainly being a very innovative company. They were enormously selective in who they hired, picking only the brightest and most ambitious, and fostered a culture of entrepreneurialism. If you worked for Enron, you had wide freedom to think up your own project and then network among others for support, both financial and material. If you could get the project going, it was yours. If you succeeded you were a hero. If not, try again. The ability to make mistakes and learn from them is attractive. Though it's doubtful that the company as a whole did learn from mistakes, since people came and went so much.
Can a corporation continue indefinitely going hither and thither without any overall purpose or control? There were a few years Enron felt it could trade and profit from any market at all. This also helped lead to losses. Yet they did not enforce trade size limits on their traders, so unless they found truly inefficient markets to trade, there was always substantial risk of overtrading. Always traders to commit you to positions too large is NOT "managing" risk. (Just ask Barings Banks - a hundreds years British institution that allowed one trader in Hong Kong to drive it out of business.)
What lead to their ultimate downfall was applying that mindset of financial manipulations to their own accounting and financial systems. So they "managed" their ever-growing debt as they "managed" risk -- and ultimately couldn't sustain it.
What if a well-managed company positioned to exploit market inefficiencies in energy and with sufficient internal controls and honest, conservative accounting and a long-range vision everybody understands and follows . . . in short, what Enron lacked . . . could they make the same business work?
I don't know, but as an investor I much prefer an "old economy" type of company that sells a well-established and in-demand product or service for a profit. Although I don't think the efficient market hypothesis applies to closed markets such as electricity, I always question the ability of traders to beat the market on a sustained, long term basis.
I suspect that supplying people and businesses with needed and desired goods and services is a better business model.
Enron viability
Enron viability
Wednesday, April 4, 2007
Dividend paying stocks more dependable than "earnings"
I got an email today from Schaeffer Research, which is basically Bernard Schaeffer who publishes The Options Advisor, his entry-level option newsletter product, predicting that there're going to be a lot of disappointing earnings announcements in the weeks to come, now that the first quarter has closed out and companies will be providing their net earnings for the first quarter.
And of course he says this will mean a lot of profit opportunity -- he foresees a lot of volatility.
Yet the thrust of the email is bullish, so apparently he think that companies will post earnings that are actually higher than investors expect. So even if they're lower than the last 3 years, they'll be higher than expected, and that means a lot to a lot of traders.
Of course, earnings always go up and down. Plus, earnings is an accounting figure subject to accounting manipulation. Cash flow is a more dependable indicator in many instances, because it can't be manipulated. Either there's money in the bank account or not. The bank doesn't care about appreciation or off the books limited partnerships.
And the best way to evaluate cash flow is to find the companies that continue to increase dividends year after year -- they are more dependable than quarterly earnings statements.
Schaeffer's tracks a put/call ratio, and that's the highest it's been in over 3 years. So stock prices may well go higher, if he's right.
But remember that you can spend dividends and still keep the stocks.
dividend increases
dividend increases
And of course he says this will mean a lot of profit opportunity -- he foresees a lot of volatility.
Yet the thrust of the email is bullish, so apparently he think that companies will post earnings that are actually higher than investors expect. So even if they're lower than the last 3 years, they'll be higher than expected, and that means a lot to a lot of traders.
Of course, earnings always go up and down. Plus, earnings is an accounting figure subject to accounting manipulation. Cash flow is a more dependable indicator in many instances, because it can't be manipulated. Either there's money in the bank account or not. The bank doesn't care about appreciation or off the books limited partnerships.
And the best way to evaluate cash flow is to find the companies that continue to increase dividends year after year -- they are more dependable than quarterly earnings statements.
Schaeffer's tracks a put/call ratio, and that's the highest it's been in over 3 years. So stock prices may well go higher, if he's right.
But remember that you can spend dividends and still keep the stocks.
dividend increases
dividend increases
Tuesday, April 3, 2007
Motley Fool on Alan Abelson
I recently read the book RULE BREAKERS, RULE MAKERS by The Motley Fool, and one part of it I found pretty funny but didn't include in the review I wrote for Ezine Articles is that the Gardners made fun of the editor of BARRON'S, Alan Abelson, for her persistent bearishness. I was reading BARRON'S around that time (the book was written in mid-1998), so I know exactly what they're talking about.
I will put in a disclaimer now that I don't know what the Fool now say about the late 1990s boom. This book is an example of it, since they tout high tech stocks and also say that they ignore Price/Earnings or P/E ratios. I will say that it may be unfair to judge their current advice by what they wrote during the dotcom boom. They were caught up in it, and so were many other people.
Alan Abelson of BARRON'S was never caught up in the dot com boom. He was predicting stock market disaster years before the boom officially began. I don't know what he wrote about the bust of 2001, or what he says about the market now that it's gone past the boom's peak.
But it's also true that if you'd invested according to Abelson instead of The Fool you'd have missed out on the dot com boom -- and also kept your money through the subsequent bust.
To be fair, if you'd bought the company that pays dividends that they recommend -- Coca-Cola -- you'd have been paid a lot of nice quarterly checks. It's their enthusiasm for some high tech stocks that looks like part of the boom mentality now, with the benefit of 2007 hindsight.
Motley Fool on Abelson
Motley Fool on Abelson
I will put in a disclaimer now that I don't know what the Fool now say about the late 1990s boom. This book is an example of it, since they tout high tech stocks and also say that they ignore Price/Earnings or P/E ratios. I will say that it may be unfair to judge their current advice by what they wrote during the dotcom boom. They were caught up in it, and so were many other people.
Alan Abelson of BARRON'S was never caught up in the dot com boom. He was predicting stock market disaster years before the boom officially began. I don't know what he wrote about the bust of 2001, or what he says about the market now that it's gone past the boom's peak.
But it's also true that if you'd invested according to Abelson instead of The Fool you'd have missed out on the dot com boom -- and also kept your money through the subsequent bust.
To be fair, if you'd bought the company that pays dividends that they recommend -- Coca-Cola -- you'd have been paid a lot of nice quarterly checks. It's their enthusiasm for some high tech stocks that looks like part of the boom mentality now, with the benefit of 2007 hindsight.
Motley Fool on Abelson
Motley Fool on Abelson
Monday, April 2, 2007
Investing lesson from Uncle Scrooge McDuck
When investing it's important to keep in mind what about economic activity is real and what is important only if and when it is connected to what's real.
I know that's vague. I'll illustrate with an example of a comic book story I read when I was a little kid.
If you're a comic book fan who knows more than superhero comics, you should know that in the 1950s and 1960s a man named Carl Barks wrote and drew the Donald Duck comic books. Since Disney didn't give credit to its artists, nobody at the time knew his name -- that came out later -- but he was widely known as the "good" artist. His style of drawing is distinctive for its detail and authority. Plus, he wrote a lot of fun and terrific stories -- sending Donald, Uncle Scrooge and Huey, Dewey and Louie to have adventures all over the world.
Anyway, in one story everybody in the world is given a million dollars or some kind of unlimited amount of money (I forget the details).
So everybody in the world decides that since they're rich, they don't have to work anymore. They start taking it easy.
Of course, Donald and his three nephews start to do the same, so they're shocked when Uncle Scrooge McDuck (I wonder if some Scottish civil rights groups would object to Disney giving him a Scottish name, if these comics were to come out today?) makes them start growing food!
They don't understand why their rich uncle says there's going to be a lot of trouble in the world!
Of course, once the world's supply of food and other goods get used up, people start to go hungry. They find that all the money they have is useless when there is no food to be bought.
Of course, the ducks are just fine, since they listened to Uncle Scrooge and worked hard to raise their food.
So Carl Barks through this comic book story gave me an important economics lesson. Money is important, but only when there's food available to buy with it. Somebody has to grow it, harvest it, and distribute it to stores. Or people don't eat.
So this connects with investing -- you make money from giving people what they need and want. All the money in the world won't help you if you can't do that.
Scrooge McDuck investing
Scrooge McDuck investing
I know that's vague. I'll illustrate with an example of a comic book story I read when I was a little kid.
If you're a comic book fan who knows more than superhero comics, you should know that in the 1950s and 1960s a man named Carl Barks wrote and drew the Donald Duck comic books. Since Disney didn't give credit to its artists, nobody at the time knew his name -- that came out later -- but he was widely known as the "good" artist. His style of drawing is distinctive for its detail and authority. Plus, he wrote a lot of fun and terrific stories -- sending Donald, Uncle Scrooge and Huey, Dewey and Louie to have adventures all over the world.
Anyway, in one story everybody in the world is given a million dollars or some kind of unlimited amount of money (I forget the details).
So everybody in the world decides that since they're rich, they don't have to work anymore. They start taking it easy.
Of course, Donald and his three nephews start to do the same, so they're shocked when Uncle Scrooge McDuck (I wonder if some Scottish civil rights groups would object to Disney giving him a Scottish name, if these comics were to come out today?) makes them start growing food!
They don't understand why their rich uncle says there's going to be a lot of trouble in the world!
Of course, once the world's supply of food and other goods get used up, people start to go hungry. They find that all the money they have is useless when there is no food to be bought.
Of course, the ducks are just fine, since they listened to Uncle Scrooge and worked hard to raise their food.
So Carl Barks through this comic book story gave me an important economics lesson. Money is important, but only when there's food available to buy with it. Somebody has to grow it, harvest it, and distribute it to stores. Or people don't eat.
So this connects with investing -- you make money from giving people what they need and want. All the money in the world won't help you if you can't do that.
Scrooge McDuck investing
Scrooge McDuck investing
Sunday, April 1, 2007
7 Deadly Money Lies
As a subscriber to Agora's free ezine, The Rude Awakening, I also get tons of email sales letters for their financial newsletters.
I often enjoy reading these for various reasons. If they're well-researched, they can be quite informative, and give you a lot to think about. I got one recently called the The 7 Deadly Money Lies. You can start to read it here:
7 Deadly Money Lies
Agora mostly takes a hard-money, pro-gold, pro-commodities especially oil, the world is going to hell approach. I've been hearing such arguments since the 1970s when libertarian Harry Browne and some others started popularizing them. They've been right in some ways -- inflation certain has eroded the value of the dollar -- but obviously wrong in others -- the world's economy has not collapsed -- yet.
Maybe it will tomorrow.
Maybe you should just seek the safety of passbook savings accounts although that concept is anathema to both sides.
My own opinion? #1 -- yes, deficits do matter. I don't know if Dick Cheney really believes they don't. But Republicans have been griping about Democratic spending deficits for years, and should continue to try to balance the budget even though we must also fight the war on terror. Because the consequences of losing that would be far greater than the economic problems brought on my the budget deficit.
money lies
money lies
I often enjoy reading these for various reasons. If they're well-researched, they can be quite informative, and give you a lot to think about. I got one recently called the The 7 Deadly Money Lies. You can start to read it here:
7 Deadly Money Lies
Agora mostly takes a hard-money, pro-gold, pro-commodities especially oil, the world is going to hell approach. I've been hearing such arguments since the 1970s when libertarian Harry Browne and some others started popularizing them. They've been right in some ways -- inflation certain has eroded the value of the dollar -- but obviously wrong in others -- the world's economy has not collapsed -- yet.
Maybe it will tomorrow.
Maybe you should just seek the safety of passbook savings accounts although that concept is anathema to both sides.
My own opinion? #1 -- yes, deficits do matter. I don't know if Dick Cheney really believes they don't. But Republicans have been griping about Democratic spending deficits for years, and should continue to try to balance the budget even though we must also fight the war on terror. Because the consequences of losing that would be far greater than the economic problems brought on my the budget deficit.
money lies
money lies
Saturday, March 31, 2007
Risk of inflation
Nobody with any sense denies that the greatest risk of fixed income investing in inflation. A lot of people are forgetting how insidious inflation is, and don't consider the current low levels (from 2 to 4%) dangerous.
Basically, general macroeconomic inflation is a general raising of the prices throughout the economy. Simply, there's a relative rise in the amount of cash going through the economy compared to the amount of goods and services available for sale in that economy.
My macroeconomics teacher in college used to like to tell us that if we wanted to reduce inflation we should burn money. It was such a shocking thing to say about money (and nobody, including him, volunteered their personal money for this stop-inflation project), that we didn't get that it was one of those jokes that was funny because true.
If you have two apples for sale and two dollars -- each apples costs a dollar. Print two more dollars so you have a total of four -- but the number of applies remains the same -- and the price of apples will go up to two dollars each.
A simplified example like that makes it clear. Our real-world economy is much larger and more complex but operates the same.
We can't eliminate inflation because there's a general call for the government to keep on creating money by spending it. Congress votes to spend some money et voila! checks are issued and then cashed and a welfare mother is paying her rent to her landlord or a defense contractor is paying its suppliers.
Some of this comes from the tax money taken from us taxpayers, of course, but when Congress authorizes more money than is already in the Treasury Department collected from taxpayers, then bonds are issued to raise the money, and the American budget deficit keeps on growing.
But people who receive the money directly (welfare recipients and defense contractors) or indirectly (landlords or raw materials suppliers) like having that cash flowing into the economy.
Retired people who are receiving only Social Security and pensions and interest on bonds are not so happy to see the price of bread go up the next time they visit the supermarket.
inflation
inflation
Basically, general macroeconomic inflation is a general raising of the prices throughout the economy. Simply, there's a relative rise in the amount of cash going through the economy compared to the amount of goods and services available for sale in that economy.
My macroeconomics teacher in college used to like to tell us that if we wanted to reduce inflation we should burn money. It was such a shocking thing to say about money (and nobody, including him, volunteered their personal money for this stop-inflation project), that we didn't get that it was one of those jokes that was funny because true.
If you have two apples for sale and two dollars -- each apples costs a dollar. Print two more dollars so you have a total of four -- but the number of applies remains the same -- and the price of apples will go up to two dollars each.
A simplified example like that makes it clear. Our real-world economy is much larger and more complex but operates the same.
We can't eliminate inflation because there's a general call for the government to keep on creating money by spending it. Congress votes to spend some money et voila! checks are issued and then cashed and a welfare mother is paying her rent to her landlord or a defense contractor is paying its suppliers.
Some of this comes from the tax money taken from us taxpayers, of course, but when Congress authorizes more money than is already in the Treasury Department collected from taxpayers, then bonds are issued to raise the money, and the American budget deficit keeps on growing.
But people who receive the money directly (welfare recipients and defense contractors) or indirectly (landlords or raw materials suppliers) like having that cash flowing into the economy.
Retired people who are receiving only Social Security and pensions and interest on bonds are not so happy to see the price of bread go up the next time they visit the supermarket.
inflation
inflation
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