Investing Obtusely

Passing over Micropac Industries (MPAD)

2012-02-14T19:39:00.000-05:00

On Jan 30, Whopper Investments introduced a very simple business to his readers. I must say, I was intrigued. I researched it a bit more, starting always with the balance sheet.

The book value is 18.67M, with no debt. There is a line of credit, which has not been tapped and appears to be used by the company for liquidity crunches that may arise in their business. This tells me that management is careful and not cavalier.

Micropac has 10.06M in cash (55% of book), and the NCAV is approximately 17M.

My conservative liquidation value estimate is 14.73M.

With the current market cap of 13.54M, Micropac (MPAD) is selling under liquidation value! This should excite any Graham style value investor.

I must say that it did peak my interest too. However, I wouldn't be true to Graham and Dodd, if I didn't look for margin of safety.

Let us dig deeper. Company supplies components for OEM parts for the US military and NASA. US DOD and NASA are 76% of revenue. With US government [eventually] deleveraging there is a significant risk of loss of revenue. In fact, there has been a gradual decline in revenue over last 6 quarters. With stable costs, the income is being squeezed. This could be due to competition or weakness in the defense sector-- it is hard to tell. In either case, this isn't good news.

I tried to see what gives Micropac the competitive advantage, and I couldn't find anything significant. Micropac own no patents, or exclusive licenses or franchises.

Micropac is making money and has enough for a rainy day (not even using the line of credit), but they might be in for a slow bleed as revenue declines.

Another thing that bothers me about this company is the 75% ownership by the 82 year old Heinz-Werner Hempel. This tells me that there is no quick catalyst on the horizon.

At current market price, I believe there isn't enough margin of safety to justify purchase of this, otherwise, fine company.

I love the simplicity of this organization and have placed it on my watch list. I will closely look at it again if Mr. Market gets even more negative and starts selling it close to absurd levels, such as 50% of NCAV.

Full Disclosure: No position.

Urbana Corp: Some discounts are just unwarranted

2011-12-30T11:52:00.000-05:00

Over the last year, much has been written on the value blog circuit on Urbana Corporation (TSE:URB and TSE:URB.A). Instead of repeating what these dedicated value investors and bloggers have written, I will try to stand on their shoulders.

It is very obvious that Urbana sells at a discount to net asset value (NAV), which the company diligently publishes every single week-- extra points to Urbana for transparency. Using that data, I have charted the Price to NAV ratio over last two years.

Over this two year period, the median discount has been 68.3%.

As of this posting, the discount is hovering close to 50%. The reasons for this may be two-fold. (1) Financials are being sold off on the wide market. Since Urbana book is mostly financials, there is a mark-to-market pressure and then the additional pressure of this organization being a financial itself. This sounds absurd, but Mr Market is known for that. In a round about way, this can be justified by the Mr Market; "If the big US banks are selling at 50% to 70% discount to tangible book, what is the point of giving any premium to this tiny Canadian financial firm called Urbana." Furthermore, (2) According to 2010 annual report, some big institutional holder had to sell off to meet redemption requirements. This forced selling has kick started a vicious circle. It is clearly visible in the growing spread, while the NAV has been fairly flat over the same period.

The upside in Urbana at current prices is significant, but it is important to look at the downside before an intelligent investor is infatuated by the upside. After researching Urbana's history and regulatory filings, I have the following risks outlined.

Urbana paid or pays too much for a security because their universe is limited to financials, especially in the emerging world and exchanges.
There is disincentive to hold cash for long periods of time because of the management fee structure.
Management is not fully aligned to the shareholders (they make more income, the bigger the portfolio)-- see blog article by Saj Karsan.
Management doesn't prove to be an effective capital allocator in the long run.

In spite of these risks, the discount to book is unwarranted. It is especially unjustified because the management has a 10% share buyback in effect. This is a good capital allocation move and will make up for a portion of the risks outlined above.

Disclosure: no position, yet

EACOM Timber Corporation: First Look

2011-12-10T11:01:00.001-05:00

Here are my notes from a cursory analysis I did of this business. It is traded on the Canadian venture exchange under the symbol ETR. All numbers below are in Canadian dollars.

Current price .075/shr -- i.e. 7.5 cents
NCAV: 0.111/shr
Book: 0.31/shr
Current discount to NCAV: 67%
Had a fire at a plant, lost everything there, but insurance covered it, minus a deductible. Will see that impact in Q4 numbers
Receivables cover 40% of current assets-- very high!
Inventories cover 46% of current assets-- very high!
Not much cash on hand for a rainy day

Management has been relying on equity raising and credit facility

Cash flow positive because of equity raising done in April, 2011

19% shareholder dilution was done

I don't like the over reliance on sizzling overpriced Canadian housing manufacturing sector

This one truly is a cigar butt style investment. It is selling close to Graham's famous 66.6% of NCAV. But there may be hidden value here in terms land and timber ownership-- I need to investigate that some more.

Frankly, I am not impressed with the balance sheet and cash flow statements. But, if I can find hidden value on the balance sheet, the stated book value would be a gross understatement of the actual book value.

Does this look like an interesting opportunity to the readers of this blog?

Full Disclosure: None

Opportunities exist when perception overpowers fundamentals

2011-11-28T12:08:00.001-05:00

The following is a perfect example from Buttonwood, where sophisticated investors (such as pension funds) make irrational decisions. This particular one relates to their fear of bad optics, i.e. how they will be perceived by stakeholders if they had to report losses due to well known, long running problem.

A hedge fund manager told me at lunch today that meetings with clients often started with the question "What's your fund's exposure to peripheral European sovereign debt?" The right answer to that question is, apparently, zero. If this attitude is common, hedge fund managers will avoid the asset class as an easy way of keeping their clients sweet. Nor do the clients want the managers to short the asset class, lest the Europeans come up with a deal at the last minute.

These clients are not sinister, top-hatted capitalists but ordinary pension funds afraid of some embarrassing loss in their portfolio. Their fear imposes a constraint on the people who look after their money. A similar process has happened at money market funds. Which fund manager wants to risk telling the clients they have lost money because of an exposure to Greek or Italian debt, stories that are all over the headlines?

Fear is often more powerful than greed.

As a long term investor, you can take advantage of this fear, and carefully select businesses to add to your portfolio. These days, plenty of opportunities exist in European equities, Japanese equities and American financials and housing sectors.

Disclosure: None

Canam Group: Significantly inconsistent market pricing

2011-11-10T15:37:00.001-05:00

What's wrong with this picture?

When a company is selling at low price-to-earnings ratio, it is usually safe to assume that the market has sufficiently discounted the future. Specifically, the market likely foresees significant decline in the earnings and earnings power.

If the same company is also selling for half the book value, then it can be assumed that market foresees future events to harm the balance sheet, either through major losses and/or significant negative cash flow.

If the market is right about the valuing the company at low price-to-book ratio, then the debt holders of the organization can also be expected to suffer a loss. Consequently, the debt holders should be expected to demand a higher premium from the company, in the event of a default.

However, that is not entirely the case in Canam Group's (TSE:CAM) situation-- the first two arguments are true, but not the third.

Canam is currently selling for under 5 times average earnings. This business is also available in the market at more than 50% discount to book value. However, the debentures (traded on the Toronto Exchange under the symbol CAM.DB) are hardly below par, while the stock has dropped significantly during the same time.

This can only mean that Mr. Market is overreacting to the recent bad news (i.e. dividend suspension) on the equities front, but is relatively calm on the fixed income front. The debt holders must not be actually worried about the balance sheet, otherwise they would have sold off the debentures to discount the expected future. Hence, the low price-to-book valuation on the common stock is likely due to short term irrationality rather than anything else.

As a value investor with a longer term horizon than the market, this sort of inconsistency can be an opportunity for significant gains in the near future.

Disclosure: I am an owner of Canam Group at the time of this writing.

Tweedy Browne Interview on Morningstar

2011-10-24T22:30:00.003-04:00

Morningstar interview with Will Browne and Tom Shrager, from Tweedy Browne.

Topics covered:

Where they see value today
What is their criteria for a good business
Tweedy portfolio overview

http://www.tweedy.com/video/ (requires Quicktime)
NB: this video is from May 2011, but only got posted today

Full Disclosure: CSCO (which is also a major holding of Tweedy Browne)

Euro Debt Crisis: From denial to acceptance

2011-10-23T21:36:00.000-04:00

I must admit that since my last post on this topic, the sentiment in Europe has rapidly changed from denial of the problem, to not just accepting it, but working towards a good solution. The market seems to expect that.

I expect that the market is at least, half right.

I believe that the European leaders finally accept the situation for what it is, but I am not convinced that they will have a perfect solution that the market is already pricing in. Besides, if the bond market truly believed that the forthcoming euro solution would be worthwhile the Greek CDS rate would have moved down in anticipation. It certainly has not done so.

Greek CDS Rate (As of Oct 23, 2011)

This may represent short term trading opportunities, but that isn't for me.

If the market drops more from here, I intend to buy some more undervalued securities. If not, I certainly wouldn't mind seeing my portfolio rise.

Full Disclosure: None

How low rates affect intrinsic valuation calculations

2011-09-30T21:43:00.000-04:00

This is an excellent post from Prof. Damodaran on how low government bond rates impact intrinsic valuation-- especially calculations using discounted cash flow.

Low rates artificially inflate the computed intrinsic value, by suppressing the discount rate. One clear way to avoid this pitfall is to simply use 6.67% no matter what the risk free rate is. 6.67% is approximately the rate of return of S&P 500 over a 100 year period. It would be a safe assumption that S&P 500 will not achieve 6.67% growth in the 21st century, having a higher rate provides some inherent margin of safety into the calculation.

Other option is to be very conservative and choose a static, and yet, reasonable high discount rate eg: 12% or 15%.

Of course, regardless of the discount rate you choose, never forget to apply a margin of safety factor to your valuation to come up with a target buy price.

European Debt Saga: Start of the End Game

2011-09-20T21:08:00.001-04:00

Value investors like to buy undervalued securities, and one of the best places to find them is in a well known area of distress. The European equities, as a group, is precisely that area.

As we all know, the European sovereign debt issue has been going on for a long time, but has not shown any signs of going away. The squabbling European governments have squandered golden opportunities to make hard decisions early in the crisis to avoid catastrophe. To this day, the public discussion in places like Germany is that this is a problem created by profligate Greeks, and they should be punished. There is absolute denial that countries like Greece are actually insolvent (due to fear of contagion) and they continue to treat this as a liquidity problem. Consequently, they are giving the Greek government money while imposing austerity (read: punishment). Fixes for liquidity issues, do not solve liquidity problems.

While this denial is going on in Germany, and rest of European countries, the problem is getting quite worse. Greece has finally reached a point where it has less than a month before it has to, most likely, default-- and since this acute public denial exists in rest of Europe, I strongly suspect, it is going to be a messy default.

I suspect that once the default happens, the European equity market will sell off in a large way. Some European equities that are cheap today, will likely become incredibly cheap. That will be the time for value investors to step in.

In the meantime, I encourage my fellow value investors to start making a wish-list of European businesses with strong balance sheets (even if it is in Euros), excellent cash flows and wide economic moats.

This may be once in a lifetime opportunity.

Going on vacation

2011-08-27T20:00:00.007-04:00

I am off to my honeymoon for the next two weeks. These two weeks, I will disconnect from the Internet and the noisy world of finance.

The benefits of doing this, you ask?

I get to relax and unwind. Vacation involves vacating the mind. What better way to do that than cut off the noise entirely.
Maybe, when I return the market would be even cheaper, and I get to average down or buy into new positions, at significant discounts to intrinsic value. I am comfortable with my portfolio and I can sleep at nights without thinking about it. I think it isn't much of a stretch to be able to sleep for 14 nights without thinking about it.
In times of market turmoil, I am naturally drawn to the market noise. This can lead me to make emotionally drawn decisions, which is something I wish to avoid. Explicitly disconnecting from the world is a good way to reiterate to myself that changing ticker prices from minute to minute don't matter.

I suspect that if there is a big enough shakeup in the market, the news will find me.

Watching David Sokol

2011-08-20T15:19:00.000-04:00

This post is not to comment on the whole "Sokol Affair". It wasn't the most favourable public relations incident that Buffett ever experienced. The affair is largely in the past and frankly, I don't know enough to comment on it.

Although, I did notice that when Sokol was asked why he was leaving Berkshire, he answered that he wanted to focus on his family's investment affairs. Consequently, I started watching his actions on SEC. Evidently, he owns 21.5% of a firm called Middleburg Financial (MBRG). MBRG is a thinly traded bank holding company.

Sokol has been making purchases around the $15 mark, and he hasn't stopped as the market prices have come down.

This is highly speculative, but I suspect that Sokol is busy buying enough stock in this organization to take over the helm, in some shape or form. MBRG is currently selling at about book value. If, and that is a big if, Sokol is someone who has the mettle and temperament of a long term value investor, this may be a good opportunity for a casual investor to join him in on the ground floor. This could be akin to buying into Berkshire Hathaway in 1962.

This isn't the idea for me, because it is highly speculative. But there is a decent chance that MBRG at this price is a reasonable long term investment, even if Sokol's ownership doesn't materialize into anything substantial.

Full Disclosure: No position

Advice from Tweedy Browne

2011-08-09T22:20:00.000-04:00

As the market volatility shoots through the roof, here is some excellent, rational, and timely advice from the smart folks at Tweedy Browne.

Uncertainty, in our opinion, is one of the most difficult factors
for professional as well as individual investors to deal with,
and it is dominating the markets currently. Uncertain markets
are characterized by increased volatility and correlation between
asset classes, as well as increasingly shorter time frames for
investment decisions. None of this, in our opinion, will improve
the probabilities of earning a satisfactory return over a
reasonable period of time. Rather, we think that in most
instances, these will improve the odds of the opposite outcome.
Emotional and behavioral biases tend to win out over objectivity.
Today’s 24-hour news cycle doesn’t contribute much to rational
thinking. The adage in the media industry that “airplanes
landing don’t make news” has an element of truth. One relatively
new factor contributing to this volatility (and we admit that we
do not have a lot of empirical data to back it up) is the impact
of algorithm driven trading which, in the U.S. equity markets, is
upwards of 60% of volume. It is largely driven by
arithmetic-historical correlations volatility, and holding
periods measured in minutes if not seconds.

Couple this with day trading and you end up with completely
irrational price movements. By way of example, the price range
of Bank of America (a stock that we do not own) from its high to
its low on August 5th was 11%, and the company had a market
capitalization of $90 billion. Yesterday, the stock was down
another 20%. Another example is Royal Dutch Shell with market
capitalization of almost $210 billion. The price range of the
stock from high to low on August 4th was about 5%. It is
unlikely that the value of those businesses changed by this much
in one or two days, in our judgment. There are numerous other
examples, some we own and others we do not. The ability to
predict this sort of swing movement is virtually impossible and
the ability to explain them is equally so. In order to function
and make objective decisions you must have other parameters for
decision making. In our view, it is ultimately the economics
that win out, and in our case, the economics of the underlying
businesses we own. It certainly has been the case historically,
and in our opinion, profits and cash flow will remain the
fundamental long term drivers of equity valuations. The
probabilities of objectively valuing the economics and
sustainability of a business are far better than the alternative
of predicting the movement of “markets” over any given time
period and we think the empirical evidence supports this view.
This is not to say that we simply ignore “global” questions. We
do consider how larger trends will ultimately impact the
businesses we own. For instance, what do a large emerging middle
class or price controls mean for a business, etc?

So while we don’t enjoy this type of environment – to say the
least – we keep our focus on trying to buy a good business at a
very attractive price. In doing this, we seek to avoid highly
leveraged businesses and businesses with obsolescence risk.
These environments create some real cognitive dissonance – the
ability to buy into a company at a great price usually goes along
with having the ones you own go down in price. Nonetheless, to
put it simply, the investment framework at Tweedy, Browne does
not change – the number of companies to look at, not
surprisingly, has increased and some averaging-in on existing
investments is occurring. Most of what we do rests on the
process coupled with a realistic time horizon.

(Original Source)

Market Climate Update

2011-08-03T11:45:00.001-04:00

As mentioned in previous posts, I was and am of the opinion that the market, as a whole is over priced. In the last one to two months we have seen macroeconomic risks emerge, largely in the form of sovereign debt issues. These have shaken the foundations of the optimism in the market. And now the fear of another recession have taken hold of the market sentiment. This shouldn't come as a surprise to anyone. Balance sheet recessions (and this one is a major one) are followed by long feeble recovery. It is not uncommon for economies to dip bank into recession a few years later, only to emerge out of them very soon. The deleveraging process for economies is painful and long (on average 7 to 8 years long).

I must remind myself, as I see my equity portfolio shrink, that this market sell off is good! Even though the market as a whole is still overvalued, there are plenty of pockets of severe to moderate undervaluation. I can sleep well at night, knowing that about 60% of my portfolio is a collection of undervalued businesses [that happen to be getting cheaper every day]. And, the other 40% is cash.

I prefer to run a fairly concentrated portfolio, with 5-10 positions. I look forward to add more weight to my most undervalued positions and, depending on valuation, build new ones.

Veteran value investors buy into Cisco

2011-07-14T10:56:00.003-04:00

When considering any investment, one can't help but look for confirmation from others. This is human nature and one must be very careful of confirmation bias.

But when I see the big names of the value investing universe buy into Cisco, I can't help but feel relieved that I am in good company.

The June 2011, semi-annual letter from First Eagle Funds (run by Jean-Marie Eveillard) explains their rationale behind buying into Cisco. Here is the excerpt on Cisco.

We had some declines in the portfolio, most notably our holding in Cisco which has a dominant market position in routers and switches, the basic nuts, bolts and software that make the internet tick. In recent months, the market has fretted about cutbacks in government spending budgets (perhaps a sneak preview of things to come more broadly), product cycle issues in their switching business and fears of competitors encroaching on their territory. Our team feels that Cisco is deeply embedded in its customers’ technology platforms and serves as part of an entrenched, interlinked mesh of hardware and software. Cisco also stands to benefit from the growth in video-based traffic over the internet. While we wait for better times ahead, Cisco is exceptionally well capitalized with net cash and has returned substantial capital to shareholders through repurchases and a recently initiated dividend. As such, we have committed some incremental capital to this investment as the valuation margin of safety expanded.

Disclosure: I am an owner of Cisco Systems at the time of this writing.

Market Climate Update

2011-06-06T12:06:00.000-04:00

As I mentioned in a previous post, I have been selling my fully-priced equity positions into the frothiness that we observed at the start of 2011.

At this point, the portfolio is approximately 40% cash, and 60% equities. Since the last post, I have been nibbling away at some undervalued equities.

My hope is that in the near future more interesting opportunities will present themselves. As I see the market soften over last month, I see that as rise in the value of my cash position valued in equities.

Is Cisco a value trap?

2011-05-26T21:57:00.001-04:00

I'd like to share an instructive writeup from Vitaliy N. Katsenelson on Cisco (CSCO)-- which, I believe, has been incorrectly hailed by popular media lately as a "value trap".

One thing that Vitaliy didn't mention was that Cisco recently started paying out a modest dividend, which should help eventually turn the market sentiment around. I completely agree with him that it may take at least a few quarters for Mr. Market to feel good about this stock. In the meantime, I intend to enjoy the fact that I am getting a chance to purchase a solid business at depressed prices.

I have previously written about Cisco and its merits at these prices.

I am also eyeing Cisco 2013 Calls to leverage up my investment without buying on margin.

Disclosure: I am an owner of Cisco at the time of this writing.

Investment idea: Terravest Income Fund

2011-04-23T11:08:00.000-04:00

Market's ability to ignore fundamentals and be a completely emotional animal astounds me. I am forever grateful to Benjamin Graham's idea of Mr. Market, the very emotional personification of the market who swings between pessimistic and optimistic extremes in the short term, but is rational in the long run.

One example of this behaviour would be Terravest Income Fund (TI.UN), a small fund based in Canada that holds a number of businesses. When I came across it, it was selling at half the book value. There was a lot of debt on their books and they had to suspend distributions. It appears that that was when the market stopped paying attention to this business.

Since then, the management has started selling various portfolio businesses to raise capital. They have paid off all their debt and have openly declared the intention to sell even more businesses. I suspect that the unsaid intention is that they want to wind down the fund by selling all the portfolio businesses.

The following was published in the fund's press release, in December 2010:

The Fund's management continues to evaluate each of the portfolio businesses in order to determine fair value. The board of trustees and management have also reviewed the future strategic direction of the Fund, and, as a result of this review, the board of trustees has determined that it is appropriate that management continue the on-going process of testing the value of each portfolio business. This process may result in the future sale of one or more portfolio businesses or the assets thereof. Subject to the Fund's cash requirements at the relevant times, the Fund plans to use proceeds received from the sale of portfolio businesses to pay one or more special distributions to unitholders.

(emphasis added by me)

In spite of this excellent news, the market hasn't given this fund the respect it deserves. As of this writing, the fund continues to sell at 0.68 price to book. Company's intrinsic value is likely much higher than stated book value. Based on the sum of parts calculation, my conservative estimated intrinsic value comes to just over $5/share.

Until Mr. Market wakes up to realize the value in this business, I will continue to hold, and collect any special distributions that come my way.

Disclosure: I am an owner of Terravest Income Fund (TI.UN) at the time of this writing.

Market Climate Update

2011-04-12T15:51:00.000-04:00

I realize that I haven't posted in some time. It isn't because there is a shortage of excitement in the market. It certainly isn't because there isn't any news-- turmoil in the middle east and the triple disaster in Japan are enough to make anyone wake up. In spite of these disruptions in the rise of the market, there has been a shortage of interesting opportunities.

As I discussed in a previous post, the market is too expensive for me to be comfortable. Over the last few months, I have been selling into the rally.

I am not selling indiscriminately, I have been selling only securities that reached and exceeded their fair value. Since the US Fed induced rally began in fall 2010, practically anyone who owned stocks, as benefited greatly.

Rising tide, does indeed, lift all boats.

However, some boats rose higher than others. Commodities based stocks have greatly out-performed some of the more boring, stable businesses. Essentially, classically "risky" investments have benefited more from the rally than boring ones.

So where does that leave me?

I find myself holding about 45% of my portfolio in cash, due to lack of juicy opportunities. The other 55% is in stocks that have an excellent to decent margin of safety still intact at current market prices.

The one [minor] fear that I have for the cash portion of my portfolio is the onslaught of inflation. Holding gold or other inflation hedges are too risky for my taste. If I can't value it, I don't want to be owning them. Gold clearly falls in that category.

Greed and Fear

2011-01-09T15:15:00.000-05:00

Warren Buffett once gave a very useful and simple advice to investors-- he suggested that the recipe for long-term success in investing is "to be fearful when others are greedy and greedy only when others are fearful".

Looking at the markets these days, I can't help but see the [unfounded] enthusiasm return to the market. Greed and complacency is back, producing almost frothy behaviour on Wall Street. Just look at securities such as Netflix (NFLX) and OPENTABLE (OPEN) selling at PE ratios of 67 and 154, respectively.

This behaviour makes me quite fearful.

Consequently, I have started to sell my fully priced investments. I may miss the top of the market, i.e. the local maxima; but I sleep better at nights knowing that I am only owning undervalued securities with a reasonable margin of safety. There is certainly nothing wrong in sitting on a pile of cash either. If the "animal spirits" in the market go for long, I am prepared to miss it and earn non-existent yield on my cash balance. Historically speaking, current exorbitant PE ratios have produced negative to mediocre yields in the long term. With history on my side, I don't mind sitting on some cash.

The S&P 500 index is currently available at 10 year average PE ratio of 23.22. This is a 42.4% premium to the long term average PE10 of 16.3.

Mean reversion is bound to follow.

I just don't know when it would happen. I am not going to bother predicting-- I happen to be very bad at that.

Niall Ferguson: Empires on the Edge of Chaos

2011-01-03T12:28:00.000-05:00

An excellent history lecture on the rise and collapse (not fall, collapse) of empires. His perspective is firmly based in finance. As always, Niall is an entertaining speaker and an author/historian that I greatly respect.

Enjoy.

In investing, It’s When You Start And When You Finish that Matters

2011-01-02T09:52:00.000-05:00

New York times has an interesting infographic showing stock market (S&P 500) returns over long time periods. The article stresses when you put money in and take it out it is of great importance. Staying invested in markets for extended periods of time without paying attention to the buying valuation is not a recipe for success. For example, 1961-1981, a 20 year period yielded -2.1% per annum.

Value investors are well aware of this fact and also know that this has to do with valuation (e.g. P/E ratios), which the article unfortunately neglects to mention.

Stock buybacks: Another one, at the right time

2010-12-29T12:17:00.001-05:00

As promised in the previous post, here is another idea of a company that has taken advantage of their low priced stock by declaring stock buyback or repurchases. The company is Markel Corporation (MKL) which is a specialty insurance company modelled much like Berkshire Hathaway. Markel's investment division is run by Tom Gayner, who is a pure value manager.

It is not surprising that Markel decided to repurchase their stock in open market when the stock was at a long term low price to book ratio of 1.11.

Source: Ycharts

This repurchase transaction is a value enhancing action that is bound to increase the book value of Markel at exceedingly fast rates. Over years, as the price of Markel reverts back to the long term Price to book mean of 1.7, the shareholders will be generously rewarded.

Disclosure: I am an owner of Markel at the time of this writing.

Stock buybacks: At the right time

2010-12-29T10:07:00.004-05:00

I greatly enjoyed Saj's post on stock buybacks at the wrong time. I wholeheartedly agree that this is a value destroying trend. When money is plentiful, it is invariably true that the assets are priced richly.

Although, I would like to point out two exceptions to this.

Cisco Systems (CSCO) recently experienced a sharp drop in the share price because of a guidance mismatch. Since this organization has a solid balance sheet with $38B in cash, they immediately announced that they will begin a $10B share buyback at those low prices. Cisco is a business that is often subject to market's extreme sentiments, positive or negative. It is good to see that the management realizes that and plays to that sentiment to increase shareholder value.

I will post my second example in the following post.

Disclosure: I own Cisco at the time of this writing.

Margin Balances

2010-11-21T10:39:00.001-05:00

As markets get more richly valued, it is bound to make a value investor nervous. One of the methods that I like to gauge the richness and euphoria in the market is to look at the use of margin debt to buy equity.

Based on this chart, even though the general market looks richly valued (based on PE ratio), it doesn't look like the euphoria has taken hold

Data Source: http://www.nyxdata.com/

Buffett writes a letter to Uncle Sam

2010-11-17T13:43:00.001-05:00

Warren Buffett wrote an entertaining letter to Uncle Sam for pulling through in the time of need and panic. In Buffett's usual manner, the prose is funny, folksy and down-to-earth. Here is an excerpt from his letter.

[When things are falling apart] Only one counterforce was available, and that was you, Uncle Sam. Yes, you are often clumsy, even inept. But when businesses and people worldwide race to get liquid, you are the only party with the resources to take the other side of the transaction. And when our citizens are losing trust by the hour in institutions they once revered, only you can restore calm.

I am glad that Buffett is congratulating the government officials for their actions, even though they created a whole lot of other mess (eg: moral hazards, etc.). But I am not sure if anyone else would have done any better. You just have to look at the current debt squabble in the EU to see just how slow bureaucracies can be, even when they are trying to be fast.

Full letter appeared in the op-ed area in the New York Times.